Environmental lobby group International Rivers has condemned the emergence of trade in fake carbon credits and says the biggest source is hydroelectric power projects on the mainland.
Under what is known as the Clean Development Mechanism (CDM) of the Kyoto Protocol, industrialised countries can support projects that decrease emissions in developing countries and then use the resulting emission reduction credits towards their own reduction targets.
But International Rivers says the CDM is “failing miserably and is undermining the effectiveness of the Kyoto Protocol” because most of the emission reduction credits are fake and come from projects that do not reduce emissions.
It says hydropower projects constitute a quarter of all projects in the CDM pipeline, and 67 per cent of these, or about 700 projects, are on the mainland.
However, International Rivers says there has been no substantial jump in hydropower development to match the large number of supposedly new projects applying to generate CDM credits.
The CDM recently withheld approval of carbon credits from numerous mainland dams and wind farms.
Controversy over the Chinese dams recently led the European Climate Exchange (ECX), the world’s leading market for trading carbon credits, to renew its ban on large hydropower Certified Emission Reductions (CERs), which are carbon credits issued by the CDM executive board.
The European Union is the biggest buyer of CERs, while China sells 70 per cent of the world’s CERs.
Dams built before applications are made for carbon credits are deemed not to contribute to reducing carbon emissions and thus should not qualify to sell carbon credits. Such dams are called “business-as-usual” in the industry jargon.
“There are blatant cases of hydro plants being business-as-usual, whereas other hydro projects seem to really require CDM credits,” Axel Michaelowa, a founding partner of the CDM consultancy Perspectives and a researcher at the University of Zurich, Switzerland, said.
The accuracy of assessments of the eligibility of mainland dams for carbon credits is distorted by questionable data, Michaelowa said.
“Many hydro plants in China use an artificially low utilisation rate for the calculation of their profitability. The regulators have also discovered some hydro projects reported a very low electricity tariff, lower than coal power plants and other hydro projects in the same province.
“Such projects are now increasingly being rejected.”
At a meeting of the CDM executive board in February, 38 mainland dams failed to get carbon credits. The board also decided to review 36 wind projects in China, Katy Yan, a campaign assistant with International Rivers, wrote in her blog.
“These 74 projects hope to produce almost 38 million carbon credits by 2013,” worth about US$600 million, she said.
“The problem is very serious,” Patrick McCully, executive director of International Rivers, said. “Dams are the largest single project type in the CDM. Almost all are likely projects that would have been built anyway regardless of receiving credits, meaning that any credits they generate are fake.”
A World Commission on Dams report has set guidelines that determine whether a dam qualifies to sell carbon credits.
By March 6, 16.32 million CERs had been issued for 132 dams, and China accounted for 71.52 per cent of the 653 large hydropower projects in the world that have been registered or are seeking registration under the CDM to sell CERs, according to International Rivers. A large hydropower project is defined as one with a capacity of more than 15 megawatts.
On March 24, ECX announced it would renew its ban, imposed in 2008, on contracts with large hydro CERs, ECX market development director Sara Stahl said. “We have always excluded large hydro because it’s a grey area,” she said.
Two types of carbon credits are traded on the exchange: CERs and EU allowances, which are carbon credits issued under the EU Emissions Trading Scheme. Since trading at ECX began in 2005, trading of carbon credits and related instruments has soared.
Last year, the value of ECX’s trades surged 82 per cent year on year to €68 billion (HK$708.4 billion).
ECX’s renewal of its ban on large hydro CERs came about after discussions with its members, which include more than 100 large multinational companies, this year, Stahl said. “We felt there were some legitimate criticisms,” she said. “Companies are nervous about it.”
Michaelowa said there was concern that some Chinese dams had required the resettlement of the local population without proper compensation and about whether large hydro plants are sustainable.
In December 2008, an International Rivers press release alleged that German utility RWE, one of the biggest carbon dioxide emitters in Europe, planned to buy carbon credits from the Xiaoxi dam in Hunan - which failed to meet World Commission on Dams guidelines - and that would be a breach of EU law.
On a site visit, International Rivers found 7,500 people had been evicted to make way for the Xiaoxi dam without proper compensation, which violated the World Commission on Dams guidelines. Xiaoxi is one of at least 11 Chinese large hydropower projects from which RWE was buying credits. TUV SUD of Germany was auditor for the project.
At a CDM executive board meeting in March, the board suspended TUV SUD from auditing hydro projects, as it had approved dams that were later found to have problems. Another carbon credit auditor, Korea Energy Management Corp, was partly suspended.
“The fact that only a few of the projects validated by TUV SUD have been rejected is proof of the quality of TUV SUD’s activities,” Heidi Atzler, a TUV SUD spokeswoman, said.
An RWE spokeswoman, Julia Scharlemann, said every CDM project in which RWE was involved was “thoroughly reviewed” by an independent auditor, and RWE adhered to German Emissions Trading Authority rules, which were more rigorous than CDM processes and the standards of other EU nations.
RWE bought carbon credits only from projects approved by the United Nations Framework Convention on Climate Change, she added.
Michaelowa admitted CDM’s process of approving dams was imperfect, with room for improvement, while McCully said the best solution would be to scrap the CDM and the whole concept of international carbon offsetting entirely.
“If that is not possible, then ban hydropower from CDM,” he said.
