Last Wednesday CDM Watch attended a public hearing organized by the EPP Group in the European Parliament on “Shortcomings undermining the Integrity of the Clean Development Mechanism.” With EU Member States poised to vote on the Commission’s proposal to ban certain industrial gas offsets from the EU’s flagship Emissions Trading Scheme – or EU ETS – on 21 January, the hearing provided a timely opportunity to discuss the undesirable consequences linked to the huge design faults in the current system. As many of you will know, these have been extensively documented by CDM Watch over the past year.
Alongside speakers from BusinessEurope, Du Pont, Enel and the Carbon Markets and Investors Association, our colleagues at the Environmental Investigation Agency and Sandbag, Fionnuala Walravens and Rob Elsworth, gave a great overview of the manifold problems associated with industrial gas projects under the CDM, namely: (in the case of HFC-23) their undermining of both the Montreal Protocol and the EU’s international climate objectives; their poor value for money, their geographical distribution (most of the projects are located in India and China, least developed countries don’t get a look in – check out Sandbag’s interactive offset map for a very good illustration of this) and their limited sustainable development benefits.
Representatives of industry associations and companies with a stake in HFC-23 and N2O from adipic acid (AA) projects, including Rhodia, Enel, GDF Suez, Mercuria and the International Emissions Trading Association (IETA), had turned out in force and the audience was packed – evidence, if any were needed, that industry takes the existential threat to fake industrial gas offsets very seriously indeed. The reasons for this are obvious. In the case of both HFC-23 and N2O from AA abatement projects, project participants have reaped astronomical returns on their investments. According to figures produced by the European Commission, in their first year alone, these projects generate sufficient profits to cover all operating costs for the remainder of their lifetime, which can be as long as 21 years.
In several particularly absurd cases, the abatement of HFC-23 – a waste gas generated by the production of the refrigerant gas HCFC-22 – has become manufacturers’ main source of revenue. Even more absurdly, the money accrued from selling CDM credits allows project developers to cross-subsidize the production of HCFC-22. A good case in point is Gujarat Fluorochemicals Ltd. Owner of India’s largest HFC-23 CDM project, it reported additional revenue of €66 million in 2007 through the sale of HFC-23 credits alone.
There is of course nothing illegal about making money (provided you turn a blind eye to the competitive distortions brought about by judicious re-investment of these über-profits). What is outrageous, however, is that owing to the perverse incentives in the methodology used for these project types, a huge number of HFC-23 and N2O from AA credits do not actually represent real emissions reductions. As a means of offsetting European companies’ domestic carbon emissions they are therefore as good as useless. Or as EU Climate Commissioner Connie Hedegaard noted somewhat more diplomatically at the hearing “In many respects, the incentive structure here is simply not right.” With industrial gas credits representing a huge proportion of the offsets used in the EU ETS – around 80% in 2008 and 2009 – it’s clear that something needs to be done.
Concerns about the environmental integrity of HFC-23 and N2O from AA offsets have been common knowledge since the early 2000s. So why were there no moves to exclude them from the EU ETS earlier? Take a quick look at which companies are investing in HFC-23 and N2O projects and you’ll soon find your answer. (It’s worth noting that a number of companies, such as HSBC, have steered clear of investing in industrial gas abatement projects altogether – no doubt on the basis that the reputational risks involved were simply too great).
Fortunately, the European Commission – more specifically DG CLIMA – did decide to take action in the end. In November last year, and despite huge pressure from a limited but vocal group of corporate investors determined to knock the initiative on the head, it brought out a draft Regulation establishing a complete ban on CDM credits from HFC-23 and N2O from AA projects in the EU ETS as of 1 January 2013. The proposal was widely hailed by civil society as being extremely progressive but unfortunately the battle is still far from over.
With the Climate Change Committee’s vote on the proposal just one week away, CDM Watch is concerned that EU Member States are being put under similar pressure to effectively hollow out the Commission’s text. As their submissions to the Commission’s public consultation on quality restrictions make clear, investors are pushing very hard for the right to use banned offsets well into Phase 3 of the EU ETS, which in substance would mean delaying the entry into force of the quality restrictions. In our view this would dramatically weaken the proposal’s impact and set a very poor precedent for future quality restrictions. It would also be evidence of the increasing leverage that corporate interests are gaining over EU climate legislation.
Acting on our concerns, we’ve put out a call for EU Member States to preserve the ambition of the Commission’s proposal and do what’s best for the environment, not the narrow financial interests of a small group of investors. Let’s hope that call is answered on Friday.