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Contributions from
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Tribune
NGOs do more than provide social services
Burning money – dysfunctional Clean Development Mechanism
Aid for the fractured societies of fragile states
02/2007
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[ Climate protection ]
Burning money
In theory, the Clean Development Mechanism (CDM) makes sense. Investors from rich countries are supposed to invest in climate protection in developing countries and be rewarded with emissions certificates, which lessen their environmental obligations at home. In practice, however, the CDM has hardly helped to make energy supply in poor countries more climate-friendly. Rather, the mechanism is subsidising the refrigerant and air-conditioner industries in emerging markets. Worse, it is inadvertently compounding environmental problems.
[ By Tillmann Elliesen ]
When the World Bank purchased $ 1 billion worth of credits for carbon emissions in China last autumn, it celebrated the deal as good news both for the economy and for the global climate. The Bank had collected funds from governmental climate-protection funds and private investors, including asset management services and large energy providers, to invest in a healthy environment.
The deal was based on the CDM, an instrument defined by the Kyoto Protocol, according to which industrialised nations must reduce their greenhouse emissions from 2008 on. The CDM allows governments and companies from rich countries to fulfil their reduction obligations by investing in climate protection in poor countries. Emissions avoided that way compensate for gas still emitted at home. In theory, the CDM should foster the growth of climate-friendly energy sectors in poor countries.
In the case of the World Bank’s China deal, however, that is not so. The emissions certificates in question do not stem from environmentally friendly power generation. Rather, they stem from facilities that dispose of an industrial gas. This gas is called HFC-23. It is the unwelcome by-product of making HCFC-22, a refrigerant used in air conditioners. HFC-23 is an extremely potent greenhouse gas. A single tonne causes as much damage as 11,700 tonnes of CO2. Accordingly, investing in burning HFC-23 is the quickest way to earn emissions certificates; and institutions in need of such certificates find it more attractive to invest in HFC-23 incinerators than to set up a dozen wind turbines or hydropower facilities.
Nonetheless, the approach is environmentally destructive and economically nonsensical.
– The science of the matter is as follows: HCFC-22 is itself a greenhouse gas. Moreover, it affects the ozone layer and is therefore controlled by the Montreal Protocol. Ironically, the Kyoto Protocol, which aims to protect the climate, is thus inadvertently promoting the production of a gas that another environmental UN protocol aims to stop. There are technologies to produce other refrigerants without doing so much harm, but they are hardly in use in emerging markets.
– Profit-driven businesses are exacerbating the problem. Revenue from emissions certificates has made disposing HFC-23 an industry in its own right. As Michael Wara of Stanford Law School’s Programme for Energy and Sustainable Development calculates, HCFC-22 producers in China, India and Brazil are making up to twice as much money from burning HFC-23 than from selling the refrigerant. The CDM is thus giving them an incentive to produce even more HCFC-22 – if only for the sake of disposing of the useless by-product. Accordingly, the price of HCFC-22 is falling. The CDM is thus, in effect, subsidising the air-conditioner industry as well. Moreover, the CDM provides an incentive to make the refrigerant in a wasteful manner. After all, the revenue from emissions certificates depends on how much waste is burnt.
The designers of the CDM were aware of the problem. Therefore, CDM rules stipulate that the share of HFC-23 in the production of HCFC-22 must not exceed three percent. Stanford scholar Michael Wara has calculated that the average for refrigerant producers involved in CDM schemes is 2.99 percent. Obviously, producers are meticulously aiming for the maximum waste amount allowed. In this context, Wara finds it maddening that the value of the emissions certificates generated in HFC-23 incinerators today exceeds the costs of avoiding HFC-23 several times.
Depressingly, the World Bank’s China deal is not exceptional. The CDM secretariat’s statistics reveal that, as of January 2007, almost 50 % of emissions certificates stem from the incineration of HFC-23. Only 15 % of the emissions certificates on sale so far stem from renewable energy facilities.
In view of these data, it hardly matters that 50 % of all CDM projects are indeed in the renewable energy-field. In terms of volume, they hardly figure. Only one sixth of the funds channelled through the CDM projects registered so far flows into climate-friendly energy generation in developing countries. 70 % of total CDM emissions certificates are based on projects in China, India and Brazil, where the biggest HCFC-22 facilities are located, with the People’s Republic making up around 40 % alone.
None of this is news to the governments that have signed the Kyoto Protocol. At the last conference in Nairobi, they once again discussed how to solve the HFC-23 problem. Two years ago, they had resolved to restrict emissions certificates to HCFC-22 facilities built before 2004, in an attempt to prevent clever, subsidy-hungry entrepreneurs from setting up new plants. As a result, the CDM secretariat expects the share of HFC-23 projects to decrease below 30% until 2012.
Nonetheless, market observers believe that the high demand for air conditioners worldwide will keep the growth rates for HCFC-22 production in double digits over the next few years. In Nairobi, the governments that have ratified Kyoto brainstormed about how to handle all the additional HFC-23 – without any results. Climate experts largely agree that the CDM should not apply to future HFC-23 incineration. In environmental terms, it would be much better to set up an international fund for funding furnaces. In business terms, doing so would be less expensive.
A sensible proposal was dropped in Nairobi. The idea was to use the profits from burning HFC-23 for investing in facilities for producing refrigerants with other technologies with less harm to the global climate. China, however, blocked this initiative. After all, the People’s Republic is making a pretty penny from burning of HFC-23. After the billion-dollar deal with the World Bank was been signed, China’s government imposed a levy to the tune of 65 % of certificate trading on the refrigerant industry. The silver lining is that Beijing has promised to use the revenue for renewable energy and sustainable development.
Tillmann Elliesen
is managing editor at D+C Development and Cooperation/E+Z Entwicklung und Zusammenarbeit.
euz.editor@fsd.de
Reference:
Michael Wara, 2006:
Measuring the clean development mechanism’s performance and potential.
Program on Energy and Sustainable Development, Working Paper #56, Stanford University
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