Carbon trading encourages greenhouse gas production

A compensation system provides a strong incentive for Chinese and Indian chemical companies to overproduce HCFC-22, for its waste product, super-greenhouse gas HFC-23, which is 14,800 times more potent than CO2.

This week, apparently following Chinese threats to emit supplies of HFC-23 into the atmosphere, a UN panel issued two million valuable carbon credits to a company called Juhua. It has a factory in Hangzhou, Zhejiang province, where the gas can be destroyed.

HFC-23 is not used for any purpose; it is a by-product produced in the manufacture of a refrigerant called HCFC-22, used mostly in developing nations. To hold back the release of HFC-23 into the atmosphere, the parties to the Kyoto Protocol agreed to pay carbon credits to refrigerant manufacturers that agree to capture and destroy it.

The manufacturers can then sell the credits to western companies that want to offset their obligations to cut emissions of GHGs, under a Kyoto scheme known as the Clean Development Mechanism (CDM). Chemical companies are being accused of exploiting the controversial system. The waste gas HFC-23 has consequently become much more profitable to refrigerant factories than HCFC-22 itself.

The compensation offer only applies to HCFC-22 plants that were built before 2000, yet it has proved highly lucrative. Some estimate that the value of the carbon credits is up to 100 times the cost of incinerating HFC-23. Chinese companies alone are estimated to make US$1.6 billion by 2012.

The London based Environmental Investigation Agency (EIA) say the carbon trading system ends up providing a strong incentive to overproduce HCFC-22, using methods that maximise the output of HFC-23.

The European Union wants all credits for HFC-22 prohibited, however last week CDM officials in China threatened that factories there would respond by releasing the gas into the atmosphere. This week's issue of new credits to Juhua suggests that the CDM has backed off on completion of a review of a scam, bowing down to Chinese pressures.

Worldwide, there are 19 companies receiving carbon credits for the destruction of HFC-23, mostly in China and India. According to EIA's Clare Perry, the Chinese government imposes a 65 per cent tax on the revenue earned from selling such credits, which funds sustainable development projects. India does not levy such a tax.

Last week, at the climate conference in Cancun, Mexico, India successfully opposed the adoption of a provision that would have called for action to limit the production of HFC gases.

A text on the first week of the 16th Conference of Parties (COP16), on 4th December 2010, asks that there be a decision made at the next UN climate conference in Durban, South Africa in 2011. In a positive move, civil society has the opportunity to submit comments on market, as well as non-market mechanisms. Innovative non-market based solutions include a fund for dealing with HFC-23, a powerful waste gas released when refrigerant is produced. This is akin to how the global community dealt with CFCs under the Montreal Protocol.

The new texts do not set hard limits on the quantity of offsets that countries can use to meet their emissions reduction targets. As previously, countries are left to decide what percentage of effort is supplemental to emissions reductions at home.

Countries are seen to continue exploiting the carbon trading mechanism and the UN will be under intense pressure to resolve un environmentally sound ventures in time for COP17 in Durban.

Author: Marianna Keen | Climate Action

Image: A. Belani | Flickr