Commissioner Connie Hedegaard stated on the 25th August 2010 that she has asked her department “to prepare a proposal for a measure to introduce further quality restrictions on the use of credits from industrial gas projects in the post-2012 EU ETS.” This is the strongest signal yet that the EU is gearing up to address the spiraling dispute about the quality of international offsets being used for compliance in the EU’s emissions trading scheme (ETS).

Much of this debate stems from the ongoing row about the legitimacy of HFC clean development mechanism (CDM) projects and their role within the EU ETS. This ongoing dispute has drawn in a wide range of stakeholder including environmental groups, the UN, the European Commission, financial institutions, project developers and the chemical industry itself. Tensions are running high. On one side are those who are seeking to protect vested interests – HFC projects have proven to be hugely profitable for all involved and many do not wish to see the gravy train come to an end. On the other are those who believe such cheap forms of emissions savings should be more properly regulated, leaving the market to fund projects which have clearer environmental and
development benefits.

It’s regrettable that the World Bank is currently on the side of the vested interests. It has tasked itself with contributing to efforts to combat climate change, which goes hand in hand with its missions to reduce poverty and improve living standards in the developing world. However, the World Bank’s Umbrella Carbon Facility invests in two of the biggest HFC-23 projects. Such projects are currently under intense scrutiny, facing allegations of gaming, acting as a perverse incentive, holding back more cost effective regulation, generating vast windfall profits and flooding the market with cheap credits which prevents projects in the lease developed countries accessing the markets. HFC projects are contained within chemical installations and have no meaningful sustainable development benefits for the local area let alone improving living standards for those living near them.

Sandbag welcomes the move to by the Commission to set in place quality restrictions for all international offsets being used for compliance within the EU ETS. The removal of industrial gas credits from the EU ETS will have an overwhelmingly positive effect on the distribution and viability of CDM projects from not only Least Developed Countries (LDCs) but also from the most environmentally sound projects. HFC emissions will still remain a problem but we now know they are very cheap to solve, in particular via the Montreal Protocol. Therefore, in parallel, regulations must be swiftly introduced and removing the profit incentive will help to achieve this.

So far the EU ETS has seen 97 million HFC credits surrendered into the EU ETS (roughly 60% of all surrendered). These, originated from just 18 HFC projects, which account for only 0.8% of all CDM projects. There are more desirable CERs making it into the EU ETS, such as those from the lone Gold Standard project, La Esperanza Hydroelectric Project, which generated 1,676 credits for use in the EU ETS. Where it’s positive to see the inclusion of such projects, and praise is due to those surrendering these credits, including EDF's Eggborough power station. Before we sing the praises of EDF too much, it's worth bearing in mind of the 875,000 surrendered by Eggborough power station, only 38 were Gold standard CERs and 658,278 were HFC CERs.

The emissions trading trade body, IETA, recently suggested that ‘Africa is turning into a major source of premium Clean Development Mechanism projects.’ Sadly this is just speculation at this point. Although existing rule changes in the next phase of trading will, in theory, open up markets in least developed countries, Africa is currently home to only 3% of all CDM projects, with just over 80,000 CERs having entered the EU ETS to date, ironically from an energy efficiency project in a steel works and an industrial gas project.

The EU needs to act quickly to ensure that not only credits from industrial gas projects are prevented from entering the EU ETS but a broader policy framework is put in place that is able to apply quality standards to all credits being used for compliance. This will provide much better value for money for EU citizens, spur investment in the most environmentally sound projects and also encourage investment to flow to those countries most in need.

As for whether these changes will scare of any future investment in the carbon market, as some are claiming, this appears an empty threat. Given the rates of return that have been generated so far it would be a very foolish investor who turned his back on this market completely – the challenge instead is to find the next low cost solution to climate change – something which the market has proven it is more than capable of achieving.