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Credits from HFC23 projects have long been the albatross around the neck of the CDM. The questions around additionality, value for money, perverse incentives and the lack of any sustainable development benefit for the local community of these projects have stifled the legitimacy and many of the positive outcomes of the mechanism.

Is the HFC debate finally coming to an end? In short, no. While the UNFCCCinvestigated the issue and found that gaming may be taking place, they have failed to put an end to the controversy surround these projects. Thankfully the EU has taken the lead on this issue by moving to ban HFC-23 and N2O adipic credits from its emissions trading scheme.

With the EU’s Climate Change Committee set to vote this Friday the Commissions draft proposal on offset quality restrictions, this is a crucial test for the environmental integrity of the EU ETS.

Sandbag EEP Public Hearing

With less than a week to go before the vote, final words are being exchanges on the issue. One such case was on the 12th January at a public in the European Parliament hearing entitled ‘shortcoming undermining the integrity of the Clean Development Mechanism’. Alongside speakers from BusinessEurope, Enel, CMIA and Du Pont, Sandbag presented in partnership with the EIA to make the case for taking these credits out of the EU ETS as soon as possible. Our reasoning was based on a number of points, including:

1. Failing to ban HFC and N20 credits would undermine EU’s international climate change position

A failure to the ban industrial gas projects conflicts with the EU’s international climate position adopted by all EU Environment Ministers prior to the UNFCCC meeting in Cancun, in particular points 9, 14 and 21 which state i) advanced developing countries should take on emission reduction commitments of their own. As HFC and N2O projects are so lucrative their continued availability might deter advanced developing countries such as China from taking domestic responsibility for these reductions. ii) The phase out of HFC-23 could be achieved much more economically via the Montreal protocol and iii) the CDM needs to be overhauled in order to spread the geographical distribution of its benefits.

2. Undermining the Montreal Protocol

The Montreal Protocol established the accelerated phase-out of HCFC-22 (an ozone depleting gas). However, the lucrative nature of HFC-23 projects (HFC-23 being a waste gas from the production of HCFC-22) discourages producers of HCFC-22 to reduce their production – rather it perversely incentivises their continued production to reap the rewards of the CDM. Ironically the EU is financing the phase-out of HCFC-22 through the Montreal Protocol while simultaneously paying some €12 per HFC-23 carbon credits – the by-product of HCFC-22 production.

3. Value for money

The true cost of destroying HFC-23 is approximately €0.17/tonne CO2-eq abated. Meanwhile, European companies are currently paying €12/tonne to abate HFC-23 to meet their obligations under the EU ETS. So, while to date (2008-09) the EU has spent €1.2bn on HFC-23 destruction the real cost of HFC-23 destruction in CDM is €13.8 million annually.

4. Geographical Distribution

There are over 2,700 registered CDM projects, however, of the 160 million CDM credits that have been surrendered into the EU ETS, 97million originated from a mere 18 HFC projects predominantly in China and India. These projects are so lucrative that they have totally dominated the CDM and thereby prevented European compliance money from reaching the most vulnerable parts of the world where investment is desperately needed. Banning HFC and N2O credits from the EU ETS would open the market up to more sustainable projects across a broader number of countries, in particular Least Developed Countries (LDC).

5. Environmental integrity of HFC – 23 CDM projects

Industrial gas projects raise environmental concerns: the exceptionally high rates of return from the destruction of HFC-23 has the consequence of stimulating the continued production and use of HCFC-22 – an ozone depleting substance. This was confirmed by the CDM Methodology Panel who concluded that the current rules may lead to the production of unnecessary carbon credits. The CDM is also designed to promote sustainable development in the host country, however, HFC-23 project have extremely limited sustainable development benefits for the surrounding community.

Also present at the public hearing was EU Climate Change Commissioner Connie Hedegaard who confirmed that member states showed “broad support” for a proposed ban on certain United Nations carbon offsets related to industrial gases. Hedegaard went onto explain this was not a discussion onwhether to ban these credits but rather “when to do this”.

And so comes the question of when. The EU emissions trading Directive clearly states that quality restriction can be introduced as on the 1st January 2013 . This is a date known to all market participants and, you would think, have been taking into account in their planning. Yet, while Sandbag is emphatic in its support for the Commission’s proposal for quality restrictions as of the 1st January 2013, many members of the industry lobby are less enthused. This is evident from their submissions to Commission’s public consultation on the issue, industry are pushing hard for a delay of any ban. In particular this delay is being advocated by those with a vested interest in the projects in question; naturally they want to maximise their investment and the number of credits they can flood the system with – even if this does undermine the integrity of the whole emissions trading system.

Most vocal in their opposition to the ban is Italian power goliath Enel. With investment in seven HFC projects they were never likely to welcome the European Commission getting in the way of their investment.

As ever the real losers in this whole debacle are those most vulnerable countries where climate investment could have real transformative and life changing effects. At the public hearing on the 12th Jan much praise was bestowed upon the CDM by almost all parties and rightly so. The CDM has proved itself a useful tool for abating emissions in developing countries as well as creating the infrastructure through with investment can flow. Yet it should not be forgotten that it was developed with two purposes: to assist non annex I counties in achieving sustainable development and to assist Annex I countries in achieving compliance with their emission reductions targets. While investors wax lyrical about the enormous abatement benefits of HFC and N2O project I doubt many would have the audacity to argue that these projects are not diverting investment away from the world’s most vulnerable regions. With €1.2bn being sent to 18 chemical works, mostly in China and India, over just two years the numbers speak for themselves.

In a few days the Climate Change Committee takes its vote, and we get to see whether it puts effective action on climate change a priority over the financial bottom line of a few big companies …