Global carbon trade collapses into hot air

September 19, 2012

If there is one thing melting away faster than the Arctic ice cap it’s the credibility of the global carbon trading system set up under the Kyoto treaty to address climate change. A United Nations sponsored panel said in a September 10 report that “global carbon markets ... are collapsing with potentially devastating consequences”.

Panel member Joan MacNaughton told the Guardian: "The carbon market is profoundly weak.” The Economist said it is “a shambles”.

The report said the price of carbon offset credits issued under the UN’s Clean Development Mechanism (CDM) had fallen 70% in the past year. The UN-backed carbon offsets now sell for less than $3: down from about $20 in 2008.

The CDM market allows firms in developed countries to buy offset credits from carbon-reduction projects in the global South. The UN oversees the process, giving out CDM credits for each tonne of carbon emissions it says has been saved. Businesses in rich countries that take part in the scheme can buy the CDM offsets to meet their emission cut targets – in effect, swapping emission cuts in the South for cash from the North.

But the market is falling over because there are far more CDM offsets for sale than there are buyers. European firms have been the biggest buyers of CDM offsets, but Europe’s emissions trading scheme has hit a wall due its huge over-allocation of free permits to industry. That, combined with Europe’s economic woes, means few of Europe’s big polluters need to buy more offset credits to meet their emission cuts targets.

The rock bottom international offset price has implications for Australia’s carbon price scheme, which recently joined with the European system. Australia’s scheme gives the country’s biggest polluters billions in compensation payouts. The government pays compensation at $23 a tonne of carbon, but these firms can meet 12.5% of their required cuts with international offsets that cost just $3 a tonne. Don’t expect them to give the extra cash back to taxpayers.

Oversupply is also dogging another UN-backed market-based climate scheme. The Kyoto protocol allows countries that emit less than their target to sell their surplus emissions on the carbon market. But these surplus credits – which the UN calls Assigned Amount Units (AAU) – are in such oversupply they now sell for less than €1 a tonne.

A recent report by Point Carbon said a worldwide AAU surplus of 13.1 billion tonnes was generated from 2008 to 2012. The surplus could rise above 17 billion tonnes by 2020. CDM-Watch’s Anja Kollmuss told the Inter Press Service: “The supply is three magnitudes bigger than the demand.”

Most of these surplus credits are bogus – often known as “hot air” credits. Russia, Ukraine and Poland hold the most hot air – the de-industrialisation of these countries after the collapse of communism means their emissions are lower than in 1990, which the Kyoto protocol treats as its baseline year. The global economic crisis, which led to a fall in Europe’s emissions, has added even more hot air to the scheme.

The oversupply crisis means Kyoto’s carbon trading scheme now ensures it is cheap for companies to increase their pollution – hardly an incentive to switch to zero emissions technologies.

The UN’s carbon markets might be a “shambles”, but the UN’s top climate change official Christina Figueres seems determined to pretend all is well. She issued a press release on September 7 to welcome the 1 billionth carbon offset credit issued under the CDM since 2005. “This exciting milestone is testament to the expanding use of the CDM,” she said.

Of course, the “expanding use” of CDM offsets has led to its oversupply crisis. But the size of the CDM market also says nothing about its integrity. The truth is that most of the billion CDM offsets approved by the UN are fakes and do not represent emissions cuts.

The August 9 New York Times said about 46% of CDM credits have come from just 19 companies that have destroyed an industrial gas called HFC 23. The gas, which is a waste byproduct created during the manufacture of coolant gases for refrigerators, has a global warming potential 11,000 times that of carbon dioxide.

Realising they stood to make millions, these companies have sharply increased production of coolant gas (itself a powerful greenhouse gas) simply so they can be paid to destroy the byproduct HFC 23.

This CDM loophole has not just given an incentive to these companies to increase pollution, but it has done so at a remarkably high price. In 2008, Stanford University’s Ken Michael Wara and David Victor estimated that by this year destroying the gas would cost about $100 million, but would create $4.7 billion in CDM credits.

The European Union says it will ban industrial gas offsets from its scheme from next year and Australia’s carbon price scheme does not allow them. But the UN is likely to keep accrediting the bogus offsets. Chinese manufacturers have threatened to release the gas into the atmosphere if they are no longer paid to destroy it.

But the CDM’s integrity problem extends beyond the waste gas issue. A September 10 investigation by India’s Daily News & Analysis said: “Several projects in the country that are earning huge sums through the sale of carbon credits are, in fact, ineligible for the CDM scheme. Promoters of these projects have manipulated and backdated documents to meet requirements as prescribed by the CDM executive board.”

It said the Indian body responsible for approving CDM proposals and submitting them for international accreditation routinely “approves CDM proposals without conducting field inspections to verify whether the project fulfils the eligibility criteria”.

In theory, to be eligible for CDM accreditation a project must a) prove it cuts emissions and b) prove that the emissions cuts are additional to what would have happened anyway.

A July 2008 cable from the US consulate in Mumbai released by WikiLeaks said “executives of major Indian companies ... conceded that no Indian project could meet the ‘additionality in investment criteria’ to be eligible for [CDM] carbon credits”. But the UN’s CDM Executive Board had still approved 346 projects in 2008. Today, there are 827 CDM-approved projects in India.

The cable said the then-chairperson of India’s CDM authority, R K Sethi, had “publically admitted that the National CDM Authority takes the ‘project developer at his word’ for clearing the additionality barriers”.

Soumitra Ghosh, from India’s North Eastern Society for Preservation of Nature and Wildlife, told Daily News & Analysis: “Of the 60 CDM projects that I have evaluated, there appeared not to be one that actually reduced emissions.”

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