Carbon Market Watch

For fair and effective climate protection.

Perverse incentives of HFC-23 projects (Newsletter #9)

16 Jul 2010

HFC-23 projects in the CDM have become the focus of media attention over their lack of environmental integrity in the past weeks[1]. During this upcoming meeting, the Board will finally discuss new evidence showing that the current CDM methodology creates perverse incentives for plant operators to artificially increase HCFC-22 production, from which HFC-23 is an unwanted byproduct.

This evidence was first presented to the Board in a letter by Noe21 in December 2007. Due to the lack of action by the CDM Executive Board to address these flaws, CDM Watch has now submitted a formal proposal to revise the crediting methodology in line with UN procedures. The suggested revision removes the strong economic incentives to increase HCFC-22 production and HFC-23 generation by introducing an emission benchmark more in line with the actual costs of HFC-23 destruction. The new benchmark would cut the inordinately high and excessive number of credits currently issued for the destruction of HFC-23 by more than 90%. The plant operators would still have sufficient economic incentives to destroy HFC-23 but the revenues from selling credits would not exceed the HCFC-22 production costs as is currently the case.

The Methodologies Panel discussed this revision request for the first time in end June 2010. Although not providing a clear recommendation to the Board it did prepare a note on the issue, agreeing that many of the claims in the revision request could cause perverse incentives, i.e. that plants are producing dramatically more HFC-23 per tonne of HCFC-22 than technically feasible, that some factories are only producing HCFC-22 if they are receiving CDM credits, and that the existence of the CDM credits may be causing an increased production of HCFC-22. The Panel said that further investigation is required to “identify situations” resulting in excessive issuance of carbon credits and how “to improve the methodology”. Based on the note that was developed at that occasion, the Board is expected to provide further guidance on possible action with respect to the methodology during this upcoming Board meeting.

Action to be taken by the Board: In light of the significance of these findings and the potential for considerable over-estimation of emission reductions, CDM Watch believes that the methodology AM0001 must be put on hold with immediate effect. The Board should request the Meth Panel to urgently conduct the required investigation and to swiftly prepare a revised methodology which addresses the issues with no further delay. In this context, CDM Watch reminds that the Board put four methodologies on hold in the past (ACM0005, AM0001, AM0006 and AM0016) in situations where the environmental integrity of the CDM was at risk and where a revision of the methodology required more time.

In addition, all issuance of CERs shall be ceased until a fully corrected, revised methodology is adopted. The continued validity of this version of the methodology and the continued issuance of CERs before the investigation is completed would seriously undermine the credibility of the whole CDM and violate the overarching principle established in the Kyoto Protocol that emission reductions from CDM projects shall be real, measurable and additional.

For more information about the revision request, including press releases and background papers see

[1] NYTimes, CDM Critics Demand Investigation of Suspect Offsets, 14 June

The Guardian, UN considers review of alleged carbon offset abuses, 16 June

Bloomberg, UN May Complete Review of Hydro-Fluorocarbon Emission Credits by August, 22 June

Le Monde, Climat: les effets pervers des crédits carbone, 26 June

Reuters, Kyoto may push factories to pollute more-UN report, 2 July

Fox News, UN report fuels charges of manipulation in $2.7 billion carbon-cutting market, 2 July

Financial Times NL, VN onderzoekt verdachte CO2-handel, 3 July