Who has a conflict of interest in the HFC-23 case? (Newsletter #9)

In cases where substantial economist interest is at stake, such as in the upcoming discussions on the HFC-23 revision request, Board members face pressure under the current CDM rules. The 19 registered HFC-23 destruction projects are expected to generate about 478 million CERs by 2012 and more than one billion CERs by 2020. These projects generate more than 80 million CERs annually, worth an estimated €800 million. The proposed revision request would cut the inordinately high and excessive number of credits – as well as the revenue – currently issued for the destruction of HFC-23 by more than 90%.

Decision 3/CMP.1 paragraph 8 (f) requests that “members, including alternate members, of the Executive Board shall have no pecuniary or financial interest in any aspect of a CDM project activity or any designated operational entity.” However, Board members often play multiple roles at the same time, including UNFCCC negotiators, representing their countries’ DNA or managers of large government CDM purchasing programs. Although members should act in their personal capacity, there are severe concerns about conflicts of interests of Board members. Last year, the New York Times reported that some Board members abuse their role and aggressively promote projects that benefit their home countries[1].

In an attempt to address these serious problems with conflicts of interests, the Board adopted a code of conduct last year. Unfortunately this code of conduct hardly provides the language needed to change the current situation and fails to include a definition of what a conflict of interest is. It merely suggests that each Board member will “exercise personal discretion in deciding whether s/he has a real or perceived conflict”. Based on this, several EB members started to document this perception in so-called “documents related to conflicts of interest” since earlier this year. These documents are uploaded on the first day of Board meetings and look like this.

Despite the weakness of this code of conduct, Board members must ensure that decisions are taken in the most independent manner to ensure the credibility of the CDM. Unfortunately, the transparency of Board decisions is facing an additional challenge: Board members do not have diplomatic immunity and therefore risk prosecution or lawsuits on the basis of their decisions. Therefore, the majority of discussions on contentious issues are exclusively held behind closed doors.

CDM Watch believes that it is time to put an end to this practice. Discussions shall be held in open sessions and the matter of lack of diplomatic immunity shall be forwarded and dealt with by COP̸MOP.

Action to be taken by the Board: CDM Watch recommends that all Board members publish “documents related to conflicts of interest” ahead of this next meeting and strongly recommends that following Board members and alternates will complete such a form and leave the room when the HFC-23 revision request will be on the agenda:

Member/Alternate Country Reason for conflict of interest[2]
Maosheng Duan China China hosts 11 of 19 registered HFC-23 projects and is hence the largest supplier of HFC-23 destruction-based credits; China also imposes a 65% levy[3]on all HFC-23 CERs. With 11 CDM projects generating apx 65 million CERs per year, this makes about € 650 million per year from HFC-23 projects for the Chinese government.
Rajesh Kumar Sethi India India hosts 7 HFC-23 projects that generate about 11 million credits per year. At about 10 € per credit, this makes 110 million € per year. In 2007, Gujarat Fluorochemicals alone made € 66 million from selling 6.5 million CERs, possibly exceeding the income from HCFC-22 production by far.
Lex de Jonge The Netherlands The Netherlands has signed LoAs with 7 HFC-23 destruction projects. At least 2 companies and the Ministry itself are directly involved in financing HFC-23 projects. But a recent article in the Financial Times states that the Dutch government does not want to disclose information about exact involvement in HFC-23 credits[4].
Martin Hession United Kingdom The UK government has signed LoAs with 15 HFC-23 projects and at least 14 UK companies are involved in financing HFC-23 projects.
Akihiro Kuroki Japan Japan has signed 8 LoAs and 17 Japanese companies are actively involved in financing HFC-23 projects. Japan (together with Switzerland) has also signed LoAs with the Ineos project currently requesting renewal.
Peer Stiansen Norway Norway has signed LoAs with 1 HFC-project and at least 1 company is actively involve

 

The Environmental Investigation Agency & CDM Watch have presented a policy briefing paper on HFC-23 offsets in the context of the EU Emissions Trading Scheme at a recent policy event in Brussels on 14 July 2010. You can download the policy briefing here