Let’s start with what has happened so far:

It was suspected for a long time that there is something fishy about HFC-23 projects.

CDM Watch’s submission of March 2010 to the UNFCCC to revise crediting rules for HFC-23 projects revealed that HCFC-22 production facilities were purposely maximising HFC emissions (see box on the right).

The UN and the EU act

Following the official request by CDM Watch to revise the methodology for these projects (AM0001), an investigation by the UNFCCC methodology panel confirmed that the methodology had major loopholes. As a consequence, in 2010 the CDM Executive Board suspended the HFC-23 methodology. The European Union also banned the use of these credits in Europe´s Emission Trading Scheme, as of 2013.

The emperor’s new clothes

With the suspension of the methodology the CDM Executive Board had tasked the Meth Panel to write a revision of the methodology. At their 49^th meeting in early May 2011, the UNFCCC methodology panel presented a new version of the methodology AM0001 which will be discussed at the next meeting of the CDM Executive Board starting on 30 May 2011.

The proposed revision includes a range of changes. The most important ones are:

1. A lower cap on the maximum creditable waste generation rate w. The former methodology had a cap of 3%. The revision proposes limits of 1% or 1.4% and the Executive Board has been asked to choose one of the two values.
2. The eligible quantity of HCFC-22 for crediting will be calculated based on the average instead of the maximum historical HCFC-22 production levels.
3. Two options to calculate project emissions.The Executive Board has been asked to choose either option A or B:
   A. Undestroyed HFC-23 emissions from all production lines in a plant (including those that cannot earn credits) are accounted for as project emissions or
   B. Only undestroyed HFC-23 emissions from HCFC-22 production lines that are eligible for crediting are accounted for as project emissions.

Although a step in the right direction, the proposed revision of the methodology is still too weak and leaves the two main issues unresolved. Please see a detailed comment in our note on the proposed revised methodology. Firstly, there are risks that CDM plants may displace HCFC-22 production in more efficient plants or in plants that are located in countries that have an emissions cap (‘carbon leakage’); and secondly, the negative implications for the phase-out of HCFCs under the Montreal Protocol.

Why does the new methodology still risk displacement of HCFC-22 production?

If the CDM revenues are very large, they can lead to a production shift to HCFC-22 plants in developing countries away from production in Europe and other developed countries that have a cap on their total emissions. Such carbon leakage undermines climate protection goals and creates unfair economic distortions. A very conservative baseline factor for the HFC waste generation rate is necessary to ensure that no carbon leakage occurs. The current methodology revision asks the CDM Executive Board to either set the cap at 1% or 1.4% (in the old methodology the cap is 3%). But even the lower of the two proposed factors (1%) is not stringent enough to prevent carbon leakage.

How does the revised methodology undermine the goals of the Montreal Protocol?

In 2007, Parties to the Montreal Protocol agreed to significantly accelerate the phase out of HCFCs. A freeze is already envisaged by 2013 and a 10% decrease below the base year level is required by 2015. HCFC-22 production for emissive uses will be phased-out by 2030. The speed of the phase-out will depend on how quickly the agreement will be implemented by host countries. Countries may start the phase out early since significant funding will be provided for this purpose under the Multilateral Fund. This can only happen if the CDM does not provide perverse incentives to delay the phase out.

The proposed methodology revisions try to address this issue by requiring a cap on HCFC-22 production based on average historic production levels instead of the maximum. Although this is an important improvement, it is not enough to minimise perverse incentives. A more conservative baseline cap for the HFC-23 generation rate is also needed. Only the combination of these two caps (average historic production levels for HCFC and a stringent waste generation rate for HFC) can ensure that there is no disincentive to shut down CDM plants in the course of the phase out of HCFC-22 under the Montreal Protocol.

The proposed methodology revisions for HFC-23 projects (AM0001) contain many improved elements but does not go far enough. The revisions and the accompanying note by the CDM Methodology Panel make it clear that neither the safeguarding of the Montreal Protocol goals or the prevention of  ‘carbon leakage’ are sufficiently addressed with the current proposal. The methodology remains flawed as long as these two issues are unresolved.

Despite the well known fact that the current methodology is flawed, industry is pushing to continue their lucrative projects unchanged. The first renewal request was submitted last year by the HFC-23 Decomposition Project in Ulsan, South Korea, operated by the Ineos Group. According to rules in place the project could renew on the basis of the old, flawed methodology. This would mean that thousands of credits would continue to be issued despite the fact the UNFCCC has openly acknowledged the loopholes and flaws in the current procedures.

CDM Watch urges the CDM Executive Board to: To reject the proposed 1% or 1.4% ‘waste generation rate’ and instead to adopt a rate of 0.2%. Or, to reject the methodology and send it back to the Methodology Panel to fully address the risks associated with undermining the Montreal Protocol and with potential ‘carbon leakage’. To support the inclusion of all HFC emissions in the project emissions. This incentivises additional abatement, reduces the potential of plants emitting unabated HFC and further protects the goals of the Montreal Protocol. To resolve the methodology issues before projects can renew their crediting period.

HFC Summary

HFC-23 is an unwanted byproduct from the production of HCFC-22, a refrigerant gas that is being phased-out under the Montreal Protocol due to its ozone-depleting properties. As a greenhouse gas, HFC-23 is 11,700 times more potent than CO₂ and has an atmospheric lifetime of 250 years. There are currently 19 HFC-23 abatement projects registered under the CDM. These 19 projects are projected to deliver more than 476 million carbon credits by 2012. Over half of these credits have already been issued, representing about 50% of the credits from all CDM projects issued to date.

HFCF-22 production is heavily influenced by when plant operators receive carbon credits and raises the question about how much of the potent greenhouse gas is actually being produced just to destroy it at a profit by creating credits under the CDM. The graph above shows how plants reduced or even stopped their HCFC-22 production once the amount of HCFC-22 eligible for crediting was reached and that production of the gas started again when the new crediting year started.