The HFC issue continues to be a hot topic of discussion.  We update you on the latest developments in the EU and at the UN. To help you navigate this complex topic, we have added some background information and three summary boxes.

EU Member States extend the EU ETS ban on HFC-23 credits

All 27 of the EU Member States^[2] have agreed to ban HFC-23 and N₂O (adipic acid) CDM project credits from the ETS as of May 2013. This decision has been hailed as a long overdue move to prioritise the integrity of the EU ETS over the financial interests of corporate investors. However, this ban does not cover EU Member States’ national targets in the non-traded sectors (such as building, agriculture and transport). This is significant given that under the Effort Sharing Decision, up to two-thirds of the total emissions reductions required of EU Member States from 2013-2020 can be met through offsets.  It is therefore vital that EU Member States do not use the spurious industrial gas credits for national mitigation obligations.

To address this loophole, the Danish government launched a voluntary initiative to encourage all member states extend the ban to their own national targets. At the EU Environment Council meeting on the 21^st of June, 15 countries joined Denmark in extending the ban to non-traded sectors and four others are expected to do so^[3].

CDM Watch calls on the seven remaining countries to commit to the full ban: Italy, Poland, Spain, the Netherlands, Finland, Romania and Lithuania.

The CDM Executive Board put off a decision about the methodology revision for HFC-23 projects (AM0001)

After the HFC-23 methodology (AM0001) was suspended last year due to evidence of serious misuse and over-crediting, the CDM Executive Board tasked the CDM Secretariat to develop a methodology revision to address the loopholes. To avoid carbon credits being issued for the destruction of inflated or unnecessary emissions, the CDM Methodology Panel proposed to lower the waste generation rate from 3% to 1%.

At their 61^st meeting in June the CDM Executive Board had a heated debate about the proposed revision. The most vocal opponent of the revision was the Chinese delegate (China has 11 of the 19 HFC-23 CDM plants and several new HCFC-22 plants). CDM Watch was also opposed to the revision because it is not strong enough. Even a 1% waste generation rate doesn’t eliminate the risks of undermining the goals of the Montreal Protocol to phase out of ozone depleting substances, including HCFCs. It also doesn’t address the 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 (so called ‘carbon leakage’). Last year, CDM Watch had proposed a waste generation rate of 0.2%, a more appropriate rate to minimise perverse incentives.

The CDM Executive Board put off its decision because it could not agree. The Board also did not resolve how to address the HFC-23 project that has requested a renewal of its crediting period (Ulsan project 003).  

CDM Watch urges the CDM Executive Board 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 CDM Methodology Panel to fully address the risks associated with undermining the Montreal Protocol and with potential ‘carbon leakage’.

› 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.

› Resolve the methodology issues before projects can renew their crediting period.

Parties to the UNFCCC put off deciding what to do about new HFC-23 plants

For years nations have been arguing if new HCFC-22 facilities should be eligible under the CDM to destroy their HFC-23. Currently they are not. The issue was discussed again at the UNFCCC’s June meeting in Bonn.  Ahead of the meeting, the UN published a technical paper that summarised how the phase out of HCFC-22, an ozone depleter and strong greenhouse gas (GHG) covered under the Montreal Protocol and the destruction of HFC-23, a strong GHG and waste product of HCFC-22 production could be coordinated and financed.[4]

Looking forward: what can be done about the HFC issue?

The issue is complicated and politically tricky. Not all HCFC-22 production is covered under the Montreal Protocol. When HCFC-22 is used as a ‘feedstock’ (a product that is then turned into something else), it does not lead to ozone depletion because it is not released to the atmosphere. Such HCFC-22 feedstock uses are therefore not covered under the Montreal protocol, only ‘emissive’ uses such as refrigerants. However, both feedstock and emissive uses still produce the very potent GHG HFC-23 as a waste product.

Parties have argued for years about whether HFCs should be covered under the Montreal Protocol.  There are many different types of HFCs. Many HFCs are refrigerants used to replace ozone-depleting CFCs and HCFCs – so as they are being phased out, HFC production is likely to increase, especially given the growing demand for air conditioning in developing nations.

In 2010, 91 Parties to the Montreal Protocol signed a statement to “declare our intent to pursue further action under the Montreal Protocol aimed at transitioning the world to environmentally sound alternatives to HCFCs and CFCs.”^[5] The United States, Canada and Mexico put forward a proposal on such an approach which will be discussed at the next conference of parties of the Montreal Protocol in November 2011. China, India and Brazil, who are all major producers of HFCs, are likely to be opposed.

Parties to the UNFCCC have put forward different proposals of how HFC-23 emissions from new HCFC-22 facilities should be addressed under the UNFCCC. The proposals include:

1. Keep the ban on new facilities.
2. Allow new facilities under the CDM and mediate risks by:

• Establishing a more stringent benchmark (as is proposed in the revised methodology for existing CDM HFC-23 facilities, see above)
• Taxing them (which China already does at 65%)
• Limiting the use of the CDM to new facilities that produce HCFC-23 for feedstock purposes only.

Over the last six years, many proposals have been made by parties under the Montreal Protocol and the UNFCCC. Yet this issue remains unresolved. Once again, parties decided in Bonn to postpone a decision.

This is not all bad, because it means that new HCFC-22 will remain ineligible under the CDM. The CDM’s current rules for existing HCFC-22 facilities are so lax that the exorbitant profit margins of these projects are undermining both the goals of the Montreal Protocol and the UNFCCC. These risks were confirmed by an investigation launched by the CDM Executive Board. Given that the CDM Executive Board has not been able to agree on strengthening the current methodology, where gaming was clearly shown, it is unlikely that rules for new facilities would be strict enough to avoid perverse incentives. It is therefore important that new HCFC-22 facilities remain ineligible.

Emissions from all HFCs (HFC-23 is just one of them) urgently need to be addressed.  The EU estimates that by 2050 HFC emissions could lead to 100 gigatonnes of CO₂e emissions.[6] Keep in mind that we have about 600 gigatonnes left that we can emit into the atmosphere if we want to have a 75% chance of staying below 2 degrees warming.[7] Both climate and ozone protection goals need to be preserved. Incentives to destroy HFCs should not hamper the phase out of ozone depleters.

A good solution would be to simply pay for the incremental costs of HFC-23 incineration in all HCFC-22 production plants in developing countries, implemented under the Montreal Protocol. The Montreal Protocol already has the necessary expertise and infrastructure, including a fully operational financial mechanism to provide sufficient financial and technical assistance to developing countries. Alternatively, HFC-23 destruction in new HCFC-22 plants could be tied into developing country Nationally Appropriate Mitigation Actions (NAMAs).

The question of whether to allow new HFC-23 projects under the CDM will be taken up again at the next meeting in Durban, in November 2011. CDM Watch will continue to lobby for solutions that permanently safeguard the ozone layer and the climate from these potent chemicals. We’ll keep you posted.