On 21 January, EU Member States endorsed the European Commission’s draft Regulation on the restriction of certain industrial gas credits in the EU Emissions Trading Scheme, a milestone in our campaign against the use of HFC-23/N₂O AA offsets and a huge victory for the climate. As has been extensively documented by CDM Watch over the past year, because of the perverse incentives created by the methodologies used for these project types, a considerable proportion of industrial gas credits do not represent real emissions reductions.

The ban will be effective as of 30 April 2013; EU ETS operators will be able to surrender HFC-23 and N₂O credits up to that date as long as they were generated before 2013, and as long as they are used for 2012 compliance. The Regulation will now be subject to three months’ scrutiny in the European Parliament before it is formally adopted.

The Climate Change Committee’s vote was the outcome of months of intensive campaigning both at the international and European level. The revision request on the methodology used for HFC-23 projects (AM0001) which CDM Watch submitted to the Executive Board in March 2010 was effectively the trigger for the sequence of events that have unfolded since then. It contained evidence that HFC-23 plant operators had been gaming the CDM by maximizing the amount of refrigerant gas (HCFC-22) and the resultant waste gas (HFC-23) generated in order to increase the number of credits issued to these projects. A different but not less worrying flaw in the methodology that leads to carbon leakage has been observed in relation to N₂O (from adipic acid) abatement projects as documented in a more recent study by the Stockholm Environment Institute.

It’s encouraging that the EU, which is by far the biggest market for CDM offsets, appears determined to tighten up the environmental integrity of the EU ETS. However, quality restrictions on industrial gas credits are just the first step in a longer process and the need for quality restrictions on other CDM credit types is currently being assessed by the European Commission. On the industrial gases front, we will also be pushing for EU Member States to ban the credits for use towards national emissions targets in the non-traded sectors. Denmark and the UK have already indicated, quite logically, that they will ban the use of HFC-23 and N₂O credits for compliance at the national level after 2012 and we encourage other Member States to follow suit.

There are already signs that the EU ban has had a positive impact on the carbon market. In December, ICE Futures Europe, the biggest exchange for carbon trading, proposed that UN credits used for settlement against its futures contracts must comply with European emissions trading rules.

UN has yet to act

At UN level there have also been significant developments in the past few months: at EB 58 in Cancún, Board members discussed the findings of the Methodology Panel’s report on HFC-23 abatement projects under the CDM and concluded that there were indeed “a series of circumstances under which the current methodology and its treatment of parameters HFC-23 waste ratio w, HCFC-22 production and lifetime may overestimate baseline emissions compared to the situation without the CDM.” In other words, our analysis showing that HFC-23 project operators were inflating production to maximize credits was correct.

However, despite these findings and the subsequent decision to suspend and revise the HFC-23 project methodology for new crediting periods, the Board decided to press ahead with issuance of HFC-23 credits, that had been suspended pending the review. This apparently contradictory move has sown confusion as to the Executive Board´s intentions and led to complaints that the financial interests of certain private parties and host governments have been put ahead of the CDM’s environmental integrity.

Unfortunately, it is difficult to ascertain whether the findings of the Methodology Panel fully support the Board´s decision to move ahead with issuance of HFC-23 credits: although the Board requested the Secretariat to make the report available on the UNFCCC website by 10 December 2010, it has to date not been published.

Ulsan must wait

This week, the Executive Board will discuss the renewal of the crediting period of the Ulsan project in South Korea, which is the first HFC-23 destruction project to seek an extension. The EB initially planned to discuss the renewal of Ulsan’s crediting period at its November meeting in Cancún.

The project is located in Ulsan, South Korea and operated by the Ineos Group. It has generated 1.4m credits over its first crediting period (2003-2010) and is planning to sell another 2.2m credits between 2010 and 2017. However, research commissioned by CDM Watch has shown that the plant’s operators seem to have artificially increased HCFC-22 production.

The figure on the right illustrates that production of HCFC-22 increased substantially after the registration of the CDM project in 2005 and therefore also dramatically increased the project’s credit issuance.

In light of the serious concerns about HFC-23 projects laid out in the Methodology Panel’s report, CDM Watch believes that a decision about the renewal of the crediting period should only be taken after the significant shortcomings in the current methodology have been addressed. The Board should therefore put the request for renewal of the crediting period of this project on hold until the results of the full investigation have been presented and a revised methodology adopted.

Action to be taken by the Board:

A revised version of the methodology will be presented in mid-2011. However, any new methodology would not apply to projects during their current crediting period. In light of the findings outlined in the Methodology Panel’s report, CDM Watch calls on the Executive Board to:

• Rescind the credits that have been issued to all HFC-23 projects since 26 November 2010
• Stop issuance of further credits for HFC-23 projects until the flaws in the crediting methodology have been fully corrected.
• Revise the HFC-23 crediting methodology as a matter of utmost urgency and apply the revised methodology to all future credit-issuance and crediting period renewal decisions.
• Publish the Methodology Panel’s report in full (currently, only the Executive Summary is available)