The United Nation’s flexible mechanisms were introduced as a cost-effective and efficient method to help poorer countries develop sustainably, whilst providing developed countries another option to meet commitments under the Kyoto Protocol.
The Clean Development Mechanism (CDM) and the Joint Implementation (JI) have progressed at different rates, with different levels of engagement and varying degrees of scope in the ensuing emission reductions. One project sector has benefited more than others and recently, has come under fire for its environmental credibility. But what is the issue and why is it so politically toxic?
A Failure or Success?
The Montreal Protocol was established to regulate a certain type of gas: ones that are believed to be responsible for ozone depletion. Difluoromonochloromethane, better known as HCFC-22, is one such gas that is still used in refrigeration and air conditioning processes in many developing countries. It is a by-product of HCFC-22 in which we are interested: HFC-23 (another hydrogen-based gas also called fluoroform).
HFC-23 has a 100-year global warming potential of between 11,700 (UN) and 14,800 (Intergovernmental Panel on Climate Change), meaning that over 100 years, one metric tonne of this gas has the equivalent global warming impact of 11,700 tonnes of carbon dioxide. Its use is not currently governed by the Montreal Protocol, but the UN Framework Convention on Climate Change (UNFCCC) realised that the potential impact to the atmosphere was too significant to ignore. As a result, they chose to include the destruction of HFC-23 in the CDM and JI via the Kyoto Protocol.
Because reducing one tonne of CO2 equivalent by a project generates one Certified Emission Reduction (CER – the currency of the CDM), destroying one tonne of HFC-23 generates 11,700 CERs. Consequently, the emission reductions generated through the CDM by destroying HFC-23 have outstripped all others: out of the 421 million CERs issued to date, HFC-23 contributes 52% from only 18 projects.
To some, CDM projects that destroy HFC-23 have been a great success, by increasing liquidity and bulking up the volume of CERs that are generated. But to others, the vast amounts of CERs which have been generated are windfall profits to polluters, and can perversely incentivise the increased production of HFC-23.
Rocking the Boat
Environmental NGO, CDM-Watch, proposed last month an amendment to the methodology which CDM HFC-23 projects conform. CDM-Watch alleged that some operators of HFC-23 projects could be “gaming” the system in order to gain more CERs (which on the secondary traded market are currently worth approximately €12).
The group questions the adequacy of the ratio of HCFC-22 to HFC-23 that is used by projects to calculate their emission reductions. Currently, the rules set the maximum ratio at 3%, so 0.03 tonnes of HFC-23 to 1 tonne of HCFC-22. But the proposal sees this reduced to a minimum of 0.2%
The CDM’s Methodology Panel, the body charged with overseeing the methodologies of the CDM, chose to ask the higher-profile CDM Executive Board (EB) to decide on the issue. There remains a good chance that the EB fails to reach a verdict and instead passes the issue up to the UNFCCC because of how politically charged this topic has become.
Indeed, CDM-Watch appears more than aware of the politically sensitivity that surrounds the HFC-23 controversy. CDM-Watch warned that EB members from China, India, Netherlands, UK, Japan and Norway should abstain from voting on the proposed methodology revision due to conflicts of interest. These countries either host the projects or have vested interest in the CER generation.
In any case, the proposal has caused a stir in the CDM and participants are looking for certainty. The EU and the US have both made suggestions that offsets generated by the destruction of HFC-23 may be banned from their respective carbon reduction plans after 2012 (if one is ever enacted in the US). So investors in HFC-23 reduction projects are right to be concerned.
If restrictions are approved, it is still unclear when they will take place. Current project contractual agreements indicate that the EB may have to wait until a project requests an extension to their crediting period (usually seven years, with the possibility of two extensions) before amending the methodology. In fact, a request to extend the crediting of a certain HFC-23 in South Korea was postponed last month by the EB until a later date, certainly until something more concrete has been decided.
It seems that the workhorse of the CDM is under threat. Just less than 50% the world’s HFC-23 is included in the CDM (since no HFC-23 projects were eligible after 2004). A proposed amendment to the Montreal Protocol could cover the rest, essentially sealing off HFC from further commercial interest. But how the CDM, JI and their participants react to its current piece-of-the-pie remains to be seen.