Daan Bauwens
For years, European governments and corporations have made use of a loophole in the Kyoto protocol on climate change to make exorbitant profits. According to some sources, this lucrative scheme has caused more pollution than ever before.
The Kyoto protocol allows European companies to ‘offset’ their excess emissions of greenhouse gases by buying emissions reductions in developing nations. This provision is called the Clean Development Mechanism (CDM). The eligibility of the overseas projects and the issuance of emission credits - which in this case are called Certified Emission Reductions (CERs) - are controlled by a council at the U.N., the CDM Executive Board.
In June 2010, two environmental NGOs - CDM Watch, based in Bonn, and Environmental Investigation Agency (EIA), with offices in Washington, DC and London - discovered that European governments and corporations were grossly misusing the CDM. Fifty-nine percent of all CERs originated from the same 19 projects, though a total of 2,800 projects were registered. These 19 projects all produced HCFC-22, a refrigerant gas that is banned in the U.S. and Europe under the Montreal Protocol on Substances That Deplete the Ozone Layer because of its ozone-depleting properties. In developing countries the gas must be phased out by 2030.
HCFC-22 is also a ‘super green house gas’ that is 1,810 times more potent than carbon dioxide. Furthermore, HFC-23, the unwanted by-product of the manufacture of HCFC-22, is 11,700 times more harmful than carbon dioxide.
When the producers of the refrigerant choose to burn the by-product HFC-23 instead of venting it into the air, they are eligible for heaps of credits under the CDM. Burning one tonne of HFC-23 would bring in 11,700 CERs or emission credits for the plant burning the gas.
It turned out this was a very lucrative business. Burning the equivalent of one tonne of carbon dioxide only cost 25 U.S. cents while the credits could be sold on the European market for not less than 19 dollars.
These projects soon attracted Western investment banks that wanted to share in the profits: JP Morgan Chase, Citigroup, Goldman Sachs, Rabobank and Fortis. Next to these banks, the Italian, Dutch and British governments appear several times on the list of investors. Large energy companies including E.ON (Germany), Nuon (Netherlands), RWE (Germany), Enel (Italy) and Electrabel (Belgium) are also involved as project participants.
According to records compiled by CDM Watch and EIA, the offset profits stimulated the increased production of ozone-depleting HCFC-22. According to EIA, the price of a tonne HCFC-22 varies from 1,000 to 2,000 dollars, while the same tonne generates 5,000 to 5,800 dollars in CERs when sold on the European market.
In economics, this is called a ‘perverse incentive’ - when the incentive has an unintended and undesirable result which is contrary to the scope of the policy. On the whole, European companies and governments have financed these projects for no less than 1.5 billion dollars, while the true cost of the gas abatement is only 150 million dollars.
"This money was invested into phony emission reductions," says Eva Filzmoser, programme director at CDM Watch. "According to the CDM, the earned credits represent emission reductions. Instead of that, more greenhouse gases were being produced while Western companies kept on emitting as much greenhouse gas as before. The resulting damage for the environment is immense," she told IPS.
According to data from the U.N. Environment Programme (UNEP), from 2004 to 2009, the production of HCFC-22 grew from 15 million to 28 million tonnes.
After complaints by CDM Watch and EIA, the U.N. started its own investigation while blocking the issuance of new CER credits.
This investigation, which was concluded on the Nov. 16, 2010 was marked ‘confidential’ by the U.N. because of the ‘commercially sensitive information’ it contained. The document was however handed over to IPS. It states that some of the investigated production facilities were "maximising credits rather than filling demand for product". Nevertheless, the report concludes there are only "indications" of perverse incentives and that the evidence is not "conclusive".
On Nov. 26, the U.N. CDM Executive Board decided to issue another 20 million credits to 12 HFC- projects.
Jos Delbeke is the Director-General of the European Commission’s Directorate-General for Climate Action that was set up last year. According to Delbeke, the European Commission was already aware of the problem before the NGOs started campaigning against it. "At the U.N., we have been complaining about this problem for several years. You should not earn CERs with gases that are forbidden in Europe," Delbeke told IPS.
The main problem, according to Delbeke, is not the damage to the environment. "There are usurious profits being made and that is repugnant," Delbeke said. "We cannot make our climate policy work in this way. We have to ask ourselves: couldn’t we have done much more with the amount of money spent?"
Just weeks before the 2010 U.N. COP16 climate talks in Cancún, Europe’s climate Commissioner Connie Hedegaard proposed a ban on all HFC-credits in the European system of emissions trading (ETS) to take effect Jan. 1, 2013. On that date, the second phase of the ETS is due to end, after which new rules could apply.
Industry lobby groups and business organisations resisted the ban. Brussels-based NGO Corporate Europe Observatory made use of Freedom of Information Regulations here to obtain documents and reconstructed the full story.
BusinessEurope is the most influential lobby group in Brussels, representing 40 industrial and employers’ federations from 34 European countries. In October 2010, BusinessEurope’s Director- General Philippe de Buck sent a letter to Hedegaard and Commissioner of Industry and Entrepreneurship Antonio Tajani in which he spells out his opposition to limiting the use of credits from the CDM.
BusinessEurope also made use of a new employee, who had just finished three years of work at the European Commission of Enterprise and Industry. In an email to his former colleagues at the Commission, this employee refers to a recent goodbye drink and expresses his wish to keep on working together in his new lobbying function. In an attachment, he forwarded the position paper of BusinessEurope - which opposes the ban.
Italian energy giant Enel is involved as an investor in seven of the 19 HFC-projects receiving CERs. Next to that, the company is one-third owned by the Italian government. In November 2010, the head of European institutional relations at Enel, Roberto Zangrandi sent a letter to several members of European Parliament (MEPs) stating that, "it is critical to trust the system and the procedures of the UNFCCC [United Nations Framework Convention on Climate Change] and CDM in order to ensure the integrity and credibility of this mechanism."
But just two weeks earlier, Zangrandi sent a letter to Antonio Preto, cabinet member for Tajani. In the letter, Zangrandi invites Preto to have a friendly talk about a serious problem: Zangrandi explains that if a ban would come into force on Jan. 1, his company would loose "at least 20 million credits with a significant value".
In an interview with carbon markets website PointCarbon.com in November, Simone Ruiz, European policy director at the International Emissions Trading Association (IETA), states that the Directorate- General for Industry and Entrepreneurship would focus on moving the date forward. According to PointCarbon.com, a delay of just four weeks would mean that 30 to 100 million extra HFC-credits would enter the European market. This way, companies would be able to make full use of the credits they had invested in.
According to Eva Filzmoser, programme director of CDM Watch, lobbyists behaved in a very unethical way. "The right thing to do is: insist on a thorough investigation, wait for the findings and take a decision," she told IPS. "Many investors only took the decision to invest in these projects after the European Commission had opened the door for possible restrictions in 2008. It was a calculated risk and most investors have already been abundantly rewarded. Furthermore, we have informally been told by investors that they knew Indian and Chinese plants were increasing their production for the sake of credits."
Eventually the industry got what it asked for - when the Commission released its final proposition on Jan. 21, 2011, the date for the ban had been moved from Jan. 1 to Apr. 30. According to some estimates, this will result in 52 million extra CERs flowing into the European market - allowing companies to emit an amount equal to the annual emissions of Belgium.
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