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Some Carbon Credit Projects Looking Shaky

Late last week, the UN body that issues carbon credits under the Kyoto Protocol said that it would take a closer look at the worthiness of several projects that have been cashing in by destroying the potent greenhouse gas HFC 23.

Back in 2008 I wrote about a Chinese project that Arkema is part of that is similar to the projects under review. To my knowledge, however, the Arkema effort has not been singled out.

Basically, HFC 23 is a waste gas made during the production of a refrigerant, HCFC 22. With the help of investors and technology experts in the developing world, factories in places like China, India, and South Korea can destroy this waste gas in exchange for carbon credits, which are worth real money, and are traded on a European exchange.

While no one disagrees that without some sort of financial reward, the waste gas would be released into the atmosphere (because the developing nations do not regulate HFC23 emissions), critics allege that companies are manufacturing the HCFC 22 in the maximum quantities allowed – more than the marketplace needs – in order to earn the valuable carbon credits.

Making HCFC 22 for the sole reason of making, and then destroying, HFC 23 for carbon credits is what economists would call a perverse incentive.

Wikipedia defines a perverse incentive as one “that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.” As an example, the site gives the case of French colonial rulers in Hanoi paying a bounty on rat pelts to eradicate rats. Instead, the locals began farming rats.

So are the HCFC 22 manufacturers just farming rats for the bounty? According to a report by CDM Watch, a European consortium of environmental groups, HCFC 22 production appears to be driven by the quest for carbon credits, and is likely resulting in more refrigerant production than market demand would otherwise dictate.

The carbon credits are worth about $16 on the spot market (the main exchange is based in Europe and is conducted in Euros). Which doesn’t sound like much, but because HFC 23 is so potent – one ton is equivalent to 11,700 tons of CO2 – destruction of it racks up millions of credits. In fact, the six projects under review (five in China, one in India) have together requested issuance of carbon credits worth about $150 million on the open market.

In reality the project owners have already negotiated a selling price for their credits with European-based financial firms, which is likely lower than the spot rate, but the credits are extremely valuable. If you’re really curious, you can browse all the projects that are registered to earn carbon credits under the Kyoto protocol.

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