Truth about Kyoto: huge profits, little carbon saved

On the eve of a G8 summit focused on climate change, Nick Davies
reveals major flaws in the global system designed to reduce emissions

Saturday June 2, 2007
The Guardian
http://business.guardian.co.uk/story/0,,2093816,00.html

In autumn 2005, three journalists working for the environmental group
the Centre for Science and Environment decided to investigate some of
the Indian projects which were trying to break into the lucrative new
business of carbon trading
.
They started looking at four schemes in Andhra Pradesh which were
trying to convert biomass - dead plants, animal dung - into fuel. They
studied the formal reports which the schemes had commissioned from a
UK company, Ernst and Young, to satisfy the demanding requirements of
the UN's Clean Development Mechanism. And they noticed a very odd
thing.

Each of the four Ernst and Young reports had had to consult people
near the proposed schemes to ensure that there was no risk to the
local economy or environment. One report quoted three different
community leaders, each expressing enthusiastic approval for the
project and concluded: "Poor farmers are getting reasonable monitory
gains for harvesting the available biomass and supplying it to project
activity."

What was odd that with two of the other schemes, each many miles from
the other, Ernst and Young quoted three sources who had the same job
descriptions, the same opinions, summarised in precisely the same
words which even included the same spelling mistakes (Secretry,
monitory). In the fourth case, the wording was slightly different, but
the opinions were the same, and it too concluded that "poor farmers
are getting reasonable monitory gains etc."

The three journalists wrote up their conclusions in the group's
magazine, Down to Earth, and made it clear that they were accusing
Ernst and Young of simply cutting and pasting the same material into
four supposedly separate and independent reports. Ernst and Young said
there was nothing wrong: the local people in all four places happened
to have said very similar things in response to a standard set of
questions. But the environmental journalists were concerned enough to
write to the executive board of the Clean Development Mechanism,
offering further information. The CDM board never even acknowledged
their letter.

The CDM is one of two global markets which have been set up in the
wake of the Kyoto climate summit in 1997. Both finally started work in
January 2005. Although both were launched with the claim that they
would reduce greenhouse gases in the atmosphere, evidence collected by
the Guardian suggests that thus far, both markets have earned fortunes
for speculators and for some of the companies which produce most
greenhouse gases and yet, through a combination of teething troubles
and multiple forms of malpractice and possibly fraud, they have
delivered little or no benefit for the environment.

While the CDM is run under the umbrella of the UN, the second market
is overseen by the European commission. Before launching, it churned
through a mass of figures and produced a maximum number of tonnes of
carbon dioxide which could be produced by each nation in the scheme;
each nation then handed its big corporations and organisations a set
number of permits - EU allocations - defining the number of tonnes of
carbon dioxide they could produce between January 2005 and December
2007. But they got their sums wrong.

The carbon market's leading analysts, Point Carbon, recently
calculated that this scheme handed out 170m too many EUAs. In the
early days, nobody realised quite how badly the commission had
miscalculated, and so the price of the EUAs was quite high, at up to
?30 a tonne. But individual companies, particularly energy companies,
rapidly saw they had millions of tonnes of EUAs that they didn't need,
and so they sold their surplus, making huge profits. A 2005 report by
IPA Energy Consulting found that the six UK electricity generators
stood to earn some £800m in each of the three years of the scheme.

A separate report by Open Europe, in July 2006, found that UK oil
companies were also poised to make a lot of free money: £10.2m for
Esso; £17.9m for BP; and £20.7m for Shell. And behind this
profiteering, the environmental reality was that these major producers
of carbon emissions were under no pressure from the scheme to cut
emissions.

At the other end of this EU market, smaller organisations like UK
hospitals and 18 universities, who had been given far fewer EUAs, were
forced to go out and buy them - while the price was still high. So,
for example, the University of Manchester spent £92,500 on EUAs. Now
that the truth about the glut has been revealed, the university would
be doing well if it managed to get £1,000 for the lot of them.

While this EU market has failed to make any serious impact on climate
change, the UN's Clean Development Mechanism has done little better.
In contrast to the EU system, which sells permits to produce
supposedly limited quantities of greenhouse gases, the CDM sets up
projects which are supposed to reduce the quantity of greenhouse gases
and then sells carbon credits which allow buyers to emit more gases.

Ten years after the idea was launched at Kyoto; six years after the
guidelines were drawn up at Marrakech; a year and a half after it
finally went to work: the CDM thus far has issued only 50m tonnes of
certified emissions reductions to offset global warming: Britain
produces more emissions than that in a single month.

There are doubts about the validity of some of these CERs, on two
separate grounds. First, some of them appear to breach the CDM's
requirements for sustainable development - 53% of the existing CERs
come from just six monster projects, in India, China and South Korea,
all of which engage in the most controversial form of carbon
reduction. They manufacture refrigerant which produces as a side
effect a gas called HFC-23. Although carbon dioxide is the most common
greenhouse gas, HFC-23 is 11,700 times more likely than carbon dioxide
to encourage global warming. Refrigerant companies find it relatively
cheap to instal an incinerator to burn the HFC-23 and, once that is
converted into certified reductions of emission, each tonne saved can
be sold as 11,700 carbon credits. These companies are now earning
millions of euros from these credits - more than from selling their
refrigerant products.

The environmental problem is two-fold, first that HFC factories tend
to pour out other pollutants which don't happen to be greenhouse gases
but which are unpleasant or dangerous for local communities; and
second, that the potential profits from burning HFC-23 are so great
that companies are being encouraged to expand production of
refrigerants so they can produce more HFC-23 to incinerate, thus
increasing the net amount of pollution.

Secondly, as our front-page story today reports, there is evidence
that a significant percentage of current and future CDM reductions,
possibly as many as 20%, may have been wrongly checked. This effects
not just the 50m tonnes of CERs which have been issued already, but a
massive quantity which is sitting in the pipeline as a result of hedge
funds pouring an estimated ?4,000m into high-profit carbon projects.

Within the world of carbon trading, there are numerous cases of
projects which are widely regarded as breaking CDM rules. Some of them
existed long before the CDM project was launched: if they do happen to
be producing fewer greenhouse gases, that is the natural state and not
a reduction which can be claimed and sold. Yet, such schemes have been
validated by specialist companies and accepted by the CDM board; and
the companies running them have been allowed to earn large amounts of
money by selling unjustified Certified Emissions Reductions.

Axel Michaelowa, an expert adviser to the CDM board, investigated the
case of a giant steel mill, run by a company called Jindal in the
state of Karnataka. It had put forward three separate projects, all of
which would capture waste heat and funnel it back into the mill as a
source of energy. But the company insisted it could afford to do this
only if the scheme was accepted by the CDM.

Michaelowa, however, found the mill had decided to do this years
earlier and accused Jindal of making statements which were "blatantly
wrong". He warned the CDM board that the evidence showed Jindal would
have gone ahead with the three schemes on purely commercial grounds
and were, he reported, "clearly non additional". But the board
accepted the projects whose supposed cuts in carbon emissions are now
being used to allow extra emissions, mostly in Europe.

SGS, the British company which validated the scheme said yesterday:
"Additionality is a complex concept. Proving additionality involves
several steps and cross checks. As one of the steps Jindal showed that
it would be financially unattractive for the project to go ahead
without the CDM revenue. Based on this and the other evidence
provided, SGS and the CDM board both regard the project as
additional." SGS also said it was not one of the three companies which
had been recently criticised after spot checks.

Other suspect projects are new but they are highly profitable and
would, therefore, go ahead on commercial grounds. Even if they are
relatively clean, they can't be presented as adding to the reduction
of greenhouse gases. There has been great controvery in South Africa
over an attempt by Sasol, a giant mining company, to persuade the CDM
to register a pipeline which it wants to use to import gas from
Mozambique. The company argued that this would allow it to stop using
coal, thus cutting carbon emissions, but that it could afford to build
the pipeline only if it were allowed to register it with the CDM and
sell carbon credits. However, campaigners say the company already had
the funds to pay for the pipeline and were simply looking for extra
cash.

There are generic problems with big hydro-power projects, where income
from carbon credits amounts to such a tiny proportion of costs that it
is hard to argue the projects would not have gone ahead without CDM
finance. There are problems, too, with landfill projects which try to
capture and harness another greenhouse gas, methane: it is tempting
for projects to exaggerate the amount of methane which the landfill is
leaking

Until July 2006, the CDM executive board did not reject a single
project. It was short of staff, short of experts and short of funds.
So it relied on the specialist companies to get it right. Since those
specialist companies are hired by the projects who stand to earn big
profits if they are accepted, that is an inherently weak structure. As
one carbon analyst put it: "The verifiers are being paid by the people
they are verifying. If it turns out the verified is a bad guy, he is
paying the policeman to sign him off as a good guy."

More recently, the CDM board has found its feet and is using a new
team of experts to check the work of the specialist companies. Now,
they are spotting bogus projects which previously were slipping
through. Since July last year, they have rejected 14 of them. Some of
them were blatantly inappropriate, and yet specialist companies had
validated them.

If a significant number of the 1,900m CDM credits waiting in the
pipeline also prove to be bogus, the whole Kyoto project would start
to backfire.

Defenders of the CDM argue that these are the early days of a complex
mechanism which will run for a hundred years and leave these problems
behind it. Jørund Buen, of Point Carbon, the pre-eminent expert on the
carbon market, said: "Some projects shouldn't have received carbon
credits, one of these specialist companies seems to have done a lousy
job. However, most projects are highly credible, and most of these
specialist companies do decent work."

The chairman of the CDM executive board, Hans Jurgen Stehr, likewise
insists that the market is stable, growing and improving. Against
them, environmental groups argue that there never was a justification
for attempting to tackle climate change by creating a carbon market.


--
There may come a time when the CO2 police will wander the earth telling
the poor and the dispossed how many dung chips they can put on their
cook fires. -- Captain Compassion.

Wherever I go it will be well with me, for it was well with me here, not
on account of the place, but of my judgments which I shall carry away
with me, for no one can deprive me of these; on the contrary, they alone
are my property, and cannot be taken away, and to possess them suffices
me wherever I am or whatever I do. -- EPICTETUS

Celibacy in healthy human beings is a form of
insanity. -- Captain Compassion

"Civilization is the interval between Ice Ages." -- Will Durant.

Joseph R. Darancette
daranc@NOSPAMcharter.net

Truth about Kyoto: huge profits, little carbon saved