Clean Development Mechanism and HFC-23 destruction

The Subsidiary Body for Scientific and Technological Advice (SBSTA), a group established under the United Nations Framework Convention on Climate Change, is considering whether projects that destroy HFC-23 (also called HCFC-23), a greenhouse gas created as a by-product in the manufacture of the refrigerant gas HCFC-22, should be allowed to receive emission credits through the Clean Development Mechanism (CDM). The issue will be under discussion at the December 2009 COP15 meeting in Copenhagen.

Background
The Clean Development Mechanism "allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets." In order to earn CERs through CDM, projects have to lead to "real, measurable, and long-term benefits related to the mitigation of climate change ... and reductions in emissions that are additional to any that would occur in the absence of the certified project activity." The additionality criteria "is essential to ensuring that the CDM does not allow carbon leakage from compliance markets," meaning an unanticipated increase in carbon dioxide emissions.

One of the first types of projects established under CDM was the investment in the destruction of the compound HFC-23, which is generated as a byproduct during the manufacturing of HCFC-22.

HCFC-22 and other HCFCs (hydrochlorofluorocarbons) replaced the use of CFCs (chlorofluorocarbons) as refrigerants because they are less harmful to the ozone layer. HCFCS and HFC-23, however, are potent greenhouse gases and therefore contribute to climate change. Because of the impact on climate change, parties to the Montreal Protocol "have now successfully agreed on an accelerated phase-out of HCFCs." However, HCFC-22 used as a "feedstock" -- a raw material for industrial processing -- "in the manufacture of other chemicals is not controlled under the Montreal Protocol."

History of CDM and HFC-23
When CDM was first being developed, projects tended to focus on cleaning up emissions of greenhouse gases with a high global warming potential, such as HFCs. HFC-23, in particular, is "11,700 times more potent a greenhouse gas than CO2." Projects that cut emissions of this compound are very valuable as they "generate enormous amounts of carbon offsets at a very low cost." While most factories in European nations typically voluntarily eliminate their HFC-23 outputs, factories in developing nations usually do not. Because HFC-23 is highly potent and cost efficient to eliminate, it was seen at the onset of CDM as an "ideal offset project."

At the 2005 Montreal COP11 Meeting of the Parties to the Kyoto Protocol, delegates discussed when CDM projects pertaining to the destruction of HFC-23 could be implemented. They admitted that "issuing certified emission reductions for the destruction of hydrofluorocarbon-23 at new HCFC-22 facilities could lead to higher global production of HCFC-22 and/or HFC-23 than would otherwise occur and that the clean development mechanism should not lead to such increases." However, they de-emphasized such concerns, as "the destruction of HFC-23 is an important measure to mitigate greenhouse gas emissions." The delegates also addressed how CDM would operate in new HCFC-22 facilities. They determined that in those facilities "that have an operating history of at least three years between the beginning of 2000 and the end of 2004," emission levels would be defined by the production of HCFC-22 "above the maximum historical annual production level." For those facilities "that do not have an operating history of at least three years," the emission levels would be the "total production of HCFC-22 at the facility." Clearly the delegates left open the option of creating CDM projects at new HCFC-22 facilities.

The debate
The debate about how to apply CDM to HFC-23 reduction started with two applications for CDM in August of 2004: one in Gujarat, India and the other in Ulsan, South Korea. These requests prompted the CDM Executive Board (EB) to ask SBSTA to "develop a recommendation related to implications of CDM projects for the achievement of objectives of other environmental conventions and protocols, in particular with respect to new chlorodifluoromethane (HCFC-22) production plants and the Montreal Protocol." The biggest reservation about the application of CDM to HFC-23 destruction was the possibility that it might lead to inflated prices for HFC-23 reduction, a greater investment in new HCFC-22 facilities, and therefore more overall HCFCs released into the atmosphere.

In light of the findings of the post-August 2004 SBSTA recommendations, the EB revised the underlying baseline and monitoring methodology for HFC-23 destruction and limited CDM projects to existing HCFC-22 facilities. These limitations were "aimed at avoiding new HCFC-22 facilities being constructed due to CDM." As noted above, however, COP 11 in December of 2005 reinstated rules that allowed, with some restrictions, CDM projects in new HCFC-22 factilies.

Studies since COP 11, including one conducted by the Oko-Institut in April 2005, have shed more light on the issue of unintended incentives for constructing new HCFC-22 facilities. This study confirmed that the issues arose from HFC-23 being both a potent greenhouse gas and relatively inexpensive to destroy. When CERs awarded for HFC-23 destruction become more valuable than the cost of HFC-23 destruction, HCFC-22 facilities profit. This provides an economic incentive for the creation of new HCFC-22 facilites. The increased production of HCFC-22 is in direct contrast with the principles of the Montreal Protocol. Under this protocol, "developing countries are committed to limiting their direct use of HCFC-22." Although the use of HCFC-22 as a feedstock is not limited by the Montreal Protocol, all other uses are supposed to be capped at 2015 levels by 2016.

The Intergovernmental Panel on Climate Change (IPCC) has estimated that HCFC-22 production, for both non-feedstock and feedstock use, "will grow by 44% between 2000 and 2015," and only about 40% of that growth will be from feedstock use. Most of this increase in production has been "attributed to an increase in demand in developing countries." As this study and others predicted, the sale of carbon credits generated from HFC-23 capture has become "far more valuable than production of the refrigerant gas that leads to its creation in the first place."

In a paper published in the journal Nature, Stanford academic Michael Wara noted that "HFC-23 emitters can earn almost twice as much from the CDM credits as they can from selling refrigerant gases -- by any measure a major distortion of the market." He estimated that the cost of the direct installation of equipment to destroy HFC-23 would only be $100 million compared to $6 billion in CDM credits.

One example of this problem is illustrated by plans for a HFC-23 incinerator at a HFC-22 plant in the Chinese city of Quzhou. While the incinerator would cost only $5 million to build, the plant would earn approximately $500 million in certified emission reduction (CER) credits. "The huge profits from that will be divided by the chemical factory’s owners, a Chinese government energy fund, and the consultants and bankers who put together the deal from a mansion in the wealthy Mayfair district of London," reported the New York Times in December 2006.

Suggested remedies
The question that remains is how to handle the unintended, perverse incentives to create more HCFC facilities that have arisen under CDM HFC-23 destruction projects. A few different approaches have been suggested.

China's submission
China has suggested setting three specific requirements for when HFC-23 CDM projects in new HCFC-22 facilities can be developed. First, "the new facility must have been in operation for at least three years." Second, there can be "no regulation in the host country that requires the destruction of the total amount of HFC-23 waste." Finally, "the owners or operators of the new HCFC-22 facilities must provide information and evidence to show that HCFC-22 production is to meet real market demand." These requirements aim to avoid the construction of more new HCFC-22 facilities than are needed to meet demand.

Critics of the Chinese plan suggest that it does little to reduce the underlying incentives to continue to produce new HCFC-22 facilities. Both the Kiko Forum, a Japan-based group of environmental non-governmental organizations (NGOs), and the Climate Action Network (CAN), a worldwide network of NGOs working to combat climate change, argue that because there are "no practical solutions to remove the perverse incentives created if these projects are included in the CDM," the only viable solution is to exclude HFC-23 reduction projects altogether. In a position paper for the COP-13 meeting in Bali, CAN suggested that parties to the Kyoto Protocol should "exclude [from CDM] HFC-23 reduction at new HCFC-22 facilities in order not to create perverse incentives to increase HCFC-22 production."

The Kiko Forum submission
The Kiko Forum also submitted a plan on the issue of unintended incentives for new HCFC-22 facilities, based their plan on four general principles. First, an "implementation of one multilateral environmental agreement (MEA) must not impair other MEA's objectives." In other words, the Kyoto Protocol mechanisms, including CDM, should not undermine the goals of the Montreal Protocol, one of which was to phase out the use of HCFC-22. Second, even where regulation is not required, "voluntary efforts to reduce HCFC-22 need to be encouraged, not discouraged." Although the regulation of HCFC-22 production in developing countries under the Montreal Protocol will not begin until 2016, CDM should encourage their voluntary reduction. Third, promoting voluntary reductions is also an applicable principle under the Kyoto Protocol. While Kyoto refrained from setting emission reduction targets for developing countries, there remains "a general obligation" to reduce emissions "for all parties under the United Nations Framework Convention on Climate Change (UNFCCC)." Finally, the Kiko Network argues that more emphasis should be placed on promoting sustainable development. While CDM currently functions well as a "market mechanism which provides cheap emission reduction opportunities ... it does not work properly as a driving force towards sustainable development in developing countries." CDM should concentrate more on projects that produce renewable energy rather than keeping its emphasis on emissions reductions.

The Kiko Forum also points out three implications of the current policy on new HCFC-22 facilities. The first is the "increased consumption of HCFC-22 in developing countries up to 2015 and the resultant higher level of emission quota after that period." Developing countries are supposed to cap their emissions at 2015 levels by 2016. If they greatly increase their HCFC-22 production before then, they will have a higher base level of emissions for their post-2015 reductions. The second implication is the "slower phase-out of HCFC-22 in developing countries after 2015." Because there is no graduated scale of reductions between the emissions cap at 2015 levels and then a phase out scheduled for 2040, the incentives for new HCFC-22 facilities may delay reductions. The final implication noted is the potential increase in HFC-23 emissions. Allowing HFC-23 destruction projects at new HCFC-22 facilities makes it more profitable for project participants not to take measures to implement "proper abatement technologies" that decrease HFC-23 emissions and "thus generation rates of HFC 23 could be discouraged from improvement."

Other ideas have been proposed for managing CDM at new HCFC-22 facilities. The Kiko Forum submission also evaluates some of them, based on their stated principles and their analysis of the potential implications of current policy. The ideas include:
 * Applying a discount rate to the achieved emission reduction in the project;
 * Setting a fixed cap on the quantity of CERs to be issued;
 * Requiring the project developer to provide relevant information to demonstrate that the HCFC-22 produced by the project plant meets the real market demand ; and
 * Imposing a tax on the revenue from earned CERs.

The Kiko Forum rejects these proposals, saying they are either too complex or fail to address the problem of "eliminating the perverse incentives" to continue building more facilities. The group concludes that because "all of the proposed solutions leave uncertainties about [their] effectiveness in addressing the implications of continuing to build new HCFC-22 facilities, the exclusion of this type of project activities from CDM is the appropriate course of action." They argue that even if these projects are allowed under CDM, "part of the revenue must be collected to provide fund for the abatement of HFC-23 in later HCFC-22 facilities in developing countries, so that further perverse incentives for such CDM projects as discussed here can be reduced."

Negotiations Ahead of COP15 meeting
At the conclusion of the COP14 conference in December 2008, the Earth Negotiations Bulletin noted that no progress was made on the issue of HFC-22 and HFC-23 projects being accredited under the Clean Development Mechanism. They also noted that the discussion would be taken up again at the next SBSTA meeting.

Key UNFCCC documents

 * United Nations Framework Convention on Climate Change, "Decision 8/CMP.1: Implications of the establishment of new hydrochlorofluorocarbon-22 (HCFC-22) facilities seeking to obtain certified emission reductions for the destruction of hydrofluorocarbon-23 (HFC-23)", United Nations Framework Convention on Climate Change, 9-10 December 2005, page 100.

Submissions received from interested parties

 * Dave Stirpe, Executive Director, Alliance for Responsible Atmospheric Policy, "Input by Industry Observer Organization on the HCFC-23 Issue", August 1, 2005.
 * Climate Action Network Europe (CAN EU), "Implications of new HCFC-22 facilities under the CDM", Climate Action Network Europe Submission, August 2005.
 * Lambert Schneider, Jakob Graichen (Institute for Applied Ecology e.V.) and Dr. Nele Matz (Max-Planck-Institute), "Implications of the CDM on other Conventions. The case of HFC-23 destruction", Discussion Paper, April 2005.
 * Kiko Forum (Japan), "Submission on practical solutions to address the implications of the situation where issuing certified emission reductions (CERs) for the destruction of hydrofluorocarbon-23 (HFC-23) at new hydrochlorofluorocarbon-22 (HCFC-22) facilities could lead to higher global production of HCFC-22 and/or HFC-23 than would otherwise occur", August 2006.
 * Sina Wartmann, Yvonne Hofman and David de Jager, The European Business Council for Sustainable Energy (e5), "Implications of the establishment of new hydrochlorofluorocarbon-22 (HCFC-22) facilities seeking to obtain certified emission reductions for the destruction of hydrofluorocarbon-23 (HFC-23)", August 3, 2006.

Related SourceWatch articles

 * Accra Climate Change Talks 2008
 * Clean Development Mechanism
 * COP14
 * COP15
 * Emissions Trading
 * Joint Implementation
 * Kyoto Protocol
 * United Nations Framework Convention on Climate Change

External articles

 * Keith Bradsher, "Outsize Profits, and Questions, in Effort to Cut Warming Gases", New York Times, December 21, 2006.
 * "Kyoto Protocol 'loophole' has cost $6 billion", New Scientist, February 9, 2007.
 * "UN's CDM Booms, but Complaints on Refrigerants", rEUTERS, February 9, 2007.
 * Robin Lancaster, "The credit for destruction: A new controversy is brewing over HFC23 destruction projects in the Clean Development Mechanism", Carbon Finance, February 15, 2007.
 * Richard Van Noorden, "Cleaning up on the carbon market", Chemistry World, April 2007.
 * Tillmann Elliesen, "Burning money", Development + Cooperation, February 2007.
 * "Kyoto less lucrative for chemical industry", Chemistry World, 25 January 2008