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I.H.T. Special Report: Energy: A Carbon Trading System Draws Environmental Skeptics
2010-10-13 05:31:27.880 GMT
I.H.T. Special Report: Energy: A Carbon Trading System Draws
Environmental Skeptics
By PATRICIA BRETT
(International Herald Tribune) -- PARIS — Carbon credit
trading has long been decried by some climate change experts as
an ineffective way to combat global warming, compared with
imposing regulatory limits on polluting greenhouse gas emissions.
But after more than a decade of negotiations, the Kyoto
Protocol established a carbon emission credit system, in 2006,
overseen by the United Nations. Known as the Clean Development
Mechanism, or C.D.M., it allows companies in industrialized
countries to sponsor a greenhouse gas emissions-reducing project
in a developing country. The sponsor picks up carbon credits
while the host country obtains cash from the sale of carbon
rights and access to pollution-free, innovative technology.
C.D.M. projects represent billions of dollars. The World
Bank started preparing for the program 10 years ago by setting up
a prototype fund worth $160 million and today it runs a whole
family of funds worth $2.5 billion, the bank said in a report
this year. In 2008 alone, carbon credit transactions amounted to
close to $7 billion, it said.
Yet five years after its introduction, and despite several
changes, the mechanism remains open to abuse, according to many
involved in climate change issues.
"The problem is that the whole mechanism is conceptually
fundamentally flawed," said Patrick McCully, executive director
of International Rivers, an environmental organization in
Berkeley, California, and a consultant for the U.N. Environment
Program.
A condition for access to the C.D.M. program is the notion
that a qualifying project would not be able to attract investment
without the added support provided by carbon credits — a
criterion known as additionality in U.N.-speak.
This can be difficult to prove, particularly in a new
project, where the intangible savings in greenhouse gases depend
on defining a theoretical baseline. Determining whether carbon
credits are critical for financing means "being asked to read the
developer's mind," Mr. McCully said.
All claims must be documented and supported and must be
screened by independent auditors who validate the projects. The
final decision to accept or reject a proposal lies with the
U.N.'s C.D.M. Executive Board. Once credits are awarded, they can
be traded. One metric ton of carbon dioxide is worth one credit.
Since it began operating in 2006, the board has validated
2,918 projects, 40 percent of them in China, according to the
U.N. Environment Program's database at the Risoe Center, in
Denmark, which tracks every project in the C.D.M. pipeline. The
center's data show that 1,668 projects are in hydroelectric power
and 1,060 of those are in China.
"China is the most sophisticated player, and they have
figured out how to manipulate the baseline to generate as many
credits as possible with the least amount of effort," said
Professor David G. Victor, director of the Laboratory on
International Law and Regulation at the University of California,
San Diego.
China's surging energy needs and its chronic pollution
problems are not new. Shattering the country's coal-dependence
has been a problem for two decades, Mr. Victor said.
Axel Michaelowa, a climate change expert who helped start
the C.D.M. program, said that major Chinese energy policy changes
in 2002 put an emphasis on diversification and developing
renewable energy. Measures to spur investment in renewables
included a requirement for utility companies to buy production at
a set rate; preferential loans; tax cuts; and the establishment
of a renewable energy fund.
As a result, wind, solar and hydro projects have flourished
across China. Rural electrification, too, has been a major
priority under government policies to encourage development,
alleviate poverty and strengthen central authority in the
country's far western provinces. Many of these projects have been
financed in part through the C.D.M. program.
For the most part this has represented an inappropriate use
of the mechanism, say Manuel Boger, a graduate student, and
Lambert Schneider, a climate change expert, in a case study on
China prepared for publication by the German publishing house
Lexxion.
The most blatant misuse of the program has been to support
large hydropower dam projects, said Mr. McCully of International
Rivers.
While C.D.M. credits might have been crucial for small
Chinese hydroelectric plants generating less than 20 megawatts of
power, medium or large projects mostly have been so-called free
riders, topping up the profitability of dams which would have
been built "with or without the C.D.M.," Mr. Schneider and Mr.
Boger found.
This calls into question the efficiency of the system in
tackling climate change, their study points out. If a project
does not depend on carbon credits for its existence, then the
notional carbon savings are bogus. Yet the credits will
nonetheless be sold to a polluting industry which will then
pollute more — probably in Europe. The European Union is the only
area with mandatory greenhouse gas reduction rules and is the
most concerned by the C.D.M. process.
The Achilles' heel of the system lies with the auditing
firms that validate the carbon trading projects.
At first, the Executive Board assumed that auditors would be
objective and fully investigate the claims presented by project
managers. The committee did not check applications, it just moved
them through to full accreditation, Mr. Michaelowa said. But it
quickly became clear that auditors were faced with a conflict of
interest: although they were required to be impartial, their
reputation — as well as their market share — would be determined
by the number of proposals that they approved for accreditation.
Auditors had an incentive to accept the claims of the project
manager without too much inspection.
In a study carried out in May 2009 for the conservation
group WWF, the five most active auditing firms all rated poorly —
the best was graded D on a descending scale from A to F.
The system is "not without deficiencies," said Simone Ruiz,
European policy director for an industry group to which the
auditors belong. But, she said, the desire to curb excesses must
be "balanced with the desire to see continued auditor and
investor interest."
In a process described by the World Bank as "learning by
doing," the executive board has since decided it needs to
establish its own regulations and verification system. It
recently raised staff levels and now takes a closer look at
applications, requiring better documentation of claims. Auditors
are inspected by U.N. teams and if found lacking are suspended
until their methods improve. Most are reinstated within six
months, minutes of board meetings show.
These changes are an improvement, but they have added to
both the cost and the validation time for applications, the World
Bank has found. And this added burden weighs most heavily on
lesser developed countries.
Both these outcomes are contrary to the original goals and
expectations of the Clean Development Mechanism. It was meant to
aid the least developed countries — yet Africa receives only 2
percent of C.D.M. credits; and it was intended that C.D.M.
administrative costs would decline, not rise.
The bank is now calling for more streamlining of the
"complicated rules and the onerous documents required," Mr.
Michaelowa said.
No one has quite figured out how to administer offset
credits because the "proof" required is ultimately a matter of
judgement, not fact, said Mr. Victor of the Laboratory on
International Law and Regulation. "The executive board has been
trying to fix things but there are still some problems," he said.
One suggestion, backed by International Rivers among others,
is to set a fixed rate for audits and to allow the Board to
appoint the auditor in a transparent basis. Or better yet, said
Mr. McCully, since the mechanism is based on proving a negative,
and can only work "in alternative universes that don't exist," it
would be best to scrap the whole system and apply strict
greenhouse gas reduction regulations in each country. That view
is shared by the authors of the case study on China, who say that
estimates of carbon credit misuse globally "range from 20 percent
to 66 percent."
Yet, radical change is unlikely to happen, Mr. McCully said,
because there are "lots of revolving doors in the carbon trading
industry where people go from different parts of the private
sector, from auditors to developers, to brokers, to funds like
the World Bank, to government, and then to the U.N. Executive
Board.
"It's quite a small world and people circulate a lot within
that world; and there is nobody in that world that is critical of
the process because they are all making their living off it."
Furthermore, the system is fed by demand from the European
Union and Japan, which must comply with strict emission
regulations, Mr. Victor said.
"They are getting as many as credits as they can now because
they can save them up and use them in the future when the
regulations will be stricter," he said. "So they have every
incentive to sponsor projects."
Copyright 2010 The New York Times Company
-0- Oct/13/2010 05:31 GMT
