Incentives offered under global clean development mechanism may be encouraging firms to overproduce greenhouse gases just to destroy them later.
Are firms deliberately overproducing greenhouse gases (GHG) for the sole purpose of destroying them in order to earn revenue through the sale of carbon credits under the clean development mechanism or CDM scheme?
The first indication is the fact that an analysis of the total carbon credits issued to projects across the globe, including India, shows that over 50 per cent of the total carbon credits issued until July 2012 were for the destruction of a deadly greenhouse gas called HFC-23 (Hydro Fluoro Carbons-23). It is 11,700 times more potent a greenhouse gas than carbon dioxide and is created during the manufacture of HCFC-22, a gas used in refrigerators and air conditioners.
In comparison, renewable energy projects like wind, solar and biomass, together, account for less than 30 per cent of the total carbon credits issued in India; the figure is 20 per cent for the world.
The CDM scheme allows firms manufacturing HCFC-22 to earn huge carbon credits by destroying its byproduct, HFC-23. Since the cost of producing HCFC-22 is lower than the revenue generated by the sale of carbon credits issued for destroying HFC-23, it is possible that HCFC-22 is being manufactured solely for the purpose of destroying its byproduct and earning carbon credits instead.
The second red flag is the fact that despite a sharp fall in the price of HCFC-22 due to supply exceeding demand and steep global economic recession, the production of this GHG has continued to remain at the same level.
Take for example, Gujarat Fluoro Chemicals (GFL), one of five companies producing refrigerants in India. According to its annual report, the firm increased its production of HCFC-22 by around 45% after it got CDM approval in 2004-05. Between 2005 and 2012, GFL realised more than Rs1,000 crore from sale of carbon credits alone. It is interesting to note that in its annual reports, one can see that its closing stock of HCFC-22 increased from 349 units in 2005 to 3,599 units in 2010. Subsequent annual reports are silent about the closing stock of the refrigerant.
GFL is the largest refrigerant manufacturer in India. Others that also earn carbon credit revenues are SRF Ltd, NFIL, Chemplast and HFL.
The CDM executive board was also concerned about a possible HFC-23 scam. In 2011, it considered a proposal to stop issuance of carbon credits withhold further approval of any CDM projects in India relating to the destruction of HFC-23 gas, according to records held by the ministry of environment and forests.
Experts are not clear about what is happening to the excess HCFC-22 produced. Some believe that companies could be stocking it; others believe it is being clandestinely released into the atmosphere. As a result, there is no actual reduction of greenhouse gases though the total number of carbon credits issued is huge.
Lawyer and CDM expert Michael Wara from Stanford University, California, told DNA that most credits generated in the CDM come from projects which are suspected of over-crediting and are creations of bogus accounting. “Since the CDM credits these firms produce are bought by developed countries that use them in lieu of reducing their own emissions, any fraud in the CDM leads to increase in emissions over the limits set under the Kyoto Protocol,” he said.
Almost 40 per cent of the total greenhouse gas reductions were only on paper as the figure (baseline) from which the net reductions of greenhouse gases are estimated were fudged by the project proponents, says Amar Mody a Mumbai-based independent consultant and carbon market specialist who has represented various carbon funds and international brokerage firms in India for over seven years.
According to a report released by International Energy Agency (IEA) in May 2011, the prospect of limiting the global increase in temperature to 2°C as required under Kyoto Protocol is bleak. “Carbon dioxide emissions reach a record high in 2010,” said the report. The world has edged incredibly close to the level of emissions that should not be reached until 2020 if the 2°C target is to be attained, the report added.
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