TI’s Global Corruption Report: Climate Change warned that complex mechanisms for incentivizing cuts in carbon emissions need to be governed properly to be effective. Krina Despota, contributing editor to the report, explains that this involves proving that carbon offsets represent real emissions reductions.
The challenge of limiting global warming to within two degrees Celsius will only be achieved through concerted efforts by governments and the private sector alike. In an effort to find cost-effective solutions to climate change and drive climate-friendly innovation, the concept of carbon offsetting was introduced into the Kyoto Protocol. A carbon offset is a reduction in emissions of C02 or C02 equivalent, which compensates for the same amount of emissions release elsewhere.
When a factory in Germany cannot keep greenhouse gas emissions below an agreed target, it may buy carbon credits to “cover” its extra carbon emission. It could buy these credits, for example, from a project overseeing the planting of trees, or investment in renewable energy technologies. This aims to provide an incentive to energy-intensive industries to lower their emissions and a source of funding to low-carbon innovators.
The largest carbon offsetting scheme is the UN Clean Development Mechanism, under which countries that must reduce their greenhouse gas emissions in line with their commitments under the Kyoto Protocol may purchase carbon offsets generated in countries that do not have any reductions commitments.
Crucial to the integrity of carbon offsets is the requirement that they be “additional”, that is, that they represent a reduction of greenhouse gases that would not have taken place without the financial incentive provided by sale of carbon offsets. If projects are not additional, their impact actually damages the environment, since carbon credits that are generated from offset projects enable emissions in another part of the world. If a carbon offset project –such as a hydropower plant or wind farm—was going to be developed even in the absence of CDM financing, the result is a net increase in emissions, since no corresponding drop in emissions occurs.
As important as this concept is for the integrity of carbon markets, proving projects are additional is difficult. It requires demonstrating the intent of the project developer as well as measuring anticipated emissions reductions against what would have occurred if no project were introduced.
There is evidence that some of the projects submitted for the CDM do not meet the additionally criteria. By October 2008, for example, over 75% of all projects registered under the CDM had been completely constructed prior to being approved for carbon credits, suggesting that in some cases projects did not rely on financing from the CDM to be realized. Other estimates suggest that between 15-20% of offset credits have been inappropriately issued because additionality was not adequately demonstrated.
The system has also been seen to create a perverse incentive for polluters to continue practices that create a lot of emissions, so that they can claim carbon credits when they slightly reduce these emissions (rather than using a cleaner technology in the first place).
The capture and elimination of the powerful greenhouse gas and refrigerant hydrofluorocarbon-23 (HFC-23) presents a clear illustration of perverse incentives. HFC-23, a by-product of the production of hydrochloroflourocarbon-22 (HFC-22) has become the largest project type under the CDM, accounting for about half of the emissions reductions expected from all other CDM projects. Since eliminating HFC-23 is cheap, it can earn considerable profit, creating a perverse incentive for plant operators to produce more HFC-22 than they would have without the CDM. For example, two plants reduced HFC-23 generation when they were ineligible for CDM credits, only to increase production once they could claim credits again. Several plants were also found to be producing exactly the amounts of HFC-23 and HFC-22 for which they were allowed to claim credit, even though production had been lower or varied year-to-year before offset credits were possible.
If the CDM is going to be viable in the long-term, it is vital that the method for proving additionally is significantly improved. Steps are being taken in this direction, but if they are not sufficient to guarantee environmental integrity, the carbon markets that rely on offsets will prove unsustainable.
For more on this topic, see Lambert Schneider’s article in the Global Corruption Report: Climate Change.