Cleaning up on the carbon market

Developed nations are paying Chinese and Indian chemical industries billions of pounds to produce ozone-depleting refrigerant gases, thanks to an unfortunate clash between two environmental protocols. Governments around the world are now wrangling about how to close this loophole.

The problem stems from the Clean Development Mechanism (CDM), an arm of the Kyoto protocol set up in 2003. This allows industrialised countries to meet greenhouse gas reduction targets by paying for cheap emission-cutting projects in developing nations. Every tonne of carbon dioxide emissions (or their equivalent, denoted CO₂e) saved counts as a 'carbon credit' - essentially a permit to pollute - which can be traded on an international carbon market worth 22.5 billion (�15.4 billion) last year.

The hole story: the ozone layer is still being hammered by refrigerants

Around half of CDM credits issued have been for destroying HFC-23 (trifluoromethane), which is 11,700 times more potent as a greenhouse gas than CO₂, and is emitted while making the refrigerant HCFC-22 (chlorodifluoromethane).

HFC-23 is easily removed by cheap gas scrubbers, making it the low-hanging fruit of emission reduction projects: it costs less than 1 to destroy a tonne of CO₂e this way, according to J�rund Buen of industry analysts Point Carbon.

Happily for China and India, which hold many of the developing world's refrigerant factories, investors are prepared to pay up to 15 for every HFC-23 derived carbon credit - that's still cheaper than reducing emissions in Europe or the US.

Two Indian companies, Gujarat Fluorochemicals and SRF, have cornered about three quarters of the 16 million credits issued so far for confirmed HFC-23 destruction, though Chinese companies have more future projects registered.

Michael Wara, a lawyer and CDM expert formerly of Stanford University, California, estimated recently in Nature that the projected total cost of destroying HFC-23 via carbon credits up to 2012 was about 4.7 billion, though installing the necessary gas scrubbers would cost less than 100 million. As he points out, this distortion isn't just an expensive loophole: it also squeezes out more preferable CDM projects, like biomass or wind power, and may create a perverse incentive for companies to expand refrigerant plant capacity purely for the greater profit of destroying HFC-23 byproducts.

This practice isn't allowed under the CDM, but China argues that it should be, as long as there is a market demand for HCFC-22; Canada and Japan agree, because they see HFC-23 credits as a relatively cheap way of meeting their Kyoto targets.

Kyoto vs Montreal

A concession written into the Montreal protocol isn't helping matters. Since 1989 this agreement has aimed to reduce ozone-depleting gases - for example, by replacing HCFC-22 with other HFC blends or hydrocarbons which are kinder to the ozone layer.

But developing countries are allowed to increase their HCFC-22 production until 2016 and maintain that level until 2040. According to Lambert Kuijpers, co-chair of the Montreal protocol's Technical and economic assessment panel, demand for cheap supermarket refrigerants and domestic air conditioners is increasing rapidly in China and India, with growth in the Chinese market now up to 30 per cent in a single year. 'Given the large demand, we are going to extend capacity,' confirmed Shen Yuezhong, vice president of Chinese fluorochemicals company Changshu 3F Zhonghao.

Unlike the EU, the US, which is phasing out domestic production, still accepts HCFC-22 imports from China. A Montreal conference in September 2007 will discuss accelerated HCFC-22 phaseout.

Possible Kyoto CDM solutions, meanwhile, will be discussed in May at a meeting of a UN-affiliated panel in Bonn, Germany, and again in December at UN climate talks in Bali, Indonesia. Wara suggests that HFC-23 may be excluded from the CDM and destroyed under a separate incentive system. Another possibility is that the bulk of payments for HFC-23 credits might go to sustainability projects, rather than directly into industry's coffers; though the Chinese government already takes 65 per cent tax from Chinese factories' HFC-23 derived CDM profits, for a sustainable development fund whose exact workings remain unclear.

Despite these problems, Wara insists that the current CDM should be improved, not discarded. Halldor Thorgeirsson, director of the sustainable development mechanisms program at the UN framework convention on climate change, agrees: 'People say HFC-23 reductions should have been done differently, but it wasn't happening at all until the CDM came round,' he told Chemistry World.

Richard Van Noorden.

Additional reporting by
Li Jiao