EU set to ban purchase of carbon credits

PUBLISHED : Monday, 29 November, 2010, 12:00am
UPDATED : Monday, 29 November, 2010, 12:00am

In a move that could upend the current global carbon-trading system, the European Commission proposes banning companies in the European Union from buying credits generated by the destruction of certain greenhouse gases.

The proposal, which suggests a ban from January 1, 2013, comes after 10 companies, mostly from China, came under scrutiny by the United Nations for possibly gaming the system for profit by overproducing an ozone-damaging gas to fake credits. The system is administered by the UN's Clean Development Mechanism (CDM) and most of the credits are purchased by European polluters to offset their own carbon emissions as part of commitments made under the 1997 Kyoto Protocol, an international treaty on global warming.

The EU's proposal was detailed in a draft regulation released late last week. It comes just ahead of this week's United Nations Climate Change Conference in Cancun, where nations will negotiate on new ways to reduce global warming after the Kyoto Protocol expires in 2012.

The timing of the EU's proposal has some market watchers speculating it's a political manoeuvre designed to put pressure on China to agree to reduce its own carbon emissions. China is the world's biggest emitter of greenhouse gases and the biggest supplier of so-called Certified Emission Reductions credits (CERs), which are tradeable. Like other developing countries, China was exempted from emission limits set at Kyoto. The US opposed this exemption and never ratified the treaty, leaving mostly Europeans polluters subject to annual pollution quotas.

The CDM mechanism also is due to expire at the end of 2012 and a new system needs to be negotiated.

If the EU's draft proposal is adopted, it will have major ramifications for the global allocation of resources to reduce greenhouse-gas emissions, because it will affect the future supply - and price - of the CERs. China produces about 60 per cent of all CERs.

'The EU wants to show it remains at the centre of the mechanism and can easily promote or sanction some sectors, or even the whole mechanism,' said Philippe Delhaise, chief executive of Capital Information Services, which provides due diligence and risk assessment on projects qualifying for CERs.

The EU is keen to get big polluters such as the United States and China to join it in committing to voluntary cuts in emissions.

Currently, China's biggest source of CERs comes from the destruction of HFC-23, also known as fluoroform, a greenhouse gas nearly 12,000 times more harmful than carbon dioxide. Its potency makes it far more profitable to destroy than gaining credit for reducing carbon dioxide emissions. HFC-23 is a by-product of the production of HCFC-22, a common refrigerant that depletes the ozone layer when released.

Pointing to flaws in the existing CDM system, the EU said in its draft regulation that HFC-23 CERs carried 'exceptionally high rates of returns' that were a disincentive for developing nations to cut their emissions.

In August, the UN asked the 10 companies subject to the probe to provide data on their output, sales, demand and inventory of HCFC-22 since 2000, and halted payments owed for credits.

Last week the executive board of the United Nations Framework Convention on Climate Change (UNFCCC) - another UN body involved in the CDM system - heard a presentation by experts assigned to revising the methodology for granting HFC-23 credits.

The panel was asked by the board to 'consider the extent of revision of the methodology based on the shortcomings identified' in its analysis, a post-meeting report said. A UNFCCC spokeswoman could not be reached and did not respond to e-mails on the status of the probe.

Dirty dealing

The UN suspects the carbon-credit system is being gamed

The number of mainly mainland-based companies being scrutinised for such practices is: 10