No more perverse incentives and windfall profits for HCFC22 production under CDM

No more perverse incentives and windfall profits for HCFC22 production under CDM !

Press release

Poznan, Saturday 6^th of December 2008

In September 2007, Parties under the Montreal Protocol agreed on accelerating the phasing-out of HCFCs in both developed and developing countries. The existing HFC destruction CDM projects are in contradiction with this new agreement since they disincentivize the phasing out and replacement of HCFC-22 as a refrigerant. In order to address this perverse incentives, the Swiss NGO Noe21 submitted a request to the CDM Executive Board (EB) to revise the methodology AM0001 for HFC-23 destruction on 4^th December 2007. Since then, no decision has been taken by the EB on this matter. From the UNFCCC Conference in Poznan, Noe21 urges the EB to adopt the revision proposed as soon as possible in order to not jeopardize the achievement of the goals pursued by the Kyoto and the Montreal Protocols.

HFC-23 is an unwanted by-product in the production of HCFC-22, a refrigerant and temporary substitute to CFCs. The HFC-23 has a Global Warming Potential (GWP) 11’700 times higher than CO2. Its destruction in HCFC-22 plants in developing countries can be registered as a CDM project and leads to the issuance of a very important amount of credits (CERs). As it is very cheap to install a destruction facility, the HFC-23 destruction CDM projects have resulted in huge windfall profits for HCFC-22 plants as well as a perverse incentive to artificially stimulate the production of HCFC-22. That is why HFC-23 destruction projects within the CDM have received much negative attention in the past. In order to address the risk some facilities would be built only for receiving credits, the HCFC-22 production facilities established after 2000 are not eligible for CDM credits.

With the new agreement under the Montreal Protocol, the HCFCs, which are ozone depleters, will be phased-out for developing countries in an accelerated way. To achieve the decided stabilization by 2013[1] and the following decrease, Parties to the Montreal Protocol may early start implementing policies in order to ensure that HCFC-22 demand peaks around 2011.

But unfortunately, the current CDM methodology for HFC-23 destruction creates a perverse incentive for operators to continuing the production of HCFC-22 at historical levels, even if the market demand drops[2]. This is due to the fact that, under this methodology, HCFC-22 amount that is eligible for crediting refers to historical production levels. As a result, much more HCFC-22 would be produced than what would have occurred in the absence of CDM project. A study realized by the NGO Noe21 with the help of the Öko Institute analysed various scenarios for the future HCFC-22 consumption and production in developing countries. It clearly shows that the impact of CER revenues on HCFC-22 production delays the achievements of the accelerated phase-out of HCFCs under the Montreal Protocol, with severe consequences on emissions of both greenhouse gases and ozone depleting substances levels. It is very likely that HCFC-22 will be produced even if not consumed but released to the atmosphere.

To address this perverse incentive the huge windfall profit potential for operators, arising from the credits, needs to be removed. As long as the revenues from HFC-23 destruction are lower than the HCFC-22 production costs, the worst incentives are avoided. This is achieved in a very simple way by introducing a cap on the HFC-23/HCFC-22 ratio. The new methodology proposed by Noe21 to the EB introduces a cap on the HFC-23/HCFC-22 ratio of 0.5%[3]. Chaim Nissim, Noe21 director considered: “Thanks to this proposition, investments in HFC-23 destruction projects would remain profitable in the future without undermining the achievement of the objectives pursued under the Kyoto and Montreal Protocols”.

Considering the inaction of the EB on this issue, Mr. Nissim commented: “It is very disappointing to see that the CDM Executive Board does not consider a very simple methodology correction that could very easily address such a huge problem for the planet.” Apart from the methodological aspects, the proposed revision would on the one hand positively affect the regional distribution of CDM projects, given there is no such installations in Least Developed Countries (LDCs), and on the other hand result in more projects with large benefits for sustainable development.

Noe21 urges the EB to consider and accept his revision request as soon as possible. “Such a perverse incentive strongly weakens the overall credibility of the CDM. If we want CDM survives in the future, it is absolutely necessary to ensure quickly its environmental integrity” Mr. Nissim concluded.

Media Contact:

Chaim Nissim, Director, cnissim@noe21.org, +41 79 316 98 13

Noe21 is the french acronym for New Economic Orientation for the 21st Century. Noe21 is an Independent NGO specialized in solutions to climate change (www.noe21.org based in Geneva, Switzerland. It is member of the European Environmental Bureau (EEB) and Climate Action Network-Europe (CAN-Europe) and is accredited to the UN Framework Convention on Climate Change (UNFCCC).

[2] Data from UNFCCC (2005), the TEAP (2007) and other publications (Schneider et al. 2005) suggest that the economic incentives are considerable and can even exceed the revenue from HCFC-22 sales.

[3] In the current CDM HFC-23 destruction methodology, a default value of 1.5% shall be used in the absence of historical data. But the HFC-23/HCFC-22 ratio can vary significantly among plants. Modern plants in industrialized countries have managed to significantly reduce the HFC-23/HCFC-22 ratio. DuPont has reported that it managed to achieve a HFC-23/HCFC-22 ratio of 1.37%. Plants in developing countries usually achieve a ratio of 3-4%.