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LETTERS

PUBLISHED ONLINE: 24 AUGUST 2015 | DOI: 10.1038/NCLIMATE2772

Perverse effects of carbon markets on HFC-23 and
SF6 abatement projects in Russia
Lambert Schneider* and Anja Kollmuss

Carbon markets are considered a key policy tool to achieve and waste generation to historically observed levels or conservative
cost-effective climate mitigation1,2 . Project-based carbon mar- benchmarks for the purpose of calculating emission reductions.
ket mechanisms allow private sector entities to earn tradable Under the CDM, safeguards to prevent perverse incentives
emissions reduction credits from mitigation projects. The were gradually introduced and strengthened over time, following
environmental integrity of project-based mechanisms has been observations that the initial safeguards may not have been
subject to controversial debate and extensive research1,3–9 , in adequate13,14,18 . Whereas the CDM requires using internationally
particular for projects abating industrial waste gases with agreed standards and international approval for registering projects
a high global warming potential (GWP). For such projects, and issuing credits, JI allows using a project-specific approach
revenues from credits can significantly exceed abatement for calculating emission reductions, and either the host countries
costs, creating perverse incentives to increase production or or the international Joint Implementation Supervisory Committee
generation of waste gases as a means to increase credit (JISC) execute regulatory oversight. Under host country oversight,
revenues from waste gas abatement10–14 . Here we show that countries can largely establish their own rules for approving
all projects abating HFC-23 and SF6 under the Kyoto Protocol’s projects and issuing credits without international oversight. The
Joint Implementation mechanism in Russia increased waste host country can determine whether it deems emission reductions as
gas generation to unprecedented levels once they could additional. Under international oversight, the JISC oversees project
generate credits from producing more waste gas. Our results approval and issuance of credits.
suggest that perverse incentives can substantially undermine This Letter assesses perverse incentives in the context of JI.
the environmental integrity of project-based mechanisms and We evaluate JI projects that incinerate high GWP waste gases,
that adequate regulatory oversight is crucial. Our findings are as these project types were particularly vulnerable to perverse
critical for mechanisms in both national jurisdictions and under incentives under the CDM. Four such projects were registered
international agreements. under JI, all of them under host country oversight. They account
The Kyoto Protocol’s project-based mechanisms, the Clean for 54 out of the 863 million credits issued to the 604 JI
Development Mechanism (CDM) for emission reductions projects projects registered as of 1 April 2015 (ref. 16). The four projects
in developing countries and Joint Implementation (JI) for projects involve five plants: two hydrochlorofluorocarbon-22 (HCFC-22)
in industrialized countries, provided industrialized countries and two sulphur hexafluoride (SF6 ) production plants in Russia,
flexibility in meeting their greenhouse gas (GHG) reduction and one trifluoroacetic acid (TFA) production plant in France. The
commitments. Numerous sub-national and national jurisdictions production of HCFC-22 generates hydrofluorocarbon-23 (HFC-23)
are implementing similar mechanisms around the world, often in as an unwanted waste gas; in the production of SF6 a waste
combination with emissions trading schemes2 . stream of SF6 is generated at rectification; and the production
Projects abating waste gases with a high global warming potential of TFA generates various unwanted fluorinated waste gases. The
(GWP) can generate large volumes of emission reductions at amount of waste gas generated depends on the production level
low abatement costs1,15 . Under the CDM, the two largest waste of the main product—HCFC-22, SF6 and TFA—and the waste
gas project types—incineration of hydrofluorocarbon-23 (HFC-23) generation rate, which is defined as the quantity (mass) of waste
from hydrochlorofluorocarbon-22 (HCFC-22) production and gas generated per quantity (mass) of product produced14 . The waste
destruction of nitrous oxide (N2 O) from adipic acid production— generation rate depends on factors, such as plant design, product
account for only 0.3% of the registered projects but generated about purity requirements, and degree of process optimization19 . In the
half of the 1.5 billion emission reduction credits issued so far16 . absence of regulations, incentives, or voluntary commitments by the
For such projects, revenues from credits can significantly exceed industry, the waste gases are usually vented to the atmosphere. The
GHG abatement costs and, in some instances, the costs of producing five registered JI plants capture and incinerate these waste gases (see
the main product10,11 . This can create perverse incentives for plant Supplementary Documentation).
operators to increase production or waste generation beyond levels The plant in France aimed to address perverse incentives by
that would occur in the absence of crediting12–14,17 . If more waste capping the emission reductions to the historical emissions of the
gas is generated owing to the incentives from crediting, emission installation. However, data on historical and monitored production
reductions are overestimated; the emissions baseline is inflated and waste gas generation are not available to assess whether the cap
compared to the emissions that would actually occur without adequately prevented perverse incentives.
crediting, and, in consequence, excess credits are issued. Three plants in Russia initially applied caps on the production
Such perverse incentives can be avoided through appropriate and waste generation rate to avoid perverse incentives, drawing
safeguards in methodological standards for the calculation of upon CDM standards. In the second quarter of 2011, the plant op-
emission reductions, mainly by capping the amount of production erators decided to retroactively change the way emission reductions

Stockholm Environment Institute, SEI US Center, 11 Curtis Avenue, Somerville, Massachusetts 02144-1224, USA. *e-mail: Lambert.Schneider@sei-us.org

NATURE CLIMATE CHANGE | VOL 5 | DECEMBER 2015 | www.nature.com/natureclimatechange 1061

© 2015 Macmillan Publishers Limited. All rights reserved

plant operators would have economic generation at the KCKK Polymer plant.4 1. A comparison with GHG inventory data reported by Russia to Year the United Nations Framework Convention on Climate Change c HFC-23 waste generation at HaloPolymer Perm (UNFCCC. 20) or the average historical waste 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 generation rate of 2.1038/NCLIMATE2772 a HFC-23 waste generation at KCKK Polymer 0. specifications which might have affected the waste generation rate.04 SF6 production and SF6 waste generation are available. 1 January 2008. All rights reserved . (metric tonnes) Start of crediting safeguards 0. it depends on how much are calculated as of 1 January 2010. After the start of crediting. ref.0 0. removing the caps and crediting waste gas the plants would otherwise have generated.5 Start of crediting 1. HFC-23 waste generation at the incentives to reduce rather than increase waste generation13. although The project at the fourth plant in Russia was developed and previous research indicated that perverse incentives affected plant approved in 2011/2012 and claimed credits retroactively as of operations. HaloPolymer Perm plant. with about two-thirds of the credits 1062 NATURE CLIMATE CHANGE | VOL 5 | DECEMBER 2015 | www.8 methodological safeguards 0.5 increased with the implementation of the JI project (Fig. corresponding to 66 originally projected levels. about facilities to unprecedented levels compared to both historical and 28 to 33 million credits were issued in excess. SF6 waste Without credit revenues.0 represent the upper end of the possible range—varied between 4 0.5 emissions from handling of SF6 at the production site. and higher levels of waste generation before crediting before crediting were sustained thereafter.6 (metric tonnes) 0. There was also no reporting of any changes in plant capacity. which considerably exceeds the default value of 0. ref. and not in for the crediting period during the crediting period production levels (see Supplementary Information).10 methodological Russia (KCKK Polymer and HaloPolymer Perm).17.00 on Climate Change (IPCC. and replaced (see Supplementary Information).nature. 21) shows that waste generation significantly HFC-23 waste generation per day 3.5 and 53 tonnes of SF6 over the period 1990 to 2007.12 Decision to abandon inventory data includes emissions from both SF6 production plants in 0. and thus 1. or product Figure 1 | HFC-23 and SF6 waste generation at three plants in Russia.3 0. For the period 2008 to 2010.14 . a.5 Start of crediting 0.com/natureclimatechange © 2015 Macmillan Publishers Limited.0 Decision to abandon project implementation.7 2. b. The project did not apply any methodological Our results suggest that perverse incentives arising from project- safeguards to avoid perverse incentives.06 0.9%. We assess the all waste gas destroyed. Several lessons can be learned from this analysis. the GHG inventory emissions from SF6 2. the extent and implications were more confined13. to 79% of the credits issued for these periods. c.9 2. The increase in waste generation is mostly Original projection Monitored data attributable to an increase in the waste generation rate.02 waste generation rate was 16. We conclude that. after abandoning methodological safe.18 .1 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year Year GHG inventory data on SF6 emissions from two SF6 manufacturing sites Monitored SF6 waste generation during the crediting period b SF6 waste generation at KCKK Polymer from HaloPolymer Perm 0.2 0.0 project implementation the plant reported an average annual waste gas generation of 117 tonnes of SF6 . Moreover.2% suggested by the Intergovernmental Panel 0.0 Start of crediting only include waste gas emissions from SF6 production but also 1. guards in 2011. The extent of such over-crediting is uncertain.0 (metric tonnes) 0.14 Figure 2 | SF6 waste generation at the HaloPolymer Perm plant. data and information provided magnitude of over-crediting using three scenarios to estimate the in the original project documentation was considered incorrect. HFC-23 waste generation at the KCKK Polymer plant.5 0.08 the waste generation from HaloPolymer Perm increased beyond historical emission levels reported in the Russian GHG inventory from both plants. in the absence of crediting (see Methods). 0.5 SF6 waste generation per day HFC-23 waste generation per day Decision to abandon 0. design. The GHG SF6 waste generation per day 0.0 0.LETTERS NATURE CLIMATE CHANGE DOI: 10.0% observed at the KCKK Polymer plant.5 methodological (metric tonnes) safeguards manufacturing—which cover both SF6 plants and which may not 2. increasing waste gas generation beyond levels that would oc- abandon methodological safeguards to prevent perverse incentives. the average 0. plausible range of waste gas generation that would have occurred or not applicable. 2). whereas after 0. Before 3. in the Figure 1 shows that waste gas generation increased in all three periods where methodological safeguards were not applied. cur in the absence of crediting leads to excess issuance of credits. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 The abrupt increase occurred in all four plants exactly at the Year point in time when plant operators could generate (more) credits Original historical data Revised historical data by producing more waste gas. First. for which data on both on environmental integrity. all waste gas destroyed was based mechanisms can have rather substantial adverse impacts credited. Waste generation increased in all three plants Absent methodological safeguards to prevent perverse incen- beyond previously reported levels when plant operators decided in 2011 to tives.

ipcc. CDM/JI Pipeline Analysis and Database (United Nations Environment sions on the review of JI and market-based mechanisms under the Programme Danish Technical University Partnership. Finally. Assessing the Impact of the Clean Development Mechanism (High Level Panel on the CDM Policy Dialogue. Acknowledgements et al. D. Perverse incentives under the Clean Development Mechanism Certification—did not address the perverse incentives. Our findings confirm earlier 17. Assessment of the methodological safeguards were removed at a point in time Options for New Installations (Ecofys.jp/public/2006gl 21.cdmpolicydialogue. Clean Development Mechanism of the Kyoto Protocol. The Clean Development Mechanism: A review of Supplementary information is available in the online version of the paper. 47. Manage. Policy 11.org/external/default/WDSContentServer/WDSP/ as part of a larger research project evaluating the environmental integrity of Joint IB/2014/05/27/000456286_20140527095323/Rendered/PDF/ Implementation. L.S. O. Industrial Gas Projects Under The research that project-based mechanisms are exposed to significant CDM: Adipic Acid—A Case of Carbon Leakage? (Stockholm Environment risks of over-crediting. the projects were implemented 14. with 15. commissioned by the Austrian Federal Ministry of Agriculture. https://cdm. Friedrich. Report of the Task Force on HCFC Issues (with Particular Focus on the Impact of wide media and policymaker attention. is member of the CDM Executive Board under the Kyoto Protocol.worldbank. Climate Change.S. it had an emissions target well above its actual Climate Change. 2011). & Seres. Q. Lazarus. Policy 9.int/resource/docs/ when perverse incentives from HFC-23 CDM projects received 2006/smsn/ngo/021.pdf (AIE) performing the relevant auditing functions—Bureau Veritas 13.pdf of non-performance. Swiss governments. new climate agreement. https://cdm. A. as well as the growing use of domestic http://www. the Ministry of the Environment of Finland.pdf 4. http://ec. IPCC Climate Change 2014: Mitigation of Climate Change (eds Edenhofer. 2015). Any views expressed are those of the authors and do not necessarily reflect the official views of the Austrian. Schneider.cdmpipeline. S. Note on the Revision of AM0001 (United Nations Framework Convention on under oversight by the host country. 2012). Correspondence and requests for materials should be addressed to L. & Lindley.sei-international. 1 Emission Reduction from the Production of HCFC-22. These lessons are critical for both ongoing international discus. et al.org/mediamanager/documents/ metry between project operators and auditors or regulators4. A. Clean-energy credits tarnished. 16. 517–518 (2011). Although (CDM): An evaluation of HFC-23 destruction projects. L. Schiermeier. 2011). A. Instrumentation of HFC-23 repercussions for meeting its target. A. Study on the Integrity of the Clean Development Mechanism L. leading ultimately to a the Clean Development Mechanism)and Emission Reduction Benefits Arising ban of HFC-23 credits under the EU’s emissions trading scheme from Earlier HCFC Phase-out and Other Practical Measures (United Nations and a revision of the applicable methodological standard under Environment Programme. Zhezherin for helpful input and comments.or. NATURE CLIMATE CHANGE | VOL 5 | DECEMBER 2015 | www. http://unfccc. Determining. that mechanisms monitor the 19.pdf 6. COMMISSION REGULATION (EU )No 550/2011 of 7 June 2011 on version of the paper. Clim. wrote the paper. dards be internationally accepted and include appropriate safe.int/Panels/meth/meeting/12/058/mp58_an17.5. 2014). Finnish and High-Level Panel on the CDM Policy Dialogue (CDM Policy Dialogue. the first international offset programme. 1. Competing financial interests http://www. G. All rights reserved . Reprints and permissions information is available online at www. Information Note on AM0028: Catalytic N2 O Destruction in the Tail Gas of If crediting mechanisms are further pursued. 2014). D. McCulloch. 2014).org/research/1030_impact. Spalding-Fecher.nature.pdf Environment and Water Management. Schneider.ch/report/ar5/wg3 We would like to thank K.unfccc. 882840AR0REPLA00EPI2102680Box385232. Mortier and V. Common Reporting Format Tables Submitted to the UNFCCC (Government of Methods the Russian Federation. L.pdf guards to prevent perverse incentives.int/national_reports/annex_i_ Methods and any associated references are available in the online ghg_inventories/national_inventories_submissions/items/7383.. S. 8.europa. Issues Arising from the Implementation of Potential Project Activities under the Clean Development Mechanism: The Case of Incineration of HFC-23 Waste Protocol. be sufficient to ensure environmental integrity. http://unfccc.org carbon markets around the world. http://www. Environ. http://www.ipcc-nggip.php 22. Baskov. Standardization of baseline and additionality Second.org/report/rpt110912. Atmos. Costs of certified emission reductions under the project information being only partially publicly available. for example. M. Institute. 2006 IPCC Guidelines for National Greenhouse Gas Inventories of non-performance. Clim. Russia had no incentives to ensure environmental integrity Streams from HCFC-22 Production (United Nations Framework Convention on of JI projects. Schneider. Y. (CDM)(AEA Technology. State and Trends of Carbon Pricing 2014 (World Bank. 41. 1560–1566 (2007). 129–141 (2015). 2010). 2.int/Panels/meth/ assess the performance of auditors or apply any sanctions in cases meeting/11/049/mp49_an13. Forestry. The research team bears sole responsibility for the content. Hofman. and 3. 179–203 (2011).int/resource/docs/2005/tp/eng/01. Report of the the Federal Office of the Environment of Switzerland. Assessing the additionality of CDM projects: Practical experiences and lessons learned. et al. http://www. it is essential that Nitric Acid or Caprolactam Production Plants and AM0034: Catalytic Reduction adequate international oversight be executed for any mechanisms of N2 O inside the Ammonia Burner of Nitric Acid Plants (United Nations involving international transfer of credits.) (Cambridge Univ. S.eu/clima/policies/ets/ linking/docs/final_report_en. 2006). & Kollmuss. we note a lack of transparency.iges. Under the Kyoto 10. 20. evaluated the data and analysed the results. Laurikka.8 . Publications/Climate/sei-adipicacidleakage-9oct2010.pdf emissions and could issue credits from its emissions budget without 11. & Michaelowa.K. Clim. from Projects Involving Industrial Gases (European Commission. http://www.S. Global emissions of HFC-23 estimated to year performance of auditors and apply effective sanctions in the case 2015. published online 24 August 2015 http://eur-lex. Lazarus. Wartmann. 2012).unfccc.com/reprints. due to the information asym. Hayashi.eu/LexUriServ/LexUriServ. & de Jager.europa. Third. AIEs were accredited by the JISC. Press. Nature 477.. 2005). Ruthner.nature.NATURE CLIMATE CHANGE DOI: 10.pdf 18. accepted 27 July 2015.pdf L. Greenhouse Gas Meas. transparent and publicly accessible. Additional information 7. http://unfccc. http://ozone. and that information on credited activities is (Intergovernmental Panel on Climate Change. Pursuant to Directive 2003/87/EC of the European Parliament and of the Council.do?uri=OJ:L:2011:149:0001: 0003:EN:PDF References 1. Energy Econ.com/natureclimatechange 1063 © 2015 Macmillan Publishers Limited. 9.unep.22). that methodological stan. L.S. 2007). 2006). Author contributions 5.org/Assessment_Panels/ the CDM (refs 14. Gillenwater. Carbon Markets and the CDM: A Call to Action. regulatory oversight by the host country alone may not determination under the CDM. the Accredited Independent Entity TEAP/Reports/TEAP_Reports/TEAP-TaskForce-HCFC-Aug2007. The research was prepared http://www-wds.pdf 12. A. 242–254 (2009). R. 2012).1038/NCLIMATE2772 LETTERS being issued in excess in periods when no safeguards were applied. M. 851–864 (2011). & Kirkman. 2011).7. M. Framework Convention on Climate Change. H. and A. For the three plants in Fig. O. Policy 13. Certain Restrictions Applicable to the Use of International Credits Received 14 February 2015. in which case the JISC did not Climate Change. Anttonen. 191–209 (2013). L. L.cdmpolicydialogue. Rahman.

monitoring reports are not publicly available for the plant in France. 2. If HFC-23 was partially vented or sold. wSF6 is the of CO2 equivalent).3. PE are the project emissions and LE are the leakage emissions (all expressed as metric tonnes where PSF6 is the SF6 production at the plant (in metric tonnes of SF6 ). or 62% of the 28. when methodological safeguards were not HaloPolymer Perm. 2 the magnitude of Project-based mechanisms generally calculate emission reductions by over-crediting is more uncertain because historical data is not available. Finally. The monitoring and We use three scenarios to reflect the range of plausible baseline emissions verification reports publicly available are incomplete for four out of the five plants: (BEplausible ). (http://www. as of 1 January 2012. We estimate the magnitude conservative level—for example. NATURE CLIMATE CHANGE | www. the first. as approximated based on SF6 claimed baseline emissions (BEclaimed ) and different assumptions on plausible emissions data reported in the Russian GHG inventory (see Supplementary baseline emission levels (BEplausible ): Information). covering the applied. or 10. or 17. baseline emissions are estimated based on a counterfactual. HaloPolymer Perm reports only HFC-23 originally projected when the project was approved. as observed before crediting at the We estimate the extent of excess issuance of credits asthe difference between the KCKK Polymer SF6 production plant. to address uncertainties or to prevent perverse of over-crediting for the period 2008 to 2012 when methodological safeguards incentives. Whereas project emissions can in most cases be directly waste generation rate expressed as metric tonnes of SF6 waste gas generated per measured. For HFC-23 abatement at 1 April 2011 to 31 December 2012.LETTERS NATURE CLIMATE CHANGE DOI: 10. are lacking. or as Moreover.carbonunitsregistry.2 million. respectively. rate of 0. that period.8%. BE are the baseline emissions. that is.3 million credits issued to the three facilities over actual HFC-23 generation in 2012 would be even higher than presented in Fig.int) and the Russian Registry of Carbon Units CO2 equivalent). assuming that the three facilities would have produced the same years 2008 and 2009 and the period 1 January to 31 March 2011. the first and second monitoring available. comparing an emissions baseline with monitored project emissions and adjusting We determine plausible baseline emission levels based on the SF6 for any indirect upstream or downstream leakage emissions occurring as a result of production and a range of plausible assumptions on the waste the project: generation rate: ER = BE − PE − LE BEplausible = PSF6 × wSF6 × GWPSF6 where ER are the emission reductions.nature.9.2%. or 3. 11. and audited by AIEs. For the period 2008 to 2010 we use the SF6 production data baseline is higher than the emissions level that would occur if the project was not reported by the plant.unfccc. historical data on waste generation is for HFC-23 and SF6 abatement at KCKK Polymer.6 million. 1. we implemented (or if project or leakage emissions are underestimated).5. corresponding to HFC-23 generated was incinerated. as during the crediting as the fourth verification report for the period 1 January to 31 March 2011. The credits issued in excess incineration but no longer HFC-23 generation. respectively. the 69%. hypothetical metric tonnes of SF6 produced. assuming that the same generation rate. Baselines often aim to reflect the emissions level that would most likely SF6 valid for the first commitment period under the Kyoto Protocol (metric occur if the project was not implemented. 1.1038/NCLIMATE2772 Methods where E are the credits issued in excess. assuming that the plant would have operated at a waste generation amount of waste gas would be generated and emitted in the absence of crediting. For 2011 and 2012. 17.com/natureclimatechange © 2015 Macmillan Publishers Limited. We conservatively assume that all would amount to 19. For the three plants in Fig. more tonnes of CO2 equivalent per metric tonnes of SF6 ). the four projects determine baseline capacity.7. or excess issuance of credits. as well amount of waste gas per day as before the start of crediting. We use three scenarios to estimate the plausible range of the waste emissions as the observed waste gas generation. published by the UNFCCC the plausible range of baseline emissions (both expressed in metric tonnes of (http://ji. as suggested by the IPCC. 87%.ru). or 75% of the credits issued over E = BEclaimed − BEplausible that period. Over-crediting. All rights reserved . conservatively assume that the plant would operate at its maximum production Absent methodological safeguards.0%. corresponding to 99%. We estimate the magnitude of over-crediting over the period report covering the years 2008 and 2009 are lacking. period before their decision to abandon the methodological safeguards. and GWPSF6 is the global warming potential of scenario. 61%. second and fourth monitoring report. The credits issued in excess would amount to 13. occurs if the estimated were not applied. but could also be set at a lower. For SF6 abatement at HaloPolymer Perm in Fig. SF6 production data is not reported. BEclaimed are the baseline emissions Data on production and waste gas generation was gathered from project design specified in the monitoring reports of the plants and BEplausible is our estimate of documents (PDDs) and monitoring reports.