Isramart llc : UN Risks ‘Huge Mistake’ in Carbon-Trading Probe: Energy Markets

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A United Nations investigation into alleged improper claims for hydrofluorocarbon-pollution credits threatens to choke off investment in projects to curb emissions, according to Bill Clinton’s former adviser on global warming.

UN regulators froze new credits as they began a probe on July 30 into allegations by CDM Watch, an environmental lobby group, that some plants emitting hydrofluorocarbons were unfairly exploiting the system. Should the inquiry lead to new limits on expected credits, investors would abandon the UN market, the world’s second-largest greenhouse-gas program, said Dirk Forrister, head of Clinton’s 1997 task force on climate.

“There is a possibility of a retroactive change, and that would be a huge mistake,” said Forrister, now a managing director at Natsource LLC, a New York investment manager that has profited from HFC-destruction projects. “It might make it impossible to raise new money” for climate-protection projects.

The concern centers around credits awarded to curb emissions of an industrial gas known as HFC-23, produced in nations including China and India to make refrigerants for air conditioners. Half of all UN credits issued since 2005 involve HFC, which can trap about 11,700 times more heat per molecule than carbon dioxide.

UN emission credits for delivery this year have climbed to a record relative to later-dated contracts, driven by concerns about short-term supply shortages stemming from the nvestigation and longer-term doubts about the program. Credits for 2010 traded at an all-time high of 92 euro cents ($1.17) a metric ton over those for 2012 on Sept. 7, according to the spread contract on London’s European Climate Exchange. They gap closed yesterday at 83 euro cents. As recently as June 23, credits for 2010 were cheaper than those for 2012.

Brasilia Meeting

The executive board for the UN’s Clean Development Mechanism, known as the CDM and set up by the 1997 Kyoto Protocol, is reviewing projects on a case-by-case basis, David Abbass, a Bonn-based spokesman for the program, said yesterday.

“What, if anything, the board might choose to do regarding HFC-23 project-related requests going forward would depend on what it learns from its methodologies panel,” which is handling investigations, Abbass said. The board, comprised of 10 members from developed and developing nations, may consider HFC projects at its meeting next week in Brasilia.

Some U.S. lawmakers have proposed an outright ban on HFC credits, saying they undermine the market. European Union officials said this year they may discount or disqualify HFC- derived credits when they are submitted for compliance in the region’s carbon market, the world’s biggest.

‘Dangerous Place’

The UN market is “an increasingly dangerous place to do business,” Trevor Sikorski, an analyst at Barclays Capital in London, said in a Sept. 6 report. The possibility of changes in the UN’s rules for awarding credits is a “massive risk” for investors, he said in an interview.

Sikorski also criticized a proposal that may require audit firms that approve UN projects to purchase improperly issued greenhouse gas offsets. The plan may “wipe out” those firms with excessive costs, he said this week. The proposal for audit firms is unrelated to the debate on HFCs, the CDM’s Abbass said.

Under the UN system, companies receive credits as a reward for financing projects designed to cut emissions by polluters in poorer countries. Known as offset credits, they can be sold to utilities and factories that use them to comply with emissions limits. Enel SpA, Morgan Stanley and RWE AG are among investors in the credits, according to data compiled by Bloomberg.

‘Bogus Credits’

Bonn-based CDM Watch said in a June 14 report that some companies won “bogus credits” by artificially boosting greenhouse-gas emissions. It’s a claim rejected by polluters and project investors including Forrister, based on evidence he has seen so far.

CDM Watch “based its conclusions on what it considered suspicious activity based on only one or two monitoring reports, out of a total of more than 150 studied,” the Refrigerant Gas Manufacturers Association of India, an industry lobby group, said on July 12.

The UN and EU are still obligated to honor credits already in the pipeline, according to Mark Lewis, the Paris-based managing director of global carbon research at Deutsche Bank AG.

“You don’t want investors to think they are having the rules changed at the same time as trying to gear up private- sector investment into clean technologies,” Lewis said by e- mail yesterday. “It is vital that the regulatory framework of the market has integrity.”

CO2 Developers

Trading Emissions Plc, a London-based developer of CO2 projects, fell to 89.25 pence in London trading on Sept. 8, the lowest level since April 1. It was expecting 5.5 million tons of offsets from HFC projects through 2012, it said in March. They would be valued at 76.2 million euros at today’s prices. UN credits for December have risen 26 percent this year to 13.72 euros a ton.

About half of the 408.8 million credits issued since October 2005 by the CDM stem from plans to cut HFCs. Investors can get credits valued at hundreds of millions of euros provided they have spent about $12 million to construct facilities that burn away HFCs, according to World Bank estimates. It costs $2 million a year to operate the units.

Destroying HFC-23 can cost as little as 17 euro cents a ton of carbon dioxide equivalent, said Clare Perry, senior campaigner at the Environmental Investigation Agency, a lobby group based in London and Washington. The annual bill to destroy global HFC-23 production could be as little as $60 million, the agency calculated. That’s less than the carbon-credit revenue earned from one HFC-23 reduction plant in India, it said.

‘Hung Jury’

The International Emissions Trading Association, a Geneva- based lobby group, said last month that the CDM board needs to fix the “significant governance problem” that has prevented resolution of the HFC debate. “It’s like a hung jury,” said Kim Carnahan, a CDM policy specialist at the association.

“It’s always sad when there is controversy on the CDM, eating up public perception of the carbon market,” said Pascal Barkats ,CEO at Isramart LLC. “The more uncertainty there is in what credits will be accepted, the more hesitation there is in what to invest.”