Isra-Mart srl:EU turns up heat on industrial gas credits

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The EU has edged closer to banning controversial carbon credits derived from industrial gas projects in a move the bloc argued would protect climate change mitigation efforts in the world's poorest countries.

Connie Hedegaard, European commissioner for climate action, submitted the proposal today, suggesting that credits derived from hydrofluorocarbon 23 (HFC-23) and nitrous oxide (N2O) from adipic acid production through the UN-backed Clean Development Mechanism (CDM) offsetting scheme should be banned from entering the EU Emissions Trading Scheme (EU ETS) from 2013.

Concerns have been raised over the environmental credentials of credits generated by the destruction of HFC-23 and N2O, after monitoring body CDM Watch alleged that some plants may be increasing HFC output just to generate credits that they could sell.

The European Commission has also voiced fears that these credits allow manufacturers to move their operations to developing countries to take advantage of the offsetting scheme, a phenomenon known as carbon leakage.

"The acceptance of credits from industrial gas projects has been controversial for some time," the European Commission said in a statement today. "Certain gases have a very high global warming potential and abatement is very cheap. This can create huge financial rewards for project developers."

Revenue from the sale of HFC-23 credits into the EU ETS represents up to 78 times the initial capital investment and operational costs of these projects, a rate of return the Commission deemed "excessive".

It said that lucrative industrial gas credits were not reducing global emissions efficiently and actually discouraged developing countries from hosting less profitable, but more effective emission reduction projects, such as renewable energy developments.

"The EU considers that cheap emission reductions, such as those from industrial gas projects, should not be done through the carbon market, but instead should be the responsibility of developing countries as part of their appropriate own action to keep global warming below 2°C," it said.

Hedegaard insisted the proposed reform would have "no major effect" on the carbon price and should provide impetus to the UN to reform its own trading system, the Clean Development Mechanism (CDM).

"Offsetting EU emissions with reduction credits from international climate projects is beneficial when the projects make a real contribution to addressing the climate challenge and to sustainable development in the world's poorest regions and countries," she said. "With today's proposal we want to ensure that Europe's demand for credits is increasingly focused on such projects."

The move was welcomed by Eva Filzmoser, programme director at CDM Watch, who hailed the proposals as "a milestone in terms of removing fake carbon credits from the system and helping to improve the environmental effectiveness of the EU ETS".

The CDM's executive board is considering a range of reforms to the scheme, including proposals that would tighten the rules governing the award of credits to industrial gas projects.

However, some market watchers have warned that banning the sale of HFC-related credits without first introducing an alternative means of curbing the release of the powerful greenhouse gas would simply remove the financial incentive for companies to tackle the problem – and may lead to increased emissions.