Is Kyoto about more than refrigerants in China?

Distribution of 2012 CDM CERsIn the midst of shipping a few thousand TerraPasses during the holidays, we had a wonderful read of Keith Bradsher’s New York Times article on the Clean Development Mechanism (CDM), a feature of the Kyoto Protocol that allows polluters to fund emissions reduction projects in the developing world. Bradsher paints a troubling picture of some of these projects as obscenely profitable refrigerant deals architected by nefarious carbon traders over tea in their Mayfair mansions. While there is some truth to this portrayal (we’ve visited these Mayfair mansions), the lessons for American policymakers are complex.

HFC-23 is a refrigerant with very powerful effects on global warming — it’s almost 12,000 times as bad as carbon dioxide. It’s also quite easy to destroy. A small investment in process changes in aging factories can easily destroy the gas. The problem, according to Swiss consultant Othmar Schwank, is that the global carbon industry created by the Kyoto Protocol has made these small investments obscenely profitable, so much so that they are overwhelming investments in energy efficiency and renewable energy that are more valuable in the long term.

The result is that a whopping 31% of the anticipated volume of CDM credits comes from just 17 HFC projects (the Times uses a 66% number which only includes registered credits). Compare this with 6% for wind.

We’ve been mulling this over and have some hallway advice for our friends in the American policy community.

  1. This is a real issue for the US, now.
    The northeastern Regional Greenhouse Gas Initiative (RGGI) includes an escape valve at which point CDM credits may be applied. CCAR is contemplating cross border mechanisms. Even the voluntary market is likely to be influenced by the CDM-style Voluntary Carbon Standard (VCS).

  2. It takes a while for markets to get going, but their reputation is built on the first projects.
    The latest report from UNEP Risoe shows almost 1,500 projects in the pipeline. 2006 started with 554. HFC overwhelmed the early market and has eroded confidence, but its influence is already waning.
  3. When structuring a market, its all about incentives.
    Policymakers should fully expect the most profitable projects to get funded first. Frankly, given the underlying economics, we’re surprised more money didn’t go into HFC.
  4. A performance standard is harder for a reason.
    A performance standard approach to additionality makes you work harder up-front for better market structure. One drawback of a project-by-project approach is that you don’t do the hard work in advance to determine which types of projects will be judged additional and how. By reviewing each project for additionality, the shape of the market is always one step ahead of you. Before you know it, the market you have approved one by one is overwhelmingly of one project type that you never really liked.

    In contrast, the debate around a performance standard will automatically bring smart types like Mr. Schwank into the fray to show you the underlying economics and supply situation. For an example, read his remarkably prescient 2004 report on HFC projects. Setting clear criteria around the types of projects you want to see will also help the market evolve faster.

  5. Markets and policymakers learn together. America is not part of the conversation.
    1,500 projects across 25 categories. 1.6 billion tons of CO2 reductions. A $28B trading market. Thousands of professionals energized and motivated to fight climate change. Hedge funds. Promoters. IPOs. Naysayers. The rest of the world is motivating to fight climate change and America is curiously absent.

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  1. Robert Cormia - December 27, 2006

    Excellent article, especially the comments about the economics of CDM projects, plus the elusive notion of ‘additionality’. While we may have an over emphasis on HFCs right now, chemically speaking, these projects, and methane abatement (sustainable agriculture) are worthy in the short term. The half-life of HFCs are so long, that their global warming potential (in the 1000’s) really needs to be appreciated. Let’s not let this opportunity go by, especially as ‘fugitive emissions’ from HFC polluters is so hard to keep track of.

    Even better news is that we are beginning to really cap the rise of anthropogenic methane emissions, and given it’s high global warming potential (23) but fairly short half-life (10 to 20 years) – we should really try to make in roads here. James Hamsen (NASA) has made similar observations – while CO2 is the primary focus of GHG emissions, we can actually make some decent progress against HFCs, CFS, SF6, and methane, and in the short term, this might be a good investment of early CDM $s. But let’s keep CDM profits reasonable.

  2. ZF - December 28, 2006

    I’m willing to believe your figures are right, but if so then they appear to suggest something rather startling about the whole global warming debate.

    Using your numbers (for my car they came out at gas cost $1,500 a year, additional Terrapass cost to offset CO2 production $49.95), I calculate that we could simply add 5¢ a gallon to the price of gas, donate the proceeds to emissions reduction projects and get on with our lives without screwing up the US economy or having to carry on this endless and debilitating wrangle about the disastrous impact of the amount of driving we do, the vehicles we choose to buy, etc., etc.

    Personally I think it would be worth it to get the whole thing behind us and get on with e.g. driving a Hummer if we want, which would from that point forward be no more blameworthy than riding a bicycle.


    I bet not one person in 1,000 in the US or Europe is aware that the whole problem could just be abolished overnight this easily.

  3. Adam Stein - December 28, 2006

    Yep, it would be great if the problem of global warming could be solved so easily. Bu there’s the small issue of supply and demand. If you’re talking about offsetting all vehicle emissions (which it sounds like you are), you’d need to find a massive source of counterbalancing carbon reductions. Finding this many reductions would be expensive, so the price of the offsets would shoot up.

  4. Aaron A. - January 2, 2007

    As Adam said, the 5 cents per gallon plan isn’t really workable. On a smaller level, though, it could be useful. We’re talking much smaller, because even at $.001 per gallon, we’re talking about millions of dollars per year nationwide. It wouldn’t offset every car on the road, but it could provide seed money for funding reductions.

    Of course, there’s also the political angle. If it’s perceived as a tax, there’ll be all the usual grumbling about “Why should I pay for this?” and “This tax discriminates against the poor.” Also, I’m not sure I’d trust that money to the government. How will they decide who gets the money, and how do we hold them accountable? Something tells me that big business would write themselves a loophole allowing them to use that funding to pay for efficiency projects they would have undertaken anyway.

  5. Evan Andersen - March 12, 2007

    In the next few years there are going to be many opportunities for hedge funds in the Green category. Emission’s trading is going to dramatically help climate control and we will see the hedge funds participating in such trading.
    Evan Andersen
    Lydia Capital