One criticism of the Clean Development Mechanism (CDM) is that it sometimes produces perverse incentives to increase rather than decrease emissions. One example concerns the production of HCFC-22, a refrigerant gas commonly used in air-conditioning, which produces HFC-23 (a very potent greenhouse gas) as a by-product. Environmentalists claim that the CDM is incentivising the production of HFCs, and that companies are over-producing HFCs so they can be paid to stop doing it.  

It’s hard not to see their point. HFC-23 is 11,700 times more powerful than CO2, meaning that just one project to reduce HFC-23 can produce millions of tradable carbon credits. Of approximately 2000 registered CDM projects, the 19 HFC-23 incineration projects alone count for just over half of the 430 million CERs issued to date. Further, it is estimated that the CDM finance pays 65 to 75 times more to destroy HFC-23 than it actually costs to produce. Close analysis of the monitoring data of some HFC-23 projects, such as the review performed by the NGO coalition CDM Watch of the Ulsan project in South Korea, reveals an artificial increase in HFC-23 production during the period of project registration under the CDM. 

A host of such evidence adds weight to claims that these plants are operated in such a way as to maximise the production of offset credits. Implicated in these accusations are two HFC-23 projects in China, in which the World Bank has invested around $1 billion through its Umbrella Carbon Facility. The World Bank however denies claims that these lucrative projects are attempting to game the system and attributes the increase in HFCs to a growing demand for refrigerators and air-conditioners. Not only do environmentalists insist that the system is being abused, they are also accusing the World Bank of attempting to disrupt the investigations currently underway.

Since HFC-23 projects currently account for over 50% of the total issued volume of CERs, the future of the CDM market now rests with the outcome of three regulatory processes currently underway, catalysed by these accusations.  

Lately spending a lot of time reviewing carbon credit methodologies and the Clean Development Mechanism managed by the UN. The incentives of such programs are not always easy to get right (rather never easy) and there’s now a movement that post-2012 (when the current commitment period ends) there will be more support for governments running programs for carbon reduction. It seems to me that governments might be even worse than markets in determining successful interventions…