In addition to Wil's comments on HCFCs, his perspective is backed up by discussions within the ozone regime where a number of delegations want to limit what they see as perverse incentives, created by the interaction of the ozone regime rules and CDM, related to the adoption of arguably unnecessary HCFC and HFC capacity.
-------------------------------------------- David Downie Director, Program on the Environment Associate Professor of Politics Fairfield University 217 Donnarumma Hall 1073 North Benson Road, Fairfield, CT 06824 [email protected]; 203-254-4000, ext 3504 -----Original Message----- From: [email protected] [mailto:[email protected]] On Behalf Of Wil Burns Sent: Friday, March 19, 2010 4:28 AM To: [email protected] Subject: RE: [gep-ed] HCFCs A couple of points about Markus's arguments: 1. There is actually plenty of empirical evidence that HCFC production was being driven by CDM; it's the reason that the EB of the CDM was unusually aggressive in trying to close the loophole. I've spent time with folks in the industry who have admitted to me that this was a motive for expansion, so yes, there was a perverse motive, even if a small one. In many ways, the broader issue is that the flexible mechanisms facilitate a lot of gaming of the system, and this is just a case study of that. 20-40% of the approved projects probably fail the additionality test, and I fear that many of the forest projects are ignoring critical justice considerations. Would some of this happen with more of an emphasis on domestic commitments? Assuredly, but the accountability and monitoring mechanisms are often more stringent in Annex I countries; 2. There's a couple of problems with picking the low hanging fruit also. First of all, given the fact that we're very close to passing critical climatic thresholds, the ability to avoid making structural changes in domestic economies by opting for these sketchy "flexible" alternatives contributes to carbon lock-in, ensuring that the next generation of power production in many Annex I countries will remain extremely carbon dioxide intensive. A cap with more incentives for domestic cuts would make more sense from my perspective for this reason. Second, given the limited amount of funds to invest in CDM projects, we should be seeking to fund projects that both contribute to sustainable development (per the clear terms of the CDM) and which don't potentially create ancillary negative impacts. For example, while Markus extols the benefits of reducing HFCs, the stark reality is that if this increased HCFC production, it could have helped to undercut the Montreal Protocol. The issue is probably moot now, but the point is that we should be looking at these exogenous issues more closely; I'm sure Professor Wara will have more to say on this issue also! Dr. Wil Burns, Editor in Chief Journal of International Wildlife Law & Policy 1702 Arlington Blvd. El Cerrito, CA 94530 USA Ph: 650.281.9126 Fax: 510.779.5361 [email protected] http://www.jiwlp.com SSRN site (selected publications): http://ssrn.com/author=240348 Skype ID: Wil.Burns -----Original Message----- From: [email protected] [mailto:[email protected]] On Behalf Of Hayes, Graeme Sent: Thursday, March 18, 2010 3:43 PM To: [email protected] Subject: RE: [gep-ed] HCFCs Hi Markus, And hi and thanks to everyone for their replies to my query today - I feel better informed (if not necessarily smarter) than I was before I had my tea. Mike asked me if I could circulate the replies, so in addition to Markus and Will's which I think have gone out live to everyone, here are the other responses I got, below. It's not really my field, so please take this on its own merits; what worries me about the logic of your response, Markus, is that whilst I respect its analytical realism, we are casting choices in a binary mode of they didn't/now they have, which has the failing of not imagining an alternative outside market expansion and the commodification and capitalisation of the atmosphere. Every time we do this, I think, we reduce a little further our ability to imagine, to conceive of the possibility that there may be another, different way of doing things. I think it's important that we hold on to this. So, here are the other replies - my thanks to Marc, Armin, Mat, and Michael, as well as to Wil and Markus. Graeme - If you think people in the future will be paid a lot of money to cease some activity, then you have an incentive to begin that activity so that you become one of the people eligible to get those payments. - There's two things here - one is the simpler one of the equivalence of HFCs to CO2 as greenhouse gases. They are indeed converted to CO2 at 11700, on the basis of the global warming potentials established by the IPCC. The more complex one is also one I think they exaggerate to be honest for effect. It is certainly the case that there are all sorts of scams in the carbon markets (their book has some of the classic examples - to see them as they unfold, subscribe to the no-carbontrade list). But this moral hazard one isn't that convincing to my mind. The logic is easy enough - that because the earnings from the CERs (the credits coming from the Clean Development Mechanism) can be very high from these projects - at say 10 euros a tonne of CO2, they can earn 117000 euros per tonne of HFCs not emitted, there's enough of an incentive to establish the factory, claiming it would be emitting the HFCs, and then use a CDM project to install the technology that eliminates the HFC emissions. The income from the CERs becomes a substantial part of the economic viability of not only the CDM project but the factory itself. They don't give a concrete example however, and I've not seen one, and I suspect none exists to be honest, although I,m willing to be persuaded. The bigger problem with the HFC projects was a) that they really skewed the CDM market in the first few years, when they were accounting for well over half of the emissions reductions (now that figure is much lower because in practice there were only so many projects that could be done - it's not a ubiquitous gas), and b) there were lots of claims that the Chinese factories didn't need the CDM money to install the technology, they would have done so anyway and so those projects were not, in the jargon, 'additional'. - Here's how the problem arises: Consider a refrigerant producer in China. The factory uses inputs necessary to make 32 tons of refrigerant but as a result of the chemical reactions that occur, 1 ton of waste and 32 tons of refrigerant are in fact produced. The waste happens to be a potent GHG that, if captured and destroyed, is in the carbon market worth 11,700 times the value of CO2 on a mass basis. The value of the 1 ton of waste is 3 times the value of the 33 tons of refrigerant product. One way to look at this is that the profits/ROI of the refrigerant manufacturer are going to triple. Another way to look at this is to worry that refrigerant manufacturers will now have an incentive to (1) produce extra waste - whereas before they had an incentive to minimize it and (2) produce extra refrigerant even at the same waste to refrigerant ration. This perverse incentive - to produce extra refrigerant in order to generate more waste in order to capture and destroy the waste and sell the resultant carbon offsets into the CDM, has been limited to a large but not total extent by the rules set up within the CDM. ________________________________________ From: [email protected] [[email protected]] On Behalf Of Markus Lederer [[email protected]] Sent: 18 March 2010 21:36 To: [email protected] Cc: [email protected] Subject: Re: [gep-ed] HCFCs Dear Graeme, dear Will, I think the story of HFCs is a fascinating example of what markets can and cannot do and I thus would like to take the opportunity to raise a couple of points: The facts (all from the UNEP Riso pipeline February 2010): * As of February 2010 there are 21 registered HFC projects, they thus make up 0.4% of all registered projects. 11 are in China, 8 in India. There is one more project in the pipeline, out of 2690. * The expected CERs will make up about 16,8% of all CERs that will be issued by 2012. * 202.096.000 CERs have been issued so far for 17 HFC projects out of 37.2352.000 CERs * Most projects entered the pipeline in 2005 and 2006. Two entered in 2007, three in 2008 and none since. I think there is complete consensus on the fact that with rather small investments (as stated by Will, Wara argues that the installations did not cost more than 100.000 million US$) in very few projects (21) huge financial benefits were made (if you take a very modest CER price of 10 US$ per CER, generated income is about 2 billion US$...) but is this "good" or "bad"? >From a purely financial market perspective one could argue that HFC projects were great as they allowed the market to mature rather early as lots of liquidity was provided but I think we all know by now that liquidity per se is maybe not so good after all, so I am not taking that road any further... As Graeme pointed out some observers fear that these projects are so lucrative that it might make sense that you build a factory only to generate CERs. Although the danger of perverse incentives is given, we simply do not have any proof that this led to the building of new factories and as Will stated, the Executive Board issued a grandfathering clause stating that only existing facilities will get credits. One can thus make the argument that the EB closed a regulatory loophole... Furthermore, looking at the pipeline it becomes evident that the issue of HFC is one of the past, as we only have one more project in the pipeline. Most importantly, the CDM as a market mechanism that primarily reacts to prices completely fulfills its job if the "low-hanging" fruits are picked. Wara's point that you could have done it so much cheaper is completely irrelevant, because nobody did! There were no HFC GEF projects nor did any Western government set up a fund of 100.000 million US$ to destroy HFC 22. Only when there was a demand generated through the CDM mechanism did people start doing something about it and I think we can all agree that the climate is after all better off if those HFCs are no longer entering the atmosphere. Thus, West European taxpayers paid way too much money to smart Chinese capitalists (and these projects are almost completely Chinese), but something happened! And the Chinese government taxes these projects very heavily and has publicly stated that all income generated through taxing CERs will go into a "green" fund. Potentially, a large junk of the money could thus have a real SD impact. This does not imply that the CDM is great for initiating sustainable development per se nor that the idea of offsets or the CDM itself is beyond criticism but the CDM as a market mechanism works as it allows smart people to find very lucrative ways of how GHGs are reduced most efficiently. Finally, most of the time when the CDM is discussed in China, people only talk of HFC projects, but there are now more than 400 wind power and more than 80 Biomass energy projects and most of them entered the pipeline much later... Let's put our attention to these and let's find out whether they can provide any small input towards a low-carbon economy in China at all... Best and looking very much forward to a lively discussion... Markus -- Dr. Markus Lederer Assistant Professor Chair of International Politics Faculty of Economics and Social Sciences, University of Potsdam August-Bebel-Str. 89; 14482 Potsdam, Germany Tel: + 49 331 977 3531 Fax: + 49 331 977 3429 Skype: markus.lederer1 Email: [email protected] Web: www.uni-potsdam.de/db/fuhr/ To unsubscribe from this group, send email to gep-ed+unsubscribegooglegroups.com or reply to this email with the words "REMOVE ME" as the subject. 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