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China Denies Breach of Carbon Credit Rules Cited in Confidential Documents

Chinese environment officials rejected claims in a document indicating some chemical factories may have adjusted output levels to maximize United Nations carbon credits, defying market rules.

Among 11 chemical plants in China that receive emission credits for cutting one of the most-potent greenhouse gases, nine curbed production after reaching an allowable cap, according to a Nov. 16 report attributed to the United Nations and marked “confidential.” That may suggest they were maximizing credits rather than filling demand for product, the document said. UN officials declined this week to authenticate the document, obtained by Bloomberg News.

The credits from projects that cut hydrofluorocarbon-23, a greenhouse gas that can trap 11,700 times more heat per molecule than carbon dioxide, will be banned in the European Union emissions-trading system starting in May 2013 under a proposal to curb “exorbitant” returns. The UN has approved projects tied to 3.5 billion euros ($5 billion) of credits since 2005, about half the total in the UN emissions market.

UN carbon credits known as Certified Emission Reductions fell 18 cents, or 1.4 percent to 12.85 euros on the ICE Futures Europe exchange in Europe, reducing this year’s gain to 13 percent.

Chemical production decreases at the Chinese plants probably because they need to stop for maintenance after reaching capacity, said Yan Li, a manager in China’s ministry of environmental protection in Beijing, which oversees five of the 11 projects. The facilities aren’t seeking more credits than they deserve, she said in an e-mailed response to questions.

‘Great Loss’

Li said the EU should drop its proposed ban on credits linked to HFC. “If this ban comes into effect, it will bring great loss to both Chinese project participants and European buyers,” she said.

UN credits traded for 3.92 euros a ton cheaper than EU permits for December today in London. That discount widens to about 10.45 euros for delivery of credits in 2020.

The ban will “ruin the market confidence,” diminish enthusiasm for investments in fighting climate change and hurt the reputation of the UN carbon regulator, she said.

Under the UN’s so-called Clean Development Mechanism, companies receive credits as a reward for financing projects to cut emissions in poorer countries. Known as offset credits, they can be sold to utilities and factories that use them to comply with EU emissions limits.

HFC Investors

Enel SpA (ENEL), Morgan Stanley (MS) and RWE AG (RWE) are among investors in the HFC-23 credits, according to data compiled by Bloomberg.

HFC is produced as waste when chemical plants make hydrochlorofluorocarbon-22, used as a refrigerant and to make plastics. The destruction of HFC-23 can be carried out at a cost of 17 euro cents a ton of CO2 equivalent, according to CDM- Watch, the Bonn-based environmental lobby group. That’s about 1.3 percent of the value of credits they attract.

The UN Framework Convention on Climate Change published the executive summary last year of the Nov. 16 document provided to Bloomberg. The UNFCCC declined to publish the full report because it contains commercially sensitive data, Lex de Jonge, vice chairman of the Clean Development Mechanism Methodologies Panel, said in a phone interview on April 4.

Eleven of 16 HCF-23-cutting projects analyzed had lower output after reaching their caps. Facilities are also located in India, Argentina, Korea and Mexico. Because five of them boosted production after hitting the limit, “it is difficult to draw conclusions on individual plants,” according to the document.

Maximizing Credits?

Nineteen plants that cut HFC-23 have received 270 million tons of credits under the program since 2005, according to UN data.

The UN halted issuance of some emissions credits last year after allegations of “gaming the system” by environmental groups CDM Watch and the Environmental Investigation Agency.

“The report confirms EIA’s warnings about significant flaws in the HFC-23 methodology, which allow for manipulation of global carbon markets and production of bogus carbon credits,” Fionnuala Walravens, a London-based campaign leader at EIA, said in an e-mail. “Europe’s decision to ban HFC-23 credits in phase three was clearly an environmentally responsible decision. We urge other markets to follow suit.”

Shandong Dongyue Chemical Co., which has a plant at Zibo City in the Shandong province of China, wasn’t operating to maximize emission credits, Xiao Gang Niu, assistant general manager of the installation, said by phone April 7.

Demand, Maintenance

The plant’s output dropped 13 percent after reaching its cap, according to the document. “Sometimes production is higher. Sometimes it’s lower” because of demand and maintenance, Niu said.

The production of HCFC-22 at the 19 CDM plants more than doubled to 334,579 metric tons in 2010 from 164,672 tons in 2002, the first year with complete figures in the document, according to estimates in the document. Production is more than the cap set under the CDM, which was 272,289 tons, and less than the installations’ collective capacity of 473,803 tons, the figures show.

Data compiled since August last year in China “shows the production of HCFC-22 matches the market demand and the firms do not produce excessive HCFC-22 for the purpose of profits from CDM projects,” Li said.

Inconclusive Results

Plants might win more credits should they produce more HFC- 23 waste for each ton of HCFC-22, measured by a so-called w factor, according to the document obtained by Bloomberg. Of 16 plants analyzed, 10 had lower w factors once they reached their caps, while six had higher w factors. These results were also “inconclusive,” it said.

The w factors used by plants were “conservative” and determined mainly by the type of technology used, said China’s Li. “Even if there were space for HCFC-22 production enterprises to improve their efficiency, so as to reduce HFC-23 generation, the space would be very small.”

More than 11,000 power plants and factories in the EU system may use UN credits as a cheaper way to comply. The UN regulators in November called for a revision of the HFC-23- project-approval rules. New rules may be available later this year, according to the methodologies panel’s de Jonge.

To contact the reporters on this story: Mathew Carr in London at m.carr@bloomberg.net Catherine Airlie at cairlie@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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