How China gamed the west’s carbon credits

Coal plant in northeast China (photo James Ockenden).

Coal plant in northeast China (photo James Ockenden).

With Extinction Rebellion in full swing across London, a curious apathy towards Chinese emissions is emerging. It’s likely a backlash against those using “China” as an excuse to do nothing, but the backlash has swung too far. China merits deep and sustained attention on climate, because here’s what happens when the west takes its eye off the ball.

The story of shady Chinese carbon been widely covered in the trade and technical press, yet fails to gather any traction amongst the general public. Which is a shame, because it’s the general public, in general, who are suckered into voluntarily buying these so-called “carbon credits” which are, very often, neither carbon reductions nor remotely good for the planet.

There’s two main types of fraud: I’ve been investigating some outright scams, involving millions of dollars of imaginary future carbon credits against which large mortgages are secured, upon which the companies dissolve and disappear into the mess of Chinese corporate shells.

But the other type of fraud is different, perhaps worse, because it’s not bank robbery but in fact fully legal. It was a loophole scam which meant people buying so-called “clean” carbon credits were woefully misled about the provenance of their offset.

For background, the Clean Development Mechanism (CDM) was a cornerstone of the 2005 Kyoto Protocol and aimed to kickstart clean projects in developing countries paid for by western firms. Through verified projects, firms in developing countries such as China, India and Brazil, would earn Certified Emissions Reductions (CERs) credits for every tonne of CO2 they cut: firms in the west could buy these CERs to manage or reduce their own carbon, either for legal requirements under or voluntarily.

CDM, the UN hoped, would encourage “green” power generation, such as biomass or wind, to reach certain scales and become more commercially viable.

At least, that was the concept. But Chinese industry had other ideas.

By mid-2007, Chinese chemical companies dominated the project list with something known as “HFC-23 reduction”.

HFC-23, or fluoroform, is used as a fire-suppressant, refrigerant and as an ingredient in Teflon; it’s also an (unwanted) byproduct of the manufacture of common refrigerant HCFC-22. And it’s a pretty nasty greenhouse gas. One tonne of fluoroform has the same “global warming potential” as around 12,000 tonnes of CO2.

The economics of HFC-23 create a massive arbitrage opportunity. If you have a tonne of the gas you can, in China, legally vent it to the atmosphere, where it acts like 12,000 tonnes of CO2; or you destroy it for around €4,000, and you will earn, under CDM, around 12,000 CERs for doing so. In 2012, a CER was valued at around €6.

Destroying this gas became a huge profit centre under Kyoto.

Now, the destruction of HFC-23 is a good thing for the planet. But two big problems: first, there was no law requiring this in China – effectively, the United Nations was having the western world pay for the destruction of Chinese HFC-23, while allowing Chinese companies to earn a vastly inflated profit for doing so.

It wasn’t long before Chinese HFC-23 completely dominated CER production (India and South Korea were pretty active too): and then came the rather predictable second problem: observers found that factories had actually ramped up their output in order to have more HFC-23 to destroy. As the EU noted in 2011 “Allowing credits from the destruction of HFC-23 can create a perverse incentive to continue to produce or even increase production of it and of HCFC-22, a gas which both depletes the ozone layer and is also a powerful greenhouse gas.”

The UN solved this by requiring companies to limit the amount of planned HFC-23 destruction, but limits in UN design documents were complex, always higher than existing plant capacity and invariably still led to an increase in the HCFC-22 and HFC-23 production.

CERs to January 2017

CERs to January 2017

And so, the destruction of the gases was no longer a good thing for the planet: it was a very bad thing for the planet because more greenhouse gases were being produced so that more could be destroyed to take advantage of the free money being handed out by the UN and the Kyoto Protocol.

The net effect is that firms who needed to buy market-based carbon credits (and early-adopter environmentalists who bought consumer credits to offset their air travel carbon footprints, for example), were essentially giving money to a nastily polluting Chinese industry.

The UN, to be fair, came down reasonably quickly to stop this chemical loophole. But, too late, given how many CERs had already been issued. To date, even though no new HFC-23 project has been approved since 2009, the CER registry is completely overrun by Chinese and Indian HFC-23. And that’s stuff is still on sale today.

China’s dominance of the Kyoto subsidy scheme and the quantities of HFC-23 CERs beggar belief. Chinese HFC-23 accounts for 76% of the total world’s HFC-23 reduction credits, at around 447 million tonnes, with HFC-23 now accounting for 43% of China’s total CER haul and 25% of the world’s total CERs. 447 million CERs is $2.7 billion at 2012 prices.

So when you buy carbon credits, as a consumer, don’t think “this is nice, I’m saving the planet, I’m cutting my carbon footprint, I’m funding geothermal projects in Colombia “. No. If your credit is a CER, around a quarter of it has gone to a chemical factory in China, which has pocketed the cash and probably ramped up its output of ozone-killing greenhouse gas HCFC-22. The rest of it is probably burning up natural gas or siphoning blast furnace gas in a steel mill… yes, other projects under CDM include millions of CERs issued to an Uzbekistan gas company for fixing gas pipe leaks, and chemical plants in India, China and Brazil building new natural gas fired power plants. Landfill methane recovery, together with industrial gas and heat recovery, together account for around 244 million tonnes.

Newer CDM projects coming on line through China do look much more legitimate: I still wouldn’t buy a CER if the South China Sea was lapping at my 17th floor window, but at least some of Kyoto’s initial aims are finally becoming reality.

But in China, “climate change” has certainly been channeling money into some strange places, and Chinese support for Kyoto has been a double-edged sword. And worse, for all the investment and subsidies, the air quality in many Chinese cities has become worse than dangerous, as fossil-powered industry (run by local CCP-cadres) continues to set the “green” agenda and continues to police itself so poorly.

Kyoto and the Clean Development Mechanism are a warning to the world: if there’s a loophole, people will find it, exploit it, and rip it large enough to render the whole garment useless. Staying vigilant means keeping a close eye on China and holding the country to account. Just because a few eejits are using China as an excuse to do nothing doesn’t mean ignoring the biggest climate threat in front of us.

+++NEW: Try our transport-related site Transit Jam, covering Hong Kong sustainable transport and liveable streets+++

About James Ockenden (300 Articles)
Writer, journalist and sustainability consultant with a passion for clean technology and public health. 25 years covering power and energy markets: former editor of Power Plant Technology, International Power Generation, Asian Electricity, Aircraft Economics, Energy Risk, Asia Risk, Benchmark; writer for South China Morning Post, Cathay Dragon's Silkroad, APlus, Veolia's "Planet", Hong Kong Tatler; founder of Blue Skies China. MSocSc in Corporate Environmental Governance, University of Hong Kong; BA & MA degree in Natural Sciences (major in Materials Science & Metallurgy), Cambridge University.
%d bloggers like this: