In a development that could impact Indian companies trading in carbon credits, the European Commission (EU) has said it would ban the most common type of offsets, for use in the EU emissions’ trading scheme (EU ETS) from the start of May 2013. The commission proposed that from 2013, it would exclude from its scheme of offsets the potent greenhouse gases, hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O).
The major companies in India that trade in HFC-23 are Gujarat Flurochemicals Ltd, SRF Ltd, Chemplast Sanmar Ltd, Navin Fluorine International Ltd and HFL Ltd. Major companies that earn carbon credits from N2O include Rashtriya Chemicals & Fertilisers Ltd, Gujarat Narmada Valley Fertiliser Co and Deepak Fertilisers & Petrochemicals Corporation Ltd.
When contacted, SRF declined to comment. HFC-23 is an unwanted by-product in the production of HCFC-22, a refrigerant. The HFC-23 has a global warming potential 11,700 times higher than CO2. Its destruction in HCFC-22 plants in developing countries can be registered as a Clean Development Mechanism (CDM) project and leads to the issuance of credits.
As it is very cheap to install a destruction facility, the HFC-23 destruction CDM projects have resulted in huge profits for HCFC-22 plants and also may offer an incentive to artificially stimulate the production of HCFC-22.
“Allowing credits from the destruction of HFC-23 can create a perverse incentive to continue to produce or even increase the production of it and of HCFC-22, gases which both deplete the ozone layer,” the European Commission said in a statement. That is why HFC-23 destruction projects within the CDM have received much negative attention in the past.
The European Parliament now has three months to comment on the proposal, after which the commission will formally adopt it.
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“These projects do not provide value for money, as they can have been funded and implemented more cost-effectively by other means. Because of the credits they receive, the rates of return are exorbitant — revenues from the sale of HFC-23 credits to EU ETS participants can represent up to 78 times the initial capital investment and operational costs of the project,” European Commission said in a statement.
“The high proportion of CDM credits generated by the small number of industrial gas projects distorts the geographical distribution of CDM projects in favour of a limited number of advanced developing countries. This contradicts the goal, strongly supported by the EU, of getting a more balanced spread of CDM projects across the developing world, in particular by increasing the involvement of least developed countries (LDCs),” it added.
The European Union Emissions Trading Scheme (EU ETS) also known as the European Union Emissions Trading System, is the largest multi-national emissions trading scheme in the world. Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year.
In order to neutralise annual irregularities in CO2-emission levels that may occur, emission credits for any plant operator subject to the EU ETS are given out for a sequence of several years at once. Each such sequence of years is called a Trading Period. The 1st EU ETS Trading Period expired in December 2007; it had covered all EU ETS emissions since January 2005. From January 2008, the 2nd Trading Period is under way, which will last until December 2012. An operator may purchase EU and international trading credits. If an installation has performed well at reducing its carbon emissions, then it has the opportunity to sell its credits and make a profit.