The Curious Case of HFC-23

A small group of carbon offset projects under the climate treaty is reaping billions of dollars in windfall profits while worsening both global warming and depletion of the ozone layer, according to an NRDC report we’re issuing today at the meeting of the parties to the Montreal Protocol in Bangkok, Thailand.  The report proposes new solutions under the climate and ozone layer treaties to fix perverse incentives and put these projects on a sustainable footing. 

(The report was written by two internationally-recognized experts on climate and ozone layer protection, Stephen O. Andersen and K. Madhava Sarma.  Tragically, Mr. Sarma recently passed away, and we dedicate the report in his honor.)

The paper reviews problems with projects to destroy HFC-23, a powerful greenhouse gas, under the Clean Development Mechanism (CDM) of the Kyoto Protocol (the international climate treaty).  The CDM allows investors from developed countries to get credit for emission reductions achieved by financing carbon control projects in developing countries. HFC-23 is an unwanted byproduct at plants that produce another chemical, called HCFC-22.  HCFC-22 itself is doubly harmful because it contributes to both depletion of the ozone layer and climate change.  Production of HCFC-22 is being phased out under the Montreal Protocol (the international ozone layer treaty). 

Paradoxically, the current arrangements for crediting HFC-23 destruction under the CDM are doing both too much and too little.

  • Too much because the 19 projects currently supported under the CDM are receiving vastly greater compensation than required to pay for installing and operating the technology for incinerating HFC-23, and this over-compensation is perversely encouraging excess production of both chemicals, HFC-23 and HCFC-22.
  • Too little because HFC-23 emissions continue unabated from other HCFC-22 plants in developing countries that receive no support under either treaty for destroying this unwanted byproduct.

The report shows that the CDM’s current payment approach turns the economics of these HCFC-22 plants upside down.  Suddenly, they are receiving more income from making and destroying the unwanted byproduct (HFC-23) than they earn from making and selling their nominal product (HCFC-22).  Instead of optimizing the plants’ operating chemistry to minimize how much unwanted HFC-23 is created, they now have incentives to run the plants in a way that increases HFC-23 creation, in order to be paid to destroy it. 

The HFC-23 projects do not actually reduce global emissions of greenhouse gases, because the credits result in more carbon emissions in the developed countries where they are used.  In fact, to the extent that the projects result in creating more HFC-23 only to destroy it, the credits actually increase total global emissions.

Further, the payments for HFC-23 destruction are undermining the Montreal Protocol’s efforts to safeguard the ozone layer.  The reason is that those payments effectively subsidize excess production of HCFC-22.  Excess HCFC-22 supplies have pushed down HCFC-22 prices, and that discourages the industries that use this chemical – makers of air conditioners and refrigerators for example – from moving to safer alternatives. 

Finally, the cash going to the 19 HFC-23 projects could be used instead to support far more sustainable clean energy projects in developing countries.

Acknowledging these problems, the CDM has currently suspended the issuance of credits to these projects while reviewing proposals to change its approach.

The NRDC report proposes specific reforms to the CDM and actions under the Montreal Protocol that would fix these problems and achieve global benefits for both the climate and the ozone layer. 

CDM reforms:

The CDM should consider basic reforms to its approach to HFC-23 projects:

  • Compensate HFC-23 projects on the basis of “agreed incremental costs.” This is the model successfully employed by the Montreal Protocol and the Global Environment Facility, among other institutions. The goal is to provide the extra costs of projects, including a reasonable rate of return for investment, rather than the full market value of the greenhouse gas reductions. This model is appropriate for projects with underlying economics like the HFC-23 projects, where compensation under the standard CDM approach produces so much revenue that it distorts the economic behavior of the enterprises and increases, rather than decreases, overall emissions. 
  • Under the “agreed incremental costs” approach, the CDM could issue a smaller number of credits for such projects –only the number needed to generate the revenue that covers projects’ extra costs. This approach would generate a net reduction in global emissions:  The emission reduction achieved by the projects would be larger than the increase in developed country emissions when the credits are used.
  • Restructure HFC-23 projects to support the closure or transition of the underlying HCFC-22 plants. The current CDM approach undercuts the objectives of phasing out HCFC production under the Montreal Protocol. A better approach would be to support and place priority on closing HCFC-22 plants or transitioning them to production of alternative sustainable products. The CDM should provide credits to cover the agreed incremental costs of closing or transitioning those plants. This approach would produce dual net benefits for the climate and the ozone layer.

Montreal Protocol reforms:

The parties to the Montreal Protocol could take two steps to address both HFC-23 and HCFC-22.

  • Make HFC-23 destruction mandatory in all countries as a condition of permission to keep operating HCFC-22 plants.  Support should be provided through the treaty’s Multilateral Fund to cover the agreed incremental costs for the plants in developing countries that receive no help from the CDM.
  • Remove a blanket exemption for HCFC-22 produced as a feedstock and replace it with a process for authorizing such feedstock production only for essential uses

A proposal to cover HFC-23 destruction under the Montreal Protocol is, in fact, under discussion at the Bangkok meeting, as part of broader proposals to curb HFCs offered by the U.S., Canada, Mexico, and by a group of island nations lead by Micronesia and Mauritius.  I’ll have more to say about those proposals and the Bangkok meeting tomorrow.  Meantime, take a look at the report.