Early last month, a news report triggered accusations that China was threatening to release large quantities of “super” greenhouse gas HFC-23, shocking environmentalists around the world. Chinese Ministry of Finance official Xie Fei, whose remarks sparked the controversy, told chinadialogue his words had been misunderstood. But he continues to argue that Chinese companies have been treated unfairly by Europe over HFC-23 climate trades.
At November’s Carbon Forum Asia, an annual climate finance trade fair in Singapore, Xie, who is revenue management director at the China Clean Development Mechanism Fund, told a Bloomberg reporter: “If there’s no trading of credits, they’ll stop incinerating the gases. . . That’s what almost all the big Chinese producers of HFCs have told me. They say they can’t bear the cost. They’ll lose competitiveness.”
Some media outlets interpreted this as a threat, an attempt to blackmail the international community. Xie has retorted that those outlets quoted him irresponsibly, out of context and distorted the facts. But behind the word games lies the real dispute: a difference of opinion between Chinese and European traders.
To understand the row, we have to dig a little into the technical background. The Kyoto Protocol allows industrialised nations to meet part of their emissions-reduction obligations by purchasing credits from carbon-cutting projects in developing countries. In other words, they can use carbon-emission cuts made by projects in poorer nations – where the costs are lower – to offset against their own greenhouse-gas output. This type of cooperation between developed and developing nations is known as the Clean Development Mechanism, or CDM. Projects that destroy the potent gas HFC-23 are one type of CDM project.
HFC-23 is a by-product of the manufacturing of refrigerant HCFC-22. There is very little HFC-23 in the atmosphere, but it traps much more heat than carbon dioxide, hence the term “super” greenhouse gas. Over 100 years, HFCs have 14,200 times the global warming potential of an equal mass of carbon dioxide, according to a new report from the United Nations Environment Programme, “HFCs: A Critical Link in Protecting Climate and the Ozone Layer”. The gases atmospheric lifetime – the length of time they will linger in our atmosphere – is 222 years. However, calculations based on data from the UNEP report put the actual climate impact of HFC-23 at only one four-hundredth that of other greenhouse gases, as it is much less prevalent.
Projects that destroy HFC-23 are very profitable, but there is dispute over what impact on climate change they actually have: the concern is that the financial rewards provide a perverse incentive for HFC-22 manufacturing, so that the by-product HFC-23 can be produced – and then destroyed for substantial gain. Environmental groups have called for global rejection of carbon credits sourced in this way. And, despite fierce opposition from China, the European Union has decided to stop allowing the use of cuts in HFC-23 in emissions trading from May 2013.
The move will have a significant impact on China. According to the China Chemical Industry News, China is the biggest seller of carbon credits from HFC-23 projects. Of 19 such CDM projects approved by the United Nations so far, 11 are in China. Previously, EU nations have been the largest buyers in CDM projects, accounting for over 80% of the global total.
Xie believes HFC-23 CDM projects have been demonised by certain western opponents. He told chinadialogue his statement at the Singapore forum last month merely “reflected the views of Chinese firms. It was not a threat.”
He argued that decisions had been made with too little consultation: CDM is a mechanism for cooperation between developed and developing nations, but the CDM executive board – the UN body which manages CDM trades – has revised the rules without consulting interested parties in China, he said.
Luo Rui, senior associate at technology and policy consultant ICF International, explained that, since 2009, there have been concerns that using emissions cuts from HFC-23 projects in carbon trading would lead to over-supply and push down the price of cuts achieved through new energy projects.
He said that, thanks to CDM income, HFC-23 projects are hugely profitable, with returns of over 100%, even rising to 200% if carbon is priced at US$10. If market signals are wrong, then funds intended to subsidise the unprofitable destruction of the gas could lead to companies actually producing more. As companies are profit-driven and there is no system of supervision, these schemes can have the opposite effect of that intended.
Clare Perry is senior campaigner at activist group Environmental Investigation Agency, which has been fiercely lobbying governments to stop HFC-23 carbon trades. She said: “It is of course entirely fair for the EU to do what the EU wants to do with their trading scheme to ensure it is viable, ethical and contributes to reducing their emissions.”
But Xie holds that the EU decision is simplistic. “If the EU thinks about it from the point of view of a Chinese firm, if there is no carbon trading or legal requirement, then why would it destroy the HFC-23?” The outcome of the move, he said, would be that Europe does not buy certified HFC-23 emission cuts, companies do not destroy HFC-23 produced during manufacturing and, ultimately, the environment suffers. This conflicts with Europe’s image as a leader in environmental protection, he said.
A better approach, Xie argued, would be to “sit down together, listen to what each other has to say and put forward constructive opinions and solutions.”
Luo added: “At the least, you need to bring in all the interested parties and hear their opinions. Then consider several possible technical solutions. Even if the final decision is not to purchase those reductions, at least the process has been a bit better.”
For Perry, however, the issue really is simple: if the Chinese government is serious about environmental protection, she said, it can easily cover the costs of years of HFC-23 incineration with just a fraction of the income it has received from such projects. Sixty-five percent of income from China’s HFC-23 CDM projects is turned over to the state and used by the China CDM Fund Management Centre for research into climate-change policy and public education.
Perry said: “China has generated 256 million credits from HFC-23 projects. Even at last week’s all time low price for secondary CERs on the EU ETS (6.3 euros), they are worth more than 1.6 billion euros. The cost of destroying the amount of HFC-23 that this represents is estimated to be 43.5 million euros.”
Meng Si is managing editor in chinadialogue’s Beijing office.
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