‘Carbon trading’ rife with controversy

As the world grows warmer, poorer nations are helping the rich by reining in heat-trapping gases, in a multibillion-dollar “carbon trade” that is outrunning its U.N. overseers and founding principles, and spawning conflicts of interest and possible abuse.

Even pig manure has gone from a hot commodity to a controversial one in the 2-year-old “CDM” market, in which industrial countries obliged by treaty to cut their greenhouse-gas emissions can get credit for reductions in the developing world. Less is being achieved than claimed, critics say.

Under the Clean Development Mechanism, a Japanese utility benefits from a hydroelectric dam in Vietnam, a British broker collects credits from a “green” cement plant in China, and Canada buys emission reductions from Brazilian farms where methane from pig waste is now burned instead of left to rise into the atmosphere.

From 40 approved projects last December, this gas exchange has grown to 356 projects today, in 35 countries. The deals totaled $4 billion in the first half of 2006.

From London to Tokyo, hundreds of financiers, traders, lawyers and consultants are cashing in on a market seen as essential to combating climate change. Some believe it’s a boon to the poor, too. CDM is a “most promising instrument to promote sustainable development,” says Indian CDM official Shri Naresh Dayal.

But others note many projects do little to create jobs, encourage energy efficiency or protect the local environment, and say the exploding market is ripe for abuse.

When his company withdrew from CDM dealing in 2004, Swiss cement executive Bruno Vanderborght told a U.N. conference the system would create “other Enrons and Arthur Andersens,” referring to the U.S. energy and accounting scandal.

Oversight issues

The European Union runs a system for trading emission allowances within the EU. Oversight of the north-south CDM trading, meanwhile, fell to an underfunded U.N. climate treaty secretariat in Bonn, Germany, and its part-time CDM Executive Board.

As entrepreneurs rushed in, a backlog of project proposals built up. More than 850 now await approval, and developers complain of slow-moving, “Kafkaesque” scrutiny by the board.

The secretariat’s CDM manager, Kai-Uwe B. Schmidt, said his expanding staff should number 43 by next year, double the size a year ago, and may take on additional duties to aid in board decision-making.

The U.N. body relies on private accounting and inspection firms to validate that projects will cut emissions and enhance economic development and the environment, and to verify later that gases are being reduced – all while being paid by project participants.

Specialist firms can act as both developers for some projects and validators or verifiers for others. Critics see conflicts of interest.

“You’re creating all kinds of incentives for corruption,” said Daphne Wysham, a CDM expert at Washington’s Institute for Policy Studies. Gareth Phillips, a Briton who has worked as both a validator and now a CDM project developer, told the Associated Press the bias is natural.

“If you give them a negative response” – by not validating a client’s project – “they’re not going to be very happy,” he said.

Selective standards

The rush for “certified emission reductions,” traded in units equivalent to one metric ton of carbon dioxide, has produced a mountain of CDM paperwork that skeptics suspect hides false claims.

In India, the private Center for Science and the Environment uncovered a half-dozen apparent examples, seeming breaches of Kyoto rules requiring developers to consult with local communities to take environmental and other concerns into account.

In two sets of projects, all widely separated, these “villager” discussions as summarized in CDM submissions were the same, word for word for many lines – carbon copies for carbon credits, the environmental group suggests.

“We were really very disgusted,” said its director, Sunita Narain.

One set of two projects involves chemical plants expected to earn at least $30 million a year in credits for incinerating the greenhouse gas HFC-23, a byproduct of the plants’ refrigerant production.

The firm PriceWaterhouseCoopers India, which prepared those submissions, rejected the environmentalists’ claim, pointing to appendixes attesting to two separate consultations, with names and other distinctive details. But the center’s investigators say village leaders told them they knew nothing of such “stakeholder” consultations.

Kyoto’s “sustainable development” criterion is routinely ignored, say market participants and environmentalists.

“You see a lot of host countries that sign off on any project that comes their way,” said Michael Schlup of Gold Standard, a Swiss-based campaign to encourage “quality” emissions reductions.

The U.N. office may be tightening up.

In late July, for the first time, it rejected four projects, from Mexico and India, finding they did not meet another criterion – “additionality,” which requires proposals not be business-as-usual projects trying to capitalize belatedly on the new CDM bonanza, while adding no unexpected reductions to the gas balance.

Large hydroelectric dams, though emission-free, can be blatant violators of “additionality,” since they generally have been planned for years. The U.N. board last February suspended consideration of such dams, though for another reason: Drowned, decomposing vegetation in their reservoirs emit methane.

Missing the point?

Because it hasn’t encouraged wind, solar and other renewable-energy ventures so much as big-payoff schemes like the Indian chemical projects, the CDM disappoints environmentalists.

“It’s become more convoluted and corrupt development, rather than sustainable development,” complained India’s Narain.

Market players like Phillips, with the British CDM developer Sindicatum Carbon Capital, protest that many projects are truly “green,” such as his firm’s plan to capture methane from Chinese coal mines to use as energy.

Critics say this simply enhances the profitability of coal, blamed for much of global warming. The industrial north will rely too heavily on such projects, they say.

“Now carbon trading is Kyoto,” said Wysham. “You’re putting all your eggs in one basket, and problems already are emerging.”