Understanding CDM Methodologies - SuSanA

Box 21: The debate on “perverse incentives” from HFC production under
CDM and its implications
Perverse
Incentives for new
Capacity?
HFC-23 Revenues
allow to increase
Production of
HCFC-22
Only pre-2005
Plants eligible to
use AM 0001
The first methodology approval ever was made by the EB for AM0001 in July
2003 (EB 10). A few months after its approval and following a workshop
organized in China on this topic, the EB was requested in a non-paper by Othmar
Schwank, leader of the international team of experts under the CDM National
Strategy Study for China, to reconsider its approval of AM0001 due to its adverse
impact on the environmental integrity of the CDM. The non-paper concluded
that due to the low cost of HFC decomposition and the high revenues from CER
sales, the approval of the methodology will cause a flood of project registrations
and bring down HCFC-22 prices in developing countries. As HCFC-22 is harmful
to the ozone layer (and itself a GHG not covered under the Kyoto Protocol),
AM0001 creates a “perverse incentive” to keep up production levels of HCFC-22
in developing countries while, according to the Montreal Protocol, these countries
are mandated to phase out HCFC-22 by latest 2040. As a reaction the EB put the
methodology “on hold” in September 2004 253 and requested the MP to again
review the methodology. The MP followed suit and launched a call for public
inputs on the topic (MP 12). The call triggered a stream of submissions from
different interest groups (NGOs to project developers). The main finding from
the call was that AM0001 might, due to the cheap CER generation, provide an
incentive to only produce HCFC-22 for the sake of destroying HFC-23 – without
actually selling the HCFC-22. The EB finally approved AM0001 again in May
2005 but limited its applicability to HFC production plants that existed before
31.12.2004 and that have an operating history of at least three years in the
period from 2000 to 2004. The consequence is that so far no plant built after
31.12.2004 is allowed to use AM0001. The COP/MOP as its Bali meeting (COP12)
has been asked to prepare guidance to the EB on how to deal with new capacity.
Additionally, emission reductions were capped by limiting the plant output
eligible for calculation of baseline emissions to the lower production of a) the
actual production of the plant during CDM project operation, or b) the maximum
historic production in any of the last three years between 2000 and 2004. The
capping was introduced in order to prevent plants under CDM producing more
HCFC-22 than they can sell for the sole purpose of CER generation.
The lessons-learnt from the debate on HFC projects have been later on been
applied to AM0021 and AM0034 where only existing production plants are
eligible to use the methodologies and production eligible for determination of
baseline emissions are capped at existing production capacity.
Baseline emissions are also automatically adjusted during CDM project
operation once the host country introduces a regulation that mandates a
certain absolute or relative level of emissions. In this case baseline emissions
are at a maximum the level of emissions that the regulation allows. This goes
contrary to the decision by the EB to not consider policies or regulations that
limit GHG emissions that have been introduced after the Marrakech Accords
(2001) in the baseline (see section 4.1.2). One can therefore expect to see
requests for deviations from AM0001, AM0021 and AM0034, if regulations
in host countries should be tightened, arguing on the basis of the EB 22
decision that the baseline does not need to be adjusted.
219
EB 15, para 12
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