“See the system”: Part 2, the profitable polluters

June 11, 2010 | Capital markets, Carbon offsets, Ecosystem, Environmental, Finance, Global news, Green, Greenwashing, Markets

By: David A. Smith

[Continued from yesterday’s Part 1.]

Yesterday, via a helpful Outlook India article, we encountered the carbon offset credits, bought in Europe (and potentially in the US, if the Senate ever ratifies the Kyoto Protocol), and produced in India and China – two nations whom one would have thought to be among the less-green places. How do they generate savings that they can then sell to westerners?


It’s all hazy to me: Rajpath, New Delhi

Getting Dirty

Credits generated do not necessarily mean reduction in emissions.

Consultants can give positive assessments –

The carbon offset certificate is issued by someone in the business of issuing such certificates – think rating agency [Oh, I feel all better – Ed.] without the history or market prominence.

– and national authorities can look the other way.

To get CDM status for an industry, firstly one has to prove to the UNFCCC that it is an ‘additional’ project. This means the company has to show it is financially unviable to take up the green project in the absence of western investment.

The idea – sound in the abstract, a bear in reality – is to eliminate economic deadweight, where people get subsidies for doing what they would have done in any event.


Would I have built this crusher without subsidy?

That’s for me to certify and you not to question

Imagine thus that you want to build a new paper mill. You have a choice, you claim, between doing it the dirty way and doing a cleaner alternative. So you first convince the consultant that you could do the dirty factory economically, but you could not do the clean factory economically.

You have to envision two counterfactual circumstances, neither of which exists now and neither of which will ever exist:

1. The dirty factory that you intend to build (even though it doesn’t exist now).

2. The clean factory that you wouldn’t build (even though when you’re done, you’ll have built it).

You get paid the difference between the dirty water avoided and the clean factory constructed – even though the original state is no factory, which we will suggest is the cleanest of all.


The only thing that flows from Point 4 to Point 1 is money

But in practice, many ‘non-additional’ projects (those by big companies that could have come up anyway without western financial aid and which may not lead to additional reduction of emissions) are managing to get CDM registration. Activists call it a fraud.

It certainly has the potential for fraud – fraud on an enormous scale, fraud without any adverse consequences, since the counterfactual does not exist, never existed, and hence cannot be used as refutation.

How can a project get fraudulent credits? “This is because UNFCCC has neither the mechanism to credibly assess the projects nor the will, it seems,” explains Gopal Krishna, an independent environment researcher.

Mr. Krishna is part of the Global Alliance for Incinerator Alternatives, an advocacy and watchdog group that appears to be trying to clean up carbon trading. Groups like GAIA are essential antibodies to corruption. Although their ability to compel governments to clean up their act remains to be established, at least they are making noise.


Somebody needs to know about this!

The first step in the chain is the designated national authority (DNA), which in India’s case is the ministry of environment and forests. The DNA certifies whether or not a project qualifies for CDM.

So we have:

1. A consultant who calculates the difference between two counterfactuals – a consultant paid presumably only if he issues happy numbers

2. A government that certifies the project is not deadweight – a government that directly benefits from the economic development resulting from certification.


When the numbers are happy, you’re happy

What could possibly go wrong?

But as Himanshu Thakkar of the South Asia Network on Dams, Rivers and People (SANDRP) points out, “The government sees the carbon credits as free gifts to be given to industries, something which will bring more money into the country. It does not bother too much to see if the projects submitted are indeed sustainable.”


In that case, I’ll take two

In 2008, SANDRP applied under the RTI to know how many applications for CDM projects had been rejected by the ministry and on what grounds.


How many times was this stamp deployed?

“They replied that they don’t keep a record of such rejections! To the best of our information, they have not rejected any,” Thakkar told Outlook.

That is appalling; out of hundreds and hundreds of projects, all predicated on two counterfactuals, not one had been rejected. Talk about a license to print money.


From us, to you …

Do the companies in fact do the right thing regardless?

Meanwhile, sustainable development is nowhere in sight. If anything, it’s only more of ‘sustained’ development for the enterprises that earn windfall profits from carbon credits. It has been found that many firms running or seeking to run these “clean” projects have dubious environmental credentials and bother little, if at all, about the environment.

If the leaded-gas emissions I saw in India are any indications, that’s for sure.


No pollution here – none at all

Some of the worst offenders in this category are sponge iron units in Chhattisgarh. They have been hauled up by the Chhattisgarh Environment Conservation Board for polluting with impunity.


Chhattisgarh, in central India

Some plants hauled up by the CECB include SKS Ispat and Godawari Power & Ispat Limited.

So the biggest polluters get the biggest credits.


Say what?

Each of these plants registered since 2006 earns thousands of dollars each year under the CDM but does little to protect the local environment.

These plants are guilty of emitting a higher level of suspended particulate matter than allowed, sending out noxious fumes and having improper solid waste disposal.

Your carbon offset credits paid to pollute Chattisgarh. And are still paying.

An environmental audit on CDMs by the British House of Commons three years ago said the carbon offset industry was clearly encouraging pollution and global warming by associating with India’s “notoriously dirty” sponge iron industry.

Carbon credits here are actually increasing carbon emissions? Brilliant!

The audit criticised two Indian CDM projects—that of SRF Limited in Rajasthan and Gujarat Flurochemicals Limited—that destroy hydrofluorocarbons (HFC), the powerful greenhouse gases used mainly in refrigeration.


“Making our nation proud”?

The House of Commons cited this as a case of “perverse incentives”, since any country making money out of something as harmful as HFCs is unlikely to ban its use as mandated by the 1987 Montreal Protocol.

Perverse incentives.

In another instance, the Allain Duhangan Hydroelectric Project in Himachal Pradesh, registered in 2007 with 4,94,668 carbon credits per annum, has paid colossal fines to the ministry of environment and forests for violating green laws.

These are the companies whose activities carbon credits subsidize.

It has paid over Rs 2 crore [$400,000 – Ed.] for illegal damage to trees, Rs 20 lakh [$40,000 – Ed.] for improper dumping of muck and over Rs 22 lakh [Another $40,000 – Ed.] for illegally encroaching upon forest land. “It shows how the CDM has become a way to access easy finance for projects that are neither beneficial to the local people nor to the local environment,” says Thakkar. “Of the 12 projects that I screened vigorously, not one reduced emissions.”


Recall, every single project submitted for CDM certification passed muster, and every single project analyzed by SANDRP failed.

Kushal Yadav, climate change programme coordinator for the Delhi-based Centre for Science and Environment, says, “If you get down to the levels of CERs [Climate Emissions Rates – Ed.], the number of non-additional (fraudulent) CERs issued would certainly be much higher than 40%.”

In other words, at least 40% of all CDM projects done, irrespective of their impact, would have been done anyway regardless of carbon offsets. Free money to subsidize India’s industrialization and to accelerate its production of carbon gases.

Barbara Haya of the University of California at Berkeley studied 85 CDM projects in India and China in the last six years and she says: “Over 50% are non-additional.” In plain speak, more than half are a fraud, a bubble, or in this case, hot air.


Saying more than half are money wasted: Barbara Haya

They are chits to get money for having the chit.

Outlook India says it gets worse:

At least one western government has even factored in credits from non-existent projects as part of their mitigation plans. “The government of Luxembourg actually claimed last year that it would be buying credits from the Timarpur Okhla Waste Management Ltd in Delhi beginning April 1, 2009. But what’s shocking is that the plant is not even there on the ground. How can you claim that you will be buying credits from a plant that does not even exist?” Yadav asks.

By the early sixteenth century, the Catholic Church was so rotten with indulgences, riches, and power politics, that the populace rebelled against it.


It starts with an honest man

Carbon offset trading needs its own Martin Luther to nail up new theses about how to add some integrity to the system.


Nail you to your promises

Independent agencies called designated operational entities (DOE), which are registered global consultancy organisations that are supposed to act as validators/verifiers of the projects for the UNFCCC, are meant to be one of the checking mechanisms. But this too has proved a failure because they are commercial entities. Paid for by the project developers, theirs is an obvious case of conflict of interest.

A conflict even worse than that of rating agencies – who have to hear from securities buyers when they downgrade issues. These global consultants never have to hear from anybody, because they can never be proved wrong. What a sweet setup.

A WWF report on the carbon trade had stated that there is growing pressure on does to positively validate project proposals given the intense competition between them. At least one DOE, it added, had ironically signed contracts in which the last payment by the client is due upon the successful registration of the project.

In America, we call that a contingency, and in appraisal and ratings, we call that illegal.


Thanks for a job well done

This malaise of greenwashing unsustainable projects and rewarding them with carbon revenue seems to have even hit the UNFCCC’s top echelons. Eva Filzmoser, of the Germany-based CDM Watch, says, “There is growing evidence, as reported by the New York Times, that members of the CDM executive board have been aggressively pushing projects promoted by companies from their home countries irrespective of their merits as sustainable projects.”

Not unlike having the Bulgarian gymnastic judge give all the Bulgarians perfect scores.


I thought they were all 10’s

This has raised demands for a credible code of conduct for board members which factors in conflict of interests and creates transparency in their working. But with so much ‘credit’ at stake, that’s easier said than done.

There is no virtue in noble goals when the system they fund is rotten.


Biofuel generation plant at Yash Paper mill in Faizabad, UP, a CDM-approved project

See the system, and see our enabling role in it.