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Carbon trading: Why 'good' companies embrace 'bad' credits

When it comes to Europe's carbon-trading system, top companies like Dow Chemical, ConocoPhillips, and BP prefer to save a little money than hone their 'green' reputation.

The village of Gusdorf, west of Cologne, is pictured in front of the lignite-fired power plant Frimmersdorf of German RWE AG energy company in this 2006 file photo. RWE is one of several European and US companies that have been using dubious credits from China to offset their greenhouse-gas emissions in the European Union. Since this photo, RWE has shut down a portion of this plant.

Arnd Wiegmann/Reuters/File

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Europe’s carbon trading system was supposed to reduce greenhouse-gas emissions. But at least one of its methods for doing so may actually have increased those emissions.

The scheme was dubious enough that the European Union (EU) banned it as part of the trading system, effective May 2013. But some of the world’s largest energy and chemical companies, far from distancing themselves from the program, continue to use it to offset their emissions – or at least leave open the option of using it until the ban goes into effect.

It's a sign that when it comes to reducing greenhouse gases in the EU, protecting one’s reputation as an environmentally responsible company doesn’t seem to matter as much as saving money. In this case, the savings are quite small by corporate standards. By one estimate, those savings amount to $24 million, pocket change compared with the combined $53 billion in profits earned last year by Dow Chemical, ConocoPhillips, and Chevron in the United States, BP in Britain, and Statoil in Norway – all of whom have relied heavily on the questionable scheme to offset their emissions.

“Companies will look to comply with EU emissions regulations in the most cost-efficient way,” says Richard Chatterton, a London-based carbon market analyst at Bloomberg New Energy Finance, a news and analysis service. “Although market participants are free to hold a view on the ethics of action on climate change, the EU [system] is driven by economics.”

The questionable program became possible because Europe’s climate-change legislation requires its power and processing plants, including subsidiaries of US companies, to meet greenhouse-gas caps. They can cut emissions (by investing in green technologies, for example) or offset them by buying carbon emissions reduction certificates (CERs), commonly called carbon credits. Because of the way the carbon trading system was set up, companies often found it cheaper to offset their emissions rather than cut them.

This created a vast demand for CERs, a tool set up by the Kyoto Protocol and supervised by the United Nations to subsidize climate-change mitigation projects in emerging countries. A few industrial gas manufacturers, mostly based in China, committed to capture and destroy a potent greenhouse gas called fluoroform, or HFC-23, which is used in a wide variety of applications, from suppressing fires to plasma etching in the semiconductor industry.

The controversial credits proved immensely popular. The 19 industrial gas destruction projects originally approved for use in Europe’s emissions trading system racked up almost 500 million credits worth $3.3 billion, representing the large majority of all CERs issued to date.  Nearly 90 percent of the credits flooded the EU where they accounted for more than half of the total emissions offsets.

In 2009-2010 American corporations purchased almost 1 million HFC-23 credits at an average market price of $16 per CER. Among US companies, Dow Chemical Co. purchased the biggest volumes to offset emissions from plants in Germany, the Netherlands, Belgium, Spain, and Poland. ConocoPhillips, Chevron, and Cabot Corp. also bought a considerable volume of the dubious credits. Their EU competitors, including Royal Dutch Shell, BP, Statoil, Germany’s RWE, the Italian-Spanish Group Enel-Endesa, and the French group EDF, began to use them heavily, too. These 10 publicly traded companies banked a total $254 million in the dubious credits through 2009 and 2010. Data for 2011 has not yet been released.

To environmental groups, the credits looked suspect. They concluded that some Chinese and other manufacturers intentionally produced far more HFC-23 than necessary in order to create the maximum number of CERs and inflate their profits. In 2010, UN CERs experts cleared the HFC-23 manufacturers of actual fraud, but concluded that in the absence of the monetary incentives, the plants would have reduced their production.


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