Page last updated at 23:28 GMT, Wednesday, 4 June 2008 00:28 UK

The great carbon bazaar

By Mark Gregory
Business correspondent, BBC World Service, India

Pollution from energy plant
Companies in developing countries are paid to cut emissions

Evidence of serious flaws in the multi-billion dollar global market for carbon credits has been uncovered by a BBC World Service investigation.

The credits are generated by a United Nations-run scheme called the Clean Development Mechanism (CDM).

The mechanism gives firms in developing countries financial incentives to cut greenhouse gas emissions.

But in some cases, carbon credits are paid to projects that would have been realised without external funding.

We've got a procedure that works
Yvo De Boer, executive secretary, United Nations Framework Convention on Climate Change

The BBC World Service investigation found examples of projects in India where this appeared to be the case.

Arguably, this defeats the whole point of the CDM scheme, set up under the Kyoto climate change protocol, as these projects are getting money for nothing.

The findings reinforce doubts that the CDM is leading to real emission cuts, which is not good news for the effort to combat climate change.

And in one case a company is earning truly staggering sums of money from the carbon credits it is receiving - perhaps as much as $500m (250m) over a period of 10 years - for a project it says it would have carried out without the incentive of the CDM.

Not watertight

The man in ultimate charge of running the Clean Development Mechanism insists it is fundamentally sound.

"We've got a procedure that works," says Yvo De Boer, the top official at the United Nations Framework Convention on Climate Change.

He is referring to the elaborate registration process projects must go through to qualify for carbon credits from the CDM.

But even Mr De Boer accepts the system is not perfect.

"At the end of the day it's always a matter of judgement," he says.

"And no, it's not watertight."

Flawed system

In order to receive carbon credits from the CDM, projects are supposed to demonstrate that they will lead to cuts in greenhouse gas emissions that are "additional" to what would have happened without the availability of credits.

[The] numbers are more favourable for us because of the CDM
Manoj Saxena, a senior manager at a KRBL rice milling plant

This concept of "additionality" is crucial to the credibility of the mechanism because of the way the system works.

The buyers of CDM credits are companies in developed nations, mostly in Europe, who use them to offset their own emissions.

They are allowed to count the carbon credits towards targets they would otherwise have to meet by cutting emissions at their own factories and offices, which is usually much more expensive.

The system is intended to give western firms a low cost way of achieving emission targets while at the same time getting businesses in developing nations involved in tackling climate change.

But it only works if the carbon credits generated by projects in developing nations really do represent genuine emission cuts.

Would have done it anyway

Three projects in India were investigated to see if the "additionality" test has been met.

One case involved the installation of a biomass generator to provide electricity at a rice milling plant in the state of Uttar Pradesh in Northern India.

Yvo De Boer, executive secretary, United Nations Framework Convention on Climate Change
I'm happy that a very potent greenhouse gas is being removed
Yvo De Boer, executive secretary, United Nations Framework Convention on Climate Change

KRBL, India's largest exporter of Basmati rice, spent $5m on the generator, which replaced a less climate friendly diesel powered system.

The generator runs on rice husks, a renewable energy source. The husks are a waste material from the rice milling process.

The company has almost completed the registration procedure and is set to receive carbon credits from the CDM worth several hundred thousand dollars a year.

Yet, when asked whether the carbon credits were important for the company's decision to install the biomass generator, Manoj Saxena, a senior manager at the plant, responded "not really" and confirmed that it would have done the project anyway, even without the CDM funds.

"[The] numbers are more favourable for us because of the CDM," he acknowledged.

He was then asked whether the company would take the money if the authorities of the CDM were silly enough to give it a million dollars extra for it, to which he replied: "Yes, definitely. Why not?"

KRBL's rice husk driven generator is unquestionably a useful project from an environmental point of view, but the evidence gathered by the BBC World Service investigation suggests it would have been installed anyway without financial help from carbon credits.

Massive windfall

Indian chemical company SRF is also receiving substantial numbers of CDM carbon credits for eliminating an obscure industrial waste product known as HFC23, a highly potent greenhouse gas.

We would have done it anyway
Mukund Trivedy, spokesman, SRF

HFC23 is a by-product of manufacturing refrigerant gases used to cool fridges and air conditioners.

It is nearly 12,000 times as toxic as carbon dioxide in its climate impact if it enters the atmosphere.

But getting rid of HFC23 is quite easy and relatively cheap.

The solution is to burn it off in an incinerator.

SRF has installed an incinerator for burning off HFC23 at its plant in Rajasthan.

The project has been registered with the CDM and is receiving up to 3.8 million carbon credits a year.

These are currently worth $50m to $60m a year.

SRF is likely to receive the credits for a period of about 10 years, so it is in line for a total windfall in the region of more than $500m, a gigantic sum for a smallish chemical plant located in rural India.

The incentives work

The company will not say what it cost to install the incinerator, but the figure is far les than the value of the credits obtained.

The number of carbon credits awarded to SRF and other similar firms for dealing with HFC23 is linked to its theoretical climate potency.

The actual cost of eliminating the gas is not taken into account.

The UN's Mr De Boer, the man in charge of the Clean Development Mechanism, defends the huge payouts made to companies like SRF.

"I'm happy that a very potent greenhouse gas is being removed," he says.

"I'm very happy that the Kyoto protocol has created a market mechanism that makes it interesting for companies to do that, because evidence shows us that in the absence of the CDM that greenhouse gas was not being destroyed.

"There was no incentive to destroy that greenhouse gas apart from the CDM"

His argument is that while it may have been expensive, at least the CDM is responsible for getting rid of a particularly nasty greenhouse gas.

But is this true? Did companies really need the CDM to take action?

During a tour of the plant at SRF's factory in Rajasthan, the company's official spokesman, Mukund Trivedy, revealed that "we would have done it anyway". He was then asked to confirm whether the project would have been carried out even if the CDM scheme hadn't been set up.

"That's right," he responded.

Which begs the question; if they were going to eliminate HFC23 emissions themselves anyway, why give them carbon credits worth several hundred million dollars?

Not solving the problem

The third company investigated by BBC World Service was a large hydro scheme in the Northern Indian state of Himalchal Pradesh.

There were arguments on both sides as whether the project genuinely deserved to qualify for carbon credits.

The CDM operates on a massive scale. More than 1,000 projects have already qualified for carbon credits.

A further 3,000 projects have applied.

Trade in CDM carbon credits is running at some $10bn a year.

That is a welcome flow of resources from the developed to the developing world.

But it is far from clear that the trade in credits is contributing much to tackling global warming.

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