The land of unintended consequences

A valuable observation from Climate Feedback on perverse incentives in carbon regulation: Far off the American radar screen, and perhaps not a bright blip on the European one either, is the perverse incentive problem for carbon emissions offsets. As voluntary offset purchases by both individuals and corporations ramp up, a strong backlash against "offsetting your guilt" is building astride. But offsetting guilt as a personal choice or for corporate strategy on an individual basis is one thing. Using an international financial trading mechanism embedded in an international treaty is quite another. And when the mechanisms of one international environmental treaty leads to the subversion of another international environmental treaty, well, you can just hear the collective "whoops!" echo across the Atlantic and Pacific.

Here is the situation: Annex I countries that cannot meet their GHG emissions targets under the Kyoto Protocol pay into the Clean Development Mechanism (CDM) fund, which then pays for emissions reductions in developing countries. These emissions reductions can take many forms as long as "additionality" can be proven – that is, the reduction in GHGs would not have occurred without the CDM funding. CDM projects have included capturing landfill-produced methane, creating facilities to burn biomass for energy, and installing wind power capacity. However, CDM projects have also included burning HFC-23 and this is where the perverse incentive creeps up.

HFC-23 is the byproduct of HCFC-22 production. HCFC-22 is a refrigerant and strong ozone depletor, ostensibly banned by the Montreal Protocol on Substances That Deplete the Ozone Layer. Developing countries, however, were given a loophole arrangement under the Montreal Protocol (MP) specifically for HCFC-22, so while most countries in the world with any degree of industrial activity have agreed to abide by the MP, developing countries do not have to meet HCFC-22 phase-out targets. Because of this loophole, as a cheap and effective refrigerant HCFC-22 continues to be an important industrial chemical, produced in especially high volume by "rich developing" countries such as China, India and Korea.

Both HCFC-22 and HFC-23 are also strong greenhouse gasses, but HFC-23 has a 270-year lifetime in the atmosphere, HCFC-22 only 12 years, and thus HFC-23 has over ten times the Global Warming Potential of HCFC-22 at 14,800 times CO2-equivalent (see Table TS.2 in the WGI Technical Summary of IPCC AR4). Those seeking to fund CDM projects jumped early at the chance to abate the release of HFC-23 to the atmosphere. It turned out to be quite easy (read: cheap) to install capture-and-burn equipment on HCFC-22 factories, and with a ton of HFC-23 burned being the equivalent of over 14,000 tons of CO2 prevented from reaching the atmosphere, the race to fund HFC-23 burn projects was on.

The problem from an international policy perspective is that producers of HCFC-22 now make more money burning HFC-23 than they do selling HCFC-22. Imagine what being paid handsomely to burn your waste does to your incentive to reduce your waste. If your waste stream costs you to dispose of it, you might try to improve your production to reduce waste and thus save money. And even if you did get paid to burn your waste, it might make financial sense to reduce waste anyway if your efficiency improvements paid more in reduced operating expenses than burning waste generated in income. But neither is the case for HCFC-22 factories. For them a double financial incentive now exists: keep making HCFC-22 in copious amounts at a profit, which will produce HFC-23 as a now-valuable waste product. And since HCFC-22 producers need not even lift a finger to burn their HFC-23 (those funding the CDM project fund the capture and burn device), any incentive for switching away from the ozone-depleting HCFC-22 as a refrigerant is also destroyed.

Aside from very good in-depth reporting from Fiona Harvey of the Financial Times, based in part on the work of Michael Wara of Stanford (see the 8-Feb-07 issue of Nature), the HCFC-22/HFC-23 issue has gone largely unreported thus far. While the New York Times has run a small handful of articles in the past year on HCFC-22 and its ozone-depleting properties, none have raised the HFC-23 specter. According to my Lexis-Nexis search, no other American newspaper has covered the issue.

As individual states in the U.S. begin forming interstate agreements on GHG trading in advance of a federally-instituted nationwide emissions reduction program, unintended consequences like depleting stratospheric ozone in favor of reducing GHGs will need to be carefully watched for.