U.N. Effort To Curtail Emissions In Turmoil

By JEFFREY BALL WSJ

April 12, 2008; 

A multibillion-dollar experiment designed to curb global warming is stumbling as regulators question whether the program is doing enough environmental good.

The United Nations is the main global policeman in an effort by wealthy nations to reduce the impact of their own pollution by paying for cleanups in the developing world. The program, known as the Clean Development Mechanism, is one of the most important coordinated efforts to attack global warming.

In recent months, however, U.N. regulators who administer the program have objected to dozens of these developing-world projects, ranging from hydroelectric plants to wind farms, questioning whether the projects would produce a real environmental payoff.

U.N. regulators are also concerned that some independent auditors of these projects, who are responsible for vetting their environmental legitimacy, have been letting project developers push through ventures of questionable environmental value.

The crackdown challenges a plank of the world's campaign against climate change: that polluters can pay someone else to clean up the mess. If the approach were to be discredited, curbing emissions could cost companies and consumers significantly more.

At issue, says Kai-Uwe Barani Schmidt, the U.N. panel's top administrator, is a conflict between "private-sector ambitions and the environmental integrity of the system."

As companies world-wide face government pressure to pollute less, the U.N. program gives them a cheaper alternative to cutting their own emissions. Instead, they can pay for the right to pollute by buying "carbon credits," essentially permission slips to spew carbon dioxide. Sale of the credits is supposed to help fund clean-air projects in China and other developing countries that would otherwise be too costly to build.

Last month, the panel declined to authorize the sale of carbon credits from two wind farms in the Indian state of Tamil Nadu. Backers of the projects, which have a combined 22 turbines, said their economic success depended on revenue from the sale of carbon credits. The U.N. panel said it wasn't persuaded.

The U.N. has rejected numerous other proposals on similar grounds since last summer. Among them: A Brazilian corn-processing factory, two Indian sugar mills and two Malaysian palm-oil plants. All were designed to install equipment to generate energy from renewable materials like wood scraps, fruit bunches and other waste. That would reduce the need for fossil fuels.

Developing-world projects like these are part of the burgeoning global carbon trade. In total, the global carbon market last year was worth 40.4 billion euros , according to Point Carbon, a Norway-based industry consultant. Of that total, Western companies and governments invested six billion euros last year in credits from projects in the developing world, nearly double the prior year, Point Carbon says.

In 2004 and 2005, as projects began to trickle in, the lightly staffed office of the U.N. Clean Development Mechanism's executive board approved virtually all of them. But as the number of proposed projects soared, the panel hired more staff and late last year tightened standards. In 2007, it rejected 9% of proposed projects, and held up another 21% for further review, according to U.N. figures -- many of which required changes before getting the go-ahead. The U.N. demanded more financial data to prove many projects needed carbon-credit revenue to be feasible.

The U.N. says it isn't suggesting that most of the developing-word projects are illegitimate. Evaluating whether a project would have been built without carbon-credit revenue is a complex judgment call, says the U.N.'s Mr. Schmidt. It represents "one of the biggest challenges" of the current system.

The average developing-world carbon credit -- which grants permission to the buyer to emit a ton of carbon dioxide -- sells on the market for $16 to $24. The U.N. issued credits last year worth roughly $1.2 billion to $1.8 billion.

The carbon market was created by the Kyoto Protocol, a 1997 global treaty underlying environmental rules already in effect for much of the world and now being considered by the U.S. Congress. Most buyers of developing-world credits are in Japan and Europe. U.S. companies aren't buying them in significant numbers, market analysts say.

The U.N. regulators are questioning the actions of two main players in the carbon market: Project developers, who put together projects in order to sell the credits to Western industrial buyers; and the auditing firms that inspect and certify to the U.N. that the projects are environmentally legitimate.

A dozen or so project developers, most based in Europe, dominate the business. Among the largest is EcoSecurities Ltd. of Oxford, England. The U.N. has rejected several of its projects, often contending they would have been financially viable without the revenue from credits.

Bruce Usher, the New York-based chief executive of EcoSecurities, says the company's projects are environmentally legitimate. Last November, largely in response to the U.N. crackdown, EcoSecurities said it was writing off a chunk of the carbon credits it had promised the market it would deliver. Since then, the company's shares, traded on the London Stock Exchange's AIM index, have fallen 67%.

Three auditors dominate the business. All three -- Det Norske Veritas, based in Norway; Tüv Süd AG, based in Germany; and SGS Group, based in Switzerland -- are major European consulting firms for whom the carbon market is a small but growing franchise.

The auditors argue that they're not to blame for the questionable quality of some proposed projects. In a presentation to U.N. officials last fall, the head of Tüv Süd's carbon business told U.N. officials that the quality of projects the auditors are receiving from carbon brokers is "going down," according to the U.N. panel's Mr. Schmidt, who was at the meeting.

In an interview, the Tüv Süd executive, Werner Betzenbichler, declined to discuss his comments in the U.N. meeting. But he confirmed the substance of his presentation.

"There is a high incentive" for companies to put together environmentally questionable carbon-credit projects, "because there is a lot of money that can be earned," he said. "People are getting more inventive, so it's getting harder to detect the black sheep."

Luc Larmuseau, global director of climate-change services for DNV, echoed those thoughts. "We've seen some examples where we've got serious doubt," he says. DNV and the other auditors have prepared a dossier of their rejections and have sent it to U.N. regulators as part of their defense.

The issue came to a head in December, at a meeting between U.N. officials and auditors during a U.N. conference on climate-change policy in Bali, Indonesia. A member of the U.N. board, Christiana Figueres, expressed concern that the system may be open to what she called "collusion" between auditors and project developers to push through environmentally dubious projects.

Ms. Figueres confirms that she used the term in the December meeting, but says she didn't intend to suggest that auditors are purposely recommending that the U.N. approve projects whose legitimacy the auditors doubt. Rather, she says, she was suggesting "a systemic collusion in which the [U.N.] board is being put in a position of having to do an in-depth review of these projects because [the auditors] are not doing it."

Ms. Figueres, a consultant living in Washington, D.C., left the U.N. board in January, when her term representing her native Costa Rica was up.

The U.N.'s Mr. Schmidt confirms that members of the U.N. panel "are aware of the clear and perceived risk of collusion" between auditors and companies putting together carbon-credit projects. One safeguard, he says, is the threat that the U.N. can revoke an auditor's accreditation if the U.N. finds that the auditor has done substandard work.

The auditors strongly deny they're acting improperly. In their defense, the major auditors, among them DNV, Tüv Süd and SGS, have produced statistics showing that they are rejecting significant numbers of projects before they're proposed to the U.N. Between the start of the market and the end of 2006, the auditors rejected 7.7% of the developing-world projects proposed to them, according to Robert Dornau, director of the climate-change program at SGS.

 

Deciding whether a proposed project needs carbon-credit money to to be viable "is not black and white," Mr. Dornau says. Auditors are intent on showing they're fastidious because, he says, "we don't want to lose people's trust" in the carbon trade.