In The ‘Crazy’ World Of Carbon Finance, Coal Now Qualifies For Emission Reduction Credits

A coal train, or a load of CDM carbon credits?

In a decision criticized as “unfortunate” and even “insane” by onlookers, the United Nations has decided that new coal plants are eligible for carbon credits under the Clean Development Mechanism (CDM).

The CDM is a trading platform set up by the UN that allows developed countries to obtain verified emissions reduction credits through renewable energy, energy efficiency, power plant fuel switching, and sustainable transportation projects in developing countries in order to meet Kyoto Protocol targets.

Now the UN has added coal to the list of eligible projects. Again.

At a CDM Executive Board meeting last week, the organization approved new rules that allow more efficient supercritical and ultra supercritical coal plants built in developing countries to obtain carbon credits. So theoretically, a coal-fired power plant in Europe could be “offset” by carbon credits not through renewable energy, but through another carbon-burning coal power plant in India.

“This destroys the sense that there is some sanity and rationale to this mechanism,” said Justin Guay, head of the international climate program at the Sierra Club. “The fact that we are defending coal plants as part of low-carbon finance is crazy.”

The Sierra Club and the watchdog group CDM Watch say there are 40 plants in China and India waiting for CDM approval.

It’s uncertain how many coal plants in that queue will qualify. The current system will only be in place until the end of 2012, when the first commitment period of the Kyoto Protocol comes to a close. With only a few months left before the transition of the CDM, there is limited time for plant operators to qualify and sell credits into the largest markets.

“We’ll have to see if these plants rush to meet the deadline. That’s unclear. But the real issue is about how this market sets standards long-term. We now have all these regional carbon market in development, and they’re all going to look somewhere for these standards,” said Guay.

This isn’t the first time the UN has added coal to the list of eligible technologies under the CDM. In November of 2011, the Sierra Club reported on coal plants that were set to receive millions of credits through the mechanism — all of which would have likely been built without CDM funding.

The UN board overseeing the mechanism even warned at the time that emissions reductions from coal plants were overestimated by up to 50 percent, possibly resulting in a net emissions increase.

The methodology was eventually suspended at the COP 17 climate conference in Durban. But the board approved a new standard last week, again allowing higher-efficiency coal plants to gain certification through January 1st.

Supporters of using CDM to encourage higher-efficiency coal plants say the method is no different than encouraging efficiency in any other sector: The end goal is realizing emissions reductions where ever possible. If the mechanism encourages more efficient supercritical coal plants over older subcritical technologies, then it is performing as designed.

But critics say that argument is dangerously flawed for a variety of reasons.

The most obvious concern is the promotion of coal at all. Echoing the view of the world’s climate scientists, Fatih Birol, chief economist at the International Energy Agency, warned in 2011 that the world’s chances of combating dangerous climate change would be “lost forever” if countries fail to quickly reduce reliance on fossil fuels :  “If we don’t change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety]. The door will be closed forever.”

The other flaws are more specific to the CDM mechanism itself.

One revolves around the concept of “additionality” — a problem that has plagued the CDM in a variety of sectors. In order for a credit to have an impact on emissions, it must prove to bring a new project on line. But in the case of large infrastructure projects — specifically coal, hydro, and industrial gas — a large number would get built even without credits.

In 2011, the Stockholm Environment Institute looked at whether decisions to build supercritical coal plants in China and India were based on CDM credits. It found that most of the projects were going ahead anyway, largely due to new technology standards within the countries:

Faced with persistent coal shortages, rising prices and the need to address major power supply deficits, the Indian government has placed a high priority on coal plant efficiency and has mandated the use of super-critical technology for the largest (“ultra mega”) projects. Within a few years, almost no new large Indian new coal plants will come on line using subcritical technology…Despite this shift to supercritical technology, all coal projects in the CDM pipeline still claim subcritical to be the baseline technology, even for projects not expected to be commissioned until 2015. Furthermore, nearly all of the supercritical plants operating or under construction have applied for CDM funding, or indicated they that intend to do so.

Most of China’s new ultra-supercritical plants are applying for CDM funding. Eight of 13 Chinese project documents claim that a subcritical plant would have been built without CDM support. However…no large subcritical unit has been commissioned since 2008. In addition, 11 of 13 Chinese coal projects in the CDM pipeline are expected to be operational by the end of 2011, and only one has been registered as of October 2011. Therefore, it would seem rather unlikely that the CDM was instrumental in technology decisions.

The report estimated that Chinese and Indian projects in the pipeline could result in a 250% over-crediting — flooding the market with coal-based credits, and thus reducing the environmental integrity of the system while pushing down prices further.

Along with general concerns over financing coal in the first place, this over-crediting issue is one of the biggest worries for groups watching the market.

According to a recent report from Thomson Reuters Point Carbon, there is currently a supply glut of credits worth 13.1 billion tons of CO2 for the Kyoto period through 2012. This is due to low demand for credits during the recent economic crisis and lenient rules on the use of offsets. In the next Kyoto period, the surplus could be between 16.2 billion tons and 17.2 billion tons, depending on if Australia and New Zealand decide to participate.

That’s more CO2 than the European Union is expected to emit over the next five years, according to the report.

Adding more coal plants to the mix will only make the problem worse, say onlookers.

“It’s unfortunate that the executive board has made this decision given that carbon markets are collapsing right now because of an oversupply of credits,” said Anja Kollmuss, a carbon markets expert with CDM Watch.

After the UN executive board approved new CDM rules for coal, prices for certified emission reduction credits fell to an all-time low of $2.01 per metric ton of CO2 equivalent.

“It’s really kind of a mystery as to why they approved this,” said Kollmuss.

While the decision may seem nonsensical to those pushing for real emissions reductions, it is not inconsistent with the standards set by other international institutions working in climate finance.

The World Bank has come under fire in recent years for financing large coal plants — most famously providing a $3.75 billion loan for one of the world’s largest coal plants, located in South Africa. The Bank, which ironically says lack of action could make climate change “unmanageable,” is also being criticized for pushing a 600-MW coal plant in Kosovo.

Two large U.S. development agencies, US AID and the Export-Import Bank, have raised the ire of some groups for their support for large, carbon-intensive projects. US AID, an organization that calls climate change “one of the greatest global challenges” is also backing the Kosovo coal project. And the Ex-Im Bank is facing a potential legal battle with environmental groups for considering assisting coal and gas export projects that would ship fossil fuels across the Great Barrier Reef World Heritage Area.

Even the UN’s new Sustainability For All Initiative, an international public-private partnership designed to help 1.5 billion people gain access to modern energy services, is being criticized by some entrepreneurs for focusing too much on large, centralized projects — some of them fossil-based.

Across a range of development institutions — even those with strong stated missions to combat climate change — fossil fuels are still a major part of the mix.

“When you look at the contradictory standards set by these organizations, it shows how insane the framework for discussion has become,” says the Sierra Club’s Guay.

8 Responses to In The ‘Crazy’ World Of Carbon Finance, Coal Now Qualifies For Emission Reduction Credits

  1. Mike Roddy says:

    CDM, cap and trade, carbon credits, and offsets are corrupt, unscientific, and designed to siphon money off to the bankers. I’m not surprised about coal plants getting credits. A few years ago loggers were clearcutting old forests and getting carbon credits for the plantations that replaced them.

    The people at the top are trying to please everyone and, especially not upset the coal, gas, and oil companies. They are cowards, unwilling to face what emissions of carbon into the atmosphere are doing to us. Sooner or later, we need to confront them, and make it clear that they are acting against the public interest.

    We need major carbon taxes, increasing over time, and internationally negotiated. Nothing else makes sense. If political leaders had any clue about their job description, this would have happened already.

  2. Pangolin says:

    Given the actual, proven damage done a new coal plant in China or India is far more of a threat to freedom and democracy than a nuclear plant in Iran. Guess which one is the the cause of all the saber rattling.

  3. Tami Kennedy says:

    Isn’t this the magic math used by natural gas industry about solving climate issues by reduced carbon from gas replacing coal in energy production. I’m sure this will maintain coal in the ‘total’ approach to a clean energy future. I suspect this is another drag on the downward trend of US carbon production.

  4. Leif says:

    Only Green Jobs can start to move the economies of the world out of the morass. As long as capitalism has the ability to profit, handily I would add, from polluting the commons, every “Black” job just digs the hole deeper. Only green jobs ADD VALUE to the economy and start to rejuvenate Earth’s life support systems.
    Corporations are “People” now. It is past time they learn to play nice with others.

  5. From Peru says:

    100% agree!

    A note on Iran, however. Thanks to all the alarm about its alleged nuclear bomb program (it bring back memories from the alleged weapons of Saddam Hussein in 2003, doesn’t it?), there is a great uncertainty about the supply of petroleum that pass across the strait of Hormuz, because in the case of Israeli attack the obvious Iranian retaliation will be trying to block the strait.

    Just the possibility of this permit the speculators to increase the price of oil. Iran knows this perfectly, and has now menaced with a blockade even without an attack, just as a retaliation to economic sanctions. The price of oil is growing again and this are good news for the iranian regime, that must bubsidize huge sectors of the economy to prevent a wave of popular unrest similar to the one that happened in oil-poor countries like Tunisia, Egypt and Syria in 2011-2012.

    In short, the Iranian problem can be the best carbon “pricing” we have at the moment. Unfortunately, it is also the kind of carbon “price” with the worst consecuences the economy of the entire world, as we saw in the 1970s and in 2008.

    (By the way, what the hell happened to the Israeli leaders? They want to bomb nuclear reactors…are they crazy? They could cause a disaster worse than Fukushima and Chernobyl. Actually, this is committing a crime against humanity: poisoning with radiation millions of people in the middle east).

  6. Originally they met to repeal the laws of thermodynamics.

  7. Mulga Mumblebrain says:

    Absolutely true! A carbon tax, set at a steadily increasing rate, would give the Business bosses just that ‘certainty’ that they are always demanding ( while ensuring that their wage slaves accept more ‘risk’ as their working conditions become ever more contingent and precarious). What’s more the proceeds should be hypothecated to renewable research and roll-out and to income relief for the poor and middle. The insane preference for ‘carbon trading’ and the ubiquitous magickal markets, is just more vulgar superstition believed only by dullard politicians attempting to ingratiate themselves with the boss caste and peddled by cynical corporate propagandists. The real beauty of markets is that they are so easily rigged and so efficient a method for taking from the many and giving it to the few, those who will play, rort and manipulate these markets for profit, and to hell with emissions reduction.

  8. “…It is not inconsistent with the standards set by other international institutions working in climate finance.”

    Scary. But it is inconsistent with current climate science, which shows that we have a fixed budget of CO2 that can be put in the atmosphere with a given level of safety, in the forseeable future.

    I have seen first-hand how the paradigm shift from let’s move toward “incremental progress” to let’s follow “absolute carbon budgeting” is very difficult for agency people – even very well-intentioned agency people.

    In addition to railing against the darkness… however valid and necessary… we could help the situation, if we could help institutional actors to accelerate their shift into reality-based paradigms.