Junk offset sellers push to enter new UN carbon market

Renewable energy schemes make up four-fifths of Kyoto-era projects hoping to keep selling offsets under Article 6, sparking concerns over the credibility of the new market.

Junk offset sellers push to enter new UN carbon market

Chinese wind farms are among the most prevalent CDM projects seeking transition. Photo: Asian Development Bank


Developers are trying to keep selling offsets from hundreds of controversial projects through a revamped United Nations mechanism, sparking fears that worthless credits will allow companies and countries to pollute.

Climate Home analysis shows that renewable energy investments make up four-fifths of all projects seeking a transfer from the old Clean Development Mechanism (CDM) to the new system under article 6.4 of the Paris Agreement.

Experts have long written off the vast majority of credits produced from renewable energy as junk because they often already provide the cheapest sources of power in most of the world and selling offsets to fund them does not have any additional impact on emissions.

Some of these projects have also been accused of human rights violations such as forced evictions for the construction of large dams.

Harry Fearnehough from New Climate Institute told Climate Home that “it could definitely undermine the credibility of the mechanism because, while there’s still uncertainty over what it will look like, as a starting point you have a huge supply of low-quality offsets that are potentially available at a very low cost”.

Established in 1997 by the Kyoto Protocol, the UN’s CDM allowed rich countries to meet some of their climate obligations by financing emission-cutting projects in poorer ones.

The programme has received widespread criticism for its patchy human rights record and for failing to deliver promised climate benefits. Supporters of a new mechanism currently being developed under article 6.4 of the Paris Agreement say it is an improved, higher-integrity successor to the CDM.

Winning a lifeline

Countries are still wrangling over many aspects of the future market, but one much-debated issue was settled at Cop26 in Glasgow.

Under pressure from Brazil, Russia, China and India, countries agreed that a vast number of projects originally created under the CDM were allowed to migrate to the new mechanism. This handed them the chance to significantly extend their lifespan and their potential credit sales.

Project developers had until the end of December 2023 to fill in a simple two-page form and submit their transition requests.

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Of the nearly 3,500 eligible projects, over a third (1,284) seized that opportunity.

In total, the projects that have requested transition by the deadline could supply 1.4 billion tonnes of carbon credits between 2021 – the start year for accounting purposes set by the regulation – and 2035, according to a preliminary analysis by NewClimate Institute shared with Climate Home. That is more than the annual CO2 emissions of Germany.

While a relatively small share of the projects opted in, they account for approximately three-quarters of the potential supply of carbon offsets.

That’s because some of the programmes seeking to move could produce an outsized volume of credits. The two biggest ones – a hydro plant and a nitrous oxide emission reduction scheme, both in Brazil – each have the potential to issue around 6 million tons of offsets a year. That’s similar to the annual emissions of Sierra Leone.

Fearnehough says that “very few, if any, of these credits are genuinely likely to be additional”, going beyond what countries would do anyway without the carbon finance.

“A key reason for this is that the CDM was really only scheduled to run up to the end of 2020,” he added. “No investor would have made a decision purely based on expecting revenues from credits in the 2020s because, quite simply, there was no political indication that the possibility to move over to a new mechanism would exist”.

Climate and social concerns

That is particularly true for the renewable energy projects vastly dominating the list. Experts say they are highly likely to fail the additionality test, meaning their credits do not bring any climate benefit. When used to compensate for real emissions elsewhere, they result in more greenhouse gases entering the atmosphere.

The reason is simple. Many renewable offsets came into existence just as solar and wind power were becoming the cheapest source of energy in most countries. After years in operation, they are likely to be profitable from the sale of the electricity alone, without the need for additional revenues from carbon offsetting.

A 2016 study commissioned by the European Commission concluded that the vast majority of these projects “are not providing real, measurable and additional emission reductions”.

Jirau dam Brazil carbon credits

The Jirau hydropower plant is located on the Madeira River, in Brazil. Photo: UHE em Jirau/Flickr

Hydropower projects carry even more concerns as their implementation is often marred by human rights problems. Vulnerable communities relying on rivers for their livelihoods are particularly at risk of forced displacement.

The largest project applying for the transition to the new mechanism – the Jirau mega-plant in Brazil’s Rondonia state – is a case in point.

Over the years the project has faced multiple accusations of stoking tensions, pushing indigenous people away from their territories and breaching the rights of the workers that built it. Engie, the project’s developer, previously rejected any accusations.

Other categories of activities featuring prominently on the transition list have raised major concerns in the past.

Credits from projects which claim to cut or stop the emission of industrial gases such as nitrous oxide (N20) and trifluoromethane (HFC-23) were banned by the EU in 2013 for use in its emission trading system.

That’s because, according to studies, they created “a perverse incentive” to increase the production of gases depleting the ozone layer.

Countries’ authorisation dilemma

While the CDM projects have now made their move and requested transition, they are not automatically through to the new system.

Standing in their way is the need to receive a formal authorisation to proceed from the countries where their activities are located. Governments have until 2025 to make a decision and, experts predict, it won’t be a straightforward one.

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“It’s not a guarantee that all host countries will want to approve all of these projects”, according to Jonathan Crook from Carbon Market Watch, who said there would be contrasting forces at play.

“If they authorise them, they have to do corresponding adjustments, which they might not be so keen on since those emission reductions will be deducted from their [NDC climate plans]. But, at the same time, most projects are located in very large countries and it may not make a big difference to their plans”.

The answer to this dilemma will rest primarily in the hands of China, India and Brazil. Between them, the countries host around three-quarters of all projects that are looking to migrate under article 6.4.

Spotlight on three countries

Observers of climate talks said their governments all pushed for rules that would grant a lifeline to as many CDM projects as possible when those negotiations took place at Cop25 in Madrid and Cop26 in Glasgow. But, since then, they have been conspicuously quiet on the topic.

Climate Home approached the respective carbon market authorities in the three countries but did not receive a response at the time of publication.

Trishant Dev is a carbon market expert at the Delhi-based Centre for Science and Environment. He expects there will be “a lot of pressure on the Indian government to let projects through from the carbon industry, which is thriving in the country”.

But, at the same time, he thinks the government will take time to properly understand all the pros and cons of allowing such authorisations. “It’s a chaotic process. Countries want to make sense of what the final outcome of the article 6 discussions will be and how that will interact with domestic carbon markets they are constructing”, he said.

Who will buy the credits?

Article 6 talks collapsed at Cop28 last December after attempts led by the EU to introduce tighter controls and further integrity safeguards had been rebuffed by the US. Negotiators will try again this year to hammer out a deal on many technical issues that need to be resolved before trading of offsets can begin.

Meanwhile, questions also remain on who will be interested in using those credits, once the market is up and running. Countries, corporations and individuals could all be potential buyers.

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New Climate Institute’s Fearnehough said there doesn’t seem to be much appetite from countries based on what they are saying in public. “But it’s hard to predict what will happen when suddenly the offsets are available and you have an easy option to meet your NDC targets”, he added.

The credits may gain more interest from polluting companies. Banks, airlines and industrial heavyweights keep buying large volumes of questionable renewable energy offsets despite the known concerns, a Bloomberg investigation found. Dressing them up with the UN stamp of approval may add to the appeal.

Carbon Market Watch’s Crook believes much will depend on the transparency of the system – something still largely unknown. “If there is a very transparent register disclosing who purchased how many credits and for what purpose, that would disincentivize companies from transacting low-quality credits out of reputational fears,” he said. “But if it isn’t transparent, buyers may not be as careful with due diligence or may be even encouraged to buy bad credits since there won’t be scrutiny”.

A previous version of this article stated that projects requesting transition could provide 700 million tonnes of credits until 2035, while the correct figure is 1.4 billion tonnes. That was due to a computational error in the model used by NewClimate Institute for their analysis of which we were informed after publication.

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