Aldyen Donnelly: The double standard of international carbon credits

On the global environmental front, a major problem is that the Kyoto Protocol rules say that we get carbon credits if we invest in/build a wind farm in China even if China continues to build a new coal-fired generation unit every week.  But when we build the same wind generation capacity in Canada, there is no reportable GHG reduction unless/until we also shut-down and equivalent amount of fossil-fired power generation capacity. 

Canadians do not understand this bias in the Kyoto Protocol yet, but when they do they will not be supportive.

Similarly, under CDM rules, a Chilean or Brazilian hog producer earns CDM credits (CERs) if they flare the methane from their effluent ponds, even when they (1) dump unsustainable volumes of effluent into rivers to free up space in those ponds (with major resulting increases in NO2 emissions to the atmosphere, relative to the pre-project case), or if they (2) spend the revenues from CER sales increasing production levels, realizing a net increase in GHGs even if GHGs per hog produced go down. 

But there is no reportable reduction in Canada’s GHG inventory if our Canadian hog producers cut GHGs per hog but increase hog production rates.  We don’t earn domestic credit for the same investment unless we hold hog production at historical levels.

Numerous studies demonstrate that when we invest to preserve one forest stand in most developing nations, deforestation just increases in other protected stands. The developing nations get CERs even if the national forest inventory is being depleted. But Canada gets not credit for reforestation under the CDM rules. Period. 

Over 40% of CERs circulating in the global market are credits that the UN has issued to producers of HCFC-22 who have paid less than $0.50/TCO2e to cut GHG discharges in the HCFC22 production processes. The problem is that HCFC22 is a potent ozone-depleting substance and GHG that is illegal to manufacture in Canada at this time and illegal to import as of the end of next year.

Canadians do not understand the Kyoto Protocol double standard yet. But I can assure you that if Canadian capital starts flying out of Canada under these or similar rules, Canadians will quickly understand and likely withdraw any and all support for the Kyoto Protocol and maybe even the UN. 

Are you really going to propose that Canadians invest up $60 to $150 billion in Canadian resources to build green energy supply offshore instead of investing at home? Yes, an offshore investment will buy more UN-certified "credits", but likely way less global GHG reductions. And not all GHG reductions are equal. 

A GHG reduction achieved at home can (but might not) generate jobs to at least partially replace the ones our GHG reduction mandates are going to destroy.  Also, 80% of the domestic investments we might make to cut GHGs will also cut local NOx, SO2, VOC, PM10 and mercury discharges.

I do not advocate for Canadian GHG rules that preclude the import of developing nation GHG credits.

Canadian regulators could agree that Canadian companies shall not invest in any of the above-described projects to secure compliance units applicable to Canadian regulations.  But this does not work.

The four activities described above account for almost 70% of the forecast CER supply through 2012.  It is not possible to stop the brokers from swapping "good" CERs" for "bad" CERs, so a discrete Canadian standard for CERs would have little global effect when bad CERs so dominate the market.

But I do recommend that Canada’s final rules only recognize GHG credits when:

The offshore credit-generating project could operate legally if it was to be built in Canada. The theory is that the Kyoto Protocol is resulting in the transfer of western standards to the developing world.

The reality is different.

The CDM/JI Board issues credits to developing nation projects as long as they exceed local permitting standards. There are two things wrong with that.

First, the existing KP policies discourage developing nation governments from introducing stringent national pollution standards. That is stupid. Our rules should reward developing nations for introducing more stringent standards.

Second, the existing CDM/JI approvals reward multi-national corporations for taking the old equipment they are removing from North American plants and installing it in developing nation plants as "new" or "better" technology.  This practice pins the parts of the developing world that depend on our investments into a permanent environmental lagging trend. Our standard for CDM/JI projects has to be that they comply with all Canadian permit conditions.  Given the new offshore projects meet this test, then I have no problem with a generous CER calculation method.

The offshore credit-generating project registers in Canada as a Canadian offset project and reports in Canada as if it was located in Canada. Who cares if it is UN-approved? Why don’t we say "yes" and issue Canadian credits to any offshore project that meets our tests? Then project developers can make their own decisions about whether they want to register with the CDM Board or Canada’s offset project registry.

The offshore credit-genrerating project has to publish and annually update a complete GHG inventory. When an offshore (or domestic, for that matter) offset project transfers GHG "credits" to a Canadian regulated entiy’s GHG inventory, the offshore project must book balancing GHG "debits" to its publicly-reported project inventory. 

Any nation that approves CER orcredit exports to Canada has to back up that export approval by booking balancing debits to their national GHG inventory.  This stops the double-counting of developing nation GHG reductions that characterizes the entire CDM CER portfolio, even when projects are otherwise "good". 

As long as we continue to import credits for which no balancing debits are booked to any GHG inventory, the CDM market is just another Credit Default Market Crash in the making. You can’t sustain a market that is all credits with no balancing debits, even if the reductions are otherwise real.

The offshore credit-generating project incorporates Canadian technology. This has to be a real test. Technically, this test is already embedded in Canadian policy.  But one Canadian broker succeeded in getting a few Canadian officials to agree that a CDM hog farm-based credit project has Canadian content because one of the sows in the breeding operations is the progeny of a sow that was born in Canada! 

Other projects have been deemed, by Environment Canada, to have Canadian content if the project auditor is a firm with operations in Canada, even if no one on the audit team has ever set foot in Canada. Maybe it is just me, but these are bogus "Canadian content" tests.

It is also important to note that, to date, the government of Canada and provinces have elected to report GHG performance relative to national/provincial GHG inventories that exclude land use change, land use change and forestry (LUCLUCF). 

Under the Kyoto Protocol, that means the in respect to domestic action, Canadian are not permitted to include improvements in the Canadian LUCLUCF GHG accounts as progress towards our international GHG targets. We can only count domestic LUCLUCF credits if we first incorporate the LUCLUCF accounts in our baseline and progress reporting inventory. 

So, at this time, offshore project developers are essentially proposing that Canada bind to a treaty in which we can get credit for forest protection offshore, but cannot get credit for rebuilding any domestic forest area that has been harvested or destroyed by pests or fire since 1990.

Again, once Canadians get that under the existing agreements Canadian reforestation does not count, the Canadian public will abandon any commitment to support the Kyoto Protocol. This is a major block that would have to be addressed in the LUCLUCF-related negotiations at Copenhagen to make the deal acceptable to Canadians.

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