Carbon trading: Why 'good' companies embrace 'bad' credits

When it comes to Europe's carbon-trading system, top companies like Dow Chemical, ConocoPhillips, and BP prefer to save a little money than hone their 'green' reputation.

Europe’s carbon trading system was supposed to reduce greenhouse-gas emissions. But at least one of its methods for doing so may actually have increased those emissions.

The scheme was dubious enough that the European Union (EU) banned it as part of the trading system, effective May 2013. But some of the world’s largest energy and chemical companies, far from distancing themselves from the program, continue to use it to offset their emissions – or at least leave open the option of using it until the ban goes into effect.

It's a sign that when it comes to reducing greenhouse gases in the EU, protecting one’s reputation as an environmentally responsible company doesn’t seem to matter as much as saving money. In this case, the savings are quite small by corporate standards. By one estimate, those savings amount to $24 million, pocket change compared with the combined $53 billion in profits earned last year by Dow Chemical, ConocoPhillips, and Chevron in the United States, BP in Britain, and Statoil in Norway – all of whom have relied heavily on the questionable scheme to offset their emissions.

“Companies will look to comply with EU emissions regulations in the most cost-efficient way,” says Richard Chatterton, a London-based carbon market analyst at Bloomberg New Energy Finance, a news and analysis service. “Although market participants are free to hold a view on the ethics of action on climate change, the EU [system] is driven by economics.”

The questionable program became possible because Europe’s climate-change legislation requires its power and processing plants, including subsidiaries of US companies, to meet greenhouse-gas caps. They can cut emissions (by investing in green technologies, for example) or offset them by buying carbon emissions reduction certificates (CERs), commonly called carbon credits. Because of the way the carbon trading system was set up, companies often found it cheaper to offset their emissions rather than cut them.

This created a vast demand for CERs, a tool set up by the Kyoto Protocol and supervised by the United Nations to subsidize climate-change mitigation projects in emerging countries. A few industrial gas manufacturers, mostly based in China, committed to capture and destroy a potent greenhouse gas called fluoroform, or HFC-23, which is used in a wide variety of applications, from suppressing fires to plasma etching in the semiconductor industry.

The controversial credits proved immensely popular. The 19 industrial gas destruction projects originally approved for use in Europe’s emissions trading system racked up almost 500 million credits worth $3.3 billion, representing the large majority of all CERs issued to date.  Nearly 90 percent of the credits flooded the EU where they accounted for more than half of the total emissions offsets.

In 2009-2010 American corporations purchased almost 1 million HFC-23 credits at an average market price of $16 per CER. Among US companies, Dow Chemical Co. purchased the biggest volumes to offset emissions from plants in Germany, the Netherlands, Belgium, Spain, and Poland. ConocoPhillips, Chevron, and Cabot Corp. also bought a considerable volume of the dubious credits. Their EU competitors, including Royal Dutch Shell, BP, Statoil, Germany’s RWE, the Italian-Spanish Group Enel-Endesa, and the French group EDF, began to use them heavily, too. These 10 publicly traded companies banked a total $254 million in the dubious credits through 2009 and 2010. Data for 2011 has not yet been released.

To environmental groups, the credits looked suspect. They concluded that some Chinese and other manufacturers intentionally produced far more HFC-23 than necessary in order to create the maximum number of CERs and inflate their profits. In 2010, UN CERs experts cleared the HFC-23 manufacturers of actual fraud, but concluded that in the absence of the monetary incentives, the plants would have reduced their production.

While European regulators decided to forbid climate-unfriendly CERs, they delayed implanting the ban until May 1, 2013, after industries lobbied for an extension. Also, the UN authority overseeing the issuing of the credits changed its methodology, cutting by two-thirds the number of controversial CERs that could be awarded. That leaves 52 million controversial CERs that will be available before the ban goes into effect.

The US companies claim they were unaware of the dubious nature of the HFC-23 credits before the EU ruled them out. But they have made no public statements to suggest they’re trimming their use now.

“Chevron complied with all required aspects of the EU [European Trading System] regulations at all points in the past and intends to continue to do so in the future”, writes Sean Comey, media adviser at Chevron in San Ramon, Calif., in an e-mail.

“We worked with a reputable financial broker, JP Morgan, to purchase CERs. These purchased CERs had physical delivery from December 2008 through 2012,” says Vanessa Apicerno, media relations specialist at Cabot in Boston, in an e-mail. “We did, however, mandate that all credits purchased be certified and valid.”

ConocoPhillips refused to comment. Dow says it will cease using the CERs when they expire.

“We buy CERs over-the-counter,” says Drea Berghorst, public affairs officer at Dow Benelux based in the Netherlands, in an e-mail. “At the time of the transaction, Dow, and in many cases even the seller, don’t know from which types of ... projects the CERs originate.”

But buyers can easily avoid the problem credits if they want to, carbon-trading experts say. In the case of over-the-counter transactions, buyers can require the seller to disclose the credits’ origin, says Mr. Chatterton of Bloomberg. 

“It’s now possible to differentiate between types of credits, many carbon exchanges sell 'green' or non HFC-23 credits,” says Rob Elsworth, policy officer at Sandbag, a London-based research center that calculated the extent of corporations' reliance on the dubious credits.

Not surprisingly, the price of the soon-to-be-outlawed CERs has plunged from a peak of $33 per ton of carbon-dioxide emissions to less than $6 as of February.

“Standard CERs futures contracts [which include HFC-23 credits] still make up over 95 percent of the traded volumes of CERs in the carbon exchanges,” says Sara Ståhl, managing director of global marketing at Green Exchange International, one of the world’s largest carbon exchanges, based in London. “Yet, they are just 46 cents cheaper than our CERplus futures,” which do not include HFC-23 credits.

That means that if all 52 million questionable CERs still available are purchased, the companies in the EU would save less than $24 million. If that’s a benchmark for calculating the value of being “green,” corporations don’t appear to put much stock in it.

– The Fund for Investigative Journalism and the Society of Environmental Journalists provided support for the investigation behind this story.