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ITALY AND THE KYOTO PROTOCOL: PERSPECTIVES OF
ITALIAN COLLABORATION WITH CHINA AND INDIA
THROUGH THE CLEAN DEVELOPMENT MECHANISM
Nadia Tecco*, Elisa Vecchione+
February 2008
ABSTRACT
The Clean Development Mechanism (CDM) is one of the flexible mechanisms designed by the
Kyoto Protocol as a win-win policy tool, by which developed countries are able to attain global
greenhouse gases mitigation through cost-effective measures and developing countries can take
advantage of technology and capital transfer to promote sustainable development practices.
The aim of this paper is to analyse and describe Italy’s position and behaviour in the CDM market
in terms of its geographical and sectoral interventions. Italian projects reflect the global trend of
choosing China and India as the privileged host countries. In particular, China represents the
largest market for fugitive emissions abatement projects, offering vast and relatively inexpensive
opportunities to obtain carbon credits. Italy is one among the leading countries in terms of the
percentage of credits obtained from CDM projects, specifically because most of its CDM
certificates originate from the reduction of fugitive HFC-23 (trifluromethane) emissions, which are
a by-product of the production of HCFC-22, with a global warming potential 11,700 times larger
than carbon dioxide (CO2).
If on the one hand Italy’s behaviour with respect to CDM projects is a virtuous example of the
potential of CDM projects to generate cost-effective reductions of GHGs, on the other hand the
possibility of creating carbon credits from the destruction of HFC-23 does not appear as a
sustainable option, due to their perverse effects on the Montreal Protocol’s objectives.
Keywords: Kyoto Protocol, Climate Change, Clean Development Mechanism, Montreal Protocol,
Italy, China, India.
JEL Classification: Q01, Q25,Q54, Q56, O13, O19, P52.
*
PhD candidate, Analysis and Governance of Sustainable Development Programme, SSAV, Ca’ Foscari,
Venice.
+
PhD candidate, IEL Programme (Institutions, Economics and Law), University of Turin.
This paper has been conceived within the Alfieri Project, sponsored by the CRT Foundation of Turin, Italy,
“The two emerging Asian superpowers (China and India) and their relationships with the economy of Italy
and Piedmont (Le due potenze economiche emergenti dell’Asia (Cina ed India) ed i loro rapporti con
l’economia italiana e piemontese).
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1. Introduction
The Kyoto Protocol represents one of the most commendable examples of international
commitment to global environmental policies. The urgency of action to face the climate
change challenge is no more in question, that is why the Kyoto Protocol has been designed
to include the largest number of participants according to “common but differentiated
responsibilities”:1 industrialized countries carry the heavier burden of reducing greenhouse
gases emissions (GHGs), whereas developing countries are recognized a right to meet
their social and development needs and hence to delay pollution abatement.2 However,
even without a commitment to reduce emissions according to the Kyoto target, developing
countries do share the common responsibility that all countries have in the face of climate
change.
Up to now, the Kyoto Protocol to the United Nations Framework Convention on
Climate Change (UNFCCC) counts 176 member states, 3 42 being part of the Annex I
countries, which includes industrialized states with emission reductions constraints. All
the other members constitute the non-Annex I countries, including all developing
countries whose participation to the Protocol does not entail GHG emission reductions but
allows for indirect partake to global emission reduction.
The Kyoto Protocol has been designed as a cap-and-trade system, combining both
standards of GHG emissions reduction and market mechanisms (the so-called “flexible
mechanisms”). In order to achieve the objective of 5.2 percent reduction of GHG emission
with respect to 1990 level by 2012, it was crucial to create a viable scheme of incentives
that would have been otherwise absent in a command-and-control strategy. Annex I
countries have a range of discretion, or flexibility, in deciding the geographical and
sectoral distribution of their effort according to the economic structure of their polluting
industries. This kind of flexibility is justified on the ground of a principle of cost-
1
This principle is grounded in shared notions of fairness: the developed countries are disproportionately
responsible for historical GHG emissions and have more capacity to act.
2 The absence of emission constraints for developing countries is going to cease in 2012 in a post-Kyoto
perspective.
3
Australia has just concluded the process of ratification of the Protocol (December 2007), The ratification
will come into force in March 2008.
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efficiency where the key factor is the difference among states in their marginal abatement
costs.
2. Flexibility mechanisms: features of CDM projects
Flexible mechanisms, as complementary to command and control policies, enable Parties
to access cost-effective opportunities to reduce emissions or to remove carbon from the
atmosphere in other countries. While the cost of limiting emissions varies considerably
from region to region, the benefit for the atmosphere is the same wherever the action is
taken.
The Kyoto Protocol provides three flexible mechanisms: the Clean Development
Mechanism (CDM), Joint Implementation (JI), and Emission Trading (ET). The latter is a
pure market mechanism, whereas the other two are project-based mechanisms. ET has
been conceived as a market, where the assets are carbon allowances. Carbon allowances
are already owned by Member States according to their emission caps and are traded
according to the price differential between the allowances and the marginal abatement
costs of each installation.4
JI and CDM consist in environmental projects intended to reduce GHG emissions
outside the national boundaries in exchange for carbon credits. JIs allow Annex I countries
with emission constraints to obtain credits (called Emission Reduction Units, ERUs) from
projects within other Annex I countries, typically Eastern European countries. CDMs are
defined as projects financed by Annex I countries to reduce GHG emissions in non-Annex
I countries in exchange for emission reduction credits (CERs). The most notable feature of
this mechanism is that it creates new carbon assets that can be used either for achieving
national Kyoto targets or for obtaining additional revenues from the trade in credits. Due
to the fact that non-Annex I countries have no emission reduction commitment and thus no
cap, they are consequently not endowed with any carbon allowance, which means that
they cannot directly participate to the carbon market because they have no assets to trade.
4
A special ET system, the European Emission Trading Scheme (ETS), allows converting other carbon
assets, i.e. credits from JI and CDM, into European allowances tradable in the EU ETS.
3
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The way non-Annex I countries participate to the CDM is thus by hosting emission
reduction projects which generate new carbon credits for industrialized countries, i.e.
credits equivalent to the units of CO2 eq. reduced through “green” projects that otherwise
would have been released in the atmosphere. This means that Annex I countries can
increase their emission allowances through a compensation mechanism that offsets their
additional domestic emissions by reducing of an equivalent amount the emissions outside
their boundaries. Nonetheless, it has to be remembered that, as a matter of fact, the CDM
enlarges the amount of CO2 eq. emitted by Annex I countries and, consequently, the
amount of emission allowances tradable in the carbon market.
The accreditation of CDM credits occurs upon determination of the additionality of
the projects, which is constituted by “reductions in emissions that are additional to any
that would occur in the absence of the certified project activity” (Article 1, Kyoto
Protocol). Despite the simplicity and fairness of that concept, calculating additionality is
all but an indisputable process. Firstly, it is not obvious whether additionality refers to an
environmental-driven or rather to an economic-driven concept. In the first case,
additionality indicates the amount of emissions that have been avoided thanks to a certain
project with respect to a standard or inexistent project. In the second case, instead,
economic or financial additionality refers to the feasibility of the projects in terms of its
implementation that would not have been possible in the absence of a CDM program.5 In
this case, the incentive is given by the generation of additional financial resources and
assets that would have otherwise been forgone.
In any case, to determine additionality, whatever the criterion is, it is indispensable to
have a term of reference corresponding to the absence-of-project scenario, i.e. the “would
be” scenario. This state is called “baseline” and relates to the amount of emissions that
would have occurred in the absence of the CDM program. The computational
methodology to determine the baseline has been already standardized for some activities;
nonetheless estimations on the expected amount of emissions over a certain period of time
The additionality criterion applies also to JI projects, but it is not as crucial, and debated, as for CDM
projects, due to the fact that the issuance of JI credits (so-called Emission Reduction Units, ERUs) for the
investor country corresponds to the surrendering of an equivalent amount of allowances (Assigned Amount
Units, AAUs) by the hosting country under a zero-sum game rule.
5
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carry the inherent problematic characteristic of impossible testing and impractical
counterfactual analysis.
The controversy over the estimation of the baseline and the computation of
additionality in terms of emissions reduced and credits issued is anchored to the high
chance of free-riding behavior. It is quite evident, in fact, that the higher the baseline, the
larger the margin of emission reductions and credits Annex I countries can earn from
CDM projects. Moreover, free-riding occurs any time an environmental projects that
would have been implemented anyway for reasons of high expected returns is registered
as a CDM project, thus allowing Annex I countries to legally produce additional
emissions.
Besides these issues, the issuance of CERs is controversial also for the kind of
greenhouse gas Annex I countries choose to abate. The Kyoto Protocol includes six
GHGs: carbon dixiode (CO2), methane (NH4), Nitrous Oxide (N2O), hydrofluorocarbons
(HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). All those gases have a
different global warming potential (GWP), according to which each ton of GHG is
converted in CO2 equivalent ton (table 1).6
Table 1. GHGs and relative GPW (in ton of CO2)
GHG
GWP
Carbon Dioxide CO2
1
Methane NH4
23
Nitrous Oxide N2O
296
Hydrofluorocarbons HFCs
11,700
11,900 (perfluoroethane)
Perfluorocarbons PFCs
5,700 (perfluoromethane)
Sulphur hexafluoride SF6
22,200
Source: UNFCCC (2001)
In fact, each gas is expressed in CO2 equivalent according to their Global Warming Potential (GWP) with
respect to CO2: the warming effect of CO2 is assigned a value of 1, and the warming effects of other gases
are calculated as multiples of this value. These estimates were made by the IPCC in 2001 on a 100-year time
horizon.
6
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The issuance of credits depends on the GWP of the gas that the project is intended to
abate. Indeed, to reduce 1 Mton of nitrous dioxide has a different effect than to reduce 1
Mton of hydrofluorocarbons: the former allows issuing 296 credits, whereas the latter
11,700. This situation has direct impact on the CDM economy and in particular on the
sectoral scope of the projects to be developed.
3. The Italian commitment to Kyoto
Italy, as a member of Annex I countries, received a commitment target of emission
reduction equal to 6.5 percent with respect to 1990 levels.
The Italian energy sector is characterized by very high costs of abatement of GHGs
emissions because of the massive consumption of fossil fuels, the low energetic intensity
and the dispersion of production activities.
Oil is the largest source of Italy’s energy consumption, representing 47 percent of
primary energy consumption in 2004 and the largest share input for electricity production
among OECD countries; natural gas accounts for 35 percent of primary energy
consumption, followed by relatively small contributions from coal (8 percent),
hydroelectricity (5 percent), and other renewable sources (2 percent) (EIA, 2007). This
situation adds on to the Italian relative low energy intensity ratio (energy consumed per
euro of real GDP) with respect to other European countries, which makes the marginal
abatement cost of emissions higher than that of the other member states. In fact, even
though for the same level of GDP Italy consumes less energy with respect to other
countries, the structural composition of its energy sources privileges fossil fuels usage
over non-carbon emitting fuels such as nuclear or renewable energy, and among fossil
fuels it prefers higher emitting fuels. Given this framework, a reduction strategy limited to
the national scale anticipates high costs for the country.
In 2002 Italian GHG emissions were already 557.81 Mton CO2 eq. with respect to
1990 levels where emissions accounted for 516.85 Mton CO2 eq. (Romano et al, 2007).
This means that the distance to the Kyoto target of 486.1 Mton CO2 eq. had already
increased (table 2).
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Table 2. Italian greenhouse gases emissions
Mton CO2 eq.
GHGs Emissions in 1990
516.85
Kyoto Target
486.1
GHGs Emissions in 2002
557.81
GHGs Emissions in 2004
577.86
Target distance
Source: Romano et al (2007) and Piano Nazionale di Assegnazione (2006)
According to APAT, the Italian governmental agency for environmental protection, in
2004 the situation worsened to 577.86 Mton CO2 eq. Quite consistently with the data
provided in the NAP II, this situation accounted for an annual gap of 95 Mton CO2 eq. to
be offset during the 2008-2012 implementation period.
Thus, in the first 2005-2007 National Allocation Plan (NAP) under the European
Union Emission Trading Scheme, Italy expressed its intention to make a large usage of all
three flexibility mechanisms allowed under the Kyoto Protocol to fulfill its reduction
objective.
Regarding the EU ETS sectors, the Italian Government planned to split the reduction
effort between domestic measures and flexible mechanisms with a respective share of 40
percent and 60 percent (NAP II). The use of flexible mechanisms should allow reducing
GHGs emissions at a lower-than-domestic cost, and at the same time to limit the need of
adopting more expensive national measures.
The second Italian National Allocation Plan for the 2008-2012 period is still under
approval, but from earlier Commission’s Communications it is expected that the number
of allowances assigned to EU ETS sectors will be reduced (Midday Express, 20077). This
would suggest that reliance on international emission credits might be further increased,
7http://www.businessupdated.com/shownews.asp?news_id=2448&cat=Italy's+national+allocation+plan+for
+2008-2012
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unless the European Commission’s enforces a preannounced fifteen percent threshold
level8 for CDM and JI of the total quantity of allowances allocated to the ETS.
3.1 Italy and CDM
3.1.1. Different ways of participating to CDM
Since 2000 (the starting period for CDM projects), Italy has actively participated to the
carbon market, taking part to 26 CDM projects.
Italy takes part to the CDM both through the activities sponsored by the government
and those carried out by private entities. Among this last category (which is quite limited
as just ten entities are involved9), only three Italian entities are able to participate on their
own.
These firms are ENEL Trade S.p.A, Eni and Asja biz. Among those, differences exist
according to their commitment to Kyoto: indeed, whereas ENEL Trade S.p.A and Eni are
bound by emission targets, Asja biz is an example of an increasing phenomenon involving
voluntary participation to the carbon market. Asja biz does not have any emission cap and
thus is a CDM project developer acting both as a buyer and a seller of CERs.
All the rest of the Italian firms are engaged in CDM projects through multilateral and
bilateral funds.
The main funds in which Italy (including the government and private enterprises) has a
quote are the Umbrella Carbon Fund, the BioCarbon Fund, the Community Development
Carbon Fund (the three managed by the World Bank and open to multilateral
participation), an the Italian Carbon Fund, created through a bilateral agreement between
the Italian Ministry for the Environment, Land and Sea and the World Bank.
Multilateral and bilateral funds operate in the CDM market by purchasing credits from
CDM projects developed by other entities. This introduces to a further complication in the
way actors gain their CERs. The usual differentiation within CDM programs is made
between direct participation to project construction and indirect participation through
European
Press
Release,
May
2007,
available
at
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/667&format=HTML&aged=1&language=IT
&guiLanguage=en#fn5
9 Edison, Eni, ENEL Trade S.p.A, Italcementi S.p.A., Iride Mercato S.p.A., ERG S.p.A., Endesa Italia
S.p.A., Cementerie Aldo Barbetti S.p.A., Pangea Green Energy, S.I.E.T. S.p.A.
8
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credits purchase. However, through the Project Design Document (PDD) it is not possible
to understand which kind of engagement each party to the project, being it public or
private, undertakes. More specifically, in case of credit purchase through a fund or a CDM
project in partnership with other countries, we cannot access the information pertaining to
each party’s share to the total amount of credits issued from the project. This information,
in fact, is reported in the Emission Reduction Purchase Agreement (ERPA), which is a
private contract.
3.1.2 Destination and types of CDM projects: a comparative analysis
Italy counts 26 CDM projects already registered10. This makes it eighth on a global rank,
dominated by United Kingdom and Japan (figure 1).
Figure 1: Number of Projects by Annex I country
Source: data elaborated from UNFCCC (October, 2007),
Despite this picture, the Italian ranking changes to fifth when we take into account the
total number of CERs issued (figure 2).
10
Throughout the paper, all CDM projects will be intended as registered, except where differently stated.
9
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Figure 2: CERs issued by Annex I country
Source: data elaborated from UNFCCC (October, 2007)
The greatest part of CDM projects at the global level concentrates in four main
countries, namely India, China, Brazil and Mexico, that aggregated represent three
quarters of the total number of CDM projects (see below figure 3).
China and India happen to be the privileged beneficiaries of this kind of synergies
between developed and developing worlds, due to their exceptional level of growth and,
accordingly, increasing level of pollutions from GHGs that opens room for massive
emission reduction projects from Annex I countries. Meanwhile, African countries are
excluded.
The geographical concentration of CDM in some countries is due to several reasons:
the presence of stable institutional settings (Lecoque and Ambrosi, 2007), the global
distribution of foreign direct investments, and the presence of sectoral field interested by
the reduction of Kyoto’s GHGs. Also the formal and sectoral rules in which CDM have
been designed automatically exclude some destinations: considering the African case,
LULUCF (Land Use, Land Use Change and Forestry) activities have a high potential of
development, but the European Union’s decision to ban those activities within the EU ETS
10
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has heavily undermined their involvement in the CDM market (Lecoque and Ambrosi,
2007).
Figure 3: Number of CDM projects by host country
Source: data elaborated from UNFCCC (October, 2007)
Italy follows the same path for its destination countries (figure 4), choosing India and
China as privileged host countries for CDM projects.
Figure 4: Number of Italian CDM projects by host country
Source: data elaborated from UNFCCC (October, 2007)
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China represents one of the most promising markets for the development of CDM
projects and is expected to reach three times its size by the end of 2012 (Abele, 2007).
Today it counts alone more than 50 percent of the global CERs supply11. The most
prominent aspects favoring the good investment climate are the strength of the
institutional framework (with the Designated National Authority (DNA)12 operating
through a top-down approach), and the government efforts to promote know how in the
CDM sector (e.g., a national fund managed by the Ministry of Finance was created to
supervise improvements on energy efficiency). Project ownership belongs to Chinese
enterprises or joint ventures, the quote of foreign capital not overcoming 49 percent.
Moreover, project owners have to pay a tax to the Chinese government, depending on the
kind of activity issuing CERs (e.g. 2 percent for renewable energies up o 65 percent for
HFCs reduction projects).
In India, the institutional framework is much more fractioned and the diversity of tax
payments for every different state makes transaction costs for CDM activities very high.
On the other side, the timing for a CDM project to be approved is no more than sixty days.
Furthermore, a favourable institutional setting prescribes no legal costs for CDM activities
on energy industries, with a special account for renewable sources. Indeed, this sector is
continuing its expansion and attracting ever more investments. Finally, despite the federal
organization of states, the fragmented information about CDM approval procedures and
rules only partly can account for a real transaction cost for foreign investors, since the
majority of CDM project in India are unilateral, i.e. developed by Indian companies that
sell CERs. This means that a great portion of the risks and transaction costs related to
CDM projects is carried by Indian firms, which can thus apply a price for credits issued
from unilateral projects which is higher than prices from bilateral (foreign capital) or
multilateral ones (e.g. World Bank fund).
11
Monthly newsletter of the GTZ Climate Protection Programme (CaPP), written by Perspectives GmbH,
February 2007, available at http://www.gtz.de/en/ [last access: January 9th, 2007].
12
The DNA is the official CDM reference agency of the host country and is responsible for issuing official
government approval for projects, which ensures that a project is in line with the country’s sustainable
development goals.
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By moving now our analysis from a host countries perspective to a sectoral one, it
emerges that Italy keeps showing some similarities with respect to the global trend (figure
5 and 6).
Figure 5: Number of global CDM projects by sectoral scope
Source: data elaborated from UNEP Risoe (November, 2007)
Figure 6: Number of Italian CDM Projects by sectoral scope
Source: data elaborated from UNFCCC (November, 2007)
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From both figure 5 and 6, the greatest number of CDM projects is located within the
energy industry sector. However, the Italian participation to the flexible mechanism is
further characterized by a massive implementation of projects concerning fugitive
emissions from production and consumption of halocarbons an sulphur, which ranks
second in terms of the number of projects (figure 6). This is not reflected at a global level,
where instead the number of these projects is far away in the scale of importance, with
only 16 out of 827 projects (figure 5).
As to the countries of destination of fugitive emissions projects related to HFC-23
destruction, these are concentrated in China, which hosts more than a half of worldwide
projects implementing that specific methodology. For reasons related to the global
warming potential of HFCs that have been already discussed and that will be further
presented in the next paragraph, this concentration makes China the largest opportunity
market for CERs issuance. Nonetheless, the majority of global investments, almost a half
of them, concentrates on renewable energy sources such as hydro and wind power,
whereas credits from HFC-23 and N2O reduction projects are decreasing.
India, differently, counts only 4 out of 16 of HFC-23 abatement projects, but shrinks
its distance from China in terms of quantity of CERs supplied (see next paragraph). The
two countries together and only relatively to HFC-23 projects accounts for more than 44
million CERs already issued, which is equivalent to 43 percent of the total amount of
CERs issued at the global level (102,544,493, UNFCCC 2008).
3.1.3 The Italian strategy in CDM participation through reduction of HFC-23 emission:
reasons and future implications
Despite the limited number of CDM projects carried out, Italy is one among the leading
countries in terms of the percentage of credits obtained from CDM projects.
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Italy has the third highest average yield from CDM projects13 although it counts only 26
projects in total (table 3).
Table 3. Average project yield by Annex I countries
Ranking
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Annex I country
Norway
France
Italy
Japan
Germany
Danmark
Netherlands
Canada
Finland
United Kingdom of
Great Britain and
Northern Ireland
Sweden
Austria
Spain
Luxemburg
Switzerland
CERS issued
at October
2007
Number of
CDM projects
Average rate
from CDM
projects
1,218,848
6,087,460
5,941,277
19,088,199
5,085,085
1,252,888
12,137,839
1,824,792
1,268,027
2
13
26
81
25
7
98
17
12
609,424
468,266
247,553
235,657
203,403
178,984
123,856
107,341
105,669
23,172,173
273
84,880
1,798,848
857,289
1,312,632
35,738
462,666
29
16
28
1
41
62,029
53,581
46,880
35,738
11,285
Source: data elaborated from UNFCCC (October, 2007)
Consistently, Norway and France, respectively first and second in this raking, have
the largest portion of CERs obtained from CDM projects devoted to HFC-23 abatement.
The UK, despite it counts the far largest number of CDM projects (273!) with respect to
all Annex I countries, is only tenth (table 3). The explanation of these disproportions
between the number of CDM projects and the credits issued lies in the fact that some
countries, like Norway and France as abovementioned, concentrate their efforts in
reducing high GWP greenhouse gases such as HFCs, but also PCFs and N2O. Concerning
13
The average yield from CDM projects has been computed by first calculating the total number of CERs
each Annex I country obtained from its projects, and then by dividing it by the total number of projects each
country participates to. Many projects include more than one country, that is why for such projects the
number of CERs issued was divided by the number of participants. Although imprecise, this operation was
the only possible one, as the distribution of CERs to the participant of the same projects is not accessible.
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the specific Italian case, most CDM certificates originate from thermal oxidation projects
consisting in the destruction of HFC-23 emissions from HCFC-22 productions (figure 8),
that have a relatively low abatement cost, but a significant potential in credits emissions
equal to 11,700 per each Mton of GHG reduced (see above table 2).
If the proportion of such projects is evidently the largest in terms of CERs supplied
worldwide (figure 7), in the Italian case the dominance of HFC-23 projects is even more
striking14, with almost the total of credits from CDM projects earned from that sector
(figure 8).
Figure 7: global CERs issued by sectoral scope
Source: data elaborated from UNFCCC (November, 2007)
14
Italy, of course, is not the only country following this strategy and participates in partnership with other
countries in four projects in HFC-23 mitigation.
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Figure 8: Number of CERs issued for Italy by sectoral scope
Source: data elaborated from UNFCCC (November, 2007)
As it was mentioned in the previous paragraph, China represents more than a half of
the total registered HFC-23-related projects (9 out of 16) and almost a half of supplied
credits from this specific sector (23,741,104 out of 50,904,337). In this framework, Italy –
and in particular ENEL Trade S.p.A. – is included as a major partner for CDM transaction,
obtaining 52 percent of its total credits from China (figure 9). The bulk of this percentage
is indeed formed by its participation to 5 HFC-23 abatement projects, issuing 3,845,911
credits15. This means that the Italian intervention in China is not only driven by the fact
that the latter represents the largest market for CERs, but also and more precisely because
those CERs come from HFC-23 projects, upon which Italy has decided to base its CDM
strategy.
15
The data is updated at January 2008 that is why it is apparently inconsistent with that of table 3. Moreover,
the same methodology as in table 3 has been used for calculating the number of CERs issued for Italy alone.
See supra note 13.
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Figure 9: Italian CDM projects: CERs issued by host country
OTHER HOST COUNTRIES
Source: UNFCCC, October 2007
The same kind of synergy at a first glance seems not replicate for Italian interventions
in India, where the number of HFC-23-related projects is generally lower (only 4 at the
global level, 2 of which are from Italy). However, fugitive emissions reduction activities
in India, despite their little number, create the largest quotes of CERs for Italy (4,579,393
credits) and even surmount those from HFC-23 projects in China. This kind of evidence,
though, strikes against some other facts. First of all, similarly to what we just said, the
number of HFC-23 projects is lower in India than in China. Second, the Italian
participation in India is characterized by a greater concentration on the energy industry
and a wider interest over other activities, such as manufacturing industries for example.
Third, and most importantly, Italy can participate as an investor in China thanks to one of
its major firm, namely ENEL Trade S.p.A, which is the sixth greatest actor in the CDM
global market with 58 projects (UNEP Risoe, 2008)16; in India, on the contrary, Italy
never participates as an investor, but just as a credit buyer, which means that it never
obtains the hole amount of credit from a project, but gets just a share of it according to the
number of other participants and, most importantly, according to the specific terms of the
16
In this case, we are referring to all CDM projects (including those under review, rejected etc) and not only
to those already given registration.
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contract subscribed17. This is why it would be logic to expect that those HFC-23-related
projects to which Italy participate in India yielded less CERs than those in China where
Italy is the only investor. These facts given, it is reasonable to think that the larger number
of CERs issued from Indian HFC-23 reduction projects is simply due to the characteristics
of the projects themselves and maybe on the timing for the issuance of CERs.
It is interesting to notice that the arguments just advanced gain more evidence when
we shift our analysis to the number CERs expected by 2012 from each sector.
China is expected to increase its variety of sectors interested by the CDM by 2012
with respect to those that have already issued credits (figure 10, see also Annex 1-table 4).
Sectoral distribution in China is announced to be more diversified with respect to
present, with the leading activities being devoted to energy industries instead of HFC
abatement, and others emerging for the first time, such as those concerning chemical and
manufacturing industry.
17
As we have already said, we are not entitled to know the terms of CERs purchase contract, that is why we
decided to divide the amount of CERs issued equally among the number participant to each specific project.
See infra paragraph 3.1.1.
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Figure 10. China: CERs issued vs CERs expected by 2012 according to activity
sectors
Source: data elaborated from IGES (January, 2008)
Source: data elaborated from Unep Risoe (January, 2008)
As regarding India, the number of sectors for CDM projects is expected to increase
as well as in China (figure 11), but at the same more than half of CERs – and so GHG
reductions – are expected to be created from energy industry activities. This sector is
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supposed to greatly expand its potentiality and to replace, as in China, fugitive emissions
destructions projects.
Figure 11. India: CERs issued vs CERs expected by 2012 according to activity
sectors
Source: data elaborated from IGES (January, 2008)
Source: data elaborated from Unep Risoe (January, 2008)
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4. Concluding remarks – HFC-23 implications for the Montreal Protocol
Being China and India the most important partners for Italy in CDM transactions, it is
useful to picture the future scenario about their sectoral role until 2012. As figure 12
shows, China is expected to deliver the majority of CERs from HFC-23 abatement
projects as well as from energy industry activities.
Figure 12: China and India – global perspective until 2012.
Source: data elaborated from UNEP Risoe, (January, 2008)
Particularly on HFC reductions, it is reasonable to expect that Italian relations with
China will be further strengthened, as it is also confirmed by the estimations that 75
percent of the annual Italian effort to reduce GHG emissions occurs in China (calculated
from UNFCCC data, October 2007).
Nonetheless, it is worth noting that Italian firms are not specialized in activities related
to HFC-23 (Romano et al, 2007), which means that the Italian strategy in CDM
participation is doubtless dictated by the incentive created by the Kyoto Protocol.
However, if on the one hand Italy’s behaviour with respect to CDM projects is a good
example for the potential of the CDM to generate cost-effective (and huge) reductions of a
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GHG, on the other hand, its peculiarity of creating carbon credits from the destruction of
HFC-23 seems not have future perspectives of a further development.
This strategy places the country in a controversial position both with respect to
sustainable development benefits in recipient countries and to future implications about
the Montreal Protocol. This is explained by the fact that HCFC-22 is an ozone depleting
substance (ODS) controlled under the Montreal Protocol as well as a GHG controlled by
the Kyoto Protocol. HCFC-22 is mainly used as refrigerant in air conditioning as well as
commercial and industrial refrigeration systems. HCFCs have a lower ozone depleting
potential than chlorofluorocarbons (CFCs) and are therefore used as intermediate
replacements for CFCs. In addition, HCFC-22 is used as feedstock for the production of
polytetrafluoroethylene (PTFE). The use of HCFC-22 as feedstock is not controlled under
the Montreal Protocol, since emissions from feedstock use are estimated to be
insignificant. For this reason HFC-23, the unwanted by-product of HCFC-22 production,
is not an ODS but a GHG and controlled under the Kyoto Protocol with a very high GWP
of 11,700 for the first commitment period from 2008 to 2012.
If the HFC-23 waste stream is mitigated under the CDM, plant operators gain
significant revenues from CERs, due to the high GWP of HFC-23. As illustrated
Schneider and others (2005), revenues from HFC-23 destruction under the CDM
significantly decrease or even outweigh HCFC-22 production costs.
A risk exists to create a “perverse incentive”, in that the CDM could encourage
industrial facilities to increase production of HCFC-22 and consequently of HFC23 to be
destroyed in order to obtain more CERs. This may impact HCFC-22 production and
consumption patterns in developing countries, where new HCFC-22 production plants
might be constructed only due to the CDM. This would generate adverse effects on the
implementation of the Montreal and Kyoto Protocol, which would further promote the
expansion of the production of HCFC-22, an important ODS as well as a GHG.
The several concerns expressed about CDM projects based on decomposition of HFC23 emissions from HCFC production sites (Schwank, 2004), led the COP/MOP in
December 2005 in Canada to revise the underlying baseline and monitoring methodology,
establishing precise rules and limits for the intervention in new HCFC-22 facilities. In this
occasion the COP/MOP has recognized that issuing certified emission reductions for
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hydrofluorocarbon-23 (HFC-23) destruction at new HCFC-22 facilities could lead to
higher global production of HCFC-22 and/or HFC-23 than would otherwise occur and that
the clean development mechanism should not lead to such increases, althought their
importance as a measure to mitigate greenhouse gas emissions. For all these reason it
encouraged parties included in Annex I to the Convention and multilateral financial
institutions to provide funding from sources other than the CDM for the destruction of
HFC-23 in Parties not included in Annex I to the Convention.
The acknowledgment and decision of the COP should have direct implications for the
Italian involvement and strategy in participating to CDM projects. Italy, since its
difficulties in reduce emission within national boundaries and the increasing distance to
Kyoto target, still need to obtain credits by CDM, but it is desiderable for Italy to open its
intervention also to other sectors, improving its capacity both at the government level and
at the firms level to invest abroad.
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References
Abele C. (2007), “CDM Market Brief, PR China”. bfai (Bundesagentur fur
Außenwirtschaft) and DEG (Deutsche Investitions -undEntwicklungsgesellschaft
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Practice and Future Approaches for Policy”, Tyndall Centre for Climate Change
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Capoor, K and P. Ambrosi (2007), “State and Trends of the Carbon Market 2007”, World
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Ellis, J. and Kamil, S. (2007), “Overcoming Barriers to Clean Development Mechanism
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2 del D.lgs. 4 aprile 2006, n. 216”.
Klepper, G. and S.Peterson (2006), “Emission Trading, CDM, JI and More: The Climate
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Lecoque, F. and F.P. Ambrosi, 2007, “The Clean Development Mechanism: History,
Status and Prospects”, Review of Environmental Economics and Policy, 1(1): 134151.
Romano, D. et al (2007) “Italian Greenhouse Gas Inventory 1990-2005”, National
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Schwank O. (2004), “Concerns about CDM Projects Based on Decomposition of HFC-23
Emissions from 22 HCFC Production Sites”, INFRAS, Zurich.
TERI (The Energy and Resources Institute) and IGES (Institute for Global Environmental
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ANNEX 1
Table 4.
CHINA
SECTORAL SCOPE (UNFCCC)
Energy industries (renewable - /
non-renewable sources)
Energy distribution
Energy demand
Manufacturing industries
Chemical industry
Construction
Transport
Mining/Mineral production
Metal production
Fugitive emissions from fuels
(solid, oil and gas)
Fugitive emissions from
production and consumption of
halocarbons and sulphur
hexafluoride
Solvents use
Waste handling and disposal
Afforestation and reforestation
Agriculture
TOTAL
CERs
expected by
2012
CERs
Issued
1,178,668
516,875,080
127,988,165
111,072,676
INDIA
CERs
Issued
CERs
expected by
2012
5,109,083 210,742,459
233,735
781,160
614,535
1,094,844 58,200,426
302,520
107,158,918
104,579
260,942
4,368,997
23,741,104
386,381,511 20,311,128
78,456,528
768,085
33,581,840
176,942
6,345,250
7,078,813
983,840
96,000
25,792,436 1,283,235,132 33,902,407 361,077,854
Source: data gathered from UNEP Risoe (January, 2008); IGES (Janaury, 2008)
27