A convenient way of cutting industrial gases that warm the planet was supposed to be the United Nation’s clean development mechanism (CDM). As a provision of the Kyoto Protocol, the CDM enables industrial nations to reduce their greenhouse gas emissions in part by purchasing “carbon offsets” from poorer countries, where green projects are more affordable. The scheme, which issued its first credits in 2005, has already transferred the right to emit an extra 250 million tons of carbon dioxide (CO2), and that could swell to 2.9 billion tons by 2012. Offsets will “play a more significant role” as emissions targets become tighter, asserts Yvo de Boer of the U.N. Framework Convention on Climate Change.

But criticism of the CDM has been mounting. Despite strenuous efforts by regulators, a significant fraction of the offset credits is fictitious “hot air” manufactured by accounting tricks, critics say. As a result, greenhouse gases are being emitted without compensating reductions elsewhere.

The accounting is rooted in a concept known as additionality. To earn credits, a project should owe its existence to the prospective earnings from carbon credits: the emissions reductions from the project should be additional to what would have happened in the absence of the CDM. Hence, the developers of a wind farm in India that replaces a coal-fired power plant could sell the difference in carbon emissions between the two projects as offsets—but not if the wind farm would have been built anyway.

Many CDM projects, however, do not appear to be offsetting carbon output at all. The Berkeley, Calif.–based organization International Rivers discovered that a third of the CDM’s hydropower projects had been completed before they were accredited. Lambert Schneider of Germany’s Institute for Applied Ecology judged two fifths of the world’s CDM portfolio to be of similarly questionable additionality. Climatologist Michael Wara of Stanford University guesses the figure could be much higher, but, he says, “we have no way of knowing.”

Determining which projects are “additional” can be tricky, explains researcher Larry Lohmann of the Corner House, an environmental think tank based in Dorset, England. “There’s no such thing as a single world line, a single narrative of what would have happened without the project,” he points out. “It’s not a solvable problem.”

A related worry is that of perverse incentives. Consultants assessing a carbon-offset project often compare it with the accepted practice in the developing country where it will be located. Such an approach gives that country an incentive to take the most polluting line to maximize the credits they earn for a CDM project. Selling this artificially inflated credit could thus ultimately enable more carbon to be emitted than if the offset had not been created at all.

Take the controversy over gas flaring in Nigeria, where oil firms burn off 40 percent of the natural gas found with oil. The state-owned Nigeria Agip Oil Company plans instead to generate electricity from the waste gas of its Kwale plant, displacing fossil fuels that might otherwise have been consumed. That strategy would create credits of 1.5 million tons of carbon dioxide a year for sale. (A credit for a ton of CO2, called a certified emissions reduction, has been selling for about $15 in Europe.) The project is deemed additional because the prospect of selling offsets motivated the developers.

But activist Michael Karikpo of Oilwatch finds that classification to be “out­rag­eous”—because routine flaring, which spews carcinogens such as benzene and triggers acid rain, is illegal in Nigeria. No company should profit from flouting the law, he adds: “It’s like a criminal demanding money to stop committing crimes.” Nevertheless, the incentive to declare a project as additional is powerful. Pan Ocean Oil Corporation, based in Nigeria, has applied for CDM approval for an effort to process and market waste gas from its Ovade-Ogharefe oil field. Should the government begin enforcing the law against flaring, it would render the project nonadditional and sacrifice considerable benefits.

The CDM’s executive board has strengthened its review process to improve the tests for additionality and to reduce perverse incentives. For instance, the board no longer accepts new projects for burning off HFC-23, a greenhouse gas produced during the manufacture of refrigerant, because the windfall credits it generated had created an incentive to set up chemical factories for the sole purpose of burning HFC-23. (Because of HFC-23’s heat-trapping potency, one ton of it fetches 12,000 CO2 credits.)

Some observers think the CDM is too far gone to salvage. No amount of tinkering will repair such a “fundamental design flaw” as additionality, Wara contends. Last November the U.S. Government Accountability Office warned that carbon offsets “may not be a reliable long-term approach to climate change mitigation.” In January the European Commission determined that the CDM should be phased out for at least the more advanced developing countries, which would instead be pressured to accept binding commitments to limit emissions. Another proposal would replace the CDM with a fund for developing countries to build green projects without generating credits—thereby eliminating the entire concept of additionality.

Doing away with the CDM and other offsets could be hard, though, because they are the easiest way for industrial nations to meet their emissions targets. The U.S. is considering a bill to reduce emissions by an ambitious 20 percent by 2020, but its provisions are so generous that apparently the country could meet its goal just by buying offsets. The fate of the CDM will be decided in climate talks to be held in December in Copenhagen.

Paying the Polluters
The World Bank is supposed to encourage sustainability, but much of its financing for carbon offsets ironically goes to polluters. For instance, the bank’s private-sector lending arm is financing a coal-fired power plant in Gujarat, India, that will generate 25.7 million tons of carbon dioxide a year. The bank also hopes to garner brokerage fees from the sale of offsets worth three million tons of carbon a year, earned by energy-efficient processes at the same plant. Janet Redman of the Institute for Policy Studies in Washington, D.C., charges that four fifths of the bank’s carbon finance portfolio is invested in offsets from polluting industries such as coal, chemicals, iron and steel.

Note: This article was originally published with the title, "A Mechanism of Hot Air".