Carbon trading - the Chinese report card

Only the foolish learn from experience - the wise learn from the experience of others. Romanian proverb

The major parties have given us only a rough sketch of their climate change policies, which rest heavily on carbon trading, and then moved on to other issues.

When our national attention finally returns to this policy area, we should keep in mind some lessons from the world's single most expensive carbon emissions trading deal - the flagship of the Kyoto Clean Development Mechanism (CDM) scheme.

Since December, China's Jiangsu Meilan Chemical Company and Changshu 3F Company have been incinerating an extremely potent greenhouse gas (HFC23), under a $1 billion deal with the World Bank. HFC23 is a by-product of manufacturing the refrigerant HFC22, and has 11,700 times the heat-trapping effect of carbon dioxide.

The first three monitoring reports for this scheme are out, all available on the Internet, and they deserve comment.

First, the good news. HFC23, equivalent to 11.6 million tonnes of carbon dioxide has been incinerated. That's a real success. But what about monitoring and compliance? Are warnings about the scheme providing distorted incentives to increase production baseless or warranted? And what's happened to China's laws on HFC23 emissions?

Verifying HFC23 destruction uses data from two flow meters and related measurements at each plant. At Jiangsu Meilan, the British company SGS, engaged to undertake verification through auditing and a site visit, found only minor flaws (such as a 100kg discrepancy between the scales that measure HFC22 production, and the values displayed in the control room).

At Changshu, however, there have been problems accounting clearly for HFC23 produced when the incinerator was out of action (four times), HFC22 produced during maintenance shut-downs, and with information on the calibration of the flow meters.

SGS describes this as "incompetence", as opposed to "malfeasance" or "fraud", and the latest report provides some clarification. But if there are even modest problems in monitoring at such a flagship site, where the abatement is on site, well understood, and immediate, what is the prospect for a national carbon-trading system in which ultimate abatement activities might be far more diverse, spread out geographically and over time and considerably less easily policed?

Our record to date - high efficiency light bulbs that are distributed but remain uninstalled, and tree-planting schemes with lax verification and uncertain effectiveness - does not augur well.

These Chinese plants are also pushing out more HFC22 than ever. Projecting the figures to date suggest that in the first year they will be at about 11 per cent (Jiangsu Meilan) and 29 per cent (Changshu) above the maximum production levels for claiming credits. These allowable levels were themselves taken as the highest of the years 2002-2005, and were, in turn, way above earlier figures.

Will Australia's carbon trading scheme rule out such incentives? Never mind the financial incentives for middlemen. I'm not at all reassured by Ziggy Switkowski's observation (as cited by Michael West in The Australian) that a carbon emissions market "would throw up ‘extraordinary returns’ for those who financed, traded, and structured the carbon market".

In any case, using direct regulation, Western Europe reduced sulphur dioxide emissions in the 1990s much more than did the US with emissions-trading.

More fundamentally, the scheme was justified on the grounds that, without it, the offending greenhouse gases would have been produced because "China has no laws to prohibit or limit these emissions". Indeed it hadn't, and nor has it legislated to do so subsequently.

With the CDM windfall under their belts, I can just see Chinese legislators (sic) falling over themselves to pass tough new laws on HFC23 emissions.

What lessons for us?

1. Don't let any scheme that lacks cast-iron verification see the light of day - ever.
2. Don't build a national scheme or agree to any international one that rewards governments for easing up on the regulation pedal.
3. Don't be surprised if undue reliance on market forces to fix our environmental woes will enrich a lot of middlemen, allow our leaders to avoid politically tougher but more direct and effective policy options, and not deliver the emissions reductions that are promised.