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PRELIMINARY PAPER – NOT TO BE CITED WITHOUT AUTHORS’ PERMISSION

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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.


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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

5 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.


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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

Perfluorocarbons PFCs 11,900 (perfluoroethane)

5,700 (perfluoromethane)

Sulphur hexafluoride SF6 22,200

Source: UNFCCC (2001)

6 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.


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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



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

8 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.


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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.


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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


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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


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



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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 Annex I country CERS issued at October

2007

Number of CDM projects

Average rate from CDM

projects 1 Norway 1,218,848 2 609,424 2 France 6,087,460 13 468,266 3 Italy 5,941,277 26 247,553 4 Japan 19,088,199 81 235,657 5 Germany 5,085,085 25 203,403 6 Danmark 1,252,888 7 178,984 7 Netherlands 12,137,839 98 123,856 8 Canada 1,824,792 17 107,341 9 Finland 1,268,027 12 105,669

10 United Kingdom of Great Britain and Northern Ireland

23,172,173 273 84,880

11 Sweden 1,798,848 29 62,029 12 Austria 857,289 16 53,581 13 Spain 1,312,632 28 46,880 14 Luxemburg 35,738 1 35,738 15 Switzerland 462,666 41 11,285


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


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


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

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.

OTHER HOST COUNTRIES


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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 HFC-

23 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


24

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.


25

References

Abele C. (2007), “CDM Market Brief, PR China”. bfai (Bundesagentur fur

Außenwirtschaft) and DEG (Deutsche Investitions -undEntwicklungsgesellschaft

mbH)

APAT (Agenzia per la protezione dell'ambiente e per i servizi tecnici)

http://www.apat.gov.it/site/it-IT/ [last access, December 2007]

Boyd, E. et al (2007), “The Clean Development Mechanism: An Assessment of Current

Practice and Future Approaches for Policy”, Tyndall Centre for Climate Change

Research, Working Paper 114.

Capoor, K and P. Ambrosi (2007), “State and Trends of the Carbon Market 2007”, World

Bank Institute and International Emission Trading Association.

Easy Carbon Consultancy Co., LTD, available at http://www.easy-

carbon.com/english/index.asp [last access, December 2007].

EEA (European environmental Agency) (2007), “Annual European Community

Greenhouse Gas Inventory 1990-2005 and Inventory Report 2007”, EEA technical

report, No 7/2007.

EIA (Energy Information Administration)

http://www.eia.doe.gov/emeu/cabs/Italy/Background.html [last access December

2007]

Ellis, J. and Kamil, S. (2007), “Overcoming Barriers to Clean Development Mechanism

Projects”, OECD, International Energy Agency and UNEP Risoe.

ICCF (International Council for Capital Formation) (2005), “Kyoto Protocol and Beyond:

the Economic Cost to Italy”.

IGES (Institute for Global Environmental Strategies), available at

http://www.iges.or.jp/en/index.html [last access, December 2007]

Italian Ministry for the Environment Land and Sea (2006), “Piano Nazionale

d’Assegnazione per il periodo 2008-2012 elaborato ai sensi dell’articolo 8, comma

2 del D.lgs. 4 aprile 2006, n. 216”.

Klepper, G. and S.Peterson (2006), “Emission Trading, CDM, JI and More: The Climate

Strategy of the EU”, The Energy Journal, 27: 1-26


26

Lecoque, F. and F.P. Ambrosi, 2007, “The Clean Development Mechanism: History,

Status and Prospects”, Review of Environmental Economics and Policy, 1(1): 134-

151.

Romano, D. et al (2007) “Italian Greenhouse Gas Inventory 1990-2005”, National

Inventory Report 2007, APAT - Agency for Environmental Protection and

Technical Services .

Schneider L., Graichen J., Matz N. (2005), “Implications of the CDM on Other

Conventions. The Case of HFC-23 Destruction”. Discussion paper, April, Oko-

Institut Berlin.

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

Strategies) (2005), “Fast-tracking CDM in Indian States, India: The Energy and

Resources Institute”, Japan: Institute for Global Environmental Strategies.

UNEP (2006), The Clean Development Mechanism. An Assessment of Progress.

UNEP Risoe, http://www.uneprisoe.org/ [last access, December 2007]

UNFCCC, http://unfccc.int/2860.php [last access, December 2007]

UNFCCC (2001), Third Assessment Report


27

ANNEX 1

Table 4.

CHINA INDIA

SECTORAL SCOPE (UNFCCC) CERs Issued

CERs expected by 2012

CERs Issued

CERs expected by 2012

Energy industries (renewable - / non-renewable sources) 1,178,668 516,875,080 5,109,083 210,742,459 Energy distribution 233,735 Energy demand 781,160 614,535 Manufacturing industries 127,988,165 1,094,844 58,200,426 Chemical industry 111,072,676 Construction Transport 302,520 Mining/Mineral production 107,158,918 Metal production Fugitive emissions from fuels (solid, oil and gas) 104,579 260,942 4,368,997 Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride 23,741,104 386,381,511 20,311,128 78,456,528 Solvents use Waste handling and disposal 768,085 33,581,840 6,345,250 7,078,813 Afforestation and reforestation 176,942 983,840 Agriculture 96,000 TOTAL 25,792,436 1,283,235,132 33,902,407 361,077,854

Source: data gathered from UNEP Risoe (January, 2008); IGES (Janaury, 2008)

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