Correction Appended
RANJIT NAGAR, India - When the United Nations wanted to help slow climate change, it established what seemed a sensible system.
Greenhouse gases were rated based on their power to warm the atmosphere. The more dangerous the gas, the more that manufacturers in developing nations would be compensated as they reduced their emissions.
But where the United Nations envisioned environmental reform, some manufacturers of gases used in air-conditioning and refrigeration saw a lucrative business opportunity.
They quickly figured out that they could earn one carbon credit by eliminating one ton of carbon dioxide, but could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of a widely used coolant gas. That is because that byproduct has a huge global warming effect. The credits could be sold on international markets, earning tens of millions of dollars a year.
That incentive has driven plants in the developing world not only to increase production of the coolant gas but also to keep it high - a huge problem because the coolant itself contributes to global warming and depletes the ozone layer. That coolant gas is being phased out under a global treaty, but the effort has been a struggle.
So since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage.
The United Nations and the European Union, through new rules and an outright ban, are trying to undo this unintended bonanza. But the lucrative incentive has become so entrenched that efforts to roll it back are proving tricky, even risky.
China and India, where most of the 19 factories are, have been resisting mightily. The manufacturers have grown accustomed to an income stream that in some years accounted for half their profits. The windfall has enhanced their power and influence. As a result, many environmental experts fear that if manufacturers are not paid to destroy the waste gas, they will simply resume releasing it into the atmosphere.
A battle is brewing.
Disgusted with the payments, the European Union has announced that as of next year it will no longer accept the so-called waste gas credits from companies in its carbon trading system - by far the largest in the world - essentially declaring them counterfeit currency. That is expected to erode their value, but no one is sure by how much.
"Consumers in Europe want to know that if they're paying for carbon credits, they will have good environmental effects - and these don't," Connie Hedegaard, the European commissioner for climate action, said in an interview.
Likewise, the United Nations is reducing the number of credits the coolant companies can collect in future contracts. But critics say the revised payment schedule is still excessive and will have little immediate effect, since the subsidy is governed by long-term contracts, many of which do not expire for years.
Even raising the possibility of trimming future payments "was politically hard," said Martin Hession, the immediate past chairman of the United Nations Clean Development Mechanism's executive board, which awards the credits. China and India both have representatives on the panel, and the new chairman, Maosheng Duan, is Chinese.
Carbon trading has become so essential to companies like Gujarat Fluorochemicals Limited, which owns a coolant plant in this remote corner of Gujarat State in northwest India, that carbon credits are listed as a business on the company Web site. Each plant has probably earned, on average, $20 million to $40 million a year from simply destroying waste gas, says David Hanrahan, the technical director of IDEAcarbon, a leading carbon market consulting firm. He says the income is "largely pure profit."
And each plant expects to be paid. Some Chinese producers have said that if the payments were to end, they would vent gas skyward. Such releases are illegal in most developed countries, but still permissible in China and India.
As the United Nations became involved in efforts to curb climate change in the last 20 years, it relied on a scientific formula: Carbon dioxide, the most prevalent warming gas, released by smokestacks and vehicles, is given a value of 1. Other industrial gases are assigned values relative to that, based on their warming effect and how long they linger. Methane is valued at 21, nitrous oxide at 310. HFC-23, the waste gas produced making the world's most common coolant - which is known as HCFC-22 - is near the top of the list, at 11,700.
The United Nations used the values to calibrate exchange rates when it began issuing carbon credits in 2005 under the Clean Development Mechanism. That system grants companies that reduce emissions in the developing world carbon credits, which they are then free to sell on global trading markets. Buyers of the credits include power plants that need to offset emissions that exceed European limits, countries buying offsets to comply with the Kyoto Protocol - an international environmental treaty - and some environmentally conscious companies that voluntarily offset their carbon footprint.
Since the United Nations program began, 46 percent of all credits have been awarded to the 19 coolant factories, in Argentina, China, India, Mexico and South Korea. Two Russian plants receive carbon credits for destroying HFC-23 under a related United Nations program.
"I was a climate negotiator, and no one had this in mind," said David Doniger of the Natural Resources Defense Council. "It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head."
Destroying the waste gas is cheap and simple, but it is hard to know exactly how much any one company has earned from doing so, since the market price for carbon credits has varied considerably with demand - from about $9 to nearly $40 per credit - and they can be sold at a discount through futures contracts.
The production of coolants was so driven by the lure of carbon credits for waste gas that in the first few years more than half of the plants operated only until they had produced the maximum amount of gas eligible for the carbon credit subsidy, then shut down until the next year, United Nations reports said. The plants also used inefficient manufacturing processes to generate as much waste gas as possible, said Samuel LaBudde of the Environmental Investigation Agency, an organization based in Washington that has long spearheaded a campaign against what he called "an incredibly perverse subsidy."
Michael Wara, a law professor at Stanford University, has calculated that in years when carbon credits were trading at high prices and coolant was dirt-cheap because of the oversupply, companies were earning nearly twice as much from the credits as from producing the coolant itself.
The United Nations, recognizing the temptation for companies to jump into the lucrative business, has refused since 2007 to award carbon credits to any new factories destroying the waste gas. And last November, it announced that in contract renewals, factories could claim credits for waste gas equivalent only to 1 percent of their coolant production, down from 3 percent. The United Nations believes that eliminates the incentive to overproduce, said Mr. Hession, the former Clean Development Mechanism board chairman.
Even with these adjustments, credits for destroying waste gas this year remain the most common type in the United Nations system, which rewards companies for reducing all types of warming emissions. Eighteen percent of credits in 2012 will go to the 19 coolant plants, compared with 12 percent to 2,372 wind power plants and 0.2 percent for 312 solar projects for the carbon dioxide emissions avoided by the clean energy they produce.
In India, coolant plants received about half of the United Nations carbon credits awarded to companies in that country, for destroying their waste gas, during the system's first five years. They accrued the power and money to fight efforts to roll back the subsidy.
Compared with Indian representatives, Chinese diplomats have shown greater willingness at international meetings to consider altering the subsidy for waste gas credits, said Stephen O. Andersen, a former United States Environmental Protection Agency official who is now with the Institute for Governance and Sustainable Development in Washington. That is because China has a more centrally controlled economy and because it is developing an industry based on newer coolants. "It's easier for them to put the national interest before the interest of one manufacturing sector," he said.
A bigger question is just how much the European Union's decision to disallow, as of next year, the waste gas credits in its immense carbon trading system will decrease their value.
Banks and companies holding such credits have been rushing to cash them in or sell them. And the potential devaluation of the carbon credits has an impact in other industrialized nations, since the carbon credit projects involve foreign sponsors and investors, who sometimes received carbon credits in exchange for services or financing.
The Gujarat project was financed by Rabobank of the Netherlands and the Sumitomo Corporation of Japan.
A coolant factory in Monterrey, Mexico, that receives carbon credits is 49 percent owned by Honeywell. Goldman Sachs bought many of its carbon credits.
Such credits are likely to have some continued value, because they can be used in other environmental programs that allow their use, like voluntary ones through which companies offset the emissions generated by having a conference or travelers opt to pay a fee to offset the emissions from an airplane flight.
Mr. LaBudde, of the Environmental Investigation Agency, who has long campaigned against the subsidy, said he hoped that no one would buy these "toxic" credits that "have no place in carbon markets" and that they would quickly disappear. In its latest annual report, Gujarat Fluorochemicals acknowledged that its carbon credits "may not have a significant market" starting next year because European companies have previously been their primary buyers.
Mr. Hanrahan, of IDEAcarbon, said that the credits could, at the very least, be sold at a low price to traders who see the possibility for marginal profit in a way similar to the market for junk bonds. Even if all the proposals to make the carbon trade far less valuable succeeded, the 19 factories certified to generate carbon credits by destroying the waste gas could earn $1 billion from that business over the next eight years, according to projections by IDEAcarbon.
And even as the economics shift, one big environmental question remains: Without some form of inducement, will companies like Gujarat Fluorochemicals continue to destroy the waste gas HFC-23? Already, a small number of coolant factories in China that did not qualify for the United Nations carbon credits freely vent this dangerous chemical. And atmospheric levels are rapidly rising.
Elisabeth Rosenthal reported from Gujarat State, India, and Andrew W. Lehren from New York.
