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The rush to go green could end in the red

By Fiona Harvey in London and Jonathan Wheatley in S„o PauloFinancial Times, April 26 2007 22:07

The rush to go green suggests easy money for investors in projects that reduce carbon dioxide output. The reality is otherwise: many carbon projects turn out to be high risk.

Project failures and over-optimism among developers, together with a tendency to exaggerate in applications, mean that 40-50 per cent of the carbon credits anticipated under the Kyoto protocol will never be delivered, carbon traders and analysts say.

Tom Frost, carbon analyst at Numis Securities, said: “I would expect that about half of the credits would not come through in the end.”

The Kyoto treaty requires qualifying projects to be certified by the United Nations clean development mechanism (CDM) board. In the same grand buildings on the banks of the Rhine in Bonn where the Marshall Plan was drawn up after the second world war, the UN clean development board scrutinises applications.

UN officials say developers tend to overestimate the number of credits their projects will generate, in part because they incorrectly assume that the number in their application request will act as a ceiling. In fact, developers can claim more credits, provided that extra emissions can be verified. Other projects suffer long delays or are abandoned.

For instance, the FT visited a project to generate energy from waste at the University of Rio de Janeiro, which began seven years ago.

“We’ve had a lot of delays and a lot of difficulties,” said Henrique Saraiva, UsinaVerde’s chief executive. “We were approached by buyers [of carbon credits] long before we were ready to sell.” He said the main problem was in building partnerships with engineering companies. Two firms worked on the project and pulled out before UsinaVerde finally reached agreement with a smaller outfit.

The pilot project has been monitored by Bureau Veritas Quality International, a Paris-based certification company. By the end of May, its voluntary emission reduction credits should go on sale, three years after its pilot unit began operating. If the project is taken up by city councils and reproduced on a larger scale, plants should qualify for UN emission reduction certificates. UsinaVerde’s technology was approved as a clean development mechanism by Brazilian certifiers in October 2005.

Another project to set up solar panels in South Africa, from which the German charity Atmosfair was hoping to buy UN credits, appears to have been delayed indefinitely, as the city of Cape Town has hit difficulties finding finance.

However, the UN said that its processes, which have been criticised for being lengthy, bureaucratic and expensive, produced carbon credits of a reliably high standard. The UN credits trade at about 25 per cent higher than equivalent credits in the unregulated voluntary market.

The board sends projects back to the developers for amendment if there is evidence of fraud, malfeasance or incompetence. By late March, officials said 570 projects had been approved and only 14 sent back, all for incompetence. They attributed the low failure rate to the stringency of the process. “If you were fraudulent, you would be less likely to apply under the CDM,” one official said.

Copyright The Financial Times Limited 2007


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