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LONDON (Reuters) - Firms participating in a Kyoto Protocol carbon scheme are abusing it by artificially inflating their greenhouse gas emissions, thereby allowing rich nations' emissions to rise significantly, a watchdog said on Saturday.
Under Kyoto's Clean Development Mechanism (CDM), worth $2.7 billion in 2009, companies can invest in carbon-cutting projects in emerging economies, and in return get carbon offsets that can be used against their own emissions.
Findings released by CDM Watch, an initiative of non-governmental organizations, showed the most lucrative projects in the CDM, chemical plants that destroy a potent gas called hydrofluorocarbon-23 (HFC-23), may have inflated their emissions in order to destroy them and sell more offsets.
It also found that plants produced less HFC-23 during periods when they were unable to request CDM offsets, called Certified Emissions Reductions (CERs).
"Analysis of monitoring data from all registered HFC-23 destruction projects revealed that plants are intentionally operated in a manner to maximize the production of CERs," CDM Watch said in a statement. "Because of the extra revenue ... far more HFC-23 is generated than would occur without the CDM."
Due to inaction by the CDM's executive, CDM Watch said it made an official submission calling for new CERs handed to HFC projects to be discounted by over 90 percent, and for projects up for renewal to be reviewed at a panel meeting from June 21-25 and by the executive when it meets in late July.
"It would ... remove the current financial incentive that causes plants to produce gas for the sole purpose of getting paid to destroy it," said CDM Watch director Eva Filzmoser.
"It's completely unacceptable for the UN to keep issuing an inflated number of bogus credits that create vast profits for carbon trading groups and chemical companies."
If approved, the revision could drastically alter the 2,236-project strong CDM, which to date has been ruled by the credits of 19 HFC projects, mainly in China and India.
Because HFC-23 traps nearly 12,000 times more heat than a molecule of carbon dioxide, and because it is cheap to destroy, HFC offsets account for more than half of the 420 million CERs issued to date by the UN's climate change secretariat.
Industry participating in the EU's Emissions Trading Scheme, which forces firms to turn in carbon permits against every tonne of carbon dioxide they emit, also surrendered over 100 million HFC credits in the past two years.
Slashing the flow of HFC offsets would starve an already scarce CER supply, expected to total under 1 billion by 2013.
If the U.S. launches an emissions scheme that accepts CERs, global demand could exceed 10 billion tonnes by 2020, an amount unlikely to be met even with the current flow of HFC CERs.
CDM Watch made the submission after the second HFC project registered, a South Korean plant owned by Britain's Ineos Group, requested another 7-year crediting period which would see it get 2.2 million CERs annually to 2016.
CERs currently trade around 13.00 euros ($15.65) each.
Ineos Group was not immediately available for comment.
Projects are only approved under the CDM if they can prove they are "additional," that they would not have gone ahead without the prospect of the revenues from selling CERs. Critics say CDM projects that are not truly additional contribute to global warming by allowing buyers of their CERs to pollute more.
"The exact amount of the environmental damage cannot be determined but the data suggests that millions of credits have been issued which do not present real emission reductions," said Chaim Nissim, head of environmental group Noe21.
CDM Watch cited two plants that cut HFC-23 generation when they were ineligible for crediting, and increased production once they could again claim CERs for its destruction. One even stopped HFC production when it was not allowed to request CERs, just to resume when it became eligible again, it added.
CDM Watch also revealed that many plants produced exactly the amount of HFC-23 they are allowed to claim credits for, even though chemical production was lower or varied annually.
Editing by Louise Heavens