The billion-pound cost of badly-drafted green taxes

The EU is paying billions of pounds to foreign corporations to produce and then destroy greenhouse gases due to a loophole in the emissions trading scheme, according to a report from the think tank Civitas released this week.

The clean development mechanism (CDM) is a subset of the emissions trading scheme designed to encourage developing nations to clean up their industry. Emission credits, CERs, are generated by emission reducing projects outside of the EU and can be sold on, to encourage green investment.

Owing to the fact that some greenhouse gases are far more damaging than carbon dioxide, extra credits are given for reducing those emissions. One, HFC-23, a gas found in coolers, is 11,700 times more damaging, and so credits worth 11,700 tonnes of carbon are given for every tonne destroyed.

This means that a gas that costs only €0.17 per tonne of CO2-equivalent to destroy creates credits worth €12 for every tonne.

As Civitas reports:

Little wonder then that some firms, especially in China, now create refrigerant gases just to create the HFC-23 that they then destroy, to reap the rewards.

Indeed, of the largest ten generators of CERs, seven are HFC destruction facilities, showing just how lucrative a system it is.

Having cottoned on to this, the Chinese government has also been making a significant sum out of the scheme.

It charges a 65 per cent tax rate on HFC-23 CDM profits, which goes into a supposed ‘sustainable development fund’, the purpose of which is unclear. It has been estimated that, by 2012, the Chinese government will have generated $1.7 billion [£1.1 billion] from the tax.

This loophole was eventually banned in January last year, but the ban will only take effect from May 2013, “as a result of intense lobbying pressure from various organisations.”

The lesson to learn from this issue is that getting support for green taxes is only half the battle. If the drafting of the bills is left to the businesses and special interest groups, then this sort of problem will be endemic.

Green taxes must, first and foremost, reduce emissions. If they don’t, then they must be opposed, not supported, by environmentalists.

See also:

• Tabloid attacks on green movement mean we have to raise our game – Reg Platt, November 29th 2011

• On the Financial Transaction Tax, why is Osborne on the side of the one per cent? – Shamik Das, November 2nd 2011

• Gideonomics: A rogue chancellor fails to run the greenest government ever – Eleanor Besley, October 19th 2011

• The challenges facing new transport secretary Justine Greening – Richard Hebditch, October 17th 2011

• Exclusive: 98 of the FTSE 100 companies are addicted to tax havens – Asha Tharoor, October 11th 2011