Global Policy Forum

By Jeffrey Ball

A United Nations program designed to combat global warming has started doing something no one expected: It is subsidizing fossil-fuel power plants that spew millions of tons of greenhouse gases into the atmosphere annually.

This unforeseen turn is fanning new doubts about the environmental efficacy of the U.N.'s "carbon trading" program -- the most ambitious effort yet to curb emissions of carbon dioxide and other greenhouse gases where they're rising the fastest, in the developing world.

Concern about the program is spreading to the U.S. Doubts about the validity of some pollution-cutting projects in the developing world were one factor in the Senate's rejection last month of a bill that would have capped U.S. greenhouse-gas emissions. The U.N. is now venturing further onto controversial turf. In recent months it has opened the door to subsidizing new coal-burning plants. Advocates argue that modern, cleaner-burning fossil-fuel technology is expensive, and without help paying for it, owners would build old-style plants that pollute more.

U.N. officials strongly defend their approach. For more than a year, they have been taking a harder line in judging proposed emission-cutting projects of all stripes, they point out. And since the world is widely expected to continue to get most of its energy from fossil fuels for decades, U.N. officials say it's entirely appropriate for the program to subsidize plants that burn that fuel more cleanly.

"Some of the countries in this world are endowed with fossil fuels," says Rajesh K. Sethi, an Indian government official who is chairman of the U.N. board that polices the subsidy program. "It is in the world's best interest that they use it as efficiently as possible."

Critics say the U.N. program is straying from its purpose of promoting renewable-energy projects. "Coal is, like, climate enemy No. 1," says Michael Wara, a Stanford University lecturer who has published several papers criticizing the U.N. program. For every unit of power it produces, burning coal generates more greenhouse gas than burning natural gas. Mr. Wara argues that India and China are already building more-efficient plants anyway, since doing so makes economic sense at a time of rising energy prices. Using the U.N. program to subsidize these plants wastes money that could be used for other clean-energy projects.

Despite growing talk of shifting away from fossil-fuel use, none of the world's big countries want to have to pay for that to happen. That strain was on display this week, as diplomats met in Japan to try to cobble together a more-forceful international agreement to curb emissions of greenhouse gases.

On Tuesday, leaders of the Group of Eight industrialized nations set a goal of cutting emissions 50% by 2050, but made it nonbinding and didn't detail how they would meet it. On Wednesday, representatives of developing countries such as India and China declined to endorse even that loose target, saying it would hit their economies too hard.

Among the coal plants seeking subsidies under the U.N. program is a $4 billion behemoth currently under construction in the western Indian state of Gujarat. When it is finished in 2012, it will be one of the biggest coal-fired plants in the world.

The developer, Indian electricity producer Tata Power Co., is seeking about $36 million a year in subsidies, arguing that the alternative would have been to build a cheaper, less-efficient power plant.

The U.N. hasn't yet officially considered Tata Power's application, but the proposal has powerful backers. Among them: The World Bank Group's International Finance Corp. and the Asian Development Bank, each of which has loaned Tata Power $450 million to fund the plant.

"Let's be honest with ourselves," says Darius Lilaoonwala, senior manager of the International Finance Corp.'s power department. "These countries are going to need fossil-fueled electricity just like the U.S. and Europe. So let's encourage them to do the most-efficient technology possible."

"Of course, if you build a coal factory, it's not good for the environment," adds Tsukasa Maekawa of the Asian Development Bank. But countries that have a lot of coal are going to burn it, he says, so helping them finance more-efficient plants makes sense.

Fundamental Principle

One of the fundamental principles of the U.N. initiative, called the Clean Development Mechanism, is that it should subsidize pollution-cutting projects only if they would otherwise be too expensive to build. The Tata Power plant, however, will be built whether or not it gets the U.N. program's financial aid. The power plant "has to go on. We've already started the project," says Prasad Menon, Tata Power's managing director.

In addition, the Indian government essentially required the plant to use high-efficiency technology. Mr. Menon argues the project should still receive the U.N. subsidies because "it's a good move for the West to encourage India to move in this direction." This tension has dogged the international global-warming campaign since its inception. Under a 1997 treaty, the Kyoto Protocol, most industrialized countries other than the U.S. agreed to cap their greenhouse-gas emissions. They then required heavily polluting companies within their borders to cut their emissions over time.

Developing countries didn't accept emission caps, arguing that stunting their economic growth to cope with a century's worth of pollution from the developed world would be unfair. As a compromise, the treaty created the Clean Development Mechanism, which aims to chip away at developing-world emissions one project at a time.

Under the U.N. program, companies in wealthy nations can meet their environmental obligations at home by financing pollution-cutting projects in the developing world. Companies in the developing world get cash, while the companies in the West get "carbon credits" -- permission slips to continue coughing out their own carbon dioxide and other greenhouse gases. The system is designed to curb world-wide emissions at the lowest possible cost.

But the system works only if the developing-world projects actually cut emissions. If projects such as coal- and gas-fired plants India and China would have been built even without financial aid, then the U.N. program isn't actually cutting emissions. The U.N. has the job of assessing the environmental validity of developing-world projects that seek subsidies. But gauging whether a proposal actually cuts emissions is tricky. The U.N. board must make two judgment calls: whether the project would reduce the country's emissions below what they otherwise would be, and whether the project would have been built even without the U.N. subsidy. It's a "hypothetical thing," says José Domingos Gonzalez Miguez, a Brazilian government official on the U.N. board. "This is the problem."

Every month or two, the board's 20 members fly to Bonn, Germany. There, in a U.N. high-rise, they meet for several days, poring over proposed projects. The meetings are posted on the Internet and watched by investors with big money riding on the decisions. The U.N. program was created to encourage renewable-energy projects. But in May 2006 the board approved the concept of letting gas-fired power plants sell carbon credits. A stream of gas-fired plants began applying.

Three of the biggest plants sit near each other in the east China province of Zhejiang, near Shanghai. Construction on all three had begun before the U.N. board's decision.

The owners of the three plants argued in their U.N. applications that the cheapest way for them to generate electricity would have been to build coal-burning plants. But because they had built more-efficient gas-fired plants, they argued, they deserved permission to sell a carbon credit for every extra ton of carbon dioxide that, according to their calculations, their plants would have emitted had they been built to burn coal.

Together, the three plants were seeking permission to sell 2.7 million carbon credits each year. A credit represents permission to emit one ton of carbon dioxide a year. Given that such credits from developing countries are now selling for about $13 apiece, U.N. approval would translate into about $35.1 million a year for the owners of the three plants combined. The value of carbon credits from projects in the developing world was $7.4 billion last year, up 28% from 2006, according to the World Bank. Based on projects that have applied so far to sell carbon credits through 2012, when the Kyoto treaty's emission caps expire, fossil-fueled power plants account for only about 7% of the market, according to U.N. figures. But their share has been growing rapidly.

The architects of the U.N. program hoped it would spark a renewable-energy revolution, inducing a shift away from fossil fuels and toward everything from the sun to the wind to animal waste. In fact, renewable energy accounts for only about one-third of the carbon credits proposed to be issued through 2012, according to U.N. figures.

The owners of the three Chinese gas-fired plants worked with a broker that specializes in organizing carbon-credit projects. That firm, in turn, had hired a Norwegian auditing company, Det Norske Veritas, to certify that the plants' in-house emissions calculations were accurate. (The U.N. board authorizes auditors to do this kind of work on its behalf.) In early 2007, Det Norske Veritas recommended all three projects to the U.N. board.

Today, Michael Lehmann, technical director for climate-change services at Det Norske Veritas, says he still believes the three Chinese power plants audited by his firm properly qualified for subsidies under the existing rules. But dozens of gas-fired plants in China are now rushing to snag carbon-credit revenue. That suggests the system "doesn't seem to be right any longer," he says -- it's unrealistic to think that none of them would be financially viable without the subsidies, particularly since so many are already built and running.

Mr. Sethi, the U.N. board chairman, says each of the plants the board has approved complies with the rules as they exist. "Each project is seen on its own merits," he says, declining to say whether he thinks the higher-level diplomats who made that policy should change it. "We are simply the implementing tool," he says of the board he heads.

Officials of the companies that own the three Chinese gas-fired plants defend their applications, saying they comply with the program's rules. "Gas is within [the] terms," says Li Jian, who works in the production technology department of one of the power companies, Zhejiang Guohua Yuyao Fuel Gas Power Generation Co. "So we got approved."

The three plants' applications were still pending before the U.N. board when, in early 2007, two coal-fired plants applied for permission to sell carbon credits. That prompted several months of testy debate among members of the U.N. board, who were conscious of how politically controversial the idea was.

Board members from developing countries that don't burn a lot of coal argued against approving the coal-fired plants. Mr. Miguez, the board member from Brazil, said it violated the U.N. program's intent.

"This would create loopholes," he said. "We are here as the board of the Clean Development Mechanism. And I think we should stress the word 'clean.'"

But members from countries that stood to gain from the proposal supported it. They included members from Canada and Japan -- both industrialized countries that accepted emission caps under the Kyoto treaty, and which therefore were hunting for cheap carbon credits to buy. Also supporting the applications from the coal plants were board members from India and China, two developing countries for whom domestic coal is a cheap energy source.

The proposal would "be of very great use in countries like India and China," Mr. Sethi, the board member from India, told his colleagues during one of the meetings that was broadcast online.

Board Approval

The board approved the coal proposal in September 2007, after adding provisions phasing out the rule over time and reducing the number of carbon credits any coal-fired plant could sell. A few months later, the board approved the three Chinese gas-fired power plants' applications to sell carbon credits. And Tata Power formally asked the board to approve the sale of carbon credits from the massive coal-fired plant the company was developing in Gujarat.

Tata says the plant will emit an average of 26.7 million tons of carbon dioxide annually during its first decade of operation. That's 2.8 million fewer tons than the plant would discharge if it used the less-efficient coal-fired technology prevalent in India today, it says. So Tata is asking the U.N. to let it sell 2.8 million carbon credits annually. That would be worth about $36 million at current market prices.

The Tata plant has its roots in an electrification push by the Indian government. The government had rolled out plans in early 2006 for about a half-dozen huge coal-fired power plants. Dubbed by the government the "ultra mega" plants, they would each be able to produce a sizable 4,000 megawatts of electricity.

Tata Power's application to sell carbon credits is being reviewed by Det Norske Veritas, the auditing firm. The firm's Mr. Lehmann says he has his doubts about Tata's bid. "Look at the facts," he says. "The project has received funding. It's part of the policy of the government to implement this type of project," he says. Whether the plant needs carbon-market money "is really questionable." Mr. Lehmann says that the auditing firm is still looking into the project and hasn't yet made its recommendation.

In May, a second Indian coal-fired plant applied for U.N. permission to sell carbon credits.