China chemical plant reaps "green" U.N. profit

Emma Graham-Harrison, Reuters 7 Dec 07;

CHANGSHU, China (Reuters) - 3F is one of China's top chemical firms with a plant outside the city of Changshu, which translates as constant harvest, that sends ingredients for everything from aerosols to fire-extinguishers around the world.

But the financial harvest the plant is reaping from its smallest, shiniest unit comes not from making a chemical, but destroying one.

Some 18 people run and monitor the unit round the clock, compared to the sprawling plant's 900 employees.

It rakes in millions of euros of revenue, much of which the plant uses to clean up its environmental standards, under a $5 billion scheme created by the Kyoto Protocol on global warming.

Several investors courted the company as early as 2004, and CDM Programme Manager Ellen Cai said 3F chose the World Bank because it offered expertise in boosting environmental protection for all 3F's product lines, rather than just cash.

"At that time there were a lot of companies talking to us, but they were not just a buyer, they also helped us improve environmental management on other programs. The other companies don't offer this," she told Reuters.

The U.N.-led scheme allows chemical plants to earn credits for destroying HFC-23, a waste product from the manufacture of a refrigerant and powerful greenhouse gas.

They can then sell these emission reduction offsets to rich countries which have overshot domestic greenhouse gas quotas.

Critics are concerned that the scheme is so lucrative that it has discouraged companies from cutting emissions of the greenhouse gas waste product, HFC 23, by giving them incentives first to produce it and then destroy it.

Some 190 countries are meeting in Bali from December 3-14 as they try to launch negotiations to agree a successor pact to the Kyoto Protocol.

One issue for debate is whether companies should be allowed to earn carbon offsets for destroying extra HFCs produced above 2000-2004 levels, the limit imposed under the present treaty.

China wants just that, but the European Union is opposed, fearing that will create an incentive for factories and their investors to produce carbon offsets purely for their own sake, harming the credibility of the scheme and of the emissions-cutting limits Kyoto imposes on rich countries.

SOCIAL RESPONSIBILITY

In a rare visit to one of the plants at the centre of the controversy, officials said they are using the windfall profit to make other production lines cleaner and pay for the incineration of additional HFC 23 not covered by Kyoto.

But the sharp-suited investors based especially in London and New York who have made big profits from other HFC programs are not making any similar payouts from their earnings, causing controversy about the role of the projects in a scheme ostensibly designed to foster sustainable development.

Changshu 3F has an annual quota of 10.43 million tonnes of offsets, based on destruction of 892 tonnes of the chemical - its 2004 output -- although it now produces around a third more.

That extra output could qualify for new offsets, depending on the outcome of the Bali talks, which are being closely watched by investors in the booming global carbon market.

HFC 23 is thousands of times more potent than the commonest manmade greenhouse gas carbon dioxide (CO2), and projects to destroy it account for more than half of all Kyoto emissions cuts.

That's because it's also cheap to destroy, compared to the cost of cutting emissions from generating renewable energy, for example. A U.N. report this summer found that plants can make up to 10 times more money than they need to destroy HFCs.

At present 3F sells the credits for 6 euros each, but then has to hand 65 percent of that cash straight to the government for a national clean development fund.

After deducting costs ranging from salaries to chemicals, the project still earns a profit of over 10 million euros, compared with up to 370 million yuan (34 million euros) of income from selling an equivalent amount of end product.

The company also voluntarily destroys extra production not covered by Kyoto, and invests an extra 10 to 20 million yuan a year in improving the environmental performance of other product lines, said Shen Xuezhong, the plant's deputy president.

That is driven partly by a government push for cleaner growth, and partly by basic business principles.

"This is our responsibility to society, but eventually we will have to do this, and if we don't do it now we will be eliminated from the competition one day," he told Reuters.

NO END FOR HFC 23

There is no likely end to the production of HFC-23 because manufacturing of HCFC-22 will continue even when its use as an ozone-depleting refrigerant is phased out by a 2040 deadline.

The gas is an increasingly important feedstock for products ranging from an ozone friendly refrigerant to firefighting chemicals and a precursor to teflon.

At present around half 3F's HCFC-22 output is sold as a refrigerant and half used or sold as feedstock, but the proportion that becomes coolant is expected to shrink to 30 percent by 2009, Cai said.

(Additional reporting by Gerard Wynn in Bali)