A recent paper published in Nature Climate Change describes how some Russian projects operating under the auspices of Kyoto Protocol’s Joint Implementation mechanism have increased waste greenhouse gas generation to unprecedented levels. These findings indicate that perverse incentives created by an emissions credit system are undermining some of the environmental integrity of the Kyoto Protocol’s initiatives. Better regulatory oversight is needed to ensure that the intent of the agreement is adhered to.

In 2005, the Kyoto Protocol established two project-based initiatives, the Clean Development Mechanism for emission reductions projects in developing countries, and the Joint Implementation for projects in industrialized countries. The latter covers Russia and most European Union countries, as well as a few others.

These initiatives provide emission reduction credits to companies if they eliminate any greenhouse gasses that are produced as waste. But revenues that companies receive from these credits can easily exceed the cost of reducing the waste in the first place. Ironically, this creates incentives for companies to increase production of these gases beyond the market demand for them, provided those gasses are not vented into the environment.

The authors of this paper specifically address Joint Implementation projects that incinerate gasses with high levels of global warming potential: two hydrochlorofluorocarbon-22 production plants in Russia, two sulphur hexafluoride production plants in Russia, and one trifluoroacetic acid production plant in France. Each of these plants produces an identified greenhouse gas as a byproduct of their main output. The incentives ensure that this byproduct is captured and destroyed.

The French plant attempted to address the incentives problem by capping plant emissions to historical levels, but strong historical data was not available, so this approach was only moderately successful.

Three of the four Russian plants initially applied caps on generation of these gases. But these caps were rendered toothless when the mechanisms for emission calculations were retroactively altered, removing these caps and giving credits for any waste gas that was destroyed, regardless of historical production. Additionally, the initial emissions data for these plants was later declared incorrect or inapplicable.

The fourth Russian plant never applied safeguards to avoid incentives for waste gas production—all waste gas destroyed was credited. From 2008-2010, the average waste generation rate at this fourth plant ended up at 16.9 percent, considerably higher than the default value of 0.2 percent suggested by the Intergovernmental Panel on Climate Change.

In the four Russian plants, higher levels of waste gasses were generated as soon as plant operators could gain credits by generating these gasses. This increase was not correlated with an increase in production of the plants’ actual products, and there were no reports of changes in plant capacity or design that could have affected the waste-generation rate.

In the absence of safeguards that prevent perverse incentives, increasing waste gas production beyond the levels that would occur if there were no crediting program leads to excess issuance of credits. The results of this investigation show that approximately two-thirds of the credits being issued in excess are happening in periods of time when there are no safeguards to prevent perverse incentives.

Without credits, plants would have economic incentives to reduce waste generation, but with the credits, these incentives were reversed.

The authors write that, unfortunately, increasing governmental control of these projects doesn’t seem to solve the problem. Under the Kyoto Protocol, Russia didn’t have any incentives to ensure the environmental integrity of the projects within its borders. Its emissions target is well above its actual emissions, so it can issue credits from its emissions budget without repercussions.

In the paper’s conclusions, the authors argue that international oversight is needed for future credit-based environmental initiatives, or we’ll simply perpetuate perverse incentives. Though it would be ideal if companies would engage in environmentally sound activities for ethical reasons, the data seem to show that economic motivations override environmental ones. Perhaps with more oversight this reality could be changed.

Nature Climate Change, 2015. DOI: 10.1038/NCLIMATE2772 (About DOIs).