By Gerard Wynn LONDON, Aug 22 (Reuters) - Chemical plants in China can earn substantial windfall profits by destroying powerful greenhouse gases, underlining the need for changes to the rules of a Kyoto Protocol incentives scheme, a U.N. report shows. Western investors who trade carbon credits may also make windfall profits from the scheme in its present form, Reuters data show. China, with its fast-growing economy, has become crucial to the global fight against climate change. It is set to overtake the United States this year as the biggest emitter of the commonest greenhouse gas, carbon dioxide. But it has also become a big beneficiary of incentives to destroy more powerful greenhouse gases, through a scheme set up under the Kyoto Protocol on global warming. Those incentives now appear very generous, the report by the United Nations Environment Programme (UNEP) showed. Factories in China, and others in India, Mexico, Argentina and South Korea, will earn up to 10 times more money than they actually need to destroy the powerful greenhouse gases, the report found. It suggested that "national levies are applied to limit the financial gain of individual manufacturers," after the first cycle of project funding ends in seven years. Kyoto is meant to fight global warming, and allows rich countries to buy carbon offsets, or carbon credits, which help them meet limits on their emissions by paying for emissions cuts in developing nations. The refrigerant industry in developing countries produces greenhouse gases so powerful that destroying them earns factories and their investors millions of such credits. The projects, based especially in China, have proved controversial, both because western speculators have profited, and because they may inadvertently drive up output of the greenhouse gas, called HFC 23. The scheme, called the clean development mechanism (CDM), is the best available for now, the report said. "The CDM itself is the only reliable mechanism available to prevent HFC 23 emissions in the short term," the report said. HOT AIR The scheme is so generous that chemical plants will earn more money destroying the greenhouse gas, previously an unintended waste product, than producing the refrigerant gas, it said. They will earn up to $880 million a year from selling carbon credits, compared with up to $510 million from selling the refrigerant gas. Such distortions may make the resulting carbon credits mere "hot air", because without the scheme factories would probably be more efficient, adopting widely available technologies that cut production of the greenhouse gas, said Stanford University's Michael Wara. HFC projects account for more than half of all emissions cuts achieved under the CDM so far. Western investors, such as London-based Climate Change Capital and New York-based Natsource, may also earn windfall profits from the scheme. HFC projects will generate more than 600 million tonnes of carbon credits in their first seven years -- the usual crediting period -- the UNEP report says. Investors based in London and New York have bought carbon credits from chemical plants for as little as 6 euros per tonne, and can now sell them at 16 euros per tonne, Reuters data show. Governments that signed the Kyoto Protocol will discuss changes to the rules of the carbon trading scheme at a meeting in December in Bali, Indonesia. http://ozone.unep.org/Assessment_Panels/TEAP/Reports/TEAP_Reports/TEAP-TaskForce-HCFC-Aug2007.pdf
