EU companies spent around €860 million last year buying 78 million international offset credits (CERs) in order to meet their emission caps under the EU's cap-and-trade scheme.
The credits, issued under the UN's Clean Development Mechanism (CDM), are designed to allow companies to meet their targets more cost-effectively by financing projects that reduce greenhouse gas emissions in developing countries.
An analysis of UN and EU data on credits bought in the EU last year by green NGO Sandbag showed that steel companies in China and India were benefiting directly from money flowing from European competitors.
German steel company Salzgitter's 'Glock Salzgitter' plant, for instance, bought 40,000 credits from an Indian steel project, the NGO said. The company offset 99.5% of its emissions with CERs, escaping the need to improve domestically, it added.
Indeed, over two million steel CERs worth some €22 million were surrendered by EU companies in 2009, according to Sandbag. The NGO argues that this contradicts the European steel industry's vocal lobbying against tight emissions caps, which they claim would put them at a competitive disadvantage and force them to relocate abroad.
Bryony Worthington, Sandbag's founder and director, regretted that EU installations seem to have a greater incentive to fund abatement projects among their competitors than to invest in such improvements themselves.
"While it is perfectly legal and on one level economically rational to do this, it begs the question of why companies would choose to send a direct subsidy to their international competitors if fears of carbon leakage were so pronounced," she said.
So-called carbon leakage occurs when industries choose to relocate abroad to escape climate regulations, leading to a shift in emissions from one region to another.
Gas projects fueling climate change
According to Sandbag, the 2009 data shows that the majority of credits were bought from projects that destroy industrial gas HFC.
The CDM Methodologies Panel, which advises the CDM Executive Board, is currently investigating the crediting of projects that destroy HFC-23, a potent greenhouse gas, which is a by-product of manufacturing a refrigerant gas called HCFC-22.
A report by CDM Watch, a group of green NGOs, showed that companies were playing the system by producing more greenhouse gas than they would have done without the CDM in order to collect credits.
Destroying HFC-23 only costs around €0.17 per tonne of CO2, and yet Europeans are paying around €11 - the price of one credit - to destroy one tonne, said Fionnuala Walravens of the Environmental Investigation Agency (EIA), an NGO. She called on the EU to remove projects that destroy HFC-23 from the EU ETS.