A Kyoto Protocol scheme may be encouraging projects to emit more greenhouse gases because of incentives to earn carbon offsets from subsequently destroying these, a U.N. report said.
The projects under investigation are the most lucrative under Kyoto's Clean Development Mechanism (CDM) and account for more than half carbon offsets sold under the scheme. Limiting their output could impact carbon prices.
The $2.7 billion scheme allows companies and countries in the industrialised world to meet carbon caps by funding emissions cuts in developing nations, earning offsets called certified emissions reductions (CERs).
"There is a strong incentive to ... not improve the efficiency of the plant ... during any refurbishment because of the CDM benefits," said the report published late on Thursday.
"Further investigation is required ... to identify situations in which overestimation of CERs occurs and improve the methodology accordingly," it added.
The U.N. methodology panel advises the scheme's supervisory executive board on what types of carbon-cutting projects qualify for offsets.
It asked the board for "guidance on possible action" at its next meeting from July 26-30. Three out of 10 board members can form a blocking minority, making decisive action unlikely, said one carbon market expert on condition of anonymity.
The investigation was sparked when a green group earlier this year made a submission to the board saying said that the most profitable CDM projects, which destroy a potent greenhouse gas called hydrofluorocarbon-23 (HFC-23), were emitting more HFCs than necessary in order to destroy these and sell more CERs.
HFC gases are a waste product from the manufacture of refrigerants, and trap around 12,000 times more heat than the more common, climate-warming carbon dioxide. Most HFC projects are registered in China and India.
In its submission to the executive board, green group CDM-Watch said plants "intentionally operated in a manner to maximise the production of CERs", and produced less HFC-23 during periods when they were unable to request CERs.
Thursday's report said that the efficiency of refrigerant plants was improving, and that "it is probable" that new factories unable to claim carbon offsets were producing fewer waste greenhouse gases than those registered under the CDM.
Among "possible actions", the report proposed: "A reconsideration of a cap ... at a level representing the best available technology," which could be half the present cap on the production of HFC-23.
Benchmark CER futures were trading at around 13 euros ($15.91) a tonne on Friday.
(Reporting by Michael Szabo; Editing by Gerard Wynn)