Updated: Carbon market under fire as UN suspends British CDM project accreditor

The credibility of the UN's flagship carbon offsetting scheme, the Clean Development Mechanism (CDM), has received a fresh body blow after one of the leading auditors of emission reduction projects was suspended from the scheme amidst allegations it had failed to properly vet projects that it had approved for CDM accreditation.

The CDM's executive board announced late last week that it had suspended SGS UK from the scheme after spot-checks revealed a number of irregularities in the accreditation firms' processes for certifying emission reduction projects for entry into the CDM.

According to reports, SGS, which is the world's largest accreditor of CDM projects, was unable to prove its staff had properly audited projects, nor that they were qualified to do so.

The move echoes a similar suspension that was meted out to one of SGS' chief competitors, Norwegian accreditation firm DNV, last November after it was found to have authorised five projects for entry into the CDM, despite not having surveyed them.

SGS today issued a statement insisting that it submitted corrective actions to the CDM board last month and "remained committed to addressing the issues raised by the CDM Executive Board and would expect that the temporary suspension will only impact a limited number of projects".

It added that it was surprised at having been issued with "such a harsh sanction as a temporary suspension" given its swift response to the issues raised.

"We are committed to the re-instatement of our accreditation as quickly as possible," said Michael Fahy, head of environmental services at the company. " This will presumably take a few weeks to complete and is dependant upon the schedule of the CDM Executive Board, and the availability of their audit team."

The company said that it will continue to undertake verification work on the projects it is already assessing, but it will have to wait until its suspension has been removed to officially submit projects for entry to the CDM and as a result some projects will have to wait a few weeks longer than expected for approval.

"We are currently contacting our customers and explaining the situation to them and are doing our utmost to rectify matters as soon as possible," added Fahy.

The suspension will come as a further blow to the CDM, which has faced consistent criticism from green groups who have accused it of failing to adequately ensure that projects selling certified emission reduction (CER) carbon credits have delivered real and quantifiable emission reductions.

Despite the fact that supporters of the CDM argue that it offers more robust accreditation criteria than the voluntary offset projects, a number of investigations have revealed projects that should not have been allowed to issue credits have been approved for entry to the scheme.

One such study from WWF estimated that as many as fifth of the CERs in a global primary CDM market estimated to be worth around €6.5bn last year had originated from "non-additional" projects that should not have been approved as they would have gone ahead even if they had not received extra income by selling carbon credits.

A second report from the lobby group released in May assessed the performance of the five firms assigned to audit CDM projects and found widespread problems across the sector. Rated on a scale from A to F, TÜV-Nord and TÜV-Süd received the best rating with a D grade. SGS received an E rating, while BV Cert and DNV were awarded F grades.

Speaking to BusinessGreen.com, Kirsty Clough, climate change policy officer at WWF, said that the suspension of SGS did prove that the UN was willing to "show some teeth" and act against firms that fail to properly audit projects, but she added that the scheme was still facing fundamental flaws.

"It's worrying that some of these companies are not undertaking adequate due diligence on projects," she said. "The problem is that the verifiers are paid by the project operators, so there is a vested interest to approve as many projects as possible. We would like to see the scheme changed so that the CDM Executive Board randomly appoints the verifiers to the projects."

The CDM Executive Board is currently in the process of debating wide-ranging reforms to the scheme, including proposals to extend it to cover carbon capture and forestry protection projects. It also announced last week that it has agreed a new policy framework designed to better assess the performance of verification firms.

In related news, the board also received the first registration of a so-called programme of activities (PoA) CDM project that has seen a number of energy-efficient lighting projects in Mexico apply for entry to the scheme.

Under the rules for PoAs, a number of different emission reduction projects in a region can join together to apply for CDM accreditation, in the process reducing the cost of entry to the scheme, which critics have argued is too high for many small-scale community projects.