Rich Countries to Pay Energy Giants to Build New Coal-Fired Power Plants

The UN is set to channel billions of pounds of public money from rich countries to giant energy companies to build 20 heavily polluting coal-fired power plants on the basis that they will emit less carbon dioxide than older ones.

Data seen by the Guardian shows that 12 companies have applied to the UN for hundreds of millions of emission reduction credits to subsidise "efficient" coal-fired power stations in China and India. Many of the plants would be paid for with carbon offsets bought by British and European companies in lieu of cutting their own emissions.

If, as expected, the power company applications are approved by the UN Framework Convention on Climate Change (UNFCCC), they will earn around PS3.5bn at current carbon market prices. This would make the UN body set up to promote clean energy and reduce global climate emissions one of the world's largest provider of funds for new coal burning.

The rush by companies to take advantage of the UN's Clean Development Mechanism (CDM) subsidies follows the successful application for credits by the Indian Adani coal group for two large power stations at Mundra in Gujarat, India. Adani will earn around PS25m a year for the lifetime of its power stations in return for using "super-critical" technology, which burns the coal at lower temperatures and emits up to 30% less carbon dioxide than conventional power plants.

An Adani company spokesman said that its application had been approved by the UN only after a "complex and gruelling" evaluation process by national government, independent inspectors and a UN committee.

Others companies are now examining if they qualify. Eskom, the giant South African coal mining company controversially loaned PS3.75bn by the World Bank in April to build what one of the largest coal-fired power stations in the world, has said it will apply for emission reduction credits. If built, the Medupi plant will emit nearly 25m tonnes of CO2 a year, more than the national output of 115 individual countries.

If Medupi is allowed to sell carbon offsets to Britain and other rich countries, it will be able to discount 6.5m tonnes of CO2 every year for 10 years, earning it tens of millions of pounds. It would be able offset all the emissions from a major new coal power station in the UK, effectively allowing the British government to meet its carbon-reduction targets by subsidising a plant in South Africa that would have been built anyway.

Eva Filzmoser, director of CDM-watch said: "It's completely unacceptable for the UN to keep issuing an inflated number of bogus credits that create vast profits for carbon trading groups and chemical companies. If the UN wishes to avoid irreparable damage to its reputation and show that is truly serious about climate mitigation, it must put the current methodology on hold with immediate effect and halt issuing credits until the methodology is revised."

David Abbass, a Unfccc spokesman, said the CDM has features that prevent projects supported by the scheme from inadvertently prolonging fossil fuel use or competing against renewable energy sources. "Fossil fuel will be a part of the energy mix for many years to come. It makes sense that the CDM should be used to reduce the emissions associated with that fossil fuel use."

"The methodology has a phase-out feature that limits the number of certified emission reduction credits that can be earned. As well, the number of projects eligible in a given country is limited, based on a percentage of the fossil fuel, covered by the project, used in the country."

The news comes at the same time as a report into the EU Emissions Trading Scheme (ETS) by the campaign group Sandbag. In 2009, European companies bought EUR860m of international offsets to comply with caps imposed by the ETS, but the report found that companies were directly subsidising competing industries in developing countries. Sandbag says this undermines claims by these companies that caps on their emissions force business to countries outside the EU and so lead to "carbon leakage". The largest purchaser of offsets, for example - Salzgitter's Glock Satzgitter steel production plant - bought 40,000 offsets from an Indian steel project.

"Frustratingly, it seems that EU installations seem to have a greater incentive to fund abatement projects amongst their competitors rather than invest in these improvements themselves," said Sandbag founder and director, Bryony Worthington, "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."