Carbon markets are considered a key policy tool to achieve cost-effective climate mitigation. Project-based carbon market mechanisms allow private-sector entities to earn tradable emission reduction credits from mitigation projects.

The environmental integrity of project-based mechanisms has been subject to controversial debate and extensive research, in particular for projects abating industrial waste gases with a high global warming potential. For such projects, revenues from credits can significantly exceed abatement costs, creating perverse incentives to increase production or waste gas generation, to increase credit revenues from waste gas abatement.

Here the authors show that all projects abating HFC-23 and SF6 under the Kyoto Protocol’s Joint Implementation mechanism in Russia increased waste gas generation to unprecedented levels, once they could generate credits from producing more waste gas. The results suggest that perverse incentives can substantially undermine the environmental integrity of project-based mechanisms and that adequate regulatory oversight is crucial.

The findings are critical for mechanisms both in national jurisdictions and under international agreements.