Searching for true Carbon offsets
The principle behind carbon offsets is that greenhouse gas emissions generated by one activity can be offset or neutralized by paying for a project that reduces GHG emissions by the equivalent amount elsewhere. For example, firms in Canada can pay to install solar panels, wind turbines, or more efficient lighting systems in developing countries because it may be cheaper than reducing emissions from domestic operations.
Yet the value of many of these offsets is questionable, and industry experts warn the market may be overrun by ‘cowboy’ operators with offsets that provide little or no real GHG reductions. They argue it is vital to know where a particular offset is being generated, and that a credible, internationally recognized verification system is put in place to ensure that offsets represent real reductions in greenhouse gas emissions.
There is a wide variety of potential offsetting methods. Renewable energy or energy efficiency upgrades in developing countries are popular because on the surface they appear to offer tangible results. Other favoured projects include purchasing or ‘retiring’ carbon credits legally owned by firms that allow them to emit GHGs (such as in the European Union’s Emissions Trading Scheme); and carbon sequestration projects - such as reforestation - that absorb carbon dioxide from the atmosphere.
An important consideration when purchasing offsets is the principle of ‘additionality’. This means the project must demonstrate it resulted in net emission reductions compared to what would have happened under a ‘business as usual’ scenario. In other words, the emissions reductions would not have been realized without the project.
For example, one of the largest offsetting organizations in the United Kingdom, Climate Care, once distributed 10,000 energy-efficient light bulbs in a South Africa township, only to discover that a local utility was offering the same bulbs free. As the bulbs would have been distributed anyway, the offset project did not meet the test of additionality.
Similarly, during the first phase of the EU Emissions Trading Scheme (ETS), credits were over-allocated. Organizations offering to offset emissions by ‘retiring’ ETS credits were paid to purchase virtually worthless certificates that have no relation to actual carbon dioxide output.
Responding to criticism that too many allowances were handed out in recent years, EU Environment Ministers last week called for a full review of the emissions-trading scheme and agreed that cap-setting mechanisms for member states should be changed so governments had fewer opportunities to over-allocate. Even this move might prove counter-productive. Critics point out that tightening the rules at home will only spur companies to purchase cheap project credits from outside the EU linked to potentially dubious Clean Development Mechanism projects. “There is a real danger that this will lock the EU into high carbon investments and soaring emissions for many years to come,” said Sanjeev Kumar, EU-ETS co-ordinator for the WWF.
Even measuring the amount of emissions to be offset is problematic, despite international protocols for doing so. In one study, the UN’s Intergovernmental Panel on Climate Change found a margin of error of 10% when measuring emissions in the cement and fertiliser industries; 60% with the oil, gas and coal industries; and 100% with some agricultural processes.
There are a number of organizations offering to verify offset projects, but so far no standard has been universally endorsed. The United Nations rules for Kyoto Protocol offsets have been subject to criticism, and the voluntary offset market lacks any uniformity in standards.
The UN provides a set of rules for CDM projects and allows Designated Operation Entities (DOEs) to act as project evaluators to ensure that earned credits are additional. However, some CDM projects have been dogged by allegations of corruption and inadequate evaluation. While defending Kyoto’s independent verification and validation requirements, Yvo de Boer, head of the UN climate change secretariat, has conceded that some “bad projects” may have slipped through the cracks. Such missteps are “to be expected in the early stages” of a new market, he argues, but criticism persists despite safeguard mechanisms that have been put in place.
Because Kyoto (and other regulated markets) are governed by legislation, the system is likely to be refined to make it more difficult for poor projects to slip through. The key will be developing clear rules based on sound science that can easily be applied to a wide range of projects. A positive aspect of a single UN offset standard is that national governments are likely to adopt it for domestic offset plans, as Canada intends to do.
While Kyoto credits are regulated, the booming voluntary market operates without formal standards. Banks, airlines, car manufacturers and individuals have entered the market in droves over the past two years, seeking ‘carbon neutral’ status. But in many cases the offsets offer little more than peace of mind.
The lack of credibility of some offsets and the need for a shared standard has not gone unnoticed, and a number of groups have launched offset codes, though universality remains elusive.
The United Kingdom is developing a standard for voluntary carbon offsetting based on the CDM rules, but this venture has itself been criticized for being open to the same weaknesses as the Kyoto process.
One of the most respected set of rules has been developed by the Swiss non-profit Gold Standard Foundation, which offers standards for both CDM and voluntary credits. The Gold Standard establishes requirements that go beyond CDM disclosures, and a certified carbon credit label is issued after adherence has been assured by third party DOEs.
Gold Standard projects require the use of renewable energy and energy efficiency technologies while explicitly excluding reforestation, and the Foundation says these credits can command premium prices on world carbon markets. Many respected environmental groups support Gold Standard offsets, including Greenpeace, WWF, Friends of the Earth, and the David Suzuki Foundation. However, the rigorous requirements have slowed its uptake, say market participants.
A set of rules from the International Emissions Trading Association (IETA) is due next month, following an 18 month consultation. The IETA code will have significant weight behind it through Association’s membership of private firms and financial institutions.
This week, a group of major banks and carbon market participants known as the European Carbon Investors and Services (ECIS) issued its own voluntary code of practice for offsets. The group’s participants, including ABN Amro, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, cited a need for quick action to quell allegations of abuse in the carbon market.
Universal implementation of any well-formed offset standards would go a long way to improving the efficacy of the carbon market and to restore confidence in the still-fledgling venture. However, lack of an oversight body in the voluntary market means that a shift towards respected certifications will rely on the actions of purchasers and offset providers.
Just as countries (including Canada) have refused to purchase ‘hot-air’ credits from Russia, businesses and individuals will need to seek out credible offsets and conduct proper due diligence to weed out inferior products. This will force offset providers to tighten their own procedures, and the result will be an offset market which could have a huge positive impact in mitigating climate change.
An important tool
Even with independent standards and rigorous monitoring, offsets may still be of secondary importance to investing in “in-house” GHG reductions. Many insist that it is far preferable for a firm to improve energy efficiency and to displace fossil fuels before seeking offsets, and even then, only purchasing outside credits for emissions that can’t be avoided. Climate change policy designed with this perspective will stimulate the development of clean technologies and give a boost to the environmental business sector.
However, a key reason for supporting emissions offsets is that they offer great potential for economic efficiency: a tonne of GHGs anywhere in the world has the same impact on the global climate, so the lowest-cost reductions should be sought. Offset credits allow investment to be shifted to places where it has the most impact per dollar.
The key is to set up mechanisms that encourage in-house investment so firms will not continue to use outdated technologies when cleaner options exist. Where costs become prohibitive, offsetting may be the best option until more effective technologies are developed. It also offers great potential for installing clean energy infrastructure in developing countries to prevent increased consumption of fossil fuels.
Canada will allow firms to use offset credits to meet their obligations under the latest federal climate change plan. Accredited domestic offsets will be earned directly or purchased on the open market, while CDM credits will be able to offset up to 10 percent of a company’s emissions. Importantly, compliance mechanisms will encourage in-house emissions cuts over offset purchases, and contributions to a technology fund will be subject to a declining cap.
Offset credits will remain an important method of reducing greenhouse gas emissions. Their current problems are symptomatic of a rapidly evolving market and managing these issues will prove challenging for both public and the private sector agencies. Properly implemented, however, carbon offset systems can provide a valuable outlet for businesses, individuals and governments to spread their clean technologies; to encourage sustainable development; and to contribute to a worldwide reduction in greenhouse gas emissions.