Monday, June 18, 2007

Are carbon offsets a good idea or a con?

There’s been a lot of media coverage about offsets recently. A growing number of institutions, individuals and businesses are claiming that all or parts of their activities are being made "carbon neutral" through the purchase of carbon offsets. Is this true or is it a con?

The UK’s Guardian has published this weekend an excellent investigation into the offset market. I recommend reading this article in its entirety as a starting point, as it's one of the most comprehensive articles I've seen so far. In addition, I thought it would be useful to place a bit of a summary here of frequent questions & answers on this issue for anyone who wants more information, summarising some work I've just done for a client.

What is a carbon offset?
A carbon offset can be generally defined as a project that compensates for the release of a certain amount of CO2e (carbon dioxide equivalent) in a certain location by avoiding the release of the same amount of CO2e somewhere else. Carbon offsets can potentially be generated by a number of activities such as energy efficiency, renewable energy and so-called sinks projects, or forestry projects.

Are offsets related to the Kyoto Protocol?
Partly, but not entirely. A very important distinction should be made between the offsets deriving from the carbon market, which is a mandatory market in countries that have ratified Kyoto, and the voluntary market. In the voluntary market, a distinction can also be made according to whether the projects are carried out under Kyoto rules or outside them.
The concept of offsetting does derive from a principle of the Kyoto protocol. This allows rich nations to meet emissions reduction targets by funding projects that reduce emissions in poorer countries through the Protocol’s Clean Development Mechanism (CDM). These projects are awarded "carbon credits". These credits can be traded on the international carbon markets. Carbon markets have grown rapidly since they were set up under the Kyoto treaty and the start of the European Union's emissions trading scheme (EU ETS) in 2005. Offset projects bought by companies that operate under the EU ETS and need them to meet their requirement are one component of the market.

What are the origins of the voluntary offset market?
A voluntary market for offsets has also been growing rapidly. Businesses, governments and individuals that are not bound to reduce emissions under the EU ETS or other regulations, also chose to buy credits from the CDM or to promote other types of projects outside the Kyoto system. The motivation for buyers ranges from the need to project a positive public image for a company, to the feeling that something should be done about emissions that are considered unavoidable – such as those arising from leisure or business travel. According to a World Bank estimate, the voluntary market represents less than 1% of the global carbon market. However, some estimate that by 2010, this market will grow 40-fold to be worth $4bn. Climate Care and Future Forests, since renamed CarbonNeutral, were among the first companies to set themselves up as offset providers in the UK in 1997. Initially, these companies were small and low profile. In the past couple of years, however, the market has grown considerably around the world, with UK companies taking the lead. A large number of new companies has been set up.

What is the price of a carbon offset?
There are currently enormous variations in the price of a tonne of CO2 in the voluntary offset market, making it very difficult for buyers to be able to say if they are getting good value for money, or whether their money is being swallowed up in administration fees or brokers' profits. Unlike charities, which operate under strict regulations in order to be able to operate as non profit companies, nobody is checking how offset companies are spending their money.

Are offsets good or bad then?
Again, a distinction should be made between the mandatory and voluntary markets (something recent media coverage has not always done very well, in my view). The mandatory Kyoto and EU carbon markets have several loopholes and are far from being 100% environmentally sound. Supporters of these markets see them as a tool to promote the transfer of cleaner technologies to developing countries, while providing a way for companies in rich countries to reduce emissions in the most cost-effective way. Critics – who are concerned about the low quality of the offset projects that have emerged so far – see them as a way for companies that to buy their way out of legal requirements to reduce emissions in their own operations at home, with questionable impact on the environment.

Several recent investigations, both from the FT and the Guardian, have found serious irregularities with some CDM projects, as well as voluntary offset products. However, the fact some CDM projects are seriously questionable does not automatically mean the whole market is flawed. It is also a very new market, currently in a pilot phase. In my view, it would be fair to give it another chance and not assume that a few bad projects mean the whole project is doomed. Also, the rules regulating this market are the result of careful negotiations by governments. If something needs to improve, this can be done as long as enough governments are willing to fight for it. The fact there is much more international media scrutiny now than there used to be when the current rules were set up a few years ago can only be good news. In addition, with only a few years left for emissions to peak and decline globally, getting rid of the main system that has been set up so far to reduce emissions - rather than try to improve it and learn from mistakes - would be suicidal.

On the contrary, the voluntary offset market can indeed be considered a complete “wild west”. Any person can set up a company and sell offsets of any kind through a website. There is no regulation or legislation setting minimum standards for offsets or checking that these companies are genuinely putting money into sound projects, or indeed that the money is going into any project at all. It is extremely likely that a percentage of the market is fraudulent.
Francis Sullivan, environment adviser at HSBC – UK bank that announced its intention to go carbon-neutral in 2005 – told the FT he found "serious credibility concerns" in the offsetting market after evaluating it for several months. "The police, the fraud squad and trading standards need to be looking into this. Otherwise people will lose faith in it," he said.

Are there any products that are better than others?
The UK government has made an attempt to create some clarity in the offset market, by creating a voluntary, proposed code of conduct for companies operating in the offset market. The Code of Conduct only recognises projects that fall under Kyoto markets and will require transparent pricing, information requirements, etc. Controversially, Defra has not included in the code of conduct the vast amount of non-Kyoto projects and has not incorporated (so far) in its Code of Conduct any of the recommendations made by the country’s largest environmental groups, such as Friends of the Earth, Greenpeace and WWF.

So, what do environmentalists think of offsets?
In a 2006 statement, the organisations mentioned above recommended the purchase of offsets from projects which have been certified by the Gold Standard – an independent, transparent, internationally recognised standard for CDM projects. The Gold Standard organisation also recently launched a standard for non-Kyoto, voluntary projects. The environmental groups also recommended in their statement that offsets should be marketed responsibly - i.e. not claiming this is THE solution to climate change. They also said these products should exclude forestry projects because of their questionable environmental value. Nobody can guarantee that a forest will not die or burn down within a few years, and not all types of forests are suitable as means to absorb carbon dioxide.

The organisations provided examples of online retailers which sell offsets from projects which meet these criteria. These include Myclimate, Atmosfair and Climate Friendly. However, most organisations selling offsets should be able to provide Gold Standard credits if asked to do so. It must also be pointed out that in the meantime, the Guardian article I linked to above found that Atmosfair has some work to do as not all its projects are genuinely Gold Standard-certified.

Other environmental organisations are far more hostile to offsets. These are smaller, more radical organisations that are generally hostile to carbon trading under the Kyoto Protocol, as well as the voluntary offset market. An organisation called Carbon Trade Watch recently issued a report comparing the voluntary offset market to modern day “indulgences” that enabled Catholics to get their sins forgiven for a fee paid to the Church . It is quite likely that the hostility to these products will continue to grow, especially if the media continues to do a good job to uncover "inconvenient truths" about this market. Also, the fact that some companies are currently using the concept of carbon neutrality and offsets in a very misleading way (e.g. to market SUVs as environmentally friendly) can only make things worse.