26 November 2008, source Sustainable Business Magazine
Despite its critics' assertions that it cannot achieve the necessary carbon cuts to avoid climate catastrophe, offsetting is maturing into a credible concept. Eric Jaques analyses the arguments
Carbon offsetting should be straightforward - you simply invest in projects that neutralise your emissions, be it for personal or compliance purposes.
With proponents ranging from rock stars and business bigwigs to the Pope and the Man in the Street, the concept becomes ever more popular with each passing year.
According to a report published in July 2007, The State of the Voluntary Carbon Markets 2007: Picking up Steam, the 2006 retail voluntary offset market was estimated to be worth $55M (£31.3M), and the compliance market (dominated by the European Union Emissions Trading Scheme, or EU ETS) was valued at $24B (£13.6B). By 2010, these are predicted to be $4B (£2.3B) and $68.2B (£38.8B), respectively.
The inaugural Environmental Data Services (ENDS) Guide to Offsets 2008 identified more than 170 offset providers (wholesalers, credit traders, credit brokers and credit retailers) worldwide. Its top 30 comprises 25 companies from Europe and ten from the UK.
"Here in the West, it is frankly unlikely that we are going to be able to reduce our emissions quickly enough," says Edward Hanrahan, chief executive of leading UK offsetting company Climate Care, which was recently acquired by finance giant JP Morgan and boasts a client roster with respected names such as Barclays, The Guardian and E-On.
"Nobody is saying offset instead of reduce, you have to do the two in parallel. So start reducing as soon as you possibly can and that which you cannot reduce, you need to offset to get emissions down to a palatable level."
The compliance market - in which nations and large energy-intensive corporations trade carbon credits to hit their Kyoto targets - uses the Clean Development Mechanism (CDM) to identify projects in the developing world that qualify for Certified Emissions Reduction (CER) units. Kyoto signatories can also apply for Emission Reduction Units (ERU) in the developed world through what is known as a Joint Implementation (JI) project.
An increasingly influential supplement to all this is the voluntary market, which enables companies and individuals to offset things like flights, electricity use or business-related travel by buying into either CDM and JI projects or those created specifically for the voluntary market (Verified Emissions Reductions).
As the brainchild of politicians and business leaders rather than scientists and climate change experts, the purpose and benefits of offsetting can be ambiguous at times.
Share of criticism
And it certainly has its share of criticism. Most detractors suggest that carbon offsetting is sophistry or little more than a distraction from the task of finding a truly meaningful solution to the climate change crisis.
Additionality is widely believed to be the crux of the offsetting problem. It is, in effect, the question: Without offsetting, would this project have taken place anyway?
There is no system currently in place to prove additionality, so the notion is vulnerable to abuse. A working paper by two Stanford University academics published this May examined more than 3,000 projects applying for or already granted up to $10B (£5.7B) of credits from the UN's CDM funds over the next four years. It concluded that between one- and two-thirds would have been built anyway.
A glaring case in point was the discovery that nearly every new hydro, wind and natural gas-fired plant set o be built in China over the next four years is likely to apply for CDM credits, even though Chinese policy actively encourages these industries.
"When you actually talk to people at industry conferences off the record, they'll admit that 'yeah these projects are going to get built anyway and the CDM is just a bit of extra money'," says Patrick McCully, executive director of US-based think tank International Rivers, former co-editor of The Ecologist and acclaimed author of Silenced Rivers: The Ecology and Politics of Large Dams.
"I think that this whole concept of project level additionality just doesn't work because you have to be able to tell the intention of the developer, and you cannot see inside their minds," he says. "There's various sort of tests and analyses you can do to have a better or worse idea, but you can't be certain."
"So the system just doesn't work. When there's so much money at stake people will cheat. It's just human nature and it was a badly thought-out idea from the start."
Any technology-driven project except nuclear can apply for CDM credits. This includes coal plants as long as they can demonstrate they will augment their operations with emission-reducing technologies. An enormous 4,000MW coal plant in Gujarat, India, is soon expected to qualify. It will emit 26M tonnes of CO2 a year for at least 25 years, and become the country's - and the world's 16th - largest source of CO2 emissions.
Due to discoveries of this nature, the media has been frequently unforgiving. A high-profile investigation by the Financial Times in 2007 uncovered, among other things, the widespread purchase of worthless credits and industrial companies profiting from doing little or from gaining spurious credits. As a part of the investigation, Francis Sullivan, environment adviser at HSBC, was quoted as saying he found "serious credibility concerns" in the offsetting market and would seek to ignore the market and get HSBC to fund carbon reduction projects directly.
"As long as we don't have very substantial reduction commitments, what offsetting does is it lets you tinker at the margins," notes Anja Kolmuss, research scientist at the US branch of the Stockholm Environmental Institute.
"If you look at the science, the reductions we have to make to avert very serious, some say catastrophic consequences, are much, much larger than anything we could possibly achieve by offsetting."
And yet, for all its flaws, offsetting continues to evolve and is likely to remain a prominent fixture in the emissions reductions arsenal for the foreseeable future. Accordingly, there are moves to make it more robust and credible. "Should we trust offsets to solve the climate crisis?" asks Kolmuss. "No. Should we trust that, if we work with a reliable offsetter developer, we can purchase offsets that are actually meaningful and that achieve reductions? Probably, yes. Certainly, you can't say it's all bad."
Concerns about the voluntary market have prompted Defra to devise its own Kitemark for offset quality. Although it will only focus on Kyoto-compliant projects initially, it is a step in the right direction. Elsewhere, IDEACarbon, a subsidiary of financial research firm IDEAglobal, which counts Lord Stern as its vice chairman, is planning to introduce a carbon credit rating service rooted in financial risk rating systems.
"Overall, the way people use offsets and the type of offset they are using has very much matured over the last few years," argues Josh Harris, head of carbon markets in China for the Climate Group. "The majority of people using offsets are doing so for the right reasons."
Offsetting companies are canny operators. To counter the cynicism, they have been forced to mature, improve and allay doubts with full accountability.
Banding together
As a result, key carbon offsetting businesses have banded together, launching the International Carbon Reduction and Offset Alliance (ICROA) in June this year. A not-for-profit organisation, it provides leadership and a prominent focal point for raising industry standards. It has also developed its own Code of Best Practice, which, unlike the Defra code, recognises high-quality offset standards developed by respectable independent organisations.
Then there's the increasing influence of the independent Swiss-based Gold Standard, which certifies high-quality emission CDM, JI and voluntary projects. Fetching premium prices, Gold Standard projects stand out for having significant co-benefits pertaining to sustainable development. With vociferous supporters among non-governmental organisations and several governments, many regard it as the future of offsetting.
"The gold standard functions like a quality label - like organic or fair trade," explains Gold Standard marketing director Jasmine Hyman.
"What the gold standard is trying to do is to push that early investment in changing the way we relate to fuel from the start, in trying to catalyse investment in renewable energy sources and fuel switch projects. The more concern there is about the benefits of offsetting, the better the gold standard does because what we do is offer clarity in a pretty hazy market."
By all accounts, offsetting companies are finding that clients are becoming far more selective about how they commit to individual projects. "I think there's a lot more cynicism among government and press than with businesses," says Mark Chadwick, chief executive officer of Carbon Clear, a member of ICROA.
"What we find with businesses is that they are used to making complex procurement decisions and they look carefully at what they buy. Businesses are much more aware of the quality of what they're buying and who they are buying from."
"Like it or not we are in a capitalist, market-based economy, and the functioning of such an economy requires that for something to be considered it needs to be priced. And that's what buying carbon credits to offset your emissions will do."
Major energy corporation E-ON typifies the clued-up approach to carbon offsetting (for which calls on the services of Climate Care) that is reportedly becoming the norm.
"The main priority for us as a business is to reduce consumption and offsetting is a small, tactical measure that's in place. It's a part of a balanced strategy," reveals Keith Fletcher, E-ON's propositions manager.
True additionality, he concedes, will always be subjective but that should not detract from funding worthwhile projects with genuine emissions reductions benefits.
"The important thing to ask is does it [the project] reduce carbon emissions? And not get obsessed if they are 100% additional. If it's doing the right thing for the planet, if it's robust and fully auditable, and it's a sensible thing to do commercially, there isn't a reason not to do it."
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