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Voluntary carbon offsets: benefit or distraction?

A burgeoning voluntary carbon offset market has evolved over the past few years. Ostensibly, the idea is that either on a corporate or a personal level, those not subject to carbon constraints may offset their own emissions by paying a third party to reduce its emissions by the same quantity. The emission reduction would thereby offset the emissions created in order to neutralise the impact on the environment.

According to a report entitled “Forging a Frontier: State of the Voluntary Carbon Markets 2008” published jointly by New Carbon Finance and Ecosystem Marketplace, 23.7 million tons of carbon dioxide equivalents were transacted in the Voluntary Market in 2006 increasing to 65.1 million tons in 2007. The value of those transactions was estimated to be $54.9m USD in 2006 and $258m USD in 2007. The same survey found that the voluntary market had grown 165% while the regulated mandatory market had experienced a comparatively low 71% growth rate for the same period.

On the face of it, those embarking on such voluntary altruistic offsets ought to be praised. Indeed, they are certainly doing nothing wrong and are exceeding that which is ordinarily required of them. But are they actually achieving any environmental benefit?

Critics claim that voluntary offsetting achieves no more than the ability to appease ones conscience while continuing to engage in environmentally damaging behaviour. It is argued that far more benefit would be derived by making a concerted effort to change one’s ways and to live in a more environmentally sustainable manner.

While this argument is not without substance, there is a more critical issue that requires consideration in relation to voluntary offsets as I shall go on to explain.

In order to purchase an offset, the emission reduction must first exist. If it exists then the emission reduction to which it relates has already occurred. If one subsequently purchases that emission reduction, what marginal benefit to the environment would flow from one’s investment? The answer is none. The emission abatement has already occurred: the emissions will have been removed from the atmosphere whether or not that offset is ever sold.

By way of example, many buyers of voluntary offsets have sought what they consider to be high quality offerings. An example may include pre-CDM emission reductions. Under the rules of the Clean Development Mechanism of the Kyoto Protocol, an emission abatement project is only eligible to be credited with CERs (Certified Emission Reductions) from the date that the project is registered by the Executive Board of the United Nations Framework Convention for Climate Change (UNFCCC). If, however, the emission abatement project had become operational prior to the date of registration then any emission reductions that were de-facto achieved prior to registration will not be credited with CERs. Project owners subsequently attempt to sell these emission reductions as voluntary offsets. This gives rise to a number of questions:

·         Are these pre-CDM emission reductions real?

• Yes they are.

·         Will these emission reductions occur whether or not anyone agrees to subsequently buy them?

• Yes they would as they are necessarily ancillary to the development of the CDM project which has been deemed to be commercially viable in its own right.

·         Is there any marginal benefit to the environment derived from someone agreeing to buy these emission reductions?

• Absolutely not.

·         So, why is anyone agreeing to pay good money in order to buy this type of voluntary offset?

The answer to this final question is that someone is being fooled somewhere along the chain. Perhaps, through a lack of proper understanding, the fool is the buyer who believes that his money is making a difference in helping to save the environment. Or, perhaps a company buys offsets with the intention of using them in a marketing campaign in order to generate increased business by publicising its carbon neutrality: in this case the fool is the unsuspecting customer of the company that falls for the marketing campaign. Either way, the vendor of the offsets is the winner since he has sold absolutely nothing but yet he has received a good price. The situation rather reminds me of the children’s fable The Emperor’s New Clothes by Hans Christian Andersen.

The principle problem with voluntary offsetting is not that there is no merit in seeking to offset one’s own emissions, but it is rather the means by which most people seek to achieve the offsetting.

In order to bring about a genuine additional emission reduction to be used as an offset, the money being spent needs to generate an emission reduction that would not have otherwise occurred. Therein lies the rub. If one chooses to offset one’s emissions today, then it is not possible to accomplish that objective by investing in the development of a new emission abatement project that may take a year or two before any emission reductions are achieved.

One solution to this conundrum is to forward plan one’s voluntary offsetting needs. This would imply that the party eventually utilising the offset is himself making the investment that brings about the emission reduction to be used as the offset. However, the economics of such a system are far from ideal and it is not reasonable to expect many people to meet their offsetting needs in this way.

A second solution to this challenge is to use the services of a company that specialises in bringing about emission reductions that would not have otherwise occurred but for the ability to fund those reductions through the eventual sale of the voluntary offsets. The Social Carbon Company based in Brazil, for example, has as its sole raison d’être the objective of bringing about real additional emission reductions. These emission reductions are verified as being genuinely additional by one of a number of independently accredited verifiers (invariably the same entities engaged in validating CDM projects). Verification is to an internationally recognised standard, typically the Voluntary Carbon Standard (VCS). Once accredited, an emission abatement becomes a Verified Emission Reduction (VER) denominated in units of one ton of carbon dioxide equivalent and are offered for sale accordingly.

There are several reasons why these projects are developed with the intention of selling the emission abatement as voluntary offsets rather than registering them as CERs for compliance in the mandatory compliance markets. Principally these reasons are based in economics. One example is that the CDM project development process is slow, inefficient and costly. More particularly, bottlenecks in the validation and registration process have led to costly delays for project developers. By contrast, a VER may be verified quickly and comparatively cheaply, thereby allowing the party investing in the emission abatement activity to amortise its investment expediently and in a cost effective manner. Similarly, for some small emission abatement opportunities it is simply not possible to justify the CDM costs. A priori, these projects would never be procured by the CDM and so it is fair to surmise that the existence of a VER market provides an environmentally valuable mechanism for encouraging investment in small scale projects.

By way of example, let us consider black carbon, otherwise known as soot. This is a particular problem in the Arctic and Himalayan glaciers because it causes snow and ice melt thereby increasing the absorption of heat from the sun. The effect is enormous and it is estimated that soot contributes between 12% - 25% towards the climate change problem.

Black carbon is produced from dirty diesel generators and primitive wood stoves used in the developing world. It will be particularly difficult to bring about change in poor villages using programmatic CDM methodologies, not least because of the cost in adequate monitoring and verification of the emission reductions required. However, as a result of voluntary offset projects, cleaner stoves can be provided to poor villages and the money needed to finance these small scale projects flows from the sale of the voluntary offsets.

Unlike carbon dioxide which, once emitted, stays in the atmosphere for hundreds of years, soot is absorbed into the earth within weeks and so does not bear the same historic burden on the environment. The elimination of black carbon emissions through the VER market would thus have a dramatic impact on the effort to fight climate change and this is a laudable benefit of voluntary offsets.

A third and final solution to the voluntary offset problem would be to use emission credits, or emission allowances, from a mandatory capped trading system as the means of offsetting one’s emissions.

A system that caps emissions, such as the EU Emission Trading Scheme, will contain only a finite number of emission allowances that may be used by companies in order to meet their compliance obligations. The quantity of emission allowances in circulation will, by definition, be lower than the business as usual emissions of the companies caught by the system. Cap-and-trade is like a game of musical chairs: the number of chairs is always less than the number of children playing and a child is thus eliminated from the game every time the music stops. Similarly, by gradually reducing the number of emission allowances in the system, actual emissions are forcibly reduced. Over time, increased scarcity of supply will lead to an increase in the price of each emission allowance. Emission abatement opportunities that may be achieved at a lower cost than the market price of an emission allowance will naturally be exploited. Consequently, if an emission allowance is purchased and retired from the system as a voluntary offset, then supply of compliance instruments is further contracted and an additional unit of emission abatement will necessarily need to be achieved by a company elsewhere in the system.

Using mandatory compliance instruments for offsetting purposes is the course of action recommended by the UK Government (DEFRA published a Code of Best Practice for Carbon Offset Providers in 2007).

Mandatory compliance instruments such as EU Allowances or CERs will, invariably, be more expensive than buying other voluntary offsets. However, a real emission reduction has a real market price and it is fair to surmise that one ought to be circumspect about anything offered as an emission reduction that is significantly below the open market price. That is not to say that a lower cost emission reduction is not real, but that a greater level of due diligence is required before one commits to buying it.

It is a case of caveat emptor (“buyer beware”). Only through education will the environmentally valueless offsets be eliminated.

The next time that you are asked if you would like to offset your own emissions, or indeed if you see an advert or a product label that claims that goods and services are carbon neutral, ask some very careful questions rather than taking it at face value!

DJE – London – 3^rd December 2009

James Emanuel

Commercial Director at CantorCO2e Ltd

Tel: +44 (0)20 7894 7315

Cell Phone: +44 (0)7956 048 049    

jemanuel@cantorco2e.com