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Carbon offsetting

Carbon offsetting is the voluntary mitigation of greenhouse gas emissions. Companies that aim to become carbon neutral will buy carbon credits generated by emissions reducing projects to offset their own emissions. While the voluntary market for carbon credits has grown exponentially, claims of improper or opaque practices in this unregulated market have become more pronounced. In this article we outline some of the criticisms of carbon offsetting and discuss how organisations may ensure that the emission reductions they finance are real, verifiable and sustainable.

What is carbon offsetting?

Carbon offsetting is a relatively new technique aimed at neutralising the carbon emissions that are generated by an organisation. The idea is that emissions in one location are offset by emission reductions in another location.

Companies, governmental organisations, NGOs and individuals can offset the emissions they produce by buying carbon credits from emission reducing projects, most of which are located in the developing world. Projects that can generate carbon offsets include:

  • Energy efficiency projects (such as the implementation of energy saving technology).

  • The use of renewable energy (eg the development of wind farms).

  • Tree-planting schemes, as they are able to take carbon dioxide out of the atmosphere.

If the amount of carbon credits is equivalent to the emissions caused, it is argued that the organisation has gone ‘carbon neutral’. Carbon offsetting and the corresponding market for carbon credits is a voluntary undertaking sometimes intended to protect the company’s reputation by preventing (or responding to) criticism in the press or pressure from environmentalists or other interested parties. This is in contrast to the compliance market for emission rights created by government legislation.

Regulated and unregulated carbon trading markets

In our previous two articles on carbon trading we discussed the compliance market. Large CO2 emitters in closely defined industries are by law obliged to comply with restrictions to their carbon emissions. The EU Emissions Trading Scheme (EU ETS) assigns emission rights, setting a limit to how much these companies can emit. If they want to or need to emit more, these companies must buy additional emission rights (so called EU allowances).

Companies not covered by these schemes do not have to trade in EU allowances, yet they may want to offset their carbon emissions. They can do so either by buying EU allowances and CERs from the CDM in the regulated compliance market or by purchasing carbon credits generated by unregulated schemes in the voluntary market.

Carbon credits from the voluntary sector cannot be used for compliance purposes, it is possible to use regulated emission allowances for carbon offsetting. These are, however, more expensive, so carbon offsetters aim to find cheaper voluntary carbon credits that still have a high quality (integrity).

The benefits of carbon offsetting

The number of companies engaged in carbon offsetting has increased significantly in recent years and the voluntary market for carbon credits is growing. This is due to several benefits offered by the technique:

  • Developing an emission strategy.

    Carbon offsetting focuses management attention on the efficient use of energy and associates emissions with a cost. It also provides opportunities to reduce energy consumption by embedding carbon offsetting into a general emission strategy. In this context an organisation would first measure its emissions. In a second step it would then aim to reduce as many emissions as possible and would only offset emissions which cannot be reduced.

  • Engage employees.

    An emission strategy and carbon offsetting can also serve to commit employees to emission reduction objectives and engage staff to the implementation process of the emission strategy.

  • Reputation.

    Climate change is an important issue and has received much media attention worldwide. Any organisation that is seen as proactive on climate change may enhance its reputation with customers and employees and be able to differentiate itself from competition. Carbon offsetting will also prepare an organisation in anticipation of tighter regulations with which it may have to comply in the future.

Not all companies and organisations will be able to use carbon offsetting effectively. A full offset of all emissions caused by large emitters such as utilities would be extremely costly. However, most large emitters in a number of industries are already subject to EU regulation and the EU Emissions Trading Scheme.

Companies that do not have to comply with EU emissions regulations, for example in the financial services or travel industry, can still use carbon offsetting to address the problem of climate change and some have started to do this.

Criticism of carbon offsetting

Carbon offsetting has not been universally regarded as beneficial and several concerns have been raised about offsetting schemes.

Criticism of the concept as such

Several environmental NGOs, for example Friends of the Earth, have questioned the value of carbon offsetting in combating climate change. The danger according to these NGOs is that carbon offsetting gives the impression that organisations can buy their way out of a problem, without having to address their own emissions. There is also the theoretical possibility that carbon offsetting could incentivise companies to increase emissions based on the notion that all emissions are being offset elsewhere.

It is therefore essential to embed any form of carbon offsetting into a general emission strategy which will first and foremost investigate the opportunities for emission reductions. Carbon offsetting should then only be used to address those emissions that cannot be reduced.

Integrity of carbon offsets

The carbon offsetting market and individual offsetting schemes are unregulated. The Financial Times reported in April and May 2007 that due to project failures, overly optimistic estimates and exaggerated assumptions about the performance of projects, about half of all carbon output reducing projects are high risk and may never deliver the promised carbon credits.

Many projects also experience long delays or are abandoned. In addition the FT claimed that some organisations had been paying for emissions reduction projects which do not actually bring about any emissions reductions. There have indeed been a number of projects which experienced difficulties in delivering the anticipated emission reductions, for example in agricultural projects where crops have failed due to weather conditions.

There may also be question marks over the ‘additionality’ of projects, a concept borrowed from the Kyoto protocol, which means the emissions reductions over and above those that would have been achieved if business had continued as usual. Other areas where carbon projects came into disrepute were over double-counting of emission reductions and high administrative charges.

Some types of projects may also be controversial with customers of companies that adopt carbon offsetting. Reforestation (the regeneration of existing forests) or afforestation projects (the planting of new forests) can be controversial as the science behind the measurement of how much CO2 is captured and for how long is currently uncertain.

Other projects may come into disrepute as they merely rely on the improvement of industrial efficiency to claim a reduction in emissions. For example, a project featuring an oil firm which pumps CO2 into depleting oil wells to gain access to the remaining oil, may prove to be an unpopular source of carbon credits with the stakeholders and customers of a company seeking to become carbon neutral.

Some carbon offsetting companies, such as HSBC, have therefore decided to fund projects directly in order to have greater control over where their carbon credits are coming from. Due to the problems mentioned above, selection of suitable and well-managed carbon reducing projects is essential. Any investment into less well-implemented projects poses not only a financial but also a reputational risk.

How to offset carbon emissions

The criticisms of carbon offsetting shows that it is important to understand the offsetting of carbon emissions as part of a wider emission strategy which includes emission monitoring and reduction.

Measuring and monitoring carbon emissions

According to the principle that it is only possible to manage that which can be measured, both emission reductions and carbon offsetting should be based on accurate measurement and monitoring of carbon emissions. Organisations can use carbon calculators, which are widely available on the internet, to calculate their carbon emissions. Carbon calculators translate the energy use and business travel of all staff into the amount of carbon emissions these have caused.

However, many carbon reducing and offsetting schemes will not include all emissions generated by an organisation. Items that may be missing include staff commuting or emissions caused by the supply chain of goods received. Organisations will therefore need to decide on the scope of their scheme.

In addition the calculating process itself is not necessarily straightforward or accurate. Much depends on the accuracy of the reporting of business travel by staff. Different calculators may also reach different results, particularly with regard to the emissions caused by travel. For example, the amount of carbon emissions generated by travel will not only depend on the method of travel used (train, car, plane) but also on the number of people using it. Any form of transport that will only be used by half the maximum number of passengers will result in double the carbon emissions per head.

Different calculators will also assign different coefficients to the climate impact of air travel.

Reducing emissions as much as possible

No organisation will be able to claim green credentials and display credible concern over climate change without first investigating the potential to reduce emissions. However, this will have the additional benefit that costs in energy bills and travel expenses can potentially be reduced. The most likely areas where emission reductions can be achieved are energy consumption, such as the use of lighting, heating, cooling and IT and other electric equipment, as well as travel.

In addition to avoiding or reducing energy consumption and travel wherever possible, changes may include:

  • The increased use of renewable energy as offered by many electricity providers.

  • Increased energy efficiency through energy saving technologies (eg insulation).

  • Choosing alternative methods of travel, such as taking the train instead of the car or plane.

Offseting the remaining emissions

Only after the company has determined how it can minimise emissions can the remainder be offset. In order to do this an organisation has several options.

  • Invest directly in a carbon reducing project.

    Organisations can invest directly in carbon reducing projects and receive the generated carbon credits in return. As mentioned previously, some organisations choose to invest into carbon reducing projects directly in order to have greater control over where their carbon credits are coming from.

  • Purchase credits from a carbon credit provider.

    Most companies will use an intermediary and purchase carbon credits from a credit provider. This provider will in turn use the funds to invest in carbon reducing projects on behalf of the carbon offsetter.

  • Purchase carbon credits from regulated markets.

    In addition to the voluntary markets, carbon credits can also be purchased on regulated markets. The most common credits in the regulated markets are generated within the EU Emissions Trading Scheme (EU allowances or EUAs) and in the Clean Development Mechanism (CDM) of the Kyoto Protocol (known as certified emission reductions (CERs)). These credits are typically more expensive, and may therefore be less affordable for smaller projects but they are subject to a much more rigorous verification process and hence have a higher quality and integrity.

Carbon offset standards

The majority of carbon credits are generated in the voluntary markets. Due to the lack of regulation, standards systems have been developed, which aim to provide the market with greater transparency and integrity. Two of the most widely used standards are the voluntary carbon standard and the gold standards for voluntary offsets.

The Voluntary Carbon Standard (VCS) uses a set of minimum threshold criteria to ensure that certified projects generate real, quantifiable, additional and permanent emission reductions. These reductions, known as Voluntary Carbon Units (VCUs), are independently verified and registered in the VCS registry. The VCS has been devised by the Climate Group, a non-profit organisation founded by a diverse group of large corporates and governments, the International Emissions Trading Association (IETA) and the World Business Council for Sustainable Development, another corporate led organisation.

The Gold Standard for voluntary offsets was initiated by the WWF, the global conservation organisation, and other non-governmental organisations. The standard certifies renewable energy and energy efficiency projects. In order to be certified with the gold standard a project has to undergo a series of screening stages, which assess its eligibility, additionality and contribution to sustainable development goals. The verification and certification has to be validated by an independent UNFCCC (United Nations Framework Convention on Climate Change) accredited organisation, the so-called designated operational entity (DOE).

Selecting a carbon provider

Standards may help guide an organisation in the selection of a carbon provider. However, not all projects are certified. In the absence of a standard, there are a number of points which should be checked in order to ensure that the emission reductions that are bought are real, verifiable and sustainable:

  • Verification.

    All emission reductions must be independently verified. The UN maintains a list of verifying companies (DOEs), which meet its criteria.

  • Additionality.

    How do project developers ensure that any reductions are additional to what would have happened if business had continued as usual?

  • Projects.

    If carbon credits are bought through an intermediary, in some cases the carbon offsetter may be able to fund specific projects instead of contributing to a portfolio. However, if a project portfolio is sponsored, its composition should be scrutinised as to whether the types of projects meet the company’s own offsetting objectives and whether the projects are likely to succeed. For instance, if a portfolio includes tree-planting, it is important to assess how the development of these long-term projects is monitored and reported.

  • Sustainable development.

    Any emission reduction should be sustainable and go beyond one-off measures. In this context, some projects may also aim to achieve social benefits in addition to environmental objectives to improve local quality of life.

  • Double-counting.

    What measures are taken to avoid double-counting? Emissions should be tracked and registered to demonstrate ownership. Organisations should register their carbon credits in a public registry to avoid double-counting on their side.

  • Vintage.

    Vintage refers to the year during which carbon credits are generated. Some companies may choose to offset their emissions only with carbon credits from the same year, as opposed to credits that will be generated in the future, to ensure that emission reductions have actually taken place. If longer term projects are chosen the timeframe should be clear and baseline calculations of future emission reductions must be conservative.

  • Costs.

    Costs are another important differentiator between carbon offsetting schemes. However, the costs do not necessarily correlate to the quality of the credits on offer. Project costs depend on a range of factors including project size and type, administration costs, licensing costs and any profit made by the carbon credit provider. Some projects may have higher upfront costs or take longer to deliver carbon credits. Due to these factors and the varying levels of risk involved in carbon projects, market prices for carbon credits can range from €5 to €25 per tonne of CO2. These will, in addition to the project costs, be influenced by variables such as general supply and demand or market liquidity. When a broker is used to purchase carbon credits, brokerage fees will also be an important factor to consider.

Based on their own offsetting objectives, carbon offsetters will have to consider the risks and benefits of the projects in which they invest together with the quality and costs of the offsets that they are buying.