Are Emissions Offsets A Carbon Con?

It is now the done thing for climate-conscious companies and consumers, but carbon offsetting is by no means straightforward and its effectiveness is far from certain. A romantic trip to Barbados would probably make most Londoners' Valentine's Day. And now couples can enjoy their visit to the Caribbean with consciences as clean as the water washing tropical beaches. Why? Because just £14 buys something very special -- a holiday that promises not to harm the planet.

The company behind this attractive proposition is the U.K. firm Climate Care, which for relatively small sums enables people to offset the environmental damage of energy-intensive activities by funding clean-energy projects around the world. It prices carbon offsets, or "voluntary emissions reductions," for a single passenger's return flight from Heathrow to Barbados at just £14.16.

This is carbon offsetting. Of all the possible solutions to climate change none is perhaps more desirable, or less well understood.

The confusion is not without good reason. The market for offsets is highly fragmented, with prices ranging wildly from as little as $1 to about $20 per ton of carbon dioxide. Firms dealing in offsets in the U.K., the global centre for trading "carbon credits," have grown in number by 60 percent a year since 2002. And these firms support a bewildering array of projects, from planting trees in Tanzania to building hydroelectricity plants in Bulgaria.

Price differences are less extreme in the compliance market for carbon offsets, where governments and companies trade carbon credits, or Compulsory Emissions Reductions, to meet emissions reductions targets under the Kyoto Protocol or the European Union's Emissions Trading Scheme. CERs account for the vast majority of offsets purchased worldwide, whose total value was $2.7 billion in 2005 according to World Bank estimates, and the market is growing quickly.

The environmental argument for carbon offsetting is that it makes more sense to cut emissions where it is cheapest and easiest to do so -- usually in developing countries. But concerns have been raised over the effectiveness of carbon offsetting as a way of tackling climate change.

For many campaigners, offsetting is flawed in principle since it gives the impression that people in rich countries need not change their lifestyles to halt global warming. A serious objection concerns the effectiveness of the voluntary offsetting market, whose lack of regulation or standards makes it far from clear whether offsets are actually having the desired effect.

The compliance market's governing framework, the Clean Development Mechanism, is considered overly bureaucratic, with emissions reductions outweighed by high transaction costs.

These limits were exposed last year when it was revealed that plans to offset emissions from the 2005 G8 summit backfired. The installation of energy-saving light bulbs and fuel-efficient stoves in properties in Cape Town, South Africa, left the local council £17,000 in debt because of the spiralling costs of auditors employed to monitor the project on behalf of the CDM.

Reasons to be Neutral

Despite embarrassments like this, going carbon neutral is fast becoming the environmental fashion for companies. For Kirsty Clough, climate change policy officer at WWF U.K., "carbon neutral is the ultimate green claim."

"Zero carbon" companies gain the reputational benefits of being seen to be green. Offsetting also offers them the experience of working with a shadow price for carbon, in preparation for future regulation. But companies should not make these claims lightly, says Clough. "It should really be the responsibility of companies to prove that the offsets they are buying are credible and actually have environmental worth."

Mike Childs, head of campaigns at Friends of the Earth, suspects that carbon offsetting is allowing companies to appear green while providing little incentive to change their, or their consumers', behaviour. "I think it's being used as greenwash," he says. He accuses energy companies and airlines, such as BP and British Airways, of being the loudest advocates of consumer carbon offsetting, as these industries stand to lose most from more environmentally friendly behaviour.

Childs is worried that offsets do not reduce emissions. He compares the planet to a running bath, full almost to the brim with carbon dioxide. To offset carbon dioxide emissions, by analogy, is to say: "I won't turn off my tap. I'll let someone else turn off their tap." The reality, he says, is that we need to turn off both.

Pablo Ceppi, strategy manager at the Carbon Trust, a U.K. group advising businesses on how to tackle climate change, says: "If a company wants to go carbon neutral they need to first look into their direct emissions, then look into their indirect emissions and then offset."

Francis Sullivan, environment adviser at HSBC, agrees that carbon offsetting should compliment other corporate strategies to reduce emissions, saying: "More and more companies are seeing this as a logical extension of their environmental management systems."

Sullivan says anyone who thinks companies regard offsets as the answer to reducing carbon emissions is mistaken. The reason is simple: offsets are a permanent cost for a business, whereas energy efficiency measures are a permanent saving. HSBC spends ten times more money (about $50 million a year) on energy-efficiency measures than it puts into offsets.

BSkyB exemplifies this structured approach to reducing a carbon footprint. The broadcaster's head of environment, Fiona Ball, stresses that offsetting is just part of the company's broader strategy to reduce emissions.

In May last year BSkyB became the world's first media company to go carbon neutral. But before then the company was already buying 100 percent green or renewable energy in England and Wales. "We offset what are currently unavoidable emissions," says Ball. Nor does she consider offsetting a long-term solution: "In time we want to reduce our reliance on offsets.”

The Great Unknown

Companies wanting to go carbon neutral are advised to buy good quality offsets. But this is easier said than done. Just as the price of voluntary offsets varies hugely, so does the extent of the environmental improvements they deliver.

Many projects are still not externally verified. Some offsetters have no way of guaranteeing the reductions achieved by a project are in fact additional to energy savings that would have happened without the project taking place. And the selling of a single credit two or three times to different buyers -- a process known as double counting -- is not uncommon.

Jasmine Hyman, spokesperson for the Gold Standard certification of offsetting projects, says: "The voluntary market is a no-man's land.” Companies need to know what they are venturing into.

Very serious doubts surround the pet choice of many carbon offsetters: tree planting. Extremely popular a few years ago, largely for its symbolic rather than environmental value, many offsetters are now moving away from forestry as their primary means of investing in carbon credits.

The Carbon Neutral Company, the U.K.'s largest offsetter, which began as Future Forests, typifies this switch. Forestry accounted for 100 percent of its portfolio two years ago. Now it makes up just 20 percent.

Trees act as "carbon sinks," locking in carbon dioxide they absorb from the atmosphere -- a process known as sequestration. But trees are also vulnerable to destruction and decay -- something the band Coldplay learned recently when most of the trees on a mango plantation in India they were supporting, to offset emissions from their on-tour flights, died.

Jonathan Shopley, chief executive of the Carbon Neutral Company, defends his company's decision to continue investing in forestry. Destruction of ecosystems accounts for about a fifth of carbon dioxide emissions worldwide, he says.

This means "a carbon portfolio that commits about 20 percent to 25 percent of its offsets to sequestration is a good balance." He also expects that within two years there will be insurance instruments in the voluntary offset market to guarantee the permanence of forestry sequestration projects.

Proving your Worth

An even greater challenge for buyers of offsets, in forestry and other clean energy projects alike, is proving that the project could not have happened without their investment. For credits in clean energy projects to count as offsets, buyers must show energy savings made are additional to those under a "business as usual” scenario -- a concept known as "additionality."

But for this seemingly defining feature of carbon offsets there is surprisingly little definition of what additionality actually is. The criteria accepted as a basis for project additionality under the CDM are: it is not required by current regulation; it uses technologies that are not common practice; or it faces economic, technological or investment barriers and therefore needs offset money to start up.

To establish project additionality, developers and offset buyers must set a baseline from which to predict emissions that would occur were the project not to go ahead. To answer this essentially counter-factual question there are 60 approved methodologies for the CDM market alone. The difference between the baseline and the forecasted emissions from the proposed clean energy project will, in theory, establish the additional emissions reductions it will make.

A lack of standardised methodologies afflicts all aspects of the offset market. Many offsetting firms work to their own proprietary standards, most but not all of which are verified by a third party. An emerging favourite of campaigners is the Gold Standard, a Swiss certification scheme devised by 43 environmental NGOs and launched in 2003.

There are currently 60 projects in the Gold Standard pipeline, which admits only energy reduction or energy efficiency projects and requires high levels of community engagement from project developers to promote sustainable development.

Hyman says the Gold Standard is "like an organic label in a supermarket." Its premium is increasingly popular in the voluntary market, where clients are beginning to demand greater assurance their offsets are of a good quality.

Room to Maneuver

The U.K. government's decision to introduce a code of practice for voluntary offsetters, announced in January by environment secretary David Miliband, responds to concerns over the sector's lack of transparency. The voluntary code, which is the first of its kind in the world, will ask offsetters to provide clients with clear information and transparent prices for offsets.

These principles are welcome for campaigners and offset firms. But both are worried the new standards, if based on the terms of certified carbon credits under the CDM, may threaten the flexibility of the current voluntary market. Voluntary offsets, they argue, have a precious record of channelling money into small projects the compliance market fails to reach.

Voluntary offsets typically go towards small-scale, local community-based renewable energy projects, says Shopley. These are exactly the sorts of projects the high transaction costs of compliance with the CDM would rule out. CDM projects can also only take place in countries where "designated official entities” (DOEs) have been established to monitor energy reduction projects. India, China and Brazil all have DOEs. But many other less developed countries such as Thailand, and the majority of sub-Saharan Africa, do not.

WWF's Kirsty Clough explains: "At the moment the CDM is very much dominated by projects in Asia, particularly in China because they have the infrastructure in place to do so.” She is concerned that the preference on the compliance market is for gas-abatement projects, such as the destruction of HFC 23, which are flooding the market with cheap carbon credits. "They might undermine the renewable energy or energy efficiency projects that are more expensive but in the long term move us down a more low-carbon trajectory,” she says.

Mike Mason, founder of Climate Care, says voluntary offsets can succeed where the CDM currently fails. He believes the voluntary offsets market needs to be regulated because "it is too difficult for consumers to work out what's what."

But this should be done in a way that does not discourage risk-taking of the sort impossible for projects funded through the CDM. "We have to reach the parts that CDM doesn't reach. We have to be pioneers,” says Mason. He adds: "We should be able to take well-intentioned risks, and occasionally get it wrong.”

Getting it wrong appears to be all too easy when it comes to carbon offsetting. But as the offset market continues to mature, and its standards become more established, the quality of offsets available should increase. Yet, ultimately, the process of offsetting is not foolproof. Nor is it the answer to climate change, which can be more effectively tackled by companies and individuals first changing their behaviour.

In years ahead, funding for renewable energy projects should come increasingly from mainstream investment funds, not offsets. But for individual consumers, the idea of flying to a place in the sun without damaging the planet is unlikely to lose its appeal.

Sidebar: Numbers and Definitions

Carbon calculating -- it all adds up A tonne of CO2 is emitted when you: fly 2,000 miles in an aeroplane. drive 1,300 miles in a large SUV. drive 1,900 miles in a mid-sized car. drive 6,000 miles in a hybrid car. run an average US household for 60 days. run your computer for 10,600 hours. graze a Ugandan dairy cow for eight months. Average CO2 emissions per year: 4.5 tonnes for the average US car. 4.5 tonnes for the average global citizen. 6.2 tonnes for electricity use of the average US household. 21 tonnes for the average US resident. 1.5 million tonnes for a 500MW gas power plant. 8.3 million tonnes for an older 1,000MW coal power plant. 6 billion tonnes for the US as a whole. 25 billion tonnes for the planet as a whole. Source: A Consumer's Guide to Retail Carbon Offset Providers, Clean Air-Cool Planet, 2006 CDM explained The Clean Development Mechanism is one of three "flexible mechanisms” to reduce carbon dioxide emissions established under the Kyoto Protocol, the others being Joint Implementation and Emissions Trading. Under the convention, so-called Annex 1 countries (most of the nations of Europe) have agreed to reduce carbon dioxide emissions to an overall 5 percent below 1990 levels between 2008 and 2012. Clean energy projects meeting the terms of the CDM are issued carbon credits, or "Certified Emissions Reductions”, which Annex 1 governments and companies can buy to meet their emission reductions targets under the protocol. These can then be traded on the carbon futures market, or under the European Union's emissions trading scheme. The Kyoto Protocol now covers 169 countries and 55 percent of global greenhouse gas emissions, although critics argue the failure of the US to ratify its terms has left the convention hamstrung. Carbon market forecast: trade is booming One way for companies to reduce their carbon dioxide emissions is to join voluntary emissions trading schemes such as the Chicago Climate Exchange (CCX). DuPont, Ford and Motorola are among 210 CCX members committed to offset 6 percent of their total emissions by 2010. This means the CCX represents a significant volume of global trade in carbon. Its independent European sister company, the European Climate Exchange (ECX), provides futures contracts and options contracts to companies trading carbon under the European Union's Emissions Trading Scheme.

John Russell is Deputy Editor of Ethical Corporation.