Voluntary Offset Standards: Separating Land Mines from the Diamonds in the Rough

Voluntary carbon offsets represent greenhouse gas emissions (GHG) reductions in industries and places not covered by mandatory cap-and-trade schemes or other forms of GHG regulation.

Companies, governments, NGOs, and individuals use voluntary offsets for a variety of reasons: preparing for impending carbon regulation or future carbon costs; to gain experience before developing carbon-related products; to acquire “pre-compliance” offsets that have the potential for future compliance use; and to demonstrate corporate (or individual) social responsibility or create “green” public relations and branding opportunities.

Voluntary offsets are different from “compliance” offsets but can exist as a flexible compliance mechanism under a cap-and-trade system. And while many voluntary offsets are developed according to standards, such as the Voluntary Carbon Standard (VCS), it isn't required.

The number of voluntary carbon offsets standards used in the market is vast and growing. So how can voluntary offset project developers and buyers wade through the mire of offsets to determine which credits are land mines and which are diamonds in the rough?

From the perspective of voluntary offset project developers and offset buyers, there are a variety of different motivations and questions behind going with a particular standard. Here are some characteristics they should weigh:

•    Requirements for additionality, permanence, verification, etc.: Does the protocol have rigorous additionality, verification, and permanence requirements? Reputable voluntary standards like VCS or CCAR always require project developers to prove their project is additional to a business-as-usual-scenario.

However, understanding what makes a rigorous additionality standard is not at all straightforward. For example, a standard could set up multiple additionality tests that are easy to meet and thereby issue non-additional credits, or it could require a strenuous financial additionality test that excludes good projects. As such, for those still learning the nuances of additionality tests, other factors such as history and reputation may be helpful in avoiding “landmine” standards.

•    Registry: Are the offsets issued with an individualized serial number, and/or via a registry where their transfer, use, and retirement can be tracked?

•    History and reputation: How long has the standard existed and does this history demonstrate a strong reputation for environmental integrity and credibility? Since standards like VCS or the California Climate Action Registry (CCAR) have solid histories and reputations, they may be preferred over newer standards with less of a reputation or proven track record.

•    Start date and crediting period: What is the earliest start date for an eligible project, and how many years will your project be eligible to receive credits before it must be resubmitted and/or the additionality argument be reevaluated? For example, if I have a project that started in 2007, it would be ineligible under a standard that only allows projects starting after 2008.

•    Vintage: What is the vintage of the offset, or the year the emission reduction took place? Some buyers prefer more recent vintages, while others prefer older vintages they believe have more atmospheric “value” in preventing critical GHG concentration levels.

•    Accepted project types, protocols, and/or methodologies: What kinds of project types are covered by the protocols under a standard? For example, a project developer may wish to develop a project to CCAR standards, but if no CCAR protocol exists they must either wait or seek out another standard with a protocol for their project type. For buyers, they may have a preference on kinds of activities their money is supporting, such as a wind farm over a landfill.

•    Is there a price premium? Prices in the voluntary market vary widely, from $1 on the low end for large volume industrial projects, to $2-3 for CCX tons, to upwards of $20 for high quality credits with strong sustainable development attributes. Project developers may prefer to develop their projects using protocols that garner a premium. For purchasers, low prices may seem desirable but buyers beware: It may also be a sign that credits are approved to a voluntary standard of questionable reputation.

•    Acknowledgement between renewable energy certificates (REC) and offsets: Project developers may run into conflicts in ownership and project crediting for projects that qualify as both RECs and offsets. This may create an additional hurdle in the project development process.

•    Direct vs. Indirect: As discussed in my last blog, different kinds of credits should be used to counterbalance different types of emissions. A purchaser should make sure the credits they’re buying are appropriate to offset the kinds of emissions they’re generating.

•    Balance between a robust protocol and administrative simplicity: Ideally, good protocols strike an inherent balance between environmental integrity and administrative simplicity. Project developers may also have opinions about which standards they believe best strike this balance for their particular project.

•    Pre-compliance credit generation: Some project developers anticipate certain voluntary offsets may eventually be permitted into future compliance cap-and-trade systems. By taking some risk now and developing a voluntary offset project to a certain standard, a project developer may hope to receive a future return many times greater than their initial investment. Likewise, a buyer likely to be covered under a future cap-and-trade system may seek out “pre-compliance” offsets first.

•    Is the standard derived from, or accepted by, other standards? Many standards have built on solid knowledge and learning by doing from past standards, such as compliance offset protocols like those developed for the CDM.

Three of the most commonly used voluntary offset standards in the U.S. are the Voluntary Carbon Standard (VCS), the California Climate Action Registry (CCAR) Standard and the Chicago Climate Exchange (CCX) Standard. I’ve profiled each standard with pros and cons that voluntary offset project developers and buyers alike should consider.

Voluntary Carbon Standard (VCS)

The VCS is global standard that can be applied to all project types, which establishes a process for the measurement and recognition of verified emission reductions (VCUs). Finalized by the International Emissions Trading Association (IETA), The Climate Group, World Business Council for Sustainable Development (WBCSD) and World Economic Forum, the goal of the VCS is to provide voluntary buyers the same quality assurances offered by the compliance market.

The VCS is rigorous without being administratively burdensome; allows project types, procedures and credits from other programs, such as CDM methodologies; provides some certainty and quality control to both project developers and buyers; and enables experimentation with different approaches to designing, implementing and assessing emission reduction projects that have not been tried under the CDM. VCS, however, has been slow and sometimes opaque in the start-up process. It remains to be seen whether it will become the unifying global voluntary carbon standard as some hope.

The California Climate Action Registry (CCAR)/Climate Action Reserve (CAR)

The California Climate Action Registry (CCAR) uses a consensus-based, expert stakeholder process to develop its protocols for reporting voluntary project-based emission reductions. Unlike the CDM and VCS, the protocols are “top-down” and based on industry and geographic benchmarks, as well as regulatory additionality standards. Developed by work groups that bring together industry, government, and NGO representatives, the protocols created by CCAR by consensus are then approved by the California Air Resources Board (CARB).

CCAR credits (CRTs) command a price premium because they are considered by many to have a potential pre-compliance value and because there is likely to be some interoperability between the CAR and VCS registry. The existing list of CCAR protocols is limited, however, and the process of approving new protocols has been slow thus far. In addition, protocols are currently only applicable in the U.S., although in the future there are plans to expand protocols for international use, particularly for Western Climate Initiative (WCI) partners Mexico and Canada.

Chicago Climate Exchange (CCX) Offset Protocols

A small fraction of the CCX market beyond the Exchange’s voluntary cap-and-trade system consists of project-based reductions, whereby project developers can receive credits for reductions achieved per a list of eligible protocols stipulated in the CCX rulebook. The CCX has been in existence for some time, and their trading platform is perhaps the most convenient for large companies today. Additionality and transparency issues with the CCX’s Carbon Financial Instruments (CFIs), however, and its low prices make CCX one of the only games in town, but not necessarily the best.

There are many standards out there beyond these three, including Green-e, the Gold Standard, the Voluntary Offset Standard (VOS), VER+, Social Carbon, Duke University Standards, Climate Leaders, ERT Standards, GE-AES Standards, 1605B, Climate Trust protocols, WRI protocols… the list goes on.

Most standards are well intentioned and developed to help project developers and offset buyers separate the wheat from the chaff. Carefully considering the above mentioned points when developing or buying offsets will help players in the market avoid potential land mines and find the true diamonds in the rough.

Aimee Barnes is senior manager of U.S. regulatory affairs at EcoSecurities, a company working to mitigate climate change through projects that reduce greenhouse gas emissions globally.

"Diamond" -- CC licensed by Flickr user jurvetson.