Carbon Offsets 101

Carbon Offsets 101

A primer on the hottest

-and trickiest-

topic in climate change.

Carbon offsets have become all the rage recently: the winter Olympics of 2006 in Turin, Al Gore, the U.S. country-rock trio Dixie Chicks, and Hollywood actor George Clooney all buy offsets in an effort to become "carbon neutral." The New Oxford American Dictionary even chose "carbon neutral" as the Word of the Year for 2006. As public awareness of the driving role carbon emissions play in climate change becomes nearly universal, the pressure to take action is increasing and many firms and individuals who have decided they want to do something about it are purchasing offsets.

Yet there is a lot of confusion, ambiguity, and even hype surrounding carbon offsets. What exactly does it mean to "offset" a ton of carbon dioxide (CO2) emitted into the air? Why does the price of a ton of CO2 vary wildly from one offset broker to another? What do you really get for your money? Are offsets just a cheap way to ease the guilt of shoppers, motorists, and frequent flyers, or can they really contribute to climate protection in a meaningful way?

The concept is very simple. All fossil-fuel powered vehicles (as well as fossil-fired power plants and factories) emit CO2 during operation. Commercial jets are no exception, and collectively contribute a significant share of global annual emissions. So let's say you fly on a commercial carrier from Chicago to Amsterdam. You would use one of the many online carbon calculators to determine your share of the CO2 emitted by the aircraft. (The best of these calculators will consider such factors as the total distance, the increased warming impact of emissions at high altitude, the aircraft type, how full it was, and whether the flight was direct or involved a stopover, but most are much less sophisticated.) In this example, you might find that you were responsible for 3.5 tons of CO2 emissions. You would then pay a carbon offset company for 3.5 tons of CO2 offsets. The company (or nonprofit organization) would then invest your money in a project meant to reduce greenhouse gas emissions and you get credit for a share equal to the carbon you were responsible for on your flight. Because climate change is a non-localized problem, it doesn't matter where the emissions are reduced. Greenhouse gases spread evenly throughout the atmosphere and reducing them anywhere contributes to protecting the climate. The same method can be used to offset the annual mileage accumulated by an automobile, or the emissions of a stationary source such as a power plant.

It sounds straightforward enough. Offsetting promises to offer environmentally conscious consumers a guilt-free way to continue their current lifestyle while at the same time contributing to climate protection.

So why do some critics liken offsetting to buying pardons from the Catholic church in 16th century Europe?

Options

The Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report, published a few months ago, said unequivocally that climate change is real, it's bad, and it's mostly humans' fault. To limit global temperature rise to less than 2.0 degrees Centigrade above the pre-industrial level-a threshold beyond which catastrophic effects on a global scale become much more likely-the concentration of atmospheric greenhouse gases has to be stabilized at about 450 parts per million (ppm). Greenhouse gas concentrations are currently at 382 ppm and rising about 2 ppm per year. In other words, we need to reduce greenhouse gas emissions by about 60-80 percent below current global levels-rapidly.

Carbon offset projects can help meet this challenge. They fall roughly into four categories. Renewable energy projects-such as solar and wind energy and biodigesters that utilize methane emissions from manure, agricultural waste, or landfills to generate electricity-reduce emissions by displacing or replacing fossil-fired energy sources. Energy efficiency projects, such as low-energy housing and lighting or efficiency gains in industrial processes, reduce emissions by using less energy to accomplish the same tasks. Greenhouse gas capture projects capture non-CO2 greenhouse gases from industrial processes (e.g., HFCs) or methane from agriculture or landfills. And biosequestration projects enhance the biological uptake of CO2 through forest planting and protection and through land management practices such as no-till agriculture.

(Another carbon-control methodology, geosequestration, involves capturing CO2 emitted from coal-fired power plants and other industrial sources and injecting it into old oil fields, beneath the sea bed, or into other geologic structures. Geosequestration technologies are relatively new and are very expensive, and despite strong interest in them from the coal industry their longterm viability is highly uncertain. Currently, no carbon offsets from geosequestration projects are being sold, and this article will not discuss geosequestration further.)

All these approaches can, if implemented well, lead to the reduction of greenhouse gas emissions or concentrations, although biosequestration is somewhat controversial. It's difficult to ensure "permanence"(that newly planted forests remain standing and are protected) and prevent "leakage" (simply logging other forests instead). While there are ways to address these issues, there are other problems too: tree plantations, for instance, might do well in absorbing carbon, but they are usually monocultures that lack even the most minimal biodiversity. (Old-growth forests, on the other hand, are a rich web of thousands of plant and animal species. They also hold large amounts of carbon in their soil and vegetation. Yet their carbon storage potential is mostly used up, and much of the new carbon they absorb is offset by carbon that is emitted from decomposing matter.) Moreover, one recent study suggests that the location of afforestation or reforestation efforts may be critical: trees planted in high-latitude lands may replace snow or ice cover and reduce the albedo (reflectivity) of the surface, thus increasing warming even as they absorb carbon during growth.

Ultimately, if global warming is to be controlled, a transĀ­ition away from fossil fuels is imperative. Renewable energy and energy efficiency projects help us move toward a low carbon economy; carbon sequestration does not. It seems therefore more important to support energy projects rather than carbon sequestration projects.

Fairness

Here's where the value and suitability of carbon offsets begins to get complicated. There are several issues surrounding carbon offsets, and the way these issues are resolved can enhance or diminish their value.

For example, does it matter where offset projects are implemented? The answer is...yes and no. Although it has only 4.5 percent of the world's population, the United States is responsible for 25 percent of global greenhouse emissions. The average American produces twice as much carbon as a European or Japanese, six times as much as a Chinese and 16 times as much as an Indian. Here is one of the conundrums of carbon offsetting. Many agree that high-emitting countries should reduce their own emissions, but many of the carbon offset projects are in developing countries. As noted earlier, since CO2 spreads evenly throughout the atmosphere it doesn't matter where a project is located, and the argument is that it makes more economic sense to reduce emissions where they are cheapest. Since everything is cheaper where people are poor, carbon offset projects in developing nations make financial sense. Further, the cheaper it is to reduce emissions, the more, and more rapidly, emissions reductions can be financed, so this actually makes environmental sense as well.

But is this fair? Some claim that carbon projects in developing countries are a form of neocolonialism, that the rich countries will snatch away all the reductions that are easy and cheap-the "low-hanging fruit"-and that the poor nations will later have to pay for more expensive reductions. Serious criticism has been leveled at projects implemented through the Kyoto Protocol's Clean Development Mechanism (CDM) (see online glossary at www.worldwatch.org/ww/offsets for definitions of this and other terms): that they are neither "clean" nor do they lead to "development," but on the contrary harm and disenfranchise local people.

However, other observers from both industrialized and poor nations claim that offset projects can be an amazingly effective tool to lower carbon emissions and at the same time alleviate poverty by spurring development in poor countries. Offset projects can have multiple additional benefits: environmental restoration, infrastructure development, education and training, and provision of energy services to the poor. Some of the best offset projects combine the Millennium Development Goals of poverty reduction with climate protection. For example, the 4.5 megawatt biomass power project in Malavalli, India, produces electricity with agricultural waste that used to be burned off or just left on the fields to decay. The project created 500 new fulltime jobs. In order to ensure stakeholder participation, local farmers were involved in the decision-making process and an NGO was formed to manage power distribution, billing, and revenue collection. The ash from the power plant is distributed to the farmers for use as a valuable organic fertilizer.

There is another reason why it may be inappropriate to carry out offset projects in rich, high-emitting countries. Most developed nations have ratified the Kyoto agreement, and 39 of those (called Annex B countries) have legally binding emissions reduction targets to meet. If a carbon offset project (say, a wind farm) is implemented by a private offset company in an Annex B country, the reductions it produces will automatically be double-counted: the purchasing individual or organization will count them, but because there is currently no regulatory system permitting those emissions to be "retired" (taken out of the system then and there), the reductions will also be counted in that country's greenhouse gas inventory.

Why does this matter? Every Annex B country has to implement policies and projects to achieve the reductions that Kyoto mandates. If a company funds an offset project in an Annex B country, the resulting carbon offsets would need to be retired from that country's national greenhouse gas inventory in order to avoid double-counting. But to date no Annex B country has a regulatory system in place that would prevent this kind of double-counting, which means the private offset project has effectively replaced another set of emissions reduction measures that the country would have had to take in order to meet its Kyoto requirements.

Viewed this way, it can be argued that the wind farm in our hypothetical example does not have any net carbon benefits. Paradoxically, in countries that have not ratified Kyoto, such as the United States and Australia, these double-counting issues don't exist at the national level. They do exist on a more local level, however: if a region, state, county, or city has enacted an emissions reduction target (even just a voluntary one), any emissions reductions that are created in that area but then sold as offsets in the voluntary market should not also be counted in that jurisdiction's emissions inventory.

Standards and Verification

The arguments for and against projects funded by rich nations in poor countries are both valid. Only strict standards, oversight, and verification of projects can ensure that the additional benefits will outweigh the negative impacts. Understanding the importance of standards and verification requires a short detour into carbon markets.

Carbon offsets are currently sold in either mandatory or voluntary markets. In mandatory markets, buyers operate within a cap-and-trade regime. Cap-and-trade regimes (such as the Kyoto Protocol, the European Union Emissions Trading Scheme, or the Regional Greenhouse Gas Initiative launched by several U.S. states) set a total upper limit on emissions and then either allocate or auction off emissions allowances-basically, licenses to pollute a certain amount-to interested buyers. These systems are meant to achieve the greatest emissions reductions at the least cost, because emitters with cheap options for reducing their emissions can sell their surplus allowances to emitters with higher reduction costs. (In a cap-and-trade system, it is crucial that the cap be set stringently enough so that meaningful reductions can be achieved. If there are too many allowances, their price will plummet and few reductions will be achieved because it will be cheaper to buy allowances than to implement greenhouse gas reductions. This is exactly what happened with the European Emissions Trading Scheme.)

Voluntary markets, on the other hand, do not function under a cap-and-trade system, and neither individuals nor companies are mandated to act. Rather, they choose to offset their emissions out of concern for the environment or to improve the company's image. Because there is no cap on emissions, voluntary markets are intrinsically different from mandatory markets.

In either case, measures that lead directly to emissions reductions are project-based transactions, which involve newly created carbon offsets from renewable energy production, energy efficiency, or carbon sequestration projects. Project-based transactions can be conducted either within the mandatory Kyoto framework or outside of it in the voluntary carbon offset market. CDM is one of the project-based mechanisms that are part of the Kyoto Protocol, and offsets that are created through CDM projects are called Certified Emissions Reductions (CERs).

In the voluntary market, companies can sell CERs, or they can opt to sell offsets created outside the CDM, called Verified Emissions Reductions (VERs).

Carbon projects that are implemented through the CDM have to go through in-depth review and verification, meet clearly spelled out standards, and have the reductions legally guaranteed by a third-party verifier. All CDM emissions reductions are also recorded in an international registry to ensure that they are only counted once. The CDM process is quite labor-intensive and bureaucratic, and although CDM projects are not without flaws, the standards and the processes are quite robust and the hope is that with time and experience the CDM projects will increase in number and quality.

Most voluntary offset companies sell VERs, because CERs are more expensive. VERs are not necessarily of lower quality than CERs, but there is currently no unified quality standard applied to all VERs. Third-party verification is not required and therefore no one is legally responsible for creating the promised reductions. Also, there is no central registry to prevent double counting.

Since CERs fetch a higher price than VERs, there are only three reasons why a project developer would opt not to go though the CDM: 1) the project is in a country that is not a party to Kyoto (e.g., the United States); 2) the project is so small that it would be too expensive to go through all the bureaucratic hurdles for CDM certification; or 3) the type of project is not covered in the CDM procedures (for example, very decentralized projects, such as light-bulb switching programs, are currently very difficult to certify under CDM). If a project declines to register for CDM and does not fall into one of these three categories, it is probably because it is of lower quality.

In the United States, the offsets sold in the voluntary market are almost exclusively VERs-and that has provoked some controversy. One of the main problems with VERs is that, unlike CERs, VERs are not required to be screened for "additionality"-the most debated topic in the carbon offset world. It answers a simple question: would the project have happened anyway, holding everything else constant, if the carbon offsets from it could not be sold? If the answer is yes, then the project fails the additionality test. And if a project is going to happen anyway, buyers of its offsets can't really claim that they are offsetting the emissions they are trying to neutralize.

The crux of additionality lies in its application. How do you prove that a project would not have happened anyway? There are several possible additionality tests. For example, the regulatory test asks: Is there a law requiring the project, such as legislation to capture methane at a landfill, or a government-mandated renewable portfolio standard? If so, the project is nonadditional. Such a regulatory test is easily applied and all reputable companies in the voluntary offset market require it. Yet to require only the exclusion of projects that are mandated by law is a very weak standard, because projects happen for many other reasons too. Wind farms in the United States, for example, are often built because the available federal tax credits make them financially viable. So other, more stringent, additionality tests have to be applied to such projects.

Another test, financial additionality, means that a carbon project is only financially feasible because of the revenue from the carbon offsets. The project may have other justifications, but the anticipated benefits of the carbon offsets have to be a decisive factor for pursuing it.

RECs

Many of the carbon offsets sold in the United States began life as Renewable Energy Credits (RECs) (see "Green Tags," p. 15, for a detailed discussion). They were then converted to carbon offsets by multiplying them by a factor that accounts for the avoided CO2 emissions. One REC represents the delivery of one megawatthour of renewable power to the total energy infrastructure, and they can be sold and traded in both mandatory and voluntary markets. It is important to understand the difference between "mandatory" or "compliance" RECs and voluntary RECs. Because mandatory RECs are an instrument for meeting a quota, for example that of a renewable portfolio standard, there is no concern or implication about their additionality, because it is the quota that drives the change. It's only in the voluntary offset markets, where RECs are sold for their carbon benefits, that their additionality needs to be tested. In theory, it does not matter if RECs are sold as RECs or as carbon credits as long as they are not double-counted and are additional. Yet in practice ensuring additionality is very difficult.

Voluntary-market RECs generally do not have to adhere to the same strict additionality standards as carbon offsets. Green-e, the largest third-party certifier of RECs that are sold in the voluntary market, for example, requires that RECs have to come from renewable energy plants that were built after 1997 and cannot be counted toward renewable portfolio standards or any other legal requirements. Although these two requirements are important, they do not fully address additionality. Because of the economic benefits of many renewable energy projects, such as wind farms, it is especially difficult to determine additionality with RECs. This is not to say that none of the available RECs are additional, but there is currently no standard and verification available that ensures additionality.

There are currently several initiatives under way to streamline the voluntary market and ensure high quality of the offsets generated outside of CDM. The U.K. government, for instance, is developing a voluntary code of best practice that would certify projects. In the United States, Representative Peter Welch (D-VT) has proposed legislation that would allow government employees to buy offsets for their travel emissions. That legislation would require that only government-approved offsets could be bought. This in turn would offer the opportunity to develop a U.S. standard for offsets. The World Wildlife Fund has developed a Voluntary Gold Standard that is endorsed by 38 NGOs. Its strength is its focus on stakeholder involvement and additional sustainability benefits. And the carbon trade industry is developing a Voluntary Carbon Standard which would include a central registry for all VERs to minimize double-counting.

In the best case this newly emerging field, which many have likened to the Wild West, will over time mature, and quality assurance will become an integral part of the market. Yet this will only happen if consumers are educated and willing to push for higher standards and more transparency in the market.

Many of us in the developed world are still trying to absorb the lesson of the limits to growth that nature imposes. It would be a serious mistake to see offsets as a comfortable way to avoid the need to drastically reduce our consumption. The price that our children and grandchildren will have to pay if we do not change our habits will be tremendous. Yet if voluntary carbon offset projects can help spur change and innovation, if they are just one of many climate protection measures undertaken-cap-and-trade, carbon taxes, efficiency standards, smart city planning, good public transportation, and so on-they could play a useful role in guiding the world towards low carbon economies and at the same time help achieve the Millennium Development Goals of alleviating poverty.

 

Anja Kollmuss works for the Stockholm Environment Institute-USA, an independent research organization affiliated with Tufts University. She did her study of voluntary carbon offset companies while with the Tufts Climate Initiative. The study and her recommendations for choosing an offset provider can be found at www.tufts.edu/tci/carbonoffsets.