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Special Report: Carbon Offsets 2010

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Voluntary offset standards have strengthened markedly, while criticism of compliance schemes has grown

Cascade Land Conservancy’s urban forestry scheme was used by rock band Pearl Jam to offset their 2009 tour
Cascade Land Conservancy’s urban forestry scheme was used by rock band Pearl Jam to offset their 2009 tour

From the middle of the last decade onwards, voluntary carbon offsetting attracted unprecedented attention. More organisations than ever dipped their toes in the carbon pool, and emissions were even offset by films, including Al Gore’s climate blockbuster An Inconvenient Truth. Rock bands also joined in, such as Seattle-based Peal Jam offsetting their 2009 tour by partnering with the Cascade Land Conservancy’s urban forestry scheme (pictured).

In 2006, “carbon neutral” was chosen by The New Oxford American Dictionary as its word of the year (curiously, its entry into the UK edition would take another year). However, not far behind this new-found celebrity came controversy.

The media brought the issue into the pub­lic spotlight, with exposés of poorly run projects such as dubious sequestration by storm-felled forests. Some critics likened carbon offsetting to the medieval practice of buying indulgences – simply an excuse for polluting business as usual.

Buyers have grown far more savvy in the last few years, a theme we will explore in greater depth in the next section. But from a supply-side perspective, the core issue has been quality – do carbon offset credits actually deliver real emission reductions?

VALID foundations

Crucial to the integrity of offsets is their ability to exhibit a number of key features (commonly abbreviated to VALID). These are:

  • Verifiability – there is a robust audit trail.
  • Additionality – carbon savings are demonstrable compared with business as usual.
  • Leakage – emissions are not created elsewhere, such as overseas.
  • Impermanence – is avoided, ensuring savings will be sustained over time.
  • Double-counting – should not occur, and reductions are only claimed once.

The most obvious progress towards guaranteed environmental integrity has been made by generators and suppliers of voluntary emission reductions (VERs).

There are now nearly 20 different standards in the market, designed to guarantee VER offset quality. By 2009, virtually all VERs – 97% – were accredited to one of these, the Ecosystem Marketplace Bloomberg New Energy Finance (EMBNEF) report indicates. A few standards have grown rapidly to a position of dominance.

The most popular by volume is the Voluntary Carbon Standard (VCS), which accredited an estimated 58% of VERs transacted in 2009 (excluding US standards). Chief executive David Antonioli sees the role of the VCS as defining a “benchmark quality” and pointing the way for future compliance regimes. The VCS also encourages project developers to apply for accreditation for new methodologies. Another innovation in the pipeline is the development of “streamlined” approaches, such as industry benchmarks, to speed up the registration of credits.

The Gold Standard (GS) continues to be recognised as the flagship for demonstrating real carbon reductions plus additional sustainability benefits. It captured at least 11% of the non-US VER market, by volume, in 2009. Further GS certified emission reduction (CER) credits, not included in this figure, were sold for voluntary purposes too. These projects, accredited for their
community and ecological benefits, attracted a very healthy sustainability premium. The GS registry has grown significantly, from 50 accounts in June 2009 to more than 500 projects now in the pipeline, representing more than 35 million tonnes CO2.

An annual survey of offsetters published in 2009 by EcoSecurities confirmed the key role of standards. Ninety per cent of respondents cited them as important or very important criteria in selecting carbon offset providers, coming only just behind third party verification, at 92%.

In addition to standards, the use of registries has also grown considerably, as predicted by ENDS in its offset survey of 2009.  These allow the verification and tracking of credits from issuance to retirement. Over half the voluntary credits sold in 2009 were tracked by a registry, compared with 28% the previous year, according to the EMBNEF report.

Popular registries for the voluntary sector were APX, Markit and Caisse de Depots. Many providers also use their own registry, which is available on their websites. Also, the independent not-for-profit resource Carboncatalog.org gathers this information together in one place.

Voluntary offset retailers took steps to raise standards too, by creating the International Carbon Reduction and Offset Alliance (ICROA). It now has 11 members, and claims to represent 80% by volume of the voluntary offset supply industry. ICROA members all commit to provide only high-quality credits and are audited regularly.

With the use of standards almost ubi­quitous and with tracking via registries rising fast, ICROA believes it has helped the industry reach a watershed over the past four years. Its co-chair, Edward Hanrahan, explained that its next tasks will include a challenging push to get the word out. “Now the ‘hygiene factors’ of quality are met, we need to promote the co-benefits of voluntary, offset such as how it ties in with the Millennium Development Goals. This may be an uphill battle, as it can be hard to get positive stories in the media,” he says.

ICROA’s bullishness about the new-found status of VERs contrasts with the situation only a few years ago when the voluntary offset market was often likened to the Wild West. Meanwhile, the trajectory has been quite the reverse for the main compliance credits bought by voluntary offsetters, namely UN Clean Development Mechanism CERs.

While the voluntary offset market was always viewed as more nimble and able to test new approaches quickly and to innovate, the CDM was seen as a lumbering yet reliable benchmark of carbon offsets’ quality. But under the surface its problems, including overly bureaucratic procedures and over-dependence on large industrial carbon projects, have been growing.

Environmentalists were slow to understand the unfamiliar terrain of carbon markets, but have now started to make their voices heard. Groups such as the Environmental Investigation Agency, Sandbag and CDM Watch have led the way, and their key target has been the CDM.

This year, they broke through for the first time, levelling plausible allegations about widespread gaming of the CDM by operators of projects in developing countries. The allegations related to the destruction of the potent greenhouse gas HFC-23, and their criticism strikes at the heart of the CDM’s reputation because HFC-23 projects account for fully half of all CERs generated by the scheme to date.

In one line of attack, CDM Watch estimates that the CDM pays 65–75 times more for HFC-23 destruction than it costs, dramatically distorting the market. More damagingly by far, NGOs have now presented evidence that manufacturers have been creating the gas just to destroy it again and claim CERs.

Following these claims, the UN’s CDM Executive Board has delayed approval of eight HFC-23 destruction projects in China and India, collectively worth hundreds of millions of CERs, pending an investigation into their additionality. NGOs remain on the warpath, arguing that projects to reduce other industrial gases, including nitrous oxide and PFCs, are similarly suspect.

Neither are industrial gases the only type of CDM project being questioned. In March, Stanford University in the US published a report suggesting that control of prices in the Chinese wind sector was determining the supply of credits to CDM markets. Subsequently, in August 2010, the UN governing board rejected ten Chinese wind project applications, on the grounds of non-additionality. Nine Chinese hydro projects and three others were also rejected, representing 12.5 million credits.

Adding to the CDM’s woes are growing doubts over the effectiveness of the third-party verifiers of carbon-cutting projects, known as designated operational entities (DOEs). The CDM Executive Board has suspended three of these companies (SGS, DNV and Tuev Sud) since the end of 2008 for procedural breaches and concerns over the qualifications of personnel. The board is now threatening to impose new liability rules on the firms.

In June, environmental group WWF claimed the performance of auditors had even deteriorated over the previous year. Its report highlighted, for example, that the CDM Executive Board is questioning key issues including the determination of additionality in 57% of projects forwarded for approval, up from 51% a year earlier.

The mechanism is not alone among compliance schemes to have seen its reputation tarnished. This year, a series of scandals has even threatened to bring the highly regula­ted EU emissions trading scheme (EU ETS) into disrepute.

In the spring it emerged that the scheme’s EUAs that had been surrendered to regulators were being resold. This enabled the possibility of double-counting, formerly thought to be an issue unique to voluntary carbon credits. The reselling scandal was followed by a phishing scam that called into question the electronic security of some EU allowances (EUA) registries. Then came news of large-scale carousel fraud, involving multiple EUA transactions across countries and non-payment of tax.

A list of factors used to rate carbon offset suppliers
A list of factors used to rate carbon offset suppliers

UK on a limb

The reversal of fortunes in the reputation of the VER, CDM and even the EU ETS markets shines an uncomfortable spotlight on a UK government initiative launched in 2009 that was intended to help carbon offset suppliers show adherence to high standards.

The Quality Assurance Scheme for Carbon Offsetting (QAS) enables providers to display a “government approved offsetting” quality mark if they can demonstrate the highest standards for carbon footprint measurement and carbon offset projects, including clear standards on additionality and reliability.

The problem for the scheme is that only EU and UN compliance grade credits – phase II EUAs from the EU ETS, emission reduction units (ERUs) from the UN Joint Implementation scheme and CERs – are eligible. VERs are excluded.

Voluntary offset suppliers believe the scheme is poorly designed. According to Cristoph Grobbel of project developer South Pole Carbon: “UN-approved CERs, even if they are of low quality, are being accepted, while high-quality VERs, such as those approved from the GS, are not not accepted officially in the UK.”

In practice, most UK providers supply voluntary credits. As a result, take-up of the government’s scheme has been limited, with only 182,000 tonnes CO2 sold with the mark’s backing since February 2009. One retailer finds the QAS is “effectively ignored” by most large providers, but used as a point of difference by a handful of smaller outfits. The International Air Transport Association and two airlines have also signed up.

In contrast to the UK, Australia’s National Carbon Offset Standard, introduced in July to replace the old Greenhouse Friendly scheme, explicitly allows voluntary credits from the GS, the VCS and UN-approved credits from CDM as eligible offset units.

New frontier

The next test of the voluntary offset market’s ability to guarantee high standards is widely expected to be projects reducing deforestat­ion in developing countries, dubbed REDD.

When the concept of carbon-neutrality emerged, most credits were derived from forestry projects. However, concerns about additionality, speed of action and permanence led to rapid development of alternative projects based largely on energy efficiency and renewable energy, with a rapid drop-off in the use of forestry credits. The development of standards to manage some of these concerns seems to have sparked new life into forestry carbon projects over the last year.

Tropical deforestation is estimated to contribute 17% of global greenhouse gas emissions. Projects to tackle it could be huge, and could therefore generate enormous quantities of carbon credits.

A framework for such projects is seen as one key to a future world-wide climate agreement. The US alone is expected to require up to one billion tonnes of CO2 in offsets should a bill allowing international credits be passed, many of which would come from REDD projects.

Development of REDD is what “everyone is talking about”, according to VCS chief executive David Antonioli. The complexity of improved forest management, the vast scale of the challenge, huge sums of money and the relative poverty of project countries, present unprecedented challenges.

A two-year study by the Centre for International Forestry Research near Jakarta, warned that “past and recent cases of corruption and financial mismanagement in Indonesia’s forestry sector revealed systemic weaknesses that could ruin REDD there”. In July 2009, Papua New Guinea’s Office of Climate Change director was suspended pending the investigation of the improper issue of millions of dollars of forestry credits.

Closer to home, investigations are ongoing into a proposed $2.2bn deal and alleged bribery by UK company, Carbon Harvesting Corporation, for the carbon rights from 400,000 hectares of Liberia’s forests. A 53-year-old man from Widnes, Cheshire, with a background in making fairground games, was arrested in July.

Much of the progress in REDD is thanks to the voluntary market, and it was seen as one of the notable successes in the otherwise fruitless Copenhagen summit. Some REDD projects and standards are being developed under the VCS, and other forest standards such as Plan Vivo continue to lead the way.

But methodological challenges remain, and many investors are deterred by the risk of such complex and long-term investments. David Antonioli has reflected: “To see REDD being traded will be a major watershed."

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