Offset buyers get picky

01 July 2009

The voluntary carbon offset market is resisting recessionary pressures, as buyers respond to criticisms by becoming more demanding, writes Stephen Gardner. Demand for voluntary carbon offsets – credits awarded for projects that supposedly reduce greenhouse gas emissions – is showing surprising resilience in the face of the economic downturn. The World Bank's State and Trends of the Carbon Market 2009 report calculates the value of the market at US$705 million in 2008, up 110 percent from the previous year. But not everyone believes offsets are worth the money. Friends of the Earth (FOE) crystallised the anti-offsets view in a report, A dangerous distraction, published at the beginning of June. According to this full-frontal assault on the concept, offsetting doesn't work, cannot be reformed and should be scrapped. Worse, it can do serious environmental harm, by distracting from genuine emission reduction measures. The problem with offsets, according to FOE, is that they are an excuse for not taking more direct measures to reduce greenhouse gas emissions. If a steel mill, for example, can "carbon neutralise" by buying offsets from elsewhere rather than investing in new, low-emissions technology, then it will not actually reduce its own emissions. As FOE puts it, offsetting means "less carbon is cut [because there are] reductions in one place, not both." Offsets are also controversial because of the concept of "additionality". How can it be proved that offset credits have come from a project that really has reduced emissions in a quantifiable way? Projects should also be able to show that they would not have happened without offset finance. FOE says these factors are often impossible to prove, especially because carbon savings "are calculated by judging action against hypothetical futures." Upset by offsets FOE's criticisms are mainly directed at the use of offsets for mandatory carbon reductions, as in the European Union's emissions trading system (EU ETS). Up to certain limits, ETS participants can offset their emissions using credits mandated under the Kyoto Protocol. These credits are generated by projects in developing countries. But the criticisms are also relevant for voluntary offset buyers, usually corporations that are not required by legislation to reduce their emissions, but which in any case want to be carbon neutral. Are doubts about offsets causing reputational risk for corporate buyers? So far, this does not seem to be the case. Tejas Ewing, author of the ENDS (Environmental Data Services) Carbon Offsets 2009 guide says that as a general strategy to tackle climate change, offsets are "not working yet." They do not actually reduce emissions; at best they prevent increases. But offsets should not be dismissed out of hand, Ewing adds. In particular, says Ewing, voluntary offset buyers are increasingly buying credits only from projects they have examined themselves, or that conform with standards such as the Gold Standard, a quality mark for both mandatory and voluntary offsets established in 2003. Gold Standard credits make up around 10 percent of the voluntary market by volume, Ewing says, but the rate of growth of Gold Standard credit volumes has been fast, with at least a 100 percent increase in two years and more than one million Gold Standard credits now available. Credibility gap Other offsets, such as those from the Chicago Climate Exchange (CCX), are losing credibility, according to Ewing. CCX credits are produced by projects in North America and Brazil including methane trapping, restoration of carbon-rich soils, and renewable energy. But there are concerns over the CCX verification system and CCX credits have a "50 percent unfavourable rating" according to the ENDS report, meaning that half of the 120 buyers who participated in the ENDS research rated them poorly on a 1-5 scale. Gold Standard, by contrast, has a 76 percent favourable rating. Nevertheless, in value terms, credits traded on the CCX still make up about 44 percent of the global voluntary market. The main mover behind the Gold Standard was environmental organisation WWF, which worked with other NGOs – including FOE – to establish the quality mark. Jasmine Hyman of the Gold Standard Foundation says offsets can have benefits and their additionality "can be proved." In response to the FOE criticisms, she says "it is somewhat juvenile to think there is no place for offsetting. The question is how you do it." In support of her argument, Hyman cites a project in Nepal converting animal dung to biogas, thus reducing use of kerosene and wood as fuel for heating of Nepalese households. This is a clear example of additionality, Hyman says, because it will replace one energy source with another, which is cleaner. Furthermore, a review of the project found other benefits, such as "overwhelming" reductions in household fuel expenditures. Offset buying tricks According to the ENDS report, 78 percent of corporate buyers are planning to at least maintain their purchase levels despite the hard times. Companies "have made a long-term commitment to this process. The companies that chose to buy these credits in the good times are still doing well," Ewing says. The trick for corporate offset buyers, according to train firm Eurostar, is to avoid using offsets as an excuse for not changing their environmental behaviour, but to purchase from credible projects, and to see offsets as the last step in the move towards carbon neutrality. Eurostar buys offsets as part of a package of measures to make passenger journeys carbon neutral. Louisa Bell, the firm's head of environment and energy, emphasises that buying offsets is the last step Eurostar takes after it has employed other means to cut emissions, such as making on-board heating, lighting and air-conditioning more efficient, and replacing refrigerant gases with greener alternatives. Bell adds that Eurostar does "as much due diligence as we can," when buying offsets. "We do not count any emissions as having been offset until the emission reductions from a project have actually taken place." Lisa Ashford, head of voluntary and new markets at carbon credit developer EcoSecurities, maintains that offsets have a role because "there are always going to be companies not covered by regulation but that want to take voluntary action." ENDS Report’s Tejas Ewing says that ultimately, corporate buyers want value for money, leading to poor quality offsets being dropped. Over the counter Gold Standard credits were trading at an average $7.35 in 2008, a level around 60 percent higher than CCX credits, which sold for an average $4.48 (World Bank State of the Carbon Market report). Careful purchasing may also lead to more specialisation, with offsets that also show tangible benefits for biodiversity or local communities, Ewing says. More specialised carbon credit standards are likely to emerge in avoided deforestation activities, he adds, as these fall outside the Gold Standard criteria. If the demand for quality offsets can be met, further expansion of the voluntary market can be expected. Love them or hate them, voluntary offsets are here to stay. A version of this article was originally published by Climate Change Corporation.

 

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