Carbon offsets and credits

Wind turbines near Aalborg, Denmark. Renewable energy projects are the most common source of carbon offsets.

A carbon offset is a financial instrument aimed at a reduction in greenhouse gas emissions. Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO₂e) and may represent six primary categories of greenhouse gases. One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases.

There are two markets for carbon offsets. In the larger, compliance market, companies, governments, or other entities buy carbon offsets in order to comply with caps on the total amount of carbon dioxide they are allowed to emit. In 2006, about $5.5 billion of carbon offsets were purchased in the compliance market, representing about 1.6 billion metric tons of CO₂e reductions.

In the much smaller, voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources. For example, an individual might purchase carbon offsets to compensate for the greenhouse gas emissions caused by personal air travel. Many companies (see list) offer carbon offsets as an up-sell during the sales process so that customers can mitigate the emissions related with their product or service purchase (such as offsetting emissions related to a vacation flight, car rental, hotel stay, consumer good, etc). In 2008, about $705 million of carbon offsets were purchased in the voluntary market, representing about 123.4 million metric tons of CO₂e reductions.

Offsets are typically achieved through financial support of projects that reduce the emission of greenhouse gases in the short- or long-term. The most common project type is renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects. Some of the most popular carbon offset projects from a corporate perspective are energy efficiency and wind turbine projects.

Carbon offsetting has gained some appeal and momentum mainly among consumers in western countries who have become aware and concerned about the potentially negative environmental effects of energy-intensive lifestyles and economies. The Kyoto Protocol has sanctioned offsets as a way for governments and private companies to earn carbon credits which can be traded on a marketplace. The protocol established the Clean Development Mechanism (CDM), which validates and measures projects to ensure they produce authentic benefits and are genuinely "additional" activities that would not otherwise have been undertaken. Organizations that are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.

Offsets may be cheaper or more convenient alternatives to reducing one's own fossil-fuel consumption. However, some critics object to carbon offsets, and question the benefits of certain types of offsets.

Offsets are viewed as an important policy tool to maintain stable economies. One of the hidden dangers of climate change policy is unequal prices of carbon in the economy, which can cause economic collateral damage if production flows to regions or industries that have a lower price of carbon - unless carbon can be purchased from that area, which offsets effectively permit, equalizing the price.

Features of carbon offsets

Carbon offsets have several common features:

• Vintage. The vintage is the year in which the carbon reduction takes place.
• Source. The source refers to the project or technology used in offsetting the carbon emissions. Projects can include land-use, methane, biomass, renewable energy and industrial energy efficiency. Projects may also have secondary benefits (co-benefits). For example, projects that reduce agricultural greenhouse gas emissions may improve water quality by reducing fertilizer usage.
• Certification regime. The certification regime describes the systems and procedures that are used to certify and register carbon offsets. Different methodologies are used for measuring and verifying emissions reductions, depending on project type, size and location. For example, the Chicago Climate Exchange uses one set of protocols, while the CDM uses another. In the voluntary market, a variety of industry standards exist. These include the Voluntary Carbon Standard and the CDM Gold Standard that are implemented to provide third-party verification of carbon offset projects.

Sources of carbon offsets

The CDM identifies over 200 types of projects suitable for generating carbon offsets, which are grouped into broad categories. These project types include renewable energy, methane abatement, energy efficiency, reforestation and fuel switching.

Renewable energy

Renewable energy offsets commonly include wind power, solar power, hydroelectric power and biofuel. Some of these offsets are used to reduce the cost differential between renewable and conventional energy production, increasing the commercial viability of a choice to use renewable energy sources.

Renewable Energy Credits (RECs) are also sometimes treated as carbon offsets, although the concepts are distinct. Whereas a carbon offset represents a reduction in greenhouse gas emissions, a REC represents a quantity of energy produced from renewable sources. To convert RECs into offsets, the clean energy must be translated into carbon reductions, typically by assuming that the clean energy is displacing an equivalent amount of conventionally produced electricity from the local grid. This is known as an indirect offset (because the reduction doesn't take place at the project site itself, but rather at an external site), and some controversy surrounds the question of whether they truly lead to "additional" emission reductions and who should get credit for any reductions that may occur.

Methane collection and combustion

Some offset projects consist of the combustion or containment of methane generated by farm animals (by use of an anaerobic digester), landfills or other industrial waste. Methane has a global warming potential (GWP) 23 times that of CO₂; when combusted, each molecule of methane is converted to one molecule of CO₂, thus reducing the global warming effect by 96%.

An example of a project using a anaerobic digester can be found in Chile where in December 2000, the largest pork production company in Chile, initiated a voluntary process to implement advanced waste management systems (anaerobic and aerobic digestion of hog manure), in order to reduce greenhouse gas (GHG) emissions.

Energy efficiency

Chicago Climate Justice activists protesting cap and trade legislation in front of Chicago Climate Exchange building in Chicago Loop

While carbon offsets which fund renewable energy projects help lower the carbon intensity of energy supply, energy conservation projects seek to reduce the overall demand for energy. Carbon offsets in this category fund projects of several types:

1. Cogeneration plants generate both electricity and heat from the same power source, thus improving upon the energy efficiency of most power plants which waste the energy generated as heat.
2. Fuel efficiency projects replace a combustion device with one which uses less fuel per unit of energy provided. Assuming energy demand does not change, this reduces the carbon dioxide emitted.
3. Energy-efficient buildings reduce the amount of energy wasted in buildings through efficient heating, cooling or lighting systems. In particular, the replacement of incandescent light bulbs with compact fluorescent lamps can have a drastic effect on energy consumption. New buildings can also be constructed using less carbon-intensive input materials.

Destruction of industrial pollutants

Industrial pollutants such as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a GWP many thousands of times greater than carbon dioxide by volume. Because these pollutants are easily captured and destroyed at their source, they present a large and low-cost source of carbon offsets. As a category, HFCs, PFCs, and N₂O reductions represent 71% of offsets issued under the CDM.

Land use, land-use change and forestry

Land use, land-use change and forestry (LULUCF) projects focus on natural carbon sinks such as forests and soil. Deforestation, particularly in Brazil, Indonesia and parts of Africa, account for about 20% of greenhouse gas emissions. Deforestation can be avoided either by paying directly for forest preservation, or by using offset funds to provide substitutes for forest-based products. There is a class of mechanisms referred to as REDD schemes (Reducing emissions from deforestation and forest degradation), which may be included in a post-Kyoto agreement. REDD credits provide carbon offsets for the protection of forests, and provide a possible mechanism to allow funding from developed nations to assist in the protection of native forests in developing nations.

Almost half of the world's people burn wood (or fiber or dung) for their cooking and heating needs. Fuel-efficient cook stoves can reduce fuel wood consumption by 30 to 50%, though the warming of the earth due to decreases in particulate matter (i.e. smoke) from such fuel-efficient stoves has not been addressed. There are a number of different types of LULUCF projects:

• Avoided deforestation is the protection of existing forests.
• Reforestation is the process of restoring forests on land that was once forested.
• Afforestation is the process of creating forests on land that was previously unforested, typically for longer than a generation.
• Soil management projects attempt to preserve or increase the amount of carbon sequestered in soil.

Purchase of carbon allowances from emissions trading schemes

Voluntary purchasers can offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs such as the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme. By purchasing the allowances that power plants, oil refineries, and industrial facilities need to hold to comply with a cap, voluntary purchases tighten the cap and force additional emissions reductions.

Links with emission trading schemes

Main article: Carbon Credit

Once it has been accredited by the UNFCCC a carbon offset project can be used as carbon credit and linked with official emission trading schemes, such as the European Union Emission Trading Scheme or Kyoto Protocol, as Certified Emission Reductions. European emission allowances for the 2008-2012 second phase were selling for between 21 and 24 Euros per metric ton of CO₂ as of July 2007.

The voluntary Chicago Climate Exchange also includes a carbon offset scheme that allows offset project developers to sell emissions reductions to CCX members who have voluntarily agreed to meet emissions reduction targets.

The Western Climate Initiative, a regional greenhouse gas reduction initiative by states and provinces along the western rim of North America, includes an offset scheme. Likewise, the Regional Greenhouse Gas Initiative, a similar program in the northeastern U.S., includes an offset program. A credit mechanism that uses offsets may be incorporated in proposed schemes such as the Australian Carbon Exchange.

Other

A UK offset provider set up a carbon offsetting scheme which set up a secondary market for treadle pumps in developing countries. These pumps are used by farmers, using human power, in place of diesel pumps. However, given that treadle pumps are best suited to pumping shallow water, while diesel pumps are usually used to pump water from deep boreholes, it is not clear that the treadle pumps are actually achieving real emissions reductions. Other companies have explored and rejected treadle pumps as a viable carbon offsetting approach due to these concerns.

Accounting for and verifying reductions

Due to their indirect nature, many types of offset are difficult to verify. Some providers obtain independent certification that their offsets are accurately measured, to distance themselves from potentially fraudulent competitors. The credibility of the various certification providers is often questioned. Certified offsets may be purchased from commercial or non-profit organizations for US$1–30 per tonne of CO₂, due to fluctuations of market price. Annual carbon dioxide emissions in developed countries range from 6 to 23 tons per capita.

Accounting systems differ on precisely what constitutes a valid offset for voluntary reduction systems and for mandatory reduction systems. However formal standards for quantification exist based on collaboration between emitters, regulators, environmentalists and project developers. These standards include the Voluntary Carbon Standard, Green-e Climate, Chicago Climate Exchange and the CDM Gold Standard, the latter of which expands upon the requirements for the Clean Development Mechanism of the Kyoto Protocol.

Accounting of offsets may address the following basic areas:

• Baseline and Measurement - What emissions would occur in the absence of a proposed project? And how are the emissions which occur after the project is performed going to be measured?
• Additionality - Would the project occur anyway without the investment raised by selling carbon offset credits? There are two common reasons why a project may lack additionality: (a) if it is intrinsically financially worthwhile due to energy cost savings, and (b) if it had to be performed due to environmental laws or regulations.
• Permanence - Are some benefits of the reductions reversible? (for example, trees may be harvested to burn the wood, and does growing trees for fuel wood decrease the need for fossil fuel?) If woodlands are increasing in area or density, then carbon is being sequestered. After roughly 50 years, newly planted forests will reach maturity and remove carbon dioxide more slowly.
• Leakage - Does implementing the project cause higher emissions outside the project boundary?

Co-benefits

While the primary goal of carbon offsets is to reduce global carbon emissions, many offset projects also claim to lead to improvements in the quality of life for a local population. These additional improvements are termed co-benefits, and may be considered when evaluating and comparing carbon offset projects. Some possible co-benefits from a project which replaces wood burning stoves with ovens which use a less carbon-intensive fuel include:

• Lower non greenhouse gas pollution, which improves health in the home.
• Improved safety for women who used to go alone into the forest to collect firewood, and were thus exposed to danger of violence.
• Better education for children who need no longer spend so much time collecting wood fuel.
• Better preservation of forests, which are an important habitat for wildlife.

In a recent survey conducted by EcoSecurities, Conservation International, CCBA and ClimateBiz, of the 120 corporates survyed more than 77% rated community and environmental benefits as the prime motivator for purchasing carbon offsets.

Carbon offset projects can also negatively affect quality of life. For example, people who earn their livelihoods from collecting firewood and selling it to households could become unemployed if firewood is no longer used. A paper from the Overseas Development Institute offers some indicators to be used in assessing the potential developmental impacts of voluntary carbon offset schemes:

• What potential does the project have for income generation?
• What effects might a project have on future changes in land use and could conflicts arise from this?
• Can small-scale producers engage in the scheme?
• What are the 'add on' benefits to the country - for example, will it assist capacity-building in local institutions?

Quality Assurance Schemes

The UK Government's Quality Assurance Scheme for Carbon Offsetting

In an effort to inform and safeguard business and household consumers purchasing Carbon Offsets, the UK Government has launched a scheme for regulating Carbon offset products. DEFRA have created the "Approved Carbon Offsetting" brand to use as an endorsement on offsets approved by the UK government. The Scheme sets standards for best practice in offsetting. Approved offsets have to demonstrate the following criteria:

• Accurate calculation of emissions to be offset
• Use of good quality carbon credits i.e. initially those that are Kyoto compliant
• Cancellation of carbon credits within a year of the consumers purchase of the offset
• Clear and transparent pricing of the offset
• Provision of information about the role of offsetting in tackling climate change and advice on how a consumer can reduce his or her carbon footprint

The first company to qualify for the scheme was Clear, followed by Carbon Footprint, Carbon Passport, Pure, British Airways and Carbon Retirement.

Australian Government National Carbon Offset Program

The Australian government is currently in a consultation period on the regulation of Carbon Offsets. The standard will provide guidance on what constitutes a genuine, additional voluntary offset credit, set requirements for the verification and retirement of such credits, and provide principles for calculating the emissions of an organisation, product or service which could be offset.

Controversies

Indulgence controversy

Some activists disagree with the principle of carbon offsets, likening them to papal indulgences, a way for the guilty to pay for absolution rather than changing their behavior. George Monbiot, an English environmentalist and writer, says that carbon offsets are an excuse for business as usual with regards to pollution. Proponents hold that the indulgence analogy is flawed because they claim carbon offsets actually reduce carbon emissions, changing the business as usual, and therefore address the root cause of climate change. Proponents of offsets claim that third-party certified carbon offsets are leading to increased investment in renewable energy, energy efficiency, methane biodigesters and reforestation and avoided deforestation projects, and claim that these alleged effects are the intended goal of carbon offsets.

Effectiveness of tree-planting offsets

Some environmentalists have questioned the effectiveness of tree-planting projects for carbon offset purposes. Critics point to the following issues with tree planting projects:

• Timing. Trees reach maturity over a course of many decades. Project developers and offset retailers typically pay for the project and sell the promised reductions up-front, a practice known as "forward selling".
• Permanence. It is difficult to guarantee the permanence of the forests, which may be susceptible to clearing, burning, or mismanagement. The well-publicized instance of the "Coldplay forest," in which a forestry project supported by the British band Coldplay resulted in a grove of dead mango trees, illustrates the difficulties of guaranteeing the permanence of tree-planting offsets.
• Monocultures and invasive species. In an effort to cut costs, some tree-planting projects introduce fast-growing invasive species that end up damaging native forests and reducing biodiversity. For example, in Ecuador, the Dutch FACE Foundation has an offset project in the Andean Páramo involving 220 square kilometres of eucalyptus and pine planted. The NGO Acción Ecológica criticized the project for destroying a valuable Páramo ecosystem by introducing exotic tree species, causing the release of much soil carbon into the atmosphere, and harming local communities who had entered into contracts with the FACE Foundation to plant the trees. However, some certification standards, such as the Climate Community and Biodiversity Standard require multiple species plantings.
• Indigenous land rights issues. Tree-planting projects can cause conflicts with indigenous people who are displaced or otherwise find their use of forest resources curtailed. For example, a World Rainforest Movement report documents land disputes and human rights abuses at Mount Elgon. In March 2002, a few days before receiving Forest Stewardship Council certification for a project near Mount Elgon, the Uganda Wildlife Authority evicted more than 300 families from the area and destroyed their homes and crops. That the project was taking place in an area of on-going land conflict and alleged human rights abuses did not make it into project report.
• Methane. A recent study has claimed that plants are a significant source of methane, a potent greenhouse gas, raising the possibility that trees and other terrestrial plants may be significant contributors to global methane levels in the atmosphere. However, this claim has been disputed recently by findings in another study.
• The albedo effect. Another study suggested that trees outside the tropics do little to mitigate climate change, because their absorption of sunlight creates a warming effect that balances out their absorption of carbon dioxide.
• Necessity. Corporate tree-planting is not a new idea; farming operations have been used by companies making paper from trees for a long time. If farmed trees are replanted, and the products made from them are placed into landfills rather than recycled, a very safe, efficient, economical and time-proven method of geological sequestration of greenhouse carbon is the result of the paper product use cycle.

Additionality and lack of regulation in the voluntary market

Several certification standards exist, offering variations for measuring emissions baseline, reductions, additionality, and other key criteria. However, no single standard governs the industry, and some offset providers have been criticized on the grounds that carbon reduction claims are exaggerated or misleading. Problems include:

• Widespread instances of people and organizations buying worthless credits that do not yield any reductions in carbon emissions.
• Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
• Brokers providing services of questionable or no value.
• A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

Perverse incentives

Because offsets provide a revenue stream for the reduction of some types of pollutants, they can in some cases provide incentives to pollute more, so that polluting entities can later get credit for reducing emissions from an artificially high baseline. This is especially the case for offsets with a high profit margin. For example, one Chinese company generated $500 million in carbon offsets by installing a $5 million incinerator to burn the HFCs produced by the manufacture of refrigerants. The huge profits provided incentive to create new factories or expand existing factories solely for the purpose of increasing production of HFCs and then destroying the resultant pollutants to generate offsets. Not only is this outcome environmentally undesirable, it undermines other offset projects by causing offset prices to collapse. The practice had become so common that offset credits are now no longer awarded for new plants to destroy HFC-23.

In Nigeria oil companies flare off 40% of the natural gas found. The Agip Oil Company plans to build plants to generate electricity from this gas and thus claim 1.5 million offset credits a year. United States company Pan Ocean Oil Corporation has also applied for credits in exchange for processing its own waste gas in Nigeria. Oilwatch.org's Michael Karikpo calls this "outrageous" as flaring is illegal in Nigeria, "It's like a criminal demanding money to stop committing crimes".

Other negative impacts from offset projects

Although many carbon offset projects tout their environmental co-benefits, some are accused of having negative secondary effects. Point Carbon has reported on an inconsistent approach with regards to some hydro-electric projects as carbon offsets; some countries in the EU are not allowing large projects into the EU ETS, because of their environmental impacts, even though they have been individually approved by the UNFCCC and World Commission on Dams..

Offset projects may also have negative social impacts, for example when local residents are evicted to enable a National Park to be marketed as a carbon offset.

See also

• Action on climate change
• Carbon dioxide sinks
• Carbon emissions trading
• Carbon neutral
• Carbon negative
• Carbon tax
• Defra
• Ecosystem Marketplace
• Live Earth Pledge
• Mitigation of global warming
• Nutrient trading
• Plantations and natural forest loss
• Renewable Energy Certificates
• Weighted average cost of carbon
• Zero carbon

External links

• Carbon Management at Curlie