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Are Carbon Offsets More Than Hot Air?
Joel Makower, 5 Dec 06
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A new report that rates providers of retail carbon offsets is out today, and even the anticipation of its publication has caused a flurry of anxiety among some of the 30 companies it reviewed.

Seems that "carbon neutral" isn't just the Word of the Year for 2006. It's also shaping up to be the Debate of the Year for 2007.

The report (Download - PDF) -- published by the nonprofit group Clean Air-Cool Planet (CACP) and sponsored by Clif Bar, Interface, Inc., and Stonyfield Farm -- represents the first independent review of retail carbon offset providers ever undertaken, according to CACP executive director Adam Markham. The goal of the report, he says, is to encourage more transparency and quality across retail offset providers as a whole.

It's about time. Over the past year, retail carbon offsets -- purchased by individuals and businesses as a means of zeroing out the carbon emissions created by their various activities and purchases -- have become big business. The International Emissions Trading Association and World Bank estimate that the market for carbon credits, of which offsets are a part, is now worth more than $21.5 billion, according to a new study by ICF International. Nearly everyone is going carbon neutral (a.k.a. "climate neutral") these days, from airlines to academia.

But what, exactly, are buyers buying? There are no standards for offsets, and more than a little disagreement on what constitutes a "quality" offset. As the stakes grow, with more companies entering the offsets arena, it's time to ask some basic questions.

CACP set out do that. It hired veteran offsets expert Mark Trexler, president of Trexler Climate + Energy Services (TC+ES), to rate 30 companies on seven criteria, using a 1-10 scale. (Full disclosure: Trexler writes the Ask the Climate Expert column on, which I run.) The criteria included such things as how well buyers are able to evaluate offset quality, the providers' transparency in explaining how they spend your money, how well the providers understood the technical aspects of offsets, the priority each assigned to educating consumers, and their use of third-party project protocols and certification.

This stuff gets geeky very quickly, so understanding even the evaluation criteria requires expert knowledge on a range of issues. One key question revolves around something called "additionality." Emissions reductions are "additional" if they would not have otherwise occurred -- that is, if an emissions reduction is not "business as usual." But not everyone agrees on what that means, and it's proven exceedingly difficult to create a standard measure of what's "additional." And therein lies one of the controversies.

Many offset providers purchase renewable energy certificates, or RECs, which represent the environmental attributes of electricity from a renewable source -- solar, wind, geothermal, etc. (I previously covered RECs here.) When a wind farm generates power, it creates two things: electrons, which it sells into the grid, and RECs, which can be traded on the open market. When you buy offsets from some of the offset companies Trexler looked at, you are essentially buying RECs.

But Trexler is among those who believe that RECs aren't "additional" -- that is, they are being generated regardless of whether anyone purchases them. To be a true offset, says Trexler, "You have to say that the money you're spending is paying for something that wouldn't otherwise happen."

CACP's Markham proffered this explanation: "If anyone is going to claim carbon neutrality for their actions or their corporation's actions, they need to be able to show that the reductions in greenhouse gas emissions occurred because of the market for offsets. In other words, if you're just buying something from a renewable energy project that would have happened anyway, we don't think that's a very good cause for claiming carbon neutrality."

As I said, this stuff is far from simple. TC+ES's report delves into some of the minutiae. But even Trexler, who's been working in the field of carbon mitigation since 1991, confided to me that, "It took me a long time to get my head around it."

In the end, TC+ES concluded that eight offset providers could be deemed "top performing" (in alphabetical order):

  • AgCert/Drive Green (Ireland)
  • AtmosFair (Germany)
  • Carbon Neutral Company (UK)
  • Climate Care (UK)
  • Climate Trust (US)
  • CO2 Balance (UK)
  • Native Energy (US)
  • Sustainable Travel/My Climate (US)

    But all's not well that ends there. Several of the providers, anticipating that they didn't make the cut, have already begun challenging the report; one of them contacted me when he heard I had received an advance copy. In an e-mail, he charged that the report "could confuse the public and ultimately harm the continued development of the voluntary carbon offset market" and noted that the report may be "premature," given that two organizations currently are working on separate standards for offsets. He also cited the report's "narrow view of the role of renewable energy certificates."

    "Efforts to develop the new standards are admirable," countered Trexler, adding that, "People have been trying to do this for a decade. It's very difficult to do. And it all comes down to additionality -- it's almost impossible to write an objective, easily interpreted way to address additionality. I have no confidence that that's going to be addressed by these standards."

    There's much more to it, but I'll confess to finding my head spinning from spending several hours pondering all these matters. Clearly, if carbon offsets are to become a mass-market purchase, buying them needs to be a no-brainer -- simple enough for the average Joe to comprehend yet rooted in solid, scientific ground. We're not yet close to that ideal, as the CACP report shows. And that may confound this nascent market, potentially risking a backlash as consumers throw up their arms in frustration, figuring it's all yet another marketing scam.

    "This whole process has been insane," sighs Trexler. "Instead of focusing on how to improve the market, we're all just focusing on what does it mean for us, which is frustrating."

    For now, read the report and make your own choices. It may not be perfect, but it's the best assessment yet of the growing field of offset providers, and CACP, TC+ES, and their sponsors deserve thanks for shedding light on this all-too-murky topic.

    Bottom line: You've got to ask good questions when buying offsets; the report suggests several questions to ask. Whether you'll fully grok the answers, of course, is a whole 'nother thing.

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    We appreciate your coverage of this timely and important topic.

    For the past six months, Center for Resource Solutions (CRS runs the Green-e program) has been engaged with an advisory group of 15 leading experts from key environmental organizations, government agencies, businesses, and advocacy organizations who work on climate change issues to develop a draft standard that will ensure that retail GHG reduction products sold to consumers provide real, verified and additional GHG reductions. CRS uses transparent, stakeholder driven processes in the development its consumer protection standards. The draft Green-e Retail GHG Reduction Product standard will be distributed for broad stakeholder review later this month. Any parties interested in participating in this process should contact CRS to be added to the stakeholder list.

    As presented in your blog, the argument against using RECs as a GHG reduction is that REC markets do not create additional renewables. This is not the case. The renewable energy and REC markets are complex. RECs are used for varying purposes
    (for example, regulatory mandates such as renewable portfolio standards, as accounting mechanisms for state run consumer disclosure programs, and also to support voluntary purchases of new renewable energy) and are of varying quality. From its inception almost 10 years ago, Green-e has assured that Green-e certified renewable energy purchases are supporting new renewable developments and delivering environmental benefits to customers.

    Specifically, Green-e requires that Green-e certified RECs must be from renewable generation serving voluntary markets for environmental attributes (which include GHG reduction benefits created by renewable energy) and from facilities put online after 1997. Further, mandated renewables do not qualify for Green-e.

    In fact, leading GHG registries and accounting protocols (including EPA Climate Leaders, World Resources Institute’s GHG Protocols, and the California Climate Action Registry) recognize Green-e certified RECs as a way for entities to reduce their GHG footprints. As you pointed out in your previous post about RECs, Green-e certification is an essential component for consumers to look for when purchasing RECs.

    The Green-e Program is developing the Retail GHG Reduction Certification standard to provide quality assurance, consumer protection and market support to the emerging retail greenhouse gas reduction market and the growing number of consumers who choose to decrease their own contribution to global warming by purchasing greenhouse gas reductions.

    We agree with you, and Mark Trexler, and Adam Markham that the time for a broadly supported, meaningful, GHG reduction standard is now. We expect our standard to serve this function, and it will be available for public comment later this month.

    Posted by: Sarah Krasley, CRS Communications Director on 5 Dec 06

    In 2004 the UK food retailer J Sainsbury introduced a refined service to customers. If they typed a code number from an organic potato package into a company’s web page, they would instantly identify which farm had produced the potatoes. Thanks to information technology, the origin of the food was no longer hidden from customers by retailers’ complex distribution chains.

    Francis Sullivan, advisor on the environment for HSBC – a bank which has pledged to become carbon neutral – sees similarities between the emerging carbon market and the organic food market, which is underpinned by visible and rigorous, consistently upheld criteria. Traceability is, of course, also a key building block for sustainable consumption.

    As with the organic market too, a clear, traceable link between carbon offset buyer and supplier is essential both in the regulated certified emissions reduction (CER) market and the non-regulated verified emissions reduction (VER) market, so that buyers can trust the validity of their emissions reduction certificates. But as 2007 begins, both the VER and CER markets still have a long way to go before resembling the now well-ordered organic food industry. Nevertheless, the battle within both markets to demonstrate the virtues of reliability and transparency is well under way.

    Companies voluntarily wishing to reduce their carbon dioxide emissions by funding clean energy projects can buy both VERs and CERs to show that they have reduced their emissions of carbon dioxide (CO2) by one tonne more than would have occurred in a business-as-usual scenario. Companies operating within the regulated European Emissions Trading Scheme (EU ETS) buy the European permits to emit one tonne of CO2 called European Union Allocations (EUAs) or they can buy CERs as an alternative.

    “Most markets in any industry are regulated in some way to ensure buyers are getting an agreed standard of product, but in the verified emissions reduction [VER] market, anyone can sell anything,? comments Sullivan, drawing conclusions based upon his company’s survey of the market. His criticism is typical of many customers and competitors shunning VERs.

    Dietrich Brockhagen, managing director of the German company Atmosfair which runs “climate protecting projects,? (it does not mention the ambiguous term carbon neutrality) is a keen competitor in the industry and equally critical. “We are not involved in the VER market – we don’t think it’s environmentally sound due to the fact that there is no common standard or uniform set of criteria. A VER can mean anything,? he remarks, unknowingly echoing Sullivan.

    Brockhagen is at pains to point out the efforts the company has made to link customers (both individuals and companies) directly with the Atmosfair projects they are investing in. “If you go to our web pages you will see every step in detail. We have made every effort to provide transparency so that the process is verifiable to the user without our involvement,? he emphasises.

    The company describes individual projects such as a solar mirror rice cooking system in India and a biogas scheme in Thailand on the website, alongside a description of its planning, verification and operational processes, official verification reports and details of its approval and project selection procedures.

    Brockhagen operates only in the more firmly structured CER market and only uses Gold Standard CERs. These CERs are derived from projects with particularly rigorous criteria relating to the sustainable development goals of a project as well as its additionality - the quality that shows the project’s creation is dependent on the creation of CERS or VERs and would not have happened under a business-as-usual scenario. Again, additionality is a hotly contested concept.

    The clean energy sector has been developing for 10 years or more and investment in the sector dates from before the creation of the Kyoto Protocol’s Clean Development Mechanism (CDM). A business-as-usual scenario frames the amount of investment that would have taken place anyway, without the CDM. Hence, additionality is supposed to represent the additional investment that has taken place, stimulated by the CDM alone, and hence making an additional impact on emissions reductions.

    In the newer VER market, companies selling VERs have been developing additionality criteria that often vary from those in the CER market. Is the development of the VER market the result of business-as-usual and a gradually developing social awareness of climate change, or is it stimulating investment in its own right? The causality is hard to prove. Most importantly, a consensus on the definition of additionality in the VER market is absent. The definition of the baseline at which investment becomes additional is very subjective.

    “Additionality is not black-and-white, but that makes it all the more important that not every group defines its own criteria but that ONE approach is followed,? comments Michael Schlup, Director of the Swiss-based Gold Standard Foundation, the organisation which makes the strictest demands on CER and VER projects.

    It is clear that since entry into force of the Kyoto Protocol, the development of projects under the CDM has gained momentum. Investment is growing, and that in turn has resulted in a closer scrutiny of supplier credibility in the CER but more noticeably in the VER market.

    And this is where the analogy between organic food markets and carbon markets weakens; it is in the commoditised EU ETS as well as the CER market that the more rigorous standards and better traceability are to be found. This is especially true of the EU ETS (linked to the CDM mechanism via the Linking Directive) - which currently makes up the bulk of global carbon trading.

    In the EU ETS, traders regard EUAs as the flipside of the oil, gas and other energy markets - a ‘negative commodity’ or right to create a certain amount of waste (CO2) alongside energy generation. For example, the price of an EUA responds to the price of coal, since companies may switch from coal to gas when coal prices rise; this in turn will cut their emissions, since gas emits less CO2. The EU ETS is a cap-and-trade scheme through which governmental pressure is placed on polluters to cut emissions by creating emission caps. The stricter the caps placed on corporate emissions, the higher the value of an EUA is likely to be.

    Whereas pollution controls are built into this market through regulation, they are integrated into the VER market through values-based corporate affairs policies. VERs are not commodities but a marketing tool for corporations who buy them from retailers such as Atmosfair, positioning them as socially responsible organisations. They are supposed to represent, not a permit to emit a tonne of CO2, but an emissions reduction of one tonne more than would have happened under a business-as-usual scenario.

    A 2006 study by the International Institute for Environment and Development (IIED) found that 30-40 retailers exist in the carbon market, based mainly in Europe, the USA and Australia. The Carbon Neutral Company in London is one of the retailers.

    “Our customers are people who want to take action and become part of the solution,? says Bill Sneyd, Operations Director. He says the company offers a range of services in addition to investment in energy projects. Projects include a solar lighting system in Sri Lanka (replacing kerosene lamps) and a plan to restore a forest in Mozambique. The company operates in both the VER and the CER market. Its services range from helping companies to understand their carbon footprint, reduce operational emissions and providing communications advice.

    Like Dietrich Brockhagen, he is keen to show that customers can trace where their investment has been placed, as well as be assured of the quality of the projects. Transactions are noted in a registry which shows that, for instance, 1000 tonnes of CO2 from project X have been allocated to client Y.

    Like Atmosfair, the company wants the “chain of custody? to be visible on its website for the purposes of transparency. “The Carbon Neutral Company is committed to making the key elements of its registry publicly accessible, and is increasing the functionality of its website to this end during 2006,? it states on its offset project registry web page. Before it is registered, though, a project has to be verified by auditors such as major accountancy firms, who also check the register itself.

    Auditors confirm the volume of emissions reductions created by the project. They also check that double counting does not occur, for instance when two customers are allocated the same lot of emissions reductions from a particular project, or when a project developer sells the same lot to a retailer and an end user. “That’s harder to guard against in the VER market,? says Sneyd.

    At the moment, the company uses its own Carbon Neutral Protocol, a standard measuring carbon neutrality developed five years ago when the market was embryonic. Sneyd says that in 2005 70% of the company’s projects were technology-based while 30% were forestry, and he sees the proportion of forestry as reducing further in the future.

    NGOs have attacked the concept of forestry projects, suggesting they show poor additionality. Forests may not be permanent and take a long time to grow. The assumptions about the CO2 absorption capacities of forests vary more widely than the assumptions behind clean energy projects.

    Sneyd agrees that there are risks involved in forestry projects. But he states that “ten years ago trees were a fantastic icon. Now messages don’t need to be as simple as that, the market is moving on.? Forestry projects, he argues, are complementary to clean energy and should not be written off as part of the solution to climate change because of the destruction of carbon sinks through deforestation.

    Critics may have less cause in future to snipe at the VER market, as standards are beginning to emerge. The International Emissions Trading Association (IETA) and the Climate Group – a stakeholder group with members ranging from the Greater London Authority (GLA), State of California and BP – are consulting on a new Voluntary Carbon Standard (VCS) which could be used to harmonise the VER market.

    They also propose to create better traceability by generating a unique serial number for each VER. But a group of NGOs including WWF and Friends of the Earth who back the Gold Standard say that the VCS’s additionality guidance is “inadequate? and that it will “legitimise false claims of carbon neutrality from buyers.?

    In a parallel development, the Renewable Energy and Energy Efficiency Partnership (REEEP) and the Gold Standard Foundation have launched the Gold Standard VER. “Because of the confusion, fragmentation, and lack of liquidity in the marketplace (not a lot of VERs were being traded), REEEP decided that VERs need to be harmonised and quality ensured, so that buyer confidence would increase and finance would flow into renewable energy projects,? says Peter Richards, Communications Director at REEEP.

    The organisation, funded by several governments, facilitates clean energy development in developing and transitional economies. “Gas flaring, carbon sequestration or forestry projects are excluded from the GS VER, because they do not support long term changes to energy production,? explains Richards. REEEP has also launched a Voluntary Carbon Offset (VCO) outsourcing service to governments who want to offset air travel (and other emissions) via CERs, though REEEP itself only facilitates the sale of GS CERs.

    Market positions are being taken as the market grows. The most demanding customers will probably choose the GS CER or GS VER. In the current market, they also pay more. Although projects are larger and eventually economies of scale may result, CERs are currently more expensive due to the demands of the CDM. Atmosfair’s customers pay E18-20 per CER at the moment. In the VER market, prices range from E4 upwards.

    Avoiding the carbon market completely and cutting fossil fuel consumption at home is the best option for the environmentally-conscious customer. HSBC, for its part, found that the VER market was not the most cost-effective way achieve its goals. Retailers could not handle the middle-ranking size of its offset requirements (700,000 tonnes per year). Equally, “the wholesale CER market is not designed for us? says Sullivan. In-house energy efficiency investments, which he says cost ten times as much as its investment in carbon credits, are an option. Another solution is to incorporate service industries into cap-and-trade schemes, nullifying the need for VERs in the first place.

    Posted by: Marianne Osterkorn on 5 Dec 06

    Hi Joel,

    Thanks for digging into this important topic. At TerraPass, we're still digesting the report, and we'll certainly be posting our full thoughts soon on our blog. In the meantime, a couple of comments:

    1) The study does do an admirable job of clearly laying out many (maybe even most) of the key issues in the voluntary carbon offset industry. These are complicated topics, and it's nice to see them laid out clearly. There's a lot in there to chew over.

    2) Unfortunately, the attempt to overlay a numeric ranking system on top of these complex issues goes so far awry as to render the report's conclusions largely meaningless. You quote the study's author as saying: "It all comes down to additionality -- it's almost impossible to write an objective, easily interpreted way to address additionality."

    The author intends this to be a criticism of the open standards process now underway in the voluntary carbon offset industry, but why shouldn't this comment apply to the CACP study itself, which after all makes additionality its pre-eminent concern?

    Indeed, why is the participatory standards process -- which embodies the pooled knowledge of dozens of environmental organizations with deep expertise in the field -- trumped by a single marketing survey conducted by an outside consultancy?

    As I read the CACP study, I found myself repeatedly frustrated by the experience of agreeing wholeheartedly with this or that qualitative statement, and then being utterly baffled by the way those statements were turned into pseudo-quantitative evaluative criteria.

    3) The voluntary carbon industry has actually been doing an excellent job of aggressively and cooperatively pursuing quality standards, contrary to what is suggested in your post. You state that the voluntary carbon industry is part of a $22 billion worldwide market, implying that it is long overdue for scrutiny. But of course this figure vastly overstates the size of the voluntary market, which is a tiny fraction of the overall pie. For such a young industry, the rapid evolution of quality standards has been remarkable.

    The study's author also complains that "this whole process has been insane. Instead of focusing on how to improve the market, we're all just focusing on what does it mean for us, which is frustrating."

    This sounds very high-minded, but in fact most of us in the voluntary carbon industry have long known that consumer trust is our most important asset and have therefore focused a huge amount of energy on quality and transparency. Perhaps the author's frustration reflects the lack of confidence that industry participants had in the study's methodology. As the study briefly notes, more than half of the ranked organizations declined to be surveyed, out of concerns over how the research was being conducted.


    So I find myself with mixed emotions. I'm glad that important issues in the industry are being aired, and I commend the study's author for laying out those issues with clarity and expertise. Had the study stuck with a qualitative analysis, perhaps backed up with individual case studies, it would indeed have been a valuable resource for consumers and practitioners. Certainly I have taken away some insights that I will be applying to my own business.

    But the study makes such a hash of its forced ranking system that I fear it only muddies further what it hoped to clarify.

    Fortunately, I don't share the author's pessimism regarding the standards process now underway. In fact, such standards processes have been enormously successful in the renewable energy market, and there's every reason to expect their success to be duplicated in the voluntary carbon market. In a few months, the picture for consumers will get a lot clearer.

    Posted by: Adam Stein on 5 Dec 06

    Nice work Joel! Apparently people really pay attention to WorldChanging =).

    Posted by: Stephen A. Fuqua on 5 Dec 06

    I think the analogy between organic food and carbon offsets is a good one. Both ask consumers to pay a price premium to conform to an ideal of the way they think the world should be. But the comparison is not entirely fair. For one thing, the organic movement has been around a lot longer than the offset industry, and has had longer to get its house in order. More importantly, I hope it is not ungenerous to add that part of the process of defining certification criteria to determine what can be called "organic" has led to what many might deem a pretty significant divergence from the movement's early ideals. I don't claim to be an expert in organic food, but I know that (fairly or not) the industry has been accused of selling out, and of being indistinguishable from non-organic agribusiness.

    So while it is no doubt supremely important to be able to establish beyond question that our offsets actually work, it is also important not to overlook one of our sector's key assets: that there are people and businesses willing to participate in this economy for no other reason than that it is the right thing to do, and others are willing to retail offsets without being motivated by profit. It would be a mistake to lose sight of this in pursuit of a set of certification criteria.

    Those who pooh-pooh offsets almost never argue that they don't work. They claim instead that they are poorly managed and audited, that they are vulnerabe to double-counting, that they pay people to do things they would have done anyway, that they encourage people in the developing world to raze one forest in order to plant another, etc. To counter these arguments we need strong and quantifiable regulations in place--no doubt about it. But another argument against offsetting is that it is no more than a mechanism for the middle class to buy a clear conscience. Another way of saying that is that offsets are a way for people to pay money to do the right thing for the environment. This is not something people would have been lining up to do even a short time ago. That's a unique opportunity to educate and to direct resources to wherever they'll help. Let's make sure that whatever regulations come into effect, they make it easier for people to do the right thing, not harder.

    Posted by: Nick Garrison, Zerofootprint Communications Director on 6 Dec 06

    Regardless of the problems, there needs to be an independent auditing agency established to ensure that carbon is actually being offset when we buy carbon offsets.

    Although I have bought offsets in the past and struggled mightily to ensure myself that I am actually doing some good, I am still skeptical as to whether I am truly offsetting the carbon emitted from my Prius, for example.

    Posted by: t on 8 Dec 06

    I do some work with a nonprofit, the Clean Air Conservancy, that has worked in pollution markets since the 1990s and has retired 7 billion pounds of pollution allowances and credits.

    The CAC supports efforts to bring transparency to emerging carbon markets. The public needs to know that offsets are real and meaningful. And carbon markets need to be shaped so that retiring pollution is encouraged.

    Posted by: Chris Thompson on 11 Dec 06

    offsets to me feel like the charitable donations part of international aid. an important component, but nowhere near as effective as institutional grants. or, bigger than a bake sale; smaller than the pentagon budget we need.

    somebody needs to prove to me that giving $50 to buy a share in a sort-of-needs-to-be-private green facility is a more effective offset than giving $50 to the union of concerned scientists or some other proven-good lobbying and advisory group. how much more might a political donation offset, if it helps beat back the fossil fuel industry trolls? me, and ten other people?

    i don't think this is the right place to be putting this money and i think the proof is how happy middle-road people are with it -- they sense, i think, that this is not a way of rocking the boat.

    Posted by: hibiscus on 13 Dec 06



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