Carbon offset

In 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands worldwide, up 68 per cent from 2008, according to the study by carbon-market research firm Point Carbon, of Washington and Oslo. But at EUR94 billion, or about $135 billion, the market's value was nearly unchanged compared with 2008, with world carbon prices averaging EUR11.40 a ton, down about 40 per cent from the previous year, according to the study.[22] The World Bank's "State and Trends of the Carbon Market 2010"[23] put the overall value of the market at $144 billion, but found that a significant part of this figure resulted from manipulation of a VAT loophole.[24]

• 90% of voluntary offset volumes were contracted by the private sector—where corporate social responsibility and industry leadership were primary motivations for offset purchases.[25]
• Offset buyers' desire to positively impact the climate resilience of their supply chain or sphere of influence was evident in our data which identifies a strong relationship between buyers’ business sectors and the project categories from which they contract offsets.[25]

The global carbon market is dominated by the European Union, where companies that emit greenhouse gases are required to cut their emissions or buy pollution allowances or carbon credits from the market, under the European Union Emission Trading Scheme (EU ETS). Europe, which has seen volatile carbon prices due to fluctuations in energy prices and supply and demand, will continue to dominate the global carbon market for another few years, as the U.S. and China—the world's top polluters—have yet to establish mandatory emission-reduction policies.

On the whole, the U.S. market remains primarily a voluntary market, but multiple cap and trade regimes are either fully implemented or near-imminent at the regional level. The first mandatory, market-based cap-and-trade program to cut CO₂ in the U.S., called the Regional Greenhouse Gas Initiative (RGGI), kicked into gear in Northeastern states in 2009, growing nearly tenfold to $2.5 billion, according to Point Carbon. Western Climate Initiative (WCI)—a regional cap-and-trade program including seven western states (California notably among them) and four Canadian provinces—has established a regional target for reducing heat-trapping emissions of 15 percent below 2005 levels by 2020. A component of California's own Global Warming Solutions Act of 2006, kicked off in early 2013, requires high-emissions industries to purchase carbon credits to cover emissions in excess of 25,000 CO2 metric tons.

Participants 

A wide range of participants are involved in the voluntary market, including providers of different types of offsets, developers of quality assurance mechanisms, third party verifiers, and consumers who purchase offsets from domestic or international providers. Suppliers include for-profit companies, governments, charitable non-governmental organizations, colleges and universities, and other groups.[26]

Motivations 

According to industry analyst Ecosystem Marketplace, the voluntary markets present the opportunity for citizen consumer action, as well as an alternative source of carbon finance and an incubator for carbon market innovation. In their survey of voluntary markets, data has shown that "Corporate Social Responsibility" and "Public Relations/Branding" are clearly in first place among motivations for voluntary offset purchases, with evidence indicating that companies seek to offset emissions "for goodwill, both of the general public and their investors".

In addition, regarding market composition, research indicates: "Though many analysts perceive pre-compliance buying as a dominant driving force in the voluntary market, the results of our survey have repeatedly indicated that precompliance motives (as indicated by 'investment/resale and 'anticipation of regulation') remain secondary to those of the pure voluntary market (companies/individuals offsetting their emissions)."[27]

Pre-compliance & trading 

The other main category of buyers on the voluntary markets are those engaged in pre-compliance and/or trading. Those purchasing offsets for pre-compliance purposes are doing so with the expectation, or as a hedge against the possibility, of future mandatory cap and trade regulations. As a mandatory cap would sharply increase the price of offsets, firms—especially those with large carbon footprints and the corresponding financial exposure to regulation—make the decision to acquire offsets in advance at what are expected to be lower prices.

The trading market in offsets in general resembles the trade in other commodities markets, with financial professionals including hedge funds and desks at major investment banks, taking positions in the hopes of buying cheap and selling dear, with their motivation typically short or medium term financial gain.

Retail 

Multiple players in the retail market have offerings that enable consumers and businesses to calculate their carbon footprint, most commonly through a web-based interface including a calculator or questionnaire, and sell them offsets in the amount of that footprint.[28] In addition many companies selling products and services, especially carbon-intensive ones such as airline travel,[29][30] offer options to bundle a proportional offsetting amount of carbon credits with each transaction.

Suppliers of voluntary offsets operate under both nonprofit and social enterprise models, or a blended approach sometimes referred to as triple bottom line. Other suppliers include broader environmentally focused organizations with website subsections or initiatives that enable retail voluntary offset purchases by members, and government created projects.

Features of companies that voluntarily offset emissions 

Companies that voluntarily offset their own emissions tend to be of relatively low carbon intensity, as they can offset a significant proportion of their emissions at relatively low cost.[31] Voluntary offsetting is particularly common in the financial sector. 61 per cent of financial companies in the FTSE 100 offset at least a portion of their 2009 emissions. Twenty-two per cent of financial companies in the FTSE 100 considered their entire 2009 operations to be carbon neutral.[32]

In 2015, the UNFCCC created a dedicated website where organizations, companies, but also private persons are able to offset their footprint with the aim of facilitating everyone's participation in the process of promoting sustainability on a voluntary basis.[33]

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. Emissions from burning fuel, such as red diesel, has pushed one UK fuel supplier to create a carbon offset fuel named Carbon Offset Red Diesel.

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.[34][35] Intel corporation is the largest purchaser of renewable power in the US.[36]

Some offset projects consist of the combustion or containment of methane generated by farm animals (by use of an anaerobic digester),[37] landfills[38] 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 an 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.[39]

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

While carbon offsets that 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 using less fuel per unit of energy provided. Assuming energy demand does not change, this reduces the carbon dioxide emitted. This can take the form of both optimized industrial processes[40] (reducing per unit energy costs) and individual action (bicycling to work as opposed to driving)[41].
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 LED lamps can have a drastic effect on energy consumption. New buildings can also be constructed using less carbon-intensive input materials.

Industrial pollutants such as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a GWP many thousands of times greater than carbon dioxide by volume.[42] 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 per cent of offsets issued under the CDM.[8]

Land use, land-use change and forestry (LULUCF) projects focus on natural carbon sinks such as forests and soil. 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.

Deforestation, particularly in Brazil, Indonesia and parts of Africa, account for about 20 per cent of greenhouse gas emissions.[43] 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.

Reforestation could support an additional 0.9 billion hectares of continuous forest which could store the equivalent of 25% of the current atmospheric pool.[44] Offset schemes using reforestation are available in developing countries, as well as an increasing number of developed countries including the US and the UK. [45][46]

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.

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[47] 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.

Carbon retirement involves retiring allowances from emission trading schemes as a method for offsetting carbon emissions. 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.

Voluntary purchases can also be made through small-scale and sometimes uncertified schemes such as those offered at South African based Promoting Access to Carbon Equity Centre (PACE),[48] which nevertheless offer clear services such as poverty alleviation in the form of renewable energy development. These projects have the potential to develop projects that are either too small or too complicated to benefit from legally mandated cap-and-trade programs.

A UK offset provider set up a carbon offsetting scheme that 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.[49] 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 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 that 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—Are there other benefits in addition to the carbon emissions reduction, and to what degree?

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. For example, possible co-benefits from a project that replaces wood-burning stoves with ovens using a less carbon-intensive fuel could include:

• Lower non–greenhouse gas pollution (smoke, ash, and chemicals), which improves health in the home.
• Better preservation of forests, which are an important habitat for wildlife.

Offset projects can also lead to co-benefits such as better air and water quality, and healthier communities.[51]

In a recent survey conducted by EcoSecurities, Conservation International, CCBA and ClimateBiz, of the 120 corporates surveyed more than 77 per cent rated community and environmental benefits as the prime motivator for purchasing carbon offsets.[52]

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 July 2007 paper from the Overseas Development Institute offers some indicators to be used in assessing the potential developmental impacts of voluntary carbon offset schemes:[53]

• 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?[54]

Putting a price on carbon encourages innovation by providing funding for new ways to reduce greenhouse gases in many sectors. Carbon reduction goals drive the demand for offsets and carbon trading, encouraging the development of this new industry and offering opportunities for different sectors to develop and use innovative new technologies.[51]

Carbon offset projects also provide savings – energy efficiency measures may reduce fuel or electricity consumption, leading to a potential reduction in maintenance and operating costs.[51]

The UNFCCC has created a dedicated website where CDM activities and prior consideration projects are able to report their co-benefits on a voluntary basis.[55]

In an effort to inform and safeguard business and household consumers purchasing Carbon Offsets, in 2009,[56] the UK Government has launched a scheme for regulating Carbon offset products.[57] DEFRA have created the "Approved Carbon Offsetting" brand to use as an endorsement on offsets[58] 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 Ltd.

On 20 May 2011 the Department of Energy and Climate Change announced that the Quality Assurance Scheme would close on 30 June 2011.[59] The stated purpose of the Quality Assurance Scheme was 'to provide a straightforward route for those wishing to offset their emissions to identify quality offsets'.[59] Critics of the closure therefore argued that without the scheme, businesses and individuals would struggle to identify quality carbon offsets.[60]

In 2012 the scheme was relaunched as the Quality Assurance Standard (QAS).[61] The QAS is now run independently by Quality Assurance Standard Ltd which is a company limited by guarantee based in the United Kingdom. The Quality Assurance Standard is an independent audit system for carbon offsets, assessing multiple criteria. Approved offsets are checked against a 40-point checklist.[62]

On 17 July 2012, the first organisations were approved as meeting the new QAS.

The Australian government's Emissions Reduction Fund provides for purchasing carbon offsets from Australian carbon emissions reduction projects. [63] The Government has committed a total of $4.55 billion to the Fund. [64]

In 2009, Carbon Retirement reported that less than 30 pence in every pound spent on some carbon offset schemes goes directly to the projects designed to reduce emissions.[65] The figures reported by the BBC[66] and based on UN data reported that typically 28p goes to the set up and maintenance costs of an environmental project. 34p goes to the company that takes on the risk that the project may fail. The project's investors take 19p, with smaller amounts of money being distributed between organisations involved in brokering and auditing the carbon credits. In that respect carbon offsets are similar to most consumer products, with only a fraction of sale prices going to the off-shore producers, the rest being shared between investors and distributors who bring it to the markets, who themselves need to pay their employees and service providers such as advertising agencies most of the time located in expensive areas.

Some activists disagree with the principle of carbon offsets, likening them to Roman Catholic 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 regard to pollution.[67][68] 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.[69] 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. Ecosystem Marketplace reported in 2016 that companies that purchased carbon offsets were likely to be engaged in an overall carbon reduction strategy, not simply buying their way out of emissions.[70]

In October 2009 responsibletravel.com, once a strong voice in favour of carbon offsetting, announced that it would no longer offer carbon offsetting to its clients, stating that "too often offsets are being used by the tourism industry in developed countries to justify growth plans on the basis that money will be donated to projects in developing countries. Global reduction targets will not be met this way."[71]

In August 2006, the three environmental NGOs Greenpeace, World Wildlife Fund-UK (WWF) and Friends of the Earth declared that carbon offsetting is often used as an "easy way out for governments, businesses and individuals to continue polluting without making changes to the way they do business or their behaviour".[72]

On 4 February 2010, travel networking site Vida Loca Travel announced that they would donate 5 percent of profits to International Medical Corps, as they think that international aid can be more effective at cutting global warming in the long term than carbon offsetting, citing the work of economist Jeffrey Sachs.[73]

Some environmentalist organizations have questioned the effectiveness of tree-planting projects for carbon offset purposes.[74] 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.[75] When discussing "tree offsets, forest campaigner Jutta Kill of European environmental group FERN, clarified the physical reality that "Carbon in trees is temporary: Trees can easily release carbon into the atmosphere through fire, disease, climatic changes, natural decay and timber harvesting."[76]
• 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.[77] However, some certification standards, such as the Climate Community and Biodiversity Standard require multiple species plantings.
• 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.[78] However, this claim has been disputed recently by findings in another study.[79]
• The albedo effect. Another study suggested that "high latitude forests probably have a net warming effect on the Earth's climate", because their absorption of sunlight creates a warming effect that balances out their absorption of carbon dioxide.[80]
• 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. This only holds if the paper in the land fill is not decomposted. In most landfills, this is the case and leads to the fact that more than half of the greenhouse gas emissions from the life cycle of paper products occur from landfill methane emissions.

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[81] 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. A 2011 report by Oxfam International describes a case where over 20,000 farmers in Uganda were displaced for a FSC-certified plantation to offset carbon by London-based New Forests Company[82]

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:[83][84][85]

Because offsets provide a revenue stream for the reduction of some types of emissions, they can in some cases provide incentives to emit more, so that emitting 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.[86][87] The practice had become so common that offset credits are now no longer awarded for new plants to destroy HFC-23.[88]

In Nigeria oil companies flare off 40 per cent 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, adding that "It's like a criminal demanding money to stop committing crimes".[88]

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 regard 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.[89] It is difficult to assess the exact results of carbon offsets given the fact that they are a relatively new form of carbon reduction, and it is possible that some carbon offset purchases are made in an attempt to increase positive business public relations rather than to help solve the issue of greenhouse gas emissions.[90]

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.[91]