Organic Carbon Offsets
Vienna, 02.04.2007 - by Dr. Marianne Osterkorn, Project Finance International, Global Energy Report
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 the 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.
Service companies like HSBC want to lower their impact to climate change. They are calculating the carbon dioxide emissions from their operations, such as electricity bills and automotive miles, in order to craft a carbon reduction strategy. HSBC is lowering emissions on-site via changes in their operations, but also from the purchase of carbon credits generated by emissions reduction projects in the developing world.
As with the organic market too, a clear, traceable link between carbon offset buyer and supplier is essential in the non-regulated verified emissions reduction (VER) market, so that buyers can trust the validity of their emissions reduction certificates. But as 2007 begins, the VER market still has a long way to go before resembling the now well-ordered organic food industry. Nevertheless, the battle to demonstrate the virtues of reliability and transparency is well under way.
“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.
Companies voluntarily wishing to reduce their carbon dioxide emissions by funding developing world clean energy projects can purchase VERs or the regulated Certified Emission Reductions (CERs) as both mechanisms represent an emissions reduction of carbon dioxide (CO2) by one tonne. CERs are considerably more expensive, since they are regulated by the United Nations, thus the strategy of companies who voluntarily purchase emission reductions tend to have two objectives: to offset emissions and to take the CERs out of the market in order to raise their price.
The theory being that higher offset prices will encourage manufacturers and utility companies, who have mandatory emissions reduction targets in the European Union, to take actions to lower emissions at home, rather than purchasing certificates from the developing world. A second and more common objective is the desire for a company to be socially responsible and contribute to sustainable development by offsetting emissions via VERs.
Dietrich Brockhagen, managing director of the German company Atmosfair which runs “climate protecting projects,” (they don’t use the term carbon neutrality) is a keen competitor in the industry and critical of the currently unregulated VER market. “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
Brockhagen operates only in the more firmly structured CER market and only uses Gold Standard CERs. These are CERs 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 revenues from the sale of CERs. The UN requires that the funds generated by the sale of CERs allow a project to occur that would not have happened under a business-as-usual scenario. Additionality is a hotly contested concept as it can be difficult to show that the funds received from selling the carbon credits make a project “bankable”.
The CER market acts like a “stick” since it is a market regulated by the Kyoto Protocol and in Europe CERs are valid in the EU Emissions Trading Scheme (EU ETS). Energy intensive industries in
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) which established the procedures for CERs. To qualify for CER status, a project must show its “additionality” to represent the additional investment that has taken place, stimulated by the CDM, and thus 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 both 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 unregulated 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
In the EU ETS, traders regard emission allowances as a ‘negative commodity’ or right to create a certain amount CO2 emissions alongside energy generation. The price of an European Emissions Allowance responds to the price of coal, since companies may switch from coal to gas when coal prices rise; this move will lower 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 energy and industrial emissions, the higher the value of an EUA is likely to be.
Whereas the CDM market is based on regulatory schemes, the VER market relies on voluntary commitments and individual values. VERs are not commodities but frequently 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
“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
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
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
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 , the partnership which aims to accelerate the global market for renewable and energy efficiency particularly in the developing countries and emerging markets is convinced that VERs can contribute to this market development. Together with Gold Standard it took the lead to develop a harmonised standard for VERs which ensures high quality and a solid tracking, so that buyers confidence would increase and finance would flow into smaller renewable energy projects.
REEEP is convinced that the beauty of VERs is that they allow smaller projects, which often are grant based, to qualify for carbon finance with low transaction costs that accompany VERs. REEEP and the Gold Standard have already experienced growth in the number of VER projects since launching the new standard.
Market positions are being taken as the market grows. The most demanding customers will probably choose the GS CER or GS VER to lower chances of reputational risk. CERs are more expensive because they priced relative to the European emissions trading market (EUA) as a compliance tool. VERs, due to their voluntary, unregulated nature can be four to five times cheaper; their price a negotiation between company CSR managers and project developers. Atmosfair’s customers pay 18-20 Euro per CER at the moment. In the VER market, prices range from 4 Euro 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.
Ultimately companies will probably take a portfolio approach to lowering their carbon footprints. Emission intensive Industry regulated under the EU Emissions Trading Scheme will purchase CERs, while also implementing industrial energy efficiency programmes at home and possibly purchasing VERs as part of a wider CSR strategy.