There is no doubt that "carbon offsetting" is one of the buzz words of the moment. However, as those of you who have been following the market will be aware it has come under criticism of late with the press focus often being on the less reputable players on the fringes of the market.
Clearly consumer confidence is key to a viable offsetting market and in this is one of the aims behind the recently issued "Draft Code of Best Practice for Carbon Offset Providers."
What is Carbon Offsetting?
In order to combat climate change we need to reduce our greenhouse gas emissions. However, there will be instances where it is simply not possible to reduce a business' or an individual's carbon emissions to zero. One way to tackle this is for the business or individual concerned to "offset" those emissions by purchasing carbon credits. The credits will typically be acquired from providers that invest in or develop carbon reduction projects in other parts of the world.
Whilst offsetting is open to criticism as a mechanism which allows rich countries to carry on emitting whilst buying their way out of trouble our view is that offsetting does have its place in any carbon management plan. In reality it will be extremely difficult for the developed world to go carbon neutral in such a short space of time however, provided companies /individuals combine offsetting with strategies to reduce their own carbon emissions it should be a worthwhile exercise.
Types of Offsets
There are 2 types of offsets which a business/consumer could acquire:
- Certified Emission Reductions ("CERs") - these are credits generated from the flexible mechanisms under the Kyoto Protocol (i.e. from Clean Development Mechanism or Joint Implementation projects);or
- Voluntary Emissions Reduction Credits ("VERs").
Whilst the CER market is already regulated the voluntary market is not. However, the voluntary market is growing rapidly - it provides offsets which are cheaper and in many cases quicker to obtain. The voluntary market will also often invest in projects which perhaps due to size or location would not meet the Kyoto Protocol criteria and therefore arguably may not go ahead if the voluntary market did not exist.
The criticism around the voluntary market has centred around areas such as whether when a buyer buys an offset of 1 tonne whether it has any assurance that a genuine saving of 1 tonne of carbon has actually taken place - how is the saving measured? Would the saving have place in the ordinary course in the absence of the project? Has the offset been previously sold to other buyers?
Draft Code of Practice
The Code which is designed to address these criticisms sets out best practice for voluntary offset products. Offset products that meet these requirements may be accredited and awarded a quality mark. The code covers standard methods of calculating carbon dioxide emissions, environmental integrity and consumer information.
Will the Code improve matters?
Initially the Code will only grant accreditation to those credits which met the Kyoto Protocol i.e. the CERs and not to those credits issued in the voluntary market which is arguably where a code could add more value given the unregulated status of the voluntary market and the lack of common standards.
In addition whilst a quality mark type certification may be attractive to domestic consumers such consumers currently make up only a small percentage of the buyers of VERs.
The Code does have some useful aspects e.g. it includes a time scale of 6 months within which an offset provider must buy a credit, and once purchased a time period (5 working days) within which the credit must be cancelled. Offset providers will need to be able to demonstrate that purchases and cancellations have occurred within the required timescale.
Perhaps one of the weaker areas in the Code is to leave it to the individual off setter whether to apply a so called radiative forcing factor to take account of the non CO2 emissions impacts of aviation.
Do corporate entities require a "quality mark"?
It will be interesting to see in a global market what weight a UK standard carries. Also it presupposes that there is a "one size fits all" VER - in fact VERs emerge from numerous different types of projects and have different risk profiles attached to them. At present the quality of the VER is reflected in the market price it obtains. Whilst a couple of years ago it would have been true to say there were no certification standards, in today's market most buyers are looking for some form of comfort via third party verification and therefore the days of large volumes of trades in none certified VERs are likely to be limited whether or not there is a code of practice.
It is also clear that the accreditation process will be a paper based exercise - given the reputational issues involved should it go wrong it remains to be seen whether the quality mark will be enough to persuade major corporates that they can rely on it rather then conducting their own due diligence on the projects from which they buy VERs.
The Voluntary Market?
Accompanying the draft code was an open letter from the secretary of state which acknowledged that the VER market can add value outside of the regulated market. However, it noted that there is currently no fully established common standard for VERs. The UK government believes that good quality offsets should recognise the principles of : additionality, dealing with leakage, avoiding double counting, permanency, independent verification, transparency and certification. In the UK government's view it is credits which are Kyoto compliant which provide the best assurance mechanism to demonstrate that these criteria are met. However, current experience suggests that just as there can be variations in the quality of VERs so there can also be variations in the quality of CDM credits. For example a recent World Wildlife Fund report estimated about 20 per cent of CERs come from CDM projects which did not met the additionality test.
The secretary of state has left the door open for VERs to become subject to the Code by asking industry to come together behind a common standard which meets the criteria set out above for a so called good quality offset.
Conclusion
It will be interesting to see whether the Code pushes consumers away from the VER market. This may be an unintended consequence at the domestic consumer level. At corporate level however, we will have to wait and see what if any effect the code has. Will the quality mark (which does have costs associated with it) be such a gold standard over and above the CDM process that businesses will pay more for a quality marked CER?
In the VER sector arguably corporate buyers are sophisticated buyers - they have chosen to go into this market for their own reasons typically linked to the corporate brand, their own corporate social responsibility standards and a desire to be a market leading player in the area of carbon neutrality - against this background it may prove to be the case that a head of sustainability at a major corporate will still do his own due diligence and enjoy a real involvement with a particular project rather than simply rely on a quality mark. If corporates continue to do their own due diligence and seek an active role on the projects they support compliance with the Code may offer limited additional benefits.
It may be that the Code's true value is at the domestic consumer end of the market.
What next?
Anybody wishing to respond to the draft Code has until the 31st March to do so. Then it is really over to industry to see what the take up is and whether the voluntary market can unite behind a single standard with a view to producing a standard that the government accepts is of a high enough standard to be capable of being quality marked under the Code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
