Carbon Offsets Then and Now

In order to stabilize greenhouse gas concentrations in the atmosphere, we need to reduce emissions by at least 60 percent over the coming two decades. A single magic bullet allowing governments, organizations, and individuals to meet this target is very unlikely. Instead, we need a portfolio of approaches and a communal effort to stimulate the alternative energy sector. High-quality carbon offsets can allow emitters to pool investment in the short to medium term to secure strategic emissions reductions. This mechanism stimulates innovation within organizations, since offsets attach a cost to greenhouse gas emissions and provide a critical source of investment into the emerging green technology sector.

Offsets had a shaky beginning in climate policy. Critics felt they were a mechanism for avoiding responsibility for emissions reductions. Today, a wide range of organizations, from HSBC to the Vatican, recognize high-quality offsets as important weapons in the arsenal of any organization tackling climate change. The market for offsets has grown rapidly over the last five years. The World Bank's 2006 report on the state of the carbon market reported trading in voluntary offsets is worth $100 million globally. Still, trade in the regulated market was $30 billion, most of which was accounted for by the European Emissions Trading Scheme.

Today, the industry is moving toward quasi-regulation of the market through standards and third-party verification. The strongest standards suggest highest-quality offsets will be achieved through investments in energy efficiency projects, alternative energy, and greenhouse gas capture systems such as landfill gas combustion.

History and Evolution of Offsets

The logic behind carbon offsets is simple: every company is responsible for greenhouse gas emissions and a huge amount of variation exists by sector. Transportation accounts for 25 to 40 percent of total emissions in North America. Air travel accounts for just 2 percent of global greenhouse gas emissions, but is getting increasingly slammed by critics as an unnecessary luxury. Greenhouse gases are everywhere. If you just stand still for a year and breathe, you will emit around 350 kg of carbon dioxide. These liabilities can be measured and valued: the cost of 350 kg of carbon dioxide at $20 per ton is $7. So if you want to be climate neutral for your liabilities from breathing, you would pay that amount to an offset organization.

As organizations and individuals, we are locked into some emissions in the short run as a result of choices made about vehicles, our places of work, and our houses. At the same time, lots of areas within the North American economy offer significant emissions reductions as new infrastructure is built or upgraded. For instance, ground source heat pumps can reduce energy use by up to 80 percent, solar thermal can reduce the use of gas and oil for hot water heating, and energy efficiency upgrades such as insulation, caulking, and double glazing can reduce energy use by 15 to 30 percent.

In some cases, a strong business case exists for making the initial investment; an immediate savings on energy bills. In others, upgrades are much pricier and capital costs associated with those upgrades may only be recovered after five or ten years. Owners and developers may be unable or unwilling to assume this risk. Here's where offsets come in: they provide a source of investment capital to help reduce the cost of energy efficiency upgrades.

The early market for offsets emerged around 2004 in North America, although it was already fairly mature in Europe at that time. Two problems emerged that undermined the credibility of early projects. First, many of the early leaders in this sector were heavy on marketing and light on quality. This attracted criticism from environmentalists who worried offsets allowed for business as usual. Second, many early offsets were of poor quality.

One project that attracted a lot of early criticism over quality was tree planting, which was popular because it was easy to explain to the public, but created major quality assurance challenges. In some cases, the tree planting was occurring anyway, so it was hard to show the project was additional. The science of carbon storage in forests is also much more complex than many realized. Most projects counted the carbon a tree would store over its lifetime on the day the tree was planted. This raised concerns about the permanence of forests, which are vulnerable to fire and disease. Also, forests in northern latitudes have lots of carbon stored in their soil already and it was unclear what would happen when the soil was disrupted or when the temperature changed.

When smart organizations recognized trends in European markets would soon emerge in North America, the race for quality was underway. Today, the quality of offsets reflects two features: the quality and independence of the measurement process and additionality. High-quality offsets are measured according to the International Organization for Standardization (ISO), 14064 or similar frameworks and should be verified by a third party. The verifier checks the project has created real reductions in greenhouse gas emissions against a baseline.

In the case of a ground source heat pump, the verifier would look at the emissions prior to installation of the system and then either monitor the performance of the system directly or monitor utility bills.

The additionality criteria are more complicated. Many early low-quality offsets came from projects a building owner would have undertaken anyway. Any money they earned from the offsets was a bonus. The challenge was the offsets didn't create extra emissions reductions; there was no net gain. Additional projects can demonstrate an offset investment created the financial conditions that allowed extra emissions reductions to be secured.

The Future of Offsets

The voluntary carbon offset market has evolved rapidly over the last two years. It has moved away from an unregulated sector and toward recognized standards under the International Organization for Standardization, the World Resources Institute, and the Voluntary Carbon Standard. The Gold Standard, established by the World Wildlife Fund, provides useful guidance, but can only be applied to projects in non-Kyoto countries. As this market evolves, consumers will see the emergence of more sophisticated options embedded in financial services, insurance, and a wide array of products. In some jurisdictions, we may see regulation of offsets or the emergence of guidelines relating to quality. The British government already released such guidelines in early 2008. Overall, as the issues related to credibility and quality are addressed, we can expect to see offsets play a significant role in promoting emissions reductions and sensitizing people and companies everywhere to the carbon intensity of their lifestyles.

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