The Art and Science of an Offset

By Joseph PallantHow does one mark an accomplishment: a ribbon, a dollar bill, a smile? Sometimes, an accomplishment should be savored solely in and of itself. Other times, achievement calls for a marker. When the accomplishment is proactive reduction of greenhouse gas (GHG) in the atmosphere, that marker is an offset.

As one considers the array of detail, data and intrigue around the concept of an offset, it can give the stomach a turn. “So, if you buy an offset, you can just pay to pollute?” The answer is yes, but it’s not really that simple. You’re not actually polluting, are you, if in the process of paying to pollute you completely clean up the pollution? Add to that the fact that, in absence of climate regulation, you can pollute as much as you like and not pay a cent. With climate regulation in place, or through the use of voluntary carbon offsets, one can still take productive action to generate energy, manufacture goods or fly to visit Granny — without the CO2 pollution. I find that settles the stomach a little.

Offsets come from physical actions in the world, i.e., projects. The proactive commission of an action that either reduces the amount of GHGs being released into the atmosphere, or results in the removal of such gases, creates an offset. There are a number of technical elements that must be satisfied in order to create an offset from these actions, and we’ll get to these later. Beyond the basics, there are further scientific and policy requirements needed to certify a project to an international carbon standard. It is the quality, reputation and makeup of said standard, along with any compliance requirements, that combine to give the offset credibility and monetary value.

There is both an art and a science to the offset.

The science of the offset

The science is relatively straightforward. An offset is a unit of equal and opposite reaction. Obtained for use to counteract an action, the offset takes the role of “-1” in the equation 1-1=0. Where a power plant emits one ton of CO2-burning coal to keep your milk cold, a landfill gas project creates an offset by destroying seeping methane, and keeps a ton of CO2 out of the atmosphere. In terms of the reference metric CO2, the result of the equation — with emission paired to reduction — is zero. Offsets present a tool to proactively clean up the greenhouse gas mess we make in the process of our physical lives.

Because simple boundaries can lead to wandering sheep, a set of rules have sprung up and been refined to ensure that an offset accurately creates a “-1” physical reality in the atmosphere.

Real: In order to be an offset, the emissions reduction or removal must be created by a specific project. The benefit must be real and reliably ascribed to a project activity — not theoretical.

Quantifiable: One must be able to count the tons of CO2 equivalent reduced or removed by the project.

Verifiable: Because of the value being placed on an intangible asset (one ton of CO2 equivalent that is NOT in the atmosphere), one must be able to prove the reduction has occurred, and that it was the result of the project activity. All tenets of an offset must be audited before that offset is ready for use.

Conservative: In a similar vein to the requirement for verifiability, using conservative approaches to estimation, measurement and monitoring ensures that an offset is sound. One must always choose the path that does not lead to overestimation.

Permanent: The beneficial action of the offset to the atmosphere must be durable and lasting. Offsets that result from reduced use of fossil fuels are often considered permanent by default. Because protection and restoration of forests and natural systems are also critical to stopping climate change, a variety of methods have been established to evidence permanence. Along with smart project design, the creation of a buffer pool of unsold offsets and/or the purchase of re-emission insurance can be utilized for this purpose.

Additional: The reduction or removal of greenhouse gases by a project must be shown to be dependent on the expectation of revenues, or removal of barriers caused by the fact that the project is being undertaken for offsets. This is to ensure that the offset really equals a true “-1” counterbalance to the pollution it is offsetting, rather than an emissions reduction that would have happened anyway. Projects must go beyond “business as usual” to generate offsets.

The counter-factual reality at play in the concept of “additionality” provides a good segue from science into art in terms of the offset discussion.

The art of the offset

Just as man cannot live by bread alone, contemplation of an offset’s role in climate regulation is bound to fall short without an investigation of the essential nature of an offset.

To explore the nature of an offset, one must heed the nature of the system to which it belongs. For the purposes of this paper, we shall focus on the role of an offset as part of a governmental regulatory system. Voluntary offsets are created in a similar fashion, but have a different set of causes and effects.

It is critical to note that offsets are created by projects implemented outside the boundaries of emissions reduction regulation. This is a foundational reality of an offset. The logic is simple: if the project was within a sector required to reduce its emissions, the incentive to undertake the project is already present, thus running afoul of the requirement for “additionality.” It follows that, were such a situation to exist, there would be competing claims for the emissions reduction — one made by the regulated entity and one by the offset developer. This leads to a reality where some project types carried out in America will use the “marker” of offsets, and others that don’t meet the criteria of an offset, will be realized as an emissions reduction directly at a regulated company.

Here’s an example of how it works:

Emissions reductions caused by installation of windmills in a climate-regulated America would count as an emissions reductions unit to be used toward meeting a carbon target. Since electricity generation would be a capped sector in this theoretical future regulation, investing in the windmill creates an emissions reduction, and would lessen a utility’s need to buy permits or offsets.

Change the frame of reference to a windmill project in a developing country with a much lower current and historical greenhouse gas emissions’ impact, a smaller per-capita footprint and annual income to boot, and the carrot of clean development becomes more appropriate than the stick of emissions reductions regulation. This is where an emissions reduction can be incentivized by the ability to create an offset, enabling the installation of windmills to supply clean energy to the grid. Importantly, due to the current use of inefficient technologies and the plethora of project opportunities, offset projects implemented in developing countries can offer reduced emissions at a lower cost than could be achieved at home. We talk about wanting other developing nations to reduce their emissions before America does. Well, besides the sandbox logic of that argument, offsets are a way to reduce emissions together, helping lesser-developed countries to clean up their industrial impacts in the hope of skipping some of the polluting steps by which we in the developed nations have evolved.

This allows American businesses to achieve GHG cuts in a cost-effective manner, while at the same time creating know-how and myriad opportunities for U.S. industry. If you think climate regulation and international offsetting are only a business cost, try telling that to the windmill manufacturers, tech developers and carbon market firms as they access the global business potential. We have grown strong by providing solutions needed around the world. Clean technology is the next frontier in that global saga. The market for offsets creates opportunities worldwide to develop projects that make money, nurture the environment and protect the climate.

Offsets allow us to do good deeds in the world. Coming from an environmental protection and social development viewpoint, the imperative of getting carbon dioxide out of the atmosphere provides an opportunity to finance the good work many have wanted to do but could never realize.

Some Project Types for Illustration:

Avoided deforestation

The cutting of forests and clearing of land caused 33 percent of all human-caused GHG emissions between 1850 and 1998. Today, deforestation is responsible for approximately 17 percent of GHG emissions annually. Forests are beautiful, powerful and mysterious. They are home to countless species; they regulate water flows; they protect soil. It is a very common impulse to want to save them. Unfortunately, often a forest is worth more as timber and clear land for building.

By quantifying the carbon that would be released by cutting the forest versus leaving it intact (and a whole range of other technical elements that we undertake here at CPS Carbon Project Solutions Inc.), one can generate and sell offsets that allow for protection of the land. In creating an alternate economic driver that values trees alive, standing and storing carbon out of the atmosphere, we have a tool to protect this precious resource.

There is often a misunderstanding around “avoided deforestation,” i.e., that you can simply buy a forest and get millions of low-priced carbon offsets for doing nothing. As with every other project, this sector generates credits only for proactively creating an outcome that wouldn’t have happened in the absence of an offset project. To wit, one can generate offsets only at the rate by which the forest would have been cut in absence of a project. A project developer calculates (and an external third party validator audits) the annual offset generation by multiplying the total carbon protected in the forest by the would-be rate of deforestation. This rate is fast upon the Amazon rainforest frontier, moderate in Oregon and non-existent in a protected national park, and it dictates the functionality of the offset tool to finance projects in these areas.

Providing fuel-efficient cook stoves

In many parts of Africa and India, women and girls spend two or more hours per day collecting firewood for cooking. In the process, they not only denude forests, often they also forgo schooling and become vulnerable to would-be attackers in remote areas. Once back in their indoor kitchens, they cook over open fires, causing terrible indoor air pollution (picture a campfire in your living room).

A more efficient cooking system, be it a hyper-efficient, well-engineered model or even a locally made clay stove, drastically reduces the amount of wood required, often in a fashion that reduces indoor air pollution. The barriers to these improved methods can be surmounted by the revenue and focus fostered by the ability to generate offsets.

Lengthening rotation age

In a combination of past management decisions and the current economic climate, many forest managers in the Pacific Northwest are cutting their second-growth forests at around 60 years of age. The trees would be more valuable, and the fiber of higher quality, if they were allowed to mature to 90 years old; however, a cold economic calculation dictates an earlier cut. Many forest managers wish they could grow the trees longer, but end up bowing to immediate cash demands.

With an innovative “Improved Forest Management” methodology authored by Ecotrust (ecotrust.org) and recently approved for the Voluntary Carbon Standard (v-c-s.org), companies can generate carbon offsets by keeping the forest on the landscape longer. The amount of carbon maintained in the forest and kept out of the atmosphere over the additional 30 years is certified and sold as an offset. This helps propagate improved ecosystem dynamics, builds economic value and creates a reserve of carbon that is kept out of the atmosphere.

It is my humble opinion that the hubbub and decision-making around implementing a system that incentivizes and utilizes offsets all depends on whether the body politic really wants to stop climate change or not. Implementing a system that restricts emissions and creates tradable markers for the lowering of these emissions has many benefits and is the lowest-cost option for creating the reductions. However, it’s still a lot more expensive than not creating them, and is perhaps also less fun for Congress and Senate than splashing out money for the “development of green technology” and “energy security.” The fact is that we already have the technology to bring us much closer to what science says we need to do to stop climate change. We have windmills. We have photovoltaic cells that turn the sun’s rays into electricity. We know how to plant a forest. And we know how to leave a forest intact. All we need to do to cut GHG emissions is do it. And all we need to do that is an incentive.…and a marker.

*Footnotes