Monday, 5 January 2009

Carbon Offsets: A "Last Resort"?

The original version of this article appeared in the September 2008 (No. 64) issue of "The Environmentalist".

The voluntary carbon offset market trebled in size between 2006 and 2007. Sales have been growing steadily throughout 2008, with no end in sight. Climate change is clearly on the global agenda, and more and more companies are buying carbon offsets to help meet their environmental objectives. Nevertheless, many environmentalists appear lukewarm – at best – on their use. In this article, we explore these concerns and consider the role of carbon offsets in corporate footprint reduction plans.

What Are Carbon Offsets?
Increasing energy efficiency and installing rooftop solar panels are two of the many ways that organisations and households can reduce their carbon footprint. When you spend time and money on these measures at your corporate HQ in say, Liverpool, it’s considered an internal emissions reduction. Paying to enact similar measures somewhere like Lagos makes it an external emissions reduction – a carbon offset. It’s important to bear in mind that emissions reductions help the climate regardless of location. Whether in Liverpool or Lagos, it’s the size of the CO2 reduction that matters to the global climate, not the location.

So why do companies offset? The key idea is simple: some footprint reduction measures cost more than others. All else being equal, it makes sense to focus first on the cheapest and fastest ways to cut carbon, wherever they occur. When Carbon Clear works with companies to cut their carbon footprint, we help them implement a wide array of these internal reductions.

However, the lowest-hanging fruit may be in someone else’s factory or home. The Kyoto Protocol established the idea of carbon offsetting to help maximise greenhouse gas savings at the lowest cost to the economy. Carbon offsets help organisations with emissions reduction targets to meet part of their obligation by funding emissions reductions in developing countries.

Are Offsets Effective?
Stories like the Financial Times’ May 2007 exposé on a handful of “carbon cowboys” have contributed to the impression of carbon offsets as a potentially ineffective footprint reduction tool.

The reality, of course, is that there are both good and bad carbon offsets. An effective carbon credit can generally pass four key tests:
  • The carbon credit comes from a project with real and measurable emissions reductions;
  • emissions reductions can be measured against a credible baseline by independent third party auditors;
  • the project that generated the carbon credit would not have happened anyway; and
  • the emissions reductions are permanent –they won’t be reversed at some point in the foreseeable future.

The most widely respected carbon credit standards include the Clean Development Mechanism (CDM), the Gold Standard, and the Voluntary Carbon Standard (VCS). Each evaluates projects against these criteria, and is administered by an independent not-for-profit secretariat to ensure impartiality. Their ultimate aim is to ensure that each carbon credit represents one less tonne of CO2 in the atmosphere.

Many people worry about carbon offsets with tree planting schemes. In reality, credits from planting and protecting trees accounted for only 15% of voluntary offsets sales last year, with most of those offset sales in the United States.

Meanwhile, carbon offset providers have been working to improve the quality of carbon offsets. Carbon Clear earlier this year helped found the International Carbon Reduction and Offsetting Alliance (ICROA) to encourage best practice in the voluntary carbon reduction industry. ICROA specifies the standards that carbon credits must meet, requires members to offer carbon offsets as part of an integrated “reduce and offset” approach, and obliges members to submit to regular audits to demonstrate compliance with the ICROA Code of Practice. Organisations that choose to reduce internal emissions and offset with ICROA members include Eurostar, Land Rover, Sky, and Ford.

When to Offset
Even where offsets are recognised as an effective way to fight climate change, they are labelled a “last resort”. There seem to be two reasons for this approach. First is the concern that offsets are somehow less effective than internal reductions when it comes to fighting climate change. As Chris Shearlock, environment manager for the Co-operative Group noted recently, “When we build a wind farm in England we’re applauded, but when we build one in India we’re criticised.” But as we have already seen, a tonne of CO2 reduction has the same climate change benefit wherever it occurs, and stringent standards can ensure the quality of purchased reductions.

The second reason offsets tend to be considered a “last resort” is the belief that internal measures somehow demonstrate a greater commitment to fighting climate change. In the 6 May 2008 “EMA in Practice” article of The Environmentalist, the question was raised “whether a company should be purchasing offsets or actually working to reduce emissions of their own operations.” Implicit in this line of argument is an assumption that offsetting comes at the expense of any and all internal emissions reductions. Allowing companies to offset, the thinking goes, means they won’t take action at home.

But is this true? Will a company that can reduce emissions and cut costs by increasing efficiency really forego that option in order to purchase carbon offsets? Our experience is that companies would rather cut their energy bill than incur an extra expense. What is more, having to pay for offsets draws the attention of the finance director and operations manager. Announcing a goal to become “carbon-neutral” and understanding the cost of carbon provides an even stronger business incentive to achieve cost-effective ways internal reductions.

Carbon Clear's view is that the either-or approach to emissions reductions is a red herring that makes it harder for corporate teams to make informed decisions and raises more questions than it answers.

One of these questions is deceptively simple: how much of a reduction is enough? If a company wants to become carbon-neutral, what level of internal reduction is required before they can offset with a clear conscience? Is this level of internal reductions the same for an office-based consultancy, an investment bank, and a heavy manufacturing plant? And with only a decade or two left to achieve major global reductions, how long can companies take to achieve their internal reductions before they can fund additional reductions beyond their boundaries?

The second question is also difficult to answer: how much should it cost?

HSBC’s corporate greening programme includes installation of solar panels on the roofs of their Canary Wharf headquarters and their DirectLine building in Leeds. We calculate that HSBC (or if HSBC is leasing, then whomever owns the panels) is paying more than £100 (€125) per tonne to reduce emissions with PV panels, even using conservative assumptions and taking into account the savings on their electricity bill.

By comparison, economist Nicholas Stern places the 2007 social cost of climate change at around €40 per tonne of CO2 and HSBC could buy high quality carbon offsets for around €20 per tonne. In other words, HSBC could fight climate change six times more cost-effectively by sourcing carbon credits beyond their corporate boundary.

Carbon Clear recommends that companies seek the most cost-effective and credible reductions, wherever they may occur. In many cases, the best reductions will come from internal operational improvements. In other cases, they will come from changes in the corporate supply chain – either by switching suppliers or encouraging existing suppliers to reduce their own carbon footprints. And in many other cases the most cost-effective will come from high quality offsets that achieve external reductions beyond the corporate boundary.

There are other reasons companies may choose to focus on either internal emissions or offsets. Both types of emission reductions bring a wealth of co-benefits beyond fighting climate change. Investing in sustainability initiatives close to the corporate headquarters can help businesses reach out to employees, customers, and other stakeholders. The stakeholder engagement benefits of these high-visibility measures might justify paying a premium for those reductions.

Similarly, investing in emission reduction projects overseas can provide much-needed livelihoods benefits to poor communities suffering energy poverty. Providing clean energy technologies in developing countries can simultaneously contribute to a company’s corporate social responsibility objectives and help local people make the transition to a lower-carbon future.

In July, Sir Nicholas Stern warned that the cost of failing to curb climate change had doubled (Environmentalist News 21 July 2008). Our view is that “last resort” language only serves to limit the range of tools we can bring to bear to tackle this global problem. A multi-pronged approach that includes both internal reductions and carbon offsets can provide the flexibility needed to achieve large, global emissions reductions.

Suzy Hodgson, AIEMA, is a principal consultant and Jamal Gore, AIEMA is the managing director at specialist carbon management company, Carbon Clear Limited.