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Market News

 September 06, 2007
US carbon offsets: still unregulated and unreliable

 London, UK (Climate Change.com) - The market in carbon offsetting is booming as executives grab an easy way to ease corporate guilty consciences on climate. But a lack of regulation means they might not be getting what they've paid for.

Carbon offset buyers fund projects like wind farms and reforestation projects to make up for their energy excesses and mitigate their contribution to global warming. It is a fast-growing market that is expected to continue expanding.

Analysts New Carbon Finance and Ecosystem Marketplace say demand for carbon offsets grew 80% in 2006. Consultancy ICF International predicts that by 2010 the value of the global market will approach $4 billion.

The purchase of carbon offset credits has become popular with individual consumers that want to ease their consciences for owning gas guzzling SUVs or building up frequent flyer mileage reaching far-flung holiday destinations.

But it is the corporate level where the big deals are made. The list of companies delving into carbon offsets is burgeoning and includes heavyweights like BP, British Airways, IBM, PepsiCo and HSBC. From wind farms to reforestation projects, companies are buying millions of carbon credits.

Mega-utility AEP recently agreed to offset 4.6 million tonnes of carbon emissions. The company will pay for projects to capture and destroy methane released from manure produced by 400,000 cows on 200 farms in the US between 2010 and 2017. The company says the offsets are part of a comprehensive strategy to address its greenhouse gas emissions.

AEP chief executive Michael Morris says the purchase, completed in conjunction with carbon offset provider Environmental Credit Corporation, also has collateral benefits. Odour and pests are reduced, and farmers struggling with razor-thin margins gain a new source of income.

Volkswagen of America also has seemingly altruistic motives behind its recently announced partnership with Carbonfund.org, a non-profit provider of renewable energy and reforestation credits. The carmaker will offset one year of emissions from each new Volkswagen vehicle sold in the US during the four-month period beginning 1 September, 2007.

Volkswagen says it hopes the initiative, which will reforest wetlands in Louisiana, will "help bring its customers to the forefront of environmental initiatives" and demonstrate that "there are actions we can all take to help ensure a cleaner environment for future generations". The carmaker will offset 372,000 tonnes of carbon from planting 250,000 native trees in the "Volkswagen Forest".

Executive vice-president Adrian Hallmark says Volkswagen wants its investment to "serve as a catalyst to involve [its] owners and create awareness beyond [its] defined contribution".

Circle the bandwagons

Whether for the good of the bottom line or the greater good, interest in carbon offsets continues to grow among a wide variety of corporate buyers.

Abbott is offsetting the emissions of a fleet of 6,000 of its corporate cars. Dell is offering emissions offsets to consumers buying its computers. And News Corp has said it will go "carbon neutral" with offsets.

As business faces increasing pressure from stakeholders to address climate change, the number of companies turning to offsets will only expand.

In response, dozens of sellers have entered the marketplace with a variety of offsetting approaches and pricing schemes. Since 2002, Ecosystem Marketplace says the number of companies selling carbon credits is up 200%.

Clean Air Watch's Frank O'Donnell says the offset market, with its lack of controls and standards, is like the "wild west"

But critics, like environmental group Clean Air Watch, question whether buyers are getting what they are paying for. CAW's Frank O'Donnell says the market, with its lack of controls and standards, is like the "wild west".

One of the biggest difficulties is that carbon offsets are intangible products. Measuring an intangible relies on estimation, extrapolation and, at times, blind faith -- qualities generally absent from healthy business transactions.

Credibility gap

The environmental group Clean Air -- Cool Planet studied offset retailers late last year and rated their performance for transparency and the credibility of their offsets. Only eight of the 30 offset providers assessed scored a five or above on a scale of one to ten.

Some of the industry's most notable names didn't make the cut, including TerraPass, which has been criticised for relying on renewable energy certificates, the US equivalent to carbon credits generated specifically from renewable energy sources, for much of its offsets. Critics, including the Union of Concerned Scientists, say such offsets often fund projects that would have occurred anyway or are already built, in effect nullifying their "offset" value.

Others, including Joseph Romm, a senior fellow at the Center for American Progress, say reforestation projects do not measure up to their hype. The impact of tree-planting projects, critics like Romm say, are highly variable depending on factors like species and location. And if a tree burns or is cut down, the benefit disappears.

Critics even question whether some providers are selling credits for projects that do not even exist. Even worse, the same credits may be sold several times over to multiple buyers, either by design or because of a lack of documentation and tracking by project providers.

US environmental watchdog Natural Resources Defense Council, for one, cautions that without closer formal monitoring of the market "the status is buyer beware".

Supply and demand

The California Climate Action Registry, a non-profit funded by state law that certifies offsets, says there is much higher demand than supply of high quality offsets. The group has been working since 2003 to create a state standard for companies buying and selling offsets, but has not yet certified any projects.

BP and Barclays bank have publicly acknowledged that they struggle to find enough emissions reduction projects that meet their quality criteria.

Concerns about whether consumers of carbon offsets are adequately protected have reached Washington. At the prompting of representative Edward Markey, chair of the US House select committee on energy independence and global warming, the US Federal Trade Commission will investigate the market and, with the Environmental Protection Agency, will consider setting standards for the sale of carbon offsets.

There are voluntary standards being considered and some brokers are joining forces to self-regulate using industry benchmarks established by the International Emissions Trading Association, the Climate Group and the World Economic Forum.

Definitions, definitions

Even providers like TerraPass admit the market is hampered by the lack of agreement on what an "offset" really means. For its part, the group says it submits to an annual audit by the Center for Resource Solutions to verify that its carbon purchases match what they have promised consumers.

Likewise, the Carbon Neutral Company says it employs KPMG to audit its carbon credit accounts to ensure the credits it sells are not also sold elsewhere, but it admits that without tighter market controls it is an uphill battle.

The problems are significant enough that the Sierra Club and Friends of the Earth, unlikely bedfellows perhaps, are encouraging companies and individual consumers to avoid carbon offsets altogether and focus on more direct and tangible actions to mitigate their impacts on climate change.

But groups like David Suzuki Foundation, a Canadian environmental non-profit, say although the emphasis should be on reducing and mitigating, offsetting offers an educational component that raises awareness and gets businesses and individuals thinking in new ways.

And as green guru Mark Gunther points out, legitimate offsetting in the US has the potential to open a "gateway to more meaningful change".


This article appears in the September 6, 2007 edition of Climate Changecorp.com and is reproduced here with the permission of the author.

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An interesting perspective on US Business reaction to climate change, including actions to purchase carbon offsets, is contained in a short, readable report by David L. Levy and Charles A. Jones that appears in this week's GLOBE-Net Business Reports.

The authors observe that "While North American companies increasingly realize that climate change is a long-term issue to which they will need to develop market and technological responses, in the short term they face a weak and fragmented regime that offers only modest economic incentives for strong action. The emerging international climate regime comprises a relatively loose system of international governance involving significant contestation as well as collaboration among states, firms, non-governmental organizations (NGOs) and multilateral institutions. Within this system, states act as economic agents concerned about their competitiveness, while firms are important political actors with significant policy influence. The fragmentation and flexibility of the current governance system has facilitated its evolution but is also a fundamental source of weakness."

For More Information: Climatechangecorp.com