Are Carbon Offsets Too Good to Be True?

Feeling a little guilty about that flight to London last month? No problem — you can offset that trip with credits from a reforestation project in Nicaragua, available at carbonfund.org.

The thriving carbon-offset market in the U.S. allows individuals and companies to voluntarily offset their carbon footprints relatively painlessly — just point, click, and pay. If the United States implements a cap-and-trade system to reduce carbon emissions, as it now seems likely to do, carbon offsets will likely play an increasingly large role in carbon-emissions reductions.

The offset credits are a popular component of most cap-and-trade proposals because they have the potential to lessen the economic costs of the programs. The cost of upgrading to environmentally friendly practices is very high for certain industries and carbon-offset credits can ease the transition in these situations. However there are doubts about whether the offset credits actually represent reduced emissions.

A large market for carbon-offset credits already exists in Europe under the Clean Development Mechanism (CDM) and offers a window into the drawbacks of carbon-offset programs. The CDM, established by the Kyoto Protocol, is a provision which allows companies in developed countries to buy carbon credits from emissions reduction projects in developing countries. For example, a company in Europe that exceeds its pollution allowance can purchase offset credits from a hydroelectric dam project in China.

Crucially, carbon-offset projects must meet an “additionality” rule, i.e. the project must create emissions savings which wouldn’t have occurred without the CDM incentive. This is where carbon-offset projects have the potential to make a mockery of cap-and-trade emissions reductions programs. Investigations have revealed that many of the offset projects receiving credits through the CDM would have occurred without the provision.

China, for example, has applied for carbon-offset credits for virtually all of its new investments in hydro, wind, and natural-gas energy, claiming that none of these investments would occur without the CDM. Yet China’s current five-year plan calls for major investments in these alternative energy sources.

There are also questions about the real cost control benefits of carbon-offset projects due to the bureaucratic hurdles inherent in responsibly certifying the projects. A recent Stanford study concludes:

… the actual issuance of emission credits through the CDM mechanism operates at a pace and with exposure to severe administrative bottlenecks that make it unlikely that CDM can supply the emission credits needed, and with sufficient reliability, to be a good cost control mechanism.

In other words, companies might be better off investing in the technology required to become environmentally friendly upfront.

The cap-and-trade systems the Obama administration and congressional Democrats are debating rely on carbon-offset projects to control compliance costs. The U.S. House of Representatives recently released a draft of The American Clean Energy and Security Act, which calls for emissions reductions of 20 percent below 2005 levels by 2020. The bill allows two billion tons of the required reductions to come from carbon-offset credits. That’s a lot of trees in Nicaragua.


aaron

I thought hydro-electric turned out to produce large amounts of GHG due to plant material and sediment being trapped and decomposing in ways that produce lots of methane.

FastFacts

I was reading on www.americanparchment.com today and saw the headline "Obama Describes Big-Government Solutions as Unwanted, but Necessary." So he says but Carbon Offsets are a perfect example of how the government does not need more control. Take Global Warming for example. The debate is not over. Even in Congressional debates they would not allow real scientists into the discussion. Al Gore and Newt Gingrich are not scientists. So why should the government add another cash cow. All carbon offsets do is produces more revenue for the Government and organizations like Al Gore's Green Businesses. Yes he does own a few carbon offset companies. The EPA is all that is needed to limit the amount of pollution that can be produced by a company. Those that go over should be fined. This is about more income for government and to make themselves bigger, and at the chopping block is our necks. Every tax dollar a company has to pay comes from our pocket. Who pays gas tax, the oil company or the consumer? We do. They say 95% of Americans won't see higher taxes. I say yeah right. We will all be affected. Especially with this new carbon initiative. Our utilities will sky rocket, for low income as well as higher income. Not $400 or $800 a year but over $1400 per household.

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cc

m-o-n-e-y g-r-a-b. That's all this is. The global warming issue is clearly the biggest money making opportunity of an environmental scientists lifetime, and a few are on record (thinking they were off the record) as saying so.

EJ

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Griff

This news story on the european trading scheme shows some additional pitfalls - governments trying to shield the high cost industries from costs of carbon reduction.

http://www.guardian.co.uk/business/feedarticle/8482511

Dan

I know this is self promotion, but I think it is relevant - an alternative to carbon offsetting for non-statutory buyers is to cancel the allowances themselves. This is what my organisation, Carbon Retirement does on behalf of our customers (you can read more at our website - www.carbonretirement.com).

DB

"China, for example, has applied for carbon-offset credits for virtually all of its new investments in hydro, wind, and natural-gas energy, claiming that none of these investments would occur without the CDM."

First of all, "China" (as in the Chinese govt.) did not apply for these credits - individual firms did. And yes, each firm has an incentive to present their project as "additional," just as every student applying to Harvard will try to present his or her grades and test scores in the best light possible. The key word here is "applied" - not all of the CDM applications were accepted! Unfortunately, you insinuate that the CDM indiscriminately accepts every application that comes before it.

Yes, the challenges of determining "additionality" are real, but you're hardly doing a service by waving your hands and suggesting additionality tests don't exist or can't be effectively designed. You might as well cite record numbers of applicants as evidence that colleges have lowered their admissions requirements.

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Mike Burnett

In public policy debates, saying that we shouldn't do something should require proposing that we do something else that would achieve equivalent results.

Saying you are "against" carbon offsets is both easy and popular. They are complex and have had a speckled start up in terms of environmental integrity. But they are not inherently "bad," and have much to offer if done correctly. And they can be done correctly.

If you against carbon offsets, you are either for cap-and-trade without offsets, or you are for a carbon tax.

According to EPA analysis of the Lieberman-Warner bill, cap-and-trade without offsets would cost twice as much (93% increase without offsets). That is why it is worth it to figure out how to develop a practical regulatory system that includes offsets while ensuring environmental integrity.

A cap-and-trade has known emissions reductions but unknown costs. A carbon tax has known costs but unknown emissions reductions. Your preference depends on what you think is more important: managing CO2 levels or managing costs.

A carbon tax relies on consumers responding to price increases in energy. However, energy is a relatively "inelastic" commodity, which means that consumers are relatively unresponsive to price increases. Over the eight years of the Bush administration, gasoline prices went up by $2.50 per gallon. This is equivalent to a $250 per ton of CO2 carbon tax, which is much higher than any carbon tax level that it is conceivable that politicians would enact. The result: gasoline usage increased by 10% over this time period. This leads me to believe that a carbon tax would be ineffective in managing the dramatic decreases in CO2 emissions that science tells us we must achieve.

So the choice is between a largely ineffective carbon tax, a much higher cost cap-and-trade without offset system, or a cap-and-trade system that includes offsets. The cost differential is compelling, so the challenge is designing integrity into the offset system.

The Climate Trust, in collaboration with five other national non-profits with experience in offsets, has formed the Offset Quality Initiative for the express purpose of providing guidance to policy makers on how to do offsets with high environmental integrity.

Finally, comparing offsets to indulgences is an inapt analogy. Under an indulgence system, you could pay money to the church and continue to sin, with no reduction in the overall amount of sin. If the church had run indulgences like offsets, it would have worked like this. The church sets a goal for a 10% reduction in alcohol consumption. You can keep drinking if you pay someone else to reduce. So you'd get Joe at the end of the bar to stop drinking. All of the barkeeps and liquor stores in town would have to report sales of liquor to ensure Joe didn't drink. By tracking the amount of sin (drinking), the church could verify that 10% reduction in sin had occurred.

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Aldyen Donnelly

If we allow offsets to become part of our cap and trade market system in the way that they are integrated in the EU CO2 ETS/UN system, it is inevitable that the global carbon market will crash as hard, in the same way and for the same reasons as the global credit default swap market crashed.

The problem is that there is no double entry book-keeping in either the regulated or voluntary carbon markets.

Let's set aside the issue of hot air (credits that have no underlying environmental value)---in spite of the fact that more than 75% of all daily traded GHG offsets are hot air at this time.

Let's say my action result in 20 TCO2e of GHGs per year and I want to offset 2 TCO2e/year. Let's say I know someone who can cut their emissions from 20 to 18 at much lower cost than I. So I pay them to achieve that cut. Before we did the deal our combined total GHGs were 40 MTCO2e/year. After we did the deal our combined discharges totalled 38 MTCO2e/year.

But under the Kyoto/UN/EU and all North American voluntary offset market structures, after we do the deal we report our combined emissions to be 36 MTCO2e/year. I imported -2 into my inventory. But my offset supplier does not report an inventory or if they do, they do not add +2 TCO2e to their reported inventory to reflect the transfer to me.

So in all of the regulated and voluntary offset markets, credits/asset values appear to be growing and no one is booking the balancing liabilities. If we let this inadequately accounted for market build to any size before we address the accounting fault, it could get big enough to trigger another global recession when it inevitably crashes.

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Aldyen Donnelly

The market crash risk I outline above is substantial and that is BEFORE we even start to consider the role that contract SWAPS already play in the global carbon market.

I estimate that at least 70% of global regulated carbon market turnover is in the form of swaps at this time. Pary A sells 10 TCO2e to Party B today on the condition that Party B delivers 10 TCO2e back to Party A in 6 months. Party A adds the 10 TCO2e to their balance sheets and Party B books the forward contract as an asset, too. Party B's GHG quota book remains the same (adding the forward contract to physical holdings) and Party A's book adds 10 TCO2e. Party A does not book a contingent liability reflecting their obligation to return the 10 TCO2e to Party B. When we combine Party A and B balance sheets, they overstate the size and value of the carbon market. The overvaluation of the market is not just 10 simple tonnes worth. The practice leads to a massive inflatoin of the "market value" to which these assets are marked on those balance sheets.

The parties mark their GHG quota books to an apparent market value for GHG quota, even though very little cash acutally traded hands in their transaction or the vast majority of transactions going on around them. (Party A pays Party B a small commission for the short-term loan of allowances. In the market we call this "leasing permits"). The parties impute a "market value" to their booked tonnes, even though noone paid anywhere near market value for 70% of the turnover in the market. he market appears to be very liquid when, in fact, it is highly illiquid. The market makers suggest that the quota and offset system is serving the purpose of revealing market prices, when, quite the opposite, they are environmental regulations that enable the market makers to create a false market value.

Approaching the date that Party A has to returm 10 TCO2e to Party B, Party A enters into another swap with Party C, to get the tonnes needed to repay Party B. But Party C got their tonnes through a prior swap with Party B. And so on, and so on.

As I said, at least 70% of the REGULATED carbon market turnover is this kind of trading activity. The brokers are doing great and will have paid off their homes before this ponzi scheme crashes. When it crashes all of the participating electricity utilities will have to book massive asset write-downs, the cost of which--of course--will be recovered as power price increases.

We let market makers fake us out with swaps in tech boom, asset-backed securities and the credit default markets. If we let them do it to us again in the carbon markets that says more about the incompetence of our governments and those of us who vote for them than it says about the guys who are taking us. Fool me once shame on you. Fool me twice (4 times?) shame on me.

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Aldyen Donnelly

Dan,

You are on to something. Sometime in the next 6 months to year you will see the UK regulate the "voluntary" offset market. The regulations will stipulate that any person who offers offsets to the generatl public will have to file a prospectus with the national securities regulator (after all, a carbon offset is, by definition, a derivative). The UK law will likely also say that the only certificates that the offsetter can offer for sale are government-issued/approved CO2 allowances or CDM credits.

I have suggested, above, that most CDM credits are "hot air" and stand by that assertion. Setting aside that concern, it is still a very good idea for governments to understand, sooner rather than later, that offsets are financial derivatives and the voluntary offset market needs to be regulated in the same way any derivative market is. When you think this through, the emerging UK idea is right. If you want to keep the voluntary market clean, ensure that it offers for sale only government-issued certificates (otherwise known as "allowances")

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Mike Ellis

We are a freight company and our business is vital and necessary to commerce. But we create significant CO2 with our trucks.

While we've done much to reduce our fuel consumption with activities including use of biodiesel, anti-idling & drive speed regs for our drivers, there simply is not affordable or logistically practical technology in the marketplace to create zero emissions in our freight transport system. So as a good corporate citizen, we compute shipment emissions and offset them with reforestation offsets that meet additionality requirements.

We have chosen to absorb the increased cost.

Our logic is that if we cannot yet stop emitting, the next best thing is to increase the earth's capacity to absorb carbon over time through more carbon sink capacity.

For those that consider offsetting a "penance" for bad behavior, I argue that if you first do what you can to reduce your emissions, your company is on firm ethical ground to then offset. It's the obnoxious companies that choose to offset while continuing to do business without reducing carbon that give offsetting a bad name. If a business can afford to offset to create "carbon neutrality" with offsets then in most cases you should be able to first find ways to reduce emissions before you buy offsets.

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jc

Mike,

That's great, but you're simply making your company less competitive.

Greener China

What I think many people fail to recognize that is that "offsetting" is at best a temporary solution, and at worst the biggest greenwash around.

It is offered as the easy alternative, as if that exists, and does nothing to address the demand side of the equation.

Want to take a plane over a train? that's ok.. offset it.
Want to continue emitting SOX into the air. That's ok...offset it.

In no way does offsetting serve the longer term (why invest when you can offset), nor does it change the grander issue of reducing ones footprint (why take the train when for 10USD you can offset those nasty airline fumes).

What we really need is regulations that force investments. that force the bar higher. encourage goverments to work together to solve common problems, and encourage citizens to engage themselves into the solutions as well.

R
www.cleanergreenerchina.com

Alex

The two largest problems with carbon cap and trade are that one- the problem of waste and pollution involved in burning coal and the emission of carbon goes far beyond the carbon itself. If driving a car (I am a resident of LA and guilty of this myself) only emitted carbon, we would have an at least approachable problem to solve, but it emits thousands of chemicals that are toxic. Like many of you said-- it's a guilt reducing mechanism, or perhaps at best a first step in beginning to start to fix this problem.

The other issue is that it ends up creating false incentives to develop places that should not be developed. Take Phoenix, AZ for example. It's very easy to build solar plants in the area, which generate 'clean' energy, however AZ has no water and if we expend our resources developing clean technologies for areas we won't be able to inhabit in 50 years once the Aquifers that we are draining have dried out, then we are even worse of than when we started. So even if we set the beaurocratic issues of certifying the projects aside, this still motivates unsustainable development.

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ecoshift

A lot depends on the price. Does $7 a ton actually enable emissions reductions that would not have been otherwise achievable? Does $20 a ton? Does $45?

Additionality won't exist if the price of emissions offsets don't equal the cost.

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