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Voluntary Carbon Offsets

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Voluntary carbon offsets are voluntarily purchased reductions in greenhouse gas emissions.  They allow individuals and organizations to voluntarily counteract or compensate for their own greenhouse gas emissions by funding projects that reduce green house gas emissions in sectors not required to reduce their emissions. Offset buyers are not actually reducing their own emissions, they are paying someone else to reduce or avoid emissions.

Offsets are usually purchased as credits representing reduced, avoided or absorbed greenhouse gas emissions. Credits are typically sold in units of one ton of CO2 equivalent (CO2e). These credits can be sold, traded or held by purchasers for investment purposes.  The credit does not offset greenhouse gas emissions until it is “retired”, or taken permanently off the market, by a supplier or purchaser.

The voluntary carbon offset market has grown rapidly in recent years, driven by companies that want to project a green image by offsetting emissions and by consumers who want to offset emissions related with an event, a product, or a lifestyle. With this growth has come increasing criticism that voluntary offsets result in ineffective reductions, are not subject to uniform and effective standards, and have opened the door to greenwashing.

Background

The voluntary carbon offset market arose largely in the United States as a market-based mechanism to address climate change and in Europe as an offshoot of Europe’s implementation of the Kyoto Protocol. It is now a global market with offsets being developed and sold throughout the world.

The United States has long favored voluntary market-based mechanisms to reduce green house gas emissions. Responding to political and market trends, a voluntary carbon market has emerged in the U.S. that includes both the Chicago Climate Exchange, which launched in 2003, and what is commonly referred to as an “over-the-counter” (OTC) market.

Chicago Climate Exchange (CCX) is a greenhouse gas emissions trading system in which participants make “voluntary but legally binding commitment” to reduce their emissions by 4% and 6% by 2006 and 2010 respectively, relative to their 1998–2002 average. Members who reduce beyond their targets have surplus allowances to sell or bank. In order to meet their reduction commitments, members can purchase credits from approved offset activities or allowances from other members who have made reductions beyond their targets. 1

The over-the-counter segment of the voluntary market does not have a regulated marketplace or agreed to standards. Customers in the over-the-counter markets are companies as well as individuals that want to reduce or offset their “carbon footprint.” The over the counter market is highly fragmented, with many diverse buyers, sellers, projects developers and project types. 2

 The voluntary carbon market operates along side of their regulate markets, often referred to as the “compliance market.”  Examples of regulated markets include the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), the Regional Greenhouse Gas Initiative (RGGI)3 ,  and the New South Wales Greenhouse Gas Abatement Scheme (GGAS).4

The Kyoto Protocol imposes national caps on green house gas emissions for developed countries that have ratified the Protocol.  The cap requires participating countries to, on average, reduce their emissions 5.2% below their 1990 baseline between 2008 and 2012. It allows them to meet their targets by reducing their own emissions; trading emission allowances with countries that have a surplus of allowances because they have exceeded their targets; and, purchasing carbon credits through Joint Implementation (JI) and the Clean Development Mechanism (CDM).5

JI projects allows emitters in developed countries (listed in Annex 1 of the Kyoto Protocol) to purchase carbon credits from green house gas reduction projects implemented in developed countries or countries in transition.  CDM allows industrial countries to acquire offsets by financing green house gas reduction projects in developing countries. Offsets that are developed as part of JI projects and CDM projects can also be sold on the voluntary market. 

The Kyoto Protocol was the catalyst for the creation of the European Union’s Emissions Trading Scheme (EU-ETS), the world’s largest green house gas compliance market. European Union members joined together to form a single entity for compliance purposes, as permitted under the Kyoto Protocol, to form the EU-ETS.  EU-ETS is based on a cap and trade system that allows members to trade emissions, and to use offsets from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects to help them achieve the mandatory emission reduction targets called for in the Kyoto Protocol. 6

Size of the voluntary market

The voluntary carbon market and the use of offsets have grown rapidly in the last seven years.  However, because no one registry exists where data is collected on the number and types of voluntary offsets, understanding the size and scope of the market is difficult.

Ecosystem Marketplace and New Carbon Finance, two private companies, have gathered data from 150 organizations and carbon registries operating in the global, over the counter market and published a report, Forging a Frontier: State of the Voluntary Carbon Markets 2008.  The data they collected indicates that transaction values on the voluntary carbon markets have risen from US $42 million in 2002 to US $331 in 2007. These figures include transactions on the Chicago Climate Exchange, which have grown from US $3 million in 2004 to US $72 million in 2007. 7

 

While the value of these transactions has grown almost five fold since 2002, the volume of trade has gone up about two and one half fold from 2006 to 2007, from 24.6 MtCO2e to 65 MtCO2e.  The authors of State of the Voluntary Carbon Markets 2008 note that the respondents to their data requests were only able to verify that 10.7 MtCO2e were destined for retirement, meaning that about 25% of the volume traded was used to offset emissions, while the remaining 75% were credits being sold or traded for future use. 8

The voluntary market is small compared to the compliance market. The volume of transactions on the voluntary market was about 2.2% of the volume on the compliance market 2007.  In 2007, the volume of transactions on the compliance market was 2,918 MtCO2e, which were valued at US $63,697. The volume and value of these transactions roughly doubled between 2006 and 2007.9

Scope of the voluntary market

According to the authors of the State of the Voluntary Carbon Market 2008, in 2007 31% of the projects in the over the counter market involved renewable energy projects, 18% energy efficiency, 16% methane destruction, and 18% were forestry land projects.  With respect to the CCX, 46% of the credits were issued for soil carbon, 30% for coalmine methane, and 9% for landfill methane. 10


Project activities in the over the counter market occurred throughout the world in 2007. Asia accounted for 39% of the credits sold, North America 27%, Europe and Russia 13%, Latin America 7%, Australia and New Zealand 7%, other areas 5%, and Africa 2%.11

In 2008, the United States General Accountability Office issued a report, Carbon Offsets: The U.S. Market is Growing but Quality Assurance Poses Challenges for Market Participants.  The information they gathered from Point Carbon, another private company, shows that the supply of offsets based in the United States is growing rapidly, from 93 projects accounting for about 6.2 MtCO2e in 2004 to 211 projects accounting for about 10.2 MtCO2e in 2007. About 49% of this offset supply came from methane projects, 19% from carbon capture and biological storage, 17% from biological sequestration, 7% from energy efficiency, 6% from renewable energy, and 1% from others types of projects.12

Cost of credits

The price of carbon credits varies tremendously. The authors of the State of the Voluntary Carbon Markets found that prices ranged from between $1.8/tCO2e to about $300/tCO2e, with the high price being an anomaly for a wind farm in New Zealand.  The highest price credits came from native and plant reforestation/afforestation projects, where prices average $6.80 and $8.20 per of tCO2e, respectively.  The lowest price credits came from industrial gas projects and geological sequestration, where prices averaged $3.70 and $2.50 per tCO2e, respectively.13

Supply chain

Participants in the offset market include project developers, who perform the projects that generate the credits or offsets to be sold; project funders, who can be banks, private equity firms, private investors, non-governmental organizations, or others; third party verifiers, who verify that the projects adhere to the relevant quality assurance mechanisms; aggregators, who buy offsets and bundle them together for resale; brokers and exchanges, which facilitate the transaction between buyers and sellers; and, retailers, or offset providers, who market and sell the offsets to individuals and organizations. Players in this supply chain may play multiple roles, and not all transactions involve all these players.  For example, a project developer may sell offsets directly to a consumer, a company may develop projects and purchase offsets from other developers for resale, or some projects may not be verified by a third party.

Although it is sometimes possible to buy offsets from project developers of brokers, most buyers purchase offsets from offset providers.  Over 170 companies and charities throughout the world are involved in providing offsets in the over the counter market.  They offer a wide range of offset types and prices.14

Many carbon-offset providers provide carbon calculators to calculate the amount of offsets necessary for an activity to become “carbon neutral.”  For example, if you want to offset the carbon emissions from a round trip flight between Dulles airport outside of Washington, DC and San Francisco, you can use these calculators to determine the amount of CO2e generated by that trip and the cost to offset those emissions.  Those offsets can then be purchased on-line.15

Benefits and criticism

While offsets can be part of a credible climate strategy, organizations and individuals serious about addressing climate change first need to reduce their own greenhouse gas emissions. Carbon offsets may slow emissions, but they will not result in overall emissions reductions. If organizations and individuals continue to increase their green house gas emissions, emissions will continue to rise, even if offsets are purchased.

Because there is general agreement that climate policy must find ways to reduce actual emissions to prevent climate change, the debate over voluntary carbon offsets centers on whether they detract from this core mission, on the quality of the offsets themselves, and on the standards and transparency of the voluntary carbon market.

Benefits of Offsets

Supporters of offsets programs cite a number of reasons why voluntary offsets are beneficial.16    Among reasons commonly cited are that offsets can: 

  • Reduce the cost of addressing climate change by channeling investments to projects that provide less costly solutions to reducing green house gas emissions. This can help make deeper reduction in emission more politically and economically feasible.
  • Prepare an organization for future regulatory requirements by focusing on measuring internal energy usage and emission levels, setting an internal price for carbon, and engaging staff in climate change issues. This can help organizations prepare for a regulated cap-and-trade system and attract investors interested in companies addressing climate risk.
  • Support internal company marketing strategies and create a positive image of organizations engaged in offsetting.  Companies can benefit by being involved in finding ways to address climate change issues.
  • Steer investment to the developing world in support greater sustainability goals. Historically, most green house gas emissions have come from the developed world, but to address climate change, emissions must be curbed in both developed and developing countries, which often lack the resources to make the necessary changes. Offsets can help address these equity issues by facilitating mitigation efforts in poorer countries.

Criticisms of Offsets

A number of criticisms have been made against voluntary offset programs.   Among these are:

  • The voluntary carbon market lacks uniform rules, clear standards and transparency. The United States General Accounting Office (GAO) review concluded that a while a variety of quality assurance mechanisms were available, the extent of their use was uncertain and consumers were provided with limited assurances of their credibility.  “The lack of comprehensive data on the use of quality assurance mechanisms and differences in the substance and applications of these mechanisms limit the market’s transparency and raise questions about whether offsets are interchangeable commodities.”17
  • Numerous carbon offset projects have not worked or would have occurred anyways. Commonly cited instances include failed mangrove planting projects supported by offsets from the popular band Coldplay, the distribution of energy efficient lightbulbs in South Africa,18   and a methane capture project in Arkansas used to help make the 2007 Oscars “carbon neutral.” 19
  • Individuals and companies are increasingly using voluntary carbon offsets in order to make claims of “carbon neutrality.”  Because no standard definition of “carbon neutrality" exists, to some, the term “carbon neutrality” is a form of greenwashing, since those that purchase offsets are not necessarily reducing their own emissions or promoting the use of renewable energy.20
  • Offsets are used to assuage guilt and promote luxury living by allowing people and companies to buy their way out of environmental responsibility.21    This makes real change more difficult because it does not address the underlying behavior and practices in the developed world that cause green house gas emissions.22
  • An offset project on another continent may result in unforeseen permitting or development issues.23    Some argue that offsets rarely benefit local communities and some have called offsets a new form of carbon colonialism.24

Standards

In part to address these concerns, organizations have developed over a dozen standards in recent years.  None of these standards has emerged as the industry standard, and many vary widely from one another in their focus.

Several recent reports evaluate the different offset providers and the standards used to develop and market the offsets.  Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards 25 evaluates the following offset standards:

  • Clean Development Mechanism (CDM)
  • Gold Standard (GS)
  • Voluntary Carbon Standard (VCS)
  • VER+
  • The Voluntary Offset Standard (VOS)Chicago Climate Exchange (CCX)
  • The Climate, Community & d Standards (CCBS)
  • Plan Vivo System
  • ISO 14064-2
  • WRI/WBCSD GHG Protocol for Project Accounting

Ends Guide to Carbon Offsets 200826 developed a scoring tool and provided a list of their top 30 offset providers as well as a world wide director of offset providers.  A Review of Offset Programs: Trading Systems, Funds, Protocols, Standards and Retailers 27 provides a comprehensive comparison of offset programs in the context both national and international initiatives and voluntary and mandatory programs.

These reports, and others recently published,28   highlight the wide range of participants, projects and prices in the voluntary market and the rapidly changing nature of the standards used to evaluate voluntary offsets.  Because of this, buyers should be educated on the market and make sure they are using a quality offset provider before purchasing offsets.

Quality assurance mechanisms

With the quality of voluntary carbon offsets being called into question, a number of industry observers and non-governmental organizations have suggested various quality assurance mechanisms, many of which are based on the rigorous procedures of the Clean Development Mechanism and which are used to varying degrees by some of the top-rated offset providers.29

These mechanisms generally involve reviewing some combination of the following elements.  While these elements may be characterized and categorized in different ways, they generally include the following concepts.

  • Verifiable -- Offsets should be verified by an independent third-party verifier with appropriate local and sector expertise.  Project developers must be able to accurately develop and check baseline greenhouse gas emissions and subsequent emission reductions.
  • Additional -- Green house gas savings must be additional to those that would have occurred anyway through a business-as-usual scenario. All reputable offset standards should include procedures to ensure that the savings are additional to those that would have occurred anyways.
  • Leakage-free -- An offset project must not increase emissions elsewhere.  For example, funding a forest preservation project or tree planting project will not result in a reduction in green house gas savings if the logging activities simply move to an adjacent parcel. (For this reason, many offset provides will not include Forestry projects in their portfolio) Monitoring, creating buffer credits, or hedging through insurance can help prevent leakage.
  • Permanent -- A good offset program will save carbon permanently. An examples of impermanence would include a situation where energy efficient equipment breaks down or is abandoned.
  • No Double Counting -- Credits must only be counted once.  An emission reduction credit is valid only if it is generated once, sold once, claimed once and retired permanently.
  • The Right Timing -- Offsets should be counted for emissions reductions that have already occurred.  The main risk is that the product will fail and that the credits will not be delivered.  A buyer that buys credits for future emission reductions should not claim reductions against their current emissions.
  • Enforceable -- Offsets should be backed by transparent legal instruments that define the offset, its creation and its ownership.
  • Tracked -- Credits should be tracked and registered to indicate ownership, avoid double counting, and provide a mechanism to verify when they are retired.

Recent developments and future trends

The voluntary offset market is rapidly evolving, and a number of trends will likely affect its evolution in the coming years.  

One trend to watch will be the relationship between voluntary and regulated carbon markets.  As the regulated cap-and-trade markets grow, what niche will the voluntary markets fill?  Will a demand for a voluntary market continue? If so, what will be the interactions between these two markets?

Another trend to watch is efforts by outside organizations and government agencies to provide greater oversight of offset standards and markets. Ensuring the credibility of carbon offsets poses challenges because of uncertainties in measuring project emissions against a hypothetical business-as-usual situation.  This difficulty is compounded when considering projects such as those involving forestry, sequestration of agricultural soil and methane capture. Without a central trading platform, exchange, or registry, many individuals and organizations will continue to question the transparency, and hence the validity, of the market. Finally, the using the term “carbon neutral” to describe the consequence of offsetting emissions will continue to be a source of concern to many.

 

Footnotes

1.  Overview, Chicago Climate Exchange

2.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008.

3.  RGGI is the first mandatory, market-based effort to reduce green house gas emissions in the United States. It began operations in early 2009 and covers electric power generators. Ten Northeastern and Mid-Atlantic states currently participate in the initiative.

4.  GGAS commenced on 1 January 2003 as one of the first mandatory greenhouse gas emissions trading schemes in the world. GGAS aims to reduce greenhouse gas emissions associated with the production and use of electricity.

5.  The Kyoto Protocol homepage contains excellent summaries of emissions trading, the Clean Development Mechanism and Joint Implementation.

6.  Emission Trading System (EU ETS) , Europa.eu (European Commission), last updated July 5, 2009.  Accessed June 28, 2009.

7.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 6.

8.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 6.

9.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 6.

10.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 7.

11.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 7.

12.  General Accounting Office, Carbon Offsets: The U.S. Voluntary Market is Growing but Quality Assurance Poses Challenges for Market Participants, GAO-08-1048 (August 2008), page 14.

13.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, pages 39-40.

14.  Tejas Ewing,  Ends Guide to Carbon Offsets 2008, ENDS, 2008, page 1.

15.  Tejas Ewing, Ends Guide to Carbon Offsets 2008, ENDS, 2008, page 1.  Provides web addresses for 170 offset providers.

16.  These benefits are explained with varying emphasis on many of the web sites for the offset providers as well as in the reports cited in this article.

17.  Katherine Hamilton, Milo Sjardin, Thomas Marcello, Gordon Xu, Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, May 2008, page 8.

18.  These two examples are cited in, The Carbon Neutral Myth: Offset Indulgences for Your Climate Sins, Carbon Trade Watch, 2007.

19.  Another Inconvenient Truth, Business Week, March 26, 2007,

20.  See, for example, Duncan McLaren, Why Carbon Nuetral May Mean Nothing at All, New Builder, accessed January 30, 2009.

21.  Laura Keisel, Rich Enough to Offset: Do Voluntary Carbon Markets Promote Luxury Emissions? emagazine, accessed  January 30, 2009.

22.  These two examples are cited in, The Carbon Neutral Myth: Offset Indulgences for Your Climate Sins, Carbon Trade Watch, 2007.

23.  Robert Kyriakides, Ideas about the Environment: Why I Do Not Buy Carbon Offsets, Weblog, July 28, 2008.

24.  These two examples are cited in, The Carbon Neutral Myth: Offset Indulgences for Your Climate Sins, Carbon Trade Watch, 2007.

25.  Anja Kollmuss, Helge Zink, Clifford Polycarp, Making Sense of the the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, WWF Germany, March 2008.

26.  Tejas Ewing, Ends Guide to Carbon Offsets 2008, ENDS, 2008, page 1.

27.  Anja Kollmuss, Michael Lazarus, Carrie Lee, Clifford Polycard, A Review of Offset Programs: Trading Systems, Funds, Protocols, Standards and Retailers, Stockholm Environment Institute, October 2008

28.  See for example, A Consumer’s Guide to Retail Carbon Offset Providers,  Clean Air Cool Planet, December 2006.

29.  See references cited in footnotes 2, 14, 12, 25 and 27 for discussions of the quality assurance mechanisms and standards for volunatry carbon offsets. See also, Offsetting Emissions: A Business Brief on the Voluntary Carbon Market, Ecosytem Marketplace, Business for Social Responsibility, February 2008.

Resources

A Consumer’s Guide to Retail Carbon Offset Providers. Clean Air Cool Planet, 2006

A Review of Offset Programs: Trading Systems, Funds, Protocols, Standards and Retailers, Stockholm Environment Institute, 2008.

Carbon Offsets: The U.S. Voluntary Market is Growing but Quality Assurance Poses Challenges for Market Participants, United States General Accounting Office (GAO-08-1048), 2008

Climate Change: Carbon Offsetting - Code of Best Practice, Defra, 2008

Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, 2008 

Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards,  WWF, 2008.

Offsetting Emissions: A Business Brief on the Voluntary Carbon Market, Ecosytem Marketplace, Business for Social Responsibility,2008

The Carbon Neutral Myth: Offset Indulgences for Your Climate Sins, Carbon Trade Watch, 2007

The Ends Guide to Carbon Offsets 2008, ENDS, 2008

The Voluntary Carbon Standard, VCS Association, 2008

Carbon Offset Research and Education (CORE), an initiative launched in June 2009 by the Stockholm Environment Institute (http://www.sei.se).  The site is divided into three sections which are interlinked: (1.) Policy Information, (2.) Consumer Information, and (3.) Aviation Information (intro to the issues related to GHG calculations from aviation for carbon offsetting).  June 2009.

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