Select Committee on Environmental Audit Sixth Report


72. Our inquiry was announced before publication of the DEFRA consultation and our call for evidence as to the future regulation of the industry went wider than the consultation. While the responses often addressed whether the voluntary market could or should be regulated (and, if so, how), some responses focussed their attention on the specifics of the DEFRA consultation and the proposed DEFRA Code alone. It was clear from the tenor of such responses that the Department had tried to do what was widely perceived as the right thing - gentle intervention on the basis of a voluntary code was welcome - but that it was perceived to have gone about it the wrong way, principally in the proposed endorsement of CERs alone. However, there was no consensus on approaches to regulation.

73. Some of those involved in offsets felt that it was too early to regulate for what they considered to be an immature industry. Paul Monaghan of the Co-operative Group stressed the importance of the Government allowing the market to self-regulate—as happened with fair-traded and Forestry Stewardship Council goods— so that "the cream come[s] to the top": he also expressed the fear that early intervention by the Government might well be "counter-productive".[86] This view was echoed by other witnesses who told us that the industry was too young and too diverse to regulate successfully, although some suggested that gentle Government intervention may help mature and consolidate this emerging business.[87]

74. It was not just those whose scepticism concerning offsets verged on hostility who wanted more strict regulation of the voluntary offset market. The two major offset companies who gave oral evidence to us, Climate Care and The CarbonNeutral Company, both wanted regulation to drive the carbon cowboys out of the market and to lend confidence to what they realised was a maligned and misunderstood industry.[88] This was also very much the view of Cheyne Management Capital Ltd. and London Climate Change Services (LCCS) which saw the need for regulation to ensure the probity of companies with whom they might deal and the robustness and verifiability of those credits which they handled.[89]

75. The carbon offset market is a business where one company may retail forestry credits aloneor help establish forestry projectswhile another might eschew forestry as of doubtful benefit (or profit); it is a place where one company happily sells credits for retirement which represent future (and thus unproven) reductions while another will retail for retirement only those credits which represent savings already made (and verified). Some companies adhere to CDM-approved methodologies for projects while others have vague proprietary standards which are not subject to any robust external audit. Some companies insist on the credits they retail (or projects they support or establish) having additional, sustainable development or environmental, benefits while others happily look no further than the direct GHG/carbon benefits, even if other benefits are not only lacking but the projects concerned possibly carry detriment to their local environment or society. In such a market there is a risk that mandatory regulation could either be so light and unspecific as to be ineffectual or so heavy and specific as to stifle innovation and retard growth.

76. It has also to be borne in mind that some of those who sell offsets have no connection with the projects from which they derive their credits. Other bodies are responsible for projects and sell on the credits which they produce to others who then retail them to their 'final' customer. Some companies of course do both, and many companies who retail credits to a final customer also have some involvement in the projects which generate the credits they sell. Regulation, to be meaningful, must cover not only the selling of credits for retirement but also the nature of the credits and the projects from which they are obtained.

77. DEFRA's proposed Code of Practice seeks to create a voluntary scheme for retailers of credits from CDM or CDM-related projects. Compliance with such a Code would also of course be open in a partial way to those who retail a mix of VERs and CERs. Those who deal only with offsets from outside the compliance market would fall outside the DEFRA scheme. This would, we believe, leave unregulated those portions of the market where there is greatest innovation and greatest environmental or sustainable development benefit—and would also leave unregulated and unconstrained the activities of 'carbon cowboys' peddling flimsy VERs, the phenomenon most likely to destroy the credibility of all schemes, good or bad. This position is one with which almost no-one who gave evidence to us appeared happy. While it is practically impossible to imagine some form of voluntary regulation that would not have had its opponents, and no doubt fierce opponents, the DEFRA proposal seems to have alienated both those who see in VERs the future of a burgeoning and beneficent market and those who see VERs as unreliable and uncertain. The former group will point out the uncertain benefits from many CERs which will be peddled under the DEFRA Code and will point to the equally robust carbon/GHG benefits of VERs and also stress the additional benefits from many VER schemes; while the latter group will see DEFRA doing nothing to remove the taint from offsets caused by the VER market being left unregulated.

Need for offsets to be robust

78. We believe, on the basis of the evidence to this inquiry, that, while the industry may indeed self-regulate itself in a robust and helpful way over the years ahead and common standards may emerge for credits and projects, it is important that greater confidence be encouraged in the voluntary offset market now. This will maximise the potential for carbon abatement through the growth in the sale and retirement of offset credits. Climate science deals with considerable time periods, but the current assessments stress the need for quick action. If we are to encourage companies—and individuals—to offset their emissions then the voluntary market must quickly be given the sort of validation it needs to facilitate this. DEFRA needs to signal clearly what criteria it thinks any scheme needs to meet to be effective, rather than rely upon the CDM to do that job for it.

79. The CDM is developing—albeit slowly—and we have already noted some of the improvements which the Government is keen to see in terms of how it functions and in the range and scale of the projects it supports (and the pace and cost of its approvals process). The CDM will not, in a short space of time, be able to support an increasing number of small-scale projects in the poorer African countries, for example (that is, outside of where it is currently dominant, namely China and India). Were the CDM able to assure extra sustainable development benefits or at least assure no environmental detriment from projects, and prove itself more flexible, while still rigorous, in setting methodologies, then there might be a case for suggesting that over the next few years the expansion of the CDM would take in the best schemes in the voluntary offset market. If this were the likely scenario then the Government's current proposals would read more reasonably.

80. However, we do not find from the evidence that this is likely to be the case. Progress with reform of the CDM will inevitably take time, and many projects will inevitably be delayed as a consequence. Moreover, offsets, wider and more innovative, need to be encouraged now. DEFRA's proposed Code of Practice will encourage customers into the CDM market and away from the market for VERs. It is our belief that this will result overall in less carbon being offset. The Government needs to set out the effective criteria for its own approval so that projects outwith the CDM can also seek the DEFRA 'stamp of approval'. The specific and detailed criteria for inclusion within the CDM are very complex and it would be pointless to ask VER projects to comply with them in every dot and tittle. Rather, the Government needs to establish a range of criteria which projects and credits, and those who retail the credits, need to meet, analogous in a broad but robust way to the worthwhile elements of the CDM. These criteria should be within reach of small projects as well as large and should not be prohibitive for those wishing to set up offset projects in some of the poorest and most politically unstable developing countries in Africa.

81. Moreover, the Government ought to take seriously its duty to ensure whether or not the projects and credits it approves, whether within the CDM or without, at least carry no overall net environmental or sustainable development disbenefits, notwithstanding their GHG or carbon benefits. Preferably, it should seek to ensure that credits which will carry a DEFRA stamp of approval should also have additional benefits beyond those for the climate. The Government has ensured that the offsets it purchases, currently to cover its official flights but in the future no doubt also to cover its pledge to make its central government estate carbon neutral by 2010, come from the more expensive end of the CDM scale at which those extra benefits are guaranteed. It would be appropriate for the Government to encourage this approach through its Code of Practice and proposed quality mark.

Criteria and approval

82. The two issues that immediately arise from our recommendation that the Government establish criteria rather than simply adopt the CDM approval as grounds for its own quality mark are: (i) how to establish what criteria should be applied, and (ii) who should assess which projects or credits, from within or without the CDM, match these criteria.

83. In regard to the first of these two points, the VALID criteria set out by the Carbon Trust in their excellent guide, The Carbon Trust three stage approach to developing a robust offsetting strategy, from the evidence we received, now seem to be gaining broad acceptance across the market.[90] The VALID acronym stands for verification, additionality leakage, impermanence, and double counting, and broadly includes those criteria essential for those who seek assurance of the quality of particular credits or offset schemes. Broadly . these mean:

    Verification: as the Carbon Trust says in its guide, "emission reductions [resulting from a project] should always be verified by an accredited independent third party according to an established standard or protocol".

    Additionality: For CDM projects additionality is 'proved' by recourse to an 'additionality tool'. Projects outside the CDM sometimes also have voluntary recourse to this same tool or to other methodologies—all of which are trying to prove the same thing. Certainly, there is room for flexibility here—and for some play of fine judgement—in order reasonably to certify that, but for a particular project, the emissions savings or sequestration concerned would not anyway have happened.

    Leakage: all projects may suffer from some leakage—that is to say that the GHG emission they mitigate or sequestrate may be displaced to somewhere outside the project boundaries so that the full benefit of the project is in broader terms at least in part reduced. Although this problem is usually associated with forestry or land-use projects (where, for example, illegal logging or clearance simply shifts to another area when one part of a forest is preserved and protected) is not exclusive to that type of offset project. Clearly, every attempt should be made to prevent leakage, and where that is not possible to minimise it and ensure that its extent is calibrated and subtracted from the project's benefits so that an accurate overall assessment of a project's final or net GHG benefit can be made.

    Impermanence: This is an issue particularly connected with forests and land-use projects which are intended to sequester carbon in a permanent way. Credits which arise from forestry projects can only be considered to be of real value if the sequestered emissions they represent remain sequestered.

    Double counting: simply put, this means that no credits ought to be sold twice to a final customer. Once they are sold to their final customer they must be permanently retired and therefore cannot be sold again.

The Carbon Trust suggests that a number of current VER standards meet these criterianamely the Voluntary Gold Standard, the Climate Group's Voluntary Carbon Standard, the Plan Vivo Standard (which is exclusively for forest-based projects) and Climate, Community and Biodiversity standards. In other words, the Government's current proposal only to quality mark CERs would rule out projects and credits which the Carbon Trust believe meet these essential five criteria

84. Beyond this set of useful criteria there are in our view two other key criteria, which are critical to the acceptability of credits. The first is that credits are only sold for final retirement when the emissions reduction or sequestration they represent has taken place and has been verified as having taken place. This is the case within the CDM but is not always the case within the VER market, where credits representing future reduction are sometimes sold to their final customer. This of course is not always clear to the customer. It may also mean that a credit is retired which represents an emissions reduction which may not in the endshould the project fail, for example—ever take place at all. Although this problem is most often associated with forestry and land-use projects it is not unique to them. Any project maker can calculate the emissions from his project over, say, ten years and decide to sell them all before they have all eventuated, no matter what the nature of the project might be. It ought to be the aim of any quality mark to ensure that the final sale does not take place before the emissions reduction has occurred.

85. The second key criteria we would add to the five encouraged by the VALID scheme is that no project from which credits are to be retailed with the DEFRA quality mark should carry any overall net environmental or other sustainable development disbenefits, no matter what their climate benefits might be. Perhaps a second, higher, quality mark could be given for those projects which not only avoid related or additional disbenefits but which carry definite additional benefits, whether in terms of social development, biodiversity or economic good. These seven criteria in total should form the standard by which projects and their credits are judged to be acceptable, robust, worthwhile and valid, and should be applied rigorously but with enough creative flexibility, so that they do not simply reproduce criteria in the CDM, but rather provide a benchmark for projects from within the compliance and voluntary markets which should receive the DEFRA or Government seal of approval.

86. If these criteria are to be accepted as appropriate, a trustworthy and independent regulatory body will be needed to decide or advise on the quality mark to be awarded to offset companies for their projects and credits. The body involved in assessing companies' projects and credits would need to be authoritative, independent, and well-resourced. The only just and equitable solution to the question of who should pay for such a body, and one which both TCNC and Climate Care seemed to accept in evidence to us,[91] is that industry pay out of its profits for its establishment and upkeep. Mark Kenber of the Climate Group also felt that this was a sensible proposition which would ensure that the increased confidence within the offset market - both within the compliance and voluntary modelswould lead to increased sales which would more than justify—and cover the cost of—such an independent body.[92] Appointments to the body would have to be within the remit of Government rather than the industry, and key NGOs may also have a role to play in participating in this function of oversight and approval.

86   Q125 Back

87   Q270, for example. Back

88   Q106 Back

89   Q374 Back

90   The Carbon Trust, "The Carbon Trust three stage approach to developing a robust offsetting strategy", 17 November 2006. Back

91   Q113 Back

92   Q273-7 Back

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