Memorandum submitted by the Environment
Agency
INTRODUCTION
1. The Environment Agency is pleased to
provide evidence to the Committee's inquiry into the voluntary
carbon offsetting market. Short responses to the Committee's specific
lines of inquiry are embedded in the discussion at paragraphs
14, 19 and 22. We have added some comments on the Government's
proposed code of practice and accreditation scheme, but these
are necessarily provisional as we will need to consider the proposals
in greater depth before responding to the consultation.
REGULATING CARBON
OFFSETTING MARKETS
2. Offsetting has gained popular currency
as a means of people and organisations taking direct action to
reduce their own "carbon footprint". It is possible
to offset emissions arising from the use of energy for travel
or consumption in buildings by paying to have emissions reduced
elsewhere through financing renewable energy projects, energy
efficiency schemes, or more controversially, through paying for
new growth of forests or protection of forests or other carbon
sinks. Several UK companies now operate as intermediaries between
people or organisations wishing to offset their emissions voluntarily
and the developers of projects that reduce emissions elsewhere.
3. There are two quite different but overlapping
offsetting markets. The first is a voluntary system rooted in
personal or organisational environmental responsibility, and the
subject of the Committee's inquiry. The second is a formal compliance
market in which offsets are traded in emissions control systems
where there are legal or contractual obligations to reduce emissions
such as the EU Emissions Trading System or by parties to the Kyoto
Protocol.
4. The main formal offsetting mechanisms
of the Kyoto Protocol are Joint Implementation (JI) and the Clean
Development Mechanism (CDM)[10],
and high levels of assurance and verification are required before
JI or CDM credits can be exchanged to settle obligations in the
compliance market. There are processes now in place to establish
the quality of credits that can be traded internationally, for
example the UN Framework Convention on Climate Change (UNFCCC)
has designed a project methodology and registration system for
CDM credits[11]
and the World Bank has developed expertise in project design with
high standards of assurance[12].
5. Building on the UNFCCC methodologies,
a consortium that now has 42 non-Governmental organisations has
defined a more restrictive "Gold Standard" for carbon
reduction projects that assesses wider sustainability characteristics[13].
As well as for JI and CDM projects, the Gold Standard can be used
to provide a high standard of assurance in the voluntary offsetting
market. For example, it has been adopted in the UK by Reed Paget
for its "Penguin Approved" label and will form the basis
of a new Climate Credit Card to be launch by Rabobank and WWF
in the Netherlands in 2007, in which purchases will be offset
with Gold Standard projects.
6. In the voluntary market, individuals,
businesses and public sector bodies may have different requirements
from offsetting their emissions. An individual will wish to secure
an environmental outcome and will not wish to be fooled, but also
has no formal external accountability for their spending on offsetting
and may wish to see the project contribute to other objectives,
such as reducing poverty. However, a business may have to go further
and account to its shareholders to show the offsetting has value
to the business, through reducing reputational risk, producing
a demonstrable environmental outcome and by adding value to its
corporate social responsibility programme. A public sector body
may need to go further still, because it is spending taxpayers'
money on offsetting and must be accountable for value for money.
The offsetting market may therefore need to provide different
trade-offs between the level of assurance offered and the cost
and difficulty of achieving it.
7. For an offsetting transaction to work
as a true greenhouse gas mitigation measure, two related conditions
must be met:
— The claimed offset emissions reductions
must be additional to what would have happened without the offsetting
transaction. This is difficult to establish with certainty as
future conditions, such as energy or technology prices, are difficult
to know. It is also important to avoid double counting resulting
from several sources of project finance each taking credit for
the carbon savings from the project.
— The claimed offset emissions reductions
must have at least the same longevity as emissions that are released
because there is little value if the reduced carbon is rapidly
returned to the atmosphere. This can be difficult to establish
when the emitting activity is different to the offsetting activity
(for example, aviation emissions offset by growing trees) and
it is related to the first condition because it is possible that
the offsetting activity would have happened at some time in the
future.
8. These conditions can be both difficult
to meet and difficult to verify with the rigour necessary in a
compliance market. In the voluntary market, there are trade-offs
between the levels of assurance that can be attained, and the
value of the transaction and the costs of the assurance process.
If these trade-offs are too disadvantageous, then the user will
simply do nothing because in the voluntary market they are not
acting under any legal or contractual obligation.
9. The Environment Agency is a champion
of modern regulation, and we believe modern, risk-based regulation
principles should be applied in this market. That means that the
levels of assurance and regulation imposed should be proportional
to the risk and reflect the needs of the user, whilst achieving
a good environmental outcome.
10. The key issue in voluntary offsetting
markets is to ensure that the transaction creates the environmental
benefits the consumer is paying for. This means that a user should
be confident that:
— when they pay their money to the
offsetting intermediary the money is actually spent on the projects
they claim it will be spent on;
— that the expenses taken by the intermediary
are an acceptably small share of the transaction;
— that appropriate calculations are
made of the emissions associated with the activity for which emissions
are being offset;
— that the emissions claimed for the
offsetting projects are valid, additional and properly attributed
to the payments received from offsetting; and
— negative environmental impacts associated
with the offsetting project are minimised and do not outweigh
any value from the offsetting project.
11. It would be possible to devise an elaborate
regulatory framework for voluntary offsetting that assessed all
of the criteria in the paragraph above at a level of assurance
comparable to that required in the compliance market. However,
that would risk suffocating the voluntary market, obstructing
innovation and costing too much. At the opposite end of the regulatory
spectrum there is an argument for application of the principle
of caveat emptor, or "buyer beware". With this principle,
the purchaser of the offset would take care to choose valid schemes
that matched their specific requirements for assurance or risk
wasting their money. In theory the intermediary companies would
respond with initiatives that built consumer trust—such
as greater transparency in assumptions, codes of practice, a voluntary
industry-led accreditation scheme etc. This is what the voluntary
Gold Standard scheme sets out to achieve. A similar approach has
been relatively successful in helping consumers choose sustainable
wood products through accreditation to Forest Stewardship Council
standards. In this way, the market not only provides offsetting
transaction but also the appropriate level of assurance and credibility
that users are seeking.
12. Governments and their regulators can
play a role between these two extremes of full regulation and
a pure buyer-beware, market-based approach. Governments could
play a role on both sides of the transaction: helping the market
to define what emissions are associated with particular goods
or services; and secondly, helping to ensure that the offsetting
transaction is fair and transparent.
13. Possible roles for Government intervention
might include:
— Facilitating the offsetting process
by providing basic data to authoritative standards. Offsetting
calculations rely on a range of data such as emissions factors,
carbon contents of fuels, relative impact of different greenhouse
gases and so on[14].
For more complex calculations, such as the embodied emissions
in products the Government could publish "best practice"
methodology. Defra provides a wide selection of emissions factors
and other data that provides authority and consistency. Though
there is no requirement to use these figures, companies tend to
stress the reliability of the source of their calculations to
build consumer confidence.
— Approving certain types of offsetting
project as meeting high standards of additionality and longevity
so that users can be confident that their spend will have an environmental
benefit.
— Ensuring that information provided
to consumers is factually correct—for example preventing
false claims about the quality of projects or level of funds spent
on projects.
— Ensuring that transaction costs claimed
by intermediaries were transparent and comparable (for example
by defining a measure like the APR used to characterise borrowing
costs)—though this should only be considered if there is
evidence of market failure.
— Ensuring that non-Governmental charitable
participants in the offsetting market were acting consistently
with their charitable objectives.
— For public sector procurement of
offsets, a Government procurement agency could set out rules to
ensure value for money.
The Government could make some or all of these
functions mandatory or voluntary. For example, it could insist
on basic standards of business probity and honesty and the provision
of information that is not misleading, but it could offer a voluntary
"quality mark" that gives a level of assurance about
particular offsetting projects. One possible concern with the
scheme proposed by the Government for consultation is that is
"all or nothing". It may be preferable to make some
of its standards mandatory for all offsetting providers, but allow
some aspects of the scheme to be voluntary.
14. From the preceding discussion, we can
respond to the committee's specific lines of inquiry as follows:
— Ought there to be a compulsory UK
or European accreditation scheme for carbon offset projects or
companies? If so, how should this operate? There are some aspects
of voluntary offsetting transactions that should be subject to
mandatory standards (for example the truthfulness of statement
made to the public). However, a mandatory scheme that covered
all aspects of the offsetting transaction, for example limiting
the choice of schemes to those approved for CDM, would be excessive
and inconsistent with principles of modern risk-based regulation.
The voluntary market should provide appropriate accreditation
schemes on the model of the Gold Standard, but the Government
could assist by defining voluntary standards or recognising and
accrediting standards already developed in the marketplace.
— Should offsetting become mandatory
for some of the more carbon-intensive activities, such as flying?
No, control of aviation emissions should be achieved through inclusion
of aviation in the compliance market through the EU Emissions
Trading System, through other instruments and the future development
of the Kyoto Protocol. Offsetting should remain a voluntary activity.
— Is there enough clarity within the
offset market to allow customers to make informed choices based
upon robust information about different schemes at different prices?
At present, the level of information provided and the ease with
which it can be accessed is insufficient. This is an area where
the Government can take an initiative to try to avoid market failures
stemming from poor information, by ensuring that a code of practice
and accreditation scheme ensures that the consumer has all the
necessary information available to make an informed choice.
— What impact will the voluntary carbon
offset market have on the compliance market if the former continues
to grow as steadily as it has done over the last few years? The
effect will be beneficial, with greater availability of funds,
provided these are subject to an accreditation process. However,
if a new accreditation system moves the voluntary market towards
sharing the same pool of projects as the compliance market, there
may be dangers of a shortage of supply of projects and excessive
bureaucratic costs and delays.
— To what extent are the schemes and
projects funded by offset companies more broadly sustainable,
in an environmental, social or economic sense? The situation is
necessarily mixed. The use of voluntary accreditation schemes
that command widespread support, such as the Gold Standard, should
provide a higher level of assurance over time. It is less clear
that the formal accreditation system for CDM projects takes wider
sustainability concerns sufficiently into account. A concern with
the Government's proposal is that it will rely heavily and exclusively
on this accreditation system.
IMPACT OF
OFFSETTING ON
BEHAVIOUR
15. The Environment Agency supports the
availability of the offsetting option and respects the desire
of people and organisations to make a difference to the climate
by offsetting their emissions. Because it involves calculating
emissions associated with consuming goods and services, offsetting
is also an important means of engaging people in greater understanding
of their own impact and contribution to climate change. However,
offsetting should be placed in hierarchy of responses to climate
change based on reducing demand, energy efficiency, and renewable
energy, with offsetting as a final stage for residual emissions.
16. One argument against offsetting is that
it is a "cop out" or "conscience money", and
an alternative to changing personal behaviour and therefore promotes
divergence from a long-term sustainable lifestyle. We are unaware
of any evidence that voluntary offsetting reduces the individual's
effort to reduce emissions. It may well have the opposite effect—sensitising
and educating the user about climate change and allowing them
to take a positive action. The direction of causation may be hard
to establish—people with a high level of concern about the
environment are likely to be drawn to offsetting in order to take
some sort of action.
17. Even under the most aggressive emissions
reductions targets, carbon emitting behaviour will continue in
Britain for the foreseeable future, and for any residual carbon
it is better to attempt an offset transaction than not to. The
change in climate behaviour is more likely to be driven by other
factors than small charges associated with offsetting: climate
policy should be based on a comprehensive behaviour change strategy
of incentives, enabling measures, communications and social marketing,
and the public sector leading by example. The priority in climate
change policy is to establish this policy framework for behaviour
change, and much effort is now invested in that.
18. Given the average UK emissions of 9.6
tonnes CO2 per capita and offsetting charges typically of £8/tonne
CO2[15],
a person could offset their annual carbon footprint for around
£77. If making a payment of this nature was the only response
made to climate change this would be far from adequate. The overwhelming
priority is to move development in the high-emissions developed
countries onto an entirely different sustainable path. It might
be objected that if a person really can neutralise their emissions
by this method, why should they take any further action? The reason
is that energy prices do not yet fully reflect costs of carbon
(the Stern Review put these costs at over £50/tonne CO2,
which compares to typical offsetting projects at £5-10/tonne).
If energy prices properly included environmental costs at this
level, they would be far higher. As a result, many of the offsetting
projects that are additional at current energy prices would be
business-as-usual at prices that properly reflected environmental
costs. Offsetting looks like a cheap response to climate change
because energy prices are much lower than they ought to be.
19. From the preceding discussion, we can
respond to the Committee's specific lines of inquiry as follows:
— What evidence is there to show that
offsetting helps to change the carbon behaviour of the customer?
To our knowledge, there is little evidence at present, which is
unsurprising given how new the voluntary market is, and how the
individuals and organisations using it are self-selected. The
key challenge for the Government is to establish powerful and
compelling drivers of behaviour change that promote reduced demand,
efficient uses of energy and resources and low-carbon energy sources,
with offsetting seen as a lower tier in a hierarchy of responses.
OFFSETTING THROUGH
FORESTRY
20. Offsets that involve developing biomass
carbon sinks (eg growing trees) or not destroying biomass carbon
reservoirs (deforestation or soil loss) cause particular accounting
difficulties. However, recognising the importance of biomass carbon
in the overall carbon cycle, the UNFCCC has defined rules for
the inclusion of forest projects in the CDM compliance market[16].
21. Though scepticism about the value of
forestry offsets is reasonable, the Stern Review highlighted the
importance of land use changes and deforestation in climate change,
pointing out that globally emissions from these sources were greater
than for transport. It may be possible to channel funds from offset
transaction to paying the opportunity cost of forest protection
(ie compensating for the economic losses of not destroying it).
Stern estimated the opportunity cost to be $1-5/tonne CO2[17],
which represents a low-cost potential source of emissions reductions.
This would potentially offer a biodiversity dividend if forest
protection were focussed on old-growth forest in the Amazon, Africa
and Indonesia. There are also opportunities to promote other environmental
and development objectives—see Table 1 below.[18]
Table 1
AFFORESTATION CDM PROJECT OVERVIEW—EXAMPLE
The proposed CDM project activity, Facilitating
Reforestation for Guangxi Watershed Management in Pearl River
Basin, China aims to explore and demonstrate the technical and
methodological approaches related to credible carbon sequestration
and pilot the viability of enhancing the livelihoods of people
and natural environment by facilitating reforestation activities
in watershed areas along the Pearl River Basin. The proposed CDM
project will generate the income to the poor farmers/communities
by enabling the carbon sequestered by plantations to act like
a "virtual cash crop" for the local project beneficiaries
who will gain direct benefits from harvesting the plantation as
well as from the sale of carbon credits, which will in turn reduce
the threats to natural forests. In addition, forest restoration
in this area plays a vital role in biodiversity conservation,
soil and water conservation and poverty alleviation, while sequestering
carbon dioxide from the atmosphere. The specific project objectives
include:
(1) To sequester CO2 through forest restoration
in small watershed areas and test and pilot how reforestation
activities generate high-quality emission reductions in greenhouse
gases that can be measured, monitored and verified.
(2) To enhance biodiversity conservation
by increasing the connectivity of forests adjacent to nature reserves.
(3) To improve soil and water erosion control.
(4) To generate income for local communities.
22. From the preceding discussion, we can
respond to the committee's specific lines of inquiry as follows:
— Many offset projects involve afforestation
or reforestation. Is the science sufficiently coherent in this
area accurately to assess overall long-term carbon (or other GHG)
gains and losses from such projects? If so, how should this operate?
If the Kyoto Protocol parties have accepted the forestry projects
can participate in the compliance market, it would be wrong to
apply a higher standard of assurance in the voluntary market—and
it is desirable to channel money into forestry projects for climate
change and wider environmental reasons. The design of forest projects
should include sustainable management and favour long-lived applications,
for example producing timber rather than pulp.
— Is there sufficient data available
to guarantee accurate amounts of carbon or other GHG mitigation
in the sorts of schemes which offset projects finance? It varies—a
good accreditation scheme will validate only those schemes where
there can be sufficient confidence, or alternatively ensure the
offset credit is time limited or otherwise discounted to reflect
risk.
THE PROPOSED
GOVERNMENT ACCREDITATION
SYSTEM
23. We welcome the Government's consultation
on a new voluntary code of practice and accreditation system for
carbon offsetting announced on 18 January 2007[19].
This could bring important consumer protection benefits to the
offset market place and help to ensure that users receive value
for money and that the environment really does benefit from expenditure
on offsetting.
24. It is important that the scheme is voluntary
and that offsetting companies will have the choice to adopt it
and customers the choice to insist on it. It is possible that
other standards, such as the "Gold Standard" will operate
alongside this and provide voluntary users with different characteristics—for
example they might be more open to small scale development focussed
projects in Africa, which would be unlikely to be validated through
the formal CDM process.
25. The Environment Agency will respond
more fully to the Government consultation and we are likely to
consider the following carefully:
— Is the proposed system unduly restrictive
by accepting only those types of credits that are assured for
use in the compliance market? This could have several unwanted
consequences such as poor uptake of the scheme, excessive bureaucracy
costs, artificially narrowing the scope of activities funded by
the offsetting market.
— Are there aspects of the voluntary
scheme that address consumer protection that ought to be mandatory,
even if the quality mark is voluntary overall?
— Should the system be more modular,
perhaps with a mandatory component for all providers to ensure
basic consumer protections? Going beyond this license to operate,
there could more options for awarding quality marks for different
types of project, including those outside the formal Kyoto compliance
mechanisms that are quality-assured in some other way. In other
words, the Government could provide a star rating system or a
silver and bronze standard, as well as what it describes as its
gold standard.
— Should the Government leave itself
the option in the design of the scheme to accredit other accreditation
bodies—for example, from other countries or from the voluntary
or business sector, if they reach high standards. At present the
system proposed for consultation relies on a single assurance
regime—the Kyoto mechanisms.
— Should EU Allowances from the EU
Emissions Trading System qualify? At present the EU ETS has excessive
allocations to member states and there is no scarcity in the system
overall. Until there is real scarcity, buying offset credits from
the EU ETS would fail the "additionality" test for legitimate
offsetting. The offsetter would be purchasing so-called hot air.
— Who is best placed to play the role
of the accreditation body, and what implications, if any, would
there be for the operation and administration of the EU Emissions
Trading System, given that all accredited offsetting companies
would need to become members of the registry under the proposal
for consultation.
GOVERNMENT APPROACH
TO OFFSETTING
ITS OWN
EMISSIONS
26. The UK is developing a Government Carbon
Offsetting Fund (GCOF) to meet the Government's commitment to
offset carbon dioxide emissions arising from official and Ministerial
air travel from April 2006. This commitment was made by the Prime
Minister as part of the wider UK Sustainable Development Strategy,
which was launched in March 2005.
27. The GCOF has been developed through
an Inter-Departmental Working Group and will be available for
all central Government departments to offset emissions from official
air travel. The central feature of the GCOF will be a portfolio
of projects under the Kyoto Protocol Clean Development Mechanism
(CDM), which will deliver the required emission reductions. The
portfolio will offset the total estimated emissions of participating
departments and agencies for a period of three years, from April
2006 to April 2009.
ENVIRONMENT AGENCY
APPROACH TO
OFFSETTING
28. The Environment Agency has taken a different
approach. We have audited our carbon footprint and taken measures
to reduce it. We have assessed how much spending would be required
to purchase offsetting for the residual carbon. Instead of purchasing
offsets on the voluntary market, we have instead used the same
funding to set up an internal Carbon Reduction Fund to be invested
in reducing the Environment Agency's own carbon footprint. The
fund stands at £250K per year. 46 projects were proposed
by employees and seven were successful:
— Carbon footprint auditing of all
buildings owned by the Environment Agency.
— National Car Share Database.
— Hatchery Energy Efficiency Project.
— Ground Source Heat Pump at Darlington
and Bio-Mass boiler at Scots Float.
— Umbrella Bid—Renewable Energy
at Environment Agency premises.
29. The Environment Agency keeps its internal
carbon management policy under regular review. We are currently
considering whether to extend our approach to investment in local
community carbon abatement projects and whether to include offsetting
projects developed to the Government's proposed code of practice
or the voluntary "Gold Standard".
January 2007
10 JI and CDM frameworks differ in that JI projects
are agreements between parties that have both have targets under
the Kyoto Protocol, whereas CDM projects are financed by parties
with targets that make carbon savings in countries that do not
have targets. Back
11
UN Framework Convention on Climate Change: CDM project activity
cycle http://cdm.unfccc.int/Projects/pac/index.html Back
12
See World Bank Carbon Finance Unit www.carbonfinance.org Back
13
See Gold Standard web site http://www.cdmgoldstandard.org Back
14
For example, Defra draws together emissions factors from a range
of sources in its: Guidelines for Company Reporting on Greenhouse
Gas Emissions Annexes (updated July 2005) and a large inventory
is kept in National Atmospheric Emissions Inventory [www.naei.org.uk]
managed by AEA Technology on behalf of the Governments of the
UK. Back
15
Costs from Carbon Neutral Company-a range of offsetting offers
with implied carbon costs from £7.50/tonne to £9/tonne
CO2. Back
16
UNFCCC Methodologies for afforestation and reforestation CDM
project activities http://cdm.unfccc.int/methodologies/ARmethodologies Back
17
HM Treasury. Stern Review: The Economics of Climate Change,
page 216. Back
18
See for example, CDM project Facilitating Reforestation for Guangxi
Watershed Management in Pearl River Basin (Ref. GIFDCP02) [link] Back
19
Defra, DfT. Consultation on establishing a voluntary Code of
Best Practice for the provision of carbon offsetting to UK customers,
January 2007. Back
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