Examination of Witnesses (Questions 267
- 279)
TUESDAY 13 MARCH 2007
MR MARK
KENBER
Q267 Chairman: Good morning. Welcome
to the Committee. Thank you very much for coming in. You and I
have already discussed some of these issues but you are now able
to discuss it with the Committee as a whole. Could I kick off
on a general point: the Voluntary Carbon Standard which you are
promoting is one of several emerging standards in the voluntary
offset market. What is going to happen? Is there room for more
than one standard? Is one going to emerge, as the Co-Operative
Group suggest, that will be the cream?
Mr Kenber: I would start by saying
I am not absolutely convinced there are lots and lots of standards
emerging in the voluntary carbon market though it is often suggested.
I know of one that already exists, which is the Gold Standard
which has been applied to the voluntary carbon market and the
work we are doing on the Voluntary Carbon Standard. Then there
are some proprietary standards that certain offset providers or
certain schemes have, but they have no ambition to go beyond the
remit or the scope of their own schemes. Then there are standards
which are being developed in certain sub-national regulatory schemes,
for example, in California or in the north eastern states of the
United States. But I do not see a plethora of Voluntary Carbon
Standards. Turning to the question, I think there is probably
scope for more than one but what we are trying to do with the
Voluntary Carbon Standard is have the base standard, and when
I say more than one, I want to explain why. The basic standard,
the Voluntary Carbon Standard, tries to say it is what it says
on the tin. This is a certificate that represents 1 tonne of CO2
equivalent reduction and that is what you are getting. It is real,
it has been measured, it has been independently verified, it is
additional and it is permanent. It does not say anything about
the sustainable development benefits, the social attributes, the
environmental attributes; it is just a guarantee that what you
are paying for, if you are buying a tonne of carbon dioxide reduction,
that is what you are getting. That is where the other standards
may be useful. For example, the Gold Standard focuses specifically
on renewable energy and end-use energy efficiency, the idea being
that is one area that people would like to channel investment
into. There are others who are looking at the forestry attributes.
Having spoken to the Gold Standard and also to the people working
with the Climate, Community & Biodiversity Alliance, who are
developing standards for forestry projects[2],
their aim is very much to have players theirs as Voluntary Carbon
Standard Plus. I think you will find that not only in standards
across the board but companies themselves, buyers themselves,
have their own requirements. One company may say, "We want
to use the Voluntary Carbon Standard but only credits from Latin
America or only credits from poverty alleviation projects in Africa"
or whatever it may be. People will have extra standards that they
will put on top but I do not think there are going to be many
that try and do the same thing, which is to say it is what it
says on the tin.
Q268 Chairman: Do you think people
are nevertheless rather confused by all this? The voluntary offset
market is itself pretty confusing, even to people who try and
take an intelligent interest in it. Do you think that people who
purchase an offset which meets the Voluntary Carbon Standard are
clear that they have something distinctive and they understand
what it is?
Mr Kenber: On a business to business
level, absolutely. I think it is worth distinguishing that what
we are trying to do is probably aimed more at the business to
business market, the wholesale level. Were we to talk about going
back to the question about other standards, I think there is some
need for both education and protection of retail customers, you
and I as individuals buying, because we do not know much about
offsetting, or the average member of the public does not know
much about offsetting and probably does not know how it fits into
climate mitigation and emissions reductions more generally, and
some sense of guarantee that they are getting what they are paying
for. We would hope that the Voluntary Carbon Standard would be
part of that in saying "This certificate represents a tonne
of emission reduction" but, rather like the code of conduct
that has been developed here and a standard that has been developed
by an organisation in the United States, which does not look at
the offset per se but if you go to a retail provider and
you want to buy a tonne of emission reduction from wind farm X
in India, you are actually getting a tonne from that wind farm
and not from another project somewhere else because there are
not enough left, a guarantee that they are being retired when
they have been used, consumer protection rather than looking at
the offset quality per se. There is certainly a need for
education, there is probably a need for some sort of protection
at the retail end, but I think the offset quality itself is being
dealt with quite adequately in the regulatory market by the CDM
rules and, with luck, in the voluntary market by the Voluntary
Carbon Standard.
Q269 Chairman: If offsetting became
mandatory for flying, for example, the need for a voluntary code
would be eliminated, would it, or would it still be desirable?
Mr Kenber: If offsetting was mandatory
for everything across the board, which I think is very unlikely,
then yes. I often say, with the Voluntary Carbon Standard, if
regulation and international negotiation is successful and we
end up having a much more comprehensive legislative framework,
then the need for the voluntary carbon market will be diminished.
I would be surprised if it disappears altogether. It is unlikely
we are going to regulate every sector and every facet of the economy
and there will still be people who want to go beyond regulation,
but at the moment, in a way, it fills a gap in regulation.
Q270 Colin Challen: You did not comment
directly in your memorandum on the Government's proposals. What
do you think of them?
Mr Kenber: I think it starts from
a useful premise that there is a lot of confusion, as we were
discussing before, in the market about what people are buying
and how it fits into general emissions reduction and climate strategies.
There are a number of questions about it that I would have. I
am not sure why the Government has decided that it needs to intervene
in this. It is a voluntary code of conduct. If it is a voluntary
code of conduct in an environmental or social space, there are
plenty of very functional examples of where industry and the non-government
movement have worked together to develop standards, for example,
the Forest Stewardship Council, the Marine Stewardship Council,
organic certification, Fair Trade and so on and so forth, without
the need of direct government intervention. If government feels
that that sort of approach is not sufficient, then regulate. You
can only have it one way or the other. I think there are enough
non-governmental actors both from the private sector and the non-profit
sector who know about this, who have worked on this for a long
time, to be able to develop a code of conduct if such a thing
is necessary. Secondly, I am not convinced about the way that
the consultation process has been carried out. I think there is
a lot of confusion. To give you an example, some of the work The
Climate Group does is with banks, helping them develop their climate
strategies going forward. One bank we were working with three
weeks ago said, "We are going to buy our offsets to go carbon
neutral from this company because it has government approval."
We said, "Government approval of what?" "It was
mentioned in the press release on the consultation," and
of course, the Government would say "We have not approved
anybody because it is still out for consultation." There
is clearly confusion being sown in people's minds about who has
been approved and who has not been approved. I think it would
have made sense to have some pre-consultation with all those who
are working in this space already, because it seems some of the
consultation reflects some understanding of some of the issues
but not all of them. I think it has been handled in a fairly heavy-handed
way. I think it was acknowledged that the consultation this Committee
was carrying out was going on in parallel and that seems to have
been fairly poorly thought through as well. In terms of the standard
itself, I think it is a fairly heavy-handed way of dealing with
the problem of offset quality. Some of the up-front reasons for
having a code that covers offset quality itself was because there
are a lot of cheap tonnes that are available which are undermining
the environmental quality but restricting it to the CDM and Joint
Implementation, for example, does not solve that problem. There
are plenty of industrial gas problems in the CDM and Joint Implementation.
We could argue whether that is a good or a bad thing but if one
of the objectives is to not have the public buying credits from
industrial gas projects, doing it with the CDM does not solve
that problem; all it does is make it more expensive for everybody,
because the public who want to voluntarily offset are competing
with businesses who are capped under the Emissions Trading Scheme
or countries that have Kyoto caps. It seems a blunt instrument
for one, assuring the public of the quality and two, of channelling
investments into new projects while just artificially raising
the price. As mentioned in our submission, our main concern, apart
from the process, which we felt, as I say, was poorly handled,
was the artificial restriction of credits to only credits from
the CDM, EU trading system and Joint Implementation.
Q271 Colin Challen: In that respect,
do you think they are just being a bit heavy-handed and perhaps
lacking in imagination because they do not understand the voluntary
market so they say "Well, we have got the CDM style and that
approach to doing things so we will just lob you all in there
and have done with it"?
Mr Kenber: I think that is correct.
If government is going to offset its own emissions, then I think
it is perfectly reasonable for it to do it using the Clean Development
Mechanism as it is a signatory of the Kyoto Protocol as a national
government and there is no reason why it should not do that. In
the voluntary market, as Mr Yeo was suggesting at the beginning,
the Government believes there are lots of standards and therefore
has said, "We are not going to look at all of the standards.
It is too much time, too much like hard work. We do not know enough
about it. They are emerging all the time"—that is what
Defra has said which, as I say, I disagree with—"and
therefore it is easier to go for something we know." What
is true is that the CDM at the moment in particular does have
an approval system, it has independent verification and it has
a registry associated with it, so it has some advantages over
other global systems, hence the reason why we are developing the
Voluntary Carbon Standard, which will have independent verification
by accredited verifiers, both CDM verifiers and others accredited
under ISO standards. It will have a single registry where you
will be able to track credits to make sure there is not double
counting and so on and so forth. It was interesting that, given
that this has been in the public domain, or early versions of
the Voluntary Carbon Standard have been in the public domain for
over a year now and that the Carbon Trust[3]
in its own report on offsetting carbon dioxide, said, "Here
are five principles for what an offsetting standard should look
like and here are two or three standards that meet them, including
the Voluntary Carbon Standard," they seem to have ignored
that bit of advice from their own subsidiary, so to speak. What
they have missed by ruling out the voluntary market is a number
of benefits that other projects outside the CDM can have. One
is scope for innovation, which I think is very important. One
of the reasons there has been a lot of support for the Voluntary
Carbon Standard is that people recognize that changing the rules
of the CDM, perhaps rightly, is a slow process. There are lots
of different countries that have to be involved in the decision-making
process. It is not easy but there are lots of projects and new
technologies are being developed, new approaches, that need trying
out, may subsequently become part of the CDM, perhaps post 2012,
and the voluntary market, provided it is within a robust framework,
is a good place to innovate and try those out, both in terms of
project types and methodologies but also the procedures, asking
questions like: where is it possible to maintain environmental
integrity while cutting costs or streamlining the timing involved?
That is one reason to put some faith in the voluntary market,
provided it is well managed, and that is what we hope to achieve.
There are project types, as I have just mentioned, that do not
go into the CDM. I am sure you have heard from other people and
other submissions that, for example, project types that would
substitute fuel wood use or innovative community reforestation
projects that would not make it through the CDM just because in
political negotiations at the outset they were not included. Then
there is a question of timing and cost. Putting a project through
the CDM is time-consuming, upwards of 200 days to get initial
approval. It is costly if you have to use one of the large verification
companies and that rules out a lot of smaller projects that are
worthy of carbon financing but would not get it through the CDM
just because they cannot afford the time or the delay. There are
project developers who are not interested—well, of course
they are interested in higher prices for their carbon but more
of a concern is having liquidity, having cash flow, generating
projects, having them certified to a decent standard and then
reinvesting in new projects, and that is difficult under the CDM
given the time process. This is not meant to be a criticism per
se of the CDM, because it is evident that it is working quite
well and there are a billion tonnes or so worth of projects already
in the CDM pipeline and that is anticipated to grow quickly but
it is true that for a lot of projects that do not fit into it,
it does not work, it is time-consuming and there is a whole lot
of demand out there. I was at a conference in the United States
last week which estimated that the voluntary carbon market just
in the United States could reach somewhere between 150-300 million
tonnes a year within three years, and that chimes with a report
you may have seen by ICF Consulting that suggests it might get
to somewhere between 400 million and 1 billion tonnes globally
in three to four years. Who knows whether those estimates are
right but that is a sizeable amount of money wanting to be invested
in emissions reductions projects that will be choked to a certain
extent if they were required to go through the CDM.
Q272 Colin Challen: If you want to
buy your offsets and you have a choice between the compliance
model which has a government stamp of approval on it and something
which is voluntarily regulated, as it were, are people going to
say, "We'll have to go with the government approved scheme"?
That is implicit, and what impact will that have on the voluntary
market?
Mr Kenber: One, it depends on
the elasticity of the demand for offsets but immediately you are
pushing up the price of an offset. Two tonnes of emissions reduction
coming from the same project can be sold at very different prices.
The price through the CDM market will be much higher largely because
of the competition with companies that have to have compliance
with the regulations under the Emissions Trading Scheme in Europe
or other countries. That does not say anything about the quality
of the offset; it is just how the demand is being driven in that
market. I think there will be some who balk at paying up to four
or five times as much for the same tonne of carbon and there will
be project developers who will wait to see what happens in the
post 2012 framework, in terms of whether there is going to be
some certainty after they have been through the CDM system. It
will not choke the market off altogether but I think it will reduce
the size of the market and it will restrict to a certain extent
the interplay between the US and Europe and other markets. There
has been some suggestion that the reason for restricting it to
the CDM is not to reward countries like the US for not having
joined up to Kyoto, and therefore people can buy credits cheaper
that are generated in the US and that would be unfair on those
of us who have made some sort of sacrifice under Kyoto. I think
there is a very small amount of merit in that argument. The situation
now, in 2007, is that we are not going to change decisions made
by the US Government six or seven years ago. Getting them involved
in carbon markets—and there is a lot of appetite for it
at the moment—is a way of demonstrating that the arguments
about the costs of compliance and the costs of reducing emissions
are largely spurious, at least in the short term, and therefore
having a thriving voluntary carbon market is a way of moving policy
forward rather than impeding it.
Q273 Dr Turner: There are a lot of
schemes out there now and clearly there comes an issue of accreditation,
if not regulation, when you have so many, otherwise we will not
know whether they are all actually giving us what they say on
the tin, to quote you. You say in your submission that "an
independent voluntary standard/accreditation scheme should be
managed in a transparent manner by an independent organisation
responsible for accreditation of verifiers and registries".
Who do you suggest should do this?
Mr Kenber: Under the process that
we are developing in the Voluntary Carbon Standard, once the standard
is finally launched, we hope in June this year, a new NGO foundation
will be created with an independent board drawn from stakeholders
from different sectors, which will have no material interest in
the carbon market itself. Accreditation of verifiers will be carried
out carried out under the new ISO 14065 standard which regulates
the accreditation of verifiers of carbon reductions or emissions
generally. Accreditation will have to be carried out by a member
of the International Accreditation Forum or the UN, so that is
a well-known and respected process for accreditation, and the
oversight of the standard and its development and implementation
will be carried out by this independent body. That is the model
that we have chosen. I think there are different approaches you
could take.
Q274 Dr Turner: You say this would
be an independent, new NGO set up specifically for the purpose,
obviously altruistic but, however altruistic it is, it is still
going to need some funding to operate. How is it going to be funded?
Mr Kenber: We have funding proposals
in two foundations. We have received foundation funding for the
work we carried out to develop the Voluntary Carbon Standard so
far and have proposals which we are very confident will provide
the initial seed funding. Then there will be a levy per tonne
of carbon dioxide reduction registered within the approved Voluntary
Carbon Standard registry, which will provide ongoing running costs.
Q275 Dr Turner: You can be quite
sure, I hope, that the actual cost of accreditation is not going
to add an undue amount to the overhead costs of running offsets?
Mr Kenber: For accrediting the
verifiers or certifiers, that is covered by the certifiers themselves.
They are paying to be part of a scheme which, we assume, will
generate some income for them, otherwise they would not get involved
in the first place. The costs the Voluntary Carbon Standard organisation
will have to bear are auditing the implementation of the standard,
a sample of projects in each year, an annual review and providing
an independent website where, separate from the registry, individuals
and companies wanting to buy and sell country carbon units will
be able to see what projects have been verified, what emission
reductions, and the serial numbers associated with them. That
will be another job. It is intended to be a fairly streamlined
process. The experience of the CDM executive board is suggesting
that, given the expertise there is now, which perhaps there was
not when the CDM started, a lot of that work can be outsourced.
Q276 Dr Turner: That is fine; if
this works smoothly, we have a mechanism for regulating the actual
doers of carbon offsets. What about the people who sell them,
the independent operators who sell carbon offset schemes? Do you
think they are going to need accreditation or regulation or do
you think the existing legislation is sufficient? Is the Trade
Descriptions Act, for instance, sufficient to monitor them or
not?
Mr Kenber: This is something I
mentioned before. I think the Advertising Standards Authority
has a remit to look at whether offers are being falsely advertised.
Trading standards officers perhaps may not have the training to
look at this quite rarefied market but trade protection overall
has an important role to play. The protection of the customer
is important in this space because it is such a rapidly growing
market, because it is such a thing of the moment. That is where
some of the ideas involved in the Defra code of conduct about
looking at who is selling the offsets, the retailers themselves,
and, as I mentioned before, the Center for Resource Solutions
in the US, who have done a similar thing with green electricity
retail sales in the US, are also developing a standard for the
US but looking not at the offsets themselves. In this one in the
US they say any emissions reductions that come from the Voluntary
Carbon Standard, the Gold Standard or the CDM are fine; we will
accept them as is, but some guarantees for the consumer that they
are getting what they are paying for, given that many of the consumers
will not even know what they are paying for in the first place,
often will not understand the mechanics behind it, have been told
that offsetting is a good thing to do as well as other strategies
to reduce emissions but do not want to go into a detailed understanding,
so some sort of consumer protection or consumer guidance, and
it may not need to be a code of conduct per se, but guidance.
There have been several publications in the last few months, a
consumer guide to offsets and various others published around
the world, which do have a checklist of "questions you should
ask your provider", which you would do with any sort of financial
services that you are being provided.
Q277 Dr Turner: We have already identified
one or two ways in which there can be pressure on overheads for
carbon offsets. What is your view on the maximum proportion of
money being paid for carbon offsets that should go towards overheads
and how do you think it can be restricted?
Mr Kenber: I am not sure I understand
the premise of the question. Should they be restricted at all?
Q278 Dr Turner: You could reach a
point where 95% of the money that people pay goes into overheads
and only 5% actually goes towards abating carbon if you are not
careful.
Mr Kenber: A company would only
get away with that if they are selling poor-quality offsets that
come at a very low price. There is that possibility. I think,
looking at what people, what companies at least—there is
not so much data on what individuals want to buy but companies
are certainly not interested in just low quality—not low
quality but basic quality carbon alone. They want to have a guarantee
of the basic quality and then make their own decisions. For example,
yesterday Barclays Bank announced that it had gone carbon neutral.
It certainly did not buy the cheapest tonnes in the market. It
bought a mixture of credits from the CDM, CERs, and voluntary
emissions reductions and they were certainly above average market
price because they wanted to both demonstrate for CSR reasons
and also to gain experience in certain types of investments that
there was a future in quality offsets. If you slap a 95% overhead
on those sort of projects, you will price yourself out of the
market quite quickly. The reason I asked the question back is
that, apart from in the regulated electricity markets, which we
do not have any more, I do not know systems whereby government
says this is the maximum profit you are allowed to make.
Q279 Mr Chaytor: You are now on version
2 of the VCS. What are the main differences between that and version
1?
Mr Kenber: Let me be clear on
this. Version 1 was a prototype standard which was both for consultation
and for people to use and then feed back to us the pros and cons
of how it had worked. Version 2 was purely a draft for consultation.
It does not supersede version 1. Version 1 is still the prototype
operating version but it drew some of the comments that we received
from the first round of consultation last year. We are now working
on version 3, which I hope will also be called version final,
because we have been working on it for 18 months, and what we
will see there is there will be some change in style, in that
version 3—once the policy decisions on additionality, methodologies
and so on and so forth have been made by the VCS Steering Committee,
which meets on 28 March—will be drawn up by two expert standard
setters (one from the Canadian Standards Association, one from
Lloyd's Register, who will be formatting in a style that is consistent
with the ISO standards), and reviewed by lawyers. ISO standards
are designed to be policy neutral; you can apply them to any system,
so we are developing the system requirements on the policy issues
so they will be adapted to the ISO standard. So there will be
a format difference. There will be some much clearer rules about
how you deal with permanence with land use change and forestry.
Whether they will be completed by June is open to question. There
is quite a lot of discussion going on. Because it is a tricky
issue both technically and politically, we need to make sure we
get it right. The additionality tests have been refined.
2 Footnote inserted by witness 19.03.07: Our hope
is that they will see their standards as Voluntary Carbon Standard
Plus, ie use the VCS as the basis and then add other attributes
as they see fit. Back
3
Footnote inserted by witness 19.03.07 part funded of course through
Defra. Back
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