Examination of Witnesses (Questions 280
- 291)
TUESDAY 13 MARCH 2007
MR MARK
KENBER
Q280 Mr Chaytor: You have had some
criticism that the additionality rules are too lax in version
2.
Mr Kenber: We had a couple of
submissions in our consultation which suggested that. However,
in a way, there was not anything to criticise there because it
said, "Continue looking at version 1. We are still working
on additionality." That is because, as you know, it is a
fraught and hotly contested issue but what we have got to—and
I chair the additionality working group of the standard—is
that there will be an additionality test in addition to baseline
setting. The initial debate was some of the members of the committee
and some of the responses, although a small minority, said if
you have a decent baseline you do not need an additionality test.
That has been cast out. There will be an additionality test[4].
There will be one test that looks rather like the CDM additionality
tool. There will be one that is a performance standard, so we
will say all the three tests must be above and beyond regulatory
requirements. Then you have a CDM-type tool. The second is a performance
standard, so a project will have to be in the top decile of producing
the service, top decile in terms of emissions efficiency, and
a third one, which there will be a predetermined list of technologies
in certain regions that you can say with reasonable certainty
are additional. The reason for doing that is that there has been
quite a lot of research, both academic and less academic, looking
at when you actually decide on additionality, there is a chance
you will have false positives and false negatives. So you will
decide something is additional when it is not but also say that
something is not additional when it is. If you have this determined
list of technologies which are likely to be top-end renewable
energy technologies in certain regions they are likely to be additional,
and it will be time-limited so we will have a review process every
three years or so. So there will be three tools which are designed
to be as equivalent and robust as possible.
Q281 Mr Chaytor: Three definitions
of additionality and three sets of criteria, but those who are
conforming to the standard can pick any one of the three?
Mr Kenber: Yes. The review we
are going through at the moment of them is aimed to say, "Let's
start with the CDM-type additionality tool. How can we design
these other two so that, within reasonable bounds of certainty,
they will be equally robust and have equal success and failure
rates in terms of testing additionality?" That is one of
the major changes.
Q282 Mr Chaytor: In terms of other
criticisms of version 2, some people have said it was just too
close to the CDM standard altogether.
Mr Kenber: That is another of
the reasons why we have developed these separate additionality
tests, because we have seen that they are the types of tools that
have been used in other schemes and therefore it is an opportunity
to try them out. There is another sub-group chaired by the World
Resources Institute in Washington[5]
looking at how you can harmonise the specific project-based approach
that the CDM has with a sectoral or policy type approach, which
has been discussed quite a lot in the context of the CDM post
2012 and they are working on whether you can certify whole programmes
so that the offsets can qualify under the Voluntary Carbon Standard.
We have had to commission some research into how it might be done,
and we hope it will be finished by June. If not, it will be issued
two or three months later. Those are the two major issues. The
other is more to do with the streamlining of the process. Our
aim is, if you have a monitoring process in the CDM, is there
a way that we can achieve 90% or above of the quality at half
the price or half the time. Where that is not possible, it will
not be included. We are trying as much as possible to look at
those sorts of questions because in the end, they will obviously
help the CDM as well as the voluntary carbon market.
Q283 David Howarth: One of the more
striking aspects of the VCS is that you only allow reductions
that have actually taken place. Your first guiding principle is
that all emissions reductions that qualify as VCUs and the project
activities that generate them must be proven to have genuinely
taken place. For this reason, the VCS only allows certification
of emission reductions that have already taken place. That is
in contrast to what often happens in this market, that people
are using future value accounting, that they are saying they are
selling you a reduction that will happen in the future and they
deal with the question of whether that would actually happen by
saying they have a portfolio approach or they can insure or they
have various discounts. What is your view of future value accounting?
Mr Kenber: The reason we have
gone for only emission reductions that have taken place is because
the principles of the Voluntary Carbon Standard which came through
the first round of consultation is that you need something that
is real and measurable, and it is only real if it has actually
happened. Secondly, there is quite a lot of controversy about
companies or people who are offsetting their current emissions
by something that is possibly or probably going to happen in the
future, or maybe with some reasonable certainty is going to happen
in the future, but the issue about dealing with climate change
is reducing emissions now. We need to reduce emissions in the
future as well but, most importantly, we need to reduce emissions
now, so having a system which allows you to effectively increase
or maintain emissions now with a promise of reductions in the
future seems to us inconsistent with what science and policy is
telling us we need to do now. The reason why there is an issue
around forward crediting or future sales is because there are
projects, particularly in the community forestry sector and some
of the more expensive renewables, that are clearly additional
and so additional that they need the carbon finance to even get
going. If you look at the CDM, there are a lot of forward sales,
at least as far as 2012; there is a policy hiatus there. That
does not mean that you can use 2009 or 2010 credits to meet current
obligations. If you have your project validated, and therefore
you have an independent verifier who says "Within bounds
of reasonable estimation, we expect this project will generate
10,000 tonnes a year," then I, as a project developer or
project owner, can sell that promise forward. The CDM will not
give me credits, the actual certified emission reductions, until
those emission reductions have taken place, and the same thing
can happen in the voluntary market. If you have your project validated
up front by an independent verifier with expertise who, you would
assume, having been accredited by the International Accreditation
Forum or the CDM board, have credibility in this area and says
"We would expect that if the project is carried out as specified
in the design document, it will generate X thousand tonnes a year",
you can sell for future delivery, as you can in many other commodities.
So I do not think there is a need to specify forward crediting,
which I think would undermine some of the issues of consistency,
temporal consistency, but that does not prevent people from having
future financing.
Q284 Joan Walley: You touched on
this before in response to Dr Turner's question but when it comes
to voluntary offset projects, should there be a minimum standard
or should it be requiring more than just carbon, the sustainable
issues? Should there be a higher standard than what is currently
just about carbon?
Mr Kenber: Given that there are
a wide range of projects and a wide range of buyers who have different
requirements, I think, provided there is a guarantee that the
carbon really is a tonne of carbon, which, as I said before, is
what the Voluntary Carbon Standard aims to do, then you can leave
what kind of carbon and what kind of projects to the buyers. There
is a difference between having projects that have additional environmental
and social attributes and ensuring that they do no harm. Doing
no harm should be one part of the rules of any overseas investment,
whether it be in carbon offset projects or any other kind of projects,
whether it is carbon finance or not. In terms of sustainable development
benefits, my concern is—I also developed the Gold Standard
initially and the aim there was to find a channel not to supplant
the rest of the market but to provide a channel for certified
projects for those who wanted to invest in technologies which
were part of the long-term solution and had a sustainable development
basis.
Q285 Joan Walley: Should not those
issues be part of the minimum standard?
Mr Kenber: The reason I think
not is because we are dealing with climate change, which I would
say is the most important environmental issue we have at the moment
and the focus there should be on reducing emissions. To give an
example, when the CDM was first created in 1997, in 1998 there
were a wealth of papers saying the CDM was going to solve the
world's sustainable development problems, the world's property
problems, the world's climate change problem and everything else
as well. Clearly, that was well-meaning fantasy at the time and
I am just concerned that, if you bundle a whole load of other
things on to carbon, you are detracting from the potential of
reducing as much carbon as possible, in a genuine way, of course,
as quickly as possible, which needs to be the objective. I think
there should be some minimum environmental standards. You need
to require environmental impact assessments for projects that
fall into those categories where there is likely to be an environmental
risk, and minimum social standards, which is what I would expect
to happen in any investment or project finance-type investment
around the world. If there are not standards that guarantee that,
that is something that needs to be addressed but dumping it all
on the carbon market rather than across the board seems to me
not the appropriate way to do it.
Q286 Joan Walley: Just going back
to the consultation and the contribution that you made in respect
of the VCS version 2, that to avoid double counting, the project
owner should provide a letter to the certification entity. Do
you think that is really going to happen, given all the cowboys
that there could be around? Are you really confident that people
will be genuinely saying what is actually being provided? Do you
think we need something greater than that verification?
Mr Kenber: I hope not. I think
the verifiers' reputation and fact that they have to have insurance
and financial backing because they may be sued if they are wrong
suggests that they will do their utmost to get it right. The transparency
that is it embodied in the VCS, as it is in the CDM, means that
people can scrutinise if they want to, and, as you know, there
are plenty of environmental and other groups out there who are
scrutinising projects. We have canvassed a lot of opinion on this,
especially in the verification community, and they say this should
work. I am open to the fact that if it does not work, we will
have to change it.
Q287 Joan Walley: How would anyone
know whether or not something was working, that it had been properly
. . . If there has not been proper validation, how would they
know that what was said was actually the case?
Mr Kenber: There is proper verification
by accredited verifiers who have the capacity and experience to
do that kind of verification. To be able to submit the voluntary
carbon units in a registry you have to have proof of ownership,
title of ownership, and provide an affirmation that you have not
sold those tonnes anywhere else. A verifier will visit a project,
and examine the books. Obviously, a verifier cannot avoid fraud
and there will be some organisations, companies, individuals who
will try and defraud the public, as there are in any other sector.
Having canvassed opinion, this seems to be a reasonably effective
way or, we hope, a very effective way of dealing with this issue.
Q288 Joan Walley: So you do not think
that the VCS would be more robust if it was properly validated?
Mr Kenber: I am not sure what
you mean by properly validated.
Q289 Joan Walley: Other than through
a voluntary route.
Mr Kenber: A CDM project will
go through a similar procedure in terms of verification, has independent
verifiers who are accredited, and so on and so forth, many of
whom will be the same organisations in the voluntary market. It
is perfectly possible for a CDM project to sell its CERs into
the compliance market and sell the same reductions voluntarily
somewhere else and there is less check of that in the CDM than
there will be in the Voluntary Carbon Standard so I do not think
the CDM will help prevent that any more than anything else. We
have built this in because there is a requirement for the letter
and it has to be verified by the independent verifier to try and
overcome this but, as I say, as it has never been done before,
there are some precedents in the Forest Stewardship Council, but
it is much easier because you are looking at logs of wood, though
again, people can defraud if they want to. This is the first time
this has been done in the carbon market and we will review it.
We have a built-in review after a year and we will review that
in the light of experience.
Q290 Mr Hurd: Do you expect forestry
projects to be part of version 2 and what might that imply in
terms of rules relating to permanence?
Mr Kenber: I do expect it to be
involved. The consultation we had—though, as I think we
all know, with consultations, people find their issue and then
mass-produce responses but I am pretty sure there will be forestry
included, I would say 95% sure. Whether it will be finalised in
time for the June launch I do not know. We have been working with
the Climate, Community & Biodiversity Alliance and some of
the forest verification bodies, including some of the negotiators
in the CDM, on how to deal with permanence. The permanence rules
in the CDM are unwieldy and poorly understood. There are two options
on the table at the moment. One is a mandatory insurance policy
which automatically kicks in. If you lose some or all of the forest,
that insurance policy kicks in immediately and provides equivalent
offset from a technology project. The other is a risk-based discounting
system which, as I am not a forester, I must confess I do not
understand completely, and the working group on forestry is looking
at that at the moment. They are also looking at rules for measurement,
monitoring and leakage, though the permanence one is the one that
is obviously exercising most of their time. What the Steering
Committee has decided is that until we have full agreement on
that, and there will be a sub-consultation amongst the forestry
and carbon community to have a look at these rules because they
will be quite innovative, we will not include it until there is
some comfort with those permanence rules.
Q291 Mr Hurd: Do you think it is
desirable that over time we seek to reconcile whatever we conclude
is the social cost of carbon—and I know there are a lot
of variables around that at the moment; there is a Defra number
£70 a tonne. Stern thinks it is higher—with the cost
of offsetting, which is much much lower? Should we seek to try
and reconcile these gaps or just let the market work?
Mr Kenber: I am not suggesting
you do this, but if you use the social cost of carbon as a tax
which the government or some body collected and then invested
in carbon, if you could get for that £70 a tonne 10 tonnes
of emission reduction because there are opportunities out there,
why on earth would you not do that? The price of offsets and emissions
reductions generally will go up over time because the low-hanging
fruit, as they are called, will disappear, although not as quickly
as perhaps people expect. Experience from companies in particular
is that, once they start finding emissions reductions, they find
more and more efficiencies that they had not even thought about,
often without the need for carbon finance. The price of carbon
makes them think about it and they realise there are a whole lot
of things they should have been doing years ago. It is the same
in the project space as well. You may want to use the social cost
of carbon as a way of doing parallel or perhaps mainstream financial
assessment. You may want to use that as a target price over a
period of time for either a carbon tax or a price in a carbon
trading system, but I would not think you would want to say all
offsets must cost £70. It goes back to the question of who
is going to take the margin. If you are creating a margin for
margin's sake, I am not sure there is any reason to do that.
Chairman: Thank you very much. It has
been a very helpful session. I am grateful to you for coming in.
4 Footnote inserted by witness for clarification 19.03.07:
There will be an additionality requirement with one or more tests.
We will say that all the three tests must be above and beyond
regulatory requirements. Back
5
Footnote inserted by witnesses for clarification 19.03.07: It
is a member of staff from the World Resourcs Institute acting
in a personal capacity here, rather than as part of the World
Resources Institute. Back
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