|
Memorandum from 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)[1], 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[2] and the World Bank has developed expertise in project design with high standards of assurance[3].
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[4]. 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; · 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[5]. 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.
· 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[6], 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.
· 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 (e.g. 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[7].
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 (i.e. compensating for the economic losses of not destroying it). Stern estimated the opportunity cost to be $1-5/tonne CO2[8], 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 Box 1 below[9]
· 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[10]. 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 · Low Carbon Concrete · 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'.
Environment AgencyJanuary 2007 [1] 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. [2] UN Framework Convention on Climate Change: CDM project activity cycle http://cdm.unfccc.int/Projects/pac/index.html [3] See World Bank Carbon Finance Unit www.carbonfinance.org [4] See Gold Standard web site http://www.cdmgoldstandard.org [5] 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. [6] Costs from Carbon Neutral Company - a range of offsetting offers with implied carbon costs from £7.50/tonne to £9/tonne CO2. [7] UNFCCC Methodologies for afforestation and reforestation CDM project activities http://cdm.unfccc.int/methodologies/ARmethodologies [8] HM Treasury. Stern Review: The Economics of Climate Change, page 216. [9] See for example, CDM project Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin (Ref. GIFDCP02) [link] [10] Defra, DfT. Consultation on establishing a voluntary Code of Best Practice for the provision of carbon offsetting to UK customers, January 2007
|