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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 331-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
THE VOLUNTARY CARBON OFFSET MARKET
Tuesday 27 February 2007 PROFESSOR JOHN MURLIS and MR MIKE MASON MS SHELAGH WHITLEY, MR MATTHEW BRANDER and MR PAUL MONAGHAN Evidence heard in Public Questions 86 - 145
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Tuesday 27 February 2007 Members present Mr Tim Yeo, in the Chair Mr Martin Caton David Howarth Mark Lazarowicz Dr Desmond Turner ________________ Memoranda submitted by CarbonNeutral Company and Climate Care
Examination of Witnesses
Witnesses: Professor John Murlis, Science Adviser and Chair of the Technical Advisory Group to the CarbonNeutral Protocol; and Mr Mike Mason, Founder, Climate Care, gave evidence. Q86 Chairman: Good morning, welcome to the Committee, thank you for coming in. A general question to start with: can you just say what role you think carbon offsetting can play in the UK's overall climate change strategy? Professor Murlis: I think that there are several kinds of roles that offsetting can play. The first thing to say is that offsetting is an instrument that can, under the correct circumstances, produce real and permanent carbon reductions, and from that point of view is something to be encouraged. I also believe that it plays an important role in terms of bringing innovation into the arena of carbon reduction. We know there are technologies out there that can play a part - the Carbon Trust and Energy Saving Trust have pointed to them - and they do not appear to market, for a number of reasons, amongst which is that they come at a small premium compared with other technologies that deliver the same basic goods. We believe that offsetting enables there to be a flow of resources that brings those technologies rather earlier into carbon reduction than would otherwise take place. We also believe that by thinking about their carbon impacts and by trying to manage them, companies raise not only their own awareness and the awareness of their various employees but also have the opportunity to use it as a way of communicating with their clients and of course with their supply chains, so we feel there is quite a powerful way in which offsetting can signal, if you like, the cost of the carbon imprint and provide incentives for managing it down. For those reasons we believe that offsets are a thoroughly useful part of an overall strategy. In UK terms, obviously the UK, which is quite a market leader in terms of technologies, should be able to benefit very well from this kind of input. Mr Mason: I would like to answer that by using a real example and I am going to draw the example from a book that George Monbiot wrote. Those of you who know George will know that he is a very forceful guy who is a journalist and he is a sometime fairly passionate critic of offsets. In his book he observed rather despondently that it would cost him something like £20,000 to turn his house from an ordinary Victorian terraced house into something that was environmentally friendly. My retort to that was, "Okay, George in the life of an energy-efficient light bulb, let us call it seven years, you are going to save three tonnes a year by doing that, so your 20,000 quid in those first seven years will do three times that, let us call it 20 tonnes, of emissions reduction. If you gave me that 20,000 quid and I put it into energy-efficient light bulbs in townships in South Africa, where there is a social benefit and an economic benefit as well as a carbon saving benefit, each of those lamps will save about a tonne of CO2. £2 per lamp, £2 for monitoring, measuring, checking, all of the things that people would like us to ramp this with to guarantee certainty, and you are still saying £4 per tonne of reduction. I am going to do 5,000 tonnes of emissions reduction in those seven years and he is going to do 20. If we have got a crisis, if we are in a hurry, we have a real duty to do "cheapest, bestest, firstest", and so from my point of view, trying to wear a rational economic hat for a moment, I think that we are overly concerned about the priority of doing things at home, not that we should not be but that at the expense of doing the better things first. The other side of that is let us just take his home as being typical: there are 22 million households in this country, take £20,000 as a reasonable estimate of the cost of doing it; that is £400 billion we are going to have to spend. If 50 per cent of that cost is manpower at £20,000, there are ten million people we need to train. Physically we have not got the human resources or the financial resources to deal with the problem at the speed that we need to, and so for me I would be slightly more aggressive than John I think about the role of offsets and I would say if you are serious about dealing with global warming, you seriously have to have a position on offsets. Chairman: Okay, that is helpful. We have heard evidence from other people, including WWF and I think more along the same lines from RSPB and the Energy Saving Trust and they say that they would like offsetting to be at the bottom of the hierarchy of responses to climate change, but what you have just said is clearly taking a completely different view; you are looking at it on a global basis and looking at what you can do most quickly and most cheaply and so offsets ranks higher, and that is a helpful contrast to some of the things we have heard recently. Des? Q87 Dr Turner: You are obviously not going to like the tenor of my question because I think that those who would say that the great imperative is immediately to reduce carbon dioxide emissions in absolute terms would also say that there is a danger, certainly with offsetting, that it is treated as a sort of comfort zone for people who can buy their offsets and then carry on polluting as they did before, and that in effect you have business as usual and the actual carbon saving from offsetting comes along somewhat later because it is an emitted tonne of carbon today but it may be many, many, many years before that tonne is saved by offsetting. Mr Mason: I think there are two important things I want to separate here. Let us leave the quality of the offset - and I am not talking about planting trees because I think planting trees is mostly a waste of time and energy - if we are talking about things that sit in the technology space, so for example we are doing tens of thousands of energy-efficient stoves or light bulbs for people around the world, you are talking about the emissions reduction happening within one to six or seven years. In the context of global warming there is nothing magic about 365 days particularly and we are talking about something that is well within the time horizons needed to make the emissions reduction, so I do not think the multiple year argument is a material one. The other one is important though. The line that most people will take is that people will buy offsets and it is like selling indulgences because you can go out and carry on sinning because you bought a good crop of indulgences this week. To an extent I am not trying to make moral and behavioural judgments. I think society has to make its own choices. We absolutely need to change society but I am not sure that we can wait to change society; we are in too much of a hurry, and Parliament has never shown a great deal of interest in applying some teeth to make those changes happen. So I am saying the reason that I got into this was that in the absence of any either social bite or parliamentary teeth we had to do something. I do not deny that we would really like to do things and I think we should do them in parallel; they are not one or the other, they are one and the other. If we want to grow an oak tree we have got to start today. We have got to do both of these things right now but the evidence is that it does not stop people doing the right thing. We surveyed in the middle of last year 3,500 of our customers and we received a 33 per cent response rate, so over 1,000 people came back, so it is a statistically significant sum. Let me give you some of the numbers that came back from that. "Our website helps improve 'carbon literacy'". 78 per cent said that this was the first time they had measured their carbon emissions. 79 per cent agreed that website calculators had increased their understanding of their own impact on climate change. 90 per cent have done one or more of the following: home energy efficiency improvements, driven less or flown less. 22 per cent have written to their MP about climate change. 70 per cent have encouraged friends and family to take action. 59 per cent have driven less. I have got a whole list that I am happy to put in. The data is there and we will happily make the survey data available. What I am saying is I think there is a immediate assumption that people are going to do the bad thing. The reality is that the climate does not care what is in their minds so long as the emissions reduction is made, and the evidence that we have does not actually point in the direction of your supposition. Professor Murlis: The experience of the CarbonNeutral Company, as I understand it, is very similar. That is to say that companies that are looking for a carbon neutral accreditation find that they are faced with a protocol which demands that they do three things. One is to measure their carbon footprint; the second is to wrestle it down as far as they can; and the third thing is to deal with what is left. It is our experience that the first two steps are very salutary for those companies and quite apart from saying the third step is an indulgence, they see it as something that happens once they have been able to understand what their impacts are and deal with them insofar as they can. I think it is also worth remembering that there are some bits of impact that companies probably cannot deal with, they can only go so far. For example, if you are running a taxi company, quite clearly you have to have fuel and although in the longer run you could have renewable fuels, in the interim period until those are available to any substantial amount (and we know the RTFO is still a glimmer in the Government's eye) we know very well that there will be a need for fuel and consequently they will inevitably have a carbon footprint. Thinking about that bit is really important. I would also argue that in an economic sense, and I think Mike alluded to this earlier, one should really try to deal with the low-hanging fruit first - and this is something that Sir Nicholas Stern points out in his report - in taking an economics approach to this problem you really want to get the most cost-effective carbon reductions you can as early as you can, and the need then is to ensure that there is the investment to bring those in. I would argue that firstly, quite apart from allowing people to feel they can just continue polluting and continue sinning, that is not the evidence we have. Secondly, I would argue that it is worth trying to ensure that solutions appear in all of their cost-effectiveness and if it turns out that offsetting instruments are highly cost-effective you will need to grab them quickly. Q88 Dr Turner: Even if you are right about people reducing their sinning, there is still an onus on carbon offsetters to demonstrate that they are actually making an impact in terms of carbon saving that could not otherwise be made. In other words, if you are spending X pounds on low-energy light bulbs in the developing world it is quite possible that they would do that anyway because there is an obvious saving for them in so doing anyway, so (a) you have got to demonstrate the additionality and (b) an awful lot of offsets that are on the market are things like forestry et cetera, et cetera, where the carbon savings are at best debatable and certainly long delayed. So how can you suggest that you establish the bona fides of carbon offsetting? Mr Mason: I would like to persuade the Committee to separate again these two strands which have become conflated. The first is the principle: are we going to encourage, support, regulate and manage an offset market as an important instrument of policy? The second thing is can we make offsets that deliver because if we cannot make offsets that deliver then clearly there is no point in having them involved. The reality is that offsets may be a good thing and I would not want the idea to be corrupted by people doing them badly, so we do need to separate those two. The other thing that I would say is that of course we are dealing in a world in which we are trying to change the future and of course because we do not know what the future is by definition, anything that we aspire to have done has to be a matter of surmise and judgment. So, for example, we put 10,000 energy-efficient lamps into a township in South Africa recently. Subsequently Eskom the national electricity company, decided that they would put a large number of lamps - one million or ten million, I cannot remember what the number was - out there and people came to us and said, "Why was what you did additional because Eskom did this on top of you?" The retort was two-fold, I guess. The first is Eskom put in ten million and we put in another 10,000 so there were more, but the second is sometimes you will be overtaken in life by things which are better than what you are doing. If you did not do anything for fear that someone might do something better and make it redundant I think you would be paralysed by indecision and inactivity. We are much better off doing things with a considered but small risk of getting it wrong and maybe doing twice as much, than doing nothing in case we make a mistake or misjudge it. I think there is a terrible danger that because we are unable to achieve certainty in our projections of what would have happened had we not been involved that we do not do anything at all. Q89 Dr Turner: So it is fair to say that the actual impact of offsetting is very difficult to determine? Mr Mason: I would not say that. I would say that it is very difficult to be 100 per cent certain that what you did would not have happened anyway, but you can be reasonably certain within the bounds of normal commercial risk. We cannot be certain that global warming is going to happen but we are not all sitting here saying we will wait until we know before we do anything. Professor Murlis: I think there is a little more to this actually. We do have some evidence of additionality and we have it in the United Kingdom, and that is the very slow uptake of these low-energy light bulbs again. We have had them around for a very long time. If you look at the scope there is for energy efficiency in Britain, according to the Carbon Trust it would deliver on current technology about half of the Government's 2050 60 per cent reduction target, that is what the Carbon Trust is saying, and yet it does not appear in the market, so that anything that makes it appear in the market would be a helpful addition to what has historically been the case. Q90 Chairman: Accepting that obviously one does not know what is going to happen next, additionality does seem to go to the very heart of the case for offsetting. Would you agree that at least to qualify for additionality it has got to be beyond what you can reasonably assume is going to happen in the foreseeable future? Professor Murlis: Of course, and in fact every company that has a reputation and has a product that it wishes to defend has very complicated procedures for ensuring that, first of all, it understands to the best possible certainty what the likely "business as usual" future would be and then also calculates on top of that the addition that would be produced by the resources that fund the offsetting instrument. I know that in many cases the kinds of bodies that do this work are exactly the same kinds of bodies that are recognised in various international fora like the IPPC, and under the Clean Development Mechanism there are bodies that do this kind of thing, verifiers and so forth, and they are normally the people that are brought in to advise on this. Certainly it has been my feeling, looking at these instruments, that tremendous care goes into ensuring that the assumptions as to the future are treated as conservatively as possible, that is to say that they are as optimistic as possible, and that therefore anything additional is truly additional. Obviously we are working in the futurology area and certainly, as I have said, behaviour historically has been very slow to adopt these technologies, but where there have been resources, for example we have got photovoltaic projects going where clearly nobody is going to put money into those unless there is some extra source of funding for them. Q91 Chairman: Staying on futurology for the time being, how fast do you think this voluntary offset market is going to grow in the next few years? Mr Mason: Let me give you some of our statistics. We have expanded 700 per cent in the last 12 months. Web sales, which are a small but growing proportion of what we sell, have increased 20-fold in the last 24 months. Q92 Chairman: That is 1,900 per cent. Mr Mason: Thank you, Chairman. It is a lot; huge. Two years ago if we went to a company and made a pitch and sold 50,000 tonnes of emissions reduction we would be cock-a-hoop and we would be out partying for the next three months. These days people ring us up and say, "I made an error in my assessment." A bank recently rang us up, "We made an error in our carbon assessment for the year and we have not been as good at reducing (John's point again) as we thought. Please can we have another 50,000 tonnes?" 18 months ago this would have been utterly unheard of so it is going through a transformation which is vast. If you project it for more than a few years you have solved the world's problems, so clearly it not going to do that, but just at the moment it is going through a huge sea change. Q93 Chairman: Given that the post 2012 environment is uncertain, would that act as any brake on the voluntary market or does it act as any kind of brake on the CDM market? Professor Murlis: I would not have thought so. Mr Mason: The voluntary market relies on people who have made a decision that this for them is something that is critically important, they do not write you cheques for £1 million just on a whim, and having made that decision and written it into the company's or individual's culture and their thinking it is a much more certain outlet for projects, I suspect, than the vagaries of the international regulatory market. We have seen in the European Union trading scheme, for example, prices wildly oscillate between €30 and €1 a tonne whereas in ten years that Climate Care has been selling carbon offsets we started at a price of £5.45 ten years ago and our weighted average cost now is about £6.30 or £6.40, and the price has not moved very much, so we provide a stability, interestingly enough, which the other market because it is a political instrument has not done. Professor Murlis: Clearly the price of allowances matters greatly and the allowances provided under the first stage of the EU ETS were such that really they did not support very much of a market. There are technologies out there for the companies who come within EU ETS which would be waiting in the wings and waiting to be implemented. There are very high-efficiency ways of generating electricity for example and there is also carbon capture and storage, and I am sure the Committee has heard about that several times. Both appear at a premium but not at an outrageous premium. A good price on the EU ETS would certainly encourage companies to bring those technologies into use, there is no doubt about that, but historically it has been very difficult to get the correct level of allowances. Similarly, on the second period of the EU ETS there is a certain amount of discounting going on in investment houses to say, "Can we rely on it that these things will really appear and they will be tough enough to support a higher price?" However, when there is a vigorous voluntary market it is pretty clear there are a lot of people looking for cost-effective ways of using carbon and the technology developers may feel more confident. I think that Mike's experience is that that supports stability of price and I think that would be ours too. Looking forward, we can see the prices rising as investors are more confident and invest first of all in the development of the technologies and then in bringing them to market. Q94 Mark Lazarowicz: My apologies for missing the start of your evidence, I was at another meeting, and so if the question has been asked already no doubt the Chairman will tell me, but on this question of the price, the general view of course on the price for carbon, and suggested by Nicholas Stern for example, is that it is well in excess of the figures you are talking about when it comes to people purchasing voluntary offsets. What is your assessment of the likely consumer reaction if the price were to start getting anywhere near the figure that is suggested is the real price for carbon? Your rapidly growing demand may suddenly become rapidly decreased demand unless there is a compulsory mechanism. Mr Mason: Again we have to look at two different things. We have to separate price and cost and the cost of carbon in the short to medium term can be set by a number of things. Let us presume that the policy instruments make all carbon fungible around the world so an emissions savings here is equivalent to one there. At around €30 a tonne of carbon dioxide the big German coal producers switched to gas. There are huge savings to be made, so in the short to medium term I think we see a ceiling there. In the very short term there are huge zero cost savings to be made in the developing world where the problems are infrastructure, technology availability and knowledge. When Sir Nicholas talks about the cost of carbon, he is talking about the marginal cost of carbon at the edges as you get close to achieving the policy objectives. If I come back to the point that you made earlier about is it not better if we did things at home and insulated our houses and cut our emissions; the reality is that we will see the marginal cost of carbon driven up to the point at which people should be then persuaded that it would be better to do these things at home than to do those things overseas. I am very happy if the market gave way. I run a renewable energy business so I do not mind which way it goes, in truth. The offset market will be a useful policy instrument if once people start to get involved in this, there are strong encouragements, arm twisting, policy measures which keep them in so that as the price rises, which it inevitably will, they do not say, "Thank you very much but not now Josephine." I think you are right, the price will rise, and if we do not capture their willingness now while it is low and wrap that up in a series of measures, systems, protocols and encouragements, then we have missed a major opportunity to get the general public on board while they can afford to be on board. Q95 Mr Caton: The Environment Agency told us in its memorandum to this inquiry what it does as an alternative to offsetting through organisations like yours. What it does is to calculate what it would need to spend to offset its emissions and then uses that amount to set up a number of funds to reduce its direct emissions instead. Is that not a better way forward? Mr Mason: No, it is worse. Q96 Mr Caton: Could you expand on that? Mr Mason: It is worse because we are in a hurry. As a society we are constrained in resources. If we are in a hurry we should do the cheapest things first and by cheapest I mean we do not have to worry about financial discounting, in the timescales that we have to deliver - ten or 20 years - we have to reduce as much carbon as we humanly can do. There are two reasons why you might not want to do it internally in the way that they do. The first is that it is just more expensive. The second is that many of these expensive technologies will have fallen in price by the time the cost of offsets has risen so you have got the technology price curve doing that and the carbon offset price curve doing that. When they cross is the time to start doing it. The rational answer is to follow the economics. Do the most you can with the resources you have available and do not be too hung up about where you do them; the climate really does not care. Professor Murlis: I think my view would be rather similar to that. I am not sure exactly what the Environment Agency is saying on what they do and how they actually do this job, but I come back to the idea that for the Environment Agency, first of all, understanding carbon impacts and then managing then down as far as possible is a very reasonable thing to do, but I suspect they will rapidly run into diminishing returns on investment, and as they run into those diminishing returns on investment if they wish to make further reductions in their carbon footprint, then offsetting I think is a very reasonable way of doing that and, as I have said, is of enormous benefit in bringing innovation into this, so I would have thought from an Environment Agency point of view there would be a limit as to how far they can reasonably go before they run into either enormous costs or great operational difficulty. They have got a serious job to do and they therefore may be thinking of perhaps some kind of mixture of managing down as far as they can and then looking for other ways in which they can take an offset. Q97 Dr Turner: You have both made play of the effect of your activities being just not to directly drive down but to change the awareness and behaviour of your customers. Indeed Professor, in your memorandum you place great emphasis on that. Professor Murlis: Yes. Q98 Dr Turner: Is there not a danger that companies that have an interest in compensating for emissions through buying offsets will not necessarily try too hard to reduce their emissions? Mr Mason, there was a hint of that in one of your earlier answers in which you talked of your great joy at a company ringing up and saying, "We have not done very well, we have got to buy another 50,000 of these because we have not done it for ourselves." You have yourself given evidence of that danger. Professor Murlis: I do not think it is a danger, I think that is a very good thing. You could put that the other way which is that it is good the company is so aware and so concerned for its reputation that it wants to come back for another slice. Mr Mason: Let me take that to its most extreme example that I can think. Members of the Committee might be aware that we offset 45,000 miles of emissions for every 2007 model of Land Rover, Range Rover, Defender, all of those. This was an interesting ethical decision for us. Here we have a car which by most accounts is a heavily polluting car; should we be associating ourselves with this? The logic is interesting. They have a number of choices. I know the management of Land Rover now from the top right downwards and I am beginning to know them quite well. They absolutely understand that they have got a very beautiful but fundamentally rubbish product. It is not a product designed for a highly carbon-constrained world, so sitting there, they have a number of choices. They can say, "Fantastic guys, we have made a big decision to deal with global warming and we are going to close the factory door and stop." Never mind the employment consequences, the reality is that as long as society carries on buying these and as long as Parliament does not stop people buying them, other people - Porsche will walk straight into the niche and say, "Fantastic, thank you very much," so that will not achieve anything. The next thing they can do is they can say, "We will wait until society changes." That course of action will not achieve anything either. You might say as a third course of action, "Let us invest £1 billion and develop new platforms and new technologies to reduce the emissions hugely." Great, and Ford are doing that, a lot of it in the UK (Ford is their parent) but that is going to have ten or 15 years' gestation period before it finally comes to fruition. The fourth thing you do is say, "Okay, I really need to do something. I am utterly convinced that this is a problem. How can I get the emissions down?" They rang Climate Care and we ended up with a lot of conversations and what we now have is a vehicle whose net emissions - and I am talking about three to seven years from the date of the emission, actually that is not true, one to four years from the date of the final emissions - being 100 per cent offset - not 50 per cent, not 20 per cent, not ten per cent: 100 per cent. Let us accept some uncertainty. We might do a bit more and perhaps we might be a bit optimistic and we do 110 per cent and 30 per cent gets thrown away; it is still an 80 per cent emissions reduction. In other words, we have achieved a huge amount whilst the technology is catching up because all of the alternatives in the absence of a legislative framework would not have achieved anything at all. It is not as simple as, "Oh well, they don't care so they aren't doing it." It is like the old saying "if I was going to go to Brighton I would not start from here" - unfortunately you are here and we have to move from here to there as fast as we can. Professor Murlis: We at the CarbonNeutral Company provided some evidence to you of case studies of some companies that had actually gone through the process of accreditation through the Carbon Neutral Protocol, and that is a protocol, as I explained, where at these three stages companies are obliged to measure and to reduce insofar as they can and then as a third stage to deal with the residue through offset. Within that protocol there is quite a lot of detail and, again, we have offered you the copy of the document in its current form. It is always evolving and I chair a group of independent people whose job it is to essentially exercise governance over that protocol as to how it develops in the future to meet future challenges. It has been the experience of the list of companies that we provided you with that by going through this process they had actually informed themselves a lot and rather changed the way they saw the world. An interesting example is RadioTaxis who came to this thinking, "We ought to do something, we are not quite sure what it is, perhaps we will have a look at it," but came away from it much more enthusiastic and feeling rather positive about it and thinking, "What do we do about new fuels, how are we going to deal with the RTFO, and how are we going to make use of all these things that are coming down the line at us?" So essentially we have a management there now that has perked up and begun to listen to these messages about carbon. Similarly with Sky, Sky started off thinking it would be a very good thing to do and it would be nice to do it for the company but then began to think about why not do it to our supply chain, why not ask them to come in, and then we have got the customer base, why not ask them to do something and we can campaign and do all of these things. We have engaged what is a very large media player and I think that is very positive myself. We see this sort of change going on all the time. People come along tentatively not quite sure how to think about this but go away, first of all, thinking that they have got quite a lot to do but, secondly, interested in it and thinking about it so it is not at the bottom of their mind any more, it is near the top. Q99 Chairman: Coming back to the Land Rover example; how much does it cost them to do that? Mr Mason: About 100 to 150 quid per car. Q100 Chairman: How many tonnes are they buying for that? What are the expected emissions over 45,000 miles? Mr Mason: Let me think about that. About 20 tonnes. Q101 Chairman: Are any other car manufacturers doing this? Mr Mason: Land Rover have simply made it impossible for you not to buy this. It is nominally voluntary but in practice the dealers are expected to pay the cost if you do not. I do not believe any other car manufacturer on the planet has got anywhere near that level. Professor Murlis: Honda do something but it is not quite comparable. Q102 Mark Lazarowicz: Could I ask you one thing about Land Rover; did you say that the extra emissions are offset within a four-year period or is that a period in which the offsets are purchased and the offsets then come into play over a longer period of time? Mr Mason: When you buy a car, first of all, all Land Rover factory emissions associated with making that car are offset and in addition you get a certificate which says: "We, Climate Care, promise to offset the emissions equivalent to 45,000 miles of motoring," which we anticipate will take three years to happen. Q103 Mark Lazarowicz: Three years is 45,000 miles of motoring? Mr Mason: It is 15,000 miles a year. Q104 Mark Lazarowicz: So it is not the period in which you would have offset the emissions? Mr Mason: No, so we start today, and if we put in energy-efficient light bulbs or stoves or something, it might take three to five years, so we might achieve the final offset maybe two or three years after the 45,000 miles had come to an end, but in the context, as I was saying earlier, there is nothing magic about 365 days. If you are talking about offset periods of 20, 30, 40 or 50 years, you have got a problem. The difference between one year and five in the context of climate change, if it is as deep a cut as that at this stage it is not --- Q105 Mark Lazarowicz: To be clear, you are saying within if not four years then five, six or seven years that all the emissions in production over the first four years will have been offset by verifiable carbon savings? Mr Mason: Correct. Q106 Chairman: The Government is going to try and introduce a measure of regulation of some sort in this area. From what you have said and from the evidence we have taken it is clear that it is growing very quickly but it is also full of grey territory and there are very few absolutes here. Do you not think that is going to make it extremely hard to produce any kind of sensible regulatory framework? Mr Mason: It need not. Professor Murlis: The thing is that no industry that has got a reputation worth having is very fond of having free riders and cowboys out there, and you can take it that the carbon management industry is no different. It is very poor for the reputation to have schemes that are in any way dodgy, and we thoroughly disapprove of them. To an extent, I think what Defra is proposing to do is rather sensible, to produce a degree of regulation so that at least one can deal with the worst excesses. I think of it rather like the Financial Services Authority. The FSA is out there really to regulate financial instruments and it does it to ensure integrity in the market and so that consumers are aware of what they are getting. I can see that that is fine and that part of it is something that is helpful. Obviously we have put in our own evidence to Defra about what we feel about the way in which they have approached this, which we do not necessarily feel is the best way of going about it, but the general direction of the enterprise seems to us to be useful. Mr Mason: I have spent ten years trying to persuade Defra to pay any attention to this whatsoever. They did nothing for nine and three quarters of them and then suddenly they went from doing nothing to what I think was a rather rapid, ill-formed and prejudged consultation, which was a terrible wasted opportunity It is not difficult to do. We have to remember a couple of things. One is that we are in a global market here and we have a position of leadership and if we want to be effective we have to do something that works globally otherwise what we will do is create a plethora of standards. We are talking for example at the moment to some of the people who import flowers and vegetables from Kenya into the United Kingdom and they are saying, "Why can't we have a Kenyan Government standard?" Those kinds of cross-border issues will emerge if they are not carefully thought through, so there is no reason why you cannot have good regulation. I think we need some thought about it. I would also add that just like the Financial Services Authority, what we have is a requirement I believe to regulate the product and also the retailer because we are dealing with future events, we are dealing with having liabilities to be discharged. Companies need to have mechanisms that ensure, just as with company pensions for example, that the interests of future generations are not compromised by the commercial activities of today. I suspect the first stage is to look at the product but the second stage may well be to look at the organisations themselves. I think if do that you can manage out huge swathes of risk which avoids you being too heavy-handed on the product, which could be counter-productive. Q107 Mr Caton: You have mentioned how quickly the market for voluntary offsetting has grown but it is still a very small proportion of the population that goes down that road and even fewer commercial companies. Do you believe through awareness raising and education that you can expand your customer base and do you think government should have a role in raising awareness on this? Mr Mason: I do not think that we have begun to see the edges of how much we could expand this customer base, but the truth of the matter is that the best marketers out there are not us but are the companies which have customers - British Airways, Land Rover, Honda, British Gas. All of these people have huge marketing outreach and if we are to persuade the population that we need to achieve what I think the climate realists are saying, which is perhaps a 90 per cent emissions reduction over the next 50 to 60 years, these are huge changes and we have to engage the mass of the population, and to do that we have to engage the most competent marketing organisations and those are the ones that currently have huge budgets, infrastructures and capacity to talk to people, and those are industry. I think we can grow it but I do not believe that we can grow it anything like as fast as companies could grow it. In order for companies to grow it, I believe that they need some token of encouragement from government. The kinds of things that I am talking about are, for example, imagine a company that is bound under the Emissions Trading Scheme to reduce emissions by ten million tonnes; you might say, "For every ten tonnes of offset you sell to the public we will reduce your burden by one," or something like that. In other words, there are ways that we could amplify their willingness and ability to communicate that we have not begun to explore, and we should. Q108 Chairman: Just on this point, when we were producing our report on transport last year BA said that they had offset between 1,000 and 2,000 tonnes of CO2 to climate change in the past year, yet BA's own web site says a fully loaded jumbo jet on one return flight from Heathrow and Sidney and back accounts for 1,574 tonnes of CO2, so it is not a very impressive achievement by BA or anyone acting on their behalf so far. Mr Mason: Will you please tell them that! That is important because I know that they are coming in to give you evidence later and I would love you to ask them about it. Q109 Chairman: We certainly will. Mr Mason: The reality is that people like Land Rover have stood up and said, "Okay, guilty, your honour, this is a rubbish product from an environmental perspective but people love it and we are going to have to do something about it." I hesitate to speak for British Airways but I think the problem that they and a lot of companies have is the first thing they have to do is stand up and say, "My product is rubbish, it creates a lot of emissions," which of course does not give you a nice marketing conversation, it is not a good entrée, is it? The second thing is they have to occupy what they see as valuable retail web space. The consumer attention and the web space on which you have to grab it has a very high opportunity cost, and so for the time being it is difficult to persuade them that this is actually a cost that they should bear. Whether you do that by arm-twisting or by incentive or by taxation, I do not know, but it sure as hell needs doing. Q110 Dr Turner: We have already touched on Defra's consultation about regulation; do you think the industry is up to self-regulation? Mr Mason: No, but we may have very different views on this. Professor Murlis: Up to a point. Industry has tried very hard and within the industry obviously there is very different practice. I can only speak for the CarbonNeutral Company and what I see in the CarbonNeutral Company, and bearing in mind I am their scientific adviser and I am not part of their executive chain and my job is to chair their technical advisory group, and the technical advisory group is there to ensure that the Carbon Neutral Protocol continues to provide a framework of state-of-the-art assurances about the quality of the process that companies have to go through in order to get their carbon neutral stamp and also the quality of the instruments that at the end of the day are used to offset residual emissions. I think that is quite an important job. I am really impressed, first of all, by the way in which the protocol has been developed and, secondly, by the care which has been taken in the governance of it. I also know that our companies together with a number of others are seeking to prepare what is an absolute basic standard, and that basic standard is something that will obviously gather a great deal of buy-in from the different parties and it will be an industry standard, so there is that kind of process in hand. There are examples in the world of good self-regulation and I suspect that the companies could achieve this. I suspect also that the kind of regulatory framework that would be suggested by Defra at the end of their consultation, and might look something like the FSA, would also be very helpful. I would not like to say that it cannot be done; I think it is rather tricky to do. Q111 Dr Turner: There is obviously not agreement between yourselves on the issue of regulation and other companies in the offsetting business are very different from you and have a very different range of activities. Could I ask both of you very briefly to set out what you think should be there in the framework of regulation which clearly is going to need to be mandatory. Professor Murlis: I feel that what should be in the framework of regulation is a set of principles which governs the standards. For example, the principle of additionality, which we have talked about, is an absolute and there should not be any kicking up to that, so there has to be first of all additionality and a satisfactory way of demonstrating that. Another principle is transparency, so that people do know what they are paying for. You could imagine a number of principles of the regulation and there are principles of good regulation, for example, published on Defra's web site. For me the thing that we would like to see coming out of the Defra consultation and to see Defra proposing is a set of principles for those regulations rather than saying exactly line-by-line what they are. Mr Mason: I think the barriers to entry for new entrants into this game are low and I think the opportunity for scamology is huge, and therefore whilst my instincts are John's, which is to have a set of regulatory principles, I think that there is a real danger that as long as you have a tension between shareholder and environment you will have companies being as imaginative as they can to shade those principles. There are lots of statements of principle that well-meaning people find themselves the wrong side of from time to time. We have an emerging very good (insofar as it can be good) set of standards coming from the United Nations through the Clean Development Mechanism. What Defra have proposed is that only certified emissions reductions, those created and certified by the CDM, should be allowed. I believe the principles and actually the practice of the CDM should form the foundation of the voluntary sector and I think we should depart from that where it is appropriate to do so by expansion. For example, there are countries like East Timor, the world's poorest country, which were not invented when the Kyoto Protocol was agreed. There are places like Turkey where for reasons of its own administrative - and I would not use the word incompetence but something managed to find themselves neither one side nor the other side of the protocol, so they are out of everything and they cannot do anything. There are technologies to which we would like to extend the CDM. The CDM is not very good at being innovative and bringing new technologies such as energy-efficient cocking stoves to the third world. There are all sorts of things happening. There is a whole swathe of opportunities that are being missed but the underlying principles are good. I think there is an extension in space, there is an extension in technology base, and the third thing that I think is critically important that we need to address, and the Defra consultation specifically denies, is we need some freedom on timing. The Defra consultation presupposes - and it is a wonderful consultation because they know what they have asked for already! - that you will need to have delivered the offsets with certificates within six months. The problem that you have is that if we are trying to grow this market hugely fast, which we are, there just are not enough people out there as engineers, as people to draft the design documents, as people to assess additionality, the whole thing is constrained by resources and those resources may not be money and often are not money. There are all sorts of other issues. When someone says, "I want to buy one million tonnes," should we say, "Sorry guys, you cannot have that until I have gone and got the project," or should we say, "Thank you very much, we will take the cash and mobilise the resources to get the project going." One is an enabling approach and the other is a restrictive approach, and I think we have to have an enabling approach. That is why I believe that the organisations themselves who offer offsets should be regulated. It is fine, if you are going to deliver something that has already been certified, anyone can do it because it is a certificate that someone has signed off, but if you are in the business of trying to develop things for the future enabling new technologies to happen, then I think we need to have some form of regulatory framework which means, like your pension, something in the future is not delivered by someone who has no responsibility. Q112 Chairman: Is it not in the nature of the CDM for instance that that is restrictive rather than enabling? You have acknowledged yourself that there are both geographical and methodological constraints imposed by it. Other people I have talked to have said it is bureaucratic, it is slow, and the compliance costs are high, so it is the big projects rather than the smaller ones, so if you want to be enabling you have got to think outside the CDM box. Mr Mason: I did not say we had to use the CDM. I said we should use the principles and the processes of the CDM. The CDM will get better. It has also been constrained by the fact that three or four years ago there was no-one in the world doing this and now it is a multi billion pound industry, but where do these people come from - the boring practicalities of getting the experience and training and so forth. Over the coming decades the CDM will undoubtedly - and I am looking beyond 2012 - get better. Between now and then, which is a time of fast growth, it is not going to be able to deliver what we need. The project design document, the use of a designated operational entity to validate, the whole swathe of things that the CDM encompasses and which a certified emissions reduction requires should be replicated in an appropriate form in the voluntary market, so I think there is a huge amount of experience and thinking gone in. We should not knock it, we should not write it off; we should build on that and we should extend it rather than try to invent something new, but we should not be restricted by it. Professor Murlis: I think that is right. Certainly the CarbonNeutral Company takes the view that the insistence on only CERs and similarly regulated instruments is an unfortunate mistake and that one should open this to VERs which actually are very fine emissions reductions where there is a verification procedure, and it is the verification procedures that actually are the key to it. Certainly there are faults with the CDM mechanism and those are pretty apparent, but one could also argue that in some ways VERs can be an improvement, they can carry other kinds of additionality, in particular when it comes to sustainability criteria. CDM projects have not been particularly good on those. Certainly our clients often say that we have got the carbon bit right but what about the rest of it? Could we show some sustainability issue here that is improving local employment? Is it really managing another kind of environmental problem? Under those circumstances of course a VER stamp can have that kind of additionality and it can also be taken up in things like, for example, the gold standard, which is one and there are the Evo projects in the forestry management area which contain multiple benefits. I feel also companies, thinking about their reputations, will want to ensure that the kind of offset instruments that they buy are of good quality. They will want to almost compete for quality in these instruments, so many companies - and there are certainly companies which will come along to us and say, "It is more important to us that these are really absolutely solid and no-one can criticise us for these and there will not be any reputational problems." You gold-plate these things because that really matters to reputation in the longer term and then they will be looking for the other kinds of benefits that I have explained. I feel that in a way the CER bit misses the opportunity there is for the market to drive quality, and we know that markets do drive quality in some areas. You only have to look at safety for example. We know that safety in vehicles is driven by markets. Similarly here, we believe the quality of the offerings will be driven by a market which is able to have a certain amount of diversity and is able to pick the best. Q113 David Howarth: Could I ask each of you a question to clarify what you have already said. Professor Murlis, you have mentioned the FSA a couple of times as a model but you have also talked about other ways of doing regulation. I am just wondering what your preferred model would be? What sort of body are you talking about? Who would pay for an independent regulatory body? Are you thinking about the industry paying for it or the state paying for it? Who would supervise it? Who would audit it? Who would regulate the regulator in effect? Professor Murlis: As in the case of the FSA, if there were to be a regulatory apparatus, in the end it would (rather like the Environment Agency) fall to a degree on the industry because of course there would be a process of certification. I know that although the Environment Agency gets a certain amount of grant-in-aid, it also is expected to recover regulatory costs. It seems entirely appropriate that it should do so and I do not think there is a problem about that, that is perfectly well understood. I think also to have a regulator that is the guardian of these big principles is what is important, so they would be able to say here is a company which first of all is correct financially (as all our companies have to be) but also their offerings as they are expressed are correct, that it is a company that has the reputation and would attract accreditation and is able to meet the general standards and then there are the instruments that the company is dealing in as well. I think that Mike has made the distinction between companies being accredited and instruments being accredited. We note in the financial area that there are many instruments out there that the FSA does not accredit, for example deed reversionary mortgages, which I am sure you have seen from your postbag have been quite troublesome. Those are not regulated and companies are obliged to say "this is not regulated by the FSA" and then it is really for the consumer to take a judgment as to whether they want them or not. That is quite a reasonable pattern for us to look at. Q114 David Howarth: Mr Mason, you might want to comment on that point as well but can I ask you a separate clarification point, which has just been raised in a way. I am not quite understanding what you are saying about the distinction between regulating projects and regulating providers. Presumably you would agree that both need to be regulated because of the additionality problem that Dr Turner raised for example and that goes more to the project than to the provider. Are you saying that we simply need to be aware that they need to be regulated in different ways and do you envisage separate regulatory bodies doing this or would it all be done under one roof? Mr Mason: There is no need for separate regulatory bodies. I think that the Defra consultation really only envisages the regulation of the instrument, the emission reduction in tonne, and it envisages doing that by getting it certified by the United Nations, which conveniently avoids inventing a new regulatory agency. It avoids the need to regulate the organisation because it is a delivered tonne. In other words, there is no uncertainty; either you get the certificate or you do not get the certificate. If you do not get the certificate it is flawed, if you do get the certificate you have got it. If we are going to move from a restrictive to an enabling regime, then we have to have companies there who are, in effect, promising to do something for you rather than giving you a certificate to say they have done it. If I am promising to do something for you, you have to have some faith in my promise, so not only what I do has to be regulated, the instrument, but you have to have faith in me actually being able to deliver that and making up the shortfall. Projects in the developing world are risky, they go wrong, tonnages do not appear, costs over run, corruption happens, all sorts of things, and what you have to do is to have a methodology, an approach and a resource base which lets you say, "I am going to give you a tonne of emissions reduction regardless of what happens in this project." For example, we take on risk in-house, we run a portfolio which gives us portfolio diversity, so some projects do better, some do worse, and we have a strategy for managing risk which is explicit and we set it in the public domain. I believe everybody should do that and should have that strategy scrutinised, just like a pension fund, and there should be some rules as to what you can and cannot do in terms of taking on risk. Q115 David Howarth: But how does the regulator of the instrument know that what you are saying about your guarantee to deliver is true without actually going to see the project? That is the point I am trying to get at. Professor Murlis: It is the procedures. In the same way the Environment Agency has to give a certificate to a company that says that it is going to achieve a certain emissions performance that is the way it works. In fact, what happens as you know under integrated pollution controls, is that the regime is such that it is up to the applicant to explain how it is going to achieve what it is expected to achieve. In the same way I am assuming that a regulator would expect a company to come along and say, "This is our procedure for ensuring that it all happens, which we will put in place." Q116 David Howarth: That is a purely paper exercise. There has to be some capacity to audit a sample at least. Mr Mason: Let us just look at these two things separately. If we put up a wind farm in India, the first thing we do is we create a project design document and that sets out what the project is going to do, how it is going to do it, why it is additional, what is going to happen to leakage, what is going to happen to local communities, and so on and so forth, and projects what those savings will be, so we write one of these. We then employ what is known in the jargon as a DOE - a designated operational entity - and these are consultancy firms appointed by the UN and we use these for the voluntary market as much as for the compliance market. They are not allowed to have a principal interest in any emissions reduction project and their job is to go and kick the tyres on the project, visit it, check it and all the rest of it, and say what they have written in the PDD is real and this is truly additional tonnage. The third step is we then have to have them go and verify by reading the electricity meter and saying that it has happened. That deals with the project and the mechanisms for doing that are in place and do not need fundamental change. They are UN mechanisms and we would go with those all the way along. What I am adding to that is an assessment of the organisation so you come to Climate Care and we say, "We have got this project and we are going to put this wind farm up in India," and all the rest of it, but the wind does not blow quite as much so we do not get as many turns on the meter and, hey presto, we are short of tonnes. However, I have promised you that I am going to sell you 100,000 tonnes and I might have paid for this turbine upfront and it has not delivered quite enough, so I now have a liability to go and source those emissions reductions from somewhere else. There are two or three ways you can do that. You can do it by insurance, and we are talking to one of the big insurers who expressed an interest in taking a position on this. You can do it by just having a big balance sheet, so I have £1 billion in the bank so if I am short I will go and buy some out in the market place. Or you can do it with a portfolio, so we say for example if you buy a tonne of offset from us you do not buy it from that project, you buy a tonne of emissions reduction and in our portfolio we have ten projects and our job is to make sure that the portfolio as a whole delivers, and that gives us a huge amount more diversity than just having a single project. Q117 Dr Turner: It also presents lots of opportunity for double counting. Mr Mason: For that there is no question that what we do need is a public, transparent registry and I do not think there is any credible player in the industry who would argue otherwise. I would go further and say that we are prepared to fund it, in fact we are prepared to write it and put it in the public domain. We should not see this as an obstacle. Writing a registry is a piece of software, it is not difficult, it has been done before. Chairman: On that happy note of harmony we will bring it to an end because we are running over time. There were a number of other issues that we had planned to raise with you and if you agreeable we will write to you with some further questions. Q118 Mark Lazarowicz: Could I ask one brief question, just to clarify; in your accounting for carbon savings, do you operate the principle that a tonne of carbon saved in 100 years' time is of the same value as a tonne saved today? Mr Mason: We do not do any carbon in 100 years' time. Q119 Mark Lazarowicz: Whenever you do. Professor Murlis: Over the project period there will be an amount of saving but that project period typically will be fairly short. Mr Mason: It is a very short question with a very, very long answer. Q120 Mark Lazarowicz: Perhaps you would send us the full answer. Mr Mason: The technical reason is that discounting in this context is the triumph of numeracy over common sense. It makes you feel you have done something but there is no rational algorithm for working out what you should be doing and why you should be doing it because of the anomalies in the climate system. I am very happy to respond on that more fully but it is a fundamental issue. Mark Lazarowicz: If it is a fundamental issue, it would be helpful to have that information. Q121 Chairman: Related to the first answer, what is the longest period for your schemes? You said you did it over a period; do you have schemes that go on for longer than ten years, for example? Mr Mason: We have one. When we started, just like my colleague here, we started in the forestry game and we have one project which is a rainforest restoration project in Western Uganda which will be about five per cent of our total turnover over this year. It is rapidly falling away but people love it unfortunately, and there is this permanent tension between selling what people want and selling --- Q122 Mark Lazarowicz: Leaving that aside, what is the longest? Mr Mason: Apart from that, seven years. Q123 Mr Lazarowicz: Is that also true for the CarbonNeutral Company? Professor Murlis: I will need to ask my colleagues and come back to you on that because I just do not know. Mr Mason: The average will be five to seven years. Chairman: Thank you very much for coming. It was a very useful and interesting session. As I say, we will pursue one or two other points in writing. Memoranda submitted by Energy for Sustainable Development, The Edinburgh Centre for Carbon Management and the Co-operative Group
Examination of Witnesses
Witnesses: Ms Shelagh Whitley, Senior Consultant, Energy for Sustainable Development; Mr Matthew Brander, Project Team Member, Edinburgh, The Edinburgh Centre for Carbon Management, and Mr Paul Monaghan, Head of Ethics, The Co-operative Group, gave evidence. Q124 Chairman: Good morning and thank you for coming in. I think you have probably heard most of the previous exchange. Could I start with the same sort of general question about what you think the role of the voluntary offset market should be in terms of Britain's overall response and our strategy on climate change more generally? Mr Monaghan: We have heard some debate from the carbon offset providers to say that we should begin with carbon offset and we have heard submissions from the likes of the Carbon Saving Trust that it should be the last thing people should do. The way we have always approached it is that it should be done in parallel because to leave it to the end probably means waiting 50 years. To take as an example, the Carbon Trust say when you address all your emissions do not do offsets until you have addressed all your direct and indirect emissions, and that means your supply chain. If you wait until you have addressed your supply chain you are talking 25 or 30 years. Look at Tesco: Tesco said they would put carbon labelling on their products. What they have actually said is that they will put money into research for three to five years and then consider the output and then think about it, so you are talking about five to seven years before you even see the labelling emerging before the carbon reductions take place. You have to have carbon reduction in parallel to energy efficiency, in our opinion. We say that as someone where arguably no corporate has done more on climate change than ourselves. In addition to the things we have put in our submission, we have just announced a £1 million investment in renewables for schools, we have announced money going into the creation of secondary workers' co-ops for biomass, we have announced all new format stores rolling out with solar optimisation as standard. We are saying as well as all that you need carbon offset now. To me it is a bit of a common sense position and that applies whether you are a corporate or an individual. Ms Whitley: I would agree with that in terms of the fact that both activities have to happen - real in-house reductions on the part of corporates and real individual reductions - at the same time as offsetting. Also, if you are thinking about it in terms of long timescales, there are a lot of measures that can be taken now that are cost-effective that both companies and individuals can be taking and there are long-term policy frameworks, and we know that there are a lot of technologies that will not be cost effective until quite a long way away in terms of carbon capture and storage and other major technologies that we think will be needed to have deep reductions, and offsetting plays a role in between those immediate actions that we can take and the long-term actions that we can take, both in terms of allowing individuals and sectors to take actions that they are not able to through existing regulation and also for technologies to be disseminated to countries that may not have access to them now. There are a lot of technologies that exist and are more common practice in the developed world which can be disseminated to the developing world through offsetting. A lot of that will be in the next 10 to 20 years when the big technology solutions have not been resolved yet; offsetting will play a role there. Mr Brander: One thing I wanted to add, when you posed the question to the last panel it was in terms of the UK climate change programme and I just wanted to bring that up on a point of clarity. In terms of meeting the 12.5 per cent obligation, the voluntary offset market is additional to that. Most of the projects that are funded by the voluntary offset market are outside of the UK and so are on top of that 12.5 per cent target. I guess there are two things from that. It does not contribute to meeting the UK climate change programme target of 12.5 per cent but it is a positive step in addressing global emissions. Q125 Chairman: Following on from that point, how do you respond to the criticism, as we discussed in the previous session, that it validates people's polluting behaviour and people will buy the offsets and go on polluting? Mr Monaghan: Can I say I do not think there is any evidence for that anywhere. I think it is one of those things that gets said and there is no evidence offered. We have heard people here previously talk about how there is counter-evidence to that. At the Co-op we have been attracting ethical consumers probably more than anyone over the years and we have produced the ethical purchasing index. The two things I would observe from that is that when we heard all the stats before how much the two businesses were growing here they never told you the absolute numbers, it was all about percentages. The sales to the personal sector in the UK are really tiny. The big growth is to corporates, it is to people like Marks & Spencer and HSBC who offset their operations. The growth to the personal sector is tiny. It is growing but it is tiny and I know that to be a fact. One of the things that worries me about some of the tone of the debates is the proportionality; regulation should be proportionate. I would suggest to you that the numbers of individuals who buy carbon offset in this country, the market for that is probably £2 to £3 million in terms of worth in the UK. That is a big nut to consider. One of the things I would say from the Co-op is that we have been very good at kick-starting ethical consumers in certain markets and then when the big boys come along we tend to fall away and that is bad for us but it is good for society. If you take something like the Forestry Stewardship Council or Fair Trade, when they were set up there were lots of competing standards around for what was essentially sound sourcing and sustainable forestry, and then over time the NGOs came out with a standard. There was Fair Trade and the Forestry Stewardship Council. Then industry came up with their own standards and the different standards were all competing. We only reached that situation with the carbon offset market in late in 2006 when we had the Climate Group, which is essentially business providers, saying here is our standard. We have the gold standard which is the NGO standard, which is a tougher standard, and then we have offset industry itself coming up with its own little standards quite soon and then we have the Government coming in now with a potential standard. I would suggest if the Government came in seven years ago to the FSC debate or the Fair Trade debate it would have been counter-productive and I have a feeling if we let competing standards play their way through the market, like we have in other areas, we will see the cream come to the top and I would probably suggest it is the gold standard. One of the reasons we are having this debate is that the gold standard has not been out there long enough to have all the providers demand it as a way through. If we look at the gold standard, we have only got, the last I saw, anything between ten and 15 signed-off projects in it, but they have got a pipeline of nearly 200 coming through because what is happening is people are now saying we need this. I think that all the projections that are taking place in the personal sector will not take place if a lot of the negative media coverage we have seen for carbon offset continues. I think it will kill the market and even the Government standard will not help with many of the problems with CDM such as the over-reliance on HFC 23, and all the debate that is going around that will kill it. Q126 Chairman: The different stage which this market is at at the moment, though, there is nothing inherently unhealthy about having more than one standard kicking around. The Climate Group would argue that what they are proposing through the VCS is better than having nothing and in a sense it is up it the buyer to demand how robust the integrity of the schemes they are investing in is. Mr Monaghan: From my perspective I have been buying offset since 2000 and for a long time until 2006 we were probably one of the biggest purchasers of carbon offset in the UK. There were no standards for us to work towards. What became necessary was when our primary provider, which was Climate Care, provided us with projects, we would choose the project and we would visit, so I spent last week for example in Uganda and the deforestation project in Kigali not just checking on the deforestation aspects but also the social aspects of the communities around those projects. The other thing that worries me slightly about some of this is a bit like the "food miles" debate which is very related, where we have seen Defra in many instances welcome Tesco and M&S and others saying they will reduce the amount of air freight coming into the country from two per cent to one per cent or whatever, and then we have seen a reaction from Defra which is, "Hang on a minute, that is cutting off exports from the likes of Kenya," and the whole debate has become a polemic in the space of something like two months. I feel that same has happened with the carbon offset debate. It is great that everybody is into carbon now and climate change, et cetera, but it is happening in many ways a little bit too fast, and we are all rushing around putting regulations on carbon offset that are not even being considered for things like micro generation. I sit on the Building Research Establishment's Sustainability Group and I am aware of all the claims that are out there that solar panels work on moonlight which are being marketed in this country right now. Passive solar has been around for 30 years and we are not talking about standards for passive solar but we are for carbon offset, even though the passive solar market to the personal sector is probably 50 times what the carbon market is in the UK, so it is a proportionality question in this whole debate; can we allow the varying standards emerging at the back end of 2006 some time to play out and see which way this goes. They are the people who know and ultimately the consumer will be king. Do not worry about the corporates looking after themselves. The corporates will do their own due diligence on products; I can guarantee that. Q127 Chairman: That point is very well made. What do you think of the Environment Agency's decision? They have calculated what their footprint is and they have said they are going to put that money into a carbon reduction fund. Do you think that is a smart thing to do? Mr Monaghan: Bonkers. I just do not understand the philosophical position. If what they are saying is you only do offset for the things after you have done everything else, implicit in that is that you have not done everything else because if you are creating a pot of money to do further energy savings, I guess they are setting a payback period of two or three years hypothetically for investment and what they are saying is, "Ah, we will create another pot of money if it goes to three and a half years we will invest in it." These are hypothetical decisions. I think that is about the Environment Agency being scared to buy third party carbon offset. That is what that is about. Q128 Dr Turner: Ms Whitley and Mr Brander, you say in your submission that you believe the voluntary market will play a critical role in engaging and educating individuals about the carbon market. The RSPB do not entirely agree with that and they told us last week they were worried that the carbon offsets currently do quite the opposite of this, and that is certainly my personal experience of what people think when they talk to me about carbon offsets. They actually believe that when they buy carbon offsets they are directly reducing emissions whereas in fact that is not strictly the case at all. So how do you reconcile this with your own view of what work needs to be done to create public awareness of what carbon offsets actually mean in practice? Ms Whitley: That is a point I was going to bring up because I think that in terms of a role that government can play there is a very wide variety in terms of carbon offset providers in terms of what information you can get about projects. You can get basic facts both about climate change and also about project accounting - future value accounting - which is an area that was touched on earlier. There is a potential role, perhaps not a regulatory role but some kind of educational role that government can play in terms of either requiring or asking retail offset providers to give that information. There was a study done by an NGO called Clean Air Cool Planet in the north-eastern US which did not rank offset providers but did a top ten list and gave a comparison of one against the other. The main areas that it focused on was information provision of projects and information in terms of education on climate change. It is an important role that offset providers can play. It does not necessarily need to be regulated but it is something that could be asked of them. I think in terms of consumer awareness of the reductions that are achieved by offsets, it is a difficult point, and that is where it seems as though the Government is looking to leapfrog over a lot of areas. There is a real lack of understanding of the basic issue of climate change among the general public. There is a lack of understanding of carbon, carbon markets, what offset is, and it is a very small segment that are choosing to buy offsets and I would say they are probably quite a well-educated section of society in terms of carbon but there is a wide swathe of people - and there has been market research done - where there is very little understanding of the issue of climate change, and I think getting that understanding in place before looking to regulate the offset market is critical and also if the Government is thinking of personal carbon allowances or other forms of regulation that type of baseline education is going to be critical as well. Q129 Dr Turner: Do you want to add to that, Mr Brander? Do you think your organisation should be contributing to this process a little more? Mr Brander: One thing that ECCM does is build carbon calculators - and you will see them on things like the Sky web site and on the BP web site - where people can go on and put in details of their activities and they are given a quantification of their CO2 emissions. Obviously offset companies use similar things to educate people about how much they are emitting and how much they may want to offset. Five years ago no-one really knew and generally a household would have no conception of how many tonnes of CO2 they produced per year. Tools like that help people look at where emissions are coming from and build on carbon numeracy. Who knows, maybe in ten years' time people will know the carbon cost of their activities in the same way that they know their monetary cost. Q130 Dr Turner: Mr Monaghan, your submission states that you plan to become the first food retailer in the UK to sell offsets through your shops. It makes a change from being asked whether you have got your dividend card. Mr Monaghan: Yes. Q131 Dr Turner: What steps are you going to take to ensure that the public actually understand what they are buying? Mr Monaghan: Currently we have started to retail at the back end of 2006 carbon offsets in our travel agents. We started there because if there is one area where you want to start thinking it is air obviously. What we do as part of the normal sales process where people are sat in the office as opposed to over the Internet, where there is a face-to-face conversation, we have trained our staff now as people are talking about the sale, to talk about whether people are aware of carbon emissions (and given that they walked in the shop to buy a holiday it is highly unlikely they are going to walk back out of the shop based on that conversation) and would they consider offsetting the holiday. We have done that. We are also later in the year going to start retailing it in all our 3,000 food stores. In this sense it is a different sales environment and we are selling fridge magnets and we will be saying if you want to offset a typical basket of food produce for a year, we will create unique points of sale. All of this for us is experimental. I would say since we have been doing this since 2000 we have learned a lot. We have learned that at first our language was overly jargonistic and we were missing the consumer. We have missed them so many times over so many years it is unbelievable. It really is quite difficult to have this debate. Do not imagine there is this massive personal carbon offset market in the UK because there is not. You heard it from the British Airways anecdote; the sales are tiny. Q132 Dr Turner: You also say that you see offsetting as a part of the solution to climate change but not a panacea. Therefore does it follow that at the same time as selling offsets to your customers you will be giving guidance about actually reducing their own carbon footprints, and how important do you think that is? Mr Monaghan: I think both are equally important. For me, it is not one or the other, it is about being in parallel. As we sell offsets, we discuss energy efficiency and in eco insurance we discuss about making sure your tyres are properly blown up. We discuss energy efficiency with mortgage customers and we have produced free energy surveys for example since 2000 for our customers. When people take a mortgage it advises them on different ways to reduce emissions and energy efficiency and there are energy efficiency loans. These are all part and parcel of the offset package. I would defend offsetting to the hilt. It strikes me the position we are in, the numbers, if we do need a 90 per cent reduction by 2060, which we do, we cannot wait 20 years for everyone to get their houses in order and consider offset at the back end. I will be honest with you, I am running round in our business now finding things to offset to put more money into carbon offset programmes to suck CO2 out of the air. All I am interested in is that. The climate is not bothered where the CO2 reduction comes from; I just want to get that CO2 out of the air and I want to get as much possible. Q133 Mark Lazarowicz: Could I draw your attention to the Declaration of Members' Interests and support from the Co-operative Group. On that point about the timescale does not that emphasise the argument that the calculation of the carbon savings should be linked to the activity which causes the carbon consumption either before that event takes place or alongside it or at least within a very short period o time, because if we need action now there is no point in having carbon savings over a longer period, and certainly they need to be valued in such a way as reflects the fact that the savings are required at the time of the emissions and not a long way in the future. Mr Monaghan: Yes where possible, the timescale should be as short as possible and ideally the consumer should know where the money goes in an ideal scenario. Q134 Mark Lazarowicz: Is that not quite essential to the consumer making informed choices? Mr Monaghan: I think it is impossible to deliver in every instance because if I as a purchaser come to Climate Care and say, "There is a hundred grand, each year and every year for three years and you know it is going to happen and I want you to tell me the projects," the number is big enough and the continuation of business is long enough for me to have quite a strong leverage in that relationship. However, if an individual consumer walks into one of my shops and says, "I will buy a £7 piece of carbon offset," there is no way in a supply chain one can allocate that to a specific project and to a specific timescale. As a principle, what you have just outlined should be the starting point to aim for and, to be honest with you, every consumer would want that as a starting point. They would like to see which project it was. I envisage a time when people do not just choose carbon providers, they choose projects, but the market is nowhere near where it needs to be in terms of scale to deliver that right now. Q135 Chairman: Technically you could have a situation where you build up little shares in projects. If you are a consumer who has only got seven quid to spend and you are rather keen on wind farms in Mozambique, you could go in electronically and add seven pounds to that one, and someone else could come along and says they want to do something in the Asian Pacific. There is no technical reason why they should not do it, it is just we have not quite got there yet. Mr Monaghan: For example, when we started retailing we are not taking any profit out of this. We are doing this because we really believe in the market and we are going to start retailing these things. What Climate Care and other providers say to me is, "How much carbon do you think these people are going to buy, so I can have a project ready?" and I have to say I do not know. I can project what I think they will do but I do not absolutely know what the sales will be in which part of the country and at what point of the year. Because of that when I market my carbon offset projects now through the Co-op we talk about what things have happened historically as an example of a project, not where the money will definitely be going because I could not guarantee that and, rightly, I would be up before trades descriptions if I start saying X will go to Y and it does not transpire. There is a logistical difficulty with promising things in the future as with anything in life. Ms Whitley: The idea is to model the voluntary market on CDM and we work both in compliance and voluntary markets. In terms of the CDM projects a lot of the additionality proof is financial additionality and you prove financial additionality because you needed the potential revenue from carbon credits to finance the project so a lot of projects have bank loans or shareholder loans that are contingent upon the funding coming in from carbon credits that have not been produced, verified or issued. The only way that the project can start and be additional is if that money is there, so you almost have to have this future timescale between when the money is paid and when the emissions are issued in order to get that additionality proof. It is important to keep that in mind for the voluntary market as well. Q136 Mark Lazarowicz: Okay, that is another issue. Ms Whitley: The projects are quite similar in terms of the financing of the voluntary and compliance markets. Q137 Mr Caton: We have had conflicting evidence about Defra's consultation proposals with regard to transparency of information. I think you have argued that they are too onerous and do not compare with others like green electricity or ethical investments. However, the majority of submissions we have received point to a lack of consumer clarity and say that better information would lead to increased consumer confidence in the market. Do consumers currently have enough information and would what be the best way to guarantee and maintain the quality of that information if not through the Defra code? Mr Monaghan: I personally think it will be through the emergence, the cream rising to the top, of NGO standards. If you look at ethical consumerism, the consumers go for the standard backed by an expert charity related to that, so if it is testing animals it is BUAV, if it is organics, it is the Soil Association, if it is the Forestry Stewardship Council or Marine Stewardship Council, it is the World Wildlife Fund, et cetera, et cetera. I think what has happened now at the end of 2006 is the gold standard has emerged. It is backed by WWF, Friends of the Earth, Greenpeace, et cetera, and I know I am pushing round now with Climate Cares and others saying how many of my projects can be gold standard going forward. I will not be asking how many of my projects will be government standard. I will not be pursuing this Government standard under any circumstances if it is what it is, which is certified emissions reductions if it means I am propping up the EU Emissions Trading Scheme because the way I see it is that the EU Emissions Trading Scheme is wrong because I could easily save money by buying a tonne of carbon through the EU ETS. It is trading at about €1.50, and I am paying £6 right now roughly, which is the full corporate rate, to Climate Care to buy my carbon. I could save masses by going to EU ETS but I refuse to do so. One thing that worries me is if we are all forced into ETS and the CDM are we propping up a market which the bottom is going to fall out of quite soon? Never mind the individual projects that that market is supporting - €1.50, that is a quid a tonne. Q138 Chairman: That is a problem in phase one but looking at the prices of phase two that problem is going to go away. Mr Monaghan: The Government standard is supposed to be in place by September. What if we have a Government standard in September that says you are all going to ETS and CDM and the bottom falls out? This is a standard that is supposed to build consumer confidence. It has not been thought through. Mr Brander: One thing we have become aware of is offset providers who are already offering the Government-compliant offset standards and offering phase one EUAs. Obviously someone in the market has moved quickly and they have said this is what the Government is endorsing and they are offering that to the market. An EUA now does not represent any kind of emissions reduction, there is a glut and industry broadly has too many. Chairman: We will have something to say about that when we publish our report on the ETS. Q139 David Howarth: Can I raise a couple of other factors that might affect consumer confidence and whether you think there needs to be regulation to offset those problems, as it were. The first is we were told last week by FERN that the average administrative cost of an offset company is 57 per cent and only 43 per cent of the funds actually go on to projects. Does that not raise the kind of problem that charities have when people learn that their administrative costs are high, that people then start to lose confidence in that charity? In fact, in a way, the whole offset market is a sort of charitable enterprise. It sells feeling good in exchange for giving money. Is there not a case for some regulation there - there is the 30 per cent cap in Germany - or at least compulsory information? Mr Monaghan: I think yes and we have argued in the past that we think carbon offset sales to the personal sector should be VAT exempt across the piece because we do think, by and large, it is a charitable purchase and it would send a signal to stimulate the market much more than any government standard would, to my mind. I would take anything that FERN said with a pinch of salt, to be honest. They are absolutely anti-offset, even good offset. There is good offset and bad offset and I think we are all probably against bad offset and some of us, hopefully, are for good offset; they are against offset per se. I cannot say where they have sourced those figures. They sound dubious to me. I personally think it is too early for regulation and I say that as somebody from a corporate that is normally out there calling for regulation. There was the whole company law review and the OFR and we were the ones arguing for mandatory disclosure of CO2 emissions in the business review, et cetera and I am sat here before you saying for this market at this point in time it is the wrong point for regulation. I really believe that quite strongly. I think it could kill and confuse the market and would stop the experimentation and it would kill all the projects in Africa right away and Africa would disappear off the offset map. Ms Whitley: I would say that is something to keep in mind. I think is transparency is very important; not regulation but encouraging transparency. So if you have a sense of the administrative cost that goes into different projects, the problem is that it is in small scale projects in countries like Africa that have higher administrative costs per tonne of carbon. You are dealing with doing rural surveys as opposed to going to one meter in a factory and taking reading, so your administrative costs per tonne are much higher. As a consumer, I might go into a market and say, "I don't care, I want a tonne of carbon, I want low administrative costs, I do not mind if there is an HFC credit, that is what I am going to buy." There are other consumers who want to do solar PB in a village in Tanzania and they will be happy to have a 50 per cent administrative cost if they know that is what they are getting and that is what required. It is about transparency and understanding and having consumers understand that sometimes those administrative costs are required in order to get these good projects done. Q140 David Howarth: The other area is future value accounting, which you have already mentioned and Mr Lazarowicz has mentioned. Is there not a paradoxical effect of the Defra code that people will suddenly realise that this is what has been going on? I think it is generally accepted that consumers have no idea this is how the thing works. That itself might lead to a crisis of confidence about whether people are really getting offsetting or it is only something that might happen in the future, and we might find that is a situation that they would not like and that would then led to some kind of argument for some regulation around that? Mr Monaghan: I do not think it needs regulation; I think it needs further consideration, and in the same way we have a discount in the finance all the time, which I am sure is where the idea is coming from, we probably do need discounting of carbon projects which are going into the future if only because of the risk. The longer the project is in the future before it reaches fruition there is more risk of something happening - political risk or technology risk, et cetera, and disrupting it. So it is something the industry needs to tackle and I would see it being tackled in a gold standard mark two because if you look at the Fair Trade standard, the Soil Association standard, the Forestry Stewardship Council, where we are now with those standards is not where we began; they have progressively toughened over time. I can see that coming in in a mark two. Q141 David Howarth: How would that work for the time question? There is a whole range of possibilities on the time question. You could say, taking an extreme view, that only already produced savings count. That would be a very strict view. Then you could have instead of that it has got to be saving within N years and N could be any number between one and 100. How would you see that standard developing? Mr Monaghan: Personally I believe there is a role for deforestation in carbon offset and it should be around the 20 per cent mark given that 20 per cent of climate change emissions are due to tropical deforestation. I also think, and I know this is RSPB's position, that the Climate Change Convention, the Kyoto Protocol should start from a baseline for developing countries of what their current forestry emissions are and subsequently committing them to a net that it does not go below because otherwise you have could have a situation where one national park is being deforested whilst another is being reforested. As a system there is no additionality and until we draw forestry in that is not going to happen. It can happen and I have seen it happen in Uganda and the RSPB and others are quietly involved in these projects because if you go to things like the Pagoda (?) National Reserve their logo is all over the project because of all the revenues and the wetlands and what is happening there. I do not think it is fair to expect the gold standard by the NGOs to deal with everything right away like you would not expect micro generation, et cetera. Again it is proportionality. I could not believe it when I saw mandatory regulation actually being actually discussed given the size of this market and given what I know to be the abuses in other markets, whether it is micro generation, the Forestry Stewardship Council, organics - there is a massive dispute over organic salmon and whether it is worth buying and nobody is talking about regulation. Q142 David Howarth: Regulation has two functions. One function is to stop abuses that already exist and you are right the market is not very big and therefore abuses are perhaps not that great in impact. The other function of regulation is to get markets going so that people have enough confidence to enter the market in the first place. Those are the two points I was trying to raise, problems which might come up where regulation might help to keep the market going. Mr Monaghan: I am not aware of an ethical market that is growing without the backing of the NGOs. It will not be the governments that make people believe in the market; it will be the NGOs. Government can say what it likes, that is the truth. Whether it is BSE or salmonella, it will be what the NGOs say. The NGOs are saying it is a gold standard. If this government standard comes out --- I find it quite difficult to understand why we are in the place we are, to be honest, and I am assuming it is just because of the temperature of the debate around climate change right now that everybody is rushing to be busy. It needs sobriety and we need to stop and think where we are taking this market. It needs time to experiment and to grow. Q143 Chairman: You also say that you think that a Defra standard would impact negatively on the existing standards that have been developed by NGOs and indeed by the industry. Does that characterise your position correctly? Ms Whitley: I think the idea of trying to create a Defra standard as the de facto standard in the market, so promoting a mark and promoting to the public that it is the best offset product; that is a danger. The developing of a standard in itself is not a danger in that there are a number of standards already out there, as has been mentioned before. I do agree that it will become one of many standards and the consumer will choose which standard they want to go with, so in that way it will not be damaging, but I think if the Government were to put a lot of marketing and educational campaigning around this one standard that could be damaging. Mr Brander: One thing on the Defra proposal is it is trying to create a standard for people who are very interested in a very tight compliance-like voluntary offset market, so it is things like the tonne-for-tonne issue where people want to have absolute assurance that when they buy a tonne of carbon that is what they are delivered, and the Defra proposals are ignoring a potential other side to the offset market, it would probably be better termed as a reductions market, where there are consumers out there who are aware of climate change, they want to do something positive about it and they want to invest, a bit like a charitable donation, in a project which reduces climate change or reduces emissions somewhere and forcing the whole market down a compliance like route ignores this other more charitably motivated side of the market where there are people who just want to invest in emissions reduction projects, and whether they are forestry projects that have high sustainable development benefits, that perhaps have 90 per cent assurance of delivering the offset that they think they will deliver, there is that side of the market, and I think Defra has missed that with its one standard which is driving everyone down a compliance-type route. Q144 Chairman: Is there much difference between making a charitable donation to an NGO which is carrying out generally good work in terms of sustainability and going into an offset which does not have any real kind of measure? Mr Brander: No, they are very similar. Q145 Chairman: That does not matter? Mr Brander: It depends on your motivation for making that donation. If your motivation is to absolutely make sure that you have offset your emissions, then it does matter that there are those assurances, but if your motivation is that you just want to do something positive about reducing emissions and also your motivation is to do something climate change related which also has sustainable development benefits, then the fact that it is like a charitable donation fits perfectly with your motivation. Chairman: Are there any urgent questions that my colleagues to ask the witnesses? We will draw it to a close in that case. We might just want to follow up one or two things in writing if we may to deal with points that we have not had time to deal with today. Thank you very much for coming in. |