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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 331-iv House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
The Voluntary Carbon Offset Market
Tuesday 13 March 2007 MR MARK KENBER MR ALAN BUCHANAN and MR ANDY KERSHAW Evidence heard in Public Questions 267 - 373
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Tuesday 13 March 2007 Members present Mr Tim Yeo, in the Chair Colin Challen Mr David Chaytor David Howarth Mr Nick Hurd Mark Lazarowicz Dr Desmond Turner Joan Walley ________________ Memorandum submitted by The Climate Group Examination of Witness Witness: Mr Mark Kenber, Policy Director, The Climate Group, gave evidence. Q267 Chairman: Good morning. Welcome to the Committee. Thank you very much for coming in. You and I have already discussed some of these issues but you are now able to discuss it with the Committee as a whole. Could I kick off on a general point: the Voluntary Carbon Standard which you are promoting is one of several emerging standards in the voluntary offset market. What is going to happen? Is there room for more than one standard? Is one going to emerge, as the Co-Operative Group suggest, that will be the cream? Mr Kenber: I would start by saying I am not absolutely convinced there are lots and lots of standards emerging in the voluntary carbon market though it is often suggested. I know of one that already exists, which is the Gold Standard which has been applied to the voluntary carbon market and the work we are doing on the Voluntary Carbon Standard. Then there are some proprietary standards that certain offset providers or certain schemes have, but they have no ambition to go beyond the remit or the scope of their own schemes. Then there are standards which are being developed in certain sub-national regulatory schemes, for example, in California or in the north eastern states of the United States. But I do not see a plethora of Voluntary Carbon Standards. Turning to the question, I think there is probably scope for more than one but what we are trying to do with the Voluntary Carbon Standard is have the base standard, and when I say more than one, I want to explain why. The basic standard, the Voluntary Carbon Standard, tries to say it is what it says on the tin. This is a certificate that represents 1 tonne of CO2 equivalent reduction and that is what you are getting. It is real, it has been measured, it has been independently verified, it is additional and it is permanent. It does not say anything about the sustainable development benefits, the social attributes, the environmental attributes; it is just a guarantee that what you are paying for, if you are buying a tonne of carbon dioxide reduction, that is what you are getting. That is where the other standards may be useful. For example, the Gold Standard focuses specifically on renewable energy and end-use energy efficiency, the idea being that is one area that people would like to channel investment into. There are others who are looking at the forestry attributes. Having spoken to the Gold Standard and also to the people working with the Climate, Community & Biodiversity Alliance, who are developing standards for forestry projects, their aim is very much to have players theirs as Voluntary Carbon Standard Plus. I think you will find that not only in standards across the board but companies themselves, buyers themselves, have their own requirements. One company may say, "We want to use the Voluntary Carbon Standard but only credits from Latin America or only credits from poverty alleviation projects in Africa" or whatever it may be. People will have extra standards that they will put on top but I do not think there are going to be many that try and do the same thing, which is to say it is what it says on the tin. Q268 Chairman: Do you think people are nevertheless rather confused by all this? The voluntary offset market is itself pretty confusing, even to people who try and take an intelligent interest in it. Do you think that people who purchase an offset which meets the Voluntary Carbon Standard are clear that they have something distinctive and they understand what it is? Mr Kenber: On a business to business level, absolutely. I think it is worth distinguishing that what we are trying to do is probably aimed more at the business to business market, the wholesale level. Were we to talk about going back to the question about other standards, I think there is some need for both education and protection of retail customers, you and I as individuals buying, because we do not know much about offsetting, or the average member of the public does not know much about offsetting and probably does not know how it fits into climate mitigation and emissions reductions more generally, and some sense of guarantee that they are getting what they are paying for. We would hope that the Voluntary Carbon Standard would be part of that in saying "This certificate represents a tonne of emission reduction" but, rather like the code of conduct that has been developed here and a standard that has been developed by an organisation in the United States, which does not look at the offset per se but if you go to a retail provider and you want to buy a tonne of emission reduction from wind farm X in India, you are actually getting a tonne from that wind farm and not from another project somewhere else because there are not enough left, a guarantee that they are being retired when they have been used, consumer protection rather than looking at the offset quality per se. There is certainly a need for education, there is probably a need for some sort of protection at the retail end, but I think the offset quality itself is being dealt with quite adequately in the regulatory market by the CDM rules and, with luck, in the voluntary market by the Voluntary Carbon Standard. Q269 Chairman: If offsetting became mandatory for flying, for example, the need for a voluntary code would be eliminated, would it, or would it still be desirable? Mr Kenber: If offsetting was mandatory for everything across the board, which I think is very unlikely, then yes. I often say, with the Voluntary Carbon Standard, if regulation and international negotiation is successful and we end up having a much more comprehensive legislative framework, then the need for the voluntary common market will be diminished. I would be surprised if it disappears altogether. It is unlikely we are going to regulate every sector and every facet of the economy and there will still be people who want to go beyond regulation, but at the moment, in a way, it fills a gap in regulation. Q270 Colin Challen: You did not comment directly in your memorandum on the Government's proposals. What do you think of them? Mr Kenber: I think it starts from a useful premise that there is a lot of confusion, as we were discussing before, in the market about what people are buying and how it fits into general emissions reduction and climate strategies. There are a number of questions about it that I would have. I am not sure why the Government has decided that it needs to intervene in this. It is a voluntary code of conduct. If it is a voluntary code of conduct in an environmental social space, there are plenty of very functional examples of where industry and the non-government movement have worked together to develop standards, for example, the Forest Stewardship Council, the Marine Stewardship Council, organic certification, Fair Trade and so on and so forth, without the need of direct government intervention. If government feels that that sort of approach is not sufficient, then regulate. You can only have it one way or the other. I think there are enough non-governmental actors both from the private sector and the non-profit sector who know about this, who have worked on this for a long time, to be able to develop a code of conduct if such a thing is necessary. Secondly, I am not convinced about the way that the consultation process has been carried out. I think there is a lot of confusion. To give you an example, some of the work The Climate Group does is with banks, helping them develop their climate strategies going forward. One bank we were working with three weeks ago said, "We are going to buy our offsets to go carbon neutral from this company because it has government approval." We said, "Government approval of what?" "It was mentioned in the press release on the consultation," and of course, the Government would say "We have not approved anybody because it is still out for consultation." There is clearly confusion being sown in people's minds about who has been approved and who has not been approved. I think it would have made sense to have some pre-consultation with all those who are working in this space already, because it seems some of the consultation reflects some understanding of some of the issues but not all of them. I think it has been handled in a fairly heavy-handed way. I think it was acknowledged that the consultation this Committee was carrying out was going on in parallel and that seems to have been fairly poorly thought through as well. In terms of the standard itself, I think it is a fairly heavy-handed way of dealing with the problem of offset quality. Some of the up-front reasons for having a code that covers offset quality itself was because there are a lot of cheap tonnes that are available which are undermining the environmental quality but restricting it to the CDM and Joint Implementation, for example, does not solve that problem. There are plenty of industrial gas problems in the CDM and Joint Implementation. We could argue whether that is a good or a bad thing but if one of the objectives is to not have the public buying credits from industrial gas projects, doing it with the CDM does not solve that problem; all it does is make it more expensive for everybody, because the public who want to voluntarily offset are competing with businesses who are capped under the Emissions Trading Scheme or countries that have Kyoto caps. It seems a blunt instrument for one, assuring the public of the quality and two, of channelling investments into new projects while just artificially raising the price. As mentioned in our submission, our main concern, apart from the process, which we felt, as I say, was poorly handled, was the artificial restriction of credits to only credits from the CDM, EU trading system and Joint Implementation. Q271 Colin Challen: In that respect, do you think they are just being a bit heavy-handed and perhaps lacking in imagination because they do not understand the voluntary market so they say "Well, we have got the CDM style and that approach to doing things so we will just lob you all in there and have done with it"? Mr Kenber: I think that is correct. If government is going to offset its own emissions, then I think it is perfectly reasonable for it to do it using the Clean Development Mechanism as it is a signatory of the Kyoto Protocol as a national government and there is no reason why it should not do that. In the voluntary market, as Mr Yeo was suggesting at the beginning, there are lots of standards and therefore government has said, "We are not going to look at all of the standards. It is too much time, too much like hard work. We do not know enough about it. They are emerging all the time" - that is what Defra has said which, as I say, I disagree with - "and therefore it is easier to go for something we know." What is true is that the CDM at the moment in particular does have an approval system, it has independent verification and it has a registry associated with it, so it has some advantages over other global systems, hence the reason why we are developing the Voluntary Carbon Standard, which will have independent verification by accredited verifiers, both CDM verifiers and others accredited under ISO standards. It will have a single registry where you will be able to track credits to make sure there is not double counting and so on and so forth. It was interesting that, given that this has been in the public domain, or early versions of the Voluntary Carbon Standard have been in the public domain for over a year now and that the Carbon Trust in its own report on offsetting carbon dioxide, and Defra of course, said, "Here are five principles for what an offsetting standard should look like and here are two or three standards that meet them, including the Voluntary Carbon Standard," they seem to have ignored that bit of advice from their own subsidiary, so to speak. What they have missed by ruling out the voluntary market is a number of benefits that other projects outside the CDM can have. One is scope for innovation, which I think is very important. One of the reasons there has been a lot of support for the Voluntary Carbon Standard is that people recognize that changing the rules of the CDM, perhaps rightly, is a slow process. There are lots of different countries that have to be involved in the decision-making process. It is not easy but there are lots of projects and new technologies are being developed, new approaches, that need trying out, may subsequently become part of the CDM, perhaps post 2012, and the voluntary market, provided it is within a robust framework, is a good place to innovate and try those out, both in terms of project types and methodologies but also the procedures, where is it possible to maintain environmental integrity while cutting costs or streamlining the timing involved? That is one reason to put some faith in the voluntary market, provided it is well managed, and that is what we hope to achieve. There are project types, as I have just mentioned, that do not go into the CDM. I am sure you have heard from other people and other submissions that, for example, project types that would substitute fuel wood use or innovative community reforestation projects that would not make it through the CDM just because in political negotiations at the outset they were not included. Then there is a question of timing and cost. Putting a project through the CDM is time-consuming, upwards of 200 days to get initial approval. It is costly if you have to use one of the large verification companies and that rules out a lot of smaller projects that are worthy of carbon financing but would not get it through the CDM just because they cannot afford the time or the delay. There are project developers who are not interested - well, of course they are interested in higher prices for their carbon but more of a concern is having liquidity, having cash flow, generating projects, having them certified to a decent standard and then reinvesting in new projects, and that is difficult under the CDM given the time process. This is not meant to be a criticism per se of the CDM, because it is evident that it is working quite well and there are a billion tonnes worth of projects already in the CDM pipeline and that is anticipated to grow quickly but it is true that for a lot of projects that do not fit into it, it does not work, it is time-consuming and there is a whole lot of demand out there. I was at a conference in the United States last week which estimated that the voluntary carbon market just in the United States could reach somewhere between 150-300 million tonnes a year within three years, and that chimes with a report you may have seen by ICF Consulting that suggests it might get to somewhere between 400 million and 1 billion tonnes globally in three to four years. Who knows whether those estimates are right but that is a sizeable amount of money wanting to be invested in emissions reductions projects that will be choked to a certain extent if they were required to go through the CDM. Q272 Colin Challen: If you want to buy your offsets and you have a choice between the compliance model which has a government stamp of approval on it and something which is voluntarily regulated, as it were, are people going to say, "We'll have to go with the government approved scheme"? That is implicit, and what impact will that have on the voluntary market? Mr Kenber: One, it depends on the elasticity of the demand for offsets but immediately you are pushing the price of an offset. Two tonnes of emissions reduction coming from the same project can be sold at very different prices. The price through the CDM market will be much higher largely because of the competition with companies that have to have compliance with the regulations under the Emissions Trading Scheme in Europe or other countries. That does not say anything about the quality of the offset; it is just how the demand is being driven in that market. I think there will be some who balk at paying up to four or five times as much for the same tonne of carbon and there will be project developers who will wait to see what happens in the post 2012 framework, in terms of whether there is going to be some certainty after they have been through the CDM system. It will not choke the market off altogether but I think it will reduce the size of the market and it will restrict to a certain extent the interplay between the US and Europe and other markets. There has been some suggestion that the reason for restricting it to the CDM is not to reward countries like the US for not having joined up to Kyoto, and therefore people can buy credits cheaper that are generated in the US and that would be unfair on those of us who have made some sort of sacrifice under Kyoto. I think there is a very small amount of merit in that argument. The situation now, in 2007, is that we are not going to change decisions made by the US Government six or seven years ago. Getting them involved in carbon markets - and there is a lot of appetite for it at the moment - is a way of demonstrating that the arguments about the costs of compliance and the costs of reducing emissions are largely spurious, at least in the short term, and therefore having a thriving voluntary carbon market is a way of moving policy forward rather than impeding it. Q273 Dr Turner: There are a lot of schemes out there now and clearly there comes an issue of accreditation, if not regulation, when you have so many, otherwise we will not know whether they are all actually giving us what they say on the tin, to quote you. You say in your submission that "an independent voluntary standard/accreditation scheme should be managed in a transparent manner by an independent organisation responsible for accreditation of verifiers and registries". Who do you suggest should do this? Mr Kenber: Under the process that we are developing in the Voluntary Carbon Standard, once the standard is finally launched, we hope in June this year, a new NGO foundation will be created with an independent board drawn from stakeholders from different sectors, which will have no material interest in the carbon market itself. Accreditation of verifiers will be carried out carried out under the new ISO 14065 standard which regulates the accreditation of verifiers of carbon reductions or emissions generally. Accreditation will have to be carried out by a member of the International Accreditation Forum or the UN, so that is a well-known and respected process for accreditation, and the oversight of the standard and its development and implementation will be carried out by this independent body. That is the model that we have chosen. I think there are different approaches you could take. Q274 Dr Turner: You say this would be an independent, new NGO set up specifically for the purpose, obviously altruistic but, however altruistic it is, it is still going to need some funding to operate. How is it going to be funded? Mr Kenber: We have funding proposals in two foundations. We have received foundation funding for the work we carried out to develop the Voluntary Carbon Standard so far and have proposals which we are very confident will provide the initial seed funding. Then there will be a levy per tonne of carbon dioxide reduction registered within the approved Voluntary Carbon Standard registry, which will provide ongoing running costs. Q275 Dr Turner: You can be quite sure, I hope, that the actual cost of accreditation is not going to add an undue amount to the overhead costs of running offsets? Mr Kenber: For accrediting the verifiers or certifiers, that is covered by the certifiers themselves. They are paying to be part of a scheme which, we assume, will generate some income for them, otherwise they would not get involved in the first place. The costs the Voluntary Carbon Standard organisation will have to bear are auditing the implementation of the standard, a sample of projects in each year, an annual review and providing an independent website where, separate from the registry, individuals and companies wanting to buy and sell country carbon units will be able to see what projects have been verified, what emission reductions, and the serial numbers associated with them. That will be another job. It is intended to be a fairly streamlined process. The experience of the CDM executive board is suggesting that, given the expertise there is now, which perhaps there was not when the CDM started, a lot of that work can be outsourced. Q276 Dr Turner: That is fine; if this works smoothly, we have a mechanism for regulating the actual doers of carbon offsets. What about the people who sell them, the independent operators who sell carbon offset schemes? Do you think they are going to need accreditation or regulation or do you think the existing legislation is sufficient? Is the Trade Descriptions Act, for instance, sufficient to monitor them or not? Mr Kenber: This is something I mentioned before. I think the Advertising Standards Authority has a remit to look at whether offers are being falsely advertised. Trading standards officers perhaps may not have the training to look at this quite rarefied market but trade protection overall has an important role to play. The protection of the customer is important in this space because it is such a rapidly growing market, because it is such a thing of the moment. That is where some of the ideas involved in the Defra code of conduct about looking at who is selling the offsets, the retailers themselves, and, as I mentioned before, the Center for Resource Solutions in the US, who have done a similar thing with green electricity retail sales in the US, are also developing a standard for the US but looking not at the offsets themselves. In this one in the US they say any emissions reductions that come from the Voluntary Carbon Standard, the Gold Standard or the CDM are fine; we will accept them as is, but some guarantees for the consumer that they are getting what they are paying for, given that many of the consumers will not even know what they are paying for in the first place, often will not understand the mechanics behind it, have been told that offsetting is a good thing to do as well as other strategies to reduce emissions but do not want to go into a detailed understanding, so some sort of consumer protection or consumer guidance, and it may not need to be a code of conduct per se, but guidance. There have been several publications in the last few months, a consumer guide to offsets and various others published around the world, which do have a checklist of "questions you should ask your provider", which you would do with any sort of financial services that you are being provided. Q277 Dr Turner: We have already identified one or two ways in which there can be pressure on overheads for carbon offsets. What is your view on the maximum proportion of money being paid for carbon offsets that should go towards overheads and how do you think it can be restricted? Mr Kenber: I am not sure I understand the premise of the question. Should they be restricted at all? Q278 Dr Turner: You could reach a point where 95 per cent of the money that people pay goes into overheads and only 5 per cent actually goes towards abating carbon if you are not careful. Mr Kenber: A company would only get away with that if they are selling poor-quality offsets that come at a very low price. There is that possibility. I think, looking at what people, what companies at least - there is not so much data on what individuals want to buy but companies are certainly not interested in just low quality - not low quality but basic quality carbon alone. They want to have a guarantee of the basic quality and then make their own decisions. For example, yesterday Barclays Bank announced that it had gone carbon neutral. It certainly did not buy the cheapest tonnes in the market. It bought a mixture of credits from the CDM, CERs and voluntary emissions reductions and they were certainly above average market price because they wanted to both demonstrate for CSR reasons and also to gain experience in certain types of investments that there was a future in quality offsets. If you slap a 95 per cent overhead on those sort of projects, you will price yourself out of the market quite quickly. The reason I asked the question back is that, apart from in the regulated electricity markets, which we do not have any more, I do not know systems whereby government says this is the maximum profit you are allowed to make. Q279 Mr Chaytor: You are now on version 2 of the VCS. What are the main differences between that and version 1? Mr Kenber: Let me be clear on this. Version 1 was a prototype standard which was both for consultation and for people to use and then feed back to us the pros and cons of how it had worked. Version 2 was purely a draft for consultation. It does not supersede version 1. Version 1 is still the prototype operating version but it drew some of the comments that we received from the first round of consultation last year. We are now working on version 3, which I hope will also be called version final, because we have been working on it for 18 months, and what we will see there is there will be some change in style, in that version 3, once the polity decisions of additionality, methodologies and so on and so forth have been made, which takes place on 28 March, instead are being taken by a group of a couple of lawyers and two expert standard setters, one from the Canadian Standards Association, one from Lloyd's Register, who will be formatting in a style that is consistent with the ISO standards the ISO Plus. ISO standards are designed to be policy neutral; you can apply them to any system, so we are developing the system requirements on the policy issues so they will be adapted to the ISO standard. So there will be a format difference. There will be some much clearer rules about how you deal with permanence with land use change in forestry. Whether they will be completed by June is open to question. There is quite a lot of discussion going on. Because it is a tricky issue both technically and politically, we need to make sure we get it right. The additionality tests have been refined. Q280 Mr Chaytor: You have had some criticism that the additionality rules are too lax in version 2. Mr Kenber: We had a couple of submissions in our consultation which suggested that. However, in a way, there was not anything to criticise there because it said, "Continue looking at version 1. We are still working on additionality." That is because, as you know, it is a fraught and hotly contested issue but what we have got to - and I chair the additionality working group of the standard - is that there will be an additionality test in addition to baseline settings. The initial debate was some of the members of the committee and some of the responses, although a small minority, said if you have a decent baseline you do not need an additionality test. That has been cast out. There will be an additionality test. There will be one that looks rather like the CDM additionality tool. There will be one that is a performance standard, so we will say all the three tests must be above and beyond regulatory requirements. Then you have a CDM-type tool. The second is a performance standard, so it will be in the top decile of producing the service, top decile in terms of emissions efficiency, and a third one, which there will be a predetermined list of technologies in certain regions that you can say with reasonable certainty are additional. The reason for doing that is that there has been quite a lot of research, both academic and less academic, looking at when you actually decide on additionality, there is a chance you will have false positives and false negatives. So you will decide something is additional when it is not but also say that something is not additional when it is. If you have this determined list of technologies which are likely to be top-end renewable energy technologies in certain regions they are likely to be additional, and it will be time-limited so we will have a review process every three years or so. So there will be three tools which are designed to be as equivalent and robust as possible. Q281 Mr Chaytor: Three definitions of additionality and three sets of criteria, but those who are conforming to the standard can pick any one of the three? Mr Kenber: Yes. The review we are going through at the moment of them is aimed to say, "Let's start with the CDM-type additionality tool. How can we design these other two so that, within reasonable bounds of certainty, they will be equally robust and have equal success and failure rates in terms of testing additionality?" That is one of the major changes. Q282 Mr Chaytor: In terms of other criticisms of version 2, some people have said it was just too close to the CDM standard altogether. Mr Kenber: That is another of the reasons why we have developed these separate additionality tests, because we have seen that they are the types of tools that have been used in other schemes and therefore it is an opportunity to try them out. There is a sub-group chaired by the World Resources Institute in Washington looking at how you can harmonise the specific project-based approach that the CDM has with a sectoral or policy type approach, which has been discussed quite a lot in the context of the CDM post 2012 and they are working on whether you can certify whole programmes so that the offsets can qualify under the Voluntary Carbon Standard. We have had to commission some research into how it might be done, and we hope it will be finished by June. If not, it will be issued two or three months later. Those are the two major issues. The other is more to do with the streamlining of the process. Our aim is, if you have a monitoring process in the CDM, is there a way that we can achieve 90 per cent or above of the quality at half the price or half the time. Where that is not possible, it will not be included. We are trying as much as possible to look at those sorts of questions because in the end, they will obviously help the CDM as well as the voluntary carbon market. Q283 David Howarth: One of the more striking aspects of the VCS is that you only allow reductions that have actually taken place. Your first guiding principle is that all emissions reductions that qualify as VCUs and the project activities that generate them must be proven to have genuinely taken place. For this reason, the VCS only allows certification of emission reductions that have already taken place. That is in contrast to what often happens in this market, that people are using future value accounting, that they are saying they are selling you a reduction that will happen in the future and they deal with the question of whether that would actually happen by saying they have a portfolio approach or they can insure or they have various discounts. What is your view of future value accounting? Mr Kenber: The reason we have gone for only emission reductions that have taken place is because the principles of the Voluntary Carbon Standard which came through the first round of consultation is that you need something that is real and measurable, and it is only real if it has actually happened. Secondly, there is quite a lot of controversy about companies or people who are offsetting their current emissions by something that is possibly or probably going to happen in the future, or maybe with some reasonable certainty is going to happen in the future, but the issue about dealing with climate change is reducing emissions now. We need to reduce emissions in the future as well but, most importantly, we need to reduce emissions now, so having a system which allows you to effectively increase or maintain emissions now with a promise of reductions in the future seems to us inconsistent with what science and policy is telling us we need to do now. The reason why there is an issue around forward crediting or future sales is because there are projects, particularly in the community forestry sector and some of the more expensive renewables, that are clearly additional and so additional that they need the carbon finance to even get going. If you look at the CDM, there are a lot of forward sales, at least as far as 2012; there is a policy hiatus there. That does not mean that you can use 2009 or 2010 credits to meet current obligations. If you have your project validated, and therefore you have an independent verifier who says "Within bounds of reasonable estimation, we expect this project will generate 10,000 tonnes a year," then I, as a project developer or project owner, can sell that promise forward. The CDM will not give me credits, the actual certified emission reductions, until those emission reductions have taken place, and the same thing can happen in the voluntary market. If you have your project validated up front by an independent verifier with expertise who, you would assume, having been accredited by the International Accreditation Forum or the CDM board, has credibility in this area and says "We would expect that if the project is carried out as specified in the design document, it will generate X thousand tonnes a year", you can sell for future delivery, as you can in many other commodities. So I do not think there is a need to specify forward crediting, which I think would undermine some of the issues of consistency, temporal consistency, but that does not prevent people from having future financing. Q284 Joan Walley: You touched on this before in response to Dr Turner's question but when it comes to voluntary offset projects, should there be a minimum standard or should it be requiring more than just carbon, the sustainable issues? Should there be a higher standard than what is currently just about carbon? Mr Kenber: Given that there are a wide range of projects and a wide range of buyers who have different requirements, I think, provided there is a guarantee that the carbon really is a tonne of carbon, which, as I said before, is what the Voluntary Carbon Standard aims to do, then you can leave what kind of carbon and what kind of projects to the buyers. There is a difference between having projects that have additional environmental and social attributes and ensuring that they do no harm. Doing no harm should be one part of the rules of any overseas investment, whether it be in carbon offset projects or any other kind of projects, whether it is carbon finance or not. In terms of sustainable development benefits, my concern is - I also developed the Gold Standard initially and the aim there was to find a channel not to supplant the rest of the market but to provide a channel for certified projects for those who wanted to invest in technologies which were part of the long-term solution and had a sustainable development basis. Q285 Joan Walley: Should not those issues be part of the minimum standard? Mr Kenber: The reason I think not is because we are dealing with climate change, which I would say is the most important environmental issue we have at the moment and the focus there should be on reducing emissions. To give an example, when the CDM was first created in 1997, in 1998 there were a realm of papers saying the CDM was going to solve the world's sustainable development problems, the world's property problems, the world's climate change problem and everything else as well. Clearly, that was well-meaning fantasy at the time and I am just concerned that, if you bundle a whole load of other things on to carbon, you are detracting from the potential of reducing as much carbon as possible, in a genuine way, of course, as quickly as possible, which needs to be the objective. I think there should be some minimum environmental standards. You need to require environmental impact assessments for projects that fall into those categories where there is likely to be an environmental risk, and minimum social standards, which is what I would expect to happen in any investment or project finance-type investment around the world. If there are not standards that guarantee that, that is something that needs to be addressed but dumping it all on the carbon market rather than across the board seems to me not the appropriate way to do it. Q286 Joan Walley: Just going back to the consultation and the contribution that you made in respect of the VCS version 2, that to avoid double counting, the project owner should provide a letter to the certification entity. Do you think that is really going to happen, given all the cowboys that there could be around? Are you really confident that people will be genuinely saying what is actually being provided? Do you think we need something greater than that verification? Mr Kenber: I hope not. I think the verifiers' reputation and fact that they have to have insurance and financial backing because they may be sued if they are wrong suggests that they will do their utmost to get it right. The transparency that is it embodied in the VCS, as it is in the CDM, means that people can scrutinise if they want to, and, as you know, there are plenty of environmental and other groups out there who are scrutinising projects. We have canvassed a lot of opinion on this, especially in the verification community, and they say this should work. I am open to the fact that if it does not work, we will have to change it. Q287 Joan Walley: How would anyone know whether or not something was working, that it had been properly... If there has not been proper validation, how would they know that what was said was actually the case? Mr Kenber: There is proper verification by accredited verifiers who have the capacity and experience to do that kind of verification. To be able to submit the voluntary carbon units in a registry you have to have proof of ownership, title of ownership, and provide an affirmation that you have not sold those tonnes anywhere else. A verifier will visit a project, and examine the books. Obviously, a verifier cannot avoid fraud and there will be some organisations, companies, individuals who will try and defraud the public, as there are in any other sector. Having canvassed opinion, this seems to be a reasonably effective way or, we hope, a very effective way of dealing with this issue. Q288 Joan Walley: So you do not think that the VCS would be more robust if it was properly validated? Mr Kenber: I am not sure what you mean by properly validated. Q289 Joan Walley: Other than through a voluntary route. Mr Kenber: A CDM project will go through a similar procedure in terms of verification, has independent verifiers who are accredited, and so on and so forth, many of whom will be the same organisations in the voluntary market. It is perfectly possible for a CDM project to sell its CERs into the compliance market and sell the same reductions voluntarily somewhere else and there is less check of that in the CDM than there will be in the Voluntary Carbon Standard so I do not think the CDM will help prevent that any more than anything else. We have built this in because there is a requirement for the letter and it has to be verified by the independent verifier to try and overcome this but, as I say, as it has never been done before, there are some precedents in the Forest Stewardship Council, but it is much easier because you are looking at logs of wood, though again, people can defraud if they want to. This is the first time this has been done in the carbon market and we will review it. We have a built-in review after a year and we will review that in the light of experience. Q290 Mr Hurd: Do you expect forestry projects to be part of version 2 and what might that imply in terms of rules relating to permanence? Mr Kenber: I do expect it to be involved. The consultation we had - though, as I think we all know, with consultations, people find their issue and then mass-produce responses but I am pretty sure there will be forestry included, I would say 95 per cent sure. Whether it will be finalised in time for the June launch I do not know. We have been working with the Climate, Community & Biodiversity Alliance and some of the forest verification bodies, including some of the negotiators in the CDM, on how to deal with permanence. The permanence rules in the CDM are unwieldy and poorly understood. There are two options on the table at the moment. One is a mandatory insurance policy which automatically kicks in. If you lose some or all of the forest, that insurance policy kicks in immediately and provides equivalent offset from a technology project. The other is a risk-based discounting system which, as I am not a forester, I must confess I do not understand completely, and the working group on forestry is looking at that at the moment. They are also looking at rules for measurement, monitoring and leakage, though the permanence one is the one that is obviously exercising most of their time. What the Steering Committee has decided is that until we have full agreement on that, and there will be a sub-consultation amongst the forestry and carbon community to have a look at these rules because they will be quite innovative, we will not include it until there is some comfort with those permanence rules. Q291 Mr Hurd: Do you think it is desirable that over time we seek to reconcile whatever we conclude is the social cost of carbon - and I know there are a lot of variables around that at the moment; there is a Defra number £70 a tonne. Stern thinks it is higher - with the cost of offsetting, which is much much lower? Should we seek to try and reconcile these gaps or just let the market work? Mr Kenber: I am not suggesting you do this, but if you use the social cost of carbon as a tax which the government or some body collected and then invested in carbon, if you could get for that £70 a tonne ten tonnes of emission reduction because there are opportunities out there, why on earth would you not do that? The price of offsets and emissions reductions generally will go up over time because the low-hanging fruit, as they are called, will disappear, although not as quickly as perhaps people expect. Experience from companies in particular is that, once they start finding emissions reductions, they find more and more efficiencies that they had not even thought about, often without the need for carbon finance. The price of carbon makes them think about it and they realise there are a whole lot of things they should have been doing years ago. It is the same in the project space as well. You may want to use the social cost of carbon as a way of doing parallel or perhaps mainstream financial assessment. You may want to use that as a target price over a period of time for either a carbon tax or a price in a carbon trading system, but I would not think you would want to say all offsets must cost £70. It goes back to the question of who is going to take the margin. If you are creating a margin for margin's sake, I am not sure there is any reason to do that. Chairman: Thank you very much. It has been a very helpful session. I am grateful to you for coming in. Witnesses: Mr Alan Buchanan, Company Secretary, and Mr Andy Kershaw, Climate Change Manager, British Airways, gave evidence. Q292 Chairman: Good morning and thank you very much for coming in. I appreciate this is quite a busy period for your business, with a number of issues that you are addressing. You are very central to the subject of this inquiry that we are now doing into voluntary offsets. Aviation, clearly not just BA but aviation generally, clearly has to be a priority for the offset market as well as in the medium term abatement. Do you think that airlines generally are giving enough priority to offsetting? Mr Buchanan: Thank you for inviting us to talk to you. Clearly, I can only principally speak for British Airways, where we have given priority to voluntary carbon offsetting along with a number of other measures that we believe are vital to climate change. Voluntary offsetting has an important role to play but is alongside measures to reduce emissions overall such as technological improvements in engines and airframes and operational improvements which will result in fuel burn efficiencies. It is part of a suite of things that need to be done. Offsets are very helpful in raising awareness about the impact of aviation. Having said that, the current levels of emission produced by UK aviation are not as dramatic as the media would sometimes have us believe. Q293 Chairman: Nevertheless, they are significant and they are rising faster than most of the other sources. Although it is true, clearly, that airlines are taking a number of steps, things like technological improvements will only have an effect over a considerable period of time whereas offsets are something which are available right now given that people are going to go on flying for the next ten years and a lot of the progress that you refer to will take at least as long as that to become meaningful in its impact. Given that, are you satisfied with the progress that you are making as BA in getting your customers to offset? Mr Buchanan: British Airways was the first major airline to introduce an offset scheme and we are proud of that. We still think we have a very good record and we have a very good story to tell in relation to climate change overall. The scheme that we have was set up in September 2005. At the time, I believe you spoke to my predecessor, Andrew Sentence, about this last year. Work was ongoing at the end of last year to improve the scheme, to improve its visibility and its attractiveness to passengers. For reasons that will be well known to you, that work was put on hold because it was felt that, in line with an increase in mandatory taxation, customers would not be willing to increase their voluntary offsets at that time, but I think the time has come for us to look again at the work we did back in December and make sure it is still relevant and begin to think about introducing it again. Q294 Chairman: What has been the take-up so far? Mr Buchanan: The take-up has been disappointing, and it has been largely flat throughout the period. So after getting to an initial level, it has been fairly stable. Q295 Chairman: Given that the scheme has been operating for a year and a half now, what is the total number of offsets that have been taken up so far? Mr Buchanan: It is about 1,600 tonnes a year. Q296 Chairman: That it is an infinitesimal amount in relation to BA's activity, is it not? Mr Buchanan: It is small, yes. Q297 Chairman: Why do you think that is? Mr Buchanan: I am not sure that a lot of passengers are as keen to offset emissions as we all hoped that they might be. We have evidence from the take-up that it is price-sensitive. We find that there is more offsetting in the short haul market than there is in the long haul market, for example. Q298 Chairman: Did you discuss with your passengers in advance the way in which this scheme might be made available to them? Mr Buchanan: I clearly was not responsible for it in September 2005 but as part of our wider corporate responsibility programme, we did some stakeholder research in October 2006 and included in that was a question specific to the offsetting offering that we were giving. We were looking at the time particularly at the question of whether or not we should make it an opt-out or an opt-in scheme. We have taken views from passengers. Q299 Chairman: Are you aware of the experience of some of your customers who would like to offset that it is extremely difficult to do so, either electronically or in conversation with your staff? Mr Buchanan: I am sorry if that is the case. I know that it is not foremost. It does not leap off the website at you but it can easily be found by searching in the website for "carbon" or "emissions" or any of those keywords. Q300 Chairman: Given that any product or service that you do wish to offer or promote does leap off the website, the only conclusion I can draw from that is that you have no interest in promoting the scheme. Mr Buchanan: I would not agree with that but we could do better. I am quite certain of that. When we go back to it we will, I am sure, in prove it. One of the things we are doing in the very short term is moving the main link, the main access to it, into a part of the website I assume you are familiar with called "Manage My Booking", which is where you would go to check in and the reason for doing that is because it extends the access to about 75 per cent of our customers. As you know, British Airways sells through a variety of channels, not just on the website, unlike some of the smaller airlines, and some of the ways of purchasing our tickets, such as through travel agents, do not make it easy for people to access the offset scheme. Moving the link to "Manage My Booking" which will come live at the beginning of May, will increase the access and should help greatly. Q301 Chairman: Just to wrap this up, it is in fact absurd really that the level of take-up is, I believe, less than a single return flight to Sydney. For possibly Britain's best-known airline, that is little short of scandalous, is it not? Mr Buchanan: It is about four return flights to New York on a 777. Q302 Chairman: How many do you do per week to New York? Mr Buchanan: Rather more than that. Q303 Chairman: A hundred? Mr Buchanan: It is half that, is it not? About 50. Chairman: After 18 months we would have to say that was a scandalous achievement. Q304 Dr Turner: It has to be said that you may have been the first airline to do this, but you have been pretty faint-hearted about promoting it. Could this be because there is an inherent conflict here that, if an airline actually promotes carbon offsetting seriously, it is drawing attention to the fact that flying, by its very nature, is environmentally extremely damaging, so it may be counterproductive in terms of selling airline tickets and could in fact encourage fewer people to fly because they may get a bad conscience about it? Does this bother you? Do you see this conflict? Mr Buchanan: I do not think we are running away from the fact that the airline industry causes emissions. We have fought very hard, for example, for the inclusion of aviation in the European Union Emissions Trading Scheme. I do not think as a corporation it is a fair accusation that we are trying to pretend that there are not emissions from our core business. Q305 Dr Turner: You are not worried then about people waking up to the fact that climate change is a damaging consequence of aviation and that this could in the future mean that fewer people fly less often if they take it seriously? Mr Buchanan: Climate change is a global phenomenon. It is not solely as a result of the aviation industry. Q306 Dr Turner: It is caused by a whole accumulation of individuals and airlines are playing a very serious part in it. Mr Buchanan: We recognize that aviation has a part to play in that. Our customers, I am sure, do as well. Q307 Mr Hurd: You know your customers very well from your research. What is your assessment of the level of understanding in your customer base about the impact of aviation on climate change? Mr Buchanan: The feedback that we had was that customers were not sufficiently interested to come and seek information out but if we made it available to them, they would look at it and consider it. Q308 Mr Hurd: My question was more general, about their awareness of the impact of flying on the climate. I am sure you have done plenty of research to explore attitudes towards that. I am not talking necessary about their attitude to offsetting; I am talking about their awareness of the link between their activity and the impact on the climate. Mr Buchanan: I think you will find it in the UK there are few people who are not aware of the impact of aviation and a number of other activities that they engage in on climate change. As you move away from Europe, that awareness becomes less acute. We are as an industry in the forefront of offsetting and work on climate change, in this country in particular, as leading the European industry, we are well ahead of the industry, for example, in America. So we are a leader in this area. I recognize the criticisms that have been made and acknowledge that we could do better and we can do more. Q309 Mr Hurd: I cannot let you get away with that. I am sorry. The reason why there is such low take-up of your scheme is because no-one knows about it. I am a customer of British Airways and I have tried five times to engage a member of staff at check-in, which is the natural point to ask about this, and was met with a completely blank expression on every occasion. They do not know anything about it. The people who are interfacing with your customers know nothing about your scheme at all. It is invisible. Mr Buchanan: It is useful to hear that. I did not realise that front-line staff were not briefed on it. I can certainly take that away and get something done about it. Q310 Joan Walley: Can I just go back to what you just said. What you just said was that people did not necessarily seek it out but if you made them aware of it they might be interested. That does not chime with it being so difficult to actually find out how to go about offsetting when accessing your website. Mr Buchanan: I imagine most of the website users are familiar with search engines. The search engine on the website is very good. It is easy. There are a number of key words that will take you there. Q311 Joan Walley: That assumes that people are going to seek it out. You just said it was only when you brought it to people's attention that they were more interested in pursuing it. It does not quite add up. Mr Buchanan: There is more that we can do and we will do as and when we feel the time is right. Q312 Chairman: I just wonder in relation to Mr Hurd's question whether you could let us know, perhaps if necessary in writing, what training your front-line staff, who interface with passengers, such as at check-in, have to make them aware that some passengers might like to buy an offset. Mr Buchanan: I will find out and write to you, as you suggest. Q313 Dr Turner: Mr Buchanan, it is clear that BA so far have not exactly been very adventurous in marketing carbon offsetting. It is something that customers can get if they can find it. It is a carbon offset company that they may be pointed to. That is not really very adventurous. Other airlines may be out-flanking you, may they not? Silverjet is marketing itself as a carbon neutral airline. Virgin Atlantic is announcing an offsetting initiative. Richard Branson is espousing all sorts of strategies for reducing emissions. What is BA actually doing to market itself as a green airline? Mr Buchanan: As I said to you when we first started, offsetting is one part of a suite of things that we are doing. We have a multifaceted approach. Q314 Dr Turner: What is it? We do not know. Mr Buchanan: The other areas that we are concentrating on particularly are the work we have been doing in trying to bring aviation into the EU trading scheme. It is work that I think you will find other airlines have not been doing. The work we have been doing with, for example, NATS in reducing hold times or in reducing fuel burn in coming into the holding pattern, those kinds of things, generally speaking, are things that we do that other airlines are not doing. We were first in the market on voluntary offsetting but we have certainly led the whole industry in relation to emissions trading and the importance of that as the way forward for controlling emissions by the aviation industry in relation to climate change. Q315 Dr Turner: But equally, it has been suggested that your fleet is older than some and therefore likely to be much less fuel-efficient than some. There are many aspects to this. Is the only work that you are doing advocating the inclusion in the carbon trading scheme and collaboration with NATS? That obviously applies across the whole aviation sector and you are not the only airline which is happy to come into the Emissions Trading Scheme. Mr Buchanan: As you may know, we have just announced the purchase of a small number of Boeing 777 aircraft. One of the things we would have liked to have done at this stage is to have found an aircraft with a significantly improved environmental performance but we recognized that to do that, to get that benefit, the delivery positions would have to be further away. That kind of major high-cost technological improvement is not something that we can generate ourselves. We are reliant on the manufacturers - Boeing Rolls-Royce, GE and Airbus but as and when it is available, we will. Our short haul fleet is not old, and neither really is our long haul fleet and I do not think you will find the performance of the long haul fleet is significantly worse than that of other carriers. You may be interested in the answer to a Parliamentary Question recently which showed that the CO2 emissions of long-haul aircraft were not a great deal higher than other forms of public transport. Q316 Dr Turner: Coming back to carbon offsetting, it clearly is not working very well with individual private customers. Do you think there is a better prospect that in ten years' time a great deal more of the corporate market will be offsetting the carbon? Mr Buchanan: A number of our corporate customers are already offsetting. Q317 Dr Turner: Is that where you are placing the most emphasis? Mr Buchanan: We are in dialogue with a number of our corporate customers about offsetting. Part of that is how we can best achieve it. Q318 Dr Turner: They are not buying much yet, obviously. Mr Buchanan: They do not buy it through the Climate Care Scheme. For example, travel by Members of Parliament is all offset but it is not offset through the British Airways scheme even when they travel on British Airways. I hope you recognize that there is a great deal of offsetting goes on outside of the voluntary scheme that we offer on our website. Q319 Dr Turner: You will not get a true effect until all of your economy class passengers buy carbon offsets, will you? The corporate market represents a fairly small percentage of your passengers. Mr Buchanan: Yes. The best way to actually achieve a proper offset is through an organised Emissions Trading Scheme that would cover the entire flight. Voluntary offsetting has a place in this and is a bridge towards it but I do not think it is the absolute solution to the problem. Q320 David Howarth: Moving to a different topic, the Government's voluntary offset consultations and the part that the airlines played in it. We gather that there were consultations between the Government and the airlines in December and then when the pre-Budget report came out and there was an announcement of an increase in Air Passenger Duty, which annoyed the airlines, they suddenly called off discussions and there was some falling out. Could I just ask you whether you were involved in these discussions and if you were, to give us a general account of what they were about, who they were with, what sort of topics were covered? Mr Buchanan: We had discussions with Defra about the proposed launch of the consultation in December but, as you rightly point out, the climate for us changed with the doubling of Air Passenger Duty, which meant that it was not really for us a good time to be thinking about bringing out a new scheme which we thought our passengers might not be very happy about, having just found that they were paying twice as much APD as they had been previously. Q321 David Howarth: The discussion was with Defra rather than the Office of Climate Change? Mr Kershaw: Both. Obviously Defra is involved in the Office of Climate Change. Q322 David Howarth: The topic that was consulted about, was it just the Government's voluntary offset scheme or did it go wider than that? Mr Kershaw: It was a discussion about how to move forward offsets in aviation. It focused around the proposals that they were planning to look at in the consultation. Q323 David Howarth: These were just offsets and not carbon emissions more widely from aviation? Mr Kershaw: No, it focused on the offsetting. Q324 David Howarth: At least you were consulted on that. Presumably you were not consulted about the increase in APD. There was no hint either direct from the Treasury or --- Mr Buchanan: We were not consulted about the increase in APD. Q325 David Howarth: Can I just ask you what the reaction was of officials in the Office of Climate Change and Defra to the announcement of the increase in APD? Were they as surprised as you were? Mr Buchanan: I really do not know the answer to that. Mr Kershaw: I am certain that they felt some amount of frustration that they were not able to make more progress as they had hoped. Q326 Chairman: Just on this point, we were told by someone else in your industry last week that their impression was that neither Defra nor the Department for Transport were actually aware in advance that APD was going to be increased, was that not right? Mr Buchanan: It would only be hearsay if I were to agree with you. Chairman: We are quite happy to accept hearsay evidence. Q327 Colin Challen: I find it a little bit odd that your enthusiasm for offsetting waned when the APD was increased but this has not diminished your enthusiasm for the European ETS, but is that enthusiasm not simply a holding operation to hold off other measures and that is the real reason you do not like the APD, it is doing something now rather than hanging fire for five or ten years possibly so you have five or ten years of unmitigated growth? Mr Buchanan: We are due to join the EU Emissions Trading Scheme on 1 January 2011. If there is anything you can do to bring that forward we would welcome it because we believe that is the best way to deal with this problem overall and we are happy to deal with that. Q328 Colin Challen: But in the meantime should the Government not do something? That is still five years away and some people do not believe that is going to happen. If you are saying with absolute certainty that you will be in the ETS by that date, that is great, but in the meantime the Government still has to do something, surely. Is it not right that the Chancellor raises APD as an interim measure? Mr Buchanan: Taxation is a blunt instrument when it comes to controlling demand for travel and it does not necessarily strike the right places at the right times. There are better ways of dealing with demand. As I say, we believe that emissions trading is a much better way but I recognise there is a gap between now and then. Offsetting has a role to play for the public in raising awareness of the issue as a bridge into a proper emissions trading scheme. APD is a blunt instrument. I recognise that it was brought in apparently on environmental grounds, although it is not clear to me that the proceeds are being used for environmental offsetting. Q329 Colin Challen: Do you think that people generally see it as an environmental tax or do they take the Michael O'Leary view which is it is greedy Gordon's grab or something of that sort, a sort of stealth tax? Mr Buchanan: Our customers are aware that the cost of APD is passed through, so they are aware of what it is. Do they really perceive it as an environmental measure, I am not convinced that they do. Q330 Colin Challen: Would you support the hypothecation of the money raised from that tax for environmental purposes? Would that help sell the idea a bit more? Mr Buchanan: After the Pre-Budget Report was made public our chief executive wrote to Gordon Brown and asked him to hypothecate 900 million of the additional money that was raised because at that time that would have been sufficient to offset the entire British Airways' emissions. Q331 Colin Challen: Did you get a response? Mr Buchanan: We did not immediately get a response so we have written again to see if Mr Brown will give us his views. Q332 Colin Challen: We might see something in the Budget! Do you support the idea that your passengers, at the time they purchase a ticket, should be forced to make a decision on purchasing an offset, it is not just some sort of voluntary trail through a website but it is there right in your face, you have to do it, yes or no, tick the box? Would you support that approach? Mr Buchanan: As I acknowledged earlier, there is a lot more we could to bring it to passengers' attention. One of the things that they have shown reluctance for is people to pass the problem on, so if customers believe that the emissions are, in fact, our problem then asking them to deal with it or forcing them to deal with it is going to be a very unpopular thing to do. Q333 Colin Challen: If they were given the choice, perhaps, of paying the APD or an offset, what sort of impact would that have on the overall take of money, wherever it goes? Mr Buchanan: It is an interesting idea that we might mandate an offset instead of APD, but for many people mandating, whether it is an APD or offset, comes to the same thing, it is money that they are paying, and in some cases unwillingly. Q334 Colin Challen: How many people have decided not to fly because of the increase in APD? Mr Buchanan: As you may know, we have had a few difficulties of our own since December so it is rather difficult for me to give an accurate assessment on that. I am sure some other airlines will have been able to. Q335 Colin Challen: Are you anticipating being able to provide a report because some of the airlines are very unhappy about the decision so I assume you are monitoring it as best you can and perhaps after six months you will be in a better position to provide that answer? Mr Buchanan: We can do that if that is what the Committee wishes. At the moment, as I say, with the difficulties we have had since December we are not in a position to give that answer. Colin Challen: I only ask because the Treasury have put a precise figure on tonnes of carbon to be saved from the increase in this duty, so presumably they will be coming along asking for the same information. Q336 Chairman: What you are saying is if people thought there was going to be a strike they might have diverted to other airlines and it cost money. Mr Buchanan: Why we cannot give an accurate figure is because we lost four days of flying in December due to extraordinary fog; we have had a number of baggage belt breakages in Terminal 4 which we have had leased from the airport; and we had the threat of industrial action which caused huge disruption, and even still we can see in forward bookings the effect of that disruption. Really we cannot compare this year with last year and, therefore, we cannot give you those figures. Q337 Chairman: I want to just probe for a second your enthusiasm for the ETS. If the ETS is to have any bite in terms of the impact on aviation it will surely mean that you have to raise the fares. Mr Buchanan: It will mean that the cost of the emission offset is included in the fares, that is correct. Q338 Chairman: So, given your previous answer, as far as the customer is concerned that seems to be rather similar in its impact to raising APD. Mr Buchanan: APD does not work in quite the same way. As I said to you, it is a much blunter instrument. As regards our enthusiasm for emissions trading, you will be aware that we were the only UK airline to join the voluntary UK Emissions Trading Scheme which ran for four years. Q339 Chairman: If I can breach the Committee's own confidence for a moment, we are going to issue a report next week which refers to APD specifically and suggests that it could be made more sophisticated relating, for example, to the flight rather than the passenger so that a half empty aircraft would have to pay the same amount of tax as a full one. If APD was reformed in a way that made it more sensitive, would that make it acceptable to BA? Mr Buchanan: Clearly it would depend on your proposals. We will look at them and let you know once we know what they are in detail. There are a number of areas where it needs to be sorted out, for example some airlines that have only one class of travel, which is normally business class only, pay a lower rate of APD than business class travellers on other airlines. Q340 Chairman: We have heard from one of those airlines recently. Mr Buchanan: There is plenty of scope for improvement and I wish you well on that project. Q341 Mr Hurd: Would you anticipate continuing to offer offsets once aviation is inside the ETS? Mr Buchanan: When the ETS is initially formed it will apply only to intra-EU flights, so there is definitely a role for voluntary offsetting in relation to flights that leave the Community. There will be an ongoing awareness role and there will be customers who just want to do that, whether they choose to do it through a scheme offered by the airlines or whether they choose to use other schemes. For example, the RSA has a carbon initiative at the moment and it invites you, as an individual, to assess your entire year's emissions in relation to travel, heating and all that sort of thing and to pay a one-off once a year offset and many people would find that much more attractive than an airline scheme on a per flight basis. Yes is the answer to your question. Q342 Mr Hurd: In relation to the ETS some concerns have been expressed to this Committee that you will be in a situation in the future where you will be buying EUAs from people who have either been over-allocated their allowances or have been able to make efficiency cuts. It has been put to us that in terms of environmental benefits those will be much less than a requirement for mandatory offsetting through VERs. Do you have any view on that? Mr Buchanan: To work properly an emissions trading scheme has to be well run. Behind your question may be an implied criticism of Phase I. Q343 Mr Hurd: Phase I has not reduced emissions at all so there is a concern that if the mechanisms roll into Phase III we are going to miss a great opportunity as far as your industry is concerned. Mr Buchanan: I think if the allocations were appropriate this scheme would be more effective. In order to be effective the guiding minds behind it have to get the allocations right, in which case if you can create a perfect market then emissions trading will work extremely well and it will drive down emissions by eliminating the lowest cost way of doing that. Q344 Mr Hurd: A final question on emissions trading. I think this Committee is aware that British Airways has been a leader within Europe in terms of pushing for emissions trading as a solution. Could you update the Committee on what you sense the state of play is within Europe in terms of consensus with the French and Germans in particular? Finally, do you have a view on the issue of whether allowances should be auctioned to your industry? Mr Kershaw: We are very pleased with the progress that the European Commission has made in putting forward proposals to include aviation in the EU Emissions Trading Scheme and that includes setting out a sensible set of design elements, many of which we fully support. In terms of the political environment, the French Government for a long time has recognised emissions trading as the most effective tool for aviation in terms of addressing climate change. Certainly German industry recently came out with a piece that said they now felt that emissions trading was the most appropriate instrument and I believe the German Government is more sympathetic than it may have been in the past on emissions trading. There are a lot of positives on emissions trading. We need to not lose sight of the importance of emissions trading and the fact that the UK has taken such a leading position, which is only in our favour, and we must continue to press for the introduction of aviation as soon as we can in emissions trading with practical application. Q345 Mr Hurd: What about auctions? Mr Kershaw: I am sorry, I missed the auction question. In our view, auctioning really does not add to the environmental effectiveness of emissions trading. It does, however, introduce high financial burden wherever it is applied. I know the UK is keen on auctioning going forward into the future and there are plans by some Member States to introduce an amount of auctioning into the allocations. I believe the UK in Phase II is planning seven per cent auctioning. The current proposal for aviation includes the possibility that auctioning would be applied on an average of Member States auctioning them out, so we take an average of what is applied in Phase II and perhaps apply that to aviation. That seems to be an approach that is fair and consistent in terms of the approach to other sectors, but we remain to be convinced that there is any benefit environmentally to these auctions. Q346 Chairman: What you are hoping for is a great big bonanza when they are allocated? Mr Kershaw: Not at all. We expect there is a need to have stringency, as Alan mentioned, on emissions trading. Aviation should be no different, there should be stringency for aviation. It means that by 2011 in the current proposals we will probably have to purchase in the order of between 20 and 30 per cent of the allowances that we need. That is already running into many millions of pounds that we will need to spend on purchasing allowances. I would not agree that there is any free lunch in this, we will have to bear costs in emissions trading. Q347 Chairman: I apologise, I have got to catch a train rather than a plane. Before I hand over to Joan Walley, can I just reiterate my appreciation to you for coming and there are a lot of issues on BA's papers that regretfully we do not have time to cover. Mr Buchanan: Thank you for the opportunity. In the absence of the Chairman, Joan Walley was called to the Chair Q348 Joan Walley: I think we are almost through anyway but there are just a couple of questions remaining. Climate Care is your offsetter of choice. It would be useful for the Committee to have some idea why it was that you chose Climate Care and whether it is to do with the reputation of the projects or the reputation of the seller? Mr Buchanan: At the time that the scheme was first set up in September 2005 Climate Care had the best track record for dealing with consumers. They have an informative website, they give clear information about the projects that they run and the costs of running them, and they give financial accounting which means people can find out as much as they want to about the costs. One of the other reasons, before I move on, was that they were one of the first of these agencies to move away from afforestation, so now it only accounts for 15 per cent of their portfolio and I believe they have plans to reduce that even further. They are very good at communicating with consumers, so if you go to their website and look at their Honduras project, for example, they have been replacing old-fashioned wood burning stoves in the houses of people with specific stoves that reduce the emissions but also have a huge health benefit because they reduce the smoke in the atmosphere and they have been fantastic for the homebound, the mothers, children and old people who live there. They are well described, there are short videos that make them very appealing and people can really understand what is happening and the benefits. Q349 Joan Walley: In terms of your work with them, do you choose specific projects or do you just go along with their portfolio? Mr Buchanan: They have a committee of, I hesitate to call them wise men, but --- Q350 Joan Walley: Some wise women as well, I hope. Mr Buchanan: They have a committee of half a dozen or so people who scrutinise and choose the projects and allocate the funds between them. Q351 Joan Walley: So you do not have any say in choosing which ones your customers go to? Mr Buchanan: No. We have allowed Climate Care to do that because they are expert at it and we are not. Q352 Joan Walley: You mentioned their website just now, in terms of the way that it works, do you make any commercial profits from the offsetting service that you offer through Climate Care on your website? Mr Buchanan: No, we do not; absolutely not. Q353 Mark Lazarowicz: Can I just be clear about that. Every single penny that someone pays to you through the offsetting on the website goes to Climate Care? Mr Buchanan: They do not actually pay us, they pay Climate Care direct. We never see the money. Q354 Mr Chaytor: The cost of offsetting a return flight to Johannesburg on your website is £13.30. That seems incredibly cheap if we consider the Stern Review's estimates of the cost of carbon or the current price of carbon on EU trading exchanges. What is the basis of these calculations? Mr Buchanan: The basis of calculation is that they have taken average British Airways fuel burn data and applied it to each of the flights. I cannot tell you whether it is --- Mr Kershaw: Broadly the number that you found on the website is right. Obviously there is a calculation of the carbon emissions but the price is something which is set by the project cost and currently that is £7.40 per tonne. Q355 Mr Chaytor: Sorry, £13.50 per tonne? Mr Kershaw: £7.50 per tonne of carbon dioxide. That is the price that customers pay through the Climate Care website. Q356 Mr Chaytor: £7.50 per tonne of CO2 abated? Mr Kershaw: Correct. Q357 Mr Chaytor: That is the working assumption. Mr Kershaw: So if Johannesburg is almost 15, it is somewhere just short of two tonnes of carbon dioxide, which sounds about right to me. Q358 Mr Chaytor: The price quoted on your website is actually different from the price quoted on the Climate Care website apparently. Mr Buchanan: That would be right because in relation to the British Airways scheme we have used British Airways flight data and fuel burn whereas on their general scheme they have calculated differently. Q359 Mr Chaytor: Okay. What about the impact of radiative forcing? What assumptions do your calculations make about the multiplier effect of radiative forcing? This is a huge area. Mr Kershaw: We do not apply a multiplier factor. We are advised by the scientific community that multiplier factors are inappropriate science. We can talk more about that if you would like but the headline would be that we do not apply a multiplier because it is not scientifically robust. Q360 Mr Chaytor: But then lots of submissions we have received suggest there should be a multiplier factor and the scientific advice we have received is not that there should not be a multiplier factor but that it is impossible to assess accurately what the multiplier should be, so the range of multipliers we have seen is somewhere between 1.9 and 5.1. These are huge discrepancies (a) within the range that we have been offered and (b) within your assumption that there should be no multiplier at all. Mr Kershaw: The reason for the range is that there is a lot of scientific uncertainty about the effects, but the reason we say that a multiplier is not to be used is that the scientific advice we have is that it is fundamentally bad science to apply a multiplier. Q361 Mr Chaytor: The radiative forcing effect does not exist? Mr Kershaw: The radiative forcing multiplier, if I can quote from a scientific paper --- Q362 Joan Walley: Can you tell us who it is you are getting this scientific advice from? Mr Kershaw: This is a paper by Forster et al. I can supply the reference to the Committee if you would like. If I can quote from this paper: "The use of the RFI multiplier is a misapplication of science as it fails to account for the resident timescales of emissions and thus attributes a larger fraction of climate change emissions to aircraft than is currently justifiable". It goes on to argue that essentially the use of a multiplier is inappropriate in aviation. One example they give is that if you apply a multiplier approach to other sectors in the way that is currently used for aviation, which by the way one should because most sectors have some other impacts other than CO2 emissions, if you apply that to shipping it would demonstrate that an increase in shipping emissions would be beneficial to climate change. In a sense it would lead you to the outcome that more emissions from shipping are actually good for the climate. That is just a demonstration of how --- Q363 Joan Walley: I am sorry, I do not understand the comparison that is being made between aviation and shipping in respect of the scientific evidence in respect of radiative forcing. I think the general public finds this whole issue of offsetting so complex and so technical, it is hardly surprising that perhaps they are not engaged with it. It would be helpful if you could give us a more direct interpretation in plain English of what you are suggesting. Mr Kershaw: My apologies for that. It is that we should stick to CO2. CO2 is the only aviation Kyoto gas. Emissions trading is based on CO2 and we should stick to CO2. That would save a lot of confusion, if we are aiming to save confusion. That is not to say that these issues are not important, so we need to understand them better. BA is involved in programmes with the scientific community, including the IAGOS Project, to better understand these effects. It is not to deny that they exist. We must describe them in ways that are consistent with the approach that we are using to describe other climate impacts from other sectors and at the moment the radiative forcing index does not do that, it really attributes a larger fraction, as I quoted earlier, to aircraft than is justifiable. Those are the words of the scientific community. Q364 Mr Chaytor: Is that agreed by other airlines that are operating offsetting schemes? Mr Kershaw: There is a general consensus in the aviation industry that the use of multipliers is inappropriate for dealing with the non-CO2 effects, however, as you know, we have a sustainable aviation strategy, an initiative, and within that the combination of airlines, most of the major ones in the UK, have accepted the need for further work in this area and even committed to the fact that we should develop appropriate mechanisms to deal with these non-CO2 effects before 2012, and we are continuing to work with the scientific community to understand how we can best move that forward. Q365 David Howarth: Were you actually saying that aviation engines do not give off NOx? Mr Kershaw: No, I am not saying that at all. Aviation creates NOx emissions. Q366 David Howarth: Yes, and causes more and more NOx as you get cleaner burn. Mr Kershaw: That can happen, although the technology is moving to rapid lower NOx combustion. Q367 David Howarth: There is research on it, in fact I know the people doing the research, but it has not succeeded yet. Mr Kershaw: I think it has. I think the current Trent engines are at least 40 per cent better in terms of NOx than engines from even ten years ago. There has been significant improvement in NOx emissions. Q368 David Howarth: Why are you saying that NOx should not be included? Mr Kershaw: We should deal with NOx emissions as it affects the climate, I absolutely agree with that. The difficulty is that you cannot use the radiative forcing indicator to properly represent those impacts. To briefly talk to the NOx subject, NOx in itself is not the problem in climate change, it is the indirect impact of NOx. NOx creates ozone but it also reduces methane, which is a climate change gas. There are some complicated chemical processes even when you speak about NOx in climate change. There are effects and we must deal with them appropriately but we need to find robust science and appropriate mechanisms for dealing with those rather than simply imagining that we can use this multiplier number which is a very simplistic and, the scientific community would say, misrepresentative approach. Q369 Joan Walley: Just before we leave this and come back to Mr Chaytor on this, it was my understanding, and I might be wrong, that the higher effects of a plane's CO2 also relate to the altitude, that is part and parcel of this particular added problem. I do not understand the comparison you made with merchant shipping, not just merchant shipping but any shipping. I thought that the altitude was part of the additional contribution that planes were making. Am I wrong in that? Mr Kershaw: There are various aspects to it. The first point is to be clear that CO2 does not have any different impact at altitude or anywhere on the globe. A tonne of CO2 is a tonne of CO2 whether it comes out of an aeroplane in cruise or a power station in India, it has precisely the same impact in terms of the climate. Q370 Joan Walley: Without going into all the scientific aspects of it, I am not a scientist, I understood there was an issue about the altitude and the particulates, if you like, exacerbating the situation, hence the particular problems from radiative forcing and we need to count that in terms of all the calculations that are being made. Mr Kershaw: The other effects do vary with altitude, that is right. Contrails is a classic. If you fly lower you can avoid a contrail, that is the condensation trail, cloud basically, but if you fly lower you will burn more fuel and create more CO2. There are altitude effects, that is correct. The shipping analogy that I was making was to say using the radiative forcing index for aviation is not appropriate and, as an example of that, if we did apply the radiative forcing index to shipping, which currently we do not, you would find an increase in shipping activity is good for the climate using the radiative forcing index. I agree that is absurd but, for me, that demonstrates the radiative forcing index is not necessarily --- Joan Walley: I think we need a note on this. Q371 Mr Chaytor: Do you think there is any possibility of these voluntary offset schemes taking off, if you will pardon the pun? Unless there is some standardisation of cost the public are going to be completely confused by the different costs that are offered by different schemes to the point at which the whole thing will collapse through lack of credibility. Is not a standardisation of cost, an agreement on basic assumptions underpinning the calculation of the costs, absolutely an essential prerequisite of successful development of voluntary offset schemes in aviation and other fields? Mr Buchanan: I have no doubt that it would be helpful. We, of course, as an airline are reluctant to discuss with other airlines aspects that may stray into the pricing area for reasons that you would fully understand, I am sure. Q372 Mr Chaytor: Then the whole thing is dead in the water if British Airways is saying it is giving an offset or suggesting your trip to Johannesburg can be reduced for £28 and Virgin is suggesting £34 and somebody else £23, this is ludicrous, the whole thing has no credibility surely. Mr Buchanan: I do not think it is dead in the water at all. I agree with you that it would be helpful if there was more of a common position, but to the extent that this is still between airlines, for example, a competitive issue it becomes very difficult for us to come together and harmonise on a standard. I am sure that is something that to the extent we can we are willing to explore, subject to our compliance and legal people telling us that we can. Mr Kershaw: It is a useful suggestion and we ought to consider how we might go about that because I agree that it is helpful to have a standardised approach so far as that makes things clearer to the general public. Q373 Joan Walley: On that useful and constructive note, can I bring the session to the end. Can I reiterate our Chairman's thanks to you for coming along today. What we are dealing with is a hugely complex issue and the role of offsetting in all of this does need to be something which goes up in public awareness and it may be that we need to have scientific improvements. Just going back to the detailed note that you said you would give us and details of the article and how that links to radiative forcing and offsetting, the Committee would find it really helpful to have that further evidence from you if you would be so kind. Mr Buchanan: Mr Hurd asked for confirmation on training for frontline staff as well. Joan Walley: Exactly, yes. Thank you very much indeed. |