Scores of companies voluntarily reduce their carbon footprints by sponsoring climate-friendly projects at home and abroad without governments telling them they have to do so. Murray Ward of GtripleC says that failure to reward voluntary efforts within a compliance regime could stifle social entrepreneurship and domestic action for decades to come.
Adapted from a series of more detailed analytical policy papers on this subject by Murray Ward and Sean Weaver available at www.GtripleC.co.nz.
3 February 2009 | It seems only a matter of time before a mandatory cap-and-trade regime covers significant portions of emissions currently generated in the United States, either at a national or regional level. That's good news, of course – but it could signal the end of innovative new voluntary offset projects contributing to reductions close to home if emerging international standards apply.
That's because standard-setting bodies, in a well-intentioned effort to ensure the credibility of voluntary projects and prevent the dilution of compliance markets, have raised the cost of executing a recognized voluntary project above the cost of simply meeting basic compliance requirements. As we will see in a moment, this means that companies operating in regulated sectors and aiming for true carbon neutrality are penalized rather than rewarded for their voluntary efforts.
This has already led to a sharp decline in new voluntary projects within regulated industries in Europe, and is the focus of intense debate in countries like Australia, New Zealand and Japan.
Volunteers Not Wanted
The problem flows from the basic premise among standards writers (primarily based in Europe) that domestic mitigation actions seeking voluntary offset credits are no longer credible if all they do is help a country or some other firm meet the commitments they have under a compliance cap-and-trade scheme. To make sure this doesn't happen, the standards require that for every ton of voluntary credits issued, one ton of compliance units be "cancelled" (meaning making them null and void). The effect is to tighten the compliance cap by one ton.
Think about this carefully.
What greater disincentive to voluntary mitigation action could exist than saying "we will make your country's (or region's) or someone else's compliance task harder by one ton for every ton you reduce through voluntary actions"?
Contrast this with the current pre-compliance situation, where US firms seek the market advantage of a carbon-neutral branding by purchasing offsets from, say, energy efficiency projects in their own community. These companies are proactively helping the community reduce its emissions. They presumably have made the judgment that the costs incurred buying these local offsets are more than recouped by the value to them of the carbon neutral brand.
But, following the international standards, in jurisdictions where compliance cap-and-trade schemes have been implemented, the costs don't stop with just buying such local offsets. Here, they additionally would have to include the cost of having to cancel a valuable compliance carbon unit. The alternative is to not support domestic mitigation by buying offsets locally but, rather, to buy offsets from projects overseas in developing countries.
The Underutilized Toolkit
To seriously tackle climate change, we need every policy tool that helps reduce emissions. This is particularly true in countries that have taken on legally-binding obligations to do so. Why then throw away the use of the voluntary carbon market in developed countries?
That's what we will be doing if this "cancellation" idea takes hold.
It's simply fanciful to believe that governments or firms 'upstream' that are obligated to hold sufficient compliance units to cover their emissions will agree to rip up these valuable units on the basis of claims of reductions being made in the voluntary market. The nail in the voluntary coffin, then, is the alternative provided in the standards that project proponents, in addition to their full project costs, also have to purchase compliance units in the market and cancel them.
Domestic mitigation, especially through voluntary action by leaders in our communities, should be lauded and incentivized, not discouraged through such punitive rules. It seems even more incredible that these rules are emerging in the policy space holding sway over voluntary actions.
"Either-Or" Thinking
The genesis of this thinking seems to have come out of the United Kingdom, where the government was reacting to concerns and high-profile media stories about "carbon cowboys" in the voluntary carbon market who, through shonky business practices, were ripping off unsuspecting British consumers worried about their carbon footprints and prepared to pay for offsets.
This situation, in turn, translated into a vaguely-defined (but widely accepted) concern about "double counting" and a view that this had to be stopped.
Good Intentions, Bad Practices
Then, as part of the process that the British government undertook to develop a code of best practice for voluntary carbon offsets, it also surveyed consumers on whether they thought "offsets should have an absolute benefit to the atmosphere or just help the government or some firm in the EU ETS to meet their compliance obligations".
Needless to say, with the question posed in this "either-or" way, the answer came back "help the atmosphere".
As a result, the Code of Best Practice for Carbon Offset Providers put out by the UK Department for Environment, Food and Rural Affairs (DEFRA) early in 2008 rejects voluntary offset projects altogether and says the only way for UK consumers to credibly offset their emissions is to purchase compliance emission units and then cancel them.
While this Code is voluntary in its application (and focused on the UK), the debate around it has influenced the Voluntary Carbon Standard and other standards emerging in the voluntary space.
In particular, this notion of the need to have an absolute benefit to the atmosphere seems to have carried over to all these standards. It is this in particular that, in practice, kills the viability of doing voluntary projects (i.e. the supply side of the voluntary carbon market) in countries and jurisdictions under a compliance cap.
The Big Picture
Seemingly, it was this narrow focus on offsets that led to the bigger-picture logic of voluntary action in general being overlooked. The DEFRA Code and these standards have got this issue wrong, but you only see this when you step back from offsets and look at the bigger picture of voluntary action, and carbon neutrality (the major 'buy-side' driver in the voluntary market) in particular.
Any carbon neutrality initiative worth its salt will involve three main steps:
Step 1, measure your current (and expected 'business-as-usual') carbon footprint;
Step 2, initiate an emissions reduction plan and calculate (and measure) how your footprint will be reduced;
Step 3, purchase carbon offsets that match your residual unavoidable (or only avoidable at high cost) emissions.
The second step is the one most encouraged and lauded, so let's focus on this for a moment.
No matter how you slice it, you're usually talking about reducing emission from the energy sector, which is usually (and rightfully) also the target of any mandatory cap-and-trade regime.
This means that voluntary Step 2 reductions also have the effect of helping other emitters with commitments under the cap-and-trade law to meet their commitments. The effect of this is that these emitters can now do one of two things: either purchase fewer emission units on the market to be in compliance or sell additional surplus units into the market.
A critical point is that nothing about this has changed the overall compliance cap, hence there is no absolute effect on the atmosphere associated with the voluntary Step 2 reductions of the carbon neutrality actor. But no one calls into question the credibility of these 'local' reductions or the mitigation actions that resulted in them. So what is the logic behind saying that the mitigation actions that underlie Step 3 offsets must provide an absolute benefit to the atmosphere or otherwise it constitutes "double counting"?
Reduce Real Double-Counting
This is the essential key to understanding the argument that, provided real double counting is avoided (see below), simple logic dictates that it is just as credible to purchase (Step 3) offsets from actions undertaken within your community and your country as it is to directly make reductions in these same sectors as part of your Step 2 voluntary actions.
This is depicted in the following diagrams, which show that the voluntary carbon market can just be seen as a business means to organize a program of aggregated, and hence cost-effective, domestic mitigation that would not otherwise happen.
What is 'Double Counting'?
The term "double counting" referred to above generally means different things to different people. Some examples are:
● where attempts are made to sell voluntary credits from the same project activity to two different buyers
● where those undertaking the offset projects are also direct "points of obligation" in a cap-and-trade scheme (e.g. Kyoto country governments or entities with legal commitments in a domestic ETS) who will already get the benefit of the emissions reduction in their compliance program
● where a project is already receiving an incentive for the reduction in emissions (e.g. compliance units in a government-run domestic offsets scheme)
There are solutions to prevent these problems. For example, the first can be addressed with robust and transparent registry systems and the other two through rules that enquire whether these situations occur and reject these as therefore failing to meet the additionality principle.
Beyond Double-Counting
There are also issues beyond double counting that need to be addressed to maintain credibility. A key one is the correct matching of offset types to the emissions they are supposed to offset. For example international aviation emissions are not covered by Kyoto accounting, i.e. are outside the cap, so it is not proper to match these with offsets in sectors that are covered and under the cap. This can also be expected to be true of US compliance cap-and-trade schemes.
Finally, a key issue about credibility is whether things are perceived as being credible in the eyes of the consumer. This suggests that a public information campaign is needed to get the 'public' (faced with buying offsets or 'buying' the carbon neutrality claims of firms that have bought them) to better understand what compliance caps mean in practice, so what is credible and what is not.
Going back to the public opinion survey done by UK DEFRA, a question such as "Do you want offsets to come from projects of a similar type to your own reduction actions and help your local community to further reduce its emissions?" would likely have also had a majority "Yes" response – but result in the opposite policy outcome to the one that DEFRA took away.
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