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The tool to leap-frog the present

Building our solutions to climate challengeThe public jury still seems to be out on carbon offsetting.

Surely, we ask, it cannot do to simply buy our way out of our dirty lifestyles by getting someone else to do the cleaning up for us?

Any honest look at the challenge ahead would tell us that if we are serious about living in a sustainable, low-carbon world, we are going to have to make some real behavioural changes - and do more than just sate our conscience by handing over money.

But to conclude that offsetting is little more than a form of 21st century purchasing of indulgences is to misunderstand the nature, and purpose, of carbon offsetting.

Offsetting is not meant to be the answer to all our problems. But it should be recognised as an important tool when building our solutions to the climate challenge.

The reality is that none of us can yet live a zero-carbon existence. We have all inherited the hydrocarbon intensive infrastructure that has created our modern societies and enriched our lives.

The technologies that will decarbonise our world do currently exist, but for the most part they are still too expensive and too early in their development to be deployed at the necessary scale to replace our traditional carbon heavy sources of heat, power and transport.

But we can accelerate this low-carbon technology to become cheaper and more technologically advanced by doing a number of things; the most effective of which is to put a price on carbon.

What does 'carbon pricing' mean? It means to treat carbon dioxide as a pollutant and thus make the producer of that carbon include the 'external cost' (i.e. the cost paid by society and the environment) into their business. To make the polluter pay.

The easiest way to do this would be to introduce a carbon tax, levied per tonne of emission. But the word 'tax' is anathema to business and the majority of the electoral public, so governments have instead (with some exceptions, such as Norway) chosen to 'cap and trade' in carbon rather than put a tax on it.

Without getting immersed in a detailed discussion of the carbon markets, what we do need to know is that a cap and trade system, as now exists in the EU, means that carbon intensive European industry will get heavy financial fines if they exceed their annual assigned quota of carbon certificates.

So, if we buy one type of carbon offset (the type that retires these tradable certificates), our purchase we will be making those companies work harder at cleaning up their act, at being more efficient. Other offset options invest in more entrepreneurial projects in the Developing World, lifting people out of energy poverty in way that is cleanest for these developing communities, so that they don't need to pay the same environmental price for progress that we have done.

But this voluntary contribution to make industries work harder towards their environmental obligations must also be accompanied by behavioural change on the part of the consumer.

We must reduce what we can and offset what we can't. Become more energy efficient at home and at work, insulate, recycle, take public transport, don't fly unless you have to; all these options and more, which are more difficult than just taking out our credit cards.

Offsetting should not be viewed as an excuse for all of us to keep on polluting, but should instead be recognised as the only tool which makes it possible to complete the transfer to a low-carbon lifestyle today, within the constrains of a society which will need more time to wean itself off of its carbon intensive ways.

Market entrepreneurship vs consumer confidence

Is it reasonable to expect consumers to spend money in a market which they do not understand? Or conversely, is it reasonable to expect consumers to understand something as complicated as the carbon market before they choose to spend their money on offsetting?

We should not be under any illusions here - the carbon offset market is, certainly upon first glance, a confusing and prohibitively complicated space for the consumer.

Government proposes a voluntary 'Code of Best Practice' on carbon offsettingThis is clearly the opinion and concern of the UK Government, who are currently in the process of designing a voluntary 'Code of Best Practice' on carbon offsetting, which will provide an easily identifiable 'Quality Mark', as a stamp of approval on offsetting products, for easy identification and assurance for the customer.

This sounds like an excellent idea: It is literally a matter of international urgency that the consuming public of the developed world starts to offset what they cannot currently reduce of their carbon-intensive lifestyles. But the barriers to entry into the offsetting, i.e. getting your head around what exactly offsetting is and considering it something that is worthy of your time and effort, are prohibitively high due to the abstract nature of the offsetting concept, as well as the complex mechanisms used to implement the concept.

So the government are going to take much of the 'heavy lifting' out of the process, by assuring the consumer that it is not necessary to understand the complexities before you buy, that if you have gone as far as to be convinced by the necessity of offsetting, you can then proceed to buy with confidence from any variety of volunteering offset providers, safe in the knowledge that the Government have audited, approved and 'stamped' the product you are buying.

But there is also a problem with this regulatory intervention: When the Government 'picks a winner' to endorse, it will certainly assure quality and simplify the process for the consumer, but it will also have to exclude other offset projects, many of which are bringing clean energy to people in the developing world, as many of these projects will not be able to meet all the required standards in order to qualify for the government Quality Mark.

The reasons for this will take some explanation:

Two different types of markets exist for carbon offsetting, one is a Regulated Market, which has developed around government targets and policies designed in order to meet agreed Kyoto targets. The credits traded on this regulated market have been created through the following means:

  • Investment by companies in the developed world (from countries which have Kyoto targets) into clean development projects in developing world economies (in countries which are not bound by Kyoto reduction targets). This process is known as the Clean Development Mechanism (CDM), which produces credits called Certified Emission Reductions (CERs).
  • Investment by companies from one country with a Kyoto target into emission reduction projects in another country with a Kyoto target. These are called Joint Implementation (JI) projects and they produce credits called Emission Reduction Units (ERU's).
  • The European Union has an Emissions Trading Scheme (EU ETS) which allocates a certain amount of carbon credits, or Allowances (EUA's), to energy intensive businesses. If the business exceeds their quota of credits, they face a fine and must buy the requisite additional credits from another business that has credits to spare.

The proposed government 'Quality Mark' will only apply to offset products which invest your money in any of these Regulated Market options.

The other market is a Non-Regulated Market which has developed outside of government policies and are therefore not recognised by, and do not form a part of the Kyoto protocol. They are thus known as Voluntary Emissions Reductions (VER's). VER projects are often non-industrial and could range from initiatives like tree planting to introducing wind power to a village in Africa. As these projects often have broader environmental or sustainability benefits, and are more entrepreneurial in nature, they can also carry greater appeal to consumers:

It is much easier to understand (and feel good about) giving money to establish a wind farm in Africa than it is to get your head around the concept of giving money to retire tradable certificates between European power companies, for example.

But with extra entrepreneurship comes extra risk: There is no internationally agreed project approval or emission reduction verification procedure for such projects. Nor is there any international registry for tracking or cancelling the VER credits. Auditing and verification concerns (over such issues as 'additionality'-whether the carbon reduction would have happened anyway regardless of the offset project's involvement) are far more difficult as a result. Since this is an unregulated market, it is not linked to the EU ETS market, so prices vary considerably between projects and bear little relation to the established carbon price. For these reasons, no offset product which invests in a VER project will be entitled to a Quality Mark.

The carbon offsetting market is only in its infancy. There must therefore be a balance struck between encouraging market development and assuring consumer confidence in that market. The Government is right not to have intervened with compulsory regulation of the offset market at this early stage. Such action would have resulted in inoperable restrictions for many of the projects in the un-regulated market, many of which are involved in sustainable development projects which are of broader benefit to developing countries than just carbon abatement or reduction.

At the same time, the absence of recognised standards in the industry could so easily damage consumer confidence – a few negative stories of trees left to die on a mountainside in Wales or a wind turbine left to rust in an African village would do extensive damage to a market trying to find its feet.

For offsetting to be an effective tool in the struggle against climate change the market will need public uptake on a massive scale. This uptake will only happen if there is real belief in the necessity and effectiveness of offsetting, and public trust in the products available. A voluntary Code of Best Practice will give consumer confidence in the market and it will remove the necessity for every consumer to understand the intricacies of the market. Provided the consumer believes in the necessity of the product, their confidence can be assured by the Government's verification.

Ideally, when both the market and the consumer become more confident and sophisticated, regulation can then be extended to the VER market. But for that day to arrive, this is the way we must begin.