Scoring with offsets

Carbon offsetting really does have the potential to finance sustainable, low-carbon development, insists Mike Mason, founder of Climate Care. Michael Buick asks him about doing it properly.

Michael Buick: We’ve seen an explosion of interest in carbon offsetting over the past year - through car insurance policies, flights… But just how well is the new ‘carbon market’ really developing?

Mike Mason: Well, we’re essentially talking about two types of carbon market at the moment. There is the compliance market, where carbon dioxide emissions allowances can be traded by countries or large industries, to keep them within the country-by-country ceilings set under the Kyoto treaty. And there is the voluntary market, for those individuals and organisations who choose to offset their carbon - which is where Climate Care’s offsets fit.

“Public confidence could be damaged by some of the poor-quality offsets on offer.”

Having an offsetting system in place for the compliance market, known as the Clean Development Mechanism (CDM), is certainly a start. This allows industrialised countries with Kyoto targets to offset their own carbon emissions by purchasing reductions achieved in the developing world. But this system faces several challenges.

MB: Such as?

MM: Firstly, the CDM was designed with a particular mandate to encourage sustainable development at the same time as cutting greenhouse gases, and in this respect it is largely failing. If you look at the map of where CDM carbon reduction projects are situated, they’re all in Brazil, Mexico, Central America, India and China. What about Africa?  Almost empty. In fact, less than 2% of CDM credits come from projects based in Africa. There are plenty of opportunities to cut carbon emissions there, but they are being largely ignored by the CDM.

It’s partly because the system is very expensive and bureaucratic. The cost to verify a project through the scheme can be over $50,000, so it tends to favour large-scale industrially based offset projects - widgets on factory chimneys etc. And Africa lacks an industrial sector comparable to, say, India or China. It is simply not feasible through the CDM to fund smaller, community-scale projects run by grassroots NGOs. You would end up paying the ‘carbon accountants’ more than the actual project!

Also, because it takes so long to register a new ‘methodology’ - an acceptable type of project with associated methods of measuring carbon reductions - it doesn’t encourage innovation. What’s more, the fact that the CDM is due to come to an end in December 2012, when stage one of Kyoto closes, means that the scheme is really struggling to offer funding for projects that take longer to get up and running. 

What it boils down to is that the CDM in its current state is failing to provide carbon funding to the community-based projects that have so much to offer a continent like Africa, and such potential to encourage low-carbon development. This was a worry we heard again and again at the last UN climate conference in Nairobi. The voluntary carbon market, however, has shown itself able to fund this type of project, and it has great potential to fund many more. In fact Climate Care has probably funded more projects in sub-Saharan Africa than the whole CDM!

MB: Are you saying people would do better to buy voluntary offsets rather than credits from the formal market?

MM: Perhaps. But the challenges to the voluntary market are significant, too. The industry urgently needs an accepted common standard for the carbon offset projects it’s funding. And it’s crucial that this strikes a delicate balance. On the one hand the voluntary market has to stay nimble footed and low cost, so that it can fund carbon reductions that the compliance market doesn’t reach. On the other hand, it mustn’t be so loosely framed that the projects are not delivering real reductions. Public confidence in carbon offsetting has to be strengthened, and at the moment there is a real danger that it will be damaged by some of the poor-quality carbon offsets being offered.

“Eco-stoves are a genuine win-win for climate and quality of life.”

It’s also important to get the methodology right. For example the CDM has failed to find a sensible way of including non-renewable biomass, which means it excludes key energy efficiency technologies such as eco-stoves. So one of Africa’s key sources of carbon emissions, unsustainable wood use, cannot be tackled through the compliance market.  Were the voluntary offset standard simply to follow suit, sustainable technologies such as efficient stoves would be excluded from carbon finance. That would be a huge loss. They provide a genuine win-win for climate and quality of life, almost eliminating indoor air pollution (one of the world’s biggest killers), reducing deforestation and cutting carbon emissions by around 1.5 tonnes per stove

MB: How optimistic are you that we can get such a standard in place? Is it the government’s job to lead on this?

MM:  We are absolutely delighted that Defra is now consulting on a proposed Voluntary Code of Best Practice for the voluntary offset market. Our concern is that they have already made up their minds on the key question of whether voluntary offset projects have a role to play, as their proposed Code only supports offset credits delivered through the compliance market. In fact, no mention is made of the work that has already been undertaken by the Gold Standard and the Climate Group to develop standards for voluntary emissions reduction projects. The first danger is that excluding voluntary offset projects will reduce this important source of funding for low-carbon development 

The second danger is that the credits that comply with the Code will be both significantly more expensive and from projects that are less attractive to consumers. If sectors such as aviation have their arms twisted to use only Defra-approved compliance market credits there is a real risk that they won’t be able to sell as many to their customers. It would be unfortunate if Defra’s Code had the opposite effect to their stated intention and actually reduced the consumer market for offsets. That would be of no help to the climate. 

In any case Climate Care will provide both types of offset credits and I will be interested to see which our customers prefer.

MB: So what’s the best way forward?

MM: In a perfect world, with perfect institutions and no uncertainty, we’d have a single carbon market with a single price. However, for the moment we need both voluntary and compliance projects running in parallel. The government has got to see the voluntary offset market as an opportunity to stimulate carbon reductions that go beyond Kyoto, and are being missed by the compliance market. It should exploit offsetting’s strengths rather than be fearful of its weaknesses.

Even if the hoped-for improvements in the compliance market were made quickly, there would still be real value in a robust voluntary market with its own standards and institutional structure. It fills in the inevitable gaps and provides a hedge in case of problems; and there is a real risk in relying solely on the compliance market. Crucially, it also provides a space for innovation for new carbon reduction technologies, where they can prove their worth in order to expand the future scope of the CDM. 

I am optimistic, though, that through sensible discussion we can arrive at the type of voluntary offset standards that ensure real reductions, protect the reputation of offsetting and don’t exclude Africa from carbon finance.

Mike Mason is founding director of Climate Care. He grew up in Africa and spent much of his engineering career working there. He founded Climate Care in 1998 in order to provide funding for carbon reduction projects. Michael Buick is communications manager at Climate Care.

Climate Care’s official position statement on the Defra consultation, and its own projects policy, is available on the Projects Principle page of www.jpmorganclimatecare.com

9 March 2007