The Carbon Trust three stage approach to developing a robust offsetting strategy

8/14/2019 The Carbon Trust three stage approach to developing a robust offsetting strategy

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A study funded by the Carbon Trust and carried out by

L.E.K. Consulting in conjunction with the Carbon Trust

The Carbon Trust three stageapproach to developing arobust offsetting strategy


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Preface 01

Executivesummary 02

1 Carbonmarkets

puttingtheoffsetmarketincontext 04

DevelopmentoftheKyotoProtocol 04

Thecompliancecarbonmarket 05

Thevoluntarycarbonmarket 06

2 Backgroundoncarbonoffsets 08

Project-basedcarbonoffsets 08

Characteristicsofoffsetprojects 10

Standardsbywhichoffsetsaremeasured 11

3 Thecarbonneutralconcept 15

Whatiscarbonneutrality? 15

Businessesandcarbonneutrality 16

4 TheCarbonTrustthreestageapproach

todevelopingarobustoffsettingstrategy 17

Stage1: Focusondirectemissionsreduction 17

Stage2: Lookatopportunitiestoreduceindirectemissions 18

Stage3:(optional):Developanoffsettingstrategy 18

Conclusion 24

Contents

This guide is divided into four sections.

Section 1providesanoverviewofthecarbonmarkets,

lookingathowtheyhaveevolved,howtheyarestructured

andputsthevoluntarymarketinthecontextoftheoverall

carbonmarket.

Section 2introducestheconceptofcarbonoffsets,their

maincharacteristicsandthestandardsagainstwhichthey

canbemeasured.

Section 3explorestheconceptofcarbonneutrality,

indicatingwhyanorganisationmightchoosetobecomecarbonneutral.

Section 4isastep-by-stepprocessdesignedtohelp

organisationsdeveloparobustoffsettingstrategy.It

includesdetailsofhowtocarryoutthenecessarydue

diligencetoassesstheintegrityandcredibilityofoffsets,

andprovidestheknowledgeandtoolsneededtohave

aninformeddiscussionwithoffsetproviders.


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TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy

Preface

01

In our experience of working with companies across the UK on emissions

reduction, the most cost effective and environmentally sound way to

address an organisations carbon footprint is to:

Firstly,focus on direct emissions,reducingthein-housecarbonfootprintandcreatingbottomlinesavingsbyimplementingallcost-effectiveenergy

efciency measures. Where cost effective, opportunities to reduce the carbon

intensityofenergysupplybydevelopinglow-carbonenergysourcessuchas

on-sitegenerationshouldalsobeexplored

Secondly,look at reducing indirect emissions,workingwithother

organisationstoreduceemissions(andcutcosts)upanddownthesupply

chain,andlookforopportunitiestodevelopnewlow-carbonproducts

Then,ifappropriate, consider developing an offset strategy,ensuringthat

only high quality offsets are purchased from veried projects that genuinely

createemissionsreductions.

Focusingondirectandsupplychainemissionsshoulddeliverbottomline

nancial and carbon savings year-on-year. For those organisations considering

buyingoffsets,thisapproachreducesthenumberofoffsetsthattheymight

needtopurchase.

TheCarbonTrustcanhelporganisationstonavigatetheoffsetmarketandprovideadviceonhowtopurchasegoodqualityoffsets,providedthisispart

ofanoverallemissionsreductionstrategywhichincludesdirectandindirect

emissionsreductions.

Thevoluntarycarbonoffsetmarkethasgrownrapidly

overthepasttwoyearsasorganisationshavebegun

touseoffsettingasawayofindirectlyreducingtheircarbonemissions.

However,thismarketislargelyunregulatedandwith

voluntaryoffsetprovidersofferingaplethoraofoffset

and carbon neutral services, it is difcult to understand

andtoknow,objectively,whatisagoodqualityoffset.

Thisguidewilltrytobridgethatgap.Itisintendedtohelp

organisationsnavigatetheoffsetmarketanddeveloparobust

strategythattakesintoaccountalltheissuesfacedby

buyersofoffsetsandparticipantsincarbonneutralschemes.


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Executivesummary

Climatechangeisoneofthegreatestchallengesofmodern

times.Mostforwardthinkingorganisationshavealready

beguntakingactiontotackleclimatechangebyreducingtheircarbonemissions.

Offsettinghasemergedasanadditionalwayfororganisations

toindirectlycuttheiremissions.Carbonoffsetsaregenerated

fromprojectsthatreducetheamountofgreenhouse

gasesenteringtheatmosphere.Toqualifyasanoffset,the

reductionsachievedbyaprojectneedtobeadditionalto

whatwouldhavehappenedintheabsenceoftheproject,

a condition dened as additionality.

Carbonoffsets(orcarboncredits)canbeusedfor

complianceaswellasforvoluntarypurposes.Inthe

compliancemarket,offsetsareacquiredbyorganisationsandgovernmentstocomplywiththeiremissionsreduction

targetssetundertheKyotoProtocolorothercompliance

initiatives(forexample,theEUEmissionsTradingScheme).

Equally,organisationsaroundtheworldhavestartedtouse

offsetsasavoluntarywaytoreducetheircarbonemissions

indirectly.Thishascreatedavoluntaryoffsetmarket

commonlyknownastheoffsettingmarket.

Thevoluntaryoffsetmarkethasseenrapidgrowthin

thepasttwoyears,drivenprimarilybyincreasingpublic

awarenessofclimatechange.Theconceptofcarbon

neutrality,orthenettingoffofcarbonemissionswithin

a dened boundary, has emerged as an approach for somebusinesseswishingtodemonstratetheircommitmentto

emissionsreduction.

Therearerisksassociatedwiththisapproach.Usingoffsets

could be an easy way to address an organisations carbon

footprintintheshortterm,butthisstrategyisonlyasgood

astheoffsetsacquiredforthosepurposes.Addressingan

organisations own carbon emissions is likely to be a better

overallapproachthanoffsettingaloneinthemediumto

longterm.

Thereareanumberofkeychallengestoaddresswhen

offsetting emissions, such as calculating the organisationscarbonfootprint,buyinggoodqualityoffsetsand

communicatingaccuratelywhathasbeenachievedtoavoid

theriskofreputationaldamage.

Toovercomethesechallenges,theCarbonTrusthas

developedathreestageprocesstohelporganisationsthat

wishtooffsettodoitrobustlyaspartofanoverallcarbon

managementstrategy.

Stage 1:

Directemissionsreduction

Stage 2:

Indirectemissionsreduction

Stage 3 (optional):

Offsetting

Calculateemissions

Lookforinternalabatement

opportunities

Developanemissions

reduction/carbon

managementplan

Mapsupplychainprocess

andestablishcarbonfootprint

Identifyopportunitiesfor

emissionsreduction

Developanimplementation

planacrossthesupplychain

Bringnewlow-carbon

productstomarket

Establishreasonsfor

buyingoffsets

Dene type of offsets to

bebought

Carryoutduediligence

onrobustnessofoffsets

Figure 1: The Carbon Trust three stage approach to developing a robust carbon management strategy

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Arobustcarbonmanagementstrategyshouldfocusonthe

rst two stages addressing an organisations direct and

indirect emissions. There are a number of benets in doingthis,including:

Cost savings:reducingenergybillsaswellasleading

tosavingsintransport,wasteandotheroperatingcosts

withintheorganisationanditssupplychain

Operationalefciency: as a side benet of improving

energy and carbon efciency

Increased revenues:fromexploitingopportunitiesto

bringnewlow-carbonproductsandservicestomarket

Mitigation of regulatory risks:includingClimateChange

Levy(CCL),EnergyPerformanceofBuildingsDirective(EPBD),EUEmissionsTradingScheme(EUETS)orany

futurelegislation

Improved Corporate Social Responsibility and

reputation:fromproactivelymakingeffortstoreduce

carbonemissions.

Afterlookingattheirdirectandindirectemissions,some

companiesmaythendecidetoincludeoffsettingaspart

oftheiroverallcarbonmanagementstrategy.

Forthisthirdstage,weprovideastep-by-stepguideon

how to dene that strategy, and how to identify the type

ofoffsetstobuy.

Wehighlighttheprosandconsofoffsetsaccordingtoseven

keycategories:

Type of projects

Standards used

Project location

Additionalbenets

Level of aggregation (credits from portfolio versus

credits from individual projects)

Provision of guarantees

Labelling service offered by offset providers.

Thelaststepintheprocessistoidentifyandpurchasegood

qualityoffsets.TheCarbonTrusthasdevelopedaprocess

withkeyquestionstohelporganisationsassessthevalidity

oftheoffsetstheyareacquiring.

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Development of the Kyoto Protocol

Thereisagrowingconsensusthatclimatechangeisone

ofthegreatestchallengesofmoderntimes.Sincethestart

oftheindustrialrevolution,thevolumeandconcentration

of so-called greenhouse gases (GHGs), has increased

in the Earths atmosphere. These gases trap heat within

theatmosphere,andcauseglobalmeantemperaturesto

increase.Thishumaninducedglobalwarmingeffecthas

produced changes to our climate which could have signicant

effectsonourplanetinthenextdecades.

Theworldisrespondingtothisthreatbytakingglobalaction to limit the emissions of GHGs into the atmosphere.

The rst step came in 1988 with the establishment of the

IntergovernmentalPanelonClimateChange(IPCC)tohelp

governmentsacrosstheworldinvestigateandunderstand

thescience,issuesandimpactsofclimatechange,and

buildsomeinternationalconsensusonthenatureofthe

problem. In 1992, the IPCC and the United Nations (UN)

established the United Nations Framework Convention on

Climate Change (UNFCCC).

Thisinternationaltreatyformallyrecognisedtheconcern

overclimatechange,andestablishednon-legallybinding

targetstostabilisedevelopedworldgreenhousegasemissions at 1990 levels.

In 1997, the UNFCCC adopted the Kyoto Protocol,

establishinglegallybindingtargetsforthedeveloped

world countries that ratied the protocol. It aims to

reducegreenhousegasemissionsbyanoverall5%below

1990 levels during the period between 2008 and 2012.

Tomeettheirtargets,countriescaneitherreduce

their domestic emissions, or use the so-called exible

mechanisms established by the Kyoto Protocol: Clean

DevelopmentMechanism(CDM),JointImplementation(JI)

orEmissionsTrading.Thesemechanismsallowforthe

tradingofcarboncredits,orcarbonemissionsreductionunits,whichcanbeusedforcompliancepurposesby

partiesthathavelegallybindingtargets.

Box 1: Kyoto Protocol

exiblemechanisms

Clean Development Mechanism (CDM)

CDMisbasedontheimplementationofprojectsin

developingcountriesthatresultinanetreduction

of greenhouse gases (GHGs) entering the atmosphere.

These projects receive emissions credits, or Certied

EmissionsReductions(CERs),whichcanbeusedby

developedcountrieswithlegallybindingtargets

toachievecompliance.Aconditionfortheissueof

creditsisthatprojectsgenerateemissionsreductions

thatareadditionaltowhatwouldhavehappened

intheabsenceoftheproject,aconditionreferred

to as additionality. Emissions reductions under

this mechanism need to be veried and certied

byanauthorisedthirdpartycalledtheDesignated

Operational Entity (DOE). The DOE periodically veries

thereductionsachievedbytheprojectactivityand

provides written certication that the project activity

has achieved the veried GHG reductions.

Joint Implementation (JI)

JIisbasedonthesameprinciplesasCDM,butoperational

inAnnexIcountries(developedcountrieswithlegally

bindingreductiontargetsundertheKyotoProtocol

agreement).EmissionsreducedbyJIprojectsneed

tobeadditionalinordertoreceiveemissionscredits

calledEmissionsReductionUnits(ERUs).TheERUs

generatedbyJIprojectscanbeusedbyAnnexIparties

towardsmeetingtheirlegallybindingemissionstargets.

Emissions trading

EmissionstradingintheKyotoProtocolisbasedona

cap-and-tradesystemwheredevelopedcountriesareallocatedemissionsallowancesbasedontheemissions

reductiontargetnegotiated.Eachallowance,calledan

AssignedAmountUnit(AAU),isequivalenttoonemetric

tonneofCO2.Attheendofthecomplianceperiodeach

countryhastoholdanamountofAAUsequivalenttohow

much GHG it has emitted during the period. Countries

whichhavereducedtheiremissionsbelowtheirallocated

allowanceswillbeabletotradethesurplusallowancesto

othersthathaveexceededtheircap.

1 Carbonmarketsputting

theoffsetmarketincontext

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The compliance carbon market

TheKyotoProtocolcreatedamarketforcarbonbasedon

thetradingofemissionsreductionsoremissionsallowance

unitsusedforcompliancepurposes.Thepossibilityof

usingtradingasacost-effectivewaytoachieveemissions

reductiontargetshasencouragednationsandgroupsof

nations(egtheEU)todeveloptheirowndomestictrading

mechanismstohelpthemmeettheirKyototargets.

AmongtheseschemesthebiggestistheEuropeanUnion

EmissionsTradingScheme(EUETS),inoperationsince

1stJanuary2005.

Box 2: Why is emissions tradingcost effective?

Emissionstradingisamarket-basedapproachthat

allowspartieswithenvironmentalcommitmentstouse

instrumentssuchasemissionsallowancesorcreditsto

demonstratecompliancewiththeircommitments.Using

emissionstrading,partiescandecidewhetherthey

reducetheiremissionsinternally,takingintoaccount

thecostsoftheirinternalabatementopportunities,whethertheyshouldbuycreditsorallowancesfrom

otherparties,takingintoaccountthepriceofthose

allowancesorcredits,ordecidetoabatetheir

emissionsbeyondwhatisrequired,generatinga

surplusofemissionsreductionsthatcouldbesoldto

otherpartieswhichareshortoftheircommitment.

Byprovidingamarket-basedmechanismwithprice

signals,partiescantakedecisionsonwhichisthe

mostcost-effectivestrategytofollowtoachievetheir

environmentalobligations.

EU Emissions Trading Scheme (EU ETS)

Basedonacap-and-tradesystem(seeBox3),theEUETS

isbyfarthelargestemissionstradingschemeintheworld.

Itcoversaround12,000installations,insixmajorindustrial

sectors,across25countries.Itencompassesover40%of

Europes and the UKs CO2emissions.Companiesincludedin

thisschemehavethechoicetoreducetheirownemissions,

buyallowancesinthemarket(calledEUallowances,EUAs)

orpurchasecreditsthroughCDMorJIprojects(although

therearelimitsonthevolumeofCDMandJIcreditsthat

canbepurchased).Theschemehasbeenrunningsince

1stJanuary2005.Itssecondphasewillstarton1stJanuary

2008 and end on 31st December 2012, in line with the rst

Kyotocommitmentperiod.Athirdphaseisexpectedtorun

after this, but its form and duration have yet to be dened.

Other schemes

ApartfromtheEUETS,therearethreeotherschemesin

operation in countries that have ratied the Kyoto Protocol:

the Norway ETS, UK ETS (which will end in December 2006)

andtheJapanVoluntaryEmissionsTradingScheme,which

hasbeenrunningsinceApril2006.Otherschemesare

alsobeingdevelopedtohelpcountriescomplywiththeirKyototargets.

The New South Wales Abatement Scheme in Australia and

the Regional Greenhouse Gas Initiative in the US are two

otherexamplesofemissionstradingschemes.Although

these countries have not ratied the Kyoto Protocol, and

thereforehavenolegallybindingcommitmentstoreduce

theiremissions,theschemesareputinplaceatastate

levelandbotharemandatoryforthecompaniescovered

withinthescheme,asdescribedbelow:

New South Wales Abatement Scheme

Inoperationsince2003,theschemeisaimedatreducingCO2emissionsfromthegenerationofelectricityinthis

Australianstate.Ahybridbetweenacap-and-tradeand

baseline-and-creditsystem(seeBox3),emittersare

givenacapontheiremissionsbasedontheemissionsper

capitawithinthestate;ifanemitterexceedsthecapthey

can either pay a ne (c. 6.25/tCO2e)oroffsetemissions

by purchasing New South Wales Greenhouse Abatement

Certicates (NGACs) generated by emissions reduction

projectscarriedoutwithinthestate.Unlikeother

schemes, the New South Wales scheme does not allow

theuseofothercredits,suchasKyotocredits,for

compliancepurposes.

Regional Greenhouse Gas Initiative (RGGI)

This scheme is to be launched in January 2009 in seven

North-Eastern and Mid-Atlantic US states. It is a cap-and-

tradeschemeandcoversaround200powerplantswith

energyproductioncapacityabove25MW,whichusefossil

fuelstogenerate50%ormoreoftheirenergy.Thescheme

allowsparticipantstouseoffsetsforcompliancepurposes,

favouringthosegeneratedintheUS,althoughoffsetsfrom

otherschemescouldbeusedwithsomerestrictions.

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Box 3: Emissions Trading

Mechanisms

Emissionstradingmechanismscantaketwobasicforms:

cap-and-tradeorproject-based(sometimesalsocalled

baseline-and-credit).

Cap-and-trade system

Cap-and-tradesystemsarebasedontheallocation

ofaceilingorcaponemissionsoveraperiodoftime.

Theauthorityallocatesallowanceseitherfreeorby

auctioning them. Each allowance represents a dened

emissionsamount(egtonneofSOX, NOXorCO2

equivalent).Inordertocreateamarket,authorities

allocatealimitednumberofallowances,belowthe

currentexpectedemissionslevel,whichcreates

scarcityinthemarket,generatingapositivevaluefor

thepermits.ExamplesofthissystemincludetheUSSOX

allowancestradingscheme,theKyotoemissionstrading

schemeandtheEUETS.

Project-based or baseline-and-credit system

Thissystemisbasedonprojectswhichreduce

emissionsbeyondabusiness-as-usualscenarioin

otherwords,theygenerateemissionsreductionsthat

areadditionaltowhatwouldhavehappenedinthe

absenceoftheproject.Thebusiness-as-usualscenario

providesthebaselinefortheseprojects.Baselinesare

establishedfromhistoricalemissionsdataorthrough

othermethodologies(egratioofemissionstooutput).

Projectsthatreduceemissionsbeyondthebaseline

areentitledtoemissionsreductioncredits,whichcan

besoldtopartiesthatcanusethemforcompliance

orvoluntarypurposes.Typically,emissionsreduction

creditsarenotissueduntilthereductionshave

actuallyoccurred.ExamplesofthissystemareCDM

andJIprojects.

The voluntary carbon market

Alongsidethecompliancemarket,avoluntarymarkethas

emerged.Thisbringstogethersomeverydifferentplayers

(eg from companies to local governments, NGOs, individuals

orcities)whohavearangeofreasonsforparticipatingin

themarket.

Asinthecompliancemarket,thevoluntarymarkethasa

numberofdifferentschemes.However,incontrasttothe

compliancemarket,theseschemesgenerateemissions

reductionunitsorallowanceswhich,inmostcases,are

nottradableoutsidetheschemeboundaries,inotherwords, are non-fungible.

Thenon-fungibilitycharacteristicofthevoluntarymarket

isbecauseofdifferencesintherulesoftheschemes.

Whileinthecompliancemarketmostschemesaregoverned

bytheKyotoProtocol,creatingemissionsreduction

unitswhicharefungibleortransferable,thereisnosuch

overarchingframeworkinthevoluntarymarket.Thismakes

thevoluntarymarketnotonlycomplextounderstand,but

alsolesstransparentandextremelydiverseintermsofits

trading units. For example, some emissions reduction

creditstradedonthismarketdonotneedtopassany

additionalitycriteria,whileothersdo.

Awaytounderstandthismarketistodivideitbetweenthe

voluntarymarketwithlegallybindingobligationsandthe

voluntarymarketwithout.

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Legally binding voluntary market

Playersinthismarketformpartofaschemeinwhichthey

voluntarily set themselves legally binding GHG emissions

reductiontargets.ThisisthecaseintheChicagoClimate

Exchange(CCX).TheCCXisavoluntarysystem(based

inCanada,theUSandMexico)whichsetsself-imposed,

legallybindingreductiontargetsonitsmembers.The

systemisahybridbetweenacap-and-tradeandproject-

basedscheme.Participantmembershaveanemissionscap

based on historic (1999-2002) emission levels. To comply,

memberscaneitherreducetheiremissionsbelowtheir

caporpurchaseoffsetcreditsgeneratedfromprojectsintheUS,Brazil,CanadaorMexicothatfocusprimarily

on landll and agricultural methane destruction, or

carbonsequestrationinsoilsorforest-basedbiomass.

TheschemealsoallowstheuseofKyotocompliance

instrumentssuchasCERsorERUs.

Non-legally binding voluntary market

(the offset market)

Playersinthismarketengagevoluntarilyinemissions

reductionschemesbecausetheyhaveeithersettheirown

reductiontargetsorwishtoreduceornetofftheircarbon

footprint.Strategicreasonswhycompaniesbuyoffsets

includeaddressingclimatechange,generatinggoodwill

amongstcustomersandemployees,learningbydoing,or

CorporateSocialResponsibility(CSR)interestorobligations.

This segment includes the so-called retail carbon market,

targetedatcompaniesandindividualsthatusuallyhave

relativelysmalldirectemissions,andwishtoreducetheir

carbonfootprintthroughoffsetting.Theyoftenpurchasesmall

quantitiesofemissionsreductioncredits,whichcouldeither

be veried or be part of a non-verication standard. This

marketiscommonlyreferredtoasthecarbonoffsetmarket.

Boththelegallyandnon-legallybindingmarketshaveseen

asteadyincreaseintheiractivitiesinthepasttwoyears.

Inthelegallybindingsector,theChicagoClimateExchange

hasseenthevalueofitstransactionsgrowbymorethan

140%annually.Similarly,thevoluntaryretailoffsetmarket

hasenjoyedasteadygrowthinthepasttwoyears.The

voluntaryoffsetmarkettodayissmallandfragmented,

butgrowthisexpectedfortheforeseeablefuture.For

example,inthepastthreeyears,themainnon-compliance

offsetprovidersintheUKhavegrownbyover60%perannum.

Growth in the voluntary market will be dependent on

thelevelofinterestfromthegeneralpublicandkeystakeholdersinterestedinclimatechange,andonthe

perceptionofwhetheroffsettingistherightwaytoaddress

climate change in the long term. Some NGOs and the media

havestartedtoquestiontheroleofoffsettingastheysee

itasalicencetocontinuethestatusquoanddelaytrue

changesinbehaviourthatwoulddrivesocietytowards

alow-carboneconomy.

Inaddition,thevoluntarymarketcouldbechanged

considerablybytheintroductionofacommonstandard

thatcouldimprovecredibility,orbytheevolutionofanew

internationalclimatechangeagreementpost-2012.This

iswhysomemarketparticipantsarecautiousabouttheexpectedgrowthrate.Theypredictthatcontinuedgrowth

canbesustainedforthenext4-5yearsbutthatafter2012

thereisuncertaintyastohowthemarketisgoingtoevolve.

Therestofthisguidewillfocusprimarilyonthevoluntary

market, specically the voluntary retail offset market. This

isstillaveryyoungandevolvingmarketandparticipants

needtoconsidercarefullytheissuesrelatingtooffsetsand

thewidercarbonneutralconceptbeforeengaginginit.

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2Backgroundoncarbonoffsets

Project-based carbon offsets

Carbonoffsetsaregeneratedfromprojectsthatavoidorabsorb/sequestercarbondioxide,oranyofthe

othermaingreenhousegases(methane,nitrousoxide,

hydrouorocarbons, peruorocarbons and sulphur

hexauoride).

Theseprojectscantakevariousforms,includingrenewable

power, energy efciency, fuel switching (eg from oil to

naturalgas),reforestation,ordestructionofgreenhouse

gases(egmethane,HFC23).Table1providesexamplesof

thetypeoftechnologiesthatcanbeusedtogenerateoffsets.

Inthevoluntarysector,offsetsaremainlysourcedfrom

smallscaleprojects(typicallywithemissionsreductionsofbelow15ktCO2eperannum)locatedindevelopingcountries.

Thisisfortwomainreasons.Firstly,smallscaleprojects

typically benet local and rural communities providing

sustainable development and/or social benets. Thesebenets are sought by buyers who not only want to reduce

theircarbonfootprint,butalsowanttouseoffsetsasa

waytopromotecorporatesocialresponsibility.

Thesecondreasonisaneconomicone.Inthemajority

ofcases,smallscaleprojectsarestilleconomically

unattractiveforthecompliancemarket(duetothehigh

transactioncostsinvolvedindevelopingtheseprojects

undercompliancemarketrules),buttheyareaviable

sourceofcreditsforthevoluntarymarketwherethe

burdens of verication are often much lower.

Table 1: Examples of technologies that can be used in offset projects.

Type of technology Examples

Technologies

avoiding

greenhouse gases

Renewableenergy Run-of-riverhydro(typicallylessthan15MW)

Biomass

Wind

Solarthermal

Photovoltaic

Energy efciency Low-energylighting

Industrial energy efciency

Gas recovery or

destruction

Methane recovery from landlls

Destructionofby-product(HFC23)fromHFC22refrigerant

production

Fuelswitch Oiltonaturalgas

Dieseltonaturalgas

Fueloiltonaturalgas

Liquid petroleum gas (LPG) to biomass briquettes

Technologies

absorbing/

sequestering CO2

Biologicalsinks Reforestation(forestationoflandpreviouslyforested)

Afforestation(forestationoflandnotpreviouslyforested)

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Not every project that reduces GHG emissions can generate

carboncredits.Toqualifyasanoffset,thereductions

achievedbyaprojectneedtobeadditionaltowhatwouldhavehappenediftheprojecthadnotbeencarriedout

a condition dened as additionality.

Box 4: Testing for additionality

The Executive Board of the UNFCCC has developed

a toolkit to help project developers assess projects

additionality. Published as the CDM tool for the

demonstration and assessment of additionality, this

hasbeenwidelyusedintheCDMmarketandisarobust

processtotestadditionalityforemissionsreductionprojects.UndertheCDMtool,aprojectisadditional

ifitmeetsthefollowingcriteria1:

Itisnotrequiredbycurrentregulation

Itisnotcommonpractice(ietechnologyorpractice

hasnotdiffusedintherelevantsectororregion

wheretheprojectiscarriedout);and/or

Itfaceseconomic,investmentortechnological

barriersthatwouldpreventtheimplementationof

theproject.Examplesofeconomicbarrierscould

be an inability to meet IRR, NPV or payback criteria;

investmentbarriersincludealackofaccesstodebtfundingortocapitalmarketsduetorealorperceived

risksassociatedwiththeproject;andtechnological

barriersincludelackoflabourresourcesneededto

operateandmaintainthetechnologyoralackof

infrastructureneededtoimplementprojectsinthe

countryorregion.

Additionality is the dening concept of offset projects.

Theintegrityofproject-basedcreditsreliesonthe

reduction of GHG emissions beyond what would have

occurredinabusiness-as-usualscenario.Whatconstitutesbusiness-as-usualisnotstraightforwardtodetermine

andanumberofmethodologieshavebeendevelopedto

dene the baseline emissions against which the project is

compared(seeBox5).Thedifferencebetweentheproject

emissions and the baseline emissions denes the number of

emissionsreductioncreditsthataprojectisentitledto,as

illustratedinFigure2.

Figure 2: Net reductions generated from offset projects

Box 5: CDM baseline methodologies

EveryprojectsubmittedforCDMregistrationhasto

haveitsbaselineemissionscalculatedaccordingtoan

approvedmethodology.Thesemethodologiesprovide

areasonableprocesstorepresentthegreenhousegas

emissionsthatwouldhaveoccurredintheabsenceof

theproject.

AsofSeptember2006,therearemorethan60approved

methodologiesthatcoverawidespectrumofproject

types,suchaszeroemissionrenewableenergyprojects,

biomassprojects,emissionsrecoveryfromwaste,

wastewateroranimalwasteprojects,fossilfuel

switchingprojects,destructionofpotentgreenhouse

gasessuchasHFC23,changesincementproduction,

energy efciency projects, transport projects and

reforestationprojects.Alistofcurrentmethodologies

can be found on the UNFCCC website, http://unfccc.int

GHG emissions

Emissions

reductions

Time

Baselinee

missions

Projectemissions

1CDMtoolforthedemonstrationandassessmentofadditionality(http://cdm.unfccc.int/EB/Meetings/022/eb22_repan8.pdf)

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Characteristics of offset projects

Besidesadditionality,thereareanumberofotherimportant characteristics that affect an offset projects

integrityandcredibility.Theseare:

Verication

Monitoring and verication of emissions reductions provide

guaranteesthattheemissionsreductionsclaimedby

aprojecthaveactuallybeenachieved.Toensurethe

integrity of the verication process, emissions reductions

should always be veried by an accredited independent

thirdpartyaccordingtoanestablishedstandardor

protocol. It is important to distinguish between verication

andvalidation.Whilevalidationinvolvesassessingthat

the offset project has been set up properly, verication

establisheswhetherthereductionsitclaimshaveactually

been achieved. In the compliance market, verication is

carried out by pre-approved veriers, called Designated

OperationalEntities(DOEs).DOEscanalsoprovidewritten

assurance that the project has achieved the veried

emissions reductions a process dened as certication

(thisiswhycarboncreditsfromCDMprojectsarecalled

Certied Emissions Reductions, CERs).

Permanence

Permanencereferstotheabilityofaprojecttomaintain

thereductionsachievedovertime.Permanenceis

importantassomeprojectsmightmitigateemissionswhich

maybereleasedintotheatmospherelater.Forexample,

projectsfromforestryactivitiesusedascarbonsinks,could

re-releasethecarboncapturedinthegrowingtreesifthe

forestburntdownortheuseofthelandchanged.Offset

providersshouldoffersomeformofguaranteethatensures

thattheemissionsreductioncreditscontractedbyabuyer

are maintained over time. Guarantees could take the form

ofaninsurancepolicy,whereanunderperformingproject

generatingcreditsiseitherreplacedbycreditsfromother

projects from the sellers portfolio, or by acquiring creditsinthemarkettocovertheshortfall.Otherstrategies

couldincludetheestablishmentofacontingencycarbon

creditspool(egapercentageofthecreditsgenerated

bytheprojectarekeptbythedeveloperandnotsold),

orthemaintenanceofaportfolioofprojectsthatwould

delivercreditsfromdifferenttechnologies,atdifferent

timescomingfromdifferentlocations.Thiswouldensure

thatunderperformingprojectscouldbebalancedbyother

projectsintheportfoliothataredelivering.

Leakages

Leakage is dened as increases or decreases in emissionsthattakeplacebeyondtheprojectboundaryandwhich

aremeasurableandattributabletotheprojectactivity.

Forexample,reforestationprojectsmighthavenegative

effectsbydisplacingagriculturalactivitiestootherareas

wheretheycouldgenerateemissions.Leakagesneedtobe

quantied and taken into account in the project, adjusting

theemissionsreductionsachievedbythelevelofleakage

identied. It is important that projects account for major

andobviousleakagesinapracticalway,strikingabalance

betweenenvironmentalintegrityandthepracticality(in

terms of resources and nancial constraints) of quantifying

the impacts outside the projects boundaries.

Double counting

Doublecountingcouldhappenataprojectlevel,whena

creditissoldtwoormoretimestodifferentbuyers;and/or

atanationallevel,wherevoluntaryreductionsarecounted

againstnationalmandatorytargets.Toavoidtheformer,

offsetsellersshouldalwayshavearegistryinplacewhere

creditsareaccountedforandretired;withoutaregistryin

place,transactionscannotbeloggedorcreditedtobuyers

andpotentiallythesamecreditcouldbesoldmorethan

once. To guard against the second issue, rules that dene

howgreenhousegasesareaccountedforatanational

levelarerequiredtogetherwiththeuseofnationaland

internationalregistries.Withoutanappropriatemechanism

fordiscountingthereductionsgeneratedbyoffsetprojects

from the national GHG inventory of countries with legally

bindingtargets,thereductionscouldbedoublecounted:

againstvoluntaryreductionsaswellasagainstnational

compliancetargets.Itisimportantthatoffsetproviders

dene how they are going to deal with double counting

issueswhensourcingprojectsfromAnnexIcountries

(developedcountrieswithlegallybindingreductiontargets

undertheKyotoProtocolagreement).


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11TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy

Standards by which

offsets are measuredToensurethatcreditsgeneratedfromemissionsreduction

projectsareequivalenttoeachother,standardshavebeen

developed that regulate carbon offsets. These dene the

maincharacteristicsthatoffsetprojectsshouldcomply

withtoguaranteetheirintegrity,especiallyregarding

additionality and verication.

Inthecompliancemarket,standardsandrulesof

engagement are well dened, with the UNFCCC ensuring

thatbothCDMandJIstandardsaremet.Projectsmust

complywithapprovedmethodologiesforcalculating

baselineemissions,executingmonitoringplans,andusepre-approved organisations to carry out verication and

certication of emissions reductions.

In the voluntary market, there is no equivalent to a dened

standardorruleofengagement.Instead,therearea

variety of standards, protocols, and verication methods,

mostofthemproprietarytoeachoffsetprovider.

Recentlytherehasbeensomeefforttoprovide

harmonisationofthevoluntarymarketthroughthe

development of two standards: the Voluntary Gold Standardand the Voluntary Carbon Standard by the Climate Group.

TheformerwaslaunchedinMay2006andthelatteris

expectedinDecember2006.

Thesetwostandardsareexpectedtobecomplementary.

TheVoluntaryCarbonStandardwillfocusonthesmallto

medium size projects, while the Voluntary Gold Standard

willbeaimedatmicrotosmallscaleprojectswithastrong

sustainabledevelopmentcomponent.

Whetherthemarketwillseethesetwoworkinginthisway

remainstobeseen,butmostlikelythevoluntarymarket

willeventuallyhaveonestandard(ortwocomplementarystandards)thatwilltrytobringharmonisationtothemarket.

ArangeofcurrentstandardsisdescribedinTable2.


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TheCarbonTrust12

Table 2:Brief description of main offset standards

Standard Coverage Key points

CDM/JI Project-basedemissions

reductions,including

rulesforbaselines,

additionality,monitoring,

reporting, verication and

certication

Governed by independent Executive Board of UNFCCC

Robust additionality, monitoring and verication process; high

credibilityinthemarket

Aimedatthegenerationofcomplianceinstruments(CERs,ERUs)

Hightransactioncosts

CDM Gold

Standard

AsforCDM,butstrong

focusonsustainable

development benets and

restrictionontechnologytypes(noforestry

projectscanbeincluded)

Providesaconsistentapproachtoassessthecontributionof

projecttowardssustainabledevelopment

Endorsed by a number of NGOsHightransactioncosts

Voluntary Gold

Standard (VGS)

As for CDM Gold Standard,

butaimedatthe

voluntarysector

Aimedatsmallscaleandmicroscaleprojects

Strong focus on sustainable development benets

Simplied rules to reduce transaction costs

LaunchedinMay2006

Voluntary Carbon

Standard (Climate

Group)

Forexclusiveuseonthe

voluntarymarket

BasedonCDMframework

CreatestradableVoluntaryCarbonUnit(VCU)

Registry to be managed by Bank of New York

ExpectedtobelaunchedinDecember2006

Climate,

Community and

Biodiversity

Standards (CCB)

Forestrycarbon

sequestrationprojects

withcommunity

involvementand

biodiversity benets

DevelopedbytheClimate,Community,andBiodiversityAlliance

over two years and involving eld testing in four continents

UsemethodologiesdevelopedbytheIntergovernmentalPanel

onClimateChange(IPCC)

Three levels of validation Approved, Silver and Gold

Plan Vivo System Frameworkforoffsets

fromruralcommunitiespromotingsustainable

livelihoods

Onlyusedonforestryprojectssofar,butscopeforothertype

ofprojects

Lowtransactioncosts

Seven years eld experience of the standard

Proprietary

VeriedEmissions

Reductions (VERs)

Generic term for

voluntarycarboncredits,

not certied by external

body but veried on

acase-by-casebasis

No formal VER standard yet, so no governance structure

Emission reduction typically veried by third party, but

standardscanvarywidely


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CDM/JI standard

Projectsthatwanttogeneratecompliancecredits(CERs,ERUs)needtocomplywiththeCDM/JIstandards,governed

bytheindependentExecutiveBoardthatispartofthe

UNFCCC framework.

Thestandardsprovidehighlevelsofintegrity,credibility

androbustness,buttocomplywiththem,project

developershavetoincurhightransactioncosts:therefore

applicabilityismainlylimitedtomediumtolargeprojects

generatingemissionsreductionsinexcessof50,000tonnes

ofCO2equivalent.

UndertheCDMstandard,additionalityisprovedusingthe

additionalitytoolkit(seeBox4)andbaselinemethodologies

approvedbytheCDMExecutiveBoard.Tocomplywith

thestandard,projectdevelopersmustcompleteaProject

DesignDocument(PDD)whichprovides:

General description of project activity

Applicationofabaselinemethodology

Durationofactivityandcreditingperiod

Applicationofamonitoringmethodologyandplan

Estimation of GHG emissions by source

Environmentalimpacts

Stakeholders comments.

ProjectdevelopershavetosubmitthePDDforvalidation

byanaccreditedthirdparty(DesignatedOperationalEntity,

DOE)andseekapprovalbytheExecutiveBoard.The

standard denes a verication process that needs to be

carriedoutbyaDOE,oncetheprojecthasbeenvalidated

andregisteredwiththeExecutiveBoard.Thisinvolves

on-siteinspectionsandreviewsoftheprojectdocumentation.

The end of the process is certication, a written assurance

bytheDOEthattheprojectactivityhasachievedthe

veried emissions reductions claimed. After certication,

Certied Emissions Reductions (CERs) can be issued.

CDM Gold Standard

The CDM Gold Standard, developed by a group of NGOs

ledbyWWF,isbuiltonthebasisoftheCDMstandard,

butincorporatesguidelinesandframeworkstoprovethe

sustainabledevelopmentcomponentofCDMprojects.As

alreadymentioned,underCDMstandards,projectsneed

topromotesustainabledevelopment.However,CDMrules

donotprovideguidelinesonhowprojectdevelopersmust

dothis,norhowtoconductastakeholderconsultation

(arequirementofCDM).Projectsmustpassthreescreens

to qualify as a CDM Gold Standard project:

Project-type screen the Gold Standard is restricted

to renewable energy and end-use energy efciency

improvementprojects

Additionalityandbaselinescreen(similartoCDM)

Sustainabledevelopmentscreenprojectsmustbe

assessedontheircontributiontosustainabledevelopment

using dened guidelines and frameworks provided by the

standardtocreateascoringsystemforenvironmental,

socialandeconomicimpacts.Thestandardrequiresan

extendedstakeholderconsultationand,whenrequired

bynationallaw,thedevelopmentofanEnvironmentalImpactAssessment.

CDM Gold Standard, although targeted at the CDM market,

couldbeappliedtoanyproject(exceptforestryprojects

whichareexcludedfromthestandard).However,dueto

thehightransactioncostsinvolvedtocertifyunderthis

standard,itisbestappliedtomediumtolargeprojects,

whichtypicallyaredevelopedfortheCDMmarket.

Voluntary Gold Standard (VGS)

The Voluntary Gold Standard, launched in May 2006, has

been specically developed for use in the voluntary offsetmarket to generate veried emissions reductions (VERs).

As with the CDM Gold Standard it has a strong focus on

sustainabledevelopment.

The standard is based on the CDM Gold Standard, but

provides simplied procedures aimed at small or micro

scale projects. For example, the verication process is

conductedonarandomsample,ratherthanforevery

project every year as in the CDM Gold Standard, and

there is no need to carry out a certication process. By

simplifying some procedures, the Voluntary Gold Standard

aimstolowertransactioncostsandmakeitmoreattractive

togenerateVERsfromsmallscaleprojects.Thestandardcanonlybeappliedtoprojectsindevelopingcountriesto

avoiddoublecountingissues.


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TheCarbonTrust14

Voluntary Carbon Standard (VCS)

TheVoluntaryCarbonStandarddesignedbytheClimateGroup and the International Emissions Trading Association

(IETA) is another standard specically being developed

forthevoluntaryoffsetmarket.Itseekstocreateanew

tradingunitcalledaVoluntaryCarbonUnit(VCU).

Thestandardaimstobringtogetherbestpracticesthat

alreadyexistinthemarketplace.Althoughitisprimarily

basedontheCDMstandard,itincorporatesprocesses

fromotherstandards.Forexample,whiletheadditionality

andbaseliningisbasedonCDMprinciples,theproject

accountingisbasedontheprinciplesandmethodsofthe

GHG Protocol for Project Accounting, a different standard

developedbytheWorldBusinessCouncilforSustainableDevelopment(WBCSD)andtheWorldResourceInstitute

(WRI),whichhasbeenwidelyendorsedbygovernments,

NGOs and industry associations to be used for corporate

andprojectgreenhousegasaccounting.

TheVoluntaryCarbonStandardhascreatedaregistry

managed by the Bank of New York to register, transfer

andretireVCUsfromthemarket.Theregistryallowsthe

tradingofVCUsbydifferentmarketplayers,andensures

doublecountingissuesareavoided.

Forestry standards

Therearetwomainstandardsusedforforestryprojects:

TheClimate,CommunityandBiodiversitystandard(CCB)

andthePlanVivosystem.Bothstandardsprovideaframework

todevelopforestryprojectsthatincorporatesustainable

development benets for the rural communities where the

projectsarecarriedout.

TheCCBstandardhasthreelevelsofvalidation:approved,

silverandgold.Itsetsout23criteriabasedonclimate,

biodiversity,andsocio-economicdevelopment;baseline,

projectdesignandprojectmanagementcriteria.Toqualify

fortheCCBstandard,projectsneedtocomplywitha

minimumof15compulsorycriteria,andindependentthird

partyevaluatorsdetermineiftheprojectmeritsapproval.

Projectscanbeapproved,orcanbeissuedasilverorgold

standard,dependingonhowmanyotherextracriteriathey

complywith.Thestandardusesthemethodologiesofthe

Intergovernmental Panel on Climate Changes Good Practice

Guidance to estimate net changes in carbon stocks due

to the projects activities. The standard can also use the

methodologiesapprovedbytheCDMExecutiveBoard.

PlanVivo,developedbytheEdinburghCentreforCarbon

Management(ECCM),isasystemtocreatecreditsfrom

smallscaleagro-forestryprojects.ItreliesonthetechnicalandmanagementexpertisedevelopedbytheECCMover

more than seven years of eld work experience. Technical

specications are put together with project developers,

the host organisation (usually an NGO or a local cooperative)

andatechnicalteamfromECCMand/oralocalorregional

organisation.Projectsareregularlymonitoredusing,in

mostcases,localexperts.CreditsgeneratedfromPlan

Vivoprojectsareregisteredonadatabasesocreditscan

betracedbacktoindividualprojectsanddoublecounting

canbeavoided.

Proprietary standardsVoluntaryoffsetproviders(primarilyretailerswhoinvest

inaportfolioofoffsetprojectsandsellsmallamountsof

creditstocustomersfromtheiroverallemissionsreduction

portfolio)havedevelopedtheirownstandardsinthe

absence of a formal Veried Emissions Reductions (VER)

standard.Thesestandardsdifferwidely,havingdifferent

approachestothewaytheytestadditionality,calculate

baselines or the way the verication procedure is carried

out.VERsgeneratedfromdifferentproprietarystandards

are usually neither comparable or tradable. This is reected

in the price range of VERs, which varies from 3-15 per tonne

ofCO2e(forprojectsthatatthelowerend,forexample,donotneedtocomplywithadditionalityprinciplesora

standard) to 20-30 per tonne of CO2e(forprojectsthat

needtocomplywitharigorousmethodology,includingthe

promotionofsustainabledevelopment).Itisuptothebuyer

ofVERstomakesurethatVERssoldunderaproprietary

standardcomplywithminimumqualitylevels(described

laterinthisdocument).Butasabareminimum,theprojects

underanystandardshouldhaveamethodologytoassess

additionality over a dened baseline and have a verication

processrunbyanaccreditedindependentthirdparty.


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Thevoluntaryoffsetmarkethasexperiencedrapidgrowth

inthepasttwoyears.Thekeyfactordrivingthismarket

hasbeentheincreaseinpublicawarenessofclimatechange,andtheacknowledgementbycompaniesthatitis

animportantelementtoconsiderintheirbusinessstrategy

andoperations.

InourreportBrand Value at Risk from Climate Change,

climate change was identied as an issue that could

becomeamainstreamconsumerconcernby2010.Itwas

acknowledgedasabusinessriskoropportunitybymore

than 85 per cent of the Financial Times Global 500 (FT500)

companiesinterviewedbytheCarbonDisclosureProject2in

2006soitisnosurprisethatclimatechangehasbecomean

importantissueoncorporatesocialresponsibilityagendas.

What is carbon neutrality?

Carbonneutralityisachievedwhenemissionsfroma

product,activityorawholeorganisationarenettedoff,

eitherthroughthepurchaseofanequivalentnumberof

offsetsorthroughacombinationofemissionsreduction

andoffsetting.Intheory,theconceptiseasytounderstand,

andthiscanexplainwhyitspopularityhasgrowninrecent

years. However, in practice this concept is more difcult

toapply.Carbonneutralityisadynamicstatewhere

year-on-yearemissionsneedtobenettedoff.Immediately

twoquestionsarise:

Howtoachievecarbonneutralityandinparticular

towhatextentshouldcompaniesdirectlyreducetheir

emissionsversuspurchasingoffsets?

How to dene the carbon footprint of products, services

orcompanies?

How to achieve carbon neutrality

Inourexperienceofworkingwithcompaniesacrossthe

UKonemissionsreduction,themostcosteffectiveand

environmentally sound way to address an organisations

carbonfootprintisto:

First,focusonreducingdirectemissionsimplementing

all cost-effective energy efciency measures and, where

costeffective,reducingthecarbonintensityofenergy

supplybygeneratinglow-carbonheatorelectricity

Secondly,lookatopportunitiestoreduceindirect

emissionsworkingwithotherorganisationstoreduce

emissionsandcutcostsupanddownthesupplychain,and

tolookfornewrevenueopportunitiessuchasdeveloping

newlow-carbonproducts

Then,ifappropriate,considertheoptionofdevelopingan

offsetstrategyforthoseemissionsthatcannotbeavoided.

Thisapproach,focusingondirectandsupplychainemissions,

delivers bottom line nancial and carbon savings year-on-

year.Andforthoseorganisationsconsideringbuyingoffsets,

thisapproachreducesthenumberofoffsetsthatthey

mightneedtopurchase.

Anorganisationcouldachievecarbonneutralityby

acquiringcarbonoffsetswithouttakinganyactionto

reduceitscarbonfootprint.However,thisstrategycan

bringmanyrisks.Firstly,itisonlyasgoodastheoffsets

acquired. Not all offset projects create truly additional

emissionsreductions,andorganisationsneedtoensure

thattheyarepurchasinggoodqualityoffsetsthatrepresent

trulyadditionalemissionsreductionsyear-on-year.

Secondly, while offsetting can address an organisations

carbonfootprintintheshortterm,itcandelayreal

changesinbehaviourthatwoulddriveoursocietytowards

alow-carboneconomy.Organisationswillneedtoaddress

directlytheircarbonfootprinttoachievethetargetssetup

bygovernmentsorcomplywithfuturelegislation.Thirdly,some NGOs and the media have started to question the role

ofoffsetting,andastrategyonlyfocusedonthatoption

couldpotentiallybringreputationalrisks.

Ifanorganisationwishestobecomecarbonneutralthen

astrategythatcombinesdirectandindirectemissions

reductionswithoffsettingasanoption,canbelessrisky

and more benecial from an economic point of view,

reducingthenumberofoffsetsneededandimproving

thebottomline.Inaddition,fromaCSRperspectiveit

demonstrates the organisations commitment to mitigating

climatechangedirectlybyreducingitsownemissionsand

carbonfootprint.Mostofthecarbonneutralschemesinplaceinthemarketsupporttheideathatcarbonneutrality

shouldbeachievedthroughacombinationofdirect

emissionsreductionsandoffsetting.

3Thecarbonneutralconcept

2The Carbon Disclosure Project (CDP) Report 2006. The CDP provides a coordinating secretariat for institutional investor collaboration on climate change. CDPs

aim is twofold: to inform investors of the signicant risks and opportunities presented by climate change; and to inform company management of the serious

concernsoftheirshareholdersregardingtheimpactofclimatechangeoncompanyvalue.


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TheCarbonTrust16

Howtodeneyourcarbonfootprint

To be able to become carbon neutral, an organisation rst

needstoknowitscarbonfootprint:theemissionsforwhich

itisresponsible.Acarbonfootprintincludesactivitiesthat

resultindirectandindirectemissions,andthereforeit

iscloselyrelatedtowheretheboundariesforparticular

activitiesaredrawn.Directemissions,orthoseunderfull

controlofanorganisation,arealwaysincludedwithinthe

companys carbon footprint (including emissions associated

withelectricityconsumption).Itisreallytheinclusionor

exclusionofindirectemissionsthatdifferswhencalculating

an organisations, products or activitys carbon footprint.Indirectemissions,orthoseemissionsnotcontrolledor

fullycontrolledbyanorganisation,canincludeemissions

from travel (eg business ights), supply chain emissions,

employeescommutingtoworkandsoon.

Guidance on which emissions to include from indirect

sourcesandhowthesearecategorisedcanbeobtained

from standards like the GHG Protocol Initiative (developed

bytheWorldResourceInstitute(WRI)andWorldBusiness

CouncilonSustainableDevelopment(WBCSD)),ISO14064

orfromproprietarystandardsdevelopedbyoffsetproviders.

However, regardless of the denition used, the key is to

stateclearlywhathasandhasnotbeenincludedwithinthecarbonfootprint.Thishelpstoexplainwhataspectsof

anorganisation,productoractivityhavebeenconsidered

inacarbonneutralclaim,andwhichhavebeenleftoutof

scopeandwhy.

Businesses and carbon neutrality

Mostforwardthinkingbusinesseshaverecognisedtheneed

toaddressclimatechangeandhavebeguntoproactively

reducetheircarbonemissions,minimisingtherisks(such

asregulatory,reputationalorcompetitiverisks),and

maximisingthebusinessopportunitiescreatedbyclimate

change(egcreatingnewcommercialopportunitiesfrom

low-carbonproductsorservices,orfromparticipatingin

theglobalcarbonmarket).Anumberofbusinesseshave

alsoturnedtothevoluntaryoffsetmarketasawayto

compensatefortheiremissionsanddemonstratetheir

commitmenttotakeactiononclimatechange.Someofthesecompaniesincludeoffsetsaspartofawidercarbon

managementstrategy,whichinvolvesdirectandindirect

emissionsreductionsaswellasoffsetting,whilstothers

onlyuseoffsetsasawaytoaddresstheircarbonfootprint.

AstudycommissionedbytheCarbonTrustandcarriedout

byL.E.K.Consultingfoundthattheperceivedpressurefrom

customersandconsumershasbeenthemaindriverofthe

voluntarymarket,motivatingorganisationstoinvestin

voluntaryoffsetsaspartoftheirCSRorenvironmentalpolicies.

Manycompaniesalsouseoffsetsasameanstoengage

employeesonenvironmentalissues,offsettingtheirindividual business ights or even giving them the opportunity

tovoluntarilyoffsettheirpersonalemissions.Inaddition,

companiescanalsouseoffsetsasawaytointernalisethe

costofcarbonandanticipatefuturelegislation.

Offsetscanalsoprovideawaytodifferentiateproducts.

Companiescanoffercarbon-compensatedproductsby

offsettingthetotallife-cycleemissionsoftheirproducts

orbyoffsettingpartoftheiremissions.

However,notallcompaniesarelikelytowanttobuyoffsets

voluntarily.Firmswhicharelargeemittersorhavehigh

directemissionsareeitherlikelytobecoveredbythe

compliancemarket(egEUEmissionsTradingScheme)orare

inabetterpositiontocosteffectivelyabatetheirinternal

emissions, obtaining a net benet rather than incurring a

netcost.


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4 TheCarbonTrustthreestageapproach

todevelopingarobustoffsettingstrategy

TheCarbonTrusthasdevelopedathreestageprocessfor

creatingarobustoffsettingstrategy,thatplacesoffsetting

withinanoverallcarbonmanagementplan.Thisincludes

directandindirectemissionreductionandputsoffsetting

incontextasanoption:

Stage 1:

Directemissionsreduction

Stage 2:

Indirectemissionsreduction

Stage 3 (optional):

Offsetting

Calculateemissions

Lookforinternalabatement

opportunities

Developanemissions

reduction/carbon

managementplan

Mapsupplychainprocess

andestablishcarbonfootprint

Identifyopportunitiesfor

emissionsreduction

Developanimplementation

planacrossthesupplychain

Bringnewlow-carbon

productstomarket

Establishreasonsfor

buyingoffsets

Dene type of offsets to

bebought

Carryoutduediligence

onrobustnessofoffsets

Figure 3: The Carbon Trust three stage approach to developing a robust carbon management strategy

Stage 1: Focus on directemissions reduction

The rst stage in a robust carbon management strategy is

tofocusonaddressingdirectemissions.Thereareanumber

of benets to doing this, including:

Costsavingsreducingenergybillsaswellasleading

tosavingsontransport,wasteandotheroperatingcosts

Operational efciency as a side benet of improving

energy and carbon efciency

MitigationofregulatoryrisksincludingClimateChange

Levy(CCL),EnergyPerformanceofBuildingsDirective(EPBD),EUEmissionsTradingScheme(EUETS)orany

futurelegislation

CorporateSocialResponsibilityandreputationfrom

proactivelymakingeffortstodirectlyreducecarbon

emissions.

Inordertodrawupanemissionsreductionplan,an

organisation rst has to quantify its emissions and look

forinternalabatementopportunities.Theseopportunities

caninclude:

Implementing cost-effective energy efciency measures,

suchasheatingandlightingupgrades,usingnewprocess

technologiesanddeliveringstafftrainingandawareness

programmes

Developinglow-carbonenergysourcessuchason-site

renewablegeneration

Addressingthemorestrategicbusinessrisksand

opportunitiesassociatedwithclimatechange.Typically,

thiscanincludeworkonregulatorycompliance,future

costofcarbon,marketopportunitiesfornewproducts

andservices,andshareholderandotherstakeholder

impacts.

TheCarbonTrust,throughitsCarbonManagement

programmeanditsrangeofenergysurveyscanhelp

organisationsquantifytheiremissionsandprovideadvice

on energy efciency and carbon management, helping

themdrawupanemissionsreductionplan.

Ideally,afeedbackloopshouldbeestablishedwhere

savingsderivedfromloworno-costemissionsreduction

measuresprovidefundstore-investincost-effective

energy efciency measures that do require capital

investment,toprovidefurtherlong-termenergyreductions

andcostsavings.


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TheCarbonTrust18

Stage 2: Look at opportunities

to reduce indirect emissions

Onceanorganisationhasitshouseinorderandhas

developedanemissionsreductionplan,thenextstageis

tolookatopportunitiestoreduceindirectemissionsby

workingwithorganisationsacrossthesupplychain.By

consideringalloftherawmaterialsandprocessesrequired

togetaproducttomarket,itallowsthecarbonfootprint

of the nal product to be calculated. This can be used to

identify opportunities to make signicant cuts in emissions

andenergycostsacrossthesupplychain.Asconsumer

attitudeschange,italsoallowsforwardthinkingcompanies

todeveloplow-carbonproductstocapturenewmarkets

and generate higher prots over time.

TheCarbonTrusthasdevelopedasupplychainmethodology

tohelpcompaniesbuildthefullcarbonfootprintof

productsandidentifyemissionsreductionsavings

opportunitiesacrossthesupplychain.Themethodology

drawsheavilyonstandardlife-cycleanalysistechniques

(LCA)andisstructuredinfourchronologicalsteps:

Presentationofresultsandimplementationplanning

Themethodologyallowstheinclusionofemissionsfrom

productuse,reuse,recyclinganddisposalalongside

emissionsfromproductionanddistributioninanintegrated

way. It identies carbon savings beyond the scope of

those identied by other analysis techniques. Because the

scopeiswiderthanintraditionalanalyses,theemissions

reduction opportunities identied tend to be larger.

Themethodologyallowstheinclusionofemissionsfrom

productuse,reuse,recyclinganddisposalalongsideemissions

fromproductionanddistributioninanintegratedway.It

identies carbon savings beyond the scope of those identied

byotheranalysistechniques.Becausethescopeiswiderthan

intraditionalanalyses,theemissionsreductionopportunities

identied tend to be larger.

Thissupplychainapproachhasthepotentialtounlock

signicant emissions reductions and large nancial benets byreducingthecarbonfootprintatanindividualproductlevel.

Ultimatelyitcanhelpallofbusinessmakebetter-informed

decisionsinproductmanufacturing,purchasing,distribution

andproductdevelopmentbyconsideringthecostsand

liabilitiesthatexistwhenevercarbonemissionsaregenerated.

Moredetailsonthesupplychainproductcanbefound

intheCarbonTrustpublication: Carbon footprints in the

supply chain: the next step for business(published

in November 2006).

Stage 3 (optional): Develop

an offsetting strategy

Afterlookingatthedirectandindirectemissions,some

companiesmaydecidetoincludeoffsettingaspartoftheir

overallcarbonmanagementstrategy.

Those companies that decide to offset should dene a

strategy.Itcouldbeassimpleasquantifyingthenumber

ofoffsetstobuyandthepotentialprovidersofgoodquality

offsets, or involve dening particular requirements that

offsets should comply with, and nding providers that could

matchthoserequirements.

Establishing reasons for buying offsets

Organisationsmightwanttooffsettheiremissions:

Aspartofanenvironmentalstrategythatincludes

offsettingemissionswhicharenotcosteffectiveor

feasibletoreduceinthepreviousstages

AspartofacarbonneutralstrategydrivenbyCSRreasons

orbrandpositioning

Asawaytoanticipatefuturelegislationortogain

experienceinthecarbonmarket.

Whatever the case, dening the reasons will help to

identifythetypeofoffsetsthatorganisationsshould

acquireiftheydecidetooffsetatall.

Forexample,anorganisationdrivenbyCSRreasons,islikely

toacquireoffsetsfromsmallscaleprojectsfromdeveloping

countrieswithastrongsustainabledevelopmentcomponent.Ontheotherhand,anorganisationwantingtoanticipate

futureregulationmighttrytoobtaincompliancecredits.

Step 1 Initialanalysisandengagement

Step 2 Constructionofthecarbonfootprint

Step 3 Opportunity identication and

prioritisation

Step 4 Presentationofresultsandimplementationplanning


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Identifying the type of offsets to buy

Onceanorganisationhasestablishedthereasonsforbuying

offsets, the next step is to dene the type of offsets to

acquire.Thiswilldependonthereasonsforoffsetting

emissionsandontheparticularrequirementsthat

organisationsmightwant.Therearesevenkeycategories

to look at when dening the type of offsets to buy:

Projecttype

Standardsused

Projectlocation

Additional benets

Levelofaggregation(creditsfromaportfolioversus

creditsfromindividualprojects)

Provisionofguarantees

Labellingserviceoffered.

Table3(overleaf)providesoptions,advantagesand

disadvantagesforeachofthesecategories.

Purchasing good quality offsets

Acquiringcrediblegoodqualityoffsetsiscrucialwhen

dening an offsetting strategy. Poor quality offsets not only

create signicant reputational risks but also provide no

additional environmental benets. As the voluntary market

remainslargelyunregulated,buyersshouldcarryouttheir

ownduediligencetoassesstheintegrityandcredibilityof

theoffsetstheyarebuying.However,withthelargevariety

of standards, protocols, and verication methodsinexistence,mostofthemproprietarytooffsetproviders,

it is difcult for buyers to carry out such an assessment.

Carrying out due diligence

Tohelpintheassessmentofgoodqualityoffsets,the

Carbon Trust has developed a test which refers to the ve

maincharacteristicsthatoffsetsshouldcomplywithto

provideaminimumlevelofqualityassurance:

Verication offset should always be veried by an

accreditedthirdpartyaccordingtoastandardorprotocol

Additionalityensurereductionsareadditionaltowhatwouldhavehappenedintheabsenceoftheproject

Leakagestakeintoaccountnegativeimpactsbeyond

theprojectboundary

Impermanencyensurethereductionsachievedare

maintainedovertime(particularlycriticalforcarbonsink

projects)

Doublecountingavoidoffsetsbeingusedorcounted

morethanonce.

Allrecognisedindependentstandardscomplywiththis

minimumlevelofqualityassurance:

CDM/JI

Voluntary Gold Standard

Climate Group Voluntary Standard

PlanVivo

Climate,CommunityandBiodiversitystandards(CCB).

For proprietary standards, it is more difcult to know,

withoutfurtherenquiry,whethertheywillpassthevalidity

test.Figure4providesastep-by-stepprocesstoaidcustomers

toassessthevalidityoftheoffsetstheyareacquiring.

Identifying offset providers

Thelaststageofthisprocessistoidentifyprovidersof

goodqualityoffsets.

Carboncredits,ingeneral,aresoldthroughanumberof

mechanismsincludingtradingplatforms,brokers,credit

aggregators,orretailers.Voluntarycreditsaremostlysold

throughretailersgiventhesmallvolumestraded(usually

below15-20tonnesofCO2e).

Althoughorganisationscouldbuyeithercomplianceor

voluntaryinstruments,offsetretailerstendtosellonly

voluntaryinstrumentsasthevolumepurchasedper

transactioninthevoluntarymarketislow,makingthe

sellingofcomplianceinstrumentsverycostineffective.

Thereare30to40retailersthatsellvoluntaryoffsets

worldwide.MostofthemarelocatedintheUS,AustraliaandEurope.InEurope,therearearound10mainoffset

providers. They all vary according to the verication

processorstandardtheyuse,thetypeofprojectsused,

theprojectlocationandthepriceofoffsets.

Offset prices can vary signicantly depending on the type

of offsets required. For certicates that include sustainable

development benets and that comply to a standard like

the Voluntary Gold Standard, buyers have been paying

prices of up to 20-30/tCO2e.Incontrast,creditsbasedon

proprietarystandardshavebeensellingatpricesranging

from 3/tCO2e to 15/tCO2e.

Oneimportantpointtomentionisthatcheapoffsetscould

comeatacostandorganisationsshouldassesswhether

the nancial benet merits putting their reputation and

brandatrisk.Valueformoneydoesnotnecessarilymean

acquiringthecheapestoffsetavailableinthemarket,but

themostcosteffectivedependingonthecharacteristics

thatbuyersarelookingfor.


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23/28


Table3

(co

nt.)

Options

Pros

Cons

Project

location

Developingcountry

Easiertoproveadditionality;sustainabledevelopment

benets

Country

risk,

non-delivery

Developedcountry

outsideKyoto

Cheapercredits,lowercountryris

k

Credibili

tyconcerns;subsidisingfree-r

idingfrom

countries

benetin

gfromc

arbonmarketbutwithoutth

emselves

makingc

ommitmentstoreducetheiremissionsunderalegally

bindingframework

Developedcountry

insideKyoto

Promotionofreductionsinhomec

ountry

Addition

alityconcerns

Additional

benets

Environmental/

conservation

benets

Buyerscanbeassociatedwithparticularprojectsthat

bringssustainabledevelopmentbe

nets,

improvingthe

CorporateSocialResponsibility(CSR)positionofthe

organisationandprovidingpositivePublicRelations(PR)

Creditsu

suallymoreexpensive;exposuretoadditional

reputationalrisksifsocialcomponentofproj

ectgoeswrong

Socialbenets

Technologytransfer

Aggregat

ion

Creditsfromp

ortfolio

ofprojects

Cheapercredits;minimisesrisko

funderperforming

(non-delivery,

impermanency)

Creditcannotbeassociatedtoindividualproject;credits

credibilitycouldbeaffectedbyanyindividua

lprojectinportfolio

(higherp

robabilityofreputationalrisks);non

-customisable

Creditsfromi

ndividual

project

Creditscanbeassociatedwithap

articularproject

(canprovidepositivePRandimprovedCSRposition);

customisable

Expecth

ighercreditprices;higherexposuretounderperformance

andcred

ibilityrisks

Guarante

es

Provideguaranteesagainst

non-delivery,

permanenceissues,or

changesinbaseline

Coveragainstuncertainties;providesinsurancefor

biologicalsinkprojects

Expecth

ighercreditprices

Labelling

Carbonneutralitystamp

ProvidespositivePRandimproved

CSRposition

Exposure

tolabelbrandrisk


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TheCarbonTrust22

Figure 4: Key questions for validity test

Verication

Project is independently veried by a third party

YES

NO

NO3 Does this standard include a verication procedure for its

emissionsreductions?

No assurance on quality of offset

2Doestheprojectcomplywithanyotherwrittenstandard? No assurance on quality of offset

1Doestheprojectcomplywithanyofthefollowingrecognised

independentstandards:

CDM/JI Voluntary Gold Standard

Climate Group Voluntary Carbon Standard

PlanVivo

Climate,CommunityandBiodiversitystandards(CCB)?

Project is independently veried

byathirdparty

No assurance on quality of offset4 Is the verication procedure carried out by an accredited

recognisedindependentthirdparty?

NO

NO

YES

YES

YES

Additionality

Projectisadditional

NO

Projectisnotadditional1Istheprojectrequiredbycurrentregulation?

Projectisnotadditional

(unlessreductionsarediscounted

from national GHG emission registry)

2Istheprojectcontributingtoachievelegallybindingemission

reductiontargets?

Projectisnotadditional3Istheprojectcommonpracticeintherelevantsectororregion

wheretheprojectiscarriedout?

Projectisnotadditional4Doestheprojectfaceeconomic,investmentortechnological

barriersthatwouldpreventitsimplementation?

NO

NO

YES

YES

NO

YES

YES

NOTE: additionality is a difcult concept and testing it could prove to be a complex process; the following diagram provides

verybasicquestionstoaskoffsetproviderstoproveadditionality.Foramoredetailedanalysisrefertothetoolkitforthe

demonstration and assessment of additionality from the UNFCCC (http://cdm.unfccc.int/EB/Meetings/022/eb22_repan8.pdf).


25/28


Figure 4: Key questions for validity test (cont.)

Double Counting

Impermanency

Leakages

1Haveupstreamanddownstreameffectsoftheprojectbeen

considered/studied?

2 Does the project have signicant measurable impact(s) in GHG

emissionsbeyondtheirboundaries?

Leakageeffectshavebeenincorporated

NO Projectmighthavenegative

leakageeffects

No leakage effect

YES

NO

3Haveeffectsbeenincorporatedintothetotalemissions

reductioncalculation?

Projectmighthavenegative

leakageeffects

NO

YES

YES

1Doesthesellerincludeastrategytodealwithpermanencyof

theemissionsreductionsoverthelifetimeoftheproject?

2 Doesthesellerprovidesomesortofguaranteetodealwith

underperformingprojects(egreplacementofcreditsoracquisitionofnewcreditsinthemarket)?

No assurance that project will deliver

contractedemissionsreductions

No assurance that project will deliver

contractedemissionsreductions

YES

Projectwilldelivercontractedemissionsreductions

YES

NO

NO

1Doestheselleroperatearegistrywherecreditsgetaccounted,

registeredtobuyersandretired?

No double counting problem

Doublecountingmightoccur

No double counting problem

Doublecountingmightoccur

NO

NO

NO

YES

2IstheprojectdevelopedinanAnnexIcountry?

3Doesthesellerhaveastrategytodiscountcreditsfromthe

national GHG inventory?

YES

YES


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TheCarbonTrust24

Thethreestageprocess,togetherwiththeessentialinformation

onoffsetsprovidedinthisguide,shouldgivecompaniesandorganisationsinterestedinoffsettingalltherelevantinformation

tohelpthemputtogetherarobustcarbonmanagementstrategy.

By following a strategy that rstly focuses on direct and indirect

emissionsbeforeoffsetting,organisationsshouldobtainbusiness

benets in addition to carbon savings. This strategy should improve

an organisations bottom line through cost-saving measures andimproved operational efciency, help them exploit new revenue

opportunitiesfromnewlow-carbonproductsandservices,and

improvetheircorporatesocialresponsibilitypositionandreputation

by demonstrating the organisations commitment to mitigating climate

changedirectlybyreducingitsownemissionsandcarbonfootprint.

Ultimately,thisstrategyshouldhelporganisationstomitigateclimate

changeinawaythatisenvironmentallysoundandcosteffective.

Conclusion


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28/28

www.carbontrust.co.uk

0800 085 2005

TheCarbonTrustworkswithbusinessandthepublicsectortocutcarbonemissionsandcapturethecommercial

potentialoflow-carbontechnologies.

An independent company set up by the Government to help the UK meet its climate change obligations through

business-focusedsolutionstocarbonemissionreduction,theCarbonTrustisgrantfundedbytheDepartment

forEnvironment,FoodandRuralAffairs,theDepartmentofTradeandIndustry,theScottishExecutive,theWelsh

Assembly Government and Invest Northern Ireland.

Whilstreasonablestepshavebeentakentoensurethattheinformationcontainedwithinthispublicationis

correct,theauthors,theCarbonTrust,itsagents,contractorsandsub-contractorsgivenowarrantyandmake

norepresentationastoitsaccuracyandacceptnoliabilityforanyerrorsoromissions.

Anytrademarks,servicemarksorlogosusedinthispublication,andcopyrightinit,arethepropertyofthe

Carbon Trust. Nothing in this publication shall be construed as granting any licence or right to use or reproduce

anyofthetrademarks,servicemarks,logos,copyrightoranyproprietaryinformationinanywaywithoutthe

Carbon Trusts prior written permission. The Carbon Trust enforces infringements of its intellectual property rights

tothefullextentpermittedbylaw.

TheCarbonTrustisacompanylimitedbyguaranteeandregisteredinEnglandandWalesunderCompanynumber

4190230 with its Registered Ofce at: 8th Floor, 3 Clements Inn, London WC2A 2AZ.

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