Beware the carbon offsetting cowboys By Fiona Harvey, Environment Correspondent
Deciding to go “carbon neutral” in late 2004 was a pioneering step for HSBC. The bank’s board agreed that it should become the first big company to cancel out all of its impact on the climate.
“It was a leap of faith,” said Francis Sullivan, deputy head of group sustainable development at HSBC. “But we knew it was something we should do.”
First, the bank would cut its greenhouse gas output, and then offset the rest by funding emissions reductions elsewhere, such as buying better cooking stoves for remote settlements in Africa.
Since then, many more companies have announced plans to go carbon neutral, such as BSkyB, News Corp, Marks & Spencer, PwC, Aviva and Barclays. Some, including British Airways, BP, Expedia and Land Rover, offer customers the chance to offset emissions spent in using their products.
Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2 .
Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.
In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.
The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.
Most companies going carbon-neutral use intermediaries to buy offsets on their behalf. But after evaluating the markets for some months, HSBC decided not to. Mr Sullivan said the bank concluded that intermediaries “do not all add very much value, they do not all do this at the minimal cost, and they are not all truly credible”. He said: “The confusion in the market is still such that you have to do as much due diligence on these brokers as you do on the projects themselves.”
Other companies, however, have found the use of intermediaries beneficial. BSkyB said it valued projects identified by the Carbon Neutral Company, one of the biggest intermediaries, which is also used by Barclays. The bank said it had a good relationship with it and Climate Care, another big offsetting specialist.
Businesses are advised to check the offsetting companies’ credentials. One hedge fund manager, who asked not to be named, said he had been offered credits he did not trust because the intermediaries could show only a spreadsheet to prove their existence. “There are plenty of carbon cowboys out there, looking to make a quick buck,” he said.
Some brokers have recognised customers’ concerns by banding together to self-regulate. They have set industry benchmarks, such as the voluntary carbon standard, established by the International Emissions Trading Association, the Climate Group and the World Economic Forum, or the “gold standard”, backed by several environmental charities.
Unlike the Kyoto and EU markets, the voluntary market is unregulated, with no legally binding standards, giving rise to several potential problems:
●The risk of fraud, such as sale of credits from carbon reduction projects that do not exist. It is often difficult for buyers and brokers to verify the existence and effectiveness of projects as many are in remote areas.
●Funding of carbon reductions that could have happened anyway. In the jargon, they would not be “additional”. Under the Kyoto protocol, qualifying projects must be “additional” meaning, in most cases, that they would not be economically viable without carbon credits. The FT has, however, uncovered examples where carbon credits have merely provided another source of revenue to projects that would have happened anyway (see the story below).
●The risk of companies selling the same credits several times over. Under the Kyoto mechanism, carbon credits are tracked through the UN’s International Transaction Log, which records every purchase or sale. When companies are buying credits for offset, the credits should be “retired” and not used again. But on the voluntary market, there is no central register, so unscrupulous companies could “double count” or sell the same credits more than once.
Bill Sneyd, director of operations at the Carbon Neutral Company, said his organisation tried to ensure that the credits it supplied from project owners were not also sold elsewhere. It employs KPMG to audit its carbon credit accounts. But he acknowledged a serious problem in the voluntary market: “There is the possibility for double counting at the project developer side. The project developer could sell carbon to us and to others.”
He said a register of credits sold in the voluntary market was being set up that would meet similar standards to the UN’s transaction log.
Although the carbon-offsets market is booming, BP has struggled to find enough emissions reduction projects to meet its quality standards, says Kerryn Schrank, programme director. BP launched its Target Neutral programme last August, inviting motorists to pay an average £20 ($40, €29) to offset their emissions from a year’s driving.
Barclays has also found a lack of projects meeting its criteria. Andrew Flett, head of environmental management at the bank, said: “Of the projects identified as meeting our criteria, there were only credits available for 40 per cent [of our needs].” As a result, the bank bought its other offsets via the Kyoto market.
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Reduced operations could bring gains By Fiona Harvey and Chris Bryant
A US company bought last year by a private equity group stands to make financial gains selling carbon credits that have resulted from reducing its operations.
The gains arise because the Freescale Semiconductor has exceeded targets for cutting carbon emissions, in part because it has closed plants. The gains raise questions about whether some voluntary carbon trading programmes are effective.
Freescale, along with companies such as Ford Motor and Stora Enso, are participants in the Chicago Climate Exchange, under which they undertake to reduce emissions by 6 per cent by 2010.
Since CCX began, Freescale, which was bought out last year by Blackstone, has cut greenhouse gas emissions at US sites by 45 per cent. “Of that 45 per cent reduction, about 30 per cent of it came from facilities closures, and 70 per cent ... from process improvements, efficiency gains, equipment optimisation,” said the company, which planned to sell the credits later this year.
Ford said it had cut its emissions as measured by the CCX by 1m tonnes, resulting in potential credits that would fetch $3.5m. It said it had not sold any credits and had no immediate plans to. It has said the cuts were down to efficiencies rather than downsizing.
Some companies buying offsets have avoided industrial efficiency programmes for fear customers may disapprove. Kerryn Schrank, programme director of BP’s TargetNeutral offsetting scheme, said she excluded such projects: “Industry has to be doing that for itself.”
But Richard Sandor, chairman of the CCX, said: “Companies are incentivised to cut their emissions by more than the cap ... by making additional money from selling credits.”
On the CCX, about 25 per cent of companies are buyers of credits and 75 per cent sellers. Hedge funds are big buyers, hedging against the risk of mandatory emissions cuts in the US.
Ms Schrank said one of BP’s key criteria was “additionality”. This is a Kyoto protocol principle requiring that projects registering to receive credits under the UN scheme prove their cuts would not be carried out under “business-as-usual”. She said it was hard to prove industrial efficiency programmes were additional.
BP had ruled out most renewable energy projects in developed countries because it was difficult to prove they would not happen without the sale of credits, she said.
Terrapass in the US offers offsets in the form of renewable energy credit certificates from the Ainsworth wind facility in Nebraska. Dave Rich of Nebraska Public Power District, which runs Ainsworth, said the credits “were not a factor in the decision” to build the facility, indicating they just provided extra revenue.
But Tom Arnold, founder of Terrapass, said the company sold credits from projects that were economically viable but had a low rate of return to encourage more such projects.
DuPont has offered people the chance to offset emissions for $4 per carbon credit through the Natsource website. The cuts come from the destruction of HFC-23, a potent greenhouse gas, at its Kentucky factory.
Tony Juniper of Friends of the Earth said DuPont was charging people for what a responsible company ought to do anyway: “DuPont ought to be switching to renewables rather than trying to profit from greenwash.” DuPont declined to comment or specify how much it raised through the sale of these credits as it was at too early a stage.