A voluntary market for carbon offsets has emerged in recent years in the United States that in many ways parallels the global compliance carbon market in countries that have signed onto the Kyoto Protocol.

In contrast to the strict regulatory framework governing offset markets under Kyoto’s Clean Development Mechanism (CDM), however, a voluntary offset market lacks consistent and universally accepted standards for offset quality.

The voluntary offset market is often seen as the “Wild West” of carbon markets, and many critics say the lack of standards risks undermining public confidence in carbon offset markets as an effective tool for reducing emissions. The voluntary market will continue to expand in the coming years, as public awareness of climate change impacts increases. Its ultimate fate depends both on the ability of various non-governmental groups to develop widely accepted standards and, in the long term, the eventual scope of federally mandated carbon restrictions.

Voluntary markets involve selling carbon offsets to consumers, businesses, and institutions. They differ from compliance markets, in which the government mandates emission reductions and offsets serve as a tool for meeting emission reduction targets.

Are the Offsets Real? How to Know?

Voluntary markets share the primary shortcoming of compliance markets: namely, the difficulty of proving that projects are actually additional. “Additionality” is, in the words of Michael Gillenwater and his colleagues, the question of “whether the added revenue or other resources gained from selling [greenhouse gas] offset credits somehow enables a project’s implementation, or if the extra revenue simply lines the pockets of those who would have implemented the project anyway.”

Unlike the compliance markets, however, voluntary markets have no strict requirements for demonstrating additionality. Standards vary considerably by offset provider: Some require detailed financial proof that the offset revenue made projects viable, and others require little or nothing at all.

Among the more egregious non-additional carbon marketing devices currently on the market are renewable energy credits (RECs), familiar to those who have seen the “green power” option on their utility bills. These RECs are tied to renewable energy generation, so the sum total of REC sales must be matched by an equal portion of installed generation capacity.

An individual purchasing an REC acquires all the “green” characteristics of the energy, including the carbon reduction. RECs are often sold far from their home market, so an individual in Massachusetts could purchase energy from, say, a wind farm in Iowa. The fundamental problem surrounding RECs is that there is no guarantee that the purchase of RECs in some way caused renewable energy capacity to be built that would otherwise not have been built. In other words, there is no way of knowing that an REC purchase will lead to reduced emissions of carbon or other greenhouse gases into the atmosphere. In fact, the economics of large renewable energy projects suggests that REC sales rarely, if ever, play a deciding role in project development decisions.

Figure one shows the typical revenue streams associated with wind projects in the United States, with RECs generally comprising 1 to 10 percent of project revenue.

0908_FigureOne.jpg - 20534 Bytes

Taken from Michael Gillenwater’s Redefining RECs (Part 1): Untangling attributes and offsets.

The risks of purchasing carbon offsets that do not actually reduce carbon emissions extends beyond RECs. Many providers in the voluntary carbon market try to sell credits from projects involving untested methodologies or involving long-term uncertainties. For instance, while compliance markets have largely avoided temperate forestry projects in light of radiative forcing uncertainties involving albedo changes and concerns about project permanence, the voluntary market has had no such qualms.

The epitome of untested offset sales is perhaps the ill-fated Planktos project, involving seeding the ocean with iron filings off the coast of the Galapagos Islands. This iron seeding would have caused massive algal blooms, which were projected to sequester carbon dioxide, and the company had planned to sell these reductions in the voluntary carbon market. However, numerous scientists raised concerns that carbon absorbed by the algae would simply be circulated in the upper layer of ocean waters before being re-released to the atmosphere as the algae decomposed, rather than traveling down into deeper ocean waters where it could be sequestered for long periods of time. Others raised concerns that these artificial blooms would deplete other important nutrients, in turn suppressing biomass growth in other ocean regions and resulting in little net sequestration.

In light of these concerns and general outcry among environmental groups worried about potential ecosystem consequences of creating large-scale artificial algal blooms, investors pulled out of the project. It died a quiet death.

Beyond Additionality … Other Shortcomings

Beyond the problem of additionality, the voluntary carbon market lacks any mandatory requirements for monitoring and verification of reductions. Because carbon offsets are often sold up-front, before emission reductions actually occur, this situation can pose a serious problem.

One of the more reputable offset providers on the voluntary market, Native Energy, recently received a bit of a public relations black eye when it was revealed that the small-scale wind project used to provide offsets for the 2008 Democratic National Convention in Denver was actually operating far less than anticipated because of a string of technical problems.

In many cases, voluntary offset projects may not be delivering the promised emissions reductions, and offset providers generally have had no obligation to ensure that their projects actually produce the offsets they already had sold.

The key problem with the voluntary offset market in the United States is the absence of a central authority to set basic standards for project additionality, monitoring, and verification. That same situation does not necessarily apply worldwide. The United Kingdom, for instance, has drafted a code of best practices for its voluntary offset market, and the Australian government approves offsets for sale in its voluntary market.

In the absence of central governance, a plethora of non-governmental standards have emerged for the voluntary market. These include the Gold Standard, the Voluntary Carbon Standard, the Voluntary Offset Standard, the Chicago Climate Exchange, the Plan Vivo System, the Green-E standard, and more.

However, none of these has captured a significant percent of the market, and there is little consumer awareness of the viability of different standards. Some have even worried that the numerous competing standards will simply confuse consumers and make them lose faith in the market. Gillenwater et al, for example, argue that “the confusion produced by a host of independent standards operating in a regulatory vacuum has the potential to discredit market-based environmental policies with the public as a means of addressing climate change.”

While a generally accepted standard for voluntary carbon offsets would help solve the legitimacy issues facing the market, the federal government inevitably in the long run will have the biggest role in shaping the future of the market. Many observers expect the U.S. to adopt binding carbon emissions standards in the next few years, either in the form of a cap-and-trade system or an emissions tax. Such a system is widely expected to allow carbon offsets as a mechanism for emission reductions, and incorporating offsets into an American compliance market likely would involve establishment of a government-run central authority comparable to the CDM Executive Board.

In the end, the domestic voluntary market may remain relatively small until it is subsumed into a national compliance market once Congress and the Executive Branch act somewhere down the road.

Also see Part 1.

Filed under: , , , , , ,