Education

Not all carbon offsets are equal

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Article by
Alex Stathakis
A wind turbine

Growing awareness of climate change is driving a major uptake of carbon offsetting. Carbon offsets offer a convenient way for organisations’ to meet their emission reduction targets or achieve carbon neutrality by allowing them to invest in environmental projects worldwide in order to balance out their own carbon footprints. Voluntary programs, such as the Australian Climate Active program (formally the National Carbon Offset Standard Carbon Neutral Program), the international Airport Carbon Accreditation program at Level 3+ and the Carbon Offsetting and Reduction Scheme for International Aviation also require organisations to offset emissions that cannot be reduced through internal measures.

While carbon offset programs and offset providers provide some assurance, unfortunately, it’s not always as simple as buying a ‘certified’ carbon offset. A better, more robust approach to carbon offsetting requires companies to understand the different types of offset units generated under different standards and methodologies to ensure the carbon offset scheme they are buying into is actually doing what they believe it is.

To avoid making incorrect low- or net-zero carbon claims, organisations need to do their homework when it comes to seeking out high-quality carbon offsets.

Here are some pointers:

Additionality: Additionality answers a simple question: would the emissions have been reduced whether or not I bought into the carbon offset scheme? If the answer is no, then the emission reductions from carbon offset projects are additional.

In other words, if emissions reductions are already required by law (official policies, regulations, or industry standards) or the project would have happened anyway of the existence of a carbon offset scheme, then these carbon offsets should not be used to offset any emissions of the purchasing organisation.

Of course, it is never that simple, and additionality is a complex subject to unravel. Considerations include whether or not the changes were common practice (practices that are not already in common use in a region or sector) or whether the possibility of earning income through the sale of carbon offsets was a ‘make-or-break’ decision to implement that project. In technical terms, this means that at the time of project implementation, the investment in emission reductions would not have occurred in the absence of the incentives created by the carbon offset project.

Organisations should also consider:

  • if a carbon offset project is currently not legally required, whether it is being implemented in anticipation of future legislation;
  • whether a carbon offset project that is dependent on the carbon offset revenue is unlikely to have gone forward without securing buyers before its implementation;
  • that there could be uncertainty in investment analysis inputs – particularly the viability benchmark, expected capital costs and cost and production risk. Project developers may choose input values strategically in order to show that their projects are less financially viable than they really are. The risk is that the rate of return of carbon offset unit revenues may be intentionally manipulated by overestimating costs and underestimating revenues;
  • whether selling carbon offset units makes up most of the project’s total revenue. For example, if 90% of the total revenue from a renewable energy project comes from the sale of electricity, additionality should be questioned;
  • that many early start projects do not provide sufficient evidence that additionality was considered in the conception stage; and
  • whether a project may continue to reduce or avoid emissions without generating revenue from the sale of carbon offset units.

For example, many renewable energy projects such as large-scale wind, solar and hydro can be considered common practice as their implementation is widespread through many sectors and regions, including China and India. While you may have the potential to earn income through the creation of carbon offsets, the effect on your rate of return is likely to be minimal.

Additionality is also difficult to ensure for energy efficiency projects, especially in developed countries such as Australia. Energy efficiency is often profitable without the financial incentives offered by carbon offset projects programs. Sure, the level of energy efficiency investment is widely seen to be suboptimal, but organisations invest billions of dollars annually in equipment and practices that can reduce their fuel and electricity costs. Furthermore, there is a natural rate of improvement in energy efficiency over time due to technological and productivity improvements, and some energy efficiency improvements occur due to natural turnover of capital stock.

Double-counting: A carbon offset represents an exclusive claim to an emissions reduction, i.e., only one entity can claim the emission reduction. Until now, this was a reasonably straightforward exercise. Organisations in developed countries would invest in a carbon offset project in a developing country and be able to claim the emission reductions from that project as their own.

This, however, may change under the Paris Agreement, where developed and developing countries alike have submitted pledges to reduce emissions. While these pledges are great overall, they have resulted in fewer opportunities for reductions additional to what countries have already pledged. Organisations need to make sure that any emission reductions claimed through their investment in a carbon offset project are not also being counted towards the host country’s target.

Beyond the Paris Agreement, in light of environmental and public health issues, more countries are mandating renewable energy targets or at least support the uptake of renewable energy (e.g., through feed-in tariffs) to address climate change, energy security and air quality. These all need to be considered to avoid double-counting of offset units.

Permanence: Permanence is primarily an issue for forest and other land-use projects and refers to the lifespan of greenhouse gas emission (GHG) reductions or removal enhancements. There is a risk that carbon stored in vegetation and soils (sequestration) could be released back into the atmosphere if the forest is damaged by fire, drought, disease or some other man-made or natural event. Many carbon offset programs have a buffer to address the risk of emission reductions or removal enhancements being reversed.

Organisations should consider:

  • whether sequestration projects provide a plan for managing reversal risks from fire, drought and disease;
  • the length of time for reversal compensation. While strictly speaking, permanence means an indefinite future, 10, 25 or 100 years are common. The longer the period, the more robust the carbon offset; and
  • that sequestration may not be an effective approach to mitigating climate change, especially if it is used as a direct substitute for avoiding or reducing emissions.

Social and environmental co-benefits: Some carbon offset programs not only have policies in place to avoid any detrimental environmental and social effects from the implementation of a project but also require projects to demonstrate environmental and social co-benefits.

Organisations should consider:

  • whether consultations with local stakeholders affected by the carbon offset project should have been undertaken, especially in countries where there may be fewer regulatory safeguards; and
  • if a third-party certification can provide added assurance that a project will do no harm.

PURCHASING THE ‘RIGHT’ CARBON OFFSETS

Understanding the different types of offset units ensures the carbon offset scheme is actually doing what you believe it is. Purchasing carbon offsets can help reduce an organisation’s GHG emissions, but it requires confidence that the carbon offset unit meets certain minimum quality expectations. This is vital because even widely-available carbon offset units that many presume have passed the required hurdles, may be of questionable additionality.

Investigating carbon offset units can be cumbersome, time-consuming and expensive. However, carbon offsets from questionable projects may lead to an increase in emissions, exactly the result prudent organisations are trying to avoid. Having a solid, diverse portfolio of carbon offset units from different projects, standards and countries, as well as retiring an extra amount of carbon offset units, will hedge against that contradictory result.

One thing to avoid is thinking that cheap offset units are synonymous with low-quality units. Considering expensive domestic carbon offset units alone is not an adequate strategy. Some offset project types with high environmental integrity can produce emission reductions at low cost, while some non-additional carbon offset projects can charge a higher price. Cheap is not necessarily bad, as long as all the considerations above are taken into account.

At the end of the day, finding the right carbon offset is a tricky job. However, it is essential for forward-thinking organisations in order to ensure that their reporting is accurate and that they are meeting the targets set for themselves and their investors

If you would like to know more about becoming carbon neutral or have questions about carbon offsets, contact Alex at alex.stathakis@conversio.com.au. Conversio can help you navigate and examine different options that meet your net-zero emission ambitions.

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