Offsetting is nothing new – offsetting schemes and providers have been around for more than ten years, and much has been written about them already. Despite renewed focus at the Copenhagen conference (COP15) on the role of carbon credits in climate change mitigation, there remains considerable lack of clarity on what they actually are, how they work, together with their advantages and potential pitfalls.

Offsetting is the general term given to the purchasing of carbon credits to compensate for a given quantity of greenhouse gas emissions. It works on the basis that money raised by the sale of carbon credits finances projects that create an equivalent amount of greenhouse gas emission reduction elsewhere in the world.

The principles of offsetting are set out in the Flexible Mechanisms of the Kyoto Protocol, including the Clean Development Mechanism (CDM) and Joint Implementation (JI). In simple terms, under these schemes, organisations and governments in the developed world can buy carbon credits produced in the developing world. These credits count towards the developed country’s carbon reduction target. In theory this results in a win-win situation; the developing country host receives additional investment in clean technology and the developed country receives carbon reduction sooner and at lower cost, essentially because projects are cheaper and quicker to implement in the developing world.

Offsetting can also be linked to emissions trading schemes. For example, the EU Emissions Trading Scheme allows participants to use a certain amount of credits from the CDM or JI to cover part of their emissions. The proposed US emissions trading scheme also allows participants to use offsets.

The credits can be produced in a variety of ways, but can be divided into four broad categories: renewable energy, energy efficiency, forestry and industrial gases. Each category has its own attributes and a variety of standards have arisen that assure the quality of the offset. However, as with offsets themselves, the quality standards differ in scope and level of assurance provided – there is no universally accepted best practice.

Benefits
Carbon offsetting is intended to benefit both parties – the offset purchaser and the host that is developing the project that will reduce greenhouse gas emissions. Most offsets are purchased as part of voluntary initiatives to reduce environmental impacts of organisations or enhance their environmental image.

Business benefits
The biggest benefit of offsets for organisations wanting to reduce their impact on climate change is that offsets provide a way of compensating for emissions that cannot be avoided. Even with the best intentions and stringent carbon reduction programmes, most businesses will have essential operations that cause emissions of greenhouse gases. Purchasing offsets is an efficient way of balancing out those impacts.

Many offset projects also have wider benefits to the host community, such as providing rural electrification to communities without electricity, or providing a source of clean drinking water. By purchasing offsets from this sort of project, businesses can benefit from the positive impacts that go with them.

A more subtle, but potentially more important benefit, is that an offsetting programme places a monetary value on the emissions caused by the organisation. This creates a driver for the organisation to reduce their emissions as this will then lead to a reduction in the amount that they need to spend on offsets in subsequent years.

Host benefits
The benefits for the communities hosting offsetting projects are more tangible. Businesses or projects receive additional financing, making marginal projects such as renewable energy more viable. More expensive clean technology can be deployed earlier, allowing these communities to develop with lower levels of pollution. In addition to emissions reduction, some offset projects also invest in social initiatives such as healthcare or schooling that have long term development benefits.

Potential pitfalls
Offsetting is not without risk. Both projects and purchasers have attracted large amounts of criticism in the past so it is important to be aware of potential pitfalls before embarking on an offsetting strategy.

Unsubstantiated claims
As many offsets result from the avoidance of emissions that would have occurred under business as usual conditions, or from the removal of greenhouse gases from the atmosphere over a long time period, it is essential that the emission reductions claimed are based on a solid and verified foundation. Low quality offset projects may not result in any real emission reduction.

‘Greenwash’
Badly planned and executed offsetting campaigns can attract criticism for so-called ‘greenwash’. Critics accuse organisations of not taking any real steps to reduce their impact on the environment, saying they are outsourcing their responsibility to the developing world.

Misreporting
Although there are no legal requirements at present on how to report an offsetting project, the Department of Energy and Climate Change (DECC) has published guidelines. The BSI is also developing a standard for correct offset reporting, PAS 2060.

Conclusion
Overall, implementing an offset strategy can be positive for the purchaser, the host country and climate change mitigation, provided that they are high quality and implemented correctly. Greenstone’s consultants can provide independent advice on the most appropriate offsetting options to achieve your organisation’s aims while avoiding the pitfalls. For more information please contact info@greenstonecarbon.com

While existing and proposed regulatory mechanisms focus on energy-intensive industry, this is most likely just the beginning for US business given the serious intent expressed by the current political administration to reduce US emissions and to take a lead in the international climate management process.  An effective emissions management policy will need to include all sectors of the economy and regulatory requirements can be expected to filter down from energy intensive industries to non-industrial emitters and large corporate entities.

US business has already begun to feel pressure to reduce emissions as a result of existing global, state and regional initiatives, as well as economic and consumer pressures to reduce energy and resource consumption.  Businesses making early progress in reducing emissions are realising the significant financial and environmental benefits that reduced energy, resource and regulatory costs can bring.

Existing and Proposed Regulatory Measures
There are a range of existing and draft regulatory mechanisms to reduce US emissions:

• US Climate Change Bill
• Renewable Electricity Standard
• Clean Air Act
• Mandatory Greenhouse Gas Reporting Rule
• State level initiatives (including multi-state cap and trade systems)

The Climate Change Bill proposes a 17% reduction in emissions on energy intensive industries by 2020.  A Renewable Electricity Standard has been approved by Congress which would require utilities to generate 15% of their electricity from renewable sources by 2021, with consumer energy efficiency initiatives potentially employed as a means for utility companies to meet that target.

The Clean Air Act (CAA), enforced by the Environmental Protection Agency, has emerged as a potential mechanism by which mandatory emission reductions could be applied in addition or instead of the Climate Change Act should the latter not pass Congress, or have its proposed targets reduced.  The CAA could be applied to sectors other than energy-intensive industry, including large service-based corporates.

The Mandatory Greenhouse Gas Reporting Rule (MGGRR) will require emissions to be reported from all entities emitting more than 25,000 tonnes of CO2 per year from any single source.  13,000 facilities and 85-90% of GHG emissions from energy intensive US industry will be covered. Reporting entities will need to begin collecting data on emissions from 1 January 2010.  While the MGGRR will not require business to reduce emissions, it marks the start of a widespread requirement for GHG emissions reporting by US business, which will lay effective foundation for subsequent requirements to reduce those reported emissions.

Many individual States already have their own emission reduction targets and mechanisms.  Approximately half of all States have also joined to create three large-scale emission trading systems:

• Regional Greenhouse Gas Initiative (RGGI) – requires a 10% reduction in emissions from the power sector by 2018. Already in operation and includes ten participating States.
• Western Climate Initiative (WCI) – due to commence 2012 and will include commercial and domestic use of fossil fuels from 2015. Requires a 15% reduction in emissions on 2005 baseline. Includes seven US states and four Canadian provinces.
• Midwestern Greenhouse Gas Reduction Accord (MGGRA) – due to commence January 2012 and will include energy intensive industry with emissions >25,000 tonnes/yr. Requires a 20% reduction in emissions on 2005 baseline by 2020 and an 80% reduction by 2050. Includes six US states and one Canadian province.

The Obama administration has expressed a preference for comprehensive legislation to tackle GHG emissions, but the existence of alternative mechanisms, particularly the ability to regulate emissions under the CAA, sends a strong message on the seriousness of the political intent and of the inevitability of mandatory emission reduction for US business. 

Voluntary Initiatives

1) Chicago Climate Exchange

The Chicago Climate Exchange (CCX) was launched in 2003 as the world’s first cap and trade system for GHG emissions and includes more than 300 participants, including Ford and DuPont. The CCX has an established baseline of 226 million metric tons of CO2e (approximately 4% of annual US emissions) with participants committed to an aggregate emissions reduction of 6% by 2010. Although the CCX constitutes a voluntary system and is not part of any regulatory initiative, participants have agreed to legally binding emission reductions.

The CCX has aimed to facilitate the development of wider GHG allowance trading across North America, and has usefully established the concept and experience in its operation for upcoming regulatory initiatives. In that respect, the future role of the CCX with alongside mandatory emission trading systems is uncertain, although could potentially include the voluntary participation of entities not included within the remit of such mandatory initiatives and the widening of its geographic scope.

 2) Climate Registry

The Climate Registry was launched in 2007 as a voluntary reporting standard for the calculation, verification and public reporting of North American GHG emissions. The Registry represents a collaboration of North American states, provinces and territories providing a credible, consistent and transparent platform for the measurement, verification and public reporting of organisational level carbon footprints in a single unified registry.

The Registry requires the reporting of the six internationally-recognised GHGs and for that data to be verified by an independent third party. The Registry has been designed to utilise best practice in GHG reporting, and to enable members to establish an emissions baseline and document early action. Participants include more than 350 leading corporations, Government bodies and academic institutions.

Additional benefits and drivers for US business
Whilst regulatory initiatives constitute an important set of tools to reduce emissions, a number of additional drivers exist for US business that are already demonstrating an impact on corporate policy, decision making and investment:

• Carbon footprint reporting is increasingly demanded by consumers of US products and services 
• Latent environmental consciousness and desire for action on emissions stifled under policies of the previous US political administration
• US businesses already exposed to emissions reporting abroad, for example for operations within scope of the EU Emissions Trading System or UK Carbon Reduction Commitment
• New independent standards, guidelines and accreditations for carbon reporting as part of competent business management
• Increasing and volatile energy prices and higher net energy consumption of US based business impacting on competitiveness against overseas competition.

Commencing a programme of emission reductions
While some businesses might be tempted to adopt a “wait and see” approach with regard to forthcoming regulatory requirements, it is far better to commence emission reduction early given that reductions in emissions result directly in financial rewards from reducing energy consumption.  Existing carbon markets are already demonstrating that businesses engaging in early action to reduce emissions can turn a perceived regulatory cost into significant long term cost savings and increased margins.

Participation in any of the aforementioned regulatory or voluntary initiatives to report and reduce emissions, and indeed for the implementation of any emissions reduction programme, the single most important requirement is the ability to accurately measure emissions from business activities, enabling an emissions baseline and reduction targets to be set.  Greenstone Carbon Management provides consultancy services to help organisations through the necessary data gathering process to build this baseline and, through its Acco2unt software solution, provides the tools for ongoing measurement and management of carbon emissions, thereby helping to minimise risk surrounding regulatory compliance and secure early benefits to the business bottom line.  For more information please contact us at info@greenstonecarbon.com

The first step in reporting and reducing GHG emissions requires the effective and accurate measurement of those emissions.  This in itself requires the collection of data on the energy, resource and service consumption across the broad spectrum of an organisation’s business activities from which GHG emissions can be calculated.  Without a thorough data collection process, the accuracy and completeness of any statement on an organisation’s carbon footprint can be called into question.

What are the data requirements for effective reporting?
The emissions resulting from any organisation’s business activities can be broken down into the following broad categories, also defined as “Scopes” by the Greenhouse Gas Protocol:

• Scope 1 – direct emissions from sources owned or controlled by the organisation in question, for example combustion processes e.g. boilers and motor vehicles.
• Scope 2 – indirect emissions from the generation of purchased electricity, steam or heating/cooling.
• Scope 3 – other indirect emissions resulting from the business activities of an organisation over which it has no operational control e.g. business travel, waste disposal as well as products and services used by the organisation.

To calculate a carbon footprint, it is advisable to collect the source data relating to all business services and activities, rather than extrapolate using assumptions or aggregated information.  Using a software reporting tool, such as Greenstone’s Acco2unt solution, it is possible to process large volumes of this source information quickly and easily to calculate an accurate carbon footprint.

How can high quality data be effectively collected and managed?
Collecting data of sufficient quality and breadth for the calculation of GHG emissions can be relatively simple for Scope 1 and 2 emissions, referencing energy billing and metering information.  Collecting data to a similarly high standard for Scope 3 activities can be more challenging, requiring information from a diverse range of sources, including:

• Travel – the detail of all journeys made is useful, including the distance travelled and mode of transport.  This can often be extracted from employee expense claims, travel booking agents, hire car companies and company car fuel cards;
• Deliveries – spreadsheet records or data outputs from courier companies on packages shipped;
• Refrigerants and other fugitive emissions – supply or servicing companies can provide the refrigerant leakage rate of the infrastructure installed within an organisation;
• Waste – cleaning or waste collection companies can often provide actual or contracted volumes of waste removed from an organisation, as well information on how the waste is processed.

Gathering data at the outset of any reporting initiative can present a challenge, often requiring process and cultural change to secure the ongoing availability of that information.  However, ensuring breadth and quality of source data will enhance the carbon footprint that is calculated and, once processes are in place, subsequent rounds of data gathering become much more straightforward.  This in turn prepares an organisation for an expanding regulatory environment in which accurate GHG emission calculations become a legal requirement.

Greenstone Carbon Management provides consultancy services to help organisations through the data gathering process and, through its Acco2unt software solution, provide the tools for ongoing measurement and management of carbon emissions.  For more information please contact us at info@greenstonecarbon.com.

Who sets them and why aren’t they all the same?
More recently, there has been growing interest in understanding carbon emissions on a smaller scale; businesses, government departments and individuals are increasingly keen to understand what their impact on climate change is, what it arises from, and therefore what they can do to reduce it. 
This interest has led to the development of emission factors aimed at enabling a consistent analysis and a variety of work has been published by various academics and consultancies.  The first comprehensive collection of these emission factors, together with guidance on how to apply them, was the Greenhouse Gas (GHG) Protocol, developed by the World Resources Institute and the World Business Council for Sustainable Development. Since its first publication in 2001, the GHG Protocol has become the best known standard for calculating carbon emissions and its associated emission factors are the most widely used international carbon methodology.

As a standard intended to be applicable worldwide, it has some limitations due to the generic nature of the emission factors that it uses and subsequent standards have been developed in an attempt to address these areas.  Noteworthy amongst these efforts are the emission factors developed by the UK Department of Environment Food and Rural Affairs (Defra) as part of their guidelines on how to report corporate carbon emissions in the UK.  This set of factors has been developed to be specific to the UK situation and consequently differs in some respects to those in the GHG Protocol.

Other countries have also developed specific emission factors for use in that particular country.  For example the French environment agency, ADEME, has developed the Bilan Carbone carbon accounting methodology, which includes one of the most comprehensive sets of emission factors available.

As a result of these efforts, a wide range of emission factors exists.  Differences between them can be due to specific conditions in each country, but also due to differing scientific approaches used in developing the factors.  For this reason it is important to state clearly which set of emission factors has been used when calculating a carbon footprint and to select the set that is most appropriate for the intended purpose.

Which emission factors should I use?
The best emission factor methodology to use will depend on why you want to measure your carbon emissions.  If your organisation only operates in one country, then the national set of emission factors is probably the most appropriate.  In the UK, this would be the emission factors developed by Defra.  If your organisation has operations in several countries, then the GHG Protocol would be better as it includes emission factors recognised in all countries worldwide. Using this methodology for all your sites would ensure consistency in the carbon footprint calculation in all countries and enable like for like comparisons.

What do I do if an activity is not covered by the existing methodologies?
The main standards such as Defra and GHG Protocol cover the majority of activities that a business would want to report, but they are not intended to be universal. There are some activities which do result in greenhouse gas emissions for which they do not provide emission factors.  That is not to say that those emission factors do not exist – due to the wide variety of government and academic research efforts, emission factors are available for a great deal of activities beyond what is in the mainstream methodologies.  These factors can be used in conjunction with Defra or GHG, provided that the report is clear on where they have been used. The key issue is to ensure that the source of the emission factors is reputable and therefore ensure the factors will provide an accurate portrayal of the actual greenhouse gas emissions resulting from the activity.

Greenstone’s consultants are experts in the application of emission factors and can provide assistance in understanding the best option to use for your organisation.  For more information please contact us at info@greenstonecarbon.com.

Which organisations will fall under the CRC legislation?
If your organisation consumed more than 6,000 MWh of electricity on mandatory half hourly meters in 2008, you will be included as a participant in the scheme and will be required to measure and report your carbon footprint, then buy allowances to cover your emissions. The exact requirements for participants in the scheme are covered in detail on the Department of Energy and Climate Change website, but little is said about what organisations should be doing now to prepare.

What should organisation be doing now to prepare?
There are opportunities for organisations with well-planned strategies. A pro-active approach will enable your organisation to prepare for the CRC effectively, mitigating the risks and making the most of the financial and business opportunities provided by good performance in the CRC league table.

If you qualify as a participant, the key elements of your CRC preparation should include:

• Understanding your exposure
  The first step to preparing for the CRC is to understand what your carbon exposure is now, using the most recently available data. This is likely to be from 2008, but will help to provide an indication of your potential exposure. In the introductory phase of the scheme the allowance price will be fixed at £12 per tonne of CO2e, so simply multiplying your 2008 footprint by 12 will give you an indication of the expected cash-flow requirement. For a more accurate estimate, project your footprint forward to 2010, taking account of any expected changes in your organisation’s structure and activities.
• Installing voluntary automatic metering and applying for Carbon Trust Standard accreditation
  In the first year of the scheme, league table position will be determined by the so-called Early Action Metrics. As there will be no baseline against which to measure emission reduction, performance will be ranked according to the extent to which organisations voluntarily install automatic metering, and whether they have Carbon Trust Standard accreditation.
• Planning a reduction strategy
  In subsequent years, league table position is much more dependent on making reductions in emissions – the greater your rate of emission reduction, the more league table points you will score. Emission reduction projects can take time to plan and implement, so you should begin planning and prioritising your options as soon as possible.

What are the penalties for non-compliance?
As with all new legislation, the CRC carries risks for participants – both financial and reputational. For example, the financial penalties for failing to report emissions are currently set at £5,000 plus £0.05 per tonne of CO2e per working day of delay past the reporting deadline. A medium-sized organisation could face penalties in excess of £6 million for not reporting at all and £400,000 if they were to report but were found to have a 15% margin of error in their reported data.  It is planned that 20% of reports will be audited.

More importantly, organisations which fail to comply with the legislation will be publicly named, and the relative performance of all organisations will be published in a league table, highlighting the best and worst performers in the scheme. 
 
What are the relevant timelines and dates?
The timelines to implement the CRC are as follows:
 

Source: Defra http://www.defra.gov.uk/environment/climatechange/uk/business/crc/timeline.htm

Greenstone’s Carbon Reduction Commitment Advisory Service can provide assistance and tools for preparing and complying with the CRC legislation. For more information please contact us at info@greenstonecarbon.com.