How to make voluntary carbon offsets a reality

Guest Post by Tim Kelly. Tim is works as a Principal Climate Change Advisor in the Water Industry.

On December 15, 2008, the Federal Government released its White Paper on its Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future White Paper and announced that Australia would seek to make a minimum 5% cut in its greenhouse gas emissions by 2020 with a further potential to negotiate up to 15% reductions with strong global action involving developed and developing nations.

During the same week, the Federal Government released the following draft legislation and documents.

• Expanded National Renewable Energy Target Scheme – exposure draft legislation – Comments close 13 February 2009
• Consultation on the treatment of electricity-intensive, trade-exposed industries under the Renewable Energy Target – Comments close 13 February 2009
• National Carbon Offset Standard – open for public consultation – comments close 27 February 2009

Whilst most eyes have centred on the White Paper, Australia’s greenhouse management framework is actually the combination of how these various components fit together or don’t fit together. Over the next few weeks it would be useful to explore exactly what the policy proposals would achieve, starting with voluntary offsets.

National Carbon Offset Standard – Overview

In this discussion, I did try refrain from asserting my recommendations, and instead tried to describe my interpretation on what the policy means and its impact and ask for reader responses to a number of questions.

The proposed Standard is meant to “ensure that consumers have confidence in the voluntary carbon offsets market and the integrity of the carbon offset products they purchase“.

Inevitably, as a consequence of adopting the CPRS cap and trade approach, the Discussion Paper describes reasons why many voluntary market products would not cause an economy wide reduction in greenhouse gas emissions once a cap and trade carbon pollution scheme commences.  This is a problem that does not occur with a carbon tax approach which accelerates voluntary behaviour.

The voluntary use of renewable energy to reduce emissions is not covered in this paper or in the National Greenhouse and Energy Reporting System.  Without change voluntary renewables may not continue.

The Paper suggests that the CPRS changes the meaning of carbon neutrality so rather than the the Oxford American Dictionary (2006) version,  a new Department of Climate Change definition evolves as:

“.. if all an entity’s emissions were covered by the Scheme it could be considered ‘carbon neutral’ in the sense that individual emissions have had no net impact on aggregate emissions“.

Any development regardless of its greenhouse impact would be carbon neutral.  Any additional voluntary action would achieve even more than carbon neutral.  With no additional voluntary action to achieve carbon neutrality, this is called the No Action Carbon Neutral Logic. The statement has a few problems that are outlined in more detail in the full version of this posting.

Carbon footprint calculations are covered and a number of options are discussed relating to offsets from sectors not yet covered or from overseas. Most will be quite limited from within Australia.

To the rescue comes the option for the voluntary acquisition and surrender of CPRS permits for customers to reduce economy wide aggregate emissions, but sorry, it is not that simple.

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For those who wish to know the details, read on…

Analysis of the Discussion Paper on a proposed National Carbon Offset Standard

Opening Remarks (Page 2)

The Opening Remarks describe that,

“Under the Scheme, aggregate emissions are capped at a level consistent with achieving the environmental outcome“.

Question 1, Is tackling climate change only about an environmental outcome?

“The Scheme will have broad coverage, with around 75 per cent of Australian emissions being covered from Scheme commencement”.

Question 2 What is the actual coverage of emissions in early years given the granting of free permits (60% and 90% to some energy organisations) and 100% transport & diesel fuel compensation?)

“The Scheme will, for the first time in Australia, impose a carbon price across most of the economy which will drive emissions reductions over time“.

Question 3 Where the market price may be $25 per tonne CO₂-e, what is the business cost on an energy Generator with 90% free permits and how would this change the competitiveness of renewable energy?

The Discussion Paper canvases the motivations for people and entities to purchase offsets and refers to a survey of the types of products purchased (including renewable energy).  The Discussion Paper suggests that:

“Businesses buy carbon credits to offset particular products and services and to meet corporate commitments”

Question 4 How important is it for customers to reduce their emissions as the outcome when taking voluntary action?

The Discussion Paper describes the voluntary market as “relatively small” and does not explore the growth potential of the voluntary greenhouse reduction market that would increase with a real cost on carbon emissions.

Question 5 Is there sufficient recognition of the potential for voluntary markets to grow where there is a cost on carbon emissions pollution, and credible market choices that become competitive where they do not include these costs?

2 Purpose of the standard

The title of the proposed Standard refers only to offsets.  The Discussion Paper however covers offsets, carbon neutrality and carbon footprint calculations.

The voluntary market deals with even more, including – offsets, renewable energy, other low emission products and services, carbon neutrality, carbon footprint calculations, accreditation and verification.

Question 6 Is the title and scope of this proposed Standard too narrow and should it cover the use of voluntary renewable energy and broader voluntary market products and services?

The discussion paper refers to:

“varied levels of understanding about carbon offsets and carbon neutrality and varied assessment methodologies can create confusion as to the legitimacy of claims and products“,

Question 7 How important is it for the proposed standard to confirm a clear definition of carbon neutrality that could be used to guide to achieve carbon neutral outcomes for individuals and businesses?

Redefining Carbon Neutrality

The discussion paper describes how the introduction of the CPRS Scheme, “places a cap on aggregate emissions from covered emissions sources it breaks the link between individual action and aggregate emissions”.  To put this, bluntly, the CPRS cap and trade approach ruins the efforts of individuals and entities from reducing economy wide emissions.  No mater how efficient an individual becomes or even if a business could change to release no emissions, the permits issued by Government would be used somewhere in the market.  It is the number of CPRS permits issued by Government that governs the outcome (such a problem does not exist with the carbon tax approach).

Recognising such a constraint helps to partly understand why an altered view of carbon neutrality is proposed.   The document progressively alters the meaning of carbon neutrality.  I will start by showing the widely accepted Oxford American Dictionary definition as follows:

“Being carbon neutral involves calculating your total climate-damaging carbon emissions, reducing them where possible, and then balancing your remaining emissions, often by purchasing a carbon offset: paying to plant new trees or investing in “green” technologies such as solar and wind power”

Note that the use of the word “your” to describes actions relative to the individual or entity and there is no mention of economy wide emissions.

And the Macquarie Dictionary definition:

“Carbon neutrality: A state in which an organisation or country balances its carbon emissions against its carbon reductions to achieve zero net emissions of carbon dioxide“.

Note the relevance to an individual or a country (where the country is seeking to achieve zero net emissions).

Now back to the Discussion Paper

STEP 1 In the Opening Statement, the Discussion Paper suggests complex issues with carbon neutrality

“In particular, the introduction of the Carbon Pollution Reduction Scheme and Australia’s ratification of the Kyoto Protocol raise complex issues regarding the concept of carbon neutrality and the range of credible offsets available to consumers“.

STEP 2 The Discussion Paper starts with a much shorter Oxford English Dictionary reference in the text as:

“However, a common understanding as defined by the Oxford English Dictionary is making no net release of carbon dioxide equivalent emissions to the atmosphere“.

(I still have not seen the actual dictionary version as it is only in the very latest OED version)

Note that this version makes no mention of the word ‘your’

STEP 3 The Discussion Paper then states a meaning that is somewhat ambiguous.

“The claim of carbon neutrality indicates that an individual entity has not added to the quantity of emissions in the atmosphere“.

STEP 4 The Discussion Paper shifts to the consumer, but introduces the idea that carbon neutrality only has relevance to economy wide emission rather than to ‘your’ emissions.

“From a consumer’s point of view, the environmental credibility of carbon neutrality comes from the fact that offsetting means an entity’s activities do not increase aggregate emissions and therefore help to mitigate climate change“.

Now don’t forget that the Cap and trade approach ruins the ability for voluntary efforts to reduce economy wide aggregate emissions (with the exception of offsets from uncovered sectors or overseas developing nations).

STEP 5 The Department of Climate Change introduces their No Action Carbon Neutral Logic, which I first heard in May 2008.

“.. if all an entity’s emissions were covered by the Scheme it could be considered ‘carbon neutral’ in the sense that individual emissions have had no net impact on aggregate emissions“.

So now we have an entirely new version of carbon neutrality, one that would mean that any development regardless of its impact would be carbon neutral.  Any additional voluntary action would be carbon neutral plus so there would be less importance to get the numbers right.

The statement has a few problems in that:

1. Under the National Greenhouse and Energy Reporting Act, its Regulations and determination the statement is false and the No Action Carbon Neutral Logic that the statement represents is also false.
2. In logic, this statement confuses no increase in aggregate emissions with carbon neutrality.
3. In logic, this statement fails to recognise that the emissions reductions are achieved by covered businesses reducing their emissions to avoid permit liabilities, they do not belong to entities that cause the pollution under permit or customers that buy standard electricity products and services that are associated with such carbon emission pollution.
4. In any ethical sense, the No-Action Carbon Neutral Concept is dangerous and wrong.  Such logic undermines legitimate actions to reduce emissions and could be used inappropriately to justify any kind of development regardless of greenhouse impact.

So the Department of Climate Change has introduced a range meanings and then asks its stakeholders:

• Is the term ‘carbon neutrality’ still meaningful in the context of a cap and trade scheme?
• Rather than ‘carbon neutrality’ would another concept such as ‘additional voluntary action’ be more appropriate to recognise voluntary activity?
• If all an entity’s emissions were covered by the Scheme, would it be sufficient for the entity to participate in the Scheme to be considered carbon neutral?

Question 8, How would you answer the Discussion Paper questions above?

Note that even for electricity users not directly covered by the scheme, their upstream emissions would be covered emissions.

1.3 Proposed Standard (Page 4)

STEP 6 Restate the desired Department of Climate Change outcome as fact

“The Discussion Paper; acknowledges that, while introduction of the Scheme alters the concept of carbon neutrality, entities will wish to engage in additional voluntary action“;

With the CPRS destroying the effectiveness of most voluntary actions and traditional offsets from reducing economy wide aggregated emissions, and then by shifting the relevance of voluntary actions from the customer emissions to aggregate economy wide emissions and redefining carbon neutrality, one might think: ‘Where is this going?’

Question 9 Should the Standard incorporate any part of the No Action Carbon Neutrality Logic would some businesses and entities stop voluntary action to reduce emissions, particularly given the nature of the CPRS mechanism governing aggregate emissions through the number of permits?

The next part of the Discussion Paper seeks to define reasons for action, albeit half-heartedly. The Department of Climate change justification for voluntary action is no longer for an individual or entity to reduce their emissions.

“For example, owners of office buildings may achieve relatively low cost abatement by implementing energy efficiency measures. This will reduce their electricity bills, the demand for electricity, emissions from the electricity sector and therefore the demand for permits. This will in turn reduce the carbon price, reducing the cost to the economy of achieving the same level of abatement. As the cost to the economy decreases it becomes increasingly feasible to set more ambitious emissions reduction targets.”

My interpretation what the Department of Climate change is suggesting that voluntary action is not to reduce individual or entity emissions, but to free up permits so that polluters don’t need to pay as much increasing the wealth of emitters and then the Government may be more inclined to reduce emissions at a faster rate in the following five year period.

Question 10 Using the logic that the purpose of voluntary action is to reduce the market price of permits rather than to reduce the emissions of the individual or entity, would the same benefit be achieved simply making financial donations to Australia’s emitters?

Box 2.1 Mechanics of a cap and trade scheme

In relation to Box 2.1, the Discussion paper suggests that: “The tradability of permits encourages the cheapest abatement to occur first and ensures that the emissions cap is achieved at least cost“.

Question 11 How well does the least cost’ statement hold up considering the compromises that have been agreed in the CPRS with large scale grand fathering of permits, large scale compensation, a price ceiling, ability to release unlimited permits in any given year and a minimum 5% reduction target by 2020?

The cap and trade ‘least cost’ statement is often used to justify government policy choices and I hope to have a greater discussion about how well the cap and trade approach compares with a tax approach at a later date.

Voluntary action beyond the Scheme (page 10)

RENEWABLE ENERGY

As previously mentioned, the Discussion Paper does not deal with the voluntary use of renewable energy.  Neither does NGERS, the White Paper or any of the Renewable Energy Target Papers. Properly defining or accounting for aspects of renewable energy is always a taboo subject despite serious shortcomings as covered in my submission on design options for an expanded National Renewable Energy Target.  Governments, political parties, NGOs renewable energy providers and the media all seem to run for cover rather than to analyse market frameworks and scope 2 electricity and renewable energy accounting with a view to reform and removal of double counting.

With regard to the future of renewable energy co-existing with the CPRS, some customers would be prepared to reduce their own emissions even knowing that they cannot reduce economy wide aggregate emissions because of the Government’s choice of policy mechanism.  The following statement however places the entire concept of purchasing renewable energy at risk.  It reads:

“Entities that wish to offset emissions embodied in their domestic inputs will find that the emissions from the majority of these inputs will be covered by the Scheme. The Scheme will cover emissions from stationary energy……” ,

Under the CPRS White Paper, only benefits coming form uncovered sectors can make a difference (with the exception of forestry offsets that just get re-badged as permits and then they apparently work).  Not one non-fuel burning renewable generator will require CPRS pollution permits and yet they are being defined as part of a pollution sector and through the NGERS framework.

Progressive avoidance to include voluntary renewable energy in any Federal Government framework is progressively eroding the future of voluntary renewable energy.  Electricity represents around half of Australia’s counted emissions and for many businesses, the greater part of their greenhouse inventories.

Question 12 Do you think that there is a place for voluntary renewables to co-exist with the CPRS even where a customer would not be reducing economy wide aggregate emissions.

Question 13 With the two conditions of voluntary purchase of renewables 1) not reducing the customers emissions because of NGERS (could be fixed) and 2 Not reducing economy wide aggregate emissions because of the CPRS, do you think that there is any future for GreenPower renewable energy?

A benefit of the continuation of voluntary renewables is that customers would not be competing for permits with emitters, so the market price would stay lower and the Government could impose further permit reductions in the following 5 year period.

INTERNATIONAL PRACTICE

There is a small mention that appears acknowledge that Internationally, cap and trade systems kill of the economy wide impact of voluntary actions.

“international practice appears not to have been formulated taking into account the operations of a cap and trade scheme. It ignores the environmental impact of an emissions trading scheme in driving emissions reductions elsewhere”.

The carbon leakage problems of the Kyoto Clean Development Mechanism have been well known for years in that the scheme is dependent on un-covered developing nations to provide offsets for developing nations despite their emissions (nationally) being out of control. China and India being well known examples.  Of course these markets must change or cease when all nations start reducing their emissions.

Question 14 If all nations sign up for action with cap and trade schemes would this globally kill off the concept of voluntary action?

Question 15 Why do you think that there has been so little debate in Australia about the effectiveness of the cap and trade approach compared to a carbon emissions tax?  More precisely, the effectiveness of a heavily compromised cap and trade approach compared with an emissions tax approach (which would also be compromised in tax exemptions or differential rates for various picked winners).

Carbon Footprint as a benchmark

The department of Climate Change suggests that:

“Although emissions reductions have been driven from within the Scheme, a product’s carbon footprint may continue to be a useful benchmark to measure the degree to which an entity has undertaken additional voluntary action“.

The suggestion when considered with the No Action Carbon Neutral Logic completes the transition to a new era of action that is not related to greenhouse outcomes.

3.1 Carbon footprint calculation (Page 13)

Despite many entities being re-defined as carbon neutral through the No Action Carbon Neutral Logic, the Discussion Paper acknowledges Scope 1, 2 and 3 emissions as important for greenhouse footprint calculations, and the need for a life cycle approach.  (perhaps this is to establish an each way bet).  Discussion Paper Questions

• Does calculation of a carbon footprint represent a sound benchmark from which to determine the degree of voluntary action an entity may wish to undertake?
• Should different approaches to lifecycle analysis be applied to organisations, products and services?
• Should the calculation of Scope 3 emissions be optional for organisations and/or services and if so which, if any, Scope 3 emissions should be considered?

Question 16, How would you respond to the Discussion Paper questions above?

4.1 Voluntary surrender of carbon pollution reduction permits (page 17)

The final significant issue in the Discussion Paper is the use of the CPRS permits as offsets by voluntarily surrendering them to the Department of Climate Change (in effect, tearing them up and throwing them into the bin)

This mechanism relies on inverse concept of taking a permission to pollute out of the market thereby causing a reduction.

This concept also has a few problems in that:

• The voluntary surrender of permits CPRS is the increasing cost option and the least choice option for voluntary markets (see Siamese twinning below).

• The Governments own logic as applied to other voluntary actions now works in reverse with voluntary demand for permits “will in turn” increase ” the carbon price“, increasing ” the cost to the economy of achieving the same level of abatement. As the cost to the economy” increases “it becomes” less ” feasible to set more ambitious emissions reduction targets“
• The emissions that are reduced are intangible.
• There may be distrust where customers perceive that the emissions cap is too high and that future emissions caps could undermine the voluntary achievements when businesses lobby for additional permit creation and release.
• Only 3% of the payment for Government Auctioned CPRS permits may actually go to implementing greenhouse reduction technologies

Siamese twinning – the failure for voluntary surrender of CPRS Permits

Using CPRS permits as emissions abatement will always tie the cost of carbon emissions abatement to the cost of pollution.  As the cost of carbon emissions pollution increases, the cost of abatement actions should decrease in at least a relative sense, and as new low emission voluntary products and services come on to the market they should decrease in absolute cost as well.  This does not happen with the Siamese twinning of CPRS permits used as abatement.

Question 17 Do you think that the Voluntary CPRS Permit market provides a sufficient market approach for voluntary action under a CPRS?

On a final note, there is perhaps a parallel between renewable energy that cannot cause economy wide emissions reductions and the voluntary surrender of CPRS permits that on paper would do exactly that.  The long term effectiveness of both options are vulnerable to the re-setting of gateways and reduction targets by Government every 5 years.  The Government has proven that it will set its gateways and targets at the level that it sees as economically responsible and politically acceptable in the short term and this may well absorb any the achievements of voluntary action causing little net benefit.

The Actual draft of the National Carbon Offset Standard as attached in the Discussion Paper, does not include the No Action Carbon Neutral Logic, but I would not be at all surprised if it continued into the Standard at the same time as a more conventional definition.  An each way bet approach might serve to avoid accountability for individual development proposals and allow voluntary idealists (like me) to play on the side.  Not the best outcome.

I am preparing a personal submission on the National Carbon Offset Discussion Paper and would be willing to share this with anyone seeking to do the same.