For a simple solution to a complex problem, carbon offsetting has been grossly misunderstood and undervalued by too many for too long. This is in part due to the emerging technology, but also the unwillingness of many to accept the science that links human carbon emissions to global warming. But science evolves. There is now overwhelming evidence connecting human generated carbon emissions to global warming. The options to carbon offset have also evolved.
The latest developments in carbon offsetting through Carbon Market Credits provide a new edge, the opportunity to encourage investment in low-carbon alternatives by supporting a carbon price that adds the environmental cost to fossil fuels. It’s an investment in the future.
Carbon Offsetting Basics
Put simply, the goal of carbon offsetting is to reduce global carbon emissions. Human carbon emissions add about 30,000 million tonnes of carbon dioxide to the atmosphere every year. The message from science is clear, the increase in carbon dioxide has been linked to global warming. The consequences of unconstrained global warming will impact life as we know it, with more severe weather events resulting in the catastrophic loss of human life.
Every effort needs to be made to reduce the amount of carbon dioxide in the atmosphere to sustainable levels. Arguably we have exceeded those levels with carbon dioxide in the atmosphere increasing from pre-industrial levels of 280 ppm to 389 ppm and rising.
Carbon Offsetting is achieved by cancelling, technically called retiring, a carbon credit. A carbon credit represents one tonne of carbon emissions sequestered or stopped from entering the atmosphere. A carbon credit can be created from a project anywhere in the world to the benefit of everybody in the world, because global warming is a global issue and reducing carbon emissions anywhere in the world helps stop damaging climate change.
Businesses and individuals offset carbon to show their environmental concern. Through carbon offsets businesses and individuals can participate in the reduction of global carbon emissions urgently required to help stop damaging climate change. When the carbon credits purchased equals the annual or total carbon emissions (i.e. the carbon footprint of a business, individual, product, or event), then that entity has a carbon neutral impact on the world.
In addition to offsetting, carbon credits can be purchased for the altruistic reduction of global carbon emissions.
Participation in the market for voluntary carbon credits is growing rapidly. The volume of carbon credits traded globally increased by 87% to 123 million tonnes of carbon dioxide in 2008; though not all of these credits were used as carbon offsets.
But the question remains, what types of carbon credits are available and how are they different? Essentially there are three categories of carbon credits. For the sake of simplicity they are referred to here as: Tree Related Credits, Renewable Energy Credits and Carbon Market Credits. They each represent a different way of reducing carbon emissions and each has a different result.
Tree Related Credits sequester carbon dioxide already emitted. Renewable Energy Credits invest in low-carbon energy and carbon capture projects. Carbon Market Credits add the environmental cost to fossil fuels in developed markets and thereby encourage low-carbon solution investment.
To understand the differences between each credit type requires closer investigation.
Tree Related Credits
Tree Related Credits provide investment for forests. The amount of carbon dioxide sequestered by a tree can be calculated and each tonne of carbon dioxide sequestered per year represented by a carbon credit. The benefit is an economic value for trees beyond the wood they represent. In economies that rely on the revenue raised from forestry, such as Indonesia, this is the difference between cutting down and not cutting down trees.
The truth is, trees are essential to human existence. Trees sequester carbon dioxide and in return provide that oxygen. As David Suzuki simply states, humans are animals that require oxygen to breath. The World Resource Institute estimates that deforestation represents 12% of the global carbon footprint. The IPCC report it to be as high as 20%. This trend must be reversed.
While Tree Related Credits have a positive impact on carbon dioxide levels, there is key concern with their effectiveness in helping stop man made global warming; They are reactive. Trees sequester carbon dioxide after it has been emitted. Further, they do not stop or inhibit the future emissions of carbon dioxide. Mankind already emits far more carbon dioxide than trees can sequester. Global tropical forests sequester only 20% of fossil fuel emissions. Trees alone are not enough to stop global warming. They are a passive form of offsetting that has been criticised because they can be used by individuals and organisations as a way to payoff their pollution and relieve their environmental conscience without forcing a change in behaviour.
Renewable Energy Credits
A more proactive form of carbon emission reduction is achieved by Renewable Energy Credits. They overcome the issue of “reactive” sequestration and provide more “active” carbon emission reduction in the form of an alternative low-carbon energy sources and carbon trapping projects. These credits fund investment in all types of renewable energy including wind turbines, solar, wave and geothermal, as well as methane trapping projects that convert methane gas into an energy source. Renewable Energy Credits are necessary to make these projects financially attractive alternatives to “cheap” fossil fuel investments.
Many of these projects exist under the CDM (Clean Development Mechanism) of the Kyoto Protocol to help developing nations low-carbon economic growth. After all, these countries deserve the same economic growth opportunities that the developed world had during the industrial age, but preferably without the carbon emissions. The investment funded by offsets can have additional benefits of providing employment and reducing pollution in the local communities.
While the majority of the renewable energy projects provide a positive impact on the local community, there are concerns with the value of their carbon offsets. Each project is different and faces unique challenges. This is made more complex for projects in developing nations. Extensive due diligence is required to ensure the project results in additional carbon emissions reduction beyond what would have occurred without the investment, has no negative consequences, and that the carbon emissions reduction is permanent, verifiable and enforceable.
But the main concern in with Renewable Energy Credits is that no matter how worthy the renewable energy project appears, creating carbon offsets to fund these projects still does not change the economic attractiveness of fossil fuels. That is the advantage of Carbon Market Credits.
Carbon Market Credits
Carbon Market Credits change the investment dynamic between fossil fuels and the environment. They represent the carbon dioxide emitted by an organisation in a compliance regulated carbon market. A market whose goal is to limit and reduce the carbon emissions in developed nations.
Carbon Market Credits represent a price on carbon dioxide. In effect, they add an environmental cost to fossil fuels; A cost that impacts the decision process and energy related investment decisions of every business in a regulated carbon market.
A price on carbon encourages investment in low-carbon alternatives. Low carbon-solutions become more economically attractive. Imagine the decision making process of a CFO (Chief Financial Officer) in a market with no carbon price. The CFO has a project that requires an energy source. There are two options available; energy source A – fossil fuels or energy source B – renewable energy. In making a decision, the CFO considers amongst other things the shareholders. Will the shareholders reward the CFO for choosing renewables over fossil fuels? Not if the renewables cost significantly more! In the scenario where there is no carbon price, the decision would be fossil fuels. However, if the environmental cost had been added to fossil fuels then option B, Renewables, would be more economically attractive.
As low-carbon alternatives become more attractive, less fossil fuels are dug up from the earth. They remain stored underground rather than being released into the atmosphere where they contribute to global warming.
A price on carbon is the game changer for fossil fuels and a carbon market provides the best price signal. The alternative, a carbon tax, is inflexible, does not target a carbon emission quota and is subject to political influence. A carbon market limits the quantity of carbon emission by applying a cap to the amount of carbon dioxide by regulating the quantity of carbon credits. Every organisation regulated by the carbon market must retire a carbon credit for every tonne of carbon dioxide it emits.
The key concern with a price on carbon is the equitable playing field for globally competing businesses. However, this has not stopped business's profit growth in the European Union Emissions Trading Scheme. As the business environment changes businesses find savings in energy efficiencies and optimisations. The real concern for a price on carbon remains political resistance.
Voluntary Cancellation is Next Generation Offsetting
Carbon Market Credits can be voluntarily purchased and cancelled. This stops them from being used to emit carbon dioxide. Because in a well designed carbon market the number of carbon credits are limited, voluntarily cancelling carbon credits effectively reduces the number of carbon credits available. With fewer credits available emitters are encouraged to invest in low-carbon alternatives.
Through carbon markets individuals and organisations can participate in next-generation carbon offsetting, where the offsets support a price on carbon. Voluntarily cancelling Carbon Market Credits provides proactive carbon emission reduction because the carbon price it supports keeps fossil fuel emissions from being added to the atmosphere.
Saving the World by Reducing Global Carbon Emissions
As the need to reduce anthropogenic carbon emissions that cause global warming becomes more widely accepted, the urgency to find effective solutions will increase. Carbon offsetting provides a way for individuals and organisations to participate in global carbon emission reduction.
The impact of the offsetting depends on the type of carbon credit. The three categories of carbon credit each have a different goal. Tree Related Credits sequester the carbon dioxide already emitted; Renewable Energy Credits provide investment for low-carbon solution projects; Carbon Market Credits support a price on carbon, changing the low-carbon investment dynamic in developed markets.
Regardless which option you choose, offsetting plays an important role in reducing global carbon emissions. While it is not the only solution to save the world, carbon offsets do provide a way for everybody to meaningfully participate in helping stop severe climate change.
Michael Salvatico - Climakind