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8/14/2019 The Carbon Trust three stage approach to developing a robust offsetting strategy
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A study funded by the Carbon Trust and carried out by
L.E.K. Consulting in conjunction with the Carbon Trust
The Carbon Trust three stageapproach to developing arobust offsetting strategy
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Preface 01
Executivesummary 02
1 Carbonmarkets
puttingtheoffsetmarketincontext 04
DevelopmentoftheKyotoProtocol 04
Thecompliancecarbonmarket 05
Thevoluntarycarbonmarket 06
2 Backgroundoncarbonoffsets 08
Project-basedcarbonoffsets 08
Characteristicsofoffsetprojects 10
Standardsbywhichoffsetsaremeasured 11
3 Thecarbonneutralconcept 15
Whatiscarbonneutrality? 15
Businessesandcarbonneutrality 16
4 TheCarbonTrustthreestageapproach
todevelopingarobustoffsettingstrategy 17
Stage1: Focusondirectemissionsreduction 17
Stage2: Lookatopportunitiestoreduceindirectemissions 18
Stage3:(optional):Developanoffsettingstrategy 18
Conclusion 24
Contents
This guide is divided into four sections.
Section 1providesanoverviewofthecarbonmarkets,
lookingathowtheyhaveevolved,howtheyarestructured
andputsthevoluntarymarketinthecontextoftheoverall
carbonmarket.
Section 2introducestheconceptofcarbonoffsets,their
maincharacteristicsandthestandardsagainstwhichthey
canbemeasured.
Section 3explorestheconceptofcarbonneutrality,
indicatingwhyanorganisationmightchoosetobecomecarbonneutral.
Section 4isastep-by-stepprocessdesignedtohelp
organisationsdeveloparobustoffsettingstrategy.It
includesdetailsofhowtocarryoutthenecessarydue
diligencetoassesstheintegrityandcredibilityofoffsets,
andprovidestheknowledgeandtoolsneededtohave
aninformeddiscussionwithoffsetproviders.
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TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Preface
01
In our experience of working with companies across the UK on emissions
reduction, the most cost effective and environmentally sound way to
address an organisations carbon footprint is to:
Firstly,focus on direct emissions,reducingthein-housecarbonfootprintandcreatingbottomlinesavingsbyimplementingallcost-effectiveenergy
efciency measures. Where cost effective, opportunities to reduce the carbon
intensityofenergysupplybydevelopinglow-carbonenergysourcessuchas
on-sitegenerationshouldalsobeexplored
Secondly,look at reducing indirect emissions,workingwithother
organisationstoreduceemissions(andcutcosts)upanddownthesupply
chain,andlookforopportunitiestodevelopnewlow-carbonproducts
Then,ifappropriate, consider developing an offset strategy,ensuringthat
only high quality offsets are purchased from veried projects that genuinely
createemissionsreductions.
Focusingondirectandsupplychainemissionsshoulddeliverbottomline
nancial and carbon savings year-on-year. For those organisations considering
buyingoffsets,thisapproachreducesthenumberofoffsetsthattheymight
needtopurchase.
TheCarbonTrustcanhelporganisationstonavigatetheoffsetmarketandprovideadviceonhowtopurchasegoodqualityoffsets,providedthisispart
ofanoverallemissionsreductionstrategywhichincludesdirectandindirect
emissionsreductions.
Thevoluntarycarbonoffsetmarkethasgrownrapidly
overthepasttwoyearsasorganisationshavebegun
touseoffsettingasawayofindirectlyreducingtheircarbonemissions.
However,thismarketislargelyunregulatedandwith
voluntaryoffsetprovidersofferingaplethoraofoffset
and carbon neutral services, it is difcult to understand
andtoknow,objectively,whatisagoodqualityoffset.
Thisguidewilltrytobridgethatgap.Itisintendedtohelp
organisationsnavigatetheoffsetmarketanddeveloparobust
strategythattakesintoaccountalltheissuesfacedby
buyersofoffsetsandparticipantsincarbonneutralschemes.
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TheCarbonTrust
Executivesummary
Climatechangeisoneofthegreatestchallengesofmodern
times.Mostforwardthinkingorganisationshavealready
beguntakingactiontotackleclimatechangebyreducingtheircarbonemissions.
Offsettinghasemergedasanadditionalwayfororganisations
toindirectlycuttheiremissions.Carbonoffsetsaregenerated
fromprojectsthatreducetheamountofgreenhouse
gasesenteringtheatmosphere.Toqualifyasanoffset,the
reductionsachievedbyaprojectneedtobeadditionalto
whatwouldhavehappenedintheabsenceoftheproject,
a condition dened as additionality.
Carbonoffsets(orcarboncredits)canbeusedfor
complianceaswellasforvoluntarypurposes.Inthe
compliancemarket,offsetsareacquiredbyorganisationsandgovernmentstocomplywiththeiremissionsreduction
targetssetundertheKyotoProtocolorothercompliance
initiatives(forexample,theEUEmissionsTradingScheme).
Equally,organisationsaroundtheworldhavestartedtouse
offsetsasavoluntarywaytoreducetheircarbonemissions
indirectly.Thishascreatedavoluntaryoffsetmarket
commonlyknownastheoffsettingmarket.
Thevoluntaryoffsetmarkethasseenrapidgrowthin
thepasttwoyears,drivenprimarilybyincreasingpublic
awarenessofclimatechange.Theconceptofcarbon
neutrality,orthenettingoffofcarbonemissionswithin
a dened boundary, has emerged as an approach for somebusinesseswishingtodemonstratetheircommitmentto
emissionsreduction.
Therearerisksassociatedwiththisapproach.Usingoffsets
could be an easy way to address an organisations carbon
footprintintheshortterm,butthisstrategyisonlyasgood
astheoffsetsacquiredforthosepurposes.Addressingan
organisations own carbon emissions is likely to be a better
overallapproachthanoffsettingaloneinthemediumto
longterm.
Thereareanumberofkeychallengestoaddresswhen
offsetting emissions, such as calculating the organisationscarbonfootprint,buyinggoodqualityoffsetsand
communicatingaccuratelywhathasbeenachievedtoavoid
theriskofreputationaldamage.
Toovercomethesechallenges,theCarbonTrusthas
developedathreestageprocesstohelporganisationsthat
wishtooffsettodoitrobustlyaspartofanoverallcarbon
managementstrategy.
Stage 1:
Directemissionsreduction
Stage 2:
Indirectemissionsreduction
Stage 3 (optional):
Offsetting
Calculateemissions
Lookforinternalabatement
opportunities
Developanemissions
reduction/carbon
managementplan
Mapsupplychainprocess
andestablishcarbonfootprint
Identifyopportunitiesfor
emissionsreduction
Developanimplementation
planacrossthesupplychain
Bringnewlow-carbon
productstomarket
Establishreasonsfor
buyingoffsets
Dene type of offsets to
bebought
Carryoutduediligence
onrobustnessofoffsets
Figure 1: The Carbon Trust three stage approach to developing a robust carbon management strategy
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TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Arobustcarbonmanagementstrategyshouldfocusonthe
rst two stages addressing an organisations direct and
indirect emissions. There are a number of benets in doingthis,including:
Cost savings:reducingenergybillsaswellasleading
tosavingsintransport,wasteandotheroperatingcosts
withintheorganisationanditssupplychain
Operationalefciency: as a side benet of improving
energy and carbon efciency
Increased revenues:fromexploitingopportunitiesto
bringnewlow-carbonproductsandservicestomarket
Mitigation of regulatory risks:includingClimateChange
Levy(CCL),EnergyPerformanceofBuildingsDirective(EPBD),EUEmissionsTradingScheme(EUETS)orany
futurelegislation
Improved Corporate Social Responsibility and
reputation:fromproactivelymakingeffortstoreduce
carbonemissions.
Afterlookingattheirdirectandindirectemissions,some
companiesmaythendecidetoincludeoffsettingaspart
oftheiroverallcarbonmanagementstrategy.
Forthisthirdstage,weprovideastep-by-stepguideon
how to dene that strategy, and how to identify the type
ofoffsetstobuy.
Wehighlighttheprosandconsofoffsetsaccordingtoseven
keycategories:
Type of projects
Standards used
Project location
Additionalbenets
Level of aggregation (credits from portfolio versus
credits from individual projects)
Provision of guarantees
Labelling service offered by offset providers.
Thelaststepintheprocessistoidentifyandpurchasegood
qualityoffsets.TheCarbonTrusthasdevelopedaprocess
withkeyquestionstohelporganisationsassessthevalidity
oftheoffsetstheyareacquiring.
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TheCarbonTrust
Development of the Kyoto Protocol
Thereisagrowingconsensusthatclimatechangeisone
ofthegreatestchallengesofmoderntimes.Sincethestart
oftheindustrialrevolution,thevolumeandconcentration
of so-called greenhouse gases (GHGs), has increased
in the Earths atmosphere. These gases trap heat within
theatmosphere,andcauseglobalmeantemperaturesto
increase.Thishumaninducedglobalwarmingeffecthas
produced changes to our climate which could have signicant
effectsonourplanetinthenextdecades.
Theworldisrespondingtothisthreatbytakingglobalaction to limit the emissions of GHGs into the atmosphere.
The rst step came in 1988 with the establishment of the
IntergovernmentalPanelonClimateChange(IPCC)tohelp
governmentsacrosstheworldinvestigateandunderstand
thescience,issuesandimpactsofclimatechange,and
buildsomeinternationalconsensusonthenatureofthe
problem. In 1992, the IPCC and the United Nations (UN)
established the United Nations Framework Convention on
Climate Change (UNFCCC).
Thisinternationaltreatyformallyrecognisedtheconcern
overclimatechange,andestablishednon-legallybinding
targetstostabilisedevelopedworldgreenhousegasemissions at 1990 levels.
In 1997, the UNFCCC adopted the Kyoto Protocol,
establishinglegallybindingtargetsforthedeveloped
world countries that ratied the protocol. It aims to
reducegreenhousegasemissionsbyanoverall5%below
1990 levels during the period between 2008 and 2012.
Tomeettheirtargets,countriescaneitherreduce
their domestic emissions, or use the so-called exible
mechanisms established by the Kyoto Protocol: Clean
DevelopmentMechanism(CDM),JointImplementation(JI)
orEmissionsTrading.Thesemechanismsallowforthe
tradingofcarboncredits,orcarbonemissionsreductionunits,whichcanbeusedforcompliancepurposesby
partiesthathavelegallybindingtargets.
Box 1: Kyoto Protocol
exiblemechanisms
Clean Development Mechanism (CDM)
CDMisbasedontheimplementationofprojectsin
developingcountriesthatresultinanetreduction
of greenhouse gases (GHGs) entering the atmosphere.
These projects receive emissions credits, or Certied
EmissionsReductions(CERs),whichcanbeusedby
developedcountrieswithlegallybindingtargets
toachievecompliance.Aconditionfortheissueof
creditsisthatprojectsgenerateemissionsreductions
thatareadditionaltowhatwouldhavehappened
intheabsenceoftheproject,aconditionreferred
to as additionality. Emissions reductions under
this mechanism need to be veried and certied
byanauthorisedthirdpartycalledtheDesignated
Operational Entity (DOE). The DOE periodically veries
thereductionsachievedbytheprojectactivityand
provides written certication that the project activity
has achieved the veried GHG reductions.
Joint Implementation (JI)
JIisbasedonthesameprinciplesasCDM,butoperational
inAnnexIcountries(developedcountrieswithlegally
bindingreductiontargetsundertheKyotoProtocol
agreement).EmissionsreducedbyJIprojectsneed
tobeadditionalinordertoreceiveemissionscredits
calledEmissionsReductionUnits(ERUs).TheERUs
generatedbyJIprojectscanbeusedbyAnnexIparties
towardsmeetingtheirlegallybindingemissionstargets.
Emissions trading
EmissionstradingintheKyotoProtocolisbasedona
cap-and-tradesystemwheredevelopedcountriesareallocatedemissionsallowancesbasedontheemissions
reductiontargetnegotiated.Eachallowance,calledan
AssignedAmountUnit(AAU),isequivalenttoonemetric
tonneofCO2.Attheendofthecomplianceperiodeach
countryhastoholdanamountofAAUsequivalenttohow
much GHG it has emitted during the period. Countries
whichhavereducedtheiremissionsbelowtheirallocated
allowanceswillbeabletotradethesurplusallowancesto
othersthathaveexceededtheircap.
1 Carbonmarketsputting
theoffsetmarketincontext
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The compliance carbon market
TheKyotoProtocolcreatedamarketforcarbonbasedon
thetradingofemissionsreductionsoremissionsallowance
unitsusedforcompliancepurposes.Thepossibilityof
usingtradingasacost-effectivewaytoachieveemissions
reductiontargetshasencouragednationsandgroupsof
nations(egtheEU)todeveloptheirowndomestictrading
mechanismstohelpthemmeettheirKyototargets.
AmongtheseschemesthebiggestistheEuropeanUnion
EmissionsTradingScheme(EUETS),inoperationsince
1stJanuary2005.
Box 2: Why is emissions tradingcost effective?
Emissionstradingisamarket-basedapproachthat
allowspartieswithenvironmentalcommitmentstouse
instrumentssuchasemissionsallowancesorcreditsto
demonstratecompliancewiththeircommitments.Using
emissionstrading,partiescandecidewhetherthey
reducetheiremissionsinternally,takingintoaccount
thecostsoftheirinternalabatementopportunities,whethertheyshouldbuycreditsorallowancesfrom
otherparties,takingintoaccountthepriceofthose
allowancesorcredits,ordecidetoabatetheir
emissionsbeyondwhatisrequired,generatinga
surplusofemissionsreductionsthatcouldbesoldto
otherpartieswhichareshortoftheircommitment.
Byprovidingamarket-basedmechanismwithprice
signals,partiescantakedecisionsonwhichisthe
mostcost-effectivestrategytofollowtoachievetheir
environmentalobligations.
EU Emissions Trading Scheme (EU ETS)
Basedonacap-and-tradesystem(seeBox3),theEUETS
isbyfarthelargestemissionstradingschemeintheworld.
Itcoversaround12,000installations,insixmajorindustrial
sectors,across25countries.Itencompassesover40%of
Europes and the UKs CO2emissions.Companiesincludedin
thisschemehavethechoicetoreducetheirownemissions,
buyallowancesinthemarket(calledEUallowances,EUAs)
orpurchasecreditsthroughCDMorJIprojects(although
therearelimitsonthevolumeofCDMandJIcreditsthat
canbepurchased).Theschemehasbeenrunningsince
1stJanuary2005.Itssecondphasewillstarton1stJanuary
2008 and end on 31st December 2012, in line with the rst
Kyotocommitmentperiod.Athirdphaseisexpectedtorun
after this, but its form and duration have yet to be dened.
Other schemes
ApartfromtheEUETS,therearethreeotherschemesin
operation in countries that have ratied the Kyoto Protocol:
the Norway ETS, UK ETS (which will end in December 2006)
andtheJapanVoluntaryEmissionsTradingScheme,which
hasbeenrunningsinceApril2006.Otherschemesare
alsobeingdevelopedtohelpcountriescomplywiththeirKyototargets.
The New South Wales Abatement Scheme in Australia and
the Regional Greenhouse Gas Initiative in the US are two
otherexamplesofemissionstradingschemes.Although
these countries have not ratied the Kyoto Protocol, and
thereforehavenolegallybindingcommitmentstoreduce
theiremissions,theschemesareputinplaceatastate
levelandbotharemandatoryforthecompaniescovered
withinthescheme,asdescribedbelow:
New South Wales Abatement Scheme
Inoperationsince2003,theschemeisaimedatreducingCO2emissionsfromthegenerationofelectricityinthis
Australianstate.Ahybridbetweenacap-and-tradeand
baseline-and-creditsystem(seeBox3),emittersare
givenacapontheiremissionsbasedontheemissionsper
capitawithinthestate;ifanemitterexceedsthecapthey
can either pay a ne (c. 6.25/tCO2e)oroffsetemissions
by purchasing New South Wales Greenhouse Abatement
Certicates (NGACs) generated by emissions reduction
projectscarriedoutwithinthestate.Unlikeother
schemes, the New South Wales scheme does not allow
theuseofothercredits,suchasKyotocredits,for
compliancepurposes.
Regional Greenhouse Gas Initiative (RGGI)
This scheme is to be launched in January 2009 in seven
North-Eastern and Mid-Atlantic US states. It is a cap-and-
tradeschemeandcoversaround200powerplantswith
energyproductioncapacityabove25MW,whichusefossil
fuelstogenerate50%ormoreoftheirenergy.Thescheme
allowsparticipantstouseoffsetsforcompliancepurposes,
favouringthosegeneratedintheUS,althoughoffsetsfrom
otherschemescouldbeusedwithsomerestrictions.
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Box 3: Emissions Trading
Mechanisms
Emissionstradingmechanismscantaketwobasicforms:
cap-and-tradeorproject-based(sometimesalsocalled
baseline-and-credit).
Cap-and-trade system
Cap-and-tradesystemsarebasedontheallocation
ofaceilingorcaponemissionsoveraperiodoftime.
Theauthorityallocatesallowanceseitherfreeorby
auctioning them. Each allowance represents a dened
emissionsamount(egtonneofSOX, NOXorCO2
equivalent).Inordertocreateamarket,authorities
allocatealimitednumberofallowances,belowthe
currentexpectedemissionslevel,whichcreates
scarcityinthemarket,generatingapositivevaluefor
thepermits.ExamplesofthissystemincludetheUSSOX
allowancestradingscheme,theKyotoemissionstrading
schemeandtheEUETS.
Project-based or baseline-and-credit system
Thissystemisbasedonprojectswhichreduce
emissionsbeyondabusiness-as-usualscenarioin
otherwords,theygenerateemissionsreductionsthat
areadditionaltowhatwouldhavehappenedinthe
absenceoftheproject.Thebusiness-as-usualscenario
providesthebaselinefortheseprojects.Baselinesare
establishedfromhistoricalemissionsdataorthrough
othermethodologies(egratioofemissionstooutput).
Projectsthatreduceemissionsbeyondthebaseline
areentitledtoemissionsreductioncredits,whichcan
besoldtopartiesthatcanusethemforcompliance
orvoluntarypurposes.Typically,emissionsreduction
creditsarenotissueduntilthereductionshave
actuallyoccurred.ExamplesofthissystemareCDM
andJIprojects.
The voluntary carbon market
Alongsidethecompliancemarket,avoluntarymarkethas
emerged.Thisbringstogethersomeverydifferentplayers
(eg from companies to local governments, NGOs, individuals
orcities)whohavearangeofreasonsforparticipatingin
themarket.
Asinthecompliancemarket,thevoluntarymarkethasa
numberofdifferentschemes.However,incontrasttothe
compliancemarket,theseschemesgenerateemissions
reductionunitsorallowanceswhich,inmostcases,are
nottradableoutsidetheschemeboundaries,inotherwords, are non-fungible.
Thenon-fungibilitycharacteristicofthevoluntarymarket
isbecauseofdifferencesintherulesoftheschemes.
Whileinthecompliancemarketmostschemesaregoverned
bytheKyotoProtocol,creatingemissionsreduction
unitswhicharefungibleortransferable,thereisnosuch
overarchingframeworkinthevoluntarymarket.Thismakes
thevoluntarymarketnotonlycomplextounderstand,but
alsolesstransparentandextremelydiverseintermsofits
trading units. For example, some emissions reduction
creditstradedonthismarketdonotneedtopassany
additionalitycriteria,whileothersdo.
Awaytounderstandthismarketistodivideitbetweenthe
voluntarymarketwithlegallybindingobligationsandthe
voluntarymarketwithout.
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Legally binding voluntary market
Playersinthismarketformpartofaschemeinwhichthey
voluntarily set themselves legally binding GHG emissions
reductiontargets.ThisisthecaseintheChicagoClimate
Exchange(CCX).TheCCXisavoluntarysystem(based
inCanada,theUSandMexico)whichsetsself-imposed,
legallybindingreductiontargetsonitsmembers.The
systemisahybridbetweenacap-and-tradeandproject-
basedscheme.Participantmembershaveanemissionscap
based on historic (1999-2002) emission levels. To comply,
memberscaneitherreducetheiremissionsbelowtheir
caporpurchaseoffsetcreditsgeneratedfromprojectsintheUS,Brazil,CanadaorMexicothatfocusprimarily
on landll and agricultural methane destruction, or
carbonsequestrationinsoilsorforest-basedbiomass.
TheschemealsoallowstheuseofKyotocompliance
instrumentssuchasCERsorERUs.
Non-legally binding voluntary market
(the offset market)
Playersinthismarketengagevoluntarilyinemissions
reductionschemesbecausetheyhaveeithersettheirown
reductiontargetsorwishtoreduceornetofftheircarbon
footprint.Strategicreasonswhycompaniesbuyoffsets
includeaddressingclimatechange,generatinggoodwill
amongstcustomersandemployees,learningbydoing,or
CorporateSocialResponsibility(CSR)interestorobligations.
This segment includes the so-called retail carbon market,
targetedatcompaniesandindividualsthatusuallyhave
relativelysmalldirectemissions,andwishtoreducetheir
carbonfootprintthroughoffsetting.Theyoftenpurchasesmall
quantitiesofemissionsreductioncredits,whichcouldeither
be veried or be part of a non-verication standard. This
marketiscommonlyreferredtoasthecarbonoffsetmarket.
Boththelegallyandnon-legallybindingmarketshaveseen
asteadyincreaseintheiractivitiesinthepasttwoyears.
Inthelegallybindingsector,theChicagoClimateExchange
hasseenthevalueofitstransactionsgrowbymorethan
140%annually.Similarly,thevoluntaryretailoffsetmarket
hasenjoyedasteadygrowthinthepasttwoyears.The
voluntaryoffsetmarkettodayissmallandfragmented,
butgrowthisexpectedfortheforeseeablefuture.For
example,inthepastthreeyears,themainnon-compliance
offsetprovidersintheUKhavegrownbyover60%perannum.
Growth in the voluntary market will be dependent on
thelevelofinterestfromthegeneralpublicandkeystakeholdersinterestedinclimatechange,andonthe
perceptionofwhetheroffsettingistherightwaytoaddress
climate change in the long term. Some NGOs and the media
havestartedtoquestiontheroleofoffsettingastheysee
itasalicencetocontinuethestatusquoanddelaytrue
changesinbehaviourthatwoulddrivesocietytowards
alow-carboneconomy.
Inaddition,thevoluntarymarketcouldbechanged
considerablybytheintroductionofacommonstandard
thatcouldimprovecredibility,orbytheevolutionofanew
internationalclimatechangeagreementpost-2012.This
iswhysomemarketparticipantsarecautiousabouttheexpectedgrowthrate.Theypredictthatcontinuedgrowth
canbesustainedforthenext4-5yearsbutthatafter2012
thereisuncertaintyastohowthemarketisgoingtoevolve.
Therestofthisguidewillfocusprimarilyonthevoluntary
market, specically the voluntary retail offset market. This
isstillaveryyoungandevolvingmarketandparticipants
needtoconsidercarefullytheissuesrelatingtooffsetsand
thewidercarbonneutralconceptbeforeengaginginit.
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2Backgroundoncarbonoffsets
Project-based carbon offsets
Carbonoffsetsaregeneratedfromprojectsthatavoidorabsorb/sequestercarbondioxide,oranyofthe
othermaingreenhousegases(methane,nitrousoxide,
hydrouorocarbons, peruorocarbons and sulphur
hexauoride).
Theseprojectscantakevariousforms,includingrenewable
power, energy efciency, fuel switching (eg from oil to
naturalgas),reforestation,ordestructionofgreenhouse
gases(egmethane,HFC23).Table1providesexamplesof
thetypeoftechnologiesthatcanbeusedtogenerateoffsets.
Inthevoluntarysector,offsetsaremainlysourcedfrom
smallscaleprojects(typicallywithemissionsreductionsofbelow15ktCO2eperannum)locatedindevelopingcountries.
Thisisfortwomainreasons.Firstly,smallscaleprojects
typically benet local and rural communities providing
sustainable development and/or social benets. Thesebenets are sought by buyers who not only want to reduce
theircarbonfootprint,butalsowanttouseoffsetsasa
waytopromotecorporatesocialresponsibility.
Thesecondreasonisaneconomicone.Inthemajority
ofcases,smallscaleprojectsarestilleconomically
unattractiveforthecompliancemarket(duetothehigh
transactioncostsinvolvedindevelopingtheseprojects
undercompliancemarketrules),buttheyareaviable
sourceofcreditsforthevoluntarymarketwherethe
burdens of verication are often much lower.
Table 1: Examples of technologies that can be used in offset projects.
Type of technology Examples
Technologies
avoiding
greenhouse gases
Renewableenergy Run-of-riverhydro(typicallylessthan15MW)
Biomass
Wind
Solarthermal
Photovoltaic
Energy efciency Low-energylighting
Industrial energy efciency
Gas recovery or
destruction
Methane recovery from landlls
Destructionofby-product(HFC23)fromHFC22refrigerant
production
Fuelswitch Oiltonaturalgas
Dieseltonaturalgas
Fueloiltonaturalgas
Liquid petroleum gas (LPG) to biomass briquettes
Technologies
absorbing/
sequestering CO2
Biologicalsinks Reforestation(forestationoflandpreviouslyforested)
Afforestation(forestationoflandnotpreviouslyforested)
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Not every project that reduces GHG emissions can generate
carboncredits.Toqualifyasanoffset,thereductions
achievedbyaprojectneedtobeadditionaltowhatwouldhavehappenediftheprojecthadnotbeencarriedout
a condition dened as additionality.
Box 4: Testing for additionality
The Executive Board of the UNFCCC has developed
a toolkit to help project developers assess projects
additionality. Published as the CDM tool for the
demonstration and assessment of additionality, this
hasbeenwidelyusedintheCDMmarketandisarobust
processtotestadditionalityforemissionsreductionprojects.UndertheCDMtool,aprojectisadditional
ifitmeetsthefollowingcriteria1:
Itisnotrequiredbycurrentregulation
Itisnotcommonpractice(ietechnologyorpractice
hasnotdiffusedintherelevantsectororregion
wheretheprojectiscarriedout);and/or
Itfaceseconomic,investmentortechnological
barriersthatwouldpreventtheimplementationof
theproject.Examplesofeconomicbarrierscould
be an inability to meet IRR, NPV or payback criteria;
investmentbarriersincludealackofaccesstodebtfundingortocapitalmarketsduetorealorperceived
risksassociatedwiththeproject;andtechnological
barriersincludelackoflabourresourcesneededto
operateandmaintainthetechnologyoralackof
infrastructureneededtoimplementprojectsinthe
countryorregion.
Additionality is the dening concept of offset projects.
Theintegrityofproject-basedcreditsreliesonthe
reduction of GHG emissions beyond what would have
occurredinabusiness-as-usualscenario.Whatconstitutesbusiness-as-usualisnotstraightforwardtodetermine
andanumberofmethodologieshavebeendevelopedto
dene the baseline emissions against which the project is
compared(seeBox5).Thedifferencebetweentheproject
emissions and the baseline emissions denes the number of
emissionsreductioncreditsthataprojectisentitledto,as
illustratedinFigure2.
Figure 2: Net reductions generated from offset projects
Box 5: CDM baseline methodologies
EveryprojectsubmittedforCDMregistrationhasto
haveitsbaselineemissionscalculatedaccordingtoan
approvedmethodology.Thesemethodologiesprovide
areasonableprocesstorepresentthegreenhousegas
emissionsthatwouldhaveoccurredintheabsenceof
theproject.
AsofSeptember2006,therearemorethan60approved
methodologiesthatcoverawidespectrumofproject
types,suchaszeroemissionrenewableenergyprojects,
biomassprojects,emissionsrecoveryfromwaste,
wastewateroranimalwasteprojects,fossilfuel
switchingprojects,destructionofpotentgreenhouse
gasessuchasHFC23,changesincementproduction,
energy efciency projects, transport projects and
reforestationprojects.Alistofcurrentmethodologies
can be found on the UNFCCC website, http://unfccc.int
GHG emissions
Emissions
reductions
Time
Baselinee
missions
Projectemissions
1CDMtoolforthedemonstrationandassessmentofadditionality(http://cdm.unfccc.int/EB/Meetings/022/eb22_repan8.pdf)
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Characteristics of offset projects
Besidesadditionality,thereareanumberofotherimportant characteristics that affect an offset projects
integrityandcredibility.Theseare:
Verication
Monitoring and verication of emissions reductions provide
guaranteesthattheemissionsreductionsclaimedby
aprojecthaveactuallybeenachieved.Toensurethe
integrity of the verication process, emissions reductions
should always be veried by an accredited independent
thirdpartyaccordingtoanestablishedstandardor
protocol. It is important to distinguish between verication
andvalidation.Whilevalidationinvolvesassessingthat
the offset project has been set up properly, verication
establisheswhetherthereductionsitclaimshaveactually
been achieved. In the compliance market, verication is
carried out by pre-approved veriers, called Designated
OperationalEntities(DOEs).DOEscanalsoprovidewritten
assurance that the project has achieved the veried
emissions reductions a process dened as certication
(thisiswhycarboncreditsfromCDMprojectsarecalled
Certied Emissions Reductions, CERs).
Permanence
Permanencereferstotheabilityofaprojecttomaintain
thereductionsachievedovertime.Permanenceis
importantassomeprojectsmightmitigateemissionswhich
maybereleasedintotheatmospherelater.Forexample,
projectsfromforestryactivitiesusedascarbonsinks,could
re-releasethecarboncapturedinthegrowingtreesifthe
forestburntdownortheuseofthelandchanged.Offset
providersshouldoffersomeformofguaranteethatensures
thattheemissionsreductioncreditscontractedbyabuyer
are maintained over time. Guarantees could take the form
ofaninsurancepolicy,whereanunderperformingproject
generatingcreditsiseitherreplacedbycreditsfromother
projects from the sellers portfolio, or by acquiring creditsinthemarkettocovertheshortfall.Otherstrategies
couldincludetheestablishmentofacontingencycarbon
creditspool(egapercentageofthecreditsgenerated
bytheprojectarekeptbythedeveloperandnotsold),
orthemaintenanceofaportfolioofprojectsthatwould
delivercreditsfromdifferenttechnologies,atdifferent
timescomingfromdifferentlocations.Thiswouldensure
thatunderperformingprojectscouldbebalancedbyother
projectsintheportfoliothataredelivering.
Leakages
Leakage is dened as increases or decreases in emissionsthattakeplacebeyondtheprojectboundaryandwhich
aremeasurableandattributabletotheprojectactivity.
Forexample,reforestationprojectsmighthavenegative
effectsbydisplacingagriculturalactivitiestootherareas
wheretheycouldgenerateemissions.Leakagesneedtobe
quantied and taken into account in the project, adjusting
theemissionsreductionsachievedbythelevelofleakage
identied. It is important that projects account for major
andobviousleakagesinapracticalway,strikingabalance
betweenenvironmentalintegrityandthepracticality(in
terms of resources and nancial constraints) of quantifying
the impacts outside the projects boundaries.
Double counting
Doublecountingcouldhappenataprojectlevel,whena
creditissoldtwoormoretimestodifferentbuyers;and/or
atanationallevel,wherevoluntaryreductionsarecounted
againstnationalmandatorytargets.Toavoidtheformer,
offsetsellersshouldalwayshavearegistryinplacewhere
creditsareaccountedforandretired;withoutaregistryin
place,transactionscannotbeloggedorcreditedtobuyers
andpotentiallythesamecreditcouldbesoldmorethan
once. To guard against the second issue, rules that dene
howgreenhousegasesareaccountedforatanational
levelarerequiredtogetherwiththeuseofnationaland
internationalregistries.Withoutanappropriatemechanism
fordiscountingthereductionsgeneratedbyoffsetprojects
from the national GHG inventory of countries with legally
bindingtargets,thereductionscouldbedoublecounted:
againstvoluntaryreductionsaswellasagainstnational
compliancetargets.Itisimportantthatoffsetproviders
dene how they are going to deal with double counting
issueswhensourcingprojectsfromAnnexIcountries
(developedcountrieswithlegallybindingreductiontargets
undertheKyotoProtocolagreement).
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11TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Standards by which
offsets are measuredToensurethatcreditsgeneratedfromemissionsreduction
projectsareequivalenttoeachother,standardshavebeen
developed that regulate carbon offsets. These dene the
maincharacteristicsthatoffsetprojectsshouldcomply
withtoguaranteetheirintegrity,especiallyregarding
additionality and verication.
Inthecompliancemarket,standardsandrulesof
engagement are well dened, with the UNFCCC ensuring
thatbothCDMandJIstandardsaremet.Projectsmust
complywithapprovedmethodologiesforcalculating
baselineemissions,executingmonitoringplans,andusepre-approved organisations to carry out verication and
certication of emissions reductions.
In the voluntary market, there is no equivalent to a dened
standardorruleofengagement.Instead,therearea
variety of standards, protocols, and verication methods,
mostofthemproprietarytoeachoffsetprovider.
Recentlytherehasbeensomeefforttoprovide
harmonisationofthevoluntarymarketthroughthe
development of two standards: the Voluntary Gold Standardand the Voluntary Carbon Standard by the Climate Group.
TheformerwaslaunchedinMay2006andthelatteris
expectedinDecember2006.
Thesetwostandardsareexpectedtobecomplementary.
TheVoluntaryCarbonStandardwillfocusonthesmallto
medium size projects, while the Voluntary Gold Standard
willbeaimedatmicrotosmallscaleprojectswithastrong
sustainabledevelopmentcomponent.
Whetherthemarketwillseethesetwoworkinginthisway
remainstobeseen,butmostlikelythevoluntarymarket
willeventuallyhaveonestandard(ortwocomplementarystandards)thatwilltrytobringharmonisationtothemarket.
ArangeofcurrentstandardsisdescribedinTable2.
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TheCarbonTrust12
Table 2:Brief description of main offset standards
Standard Coverage Key points
CDM/JI Project-basedemissions
reductions,including
rulesforbaselines,
additionality,monitoring,
reporting, verication and
certication
Governed by independent Executive Board of UNFCCC
Robust additionality, monitoring and verication process; high
credibilityinthemarket
Aimedatthegenerationofcomplianceinstruments(CERs,ERUs)
Hightransactioncosts
CDM Gold
Standard
AsforCDM,butstrong
focusonsustainable
development benets and
restrictionontechnologytypes(noforestry
projectscanbeincluded)
Providesaconsistentapproachtoassessthecontributionof
projecttowardssustainabledevelopment
Endorsed by a number of NGOsHightransactioncosts
Voluntary Gold
Standard (VGS)
As for CDM Gold Standard,
butaimedatthe
voluntarysector
Aimedatsmallscaleandmicroscaleprojects
Strong focus on sustainable development benets
Simplied rules to reduce transaction costs
LaunchedinMay2006
Voluntary Carbon
Standard (Climate
Group)
Forexclusiveuseonthe
voluntarymarket
BasedonCDMframework
CreatestradableVoluntaryCarbonUnit(VCU)
Registry to be managed by Bank of New York
ExpectedtobelaunchedinDecember2006
Climate,
Community and
Biodiversity
Standards (CCB)
Forestrycarbon
sequestrationprojects
withcommunity
involvementand
biodiversity benets
DevelopedbytheClimate,Community,andBiodiversityAlliance
over two years and involving eld testing in four continents
UsemethodologiesdevelopedbytheIntergovernmentalPanel
onClimateChange(IPCC)
Three levels of validation Approved, Silver and Gold
Plan Vivo System Frameworkforoffsets
fromruralcommunitiespromotingsustainable
livelihoods
Onlyusedonforestryprojectssofar,butscopeforothertype
ofprojects
Lowtransactioncosts
Seven years eld experience of the standard
Proprietary
VeriedEmissions
Reductions (VERs)
Generic term for
voluntarycarboncredits,
not certied by external
body but veried on
acase-by-casebasis
No formal VER standard yet, so no governance structure
Emission reduction typically veried by third party, but
standardscanvarywidely
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13TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
CDM/JI standard
Projectsthatwanttogeneratecompliancecredits(CERs,ERUs)needtocomplywiththeCDM/JIstandards,governed
bytheindependentExecutiveBoardthatispartofthe
UNFCCC framework.
Thestandardsprovidehighlevelsofintegrity,credibility
androbustness,buttocomplywiththem,project
developershavetoincurhightransactioncosts:therefore
applicabilityismainlylimitedtomediumtolargeprojects
generatingemissionsreductionsinexcessof50,000tonnes
ofCO2equivalent.
UndertheCDMstandard,additionalityisprovedusingthe
additionalitytoolkit(seeBox4)andbaselinemethodologies
approvedbytheCDMExecutiveBoard.Tocomplywith
thestandard,projectdevelopersmustcompleteaProject
DesignDocument(PDD)whichprovides:
General description of project activity
Applicationofabaselinemethodology
Durationofactivityandcreditingperiod
Applicationofamonitoringmethodologyandplan
Estimation of GHG emissions by source
Environmentalimpacts
Stakeholders comments.
ProjectdevelopershavetosubmitthePDDforvalidation
byanaccreditedthirdparty(DesignatedOperationalEntity,
DOE)andseekapprovalbytheExecutiveBoard.The
standard denes a verication process that needs to be
carriedoutbyaDOE,oncetheprojecthasbeenvalidated
andregisteredwiththeExecutiveBoard.Thisinvolves
on-siteinspectionsandreviewsoftheprojectdocumentation.
The end of the process is certication, a written assurance
bytheDOEthattheprojectactivityhasachievedthe
veried emissions reductions claimed. After certication,
Certied Emissions Reductions (CERs) can be issued.
CDM Gold Standard
The CDM Gold Standard, developed by a group of NGOs
ledbyWWF,isbuiltonthebasisoftheCDMstandard,
butincorporatesguidelinesandframeworkstoprovethe
sustainabledevelopmentcomponentofCDMprojects.As
alreadymentioned,underCDMstandards,projectsneed
topromotesustainabledevelopment.However,CDMrules
donotprovideguidelinesonhowprojectdevelopersmust
dothis,norhowtoconductastakeholderconsultation
(arequirementofCDM).Projectsmustpassthreescreens
to qualify as a CDM Gold Standard project:
Project-type screen the Gold Standard is restricted
to renewable energy and end-use energy efciency
improvementprojects
Additionalityandbaselinescreen(similartoCDM)
Sustainabledevelopmentscreenprojectsmustbe
assessedontheircontributiontosustainabledevelopment
using dened guidelines and frameworks provided by the
standardtocreateascoringsystemforenvironmental,
socialandeconomicimpacts.Thestandardrequiresan
extendedstakeholderconsultationand,whenrequired
bynationallaw,thedevelopmentofanEnvironmentalImpactAssessment.
CDM Gold Standard, although targeted at the CDM market,
couldbeappliedtoanyproject(exceptforestryprojects
whichareexcludedfromthestandard).However,dueto
thehightransactioncostsinvolvedtocertifyunderthis
standard,itisbestappliedtomediumtolargeprojects,
whichtypicallyaredevelopedfortheCDMmarket.
Voluntary Gold Standard (VGS)
The Voluntary Gold Standard, launched in May 2006, has
been specically developed for use in the voluntary offsetmarket to generate veried emissions reductions (VERs).
As with the CDM Gold Standard it has a strong focus on
sustainabledevelopment.
The standard is based on the CDM Gold Standard, but
provides simplied procedures aimed at small or micro
scale projects. For example, the verication process is
conductedonarandomsample,ratherthanforevery
project every year as in the CDM Gold Standard, and
there is no need to carry out a certication process. By
simplifying some procedures, the Voluntary Gold Standard
aimstolowertransactioncostsandmakeitmoreattractive
togenerateVERsfromsmallscaleprojects.Thestandardcanonlybeappliedtoprojectsindevelopingcountriesto
avoiddoublecountingissues.
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TheCarbonTrust14
Voluntary Carbon Standard (VCS)
TheVoluntaryCarbonStandarddesignedbytheClimateGroup and the International Emissions Trading Association
(IETA) is another standard specically being developed
forthevoluntaryoffsetmarket.Itseekstocreateanew
tradingunitcalledaVoluntaryCarbonUnit(VCU).
Thestandardaimstobringtogetherbestpracticesthat
alreadyexistinthemarketplace.Althoughitisprimarily
basedontheCDMstandard,itincorporatesprocesses
fromotherstandards.Forexample,whiletheadditionality
andbaseliningisbasedonCDMprinciples,theproject
accountingisbasedontheprinciplesandmethodsofthe
GHG Protocol for Project Accounting, a different standard
developedbytheWorldBusinessCouncilforSustainableDevelopment(WBCSD)andtheWorldResourceInstitute
(WRI),whichhasbeenwidelyendorsedbygovernments,
NGOs and industry associations to be used for corporate
andprojectgreenhousegasaccounting.
TheVoluntaryCarbonStandardhascreatedaregistry
managed by the Bank of New York to register, transfer
andretireVCUsfromthemarket.Theregistryallowsthe
tradingofVCUsbydifferentmarketplayers,andensures
doublecountingissuesareavoided.
Forestry standards
Therearetwomainstandardsusedforforestryprojects:
TheClimate,CommunityandBiodiversitystandard(CCB)
andthePlanVivosystem.Bothstandardsprovideaframework
todevelopforestryprojectsthatincorporatesustainable
development benets for the rural communities where the
projectsarecarriedout.
TheCCBstandardhasthreelevelsofvalidation:approved,
silverandgold.Itsetsout23criteriabasedonclimate,
biodiversity,andsocio-economicdevelopment;baseline,
projectdesignandprojectmanagementcriteria.Toqualify
fortheCCBstandard,projectsneedtocomplywitha
minimumof15compulsorycriteria,andindependentthird
partyevaluatorsdetermineiftheprojectmeritsapproval.
Projectscanbeapproved,orcanbeissuedasilverorgold
standard,dependingonhowmanyotherextracriteriathey
complywith.Thestandardusesthemethodologiesofthe
Intergovernmental Panel on Climate Changes Good Practice
Guidance to estimate net changes in carbon stocks due
to the projects activities. The standard can also use the
methodologiesapprovedbytheCDMExecutiveBoard.
PlanVivo,developedbytheEdinburghCentreforCarbon
Management(ECCM),isasystemtocreatecreditsfrom
smallscaleagro-forestryprojects.ItreliesonthetechnicalandmanagementexpertisedevelopedbytheECCMover
more than seven years of eld work experience. Technical
specications are put together with project developers,
the host organisation (usually an NGO or a local cooperative)
andatechnicalteamfromECCMand/oralocalorregional
organisation.Projectsareregularlymonitoredusing,in
mostcases,localexperts.CreditsgeneratedfromPlan
Vivoprojectsareregisteredonadatabasesocreditscan
betracedbacktoindividualprojectsanddoublecounting
canbeavoided.
Proprietary standardsVoluntaryoffsetproviders(primarilyretailerswhoinvest
inaportfolioofoffsetprojectsandsellsmallamountsof
creditstocustomersfromtheiroverallemissionsreduction
portfolio)havedevelopedtheirownstandardsinthe
absence of a formal Veried Emissions Reductions (VER)
standard.Thesestandardsdifferwidely,havingdifferent
approachestothewaytheytestadditionality,calculate
baselines or the way the verication procedure is carried
out.VERsgeneratedfromdifferentproprietarystandards
are usually neither comparable or tradable. This is reected
in the price range of VERs, which varies from 3-15 per tonne
ofCO2e(forprojectsthatatthelowerend,forexample,donotneedtocomplywithadditionalityprinciplesora
standard) to 20-30 per tonne of CO2e(forprojectsthat
needtocomplywitharigorousmethodology,includingthe
promotionofsustainabledevelopment).Itisuptothebuyer
ofVERstomakesurethatVERssoldunderaproprietary
standardcomplywithminimumqualitylevels(described
laterinthisdocument).Butasabareminimum,theprojects
underanystandardshouldhaveamethodologytoassess
additionality over a dened baseline and have a verication
processrunbyanaccreditedindependentthirdparty.
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15TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Thevoluntaryoffsetmarkethasexperiencedrapidgrowth
inthepasttwoyears.Thekeyfactordrivingthismarket
hasbeentheincreaseinpublicawarenessofclimatechange,andtheacknowledgementbycompaniesthatitis
animportantelementtoconsiderintheirbusinessstrategy
andoperations.
InourreportBrand Value at Risk from Climate Change,
climate change was identied as an issue that could
becomeamainstreamconsumerconcernby2010.Itwas
acknowledgedasabusinessriskoropportunitybymore
than 85 per cent of the Financial Times Global 500 (FT500)
companiesinterviewedbytheCarbonDisclosureProject2in
2006soitisnosurprisethatclimatechangehasbecomean
importantissueoncorporatesocialresponsibilityagendas.
What is carbon neutrality?
Carbonneutralityisachievedwhenemissionsfroma
product,activityorawholeorganisationarenettedoff,
eitherthroughthepurchaseofanequivalentnumberof
offsetsorthroughacombinationofemissionsreduction
andoffsetting.Intheory,theconceptiseasytounderstand,
andthiscanexplainwhyitspopularityhasgrowninrecent
years. However, in practice this concept is more difcult
toapply.Carbonneutralityisadynamicstatewhere
year-on-yearemissionsneedtobenettedoff.Immediately
twoquestionsarise:
Howtoachievecarbonneutralityandinparticular
towhatextentshouldcompaniesdirectlyreducetheir
emissionsversuspurchasingoffsets?
How to dene the carbon footprint of products, services
orcompanies?
How to achieve carbon neutrality
Inourexperienceofworkingwithcompaniesacrossthe
UKonemissionsreduction,themostcosteffectiveand
environmentally sound way to address an organisations
carbonfootprintisto:
First,focusonreducingdirectemissionsimplementing
all cost-effective energy efciency measures and, where
costeffective,reducingthecarbonintensityofenergy
supplybygeneratinglow-carbonheatorelectricity
Secondly,lookatopportunitiestoreduceindirect
emissionsworkingwithotherorganisationstoreduce
emissionsandcutcostsupanddownthesupplychain,and
tolookfornewrevenueopportunitiessuchasdeveloping
newlow-carbonproducts
Then,ifappropriate,considertheoptionofdevelopingan
offsetstrategyforthoseemissionsthatcannotbeavoided.
Thisapproach,focusingondirectandsupplychainemissions,
delivers bottom line nancial and carbon savings year-on-
year.Andforthoseorganisationsconsideringbuyingoffsets,
thisapproachreducesthenumberofoffsetsthatthey
mightneedtopurchase.
Anorganisationcouldachievecarbonneutralityby
acquiringcarbonoffsetswithouttakinganyactionto
reduceitscarbonfootprint.However,thisstrategycan
bringmanyrisks.Firstly,itisonlyasgoodastheoffsets
acquired. Not all offset projects create truly additional
emissionsreductions,andorganisationsneedtoensure
thattheyarepurchasinggoodqualityoffsetsthatrepresent
trulyadditionalemissionsreductionsyear-on-year.
Secondly, while offsetting can address an organisations
carbonfootprintintheshortterm,itcandelayreal
changesinbehaviourthatwoulddriveoursocietytowards
alow-carboneconomy.Organisationswillneedtoaddress
directlytheircarbonfootprinttoachievethetargetssetup
bygovernmentsorcomplywithfuturelegislation.Thirdly,some NGOs and the media have started to question the role
ofoffsetting,andastrategyonlyfocusedonthatoption
couldpotentiallybringreputationalrisks.
Ifanorganisationwishestobecomecarbonneutralthen
astrategythatcombinesdirectandindirectemissions
reductionswithoffsettingasanoption,canbelessrisky
and more benecial from an economic point of view,
reducingthenumberofoffsetsneededandimproving
thebottomline.Inaddition,fromaCSRperspectiveit
demonstrates the organisations commitment to mitigating
climatechangedirectlybyreducingitsownemissionsand
carbonfootprint.Mostofthecarbonneutralschemesinplaceinthemarketsupporttheideathatcarbonneutrality
shouldbeachievedthroughacombinationofdirect
emissionsreductionsandoffsetting.
3Thecarbonneutralconcept
2The Carbon Disclosure Project (CDP) Report 2006. The CDP provides a coordinating secretariat for institutional investor collaboration on climate change. CDPs
aim is twofold: to inform investors of the signicant risks and opportunities presented by climate change; and to inform company management of the serious
concernsoftheirshareholdersregardingtheimpactofclimatechangeoncompanyvalue.
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TheCarbonTrust16
Howtodeneyourcarbonfootprint
To be able to become carbon neutral, an organisation rst
needstoknowitscarbonfootprint:theemissionsforwhich
itisresponsible.Acarbonfootprintincludesactivitiesthat
resultindirectandindirectemissions,andthereforeit
iscloselyrelatedtowheretheboundariesforparticular
activitiesaredrawn.Directemissions,orthoseunderfull
controlofanorganisation,arealwaysincludedwithinthe
companys carbon footprint (including emissions associated
withelectricityconsumption).Itisreallytheinclusionor
exclusionofindirectemissionsthatdifferswhencalculating
an organisations, products or activitys carbon footprint.Indirectemissions,orthoseemissionsnotcontrolledor
fullycontrolledbyanorganisation,canincludeemissions
from travel (eg business ights), supply chain emissions,
employeescommutingtoworkandsoon.
Guidance on which emissions to include from indirect
sourcesandhowthesearecategorisedcanbeobtained
from standards like the GHG Protocol Initiative (developed
bytheWorldResourceInstitute(WRI)andWorldBusiness
CouncilonSustainableDevelopment(WBCSD)),ISO14064
orfromproprietarystandardsdevelopedbyoffsetproviders.
However, regardless of the denition used, the key is to
stateclearlywhathasandhasnotbeenincludedwithinthecarbonfootprint.Thishelpstoexplainwhataspectsof
anorganisation,productoractivityhavebeenconsidered
inacarbonneutralclaim,andwhichhavebeenleftoutof
scopeandwhy.
Businesses and carbon neutrality
Mostforwardthinkingbusinesseshaverecognisedtheneed
toaddressclimatechangeandhavebeguntoproactively
reducetheircarbonemissions,minimisingtherisks(such
asregulatory,reputationalorcompetitiverisks),and
maximisingthebusinessopportunitiescreatedbyclimate
change(egcreatingnewcommercialopportunitiesfrom
low-carbonproductsorservices,orfromparticipatingin
theglobalcarbonmarket).Anumberofbusinesseshave
alsoturnedtothevoluntaryoffsetmarketasawayto
compensatefortheiremissionsanddemonstratetheir
commitmenttotakeactiononclimatechange.Someofthesecompaniesincludeoffsetsaspartofawidercarbon
managementstrategy,whichinvolvesdirectandindirect
emissionsreductionsaswellasoffsetting,whilstothers
onlyuseoffsetsasawaytoaddresstheircarbonfootprint.
AstudycommissionedbytheCarbonTrustandcarriedout
byL.E.K.Consultingfoundthattheperceivedpressurefrom
customersandconsumershasbeenthemaindriverofthe
voluntarymarket,motivatingorganisationstoinvestin
voluntaryoffsetsaspartoftheirCSRorenvironmentalpolicies.
Manycompaniesalsouseoffsetsasameanstoengage
employeesonenvironmentalissues,offsettingtheirindividual business ights or even giving them the opportunity
tovoluntarilyoffsettheirpersonalemissions.Inaddition,
companiescanalsouseoffsetsasawaytointernalisethe
costofcarbonandanticipatefuturelegislation.
Offsetscanalsoprovideawaytodifferentiateproducts.
Companiescanoffercarbon-compensatedproductsby
offsettingthetotallife-cycleemissionsoftheirproducts
orbyoffsettingpartoftheiremissions.
However,notallcompaniesarelikelytowanttobuyoffsets
voluntarily.Firmswhicharelargeemittersorhavehigh
directemissionsareeitherlikelytobecoveredbythe
compliancemarket(egEUEmissionsTradingScheme)orare
inabetterpositiontocosteffectivelyabatetheirinternal
emissions, obtaining a net benet rather than incurring a
netcost.
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17TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
4 TheCarbonTrustthreestageapproach
todevelopingarobustoffsettingstrategy
TheCarbonTrusthasdevelopedathreestageprocessfor
creatingarobustoffsettingstrategy,thatplacesoffsetting
withinanoverallcarbonmanagementplan.Thisincludes
directandindirectemissionreductionandputsoffsetting
incontextasanoption:
Stage 1:
Directemissionsreduction
Stage 2:
Indirectemissionsreduction
Stage 3 (optional):
Offsetting
Calculateemissions
Lookforinternalabatement
opportunities
Developanemissions
reduction/carbon
managementplan
Mapsupplychainprocess
andestablishcarbonfootprint
Identifyopportunitiesfor
emissionsreduction
Developanimplementation
planacrossthesupplychain
Bringnewlow-carbon
productstomarket
Establishreasonsfor
buyingoffsets
Dene type of offsets to
bebought
Carryoutduediligence
onrobustnessofoffsets
Figure 3: The Carbon Trust three stage approach to developing a robust carbon management strategy
Stage 1: Focus on directemissions reduction
The rst stage in a robust carbon management strategy is
tofocusonaddressingdirectemissions.Thereareanumber
of benets to doing this, including:
Costsavingsreducingenergybillsaswellasleading
tosavingsontransport,wasteandotheroperatingcosts
Operational efciency as a side benet of improving
energy and carbon efciency
MitigationofregulatoryrisksincludingClimateChange
Levy(CCL),EnergyPerformanceofBuildingsDirective(EPBD),EUEmissionsTradingScheme(EUETS)orany
futurelegislation
CorporateSocialResponsibilityandreputationfrom
proactivelymakingeffortstodirectlyreducecarbon
emissions.
Inordertodrawupanemissionsreductionplan,an
organisation rst has to quantify its emissions and look
forinternalabatementopportunities.Theseopportunities
caninclude:
Implementing cost-effective energy efciency measures,
suchasheatingandlightingupgrades,usingnewprocess
technologiesanddeliveringstafftrainingandawareness
programmes
Developinglow-carbonenergysourcessuchason-site
renewablegeneration
Addressingthemorestrategicbusinessrisksand
opportunitiesassociatedwithclimatechange.Typically,
thiscanincludeworkonregulatorycompliance,future
costofcarbon,marketopportunitiesfornewproducts
andservices,andshareholderandotherstakeholder
impacts.
TheCarbonTrust,throughitsCarbonManagement
programmeanditsrangeofenergysurveyscanhelp
organisationsquantifytheiremissionsandprovideadvice
on energy efciency and carbon management, helping
themdrawupanemissionsreductionplan.
Ideally,afeedbackloopshouldbeestablishedwhere
savingsderivedfromloworno-costemissionsreduction
measuresprovidefundstore-investincost-effective
energy efciency measures that do require capital
investment,toprovidefurtherlong-termenergyreductions
andcostsavings.
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TheCarbonTrust18
Stage 2: Look at opportunities
to reduce indirect emissions
Onceanorganisationhasitshouseinorderandhas
developedanemissionsreductionplan,thenextstageis
tolookatopportunitiestoreduceindirectemissionsby
workingwithorganisationsacrossthesupplychain.By
consideringalloftherawmaterialsandprocessesrequired
togetaproducttomarket,itallowsthecarbonfootprint
of the nal product to be calculated. This can be used to
identify opportunities to make signicant cuts in emissions
andenergycostsacrossthesupplychain.Asconsumer
attitudeschange,italsoallowsforwardthinkingcompanies
todeveloplow-carbonproductstocapturenewmarkets
and generate higher prots over time.
TheCarbonTrusthasdevelopedasupplychainmethodology
tohelpcompaniesbuildthefullcarbonfootprintof
productsandidentifyemissionsreductionsavings
opportunitiesacrossthesupplychain.Themethodology
drawsheavilyonstandardlife-cycleanalysistechniques
(LCA)andisstructuredinfourchronologicalsteps:
Presentationofresultsandimplementationplanning
Themethodologyallowstheinclusionofemissionsfrom
productuse,reuse,recyclinganddisposalalongside
emissionsfromproductionanddistributioninanintegrated
way. It identies carbon savings beyond the scope of
those identied by other analysis techniques. Because the
scopeiswiderthanintraditionalanalyses,theemissions
reduction opportunities identied tend to be larger.
Themethodologyallowstheinclusionofemissionsfrom
productuse,reuse,recyclinganddisposalalongsideemissions
fromproductionanddistributioninanintegratedway.It
identies carbon savings beyond the scope of those identied
byotheranalysistechniques.Becausethescopeiswiderthan
intraditionalanalyses,theemissionsreductionopportunities
identied tend to be larger.
Thissupplychainapproachhasthepotentialtounlock
signicant emissions reductions and large nancial benets byreducingthecarbonfootprintatanindividualproductlevel.
Ultimatelyitcanhelpallofbusinessmakebetter-informed
decisionsinproductmanufacturing,purchasing,distribution
andproductdevelopmentbyconsideringthecostsand
liabilitiesthatexistwhenevercarbonemissionsaregenerated.
Moredetailsonthesupplychainproductcanbefound
intheCarbonTrustpublication: Carbon footprints in the
supply chain: the next step for business(published
in November 2006).
Stage 3 (optional): Develop
an offsetting strategy
Afterlookingatthedirectandindirectemissions,some
companiesmaydecidetoincludeoffsettingaspartoftheir
overallcarbonmanagementstrategy.
Those companies that decide to offset should dene a
strategy.Itcouldbeassimpleasquantifyingthenumber
ofoffsetstobuyandthepotentialprovidersofgoodquality
offsets, or involve dening particular requirements that
offsets should comply with, and nding providers that could
matchthoserequirements.
Establishing reasons for buying offsets
Organisationsmightwanttooffsettheiremissions:
Aspartofanenvironmentalstrategythatincludes
offsettingemissionswhicharenotcosteffectiveor
feasibletoreduceinthepreviousstages
AspartofacarbonneutralstrategydrivenbyCSRreasons
orbrandpositioning
Asawaytoanticipatefuturelegislationortogain
experienceinthecarbonmarket.
Whatever the case, dening the reasons will help to
identifythetypeofoffsetsthatorganisationsshould
acquireiftheydecidetooffsetatall.
Forexample,anorganisationdrivenbyCSRreasons,islikely
toacquireoffsetsfromsmallscaleprojectsfromdeveloping
countrieswithastrongsustainabledevelopmentcomponent.Ontheotherhand,anorganisationwantingtoanticipate
futureregulationmighttrytoobtaincompliancecredits.
Step 1 Initialanalysisandengagement
Step 2 Constructionofthecarbonfootprint
Step 3 Opportunity identication and
prioritisation
Step 4 Presentationofresultsandimplementationplanning
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19TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Identifying the type of offsets to buy
Onceanorganisationhasestablishedthereasonsforbuying
offsets, the next step is to dene the type of offsets to
acquire.Thiswilldependonthereasonsforoffsetting
emissionsandontheparticularrequirementsthat
organisationsmightwant.Therearesevenkeycategories
to look at when dening the type of offsets to buy:
Projecttype
Standardsused
Projectlocation
Additional benets
Levelofaggregation(creditsfromaportfolioversus
creditsfromindividualprojects)
Provisionofguarantees
Labellingserviceoffered.
Table3(overleaf)providesoptions,advantagesand
disadvantagesforeachofthesecategories.
Purchasing good quality offsets
Acquiringcrediblegoodqualityoffsetsiscrucialwhen
dening an offsetting strategy. Poor quality offsets not only
create signicant reputational risks but also provide no
additional environmental benets. As the voluntary market
remainslargelyunregulated,buyersshouldcarryouttheir
ownduediligencetoassesstheintegrityandcredibilityof
theoffsetstheyarebuying.However,withthelargevariety
of standards, protocols, and verication methodsinexistence,mostofthemproprietarytooffsetproviders,
it is difcult for buyers to carry out such an assessment.
Carrying out due diligence
Tohelpintheassessmentofgoodqualityoffsets,the
Carbon Trust has developed a test which refers to the ve
maincharacteristicsthatoffsetsshouldcomplywithto
provideaminimumlevelofqualityassurance:
Verication offset should always be veried by an
accreditedthirdpartyaccordingtoastandardorprotocol
Additionalityensurereductionsareadditionaltowhatwouldhavehappenedintheabsenceoftheproject
Leakagestakeintoaccountnegativeimpactsbeyond
theprojectboundary
Impermanencyensurethereductionsachievedare
maintainedovertime(particularlycriticalforcarbonsink
projects)
Doublecountingavoidoffsetsbeingusedorcounted
morethanonce.
Allrecognisedindependentstandardscomplywiththis
minimumlevelofqualityassurance:
CDM/JI
Voluntary Gold Standard
Climate Group Voluntary Standard
PlanVivo
Climate,CommunityandBiodiversitystandards(CCB).
For proprietary standards, it is more difcult to know,
withoutfurtherenquiry,whethertheywillpassthevalidity
test.Figure4providesastep-by-stepprocesstoaidcustomers
toassessthevalidityoftheoffsetstheyareacquiring.
Identifying offset providers
Thelaststageofthisprocessistoidentifyprovidersof
goodqualityoffsets.
Carboncredits,ingeneral,aresoldthroughanumberof
mechanismsincludingtradingplatforms,brokers,credit
aggregators,orretailers.Voluntarycreditsaremostlysold
throughretailersgiventhesmallvolumestraded(usually
below15-20tonnesofCO2e).
Althoughorganisationscouldbuyeithercomplianceor
voluntaryinstruments,offsetretailerstendtosellonly
voluntaryinstrumentsasthevolumepurchasedper
transactioninthevoluntarymarketislow,makingthe
sellingofcomplianceinstrumentsverycostineffective.
Thereare30to40retailersthatsellvoluntaryoffsets
worldwide.MostofthemarelocatedintheUS,AustraliaandEurope.InEurope,therearearound10mainoffset
providers. They all vary according to the verication
processorstandardtheyuse,thetypeofprojectsused,
theprojectlocationandthepriceofoffsets.
Offset prices can vary signicantly depending on the type
of offsets required. For certicates that include sustainable
development benets and that comply to a standard like
the Voluntary Gold Standard, buyers have been paying
prices of up to 20-30/tCO2e.Incontrast,creditsbasedon
proprietarystandardshavebeensellingatpricesranging
from 3/tCO2e to 15/tCO2e.
Oneimportantpointtomentionisthatcheapoffsetscould
comeatacostandorganisationsshouldassesswhether
the nancial benet merits putting their reputation and
brandatrisk.Valueformoneydoesnotnecessarilymean
acquiringthecheapestoffsetavailableinthemarket,but
themostcosteffectivedependingonthecharacteristics
thatbuyersarelookingfor.
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21TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Table3
(co
nt.)
Options
Pros
Cons
Project
location
Developingcountry
Easiertoproveadditionality;sustainabledevelopment
benets
Country
risk,
non-delivery
Developedcountry
outsideKyoto
Cheapercredits,lowercountryris
k
Credibili
tyconcerns;subsidisingfree-r
idingfrom
countries
benetin
gfromc
arbonmarketbutwithoutth
emselves
makingc
ommitmentstoreducetheiremissionsunderalegally
bindingframework
Developedcountry
insideKyoto
Promotionofreductionsinhomec
ountry
Addition
alityconcerns
Additional
benets
Environmental/
conservation
benets
Buyerscanbeassociatedwithparticularprojectsthat
bringssustainabledevelopmentbe
nets,
improvingthe
CorporateSocialResponsibility(CSR)positionofthe
organisationandprovidingpositivePublicRelations(PR)
Creditsu
suallymoreexpensive;exposuretoadditional
reputationalrisksifsocialcomponentofproj
ectgoeswrong
Socialbenets
Technologytransfer
Aggregat
ion
Creditsfromp
ortfolio
ofprojects
Cheapercredits;minimisesrisko
funderperforming
(non-delivery,
impermanency)
Creditcannotbeassociatedtoindividualproject;credits
credibilitycouldbeaffectedbyanyindividua
lprojectinportfolio
(higherp
robabilityofreputationalrisks);non
-customisable
Creditsfromi
ndividual
project
Creditscanbeassociatedwithap
articularproject
(canprovidepositivePRandimprovedCSRposition);
customisable
Expecth
ighercreditprices;higherexposuretounderperformance
andcred
ibilityrisks
Guarante
es
Provideguaranteesagainst
non-delivery,
permanenceissues,or
changesinbaseline
Coveragainstuncertainties;providesinsurancefor
biologicalsinkprojects
Expecth
ighercreditprices
Labelling
Carbonneutralitystamp
ProvidespositivePRandimproved
CSRposition
Exposure
tolabelbrandrisk
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TheCarbonTrust22
Figure 4: Key questions for validity test
Verication
Project is independently veried by a third party
YES
NO
NO3 Does this standard include a verication procedure for its
emissionsreductions?
No assurance on quality of offset
2Doestheprojectcomplywithanyotherwrittenstandard? No assurance on quality of offset
1Doestheprojectcomplywithanyofthefollowingrecognised
independentstandards:
CDM/JI Voluntary Gold Standard
Climate Group Voluntary Carbon Standard
PlanVivo
Climate,CommunityandBiodiversitystandards(CCB)?
Project is independently veried
byathirdparty
No assurance on quality of offset4 Is the verication procedure carried out by an accredited
recognisedindependentthirdparty?
NO
NO
YES
YES
YES
Additionality
Projectisadditional
NO
Projectisnotadditional1Istheprojectrequiredbycurrentregulation?
Projectisnotadditional
(unlessreductionsarediscounted
from national GHG emission registry)
2Istheprojectcontributingtoachievelegallybindingemission
reductiontargets?
Projectisnotadditional3Istheprojectcommonpracticeintherelevantsectororregion
wheretheprojectiscarriedout?
Projectisnotadditional4Doestheprojectfaceeconomic,investmentortechnological
barriersthatwouldpreventitsimplementation?
NO
NO
YES
YES
NO
YES
YES
NOTE: additionality is a difcult concept and testing it could prove to be a complex process; the following diagram provides
verybasicquestionstoaskoffsetproviderstoproveadditionality.Foramoredetailedanalysisrefertothetoolkitforthe
demonstration and assessment of additionality from the UNFCCC (http://cdm.unfccc.int/EB/Meetings/022/eb22_repan8.pdf).
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23TheCarbonTrustthreestageapproachtodevelopingarobustoffsettingstrategy
Figure 4: Key questions for validity test (cont.)
Double Counting
Impermanency
Leakages
1Haveupstreamanddownstreameffectsoftheprojectbeen
considered/studied?
2 Does the project have signicant measurable impact(s) in GHG
emissionsbeyondtheirboundaries?
Leakageeffectshavebeenincorporated
NO Projectmighthavenegative
leakageeffects
No leakage effect
YES
NO
3Haveeffectsbeenincorporatedintothetotalemissions
reductioncalculation?
Projectmighthavenegative
leakageeffects
NO
YES
YES
1Doesthesellerincludeastrategytodealwithpermanencyof
theemissionsreductionsoverthelifetimeoftheproject?
2 Doesthesellerprovidesomesortofguaranteetodealwith
underperformingprojects(egreplacementofcreditsoracquisitionofnewcreditsinthemarket)?
No assurance that project will deliver
contractedemissionsreductions
No assurance that project will deliver
contractedemissionsreductions
YES
Projectwilldelivercontractedemissionsreductions
YES
NO
NO
1Doestheselleroperatearegistrywherecreditsgetaccounted,
registeredtobuyersandretired?
No double counting problem
Doublecountingmightoccur
No double counting problem
Doublecountingmightoccur
NO
NO
NO
YES
2IstheprojectdevelopedinanAnnexIcountry?
3Doesthesellerhaveastrategytodiscountcreditsfromthe
national GHG inventory?
YES
YES
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TheCarbonTrust24
Thethreestageprocess,togetherwiththeessentialinformation
onoffsetsprovidedinthisguide,shouldgivecompaniesandorganisationsinterestedinoffsettingalltherelevantinformation
tohelpthemputtogetherarobustcarbonmanagementstrategy.
By following a strategy that rstly focuses on direct and indirect
emissionsbeforeoffsetting,organisationsshouldobtainbusiness
benets in addition to carbon savings. This strategy should improve
an organisations bottom line through cost-saving measures andimproved operational efciency, help them exploit new revenue
opportunitiesfromnewlow-carbonproductsandservices,and
improvetheircorporatesocialresponsibilitypositionandreputation
by demonstrating the organisations commitment to mitigating climate
changedirectlybyreducingitsownemissionsandcarbonfootprint.
Ultimately,thisstrategyshouldhelporganisationstomitigateclimate
changeinawaythatisenvironmentallysoundandcosteffective.
Conclusion
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www.carbontrust.co.uk
0800 085 2005
TheCarbonTrustworkswithbusinessandthepublicsectortocutcarbonemissionsandcapturethecommercial
potentialoflow-carbontechnologies.
An independent company set up by the Government to help the UK meet its climate change obligations through
business-focusedsolutionstocarbonemissionreduction,theCarbonTrustisgrantfundedbytheDepartment
forEnvironment,FoodandRuralAffairs,theDepartmentofTradeandIndustry,theScottishExecutive,theWelsh
Assembly Government and Invest Northern Ireland.
Whilstreasonablestepshavebeentakentoensurethattheinformationcontainedwithinthispublicationis
correct,theauthors,theCarbonTrust,itsagents,contractorsandsub-contractorsgivenowarrantyandmake
norepresentationastoitsaccuracyandacceptnoliabilityforanyerrorsoromissions.
Anytrademarks,servicemarksorlogosusedinthispublication,andcopyrightinit,arethepropertyofthe
Carbon Trust. Nothing in this publication shall be construed as granting any licence or right to use or reproduce
anyofthetrademarks,servicemarks,logos,copyrightoranyproprietaryinformationinanywaywithoutthe
Carbon Trusts prior written permission. The Carbon Trust enforces infringements of its intellectual property rights
tothefullextentpermittedbylaw.
TheCarbonTrustisacompanylimitedbyguaranteeandregisteredinEnglandandWalesunderCompanynumber
4190230 with its Registered Ofce at: 8th Floor, 3 Clements Inn, London WC2A 2AZ.
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