The business case for carbon offsets

The concept of carbon offsets has been around since the mid-1990s. A programme on behalf of a number of Dutch energy companies to reforest areas in Africa as a means of sequestering the greenhouse gas emissions of its backers was one of the first offsetting initiatives of scale. It created an enduring association of carbon offsetting with trees and reforestation.

Companies, including Climate Care and The CarbonNeutral Company, commercialised the concept by offering offset services to consumers and businesses. Today hundreds of organisations are involved in the business of creating and selling offsets: they fund reduction projects spanning renewable energy, energy efficiency and sequestration e.g. reforestation and carbon capture and storage.

Carbon offsetting is used as a simple and effective means of compensating for unavoidable greenhouse gas emissions. It invests in emission reduction projects which deliver reductions above and beyond ‘business as usual’ strategies.

The first comprehensive survey of the voluntary carbon market conservatively estimated that trade in offsets totalled around 24m tonnes in 2006, double 2005 estimates. More recently, a survey across the FTSE All Share Index found that seven per cent of companies, representing 25 per cent of the capital value in the Index, are offsetting or are planning to offset their emissions. The report forecasts UK demand for voluntary offsets increasing 40-fold by 2010.

This growth is occurring in the face of criticism and concerns about the integrity and impact of offsetting. However, offset projects and the way in which offset programmes are operated are evolving rapidly: a Voluntary Carbon Standard has been developed and it is set to become an accepted international standard for voluntary offsets; with a link to registries it will bring much needed transparency and control to voluntary offset transactions. Latest results from the Carbon Disclosure Project (2007), which surveyed the carbon management programmes of 3,000 of the largest corporations, suggests that leading standards for offsets are now more rigorous and consistently applied than those being used by companies to measure and report their internal reductions.

So, how does a company go about setting an offset-based carbon management strategy? There are several stages an organisation works through in order to effectively execute such a strategy. The first is to measure its carbon footprint and forecast its ‘business as usual’ emissions growth; the second is to set absolute reduction targets that are in-line with the global reduction trajectory and undertake abatement cost analysis to establish the cost of achieving internal carbon reductions. Finally it needs to determine the cost of achieving external reduction (carbon offsets) and invest in the most cost-effective reductions to deliver the target.

An organisation evaluates each of its potential reduction activities in terms of the average cost to reduce each tonne of carbon over the life cycle of the investment.

Regardless of its position on climate change a business should implement all projects with a negative cost of carbon as it improves its bottom line. How it prioritises activities with a positive cost of carbon depends on how aggressively it sets reduction targets, but it will want to bear in mind that DEFRA is already using a shadow price for carbon of £26 per tonne and forecasts a price of £60 per tonne in 2050. Offsets expand the range of reduction opportunities for achieving stretching targets while reducing the cost burden for doing so. An analysis of the Low Carbon Economy Act of 2007 (the Bingaman-Specter cap-and-trade bill) concludes that allowing the use of unlimited international credits and offset projects lowers the cost of achieving emissions goals by 65 per cent and that the effect of climate change reductions on GDP improves by 60 per cent.

It is important not to forget that investments in quality offsets are funding real and permanent reductions within the global economy. As far as the climate is concerned, where reductions take place is of no consequence. Yvo de Boer, Executive Secretary of the United Nations Framework Convention on Climate Change estimated in December 2007 that if developed economies commit to reduce emissions by 60 per cent by 2050 compared to 1990 levels, and bought half of the required reductions in developing countries, that could generate $100bn in financial flows for low-carbon development options.

A full range of solutions is required to facilitate the transition to a low-carbon economy. However, regulation and appeals for public behaviour change are not delivering the carbon reductions scientists believe are necessary to stabilise our climate. Offset-based carbon management strategies have a vital role to play because they provide an immediate response to the need for material reductions in global greenhouse gas emissions and they use principles of efficient markets to identify and enable those reductions wherever they can be made fastest and at the lowest cost.

Moreover they can speed progress to a low/no carbon economy by enabling additional investment in carbon reduction technologies over and above that achieved by government regulations. By establishing a ‘price for carbon’ they promote investment in cleaner technologies and processes, and in low carbon assets. Those who are not obliged to set and meet meaningful reduction targets are offered an alternative means of fully or partially balancing out their greenhouse gas emissions through carbon offsetting.

Offsetting is an essential element in business strategies in those companies which seek to decouple top- or bottom-line growth from greenhouse gas emissions in the short- and medium-term and in doing so direct investment to the most cost effective ways of reducing global greenhouse gas emissions.

Jonathan Shopley is Executive Director of The CarbonNeutral Company.