Understanding the Carbon Offset Market

Steven Andrew – Principal Consultant

Climate Change solutions for a more balanced world!www.carbonbalanceconsulting.com.au

Ph: 03 9018-5175Twitter: carbon--offsets

The role of Offsetting

• Offsetting is the application of carbon credits against an activity or entities environmental emissions.

• A carbon offset is defined as the use of carbon credits to balance the total emissions that result from a defined activity measured in carbon dioxide equivalent (CO2e).

• Offsetting is ideally applied to those emissions that are residual.

What is a Carbon Credit

• A Carbon Credit offset is an event, action ,or activity that reduces, prevents or abates an equivalent 1 tonne of carbon dioxide equivalent (1.0 t CO2-e) from entering or remaining in the atmosphere.

• A Credit is a verifiable, legally binding action that is sold as a commodity into– Cap and trade Schemes– Carbon markets– Businesses

– Individuals

Ideal Criteria of an Offset

Additional The offsets would not have occurred if the project did not go ahead. Not

BAU.

Accountable Audited and accounted for using industry approved standards that

abide by quantifiable scientific evidence

Permanent No future event or process will eliminate the carbon saved (i.e. leakage in forests)

Transparent Project type, certification and ownershipare identifiable

Real time Offset happened in a real time setting not as a future event

Understanding Additionality

• If the event that is proposing to generate carbon offsets was going to happen regardless of the offset market and the drivers for it, then it may not qualify as a true credit.

• If the whole project was conceived of and intentionally financed for the carbon offsets generated, then it qualifies.

• The projects main intention is for an environmental benefit.

• If the offsets are a secondary benefit (accidental) from a large project and was not the key driver then unlikely to qualify.

• E.G Pre 1990 dam / Scheduled up grade of technology / post 1990 plantation

Types of Carbon Projects

• LULUCF (Aff/ref Plantation/ Aff/Ref Mixed Native, Agricultural Soil, Avoided Deforestation, Savannah Burning)

• Livestock (Methane capture & renewable energy source)

• Landfill (Methane capture & renewable energy source)

• Coal MM (Demineralising of coal ‘cleaner’)

• REC’s (Renewable Energy Certificates, wind, tidal, solar, geothermal, hydro, )

• Industrial Gas destruction (LPG & Synthetic gases)

• Energy Efficiency (Demand Side Abatement )

• Fuel Switching (Diesel to LPG, wood to parrafin, coal to natural gas)

• Geological Sequestration

Carbon Projects by %

Offset Standards

“An offset is only as good as the certifiers standards that created it”

Certification of Offsets

• The certification is primarily a compliance that the project has been implemented and scrutinised using the certifications Project Development & Design rules.

• The PDD outlines all the detail the project must adhere to. They often grades projects of High & Lower quality adherence.

• The integrity of the Standard is written in the PDD and each standard had different PDD rules

International Carbon Certification Standards

• American Carbon Registry standards (formerly ERT)

• Alberta Offset Protocols • CarbonFix • CCAR Protocols • Chicago Climate Exchange • Clean Development

Mechanism • Climate, Community, &

Biodiversity Standards• DOE 1605 (b)• EPA Climate Leaders

• GE AES Greenhouse Gas Services

• Gold Standard • Green-e Climate • ISO-14064 • Plan Vivo • Regional Greenhouse Gas

Initiative • Social Carbon • TUV NORD • VER+ • Voluntary Carbon Standard

Overview of some standards

• CDM Clean development Mechanism

• GS Gold Standard

• VCS Voluntary Carbon Standard

• G.F. Greenhouse Friendly

• CCBS Climate Community & Biodiversity Standard

CDM Clean Development Mechanism

• Part of the legally binding Kyoto Protocol• Administered by UNFCC• Came into force from the Marrakesh Accord Feb

2005• Recognised standard for international cap &

trade schemes • Instrument for Developed countries (Annex 1) to

implement efficiency projects in developing countries (Annex 2)

CDM - Overview• Only Kyoto compliant countries (ratify) can generate CDM’s

• The CDM allows Annex 1 (developed) countries to partly meet their Kyoto targets by financing carbon emission reductions projects in developing countries.

• Projects are arguably more cost effective than projects implemented in richer

nations because developing countries have on average lower energy efficiencies, lower labor costs, weaker regulatory requirements, and less advanced technologies.

• The CDM is also meant to deliver sustainable development benefits to the host country.

• CDM projects generate emissions credits called Certified Emissions Reductions or CERs – which are then bought and traded.

• CER’s are traded in the European ETS, Australian CPRS & for Voluntary offsetting

CDM/JI Project Types

Types of CDM Projects (http://www.cdmbazaar.net/seller_project_overview.asp)

• Landfill closure and Gas Capture Project, Mumbai, India

• Compost production facility at Mysore, Karnataka

• CDM Project Small Hydro Power Plant - Brazil

• Natural drying of phosphates Tunisia

• Project of rural electrification and water supply by solar photovoltaic (PV) in Tunisia • Reforest and maintenance of original forest – Paraguay

• 6.75 MW Small Scale Grid Connected Wind Tamul Nadu

• China Lighting Conversion Project

Gold Standard• Full Fledged voluntary carbon Standard• Developed by WWF and other NGO’s to improve on

CDM projects• High end carbon credits from Renewable Energy (RE)

and Energy Efficiency (EE) (Non Forestry)• Projects must contribute to sustainable development• Projects endorsed by local stakeholders• Standard is endorsed by 56 NGO’s internationally• Pass an independent verification by UN accredited

auditors• Monitor the sustainable Development impact/ benefits

Gold Standard• Not for profit org based in Switzerland

Gold Standard Projects

• 10 Projects Registered

• 35 projects in application

• Generating 4 million CER’s

• 65 Project in pipeline

• Represent about 9% of global market

VCS Voluntary Carbon standard

• Full fledged carbon-offset standard• Non – profit organisation based in Switzerland • Co-benefits and social benefits not prerequisite• Launched in 2007 by Climate Group, IETA,

WBCSD & WEF• Aims to stimulate innovation in voluntary carbon

market• It creates Voluntary Carbon units (VCU’s)• Low budget early entry into Carbon Market

VCS - Objective• Standardise and provide transparency and credibility to

the voluntary offset market. • Enhance business, consumer and government

confidence in voluntary offsets. • Create a trusted and tradable voluntary offset credit; the

Voluntary Carbon Unit. (VCU) • Stimulate additional investments in emissions reductions

and low carbon solutions • Experiment and stimulate innovation in emission

reduction technologies and offer lessons that can be build into future regulation.

• Provide a clear chain of ownership over voluntary offsets that prevents them being used twice.

VCS - Objective• Standardise and provide transparency and credibility to

the voluntary offset market. • Enhance business, consumer and government

confidence in voluntary offsets. • Create a trusted and tradable voluntary offset credit; the

Voluntary Carbon Unit. (VCU) • Stimulate additional investments in emissions reductions

and low carbon solutions • Experiment and stimulate innovation in emission

reduction technologies and offer lessons that can be build into future regulation.

• Provide a clear chain of ownership over voluntary offsets that prevents them being used twice. (Registry)

CCBSClimate Community & Biodiversity Standard

• Project Design standard for forestry protection, restoration and agroforestry projects

• High quality community and environmental benefits (co –benefits)

• Members include: Conservation international, CARE, Rainforest Alliance, The nature Conservancy Wildlife Conservation, BP and others.

• Developed in 2003 –first design standard produced 2008• Limited projects – Ideal for Avoided Deforestation

projects

CCBS – Projects Certified

• Reducing Carbon Emissions from Deforestation in the Ulu Masen Ecosystem - ACEH

• Avoided Deforestation in the Coffee Forest in El Salvador• Afforestation and Reforestation on Degraded Lands in

Northwest Sichuan, China • The Juma Sustainable Development Reserve Project: Reducing

Greenhouse Gas Emissions from Deforestation in the State of Juma Amazonas, Brazil

http://www.climate-standards.org/projects/index.html

Greenhouse Friendly• Australian governments Scheme for carbon

credits• Has no set PDD• Scheme only approves proposals • Wide variety of approved offset providers• Gives no framework for certification and

acceptance• Guidelines are Kyoto Compliant• Uses an external auditing company to verify

projects authenticity

GF Projects Guidelines

• These abatement projects must occur in Australia• Must generate additional, permanent and verifiable

greenhouse gas emissions reductions or sequestration.• Additionality - Abatement projects are generally

associated with an investment or behaviour change that would normally not be undertaken as part of the companies established operating practices, or under existing internal investment requirements.

• http://www.climatechange.gov.au/greenhousefriendly/abatement/projects.html

Transaction and Volumes in Offsets

Projects used for OTC 2008• i

Standards Used by %“One of the clear trends of 2008 has been that almost all voluntary credits

are now verified by an independent third-party organization: 96%, up from 87% in 2007”.

• i

Location of Projects & Purchasers

Project Sizes and %

• Project Sizes (tCO2-e)

• Very Large >500,000• Large 100,000 – 499,999• Medium 20,000 – 99,000• Small 5,000 – 19,999• Micro < 5,000

Appendix of International ReportCarbon Balance Consulting

Markets also depends on one of these to Survive.