Posted: November 27th, 2013
This paper addresses the controversial issues surrounding the trading of carbon-offset credits. Examples of ways to achieve carbon offsets are given and carbon neutrality is discussed.
A detailed definition of carbon offsets is discussed. The concept of trading in Carbon Emission Reduction (CER) credits is also introduced.
Carbon Offset Markets ……………………………………………………….2
Two markets of carbon offsets trading are mentioned, among them the major market, Kyoto Protocol Clean Development Mechanism (CDM).
Controversies Surrounding CDM ……………………………………………3
Three main controversial issues surrounding CDM are discussed. These are project-offset costs, determination of the relevance of trading in regards to certain greenhouse gases, and facilitation of indulgence at a minimal cost.
It is arrived at that while carbon offsets are globally beneficial, CDM needs to address the issues discussed above in order to remain efficient.
Carbon offsets can be defined as reductions or neutralizations of carbon dioxide and other greenhouse gases emissions (Taiyab 3). In essence, carbon offsets work by compensating for carbon emissions done in one place by avoiding the release of carbon dioxide in another place, negating the carbon dioxide through planting of trees, or investing in renewable energy that can be distributed and used by communities. When a company or organization claims to be carbon neutral, it is saying that it has compensated for its carbon emissions by investing in renewable energy or planted a certain number of trees that would essentially absorb the same amount of carbon dioxide it emitted. Moreover, it may have avoided the release of carbon dioxide into the atmosphere or bought carbon offsets allowances from companies that have a difference in their carbon offset allowance. Indeed, with carbon offsets come carbon markets. A carbon market is a national or global attempt to slow down the emission and concentration of greenhouse gases in the atmosphere by allowing and facilitating trading of carbon credits (Taiyab 6). Countries that have signed the Kyoto Protocol have a carbon dioxide limit, which is then distributed to companies within the country. When a company does not meet its set allowance of carbon emissions, it can sell the difference to other organizations that have exceeded their limit in the form of carbon credits. The question remains however, how effective are carbon offsets and the trading of carbon credits in the actual reduction of greenhouse gases in the atmosphere?
To answer this question, we need to first delve deeper into the definition of carbon offsets as well as explore the principles of the largest market of carbon offsets, the Kyoto Protocol Clean Development Mechanism (CDM). As discussed earlier, carbon offsets are a company, organization or country’s way of compensating for its carbon dioxide and greenhouse gas emissions. A carbon offset is measured using a ton of carbon dioxide-equivalent (CO2e). Reduction of one ton of CO2e therefore represents one carbon offset; two tons of CO2e represent two carbon offsets, and so on. In addition to carbon dioxide, other greenhouse gases that are considered in the measurement of carbon offsets include methane, hydrofluorocarbons, nitrous oxide, and sulfur hexafluoride. In order for a project to be considered a source of carbon offsets, it has to feature the element of ‘additionality.’ Additionality is defined by Taiyab as a required increase in emissions reduction from what would have otherwise occurred under a normal business scenario (Taiyab 3).
Carbon Offset Markets
Trading of carbon offset allowances or carbon credits is meant to create incentives for companies and organizations to invest in projects that decrease the amount of greenhouse gases in the atmosphere (Hillebrand 7). Carbon offset markets can be divided into two: voluntary, also known as Non-CDM, and CDM. CDM refers to Clean Development Mechanism defined in Article 12 of the Kyoto Protocol (Taiyab 12). Under this mechanism, countries can commit to carbon emission reduction by implementation of emission-reduction projects in developing countries. These countries then earn certified emission reduction (CER) credits or carbon credits, which they can then trade with other countries within the CDM market (United Nations Framework Convention on Climate Change [UNFCCC]). Each member country is assigned an allowed amount of emissions that it should not exceed. If it does, it is required to buy carbon credits from countries that did not exceed their emission allowance.
The voluntary market on the other hand, refers to governments, companies, organizations and individuals who trade in carbon credits; in this case referred to as Verified Emission Reductions (VER) credits, for purposes that are not necessarily those of meeting regulatory targets (Taiyab 9). Retailers of VERs can also sell CERs for regulatory purposes or voluntary purposes even though they sell primarily to the voluntary market. The largest market of CER credits however, remains the Kyoto Protocol CDM.
Under the Kyoto Protocol Clean Development Mechanism, developed countries that have high emission costs can acquire CER credits by setting up of projects in developing counties where the costs of setting up the said projects are much lower than in the developed country. The two countries benefit from the arrangement such that the developed country gets credits for not exceeding its emission allowance while the developing country enjoys investment from the developed country (UNFCCC). In addition, both countries benefit from decreased carbon emissions in the atmosphere. According to Wara and Victor (8), much as the CDM’s efforts may be noble, the market is far from perfect and it has to address certain issues in order to remain a viable option for countries to consider in regards to carbon emission reduction.
Controversies Surrounding CDM
One of the major controversial issues surrounding CDM and other like-minded markets is in relation to offsetting costs of the project. According to Hillebrand, only a small percentage of funds set aside for carbon offset schemes go to the actual project itself (13). This is because a big percentage of the funds is payable to the company that is responsible for the project, investors get a cut, and there are maintenance costs of the project. The efficiency of trading of carbon credits in reduction of carbon emissions, as well as whether the projects’ costs can be accounted for in the net benefit of the projects, has been called into question. Critics argue that the cost of setting up of such projects as well as their maintenance is too much compared to the actual benefits of the projects (Wara and Victor, 10).
In addition to costs, CDM has come under criticism for failing to determine reliably whether the carbon-offset activities would not have happened anyway without the issuing of credits. For instance, some critics of this and other such markets argue that while the cost of capturing and destroying greenhouse gases is not necessarily zero, certain greenhouse gases can be eliminated through very minimal costs. Such gases include HFC-23, which can be eliminated at a low cost (11). In fact, numerous factories in Europe and the U.S. have eliminated the gas voluntarily (Wara and Victor, 11). This begs the question as to whether it is necessary to include some greenhouse gases that can be reduced at low cost under CDM’s definition of carbon dioxide equivalent.
Finally, CDM has also come under criticism for what some view as facilitation of indulgence at a cost. Critics view CDM and other markets as a means for developed countries to continue with business as usual, justifying pollution of the environment by parting with a fee that they can easily afford to pay (Hillebrand, 17). Moreover, they argue that trading in CERs eases the burden of reduction of carbon emissions by developed countries, by providing a cheaper way for them to account for their carbon emissions. Proponents of CDM and other markets however argue that trading of carbon credits is beneficial, as it not only leads to increased investment in renewable energy especially in developing countries; it also leads to actual reduction of carbon emissions in the atmosphere.
Carbon offsets are a good initiative for any country, organization or individual to undertake. Investing in projects that lead to the reduction of greenhouse gas emissions is a noble idea as it reduces one’s impact on negative global climate change. Creating of incentives for the undertaking of these projects is also commendable. It ensures that developing countries that may have otherwise found it too costly to engage in such projects get a chance to do so and in turn contribute to the reduction of carbon dioxide and green house gases in the atmosphere. However, CDM and other markets need to review some of their rules and strategies in order to ensure that this noble idea does not escalate into one whose intended purpose is not met, but rather one that facilitates the serving of other interests.
Hillebrand, Jens. Carbon credits and global emissions trading: A viable concept for the future? Germany: GRIN Verlag, 2008. Print.
Taiyab, Nadaa. Exploring the market for voluntary carbon offsets. United Kingdom: IIED, 2006. Print.
United Nations Framework Convention on Climate Change. “Clean Development Mechanism (CDM)”. United Nations Framework Convention on Climate Change. n.d. Web. 25 July 2011.
Wara, Michael, and Victor David. “A realistic policy on international carbon offsets.” PESD Working Paper 74 (2008): 1-24. Print.
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