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Carbon Offsets: Giving Credit Where It’s Due

3p Contributor | Tuesday March 23rd, 2010 | 3 Comments

By Justin Felt, Product Manager for Offsets, Point Carbon

Carbon offset markets have exploded in the last ten years, from a theoretical concept to a $25 billion-a-year industry. Increasing attention and criticism have also followed this steep rise. While many articles have focused on various aspects of carbon offset credits, few fully explain what an offset is and what’s happening in the market right now.

So let’s get right down to it. First, assuming you are up to speed on the concept of cap-and-trade, carbon offsets in most systems can be used as a form of replacement for carbon permits or “allowances”. The credits come from projects that reduce greenhouse gas (GHG) emissions. These reductions must be additional to what would occur in a business-as-usual scenario. This concept is known as “additionality.”

An offset credit is a tradable carbon instrument equal to one metric ton of CO2 equivalent emission reductions (tCO2e). Retiring one offset effectively reduces emissions, and therefore removes the obligation to purchase one allowance. In almost all situations, these reductions are audited by a verifier.

Typical projects
In the US, the most common types of projects involve methane capture from landfills, agricultural livestock, or coal mines. This makes sense, given that methane is a powerful greenhouse gas, and capturing 1 ton of methane gets credit for 21 tons of CO2 reductions. Landowners and farmers can also create offset credits, when they plant or conserve trees, or practice no-till agriculture. Renewable energy, energy efficiency, carbon capture and storage, and incineration of industrial greenhouse gases all play a part in the US offset market as well.

Right now, the US market for offsets is almost entirely voluntary, meaning buyers are purchasing offsets either to be more climate-friendly, or with the hopes of using them in a compliance scheme down the road. The market is also fairly small at $74 million in 2009, with many investors watching the fate of the climate bill in Congress. There were 29 million tCO2e reductions last year in the US (based on our database of offset projects), many of which should trade this year after they are verified.

The offset’s young maturity
Given the market’s small size, it is quite surprising how mature the US offset business has become, with many companies already developing, packaging, consulting, and purchasing in this space. Alongside these players, standards organizations have sprouted in America to provide transparency and certainty to offset buyers. Leading standards include the Climate Action Reserve (CAR), Voluntary Carbon Standard (VCS), Chicago Climate Exchange (CCX), and the American Carbon Registry (ACR). Currently, CAR is the most sought-after standard in the US, with credits produced from 2009 reductions currently trading between $6 and $7 per metric ton CO2e.

Looking abroad, the offset market is many times larger, with most volumes coming under the Clean Development Mechanism, or CDM, a standard and certification system which originated from the Kyoto protocol. Developed countries which signed the Kyoto agreements can use some of these offsets as a way to meet their targets. CDM projects take place exclusively in developing countries, such as a landfill methane project in Brazil, or a wind power project in India. Through certification by a special agency of the United Nations, the CDM has produced roughly 380 million tCO2e cumulatively since 2005, and last year the CDM market was worth approximately $25 billion.

Where the US offset market goes in 2010 and thereafter remains a big question. We predict tremendous growth if a federal cap-and-trade bill passes this year, as buyers will want to use offsets for compliance to the bill’s required caps. But the challenges to passage of such a bill are daunting. If successful, the early actors will certainly enjoy the spoils of their early investments. However, if the bill fails, many will say that the US offset market matured just a little too quickly.

For more information on the US carbon offset market, please see our free report “US Offset Markets in 2010: The Road Not Yet Taken.”

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Justin Felt is a Product Manager in Point Carbon’s Trading Analytics and Research division, heading up US and Canadian offset markets analysis, and product manager for an online subscription-based product called Carbon Project Manager North America.


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  • Vv

    You don't mention anything about the emissions. Is it because eventhough the market is growing, as you say, it isn't actually reducing emissions overall?

    This is the whole reason for Cap and Trade, and the offsets market, not to reap profit in a new market, but to reduce emissions!!
    and you mention nothing about it..what is wrong with this picture..business as usual?

  • Justin Felt

    The discussion around whether emissions reductions are real is a valid question. Just yesterday a study from Stanford looked at what was driving the reductions from Chinese Wind projects. This blog posting was meant to be an introduction to the “market”, I didn't delve into this vexing issue.

    There are two different questions here. First, are the reductions “real”, ie would they happen in a business as usual case anyway. This is always difficult to assess, since it depends on a counterfactual about what would happen in a theoretical situation where there are no offset credits. Needless to say, there are some projects are high quality, and others that are not. I would say that given the international market (called CDM) has to meet the rigors of a very finicky UN, and sells credits at a higher price per ton, those tend to be higher quality than those that are stateside. However, there are a number of high quality projects in the US, and once a federal policy is in place we may see further movement to higher quality.

    The second point regards whether offsets–themselves as a concept–lead to real reductions. I see a role for them in the case that it allows sectors that are hard to include in a cap-and-trade, such as agriculture and forestry, or emissions in developing countries, to have incentives in place to reduce emissions. I think most thoughtful observers would say that offsets have a place, but should be only a limited part of the solution, since real abatement still needs to happen at the emitters level. Many thought leaders think that offsets should be part of initial phases and eventually sunsetted over a decade or so, and I would put myself in that camp.

    Hope this helps address this question.

    Cheers,
    Justin Felt

  • Justin Felt

    The discussion around whether emissions reductions are real is a valid question. Just yesterday a study from Stanford looked at what was driving the reductions from Chinese Wind projects. This blog posting was meant to be an introduction to the “market”, I didn't delve into this vexing issue.

    There are two different questions here. First, are the reductions “real”, ie would they happen in a business as usual case anyway. This is always difficult to assess, since it depends on a counterfactual about what would happen in a theoretical situation where there are no offset credits. Needless to say, there are some projects are high quality, and others that are not. I would say that given the international market (called CDM) has to meet the rigors of a very finicky UN, and sells credits at a higher price per ton, those tend to be higher quality than those that are stateside. However, there are a number of high quality projects in the US, and once a federal policy is in place we may see further movement to higher quality.

    The second point regards whether offsets–themselves as a concept–lead to real reductions. I see a role for them in the case that it allows sectors that are hard to include in a cap-and-trade, such as agriculture and forestry, or emissions in developing countries, to have incentives in place to reduce emissions. I think most thoughtful observers would say that offsets have a place, but should be only a limited part of the solution, since real abatement still needs to happen at the emitters level. Many thought leaders think that offsets should be part of initial phases and eventually sunsetted over a decade or so, and I would put myself in that camp.

    Hope this helps address this question.

    Cheers,
    Justin Felt