The EU Emissions Trading System has failed to drive real action on carbon emissions. With the Copenhagen climate change conference approaching, what can be done to fix the system and improve carbon offsetting as an instrument to tackle climate change?

What is carbon offsetting?

Carbon offsetting is the process of attempting to redeem the CO₂ generated by a particular activity, by paying a contribution to a project that will remove an equivalent amount of CO₂ from the atmosphere, or prevent its release.

Got that? OK. Let’s try again.

“…carbon offsetting is Enron environmentalism, a neat accounting trick that does little to stop global warming. The government should focus on transforming the way we use energy here in the UK at the same time as helping to put the growing economies of the developing world on a low carbon pathway.”
Greenpeace statement on carbon offsetting, 17 January 2007

An offset is essentially a financial instrument, measured and traded in units corresponding to one tonne of CO₂. Buy an offset, create a tonne of pollution (or visa versa). Your money funds projects to develop renewable energy, carbon sequestration (capturing and burying pollution), energy efficiency, or forestry. Theoretically, by the time you’re done, it’s as if you never polluted in the first place. In reality, assuming the project you contributed to was even fully successful, your carbon emissions may not be neutralised for years.

Proponents of offsetting see it as anything from a great way to create investment in renewable energy and energy efficiency to a panacea for developing countries. Another way of looking at carbon offsetting is that it is a license to pollute, what George Monbiot describes as “an excuse for business as usual”. When the ideal aim of reduction of CO₂ emissions costs money and takes investment, effort and changes to infrastructure and behaviour, offsetting offers a great way out by paying for these things to happen elsewhere while you continue doing what you were doing all along.

Carbon offsetting is controversial, difficult to prove, and yet the most popular way so far to mitigate climate change.

How does offsetting work?

Cough up if you cough up.

Carbon offsetting activities can be split into two main types; the large scale offset trading of companies and governments to comply with greenhouse gas emissions capping within a regulatory regime set out by the Kyoto Protocol, and the smaller scale activities of organisations, companies, governments and individuals within a voluntary regime. That means anything from nation states building wind farms to a family paying for a few trees to be planted to offset their flight to Spain.

Since the introduction of the Kyoto Protocol on February 16 2005, 183 countries have agreed to put in place efforts to reduce 5 percent of their GHG emissions between 2008 and 2012 from 1990 levels, including Europe. The UK has since undertaken to reduce carbon emissions by 34% on 1990 levels by 2020, announcing the Low Carbon Transition Plan on 15 July.

Under the EU Emissions Trading System (ETS), also introduced in 2005, companies can buy and sell carbon credits representing one tonne of carbon emissions. In exchange for a payment, a company is allowed to emit carbon, with the payment contributing to the cost of projects that defray the environmental impact of those carbon emissions. If a company has excess permits, it can sell these in an open marketplace.

The failure of the ETS

The ETS has been compromised by political and commercial meddling since its inception. Emissions caps were initially set too high, ignoring the scientifically indicated effective level, and industrial lobbying has led to a market flooded with surplus permits.

After the introduction of the ETS, industry lobbied the EU over the perceived commercial threat posed by a strict carbon trading scheme – to tourism and transport, for example. To placate industry, emissions permits were over-issued, for free or from abroad in the form of Certified Emissions Reduction (CER) credits from the Clean Development Mechanism, a system where industrialised, high-carbon nations can buy credit from developing, low-carbon nations. This flooded the permits market, commoditising permits and driving down their value to less than €1 in the early stages. An ETS carbon credit costs about €14 at the time of writing, less than half of its peak value in 2008.

With low-cost, readily available emissions permits, combined with a reduction in emissions in the last decade due to recession and off-shoring, many European companies have acquired a massive surplus of emissions permits. For example, German company Integriertes Hüttenwerk has 10.3 million surplus permits, one in ten of all surplus permits in the EU. That’s roughly the amount of emissions one person creates by flying return from London to Sydney. Two and a half million times.

European industry is likely to have 400 million tonnes worth of surplus permits in the period 2008-2012, which could be sold for over €5 billion in profits, or simply banked for future use, potentially depressing permit prices for the foreseeable future, while having no effect on emissions levels. There is no formal mechanism for clawing these surplus credits back. Companies are effectively able to continue business as usual, profit from surplus credits, and further enable other companies to pollute. High limits on the use of CER credits and further stockpiling could lead to a possible surplus of 1.6 billion permits in the ETS, which may be kept in reserve up to 2020.

Failing the environment

The environmental concerns attached to the failure of the EU ETS are numerous.

• Firstly, with the reduced value of emissions permits and overall volatility of prices, no predictable revenue stream exists to undertake large-scale sustainable energy projects or other projects aimed at reducing the impact of emissions. A lack of investment in low-carbon technologies arguably renders the ETS redundant as one of its primary aims is to fund this investment.
• Secondly, the ability of companies to purchase CER credits through the Clean Development Mechanism allows industrialised nations to purchase credit from developing countries with lower emissions, enabling them to continue to pollute by claiming the credit of low-carbon nations. It goes without saying that the effects of climate change caused by continuing carbon emissions are often felt most severely in precisely those developing countries.
• Thirdly, European companies sitting on a potential surplus of 1.6 billion tonnes of emissions permits need take no action on cutting domestic emissions, keeping surplus permits banked for sale or offsetting.
• Finally, any benefit of lower emissions levels due to decreased fossil fuel consumption as a result of decreased industrial output is cancelled out by the sustained activity of polluting companies with surplus credits, as well as their having enabled other companies – particularly power companies – to pollute with traded credit.

The next steps

The United Nations climate change conference in Copenhagen this December presents an opportunity to address the failures of the current approach to climate change, stymied by the competing concerns of the economy and the environment – as the EU ETS so clearly illustrates.

Fixing the ETS

The EU ETS could still provide a template for fledgling international emissions capping schemes, even for a global emissions market.

UK campaigning organisation Sandbag is focussed on emissions trading, specifically fixing the problem of surplus low-price EU emissions permits. Sandbag provides supporters with the means to buy and ‘retire’ (tear up) emissions permits, thus taking permits out of the system which can not then be used to pollute. Companies like Carbon Retirement also focus exclusively on buying and retiring emissions permits.

Sandbag is also campaigning to tighten emissions caps, forcing industry and governments to take the action that the ETS was originally designed to promote – to develop low-carbon energy infrastructure. These measures, along with financial incentives for permit cancellation and setting reserve permit prices, could repair the bloated and ineffective ETS.

Gold Standard organisations such as Climate Care also provide brokerage, trading and offsetting services with a focus on investment in effective, high quality projects offering sustainable development.

Protest and awareness

Campaigning organisations continue to serve an essential function by raising public consciousness to the issues around climate change, and stimulating debate.

On the day of publication of the UK government’s Low Carbon Transition Plan, the World Development Movement described it as a ‘dangerous get-out-of-jail-free card’ due to the reliance of the plan on carbon offsetting. Furthermore the WDM has initiated the ‘Big If’ campaign to protest against the construction of the new E.ON coal fired power station at Kingsnorth in Kent, inviting supporters to vote for candidates who oppose the construction of coal fired power stations, organise vigils, and ‘stand in the way’. Actor Pete Postlethwaite, supporting the campaign, told the press at the launch of environmental documentary ‘The Age of Stupid’ that the government should be dissolved if it proceeded with the construction of new coal fired power stations. Projects like the new Kingsnorth facility can only go ahead with the use of carbon capture and storage (CCS) technology to sequester the huge amounts of carbon they will generate, and represent a step in the opposite direction from the development of renewable or low-carbon energy production.

Offsetting done right?

Surui land viewed with Google Earth

The Surui people of the Brazilian Amazon have been fighting a grassroots campaign with the assistance of environmental and monitoring groups, to protect their tribal lands from deforestation. They first drove settlers away in 1982 after their tribe was virtually wiped out by disease and loss of land in the wake of incursions by land speculators and loggers. The Surui have gained support from organisations who seek to promote the REDD (Reducing Emissions from Deforestation and Forest Degradation) approach to carbon capture, an approach based on the principle that forests are worth more intact than felled.

Though reforestation is a controversial approach to carbon offsetting (amongst other reasons, CO₂ capture can be difficult to guarantee), the REDD approach suggests that leaving forests intact could go some way to mitigating up to one fifth of the world’s carbon emissions, and that intact forests, if closely monitored, are an essential component of a successful low-carbon future for the world. REDD attracts funding to communities in developing countries; the Surui map their lands with laptops and a high-resolution version of Google Earth, and they have been given funding for community education and health projects, and the establishment of sustainable industries. Industrialised countries can sink money into REDD projects as a component of their current cap-and-trade activities.

REDD may be our last, best hope of saving the tropical forests.
Rhett Butler, Washington Monthly

REDD has the potential to gain more support at Copenhagen as it is shown to be more vigorously monitored, offering quantifiable benefits and development opportunities for indigenous people, and able to offer other benefits such as the preservation of biodiversity.

The future

It is vital that EU leadership (in climate change) continues. We have to invest in the future and the future is low-carbon.
Nicholas Stern (author of the Stern Review on the Economics of Climate Change)

UN climate chief Yvo de Boer identifies four essential points that must be agreed at Copenhagen:

1. How much are the industrialized countries willing to reduce their emissions of greenhouse gases?
2. How much are major developing countries such as China and India willing to do to limit the growth of their emissions?
3. How is the help needed by developing countries to engage in reducing their emissions and adapting to the impacts of climate change going to be financed?
4. How is that money going to be managed?

Along with initiatives like REDD, clean energy development and low-carbon technology transfer to developing countries, fixing the EU ETS offers only part of the solution – and it’s worth noting that every question asked by de Boer above involves money. Idealistic ambitions to save the world will come to nothing if no one is willing to foot the bill.

Related posts:

1. Carbon neutral with that? Lucy Siegle points out in today’s Observer that everything is...
2. Sandbag New website http://sandbag.org.uk/ offers a solution to carbon emissions by...
3. REDD A fascinating article on the Washington Monthly website by (I...
4. Of all the ways to save the world… When Christian Wolmar wrote an article on Guardian's Comment Is...