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Comparing Apples & Oranges

Steve Zwick

The volume of voluntary carbon emission reduction credits has surged 1000% over the past two years and is set to double again by next year, but the challenge of constructing a global standard for all but the most pristine projects is proving difficult. The Ecosystem Marketplace discovers why finding a standard that keeps everyone happy is no easy task.

The volume of voluntary carbon emission reduction credits has surged 1000% over the past two years and is set to double again by next year, but the challenge of constructing a global standard for all but the most pristine projects is proving difficult. The Ecosystem Marketplace discovers why finding a standard that keeps everyone happy is no easy task. Last year, banking giant HSBC announced it was voluntarily buying "carbon credits" equivalent to the number of tons of greenhouse gases its operations pump into the atmosphere every year. This year, organizers of soccer's World Cup took a similar step by funding clean energy projects in South Africa and India to "offset" emissions of greenhouse gasses generated by the event in Germany. Likewise, pop star Dido, producers of the movie Syriana, and countless individuals in Europe, Asia, and the US, are making their activities "carbon neutral" by purchasing offsets on the voluntary carbon market. No government is forcing any of these buyers to make up for their emissions of greenhouse gases. They are doing it because they believe it is the right thing to do and is in their best interest. But they all face a common question: what constitutes a "voluntary emission credit"? Some buyers hold themselves—and the credits they buy—to the standards set by the UN Framework Convention on Climate Change's (UNFCCC's) Kyoto Protocol, while others give their purchases about as much thought as they would a feelgood donation to Greenpeace, with the majority falling somewhere in the middle. Now, an arcane but critical global debate has evolved over how to come up with internationally recognized rules, regulations, and procedures for evaluating and certifying voluntary emission reduction projects that fall outside the Kyoto Protocol. Such standards will lend credibility to the voluntary credits and could ultimately make it possible to create fungible instruments for trading amongst market participants around the world. The danger, however, is that the creation of cumbersome standards will create little more than another global bureaucracy. "We certainly want robustness in the voluntary market," says Nicola Steen, vice president of emission-offset broker CO2e. "We want the standards to be there, but if you make them needlessly stringent, you will simply kill off smaller projects." A giant step towards synchronization was taken last December, when the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI) jointly issued the Greenhouse Gas (GHG) Protocol for Project Accounting (WBCSD/WRI GHG Protocol). Another shoe dropped in March of this year, when the International Organisation for Standardisation (ISO) followed up with ISO 14064, the first truly global standard for dealing with voluntary emission reduction credits. The focus now is on how to implement these standards, and two efforts are underway to do just that: One is the Voluntary Carbon Standard (VCS), which is still in the formative stage, and the other is the Gold Standard for Voluntary Emission Reductions (GSV), which was released this past May.

A Global Benchmark

"There are plenty of hot issues in the debate, and there's also plenty of misunderstanding," says Thomas Baumann, country manager of climate change services for Det Norske Veritas (DNV) Canada – easily the world's largest Designated Operational Entity (DOE, a company or organization accredited by the UN to certify and verify offset projects under the Kyoto Protocol). He has been a main contributor to the new ISO standards and the GHG Protocol. "The latest meeting by IETA (International Emissions Trading Association) members clarified that the VCS is not meant to replace or supplant any other existing standards, including ISO 14064," he says. "The VCS is meant to build on these efforts, and create a global benchmark." It does this, say its authors, by providing the protocol and criteria that project developers and project verifiers can use to create, verify, and ultimately register so-called Voluntary Carbon Units (VCUs, the equivalent to one metric ton of CO2 emissions). Once registered in a VCU Registry, VCUs in theory become fungible and tradable instruments—although not everyone is convinced that can be achieved. "EUAs (European Union Allowances) hope to be fungible, but VCUs aren't EUAs because people aren't buying them for the same reasons," says Steen. "VCUs exist because people want to make a difference, and not to conform for compliance reasons." IETA, The Climate Group, and the World Economic Forum (WEF) are spearheading the effort behind the VCS. The three released a consultation draft in March, with the finished product slated for October of this year. Mark Kenber, the Climate Group's policy director, is a driving force behind the VCS initiative and also contributed to putting together the Gold Standard for mandatory emission reduction credits while at WWF. He says the VCS is not intended to compete with the Gold Standard, but rather to complement it. "The Gold Standard looks to the top ten or 20% of the market," he says. "The Gold Standard only recognizes renewable energy projects and end-use efficiency projects, and has rigorous requirements as far as contributions to sustainable development are concerned." The supply of GSV projects is tight, but demand is growing. "Many firms making voluntary commitments are going for 25% Gold Standard and the rest something else," says Kenber. "We may one day offer a gold module within the VCS to meet this demand, but for now our goal is to provide a benchmark for all projects, so that the VCU becomes something all schemes can use, and not just something for one segment of the market."

Setting the Bar

But where—or, more accurately, "how"—to set the bar? There is, for instance, some controversy over what sorts of projects are allowed to meet the standard, as well as who can certify and verify that projects are meeting that standard. To give but one example: in the initial draft of the VCS, all projects that offset emissions by sequestering carbon in trees (what in the Kyoto parlance is referred to as projects from Land Use, Land Use Change, and Forestry, or LULUCF) would be deemed to fall outside the standards and would not be allowed. This sparked a slew of comments from a number of environmental groups who see LULUCF as one the main avenues for developing country participation in the voluntary carbon market. It is still unclear how the final VCS documents will deal with this issue, and while Kenber says the VCS will cover combined heat and power gas projects, he adds that he is not sure whether carbon capture and storage will have a place in the standard. This debate is likely to continue until the final standard is issued, and possibly even beyond that. Meanwhile, on some of the other bones of contention within the VCS, Steen would like to see local entities in developing nations given the authority to certify projects, while Baumann would like to see more emphasis on sectors, and no one, it seems, can agree on how to gauge additionality (i.e. the measure of whether a project really is creating new reductions or just cashing in on reductions that would have happened anyway). Then there is the issue of how to accredit anything involving fossil fuels. The current iteration of VCS excludes government-subsidized projects, but many countries routinely provide aid to their energy sectors, so would all these projects be excluded? One major area of contention in developing the standard is between practitioners who want to see the VCS evolve as a standard in itself and those who view it as a set of agreed-upon procedures for supporting voluntary actions on GHG emission reductions by building on experience and reinforcing existing practices. Chief among these tools and practices are ISO 14064 and the GHG Protocol. "The GHG Protocol says 'should', while ISO says 'shall'," explains Kenber. "One is a protocol describing 'how to do' GHG accounting, and the other is a standard that states 'what to do' in clear, auditable text." Both ISO and the GHG Protocol are "general" high-level documents, whereas the Kyoto Protocol's Clean Development Mechanism (CDM) includes project specific methodologies. Both ISO 14064 and the GHG Protocol also claim to be neutral in terms of policy and technology, in the sense that they do not favor wind parks over non-renewable energy, but they do prescribe principles of accuracy, transparency, completeness, consistency, conservativeness, and relevance, among others. "They don't tell you what areas to invest in, or what is the proper level of additionality," says Kenber. "They just lay out basic rules on how to account for emissions for organizations and projects of different types and sizes." The ISO standards are being used as a template for voluntary projects around the world. DNV, for example, is working with the Australian Greenhouse Office (AGO) on its so-called Greenhouse Challenge Plus voluntary reduction program, which uses the ISO standards as a foundation. ISO 14064 has three parts—the first, ISO 14064-1, contains requirements and recommendations for designing and developing an organizational GHG emissions inventory. This lays out clear definitions for where one company or organization begins and ends, which is critical in defining which emissions each entity is responsible for and makes it possible for companies to measure their emissions accurately. ISO 14064-2 specifies a process and requirements for designing and quantifying a GHG project's emission reductions or removal enhancements. This enables a project to quantify its emissions reductions – or, in market-terms, how many reduction credits it can sell. Finally, ISO 14064-3 specifies procedures and requirements for validating or verifying GHG projects or GHG inventories. This is the final piece of the puzzle that tells verifying companies how they can go about verifying and certifying that projects are, in fact, reducing emissions in the way they say they are (and can therefore sell those reductions), and/or that companies or entities have accurately measured and reported on their overall emissions inventories. Linked to this is ISO 14065, which is set for release in early 2007, and which will specify the accreditation requirements that will allow entities to perform GHG validations and verifications—essentially setting them up as verifiers and certifiers, or DOEs like DNV.

Certified Uncertainty

Clearly the ISO process is thorough and complete, but what worries some is that it may be too bulky, too bureaucratic, and perhaps even too expensive. The same sort of concerns plague the proposed VCS. For example, the first consultation paper stated that VCU projects had to be certified by a DOE accredited by the CDM Executive Board or an Independent Entity (IE) accredited by the Joint Implementation Supervisory Committee. Several respondents echoed Steen's objection that the cost of bringing in such auditors would kill off smaller projects. "You're talking around $15,000 to get these people into, say, Jamaica, where they can audit a project," she says. "I'd argue that local universities or consultants can provide the auditing—which not only saves money, but builds local capacity and expertise for future projects." Baumann says this concern is over-stated. "I agree that audit cost can kill a small project," he says, "but that is why small projects are often aggregated to spread the cost, and/or the audit is streamlined, so the cost goes down 20-30%." He adds that validation and verification may be on average about up to 30% of the total transaction costs of getting a project registered (depending on what is considered in the tally of transaction costs). In their consultation draft, Kenber and his team offered two solutions: certification entities could be either DOEs or unspecified certification bodies designated by the VCS steering committee. They offered general operating criteria for verifiers and laid out twelve minimum threshold criteria for VCUs, and are currently hammering out the specifics. "It's not as easy as it sounds," he says. "It's a completely different thing to verify forestry in Jamaica from an ag soils project in the same place. It may be that the same organization does not have capacity to do both, and the challenge is how to find a not too bureaucratic way of letting a project proponent use any verifier they like, provided they are credible. What we are now saying is that if a verifier is not a DOE, then it must at least be certified by a CDM entity. However, this is something the steering committee will be looking at in detail to ensure the most effective and efficient solution, taking into account ongoing work by ISO." The VCS is currently structured with a two-stage verification-certification process. A CDM-accredited entity is qualified to do either or both steps, whereas a non-CDM-accredited entity can only do verification unless the VCS accredits them to be able to do certification. Baumann also believes that more sector-specific quantification standards are what project developers are asking for rather than a general standard. "It's a real balancing act," he concedes. "In the past, you had all different types of methodologies being developed, but there was no standardization among them. The standards community wanted a generally applicable mother standard that everybody conforms to at a high level, and then to develop numerous sector specific standards consistent with the mother standard." The GHG Protocol has developed many quantification tools for different sectors. "Industry associations have also developed GHG guidebooks based on the GHG Protocol," he says. "These efforts have been tremendous in advancing GHG accounting." And while these discussions are going on, the voluntary carbon markets continue trading and growing. Kenber has publicly said that in 2005 the voluntary market may have traded as much as 20 million tons of carbon dioxide equivalent worldwide, and that this number could easily double in the next few years. Likewise, large financial firms like hedge fund Cheyne Capital have created funds aimed at buying voluntary carbon credits. As far as they're concerned, what they need is some way of comparing apples to apples and of trading oranges for oranges; they need standards. Initiatives such as the VCS seek to provide such standards and to create a fungible voluntary carbon unit (the VCU). The problem is that in setting such standards, some projects will necessarily be left out; and no matter what standard is set, it will be either too rigorous or not rigorous enough for some. Which brings us back to the issue that Steen raised at the very beginning: how to create a standard that is rigorous enough to allow trading and confidence, while not being so bulky that it stymies trade in what is essentially a voluntary market for activities that could ultimately help the planet? Can we find that "Goldilocks zone" that is neither too strict nor too loose? The questions are many, and the only thing that appears clear is that standardization will require an ongoing effort of development, revision and management for a long time to come. Clarity takes time, but buyers and sellers anxious for the market to grow stand ready to remind all concerned: there isn't much time to waste. Steve Zwick is a free-lance journalist and editor-at-large for Futures Magazine. He can be reached at Steve.Zwick@gmail.com. First published: June 29, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.