oikosea2011_sebastianthomas

The Colours of Carbon

oikos Young Scholars Entrepreneurship Academy 2011: Cleantech Entrepreneurship, Finance and Policy 1

oikos Young Scholars Entrepreneurship Academy 2011 Cleantech Entrepreneurship, Finance and Policy


This is a work in progress. Please do not cite without permission of the author. Sebastian Thomas School of Business The University of Queensland St Lucia QLD 4072 Australia [email protected]

Abstract Carbon offset projects in developing countries are one of the principal mechanisms designed to reduce greenhouse gas emissions and promote sustainable development yet have critical limitations in both areas. This paper presents a framework for categorizing offset projects according to four general approaches: (1) efficiency (‘Brown’); innovation (‘Yellow’), terrestrial carbon sequestration (‘Green’) or sequestration in aquatic environments (‘Blue’). The Colours of Carbon framework is an analytical tool, a policy instrument, an interpretive device and a means to facilitate an integrated portfolio approach to offset project development. Analysis of 7615 registered and pending offset projects reveals that 98.3% are Brown or Yellow, and only 1.7% is Green or Blue. While all carbon credits are measured to the same base standard, different project types offer a variety of benefits for ecosystems and society. Application of the framework would have the potential to (1) help redirect demand in carbon markets toward projects with greater sustainability benefits; (2) allow for cost-‐effective, integrated mitigation and adaptation strategies by promoting a portfolio approach to project development; (3) clarify and support corporate social responsibility initiatives; and (4) offer a powerful interpretive tool to engage consumers with the global carbon offset infrastructure.

The Colours of Carbon – Sebastian Thomas

2 oikos Young Scholars Entrepreneurship Academy 2011: Cleantech Entrepreneurship, Finance and Policy

Introduction

There is a broad consensus that human industrial activities and land use practices are con-tributing to environmental changes that will have major impacts on the Earth’s social sys-tems and biodiversity (IPCC, 2007; Rosenzweig et al., 2008; Smith et al., 2009; New et al., 2011). While reducing greenhouse gas (GHG) emissions remains a priority, and ultimately requires decarbonisation of the current energy system, it is now clear that adaptation to the impacts of climate change is necessary. Thus, while innovation and policy in zero emis-sion energy sources is increasingly important it is imperative that societies also commit to building their adaptive capacity. This involves reducing vulnerability and enhancing resili-ence in social-ecological and economic systems, including communities and firms. The role of carbon dioxide is critical in the planetary greenhouse effect that is driving cli-matic changes (Lacis et al., 2010). The international strategic policy response to the chal-lenge of climate change has established carbon as the currency of a new global market that relies heavily on emission ‘offsets’ generated by project activities in developing coun-tries (Kossoy and Ambrosi, 2010). There is, however, widespread uncertainty and scepti-cism about the value of carbon offsets (Akter et al., 2009). Here we present a framework to characterize the nature of offset projects. The framework is used to outline policies that will help structure and direct carbon markets in order to achieve climate change mitigation as well as socio-economic and ecological benefits. Gov-ernments, communities and private sector organisations would benefit from using the Col-ours of Carbon in the design of emission trading schemes and abatement strategies, con-servation programs and strategic planning for resilience in social-ecological systems. The value of the Colours of Carbon framework lies in its potential to achieve four important outcomes: (1) directing demand in carbon markets toward desirable but less financially attractive projects and activities with greater sustainability benefits; (2) allowing for cost-effective, integrated mitigation and adaptation strategies by promoting a portfolio ap-proach to project development; (3) clarifying and supporting corporate social responsibility initiatives; and (4) offering a powerful interpretive tool to engage consumers with the global carbon offset market.

The Trouble with Offsets The majority of emission reduction projects are implemented through the Clean Develop-ment Mechanism (CDM) established by the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). The CDM is intended to reduce emissions and promote sustainable development (UNFCCC, 1998). CDM projects operate within parame-ters stipulated in registered methodologies, and offsets are generated through projects registered with the CDM Executive Board. The international carbon market is growing rap-idly, with over US$6.5 billion in project-based transactions in 2008 and total transacted value exceeding US$140 billion in 2009 (Kossoy and Ambrosi, 2010). CDM offsets serve as one of the primary means for firms in industrialized nations to achieve net reportable emissions reductions (Ellis et al., 2007; Spash, 2010). The CDM has been criticized, however, for its lack of positive ecological outcomes and the disproportionate representation of certain project sectors and countries, and has arguably failed in its mandate to achieve sustainable development (Olsen, 2007; Sutter and Parreño, 2007; Boyd et al., 2009). As a consequence, there is widespread uncertainty about the in-



tegrity of offsets and this has impeded progress in implementing effective climate change mitigation and adaptation policies. Voluntary offset schemes have been established partly in order to address the perceived inadequacies of the CDM. Emission reductions credits generated through voluntary mechanisms, however, represent a small fraction of the glob-al market (Hamilton et al., 2010; Kossoy and Ambrosi, 2010).

The Colours of Carbon framework Offset project methodologies achieve reductions through avoidance, reduction, destruction or sequestration of emissions. The framework presented here assigns to each methodology a colour label that describes the nature of its carbon management. The analysis involved the application of the framework across 201 methodologies registered under the CDM and numerous voluntary mechanisms (Voluntary Carbon Standard, Gold Standard, Chicago Cli-mate Exchange, Plan Vivo, CarbonFix, Social Carbon, ISO 14064-2 and Brasil Mata Viva) and 7615 projects in the CDM and voluntary ‘pipelines’. Data was sourced from the United Na-tions Environment Program (UNEP) Risoe Centre CDM Pipeline Database (UNEP 2010), the Markit Environmental Registry (Markit, 2011), the Gold Standard Registry (The Gold Stand-ard, 2011) and the Chicago Climate Exchange (CCX, 2011). Brown methodologies represent improvements or efficiency in existing methods rather than innovation, and include decomposition and burial of captured emissions of industrial gases, energy efficiency, landfill gas capture, recovery of fugitive emissions, some fuel switching, cement production and CO2 capture. Yellow methodologies involve alternative development pathways including renewable energy provision from sources such as wind, solar and geothermal power, as well as transport, energy distribution systems and some fuel switching. Green methodologies directly sequester carbon in soils or in vegetation by accreting new biomass. Blue carbon projects also involve sequestration, but in aquatic en-vironments, and can increase carbon stocks in existing vegetation and soils as well as through production of new biomass. Almost two thirds of all methodologies are Brown and 61% of projects are Yellow (Figure 1). While a tenth of all methodologies are Green, there are only 128 Green projects, less than 1.7% of the total. Half of all Green projects occur in voluntary schemes. Ten CDM methodologies account for 77% of all projects in the regulated market. Two of these, both involving electricity generation from renewable sources, account for nearly half of all CDM projects (23.8% and 23.4% respectively) (UNEP, 2010). There is a single Blue carbon meth-odology and one such CDM project (currently at the validation stage) that involves man-grove afforestation in tidal wetlands around several small islands in Indonesia. There are as yet no methodologies featuring seagrasses or salt marsh vegetation.



Figure 1: Analysis of offset methodologies and projects using the Colours of Carbon framework1. It is estimated that by 2020 CDM projects employing Brown methodologies will have gener-ated 4.92 billion certified emissions reductions (CERs) measured in metric tons of carbon dioxide equivalent (tCO2e), more than 60% of the total (UNEP, 2010). Yellow projects will have achieved reductions of nearly 3.14 billion CERs, almost 40%. In contrast, Green and Blue projects will have accounted for less than 76 million CERs, less than 1% of total emis-sion reductions by 2020. There is a clear imbalance between the expected reductions from different project types, with Green and Blue projects significantly under-represented, which is anomalous given the importance of the ocean (over 70% of Earth's surface) and land-ocean-atmosphere feedbacks in the global climate system (McAlpine et al., 2010). The absence of Blue carbon from the climate policy discourse is a striking deficiency (The Katoomba Group 2010) as the ocean is a dominant component of the global carbon cycle and more than half of all carbon accumulated in vegetation through photosynthesis is in marine organisms (Nelleman et al., 2009). Vegetated coastal ecosystems including man-

1 Projects include ‘Registered’, ‘In Process’, ‘At Validation’ and ‘Rejected’. ‘Registered’ projects include those that have already been issued with certified emissions reductions and those that have not; ‘In Process’ includes projects requesting registration, under review, or that have had reviews or corrections requested by the CDM Executive Board; ‘At Validation’ includes projects being assessed by Designated Operational Entities; ‘Rejected’ includes projects rejected by the CDM Executive Board or voluntary scheme administrators, withdrawn by project developers, and projects that have been rejected or terminated in the validation process by Designated Operational Entities. Some of the 7615 projects employ multiple methodologies. In these cases the Colour is assigned based on the principal methodology of the project.



grove forests, salt marshes and seagrass meadows are immensely important ecological re-sources and largely unregarded. These areas provide vital ecosystems services including the provision of habitat, production of food, regulation of local climate and disease vec-tors, nutrient cycling and pollination, stabilization and protection of coastal areas and are highly effective carbon sinks (Nellemann et al., 2009). Blue carbon projects not only gen-erate these ancillary benefits but develop the adaptive capacity and social-ecological resil-ience of coastal communities that are likely to be disproportionately affected by the bio-physical impacts of climate change (Adger et al., 2005). The dearth of Green and Blue projects in existing international climate policy structures stems from practical and informational constraints, issues of leakage, data deficiency, cost-effectiveness, permanence, and even charisma (Duarte et al., 2008; Boyd et al., 2009; Thomas et al., 2010). Perhaps the most significant constraint is the construct of perma-nence. Green and Blue offsets are currently considered temporary, and temporary CERs are excluded from the largest existing carbon market, the European Union Emissions Trad-ing Scheme, as well as the Australian National Carbon Offset Standard. Yellow and Brown offsets are far more common as these types of projects provide a more attractive invest-ment proposition than Green and Blue projects from a financial point of view, rather than from a public benefit perspective. Yellow and Brown projects generate larger quantities of emission reductions more quickly than do Green and Blue projects.

Policy approaches and benefits of the Colours of Carbon framework Differentiation based on project type or quotas is considered a means of reforming offset mechanisms (Bakker et al. 2011). If firms covered by emission trading schemes were re-quired to buy a certain proportion of their offset acquisitions from particular types of pro-jects, then demand for such projects would be dramatically increased. Previous examples of this approach to policy formation have been highly successful. The Australian Mandatory Renewable Energy Target (MRET), for example, which commenced in 2001, imposed a legal liability on wholesale purchasers of electricity to proportionately contribute toward the generation of 9500 gigawatt hours (GWh) of renewable energy annually by 2010 above and beyond business as usual scenarios. The first review of the MRET, in 2003, found that in-vestment in renewables resulting from the legislation was so substantial that the 2010 tar-get would be met by 2007 (Tambling et al., 2003). Structuring policy instruments in this way would make projects with desirable sustainabil-ity outcomes competitive investment propositions and drive finance to sectoral constrained by issues including permanence, leakage, accountability and independent verification of outcomes, which in conjunction with the high costs of carbon measurement are the main reasons why these types of mitigation have not been fully adopted. Green and Blue offset projects would become increasingly competitive with Brown and Yellow projects, because if demand exceeded supply, buyers would pay more, and perhaps be prepared to pay in advance for offsets from projects before the carbon was sequestered. This type of policy approach would help reduce the data deficiencies and high transaction costs associated with natural resource-based projects. The framework also allows for the development of cost-effective, integrated mitigation and adaptation strategies by promoting a portfolio approach to project development. Pro-ject activities could be managed across a catchment, landscape or region as part of inte-grated programs of activities. Cost-efficient activities such as landfill gas capture, run-of-



river hydroelectricity generation and carbon forestry could be combined with more expen-sive but desirable activities, such as biomass-based power generation and coastal man-grove reforestation. This notion of integrated offset portfolios should be attractive to firms, communities and governments alike. At the same time, firms should declare the colour of their offset acquisitions in public re-ports. This would facilitate stakeholder understanding, promote transparency and more accurately reflect corporate social responsibility. The widespread adoption of this frame-work might also reshape the role of intermediaries (such as banks) in the global carbon market. Intermediaries have featured prominently in the growth of the market to date, and while this has provided necessary liquidity, offsets have been commoditised to the detriment of mitigation and sustainability outcomes. The bundling of offsets of all types for the purposes of price risk mitigation has benefits for business cost management but does little to promote the fundamental objectives of offset schemes. The framework would encourage reform of these types of financial instruments through the inclusion of sustainability criteria in the design of bundled portfolios. Finally, the framework offers a straightforward, powerful means of explaining carbon off-sets to consumers. As an interpretive device, the framework has the potential to improve public understanding of carbon markets, clarify corporate investment strategies and gov-ernment development approaches, and empower consumers to make informed purchasing decisions (cf. Eyre 2010). The clarity and flexibility of the framework will also appeal to businesses wishing to participate in offset schemes.

Facing Future Tides The lack of effective policy responses to climate change and continued increases in emis-sions imply that impacts will continue to grow in frequency and intensity (Rosenzweig et al., 2008; Smith et al., 2009; Sokolov et al., 2009). A realistic response to current projec-tions recognizes that mitigation alone is no longer sufficient – adaptation is a necessity, particularly in developing countries and coastal zones. The most desirable policy ap-proaches are those that incorporate emissions abatement and adaptive measures in coher-ent strategies to achieve a range of local sustainability outcomes. Project activities that generate offsets through sequestration of atmospheric CO2 while enhancing adaptive ca-pacity should be actively pursued and supported in policy frameworks. The need for effective mitigation and adaptation strategies is becoming increasingly urgent (Smith et al., 2009). There are efforts to improve the uptake of Green and Blue projects through voluntary accreditation schemes but these play a minor role in the carbon market-place (Hamilton et al., 2010; Kollmuss et al., 2010; Kossoy and Ambrosi, 2010). Pricing carbon remains a contentious issue in some industrialized countries, yet appears to be in-evitable, and at present there are political opportunities to reform the existing regulatory system (centred on UNFCCC initiatives, and the domestic climate policies of wealthier na-tions), which has admirable intentions but is not achieving its goals. Those charged with the design of cap-and-trade emissions trading schemes, or related carbon pricing schemes in Europe, the USA, Japan, Canada, New Zealand and Australia have an opportunity to in-vigorate investment in Green and Blue offset projects, encouraging the wide range of envi-ronmental and social benefits these generate. Using the same methods that have support-ed investment in Yellow methodologies, policy-makers should implement measures to sup-port Green and Blue offset activities as these types of projects offer substantial value in



terms of carbon sequestration, and enhancing ecological resilience and social adaptation to climate change. Encouraging investment in this way would help to overcome many of the constraints on the development of Green and Blue projects including delayed revenue returns and burdensome transaction costs. There are many ways this endorsement can be achieved, including through the establishment of quota systems and differential pricing (Castro and Michaelowa, 2009; Schneider, 2009).

Conclusions Existing policy mechanisms and market instruments designed to mitigate climate change and achieve sustainable development are largely failing to promote positive social and en-vironmental outcomes. The Colours of Carbon framework can be easily communicated and understood by the public. It offers an effective market mechanism for the promotion of better sustainability outcomes – a system with minimal transaction costs, fundamentally driven by buyer demand, yet sufficiently robust and rigorous to be meaningful. Widespread adoption of the framework should drive demand for Green and Blue offset projects and therefore invigorate investment and development in those sectors. These types of method-ologies are likely to achieve real and significant emissions reductions, protect and enhance ecological systems and biodiversity, promote social sustainability by improving resource security and livelihoods, offer protection from geophysical climate change impacts, and contribute to the overall resilience and adaptive capacity of threatened human communi-ties and biological systems. Efficiency, innovation and carbon-oriented environmental management are all necessary components of climate mitigation and adaptation strategy, yet all carbon is not created equal. The Colours of Carbon framework will allow policy instruments and market mecha-nisms to reflect this fact.



References Adger, W.N., Hughes, T.P., Folke, C., Carpenter, S. and Rockström, J., 2005. Social-Ecological Resilience to Coastal Disasters. Science 309: 1036-1039. Akter, S., Brouwer, R., Brander, L. and van Beukering, P. 2009. Respondent uncertainty in a contingent market for carbon offsets. Ecological Economics 68: 1858-1863. Bakker, S., Haug, C., van Asselt, H., Gupta, J. and Saïd, R., 2011. The future of the CDM: same same, but differentiated? Climate Policy 11: 752–767 Boyd, E., Hultman, N., Roberts, J.T., Corbera, E., Colea, J., Bozmoskia, A., Ebeling, J., Tippman, R., Manna, P., Browne, K. and Liverman, D.M., 2009. Reforming the CDM for sus-tainable development: lessons learned and policy futures. Environmental Science & Policy 12: 820-831. Castro, P. and Michaelowa, A., 2009. The Impact of CER Discounting on the Competitive-ness of Different CDM Host Countries. Climate Strategies Working Paper, available at www.climatestrategies.org. CCX, 2011. CCX Offset Project Public Registry Homepage. Chicago Climate Exchange. Available at https://registry.chicagoclimatex.com/public/projectsReport.jsp Duarte, C., Dennison, W., Orth, R. and Carruthers, T., 2008. The charisma of coastal eco-systems. Estuaries and Coasts 31: 233. Ellis, J., Winkler, H., Corfee-Morlot, J. and Gagnon-Lebrun, F., 2007. CDM: Taking stock and looking forward. Energy Policy 35: 15. Eyre, N., 2010. Policing carbon: design and enforcement options for personal carbon trad-ing. Climate Policy 10: 432-446. Hamilton, K., Sjardin, M., Peters-Stanley, M. and Marcello, T., 2010. Building Bridges: State of the Voluntary Carbon Markets 2010. Ecosystem Marketplace and Bloomberg New Energy Finance, Washington D.C. and New York, USA. Kollmuss, A., Zink, H. and Polycarp, C., 2010. Making Sense of the Voluntary Carbon Mar-ket: A Comparison of Carbon Offset Standards. Stockholm Environment Institute, Tricorona and WWF Germany. Kossoy, A. and Ambrosi, P., 2010. State and Trends of the Carbon Market 2010. World Bank. Lacis, A., Schmidt, G., Rind, D. and Ruedy, R., 2010. Atmospheric CO2: Principal control knob governing Earth’s temperature. Science 330: 356-359. Markit, 2011. Markit Environmental Registry, Public View. Available at http://www.markit.com/en/products/registry/markit-environmental-registry-public-view.page?. McAlpine, C.A., Ryan, J.G., Seabrook, L., Thomas, S., Dargusch, P.J., Syktus, J.I., Pielke Sr, R.A., Etter, A.E., Fearnside, P.M, and Laurance, W.F., 2010. More than CO2: A broader paradigm for managing climate change and variability to avoid ecosystem collapse. Current Opinion in Environmental Sustainability 2: 334-346. Nellemann, C., Corcoran, E., Duarte, C. M., Valde ́s, L., De Young, C., Fonseca, L., Grimsditch, G. (Eds), 2009. Blue Carbon. A Rapid Response Assessment. United Nations Environment Programme, GRID-Arendal, www.grida.no. Olsen, K., 2007. The clean development mechanism’s contribution to sustainable develop-ment: a review of the literature. Climatic Change 84: 59-73. Rosenzweig, C., Karoly, D., Vicarelli, M., Neofotis, P., Wu, Q., Casassa, G., Menzel, A., Root, T.L., Estrella, N., Seguin, B., Tryjanowski, P., Liu, C., Rawlins, S. and Imeson, A.,



2008. Attributing physical and biological impacts to anthropogenic climate change. Nature 453: 353-357. Schneider, L., 2009. Assessing the additionality of CDM projects: practical experiences and lessons learned. Climate Policy 9: 242-254. Smith, J.B., Schneider, S.H., Oppenheimer, M., Yohee, G.W., Hare, W., Mastrandrea, M.D., Patwardhan, A., Burton, I., Corfee-Morlot, J., Magadza, C.H.D., Füsself, H.-M., Pit-tock, A.B., Rahman, A., Suarez, A. and van Ypersele, J.-P., 2009. Assessing dangerous cli-mate change through an update of the Intergovernmental Panel on Climate Change (IPCC) “reasons for concern”. Proceedings of the National Academy of Science 106: 4133-4137. Sokolov, A. P., Stone, P. H., Forest, C. E., Prinn, R., Sarofim, M. C., Webster, M., Paltsev, S. and Schlosser, C. A., 2009. Probabilistic Forecast for Twenty-First-Century Climate Based on Uncertainties in Emissions (Without Policy) and Climate Parameters. Journal of Climate 22: 5175-5204. Spash, C., 2010. The Brave New World of Carbon Trading. New Political Economy 15: 169-195. Sutter, C. and Parreño, J., 2007. Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of offically registered CDM projects. Climatic Change 84: 75-90. Tambling, G., Laver, P., Oliphant, M. and Stevens, N. 2003. Renewable Opportunities: A Review of the Operation of the Renewable Energy (Electricity) Act 2000. Australian Green-house Office, Canberra. The Gold Standard, 2011. The Gold Standard Registry. Available at http://goldstandard.apx.com . The Katoomba Group, 2010. A Call To Action: Protecting Mangroves for Climate Change Mitigation and Adaption. The Katoomba Group. Available at http://www.forest-trends.org/documents/files/doc_2553.pdf. Thomas, S., Dargusch, P., Herbohn, J. and Harrison, S., 2010. Why are there so few affor-estation and reforestation Clean Development Mechanism projects? Land Use Policy 27: 880. UNFCCC, 1998. Kyoto Protocol – Article 12. United Nations, Japan. UNEP, 2010. CDM/JI Pipeline Analysis and Database. www.cdmpipeline.org, viewed May 2010. United Nations Environment Program.

oikosea2011_sebastianthomas

Documents