Voluntary emission reductions (VERs) focus on sustainability rather than just carbon reduction and allow renewables projects to produce truly game-changing results. So says Tom Morton of ClimateCare, a developer and marketer of this type of offset internationally. ‘It’s important to intervene early in a country’s development to introduce sustainable, low-carbon practice rather than wait until unsustainable practices develop,’ he said, suggesting that, for example, micro-renewable energy technology funded by VERs could avoid the need for a centralised grid fuelled by large-scale coal.
VERs cover a wide range of projects, including those that have used solar, large wind and geothermal plants in countries such as Tajikistan and Kenya to displace the use of hydrocarbons. Companies and individuals can buy VERs to pay for others to adopt practices or invest in means to reduce carbon emissions, normally alongside other benefits. Those offsets can then be set against carbon released by the buyer, allowing them to adhere to non-UN compulsory regimes, such as those in the US states of California and Illinois. Big buyers include airlines, automotive manufacturers and government bodies.
Unlike UN CDM offsets, there is no single standard for voluntary offset projects, no uniform pricing mechanism and no central registry to log their purchase. Instead most projects adhere to international standards and many – the best ones, according to Morton – aim to combine carbon reduction with sustainability and community development.
VERs are particularly useful in funding the early stages of large renewable power projects, where the initial emissions reductions have not yet obtained certified emission reduction (CER) status to qualify under the CDM, or where projects are being developed in countries that have not signed up to Kyoto, according to Morton. ‘Overall, transaction costs are lower, and VERs are great as a launching aid,’ he said.
In the UK, clean energy investment firm CF Partners, initially focused on the compliance carbon market, or EU Emissions Trading Scheme (ETS), responded in September 2012 to a steady growth in requests for VERs by establishing Arctix Sustainable Solutions, a new business which invests directly in carbon reduction projects and sells VERs directly to firms, said its head, Tobias Troye.
In Troye’s view a key difference between VERs and certified offsets is the addition of social benefits. ‘VERs have a much bigger social aspect. For example some involve local educational programmes or investment in a health services fund.’
Arctix also aims to match the specific goals of companies’ carbon reduction schemes with the characteristics of the 60-plus projects it has developed around the globe. ‘A law firm’s carbon footprint may relate to travel – specifically lawyers travelling to China – so we would look at a project in China that fits with the wider corporate social responsibility strategy.’
The light regulatory touch of VERs has been beneficial in helping encourage innovation, spurring providers to design products for a range of buyers. Partly to tackle early failures, providers have set up voluntary best practice body the International Carbon Reduction and Offset Alliance (ICROA), which represents companies that sell 85% of all VERs in Europe. It has adopted the strict Gold Standard and Voluntary Carbon Standard (VCS), which many companies see as the most robust for voluntary verification.
Increasingly standards for offsets necessitate much work in the evaluation of the quality of each offset project and in ensuring that they keep to contractual commitments. This improved monitoring and verification by the voluntary offset industry itself should make it simpler for some corporations, which have been carrying out much of the checking themselves. On the other hand, some standards have been simplified to allow for small-scale or prototype projects.
The evolution of standards is being determined by the industry and its customers on an international basis rather than by any government body. ICROA members are keen not to sell or buy anything that resembles any of the slip-ups of the past, which had led to heavy criticism of VERs.
Despite a spell of declining activity, the VER market now appears to be recovering, helped by companies such as Microsoft, which recently committed itself to carbon neutrality through various means including VERs.
According to Iain Watt of environmental group Forum for the Future, companies are moving away from just assessing their internal emissions and increasingly assessing the carbon emissions of their complete supply chains. UK department store Marks & Spencer, for example, often imports goods to sell in its outlets, so it assesses the carbon expended in transportation as well as production. Watt adds that the retailer is also looking at carbon used in getting the products to customer’s homes – secondary emissions are thought to be about 10 times its own.
VER Prices Hold Steady, CER Prices Slide
Certified carbon prices traded on the EU ETS collapsed recently, and many voluntary offsets are now more expensive than the European carbon market price. ‘High quality voluntary credits have stayed firm,’ said Morton, who puts typical levels at around €8/tonne for Gold Standard or VCS projects. This compares with current levels as low as €3-€4/tonne on the CER market.
However, the price of VERs are settled both according to cost and the buyer’s view of the additional value of non-environmental benefits. Some VERs linked to Chinese wind projects, for example, are still valued at less than the current ETS CER price. Offset providers often package high cost and low cost offsets together to help support projects with a high social impact that may cost a little more. ‘The sustainability and development aspects of the credits are what make the difference to buyers,’ said Morton.
Paul Monaghan, head of social goals & sustainability at the UK’s Co-operative Group, agreed, pointing out that his organisation only buys voluntary offsets from developing countries because the social benefits are normally much greater and there is more certainty that the projects have additionality, in other words that they would not have gone ahead anyway.
ClimateCare’s director Edward Hanrahan explained how projects in the least developed countries, especially in Africa, are far more likely to have additionality. And good verification eliminates both financial additionality (without this finance the project would not go ahead at all) and environmental additionality (a facility emitting higher emissions would have been installed).
‘Projects gain a sustainable source of funds, while at the same time a framework is introduced to measure progress. Offsetting finance enables a scaling up of what is possible, improving the quality of life on a grand scale,’ said Hanrahan.
International VERs can also help with technology transfer, which gives developing countries a leg-up the development ladder. And, importantly, VERs add accountability to the world of aid, said Morton, who noted that the results-based nature of the offsets ensures ongoing monitoring that makes sure projects achieve planned goals. If a project does not actually produce the green power anticipated the offsets become invalid and the VER finance dries up.
According to many observers, VERs could make an important contribution to meeting the UK’s agreed Kyoto carbon reductions too, although they do not count towards it. Oddly the British government has encouraged the market with tax breaks while quietly dropping a code developed to assess VERs, which has left the government without any clear guidelines. A similar situation exists in most of the rest of Europe, although many countries retain some kind of voluntary standard code. Some UK government departments do buy VERs to offset their emissions – relying on industry standards – according to Robert Stevens of ClimateCare, but others caution non-corporate investors that any certification is voluntary and can involve a wide range of bodies of differing quality standards, none of which are yet officially recognised.
ClimateCare said it welcomed the UK government’s dropping of its code, and both it and ICROA claim VERs beat CERs when it comes to making voluntary carbon reductions. VERs have additional benefits, encompass a variety of projects and – at least until recently – are lower in cost, they say.
State Recognition of VERs
Over the last few years some governing bodies have shifted from scepticism to acceptance of the voluntary carbon offset market. More than 20 national and regional governments are using voluntary climate change solutions as part of their formal carbon strategies. These include the US states of Oklahoma, California and Oregon, the latter two of which have implemented mandatory emission caps but in a way that incorporates elements from long-standing voluntary programmes. However, most VERs in these states are domestic rather than in developing countries, representing a far more easily verifiable and less development-focused market.
California is now selecting a voluntary-market registry to keep track of credits once they are issued. About half of the 20 programmes have emerged in just the last four years, and three – in California, Oregon and British Columbia in Canada – use offsetting tools that were developed for voluntary participants to underpin regional greenhouse gas regulations. Other nations are not far behind, including Costa Rica, the Republic of Korea and, most recently, South Africa.
VERs may not be for all, but they provide an important channel for innovative development work as well as emissions avoidance. As the European certified credit market continues to be undermined by the financial crisis in that continent, interest in VERs could grow, particularly if given more state recognition.