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Carbon trading: A multibillion-dollar boondoggle?

The carbon offsetting market is worth billions, but insiders say it’s ineffective
North American carbon offsetting markets are expected to double in value this year to $2.5 billion

In a little over a decade, a new multibillion-dollar industry has grown out of the Kyoto Protocol to address climate change: the carbon market.

It has spawned a number of brokers, including B.C.’s Offsetters Climate Solutions Inc. (TSX:COO), created through a merger of three offset brokers to become Canada’s largest.

North American carbon markets alone are expected to double in value this year to $2.5 billion, according to Thomson Reuters Point Carbon, thanks to California’s introduction of a carbon cap-and-trade system.

Closer to home, PwC estimates that the companies and organizations that have received offsets through B.C. Crown carbon broker, the Pacific Carbon Trust (PCT), have committed more than $300 million to emission reduction projects.

But how effective are carbon offsets in achieving their key goal of reducing greenhouse gases?

The economic impacts of carbon trading appear to be easier to quantify than the environmental impacts, at least in B.C., where the government’s claim to have achieved neutrality through offsetting have been questioned by noted energy economist Mark Jaccard and, more recently, by B.C. Auditor General John Doyle.

Doyle concluded that, despite claims to the contrary, B.C. can’t claim to be carbon neutral because the offsets it has sold are not credible. That sparked a backlash from the carbon industry, which said Doyle lacks the expertise to make such an assessment and ignored the advice of those who do.

But Jaccard, whose bona fides as an expert in energy economics and climate change policy include a Nobel Prize awarded in 2007 to the Intergovernmental Panel on Climate Change that he sat on, also disputes Victoria’s claims to carbon neutrality.

Jaccard told Business in Vancouver that a “significant percentage of so-called offsets are likely to be non-additive, hence bogus.”

In a 2011 report, Jaccard and Brad Griffin asked: B.C.’s Carbon Neutral Public Sector: Too Good to Be True?

They concluded the CO2 reductions from projects funded with PCT offsets is, at best, guesswork and that the system in place is prone to “free-riders” – companies being subsidized for initiatives they would have undertaken anyway, because it makes economic sense (fuel switching, for example).

Offsetters CEO James Tansey, whose company has received $2.7 million in PCT offsets to fund several projects, dismisses Jaccard’s analysis.

“He is not a qualified accountant,” Tansey said, “so I would trust him no more to have an opinion on this than I would to have an opinion on the financial statements of a forestry company just because he happens to be an environmental economist.”

He referred to the auditors that provide independent verification of offset projects approved by the PCT – accounting firms like PwC and KPMG.

“There are a lot of armchair quarterbacks in the carbon industry who don’t understand the accounting rules who seem to have opinions that get traction,” Tansey said.

But Bob Simpson, a vocal critic of the government’s offset program, counters that some of the same accounting firms verifying offset proposals also signed off on financial derivatives schemes. He characterized carbon trading as a kind of cabal where everyone with a vested interest agrees to play by the same rules.

“They’re all inside the game trying to make sure that the rules of the game are obeyed,” he said. “The auditor general is outside the game asking if the rules of the game makes sense.”

Jaccard is not the only internationally recognized energy expert to question the efficacy of carbon offsetting.

David Victor, a Stanford University energy policy expert, analyzed offsets approved under the Carbon Development Mechanism (CDM), an international standard. He concluded: “At root, the CDM and other offset schemes are unable to determine reliably whether credits are issued for activities that would have happened anyway while also keeping transaction costs under control and assuring investor certainty.”

That could explain why some projects have qualified for funding, even though they appear to fail the additionality test.

How offsetting works

The carbon offset industry grew out of the Kyoto Protocol as a tool for fighting climate change.

It recognized that some industries, by their nature, have a limited ability to reduce their greenhouse gas emissions – airlines, for example.

Carbon trading was set up so that industries that can’t or won’t shrink their carbon footprints can buy offsets from those that can.

Carbon brokers like Offsetters find buyers and sellers and verify that the projects being funded will reduce carbon emissions. Only about 20% of Offsetters’ business has been through PCT, which Tansey describes as “low margin” compared with some of the projects it has developed independent of the PCT. One of its forest conservation projects is in the Democratic Republic of Congo.

The calculations are made according to international standards, such as the Verified Carbon Standard, the Carbon Development Mechanism and International Organization for Standardization.

The problem in B.C., according to Simpson, is that the PCT came up with its own standards. He added that the PCT has to buy 700,0000 tonnes of carbon per year and all the projects have to be in B.C.

That could explain why some projects have qualified for funding, even though they appear to fail the additionality test.

But the PCT insists it has funded emissions reduction projects after they already went ahead because it needs evidence to support that applications meet its standards.

“It is important to note that offsets are not grants,” PCT’s Hope Hickli told Business in Vancouver.

“The Carbon Trust purchases a commodity, made in B.C., after the project activity has taken place. That’s because the project must undergo rigorous verification by an independent auditor before PCT will consider purchasing the emission reductions as offsets.”