To Offset or Not?

Stakeholders today want to know how corporations are addressing climate change. In response, and out of their own convictions, corporations increasingly are declaring they will reduce their greenhouse gas emissions to zero—becoming carbon neutral.

But how can a company truly be carbon neutral? No matter how much a company reduces energy use and switches to alternative energy sources, it will be left with some emissions. It’s at this point that a corporation steps into the evolving world of the voluntary carbon offset market.

Offsets are projects that reduce, avoid or sequester carbon dioxide or other greenhouse gas emissions. Corporations purchase “offsets” by financing all or part of these projects. Interface, the world’s largest commercial carpet manufacturer, offsets some of its emissions by investing in anaerobic digesters that convert methane from decomposing animal waste on U.S. farms into fuel (Interface’s sales force refers to the projects as “re-moo-able energy”). Media company News Corp. recently said it would offset some of its emissions by buying 61,000 metric tons of carbon dioxide offsets from wind energy projects in the state of Maharashtra, India, among other projects.

Detractors worry that corporations would rather buy offsets than reduce their own emissions, or that offset projects won’t deliver the promised reductions. Others are concerned that no matter how quickly the voluntary carbon market grows, meaningful carbon reductions will only occur once U.S. emissions are regulated.

Still, the voluntary market is growing and many believe it will play a significant role in reducing global emissions. To answer a common criticism, Craig Ebert, Executive Vice President of the global consulting firm ICF International, says few companies are cavalierly offsetting emissions while conducting business-as-usual. ICF views companies like News Corp. and Yahoo!, which both consulted with ICF, as environmental leaders that can help legitimize the global market for cost-effective, credible carbon reductions.

“Globally, the world needs a lot less carbon, 50 percent to 80 percent less by 2050. So, it’s in all our interest to take action,” Ebert says. “The purpose of offsets is to create low cost efficient markets to reduce carbon dioxide emissions worldwide.”

Corporate interest in climate reduction strategies—and in offsets—is increasing at a rapid rate. In a report last November, ICF forecasted global demand for voluntary carbon offsets would reach an annual level of 400 million metric tons of carbon dioxide or its equivalent by 2010, up from 10 million metric tons, or 1 percent of the global carbon market, in 2005.

The global carbon market includes regulated as well as voluntary transactions. Much of the regulated market involves allowances, which are created through regulated cap-and-trade systems such as the ones established through the Kyoto Protocol for countries that signed on to the United Nations treaty to reduce global emissions. Some carbon credits, which are created by emission reduction projects, are also regulated by Kyoto. The Chicago Climate Exchange is an unusual cap-and-trade system in the United States, where members agree to voluntary, but legally, binding emission reduction targets.

The United States doesn’t participate in Kyoto, but regulatory schemes are being developed here. The Regional Greenhouse Gas Initiative is developing a multistate cap-and-trade program to manage greenhouse gas (GHG) emissions among electric power generators in northeastern states. The program will involve trading of allowances and allow for limited offset purchases. And the state of California may use a cap-and-trade system to meet the requirements of a bill passed last August calling for a 25 percent cut in the state’s carbon dioxide emissions by 2020, according to “Voluntary Carbon Markets,” a book written and edited by Ricardo Bayon, Amanda Hawn and Katherine Hamilton, and published earlier this year.

The voluntary carbon offsets market, however, exists largely outside of these regulatory efforts, and while smaller than the regulatory market, it is capturing the enthusiasm of corporate executives who are seeking a way to respond to climate change. Corporate leaders are asking questions in part to answer investors, as well as customers and employees, who are questioning how their companies are responding to the risks and opportunities of combating global warming. They are also stepping into this world to align their brands on the right side of an environmental issue that is on everyone’s mind.

“By being a climate leader and investing in high quality projects, they can distinguish themselves,” says Toby Janson-Smith, Director of the Climate, Community and Biodiversity Alliance (CCBA), a coalition of nongovernmental organizations, research institutes and companies supporting land management products that address climate change, sustainable development and biodiversity.

Less than a year ago, Mark Armitage, Chief Operating Officer of The Carbon Neutral Company, a consulting firm and offset provider founded in London, came to the United States to meet with nongovernmental organizations and companies to gauge the level of interest in corporate climate reduction. Now, companies large and small are calling and e-mailing at the rate of 50 to 60 a week, saying, “‘we want to go carbon neutral, we want to understand how we do it, and we’d like to do it this year,’” Armitage says.

Companies often choose to go beyond their own emissions reductions to become carbon neutral simply to make a statement. “Zero as a goal has a very powerful clarity to it,” says Roy Bahat, News Corp.’s Vice President of Business Development.

News Corp. views becoming carbon neutral, which it plans to do by 2010, as a way of getting its own house in order, or in other words, of making sure it has looked at everything it can do. The company’s larger goal, however, is “to engage with our audiences and really help them as they encounter climate change through their own lives,” Bahat says.

At its annual presentation of upcoming programming to advertisers, News Corp.’s broadcasting company FOX outlined several changes it was making—in everything from production to transportation to food—to reduce the impact of the event on the climate and invited advertisers to partner with the company to reach audiences on the issue of climate change, Bahat says. “Imagine if we succeed in inspiring our audiences to reduce their own impacts on climate change by just 5 percent,” the company asks in a paper on its global energy initiative. “That would be like turning off the state of California for almost a year.”

Similarly, Yahoo! viewed becoming carbon neutral as a way to engage its audience. “We saw a great opportunity to educate and inspire our 500 million users on ways they could make a difference,” says Erin Carlson, Senior Manager of Yahoo! for Good, the company’s community relations program.

Interface launched its first carbon neutral product in 2003 called “Cool Carpet.” The idea of the Cool Carpet program is to allow customers to neutralize the GHG emissions resulting from the lifecycle of a carpet. About 8 percent of the emissions from an Interface carpet come from the company’s own manufacturing, another 70 percent occur from the extraction and processing of raw materials, and the rest come from transportation and customer use until the product is returned to Interface, says Erin Meezan, the Atlanta company’s Director of Environmental Affairs. Through the Cool Carpet program, Interface is educating its suppliers, as well as its employees and customers about climate change, Meezan says.

Even if the voluntary market itself won’t lead to huge reductions, its role in educating and engaging consumers is critical, says Janet Peace, a Senior Fellow in Economics at the Pew Center on Global Climate Change.

“In addition to policy that requires emissions to be reduced and that motivates technological change, we also need to change behavior—which is where consumers come in,” Peace says. “Consumers need to buy smaller, more fuel-efficient cars; they need to demand less packaging; they need to
walk more and drive less—all the usual environmental suggestions, and offsets help to remind consumers about their role in the issue.”

Getting Started

Before thinking about offsets, corporations need to look internally and follow a series of steps: first, measure the corporation’s “carbon footprint”; then, reduce and conserve energy everywhere possible; and then purchase alternative energy where practical. The final step for reducing leftover emissions is to go outside the company and invest in offset projects.

To accomplish the first step—establishing a carbon footprint—a corporation needs to inventory all GHGs emitted through its operations. That includes direct emissions, which are mainly a concern of power companies or manufacturers directly producing carbon dioxide or one of the five other GHG emissions covered by Kyoto, including methane and perfluorocarbons (PFCs). The carbon footprint also includes indirect emissions resulting from using electricity to run facilities or otherwise conduct business.

Companies can calculate their GHG inventories themselves by following various guidelines, including the Corporate Accounting and Reporting Standard created by the Greenhouse Gas Protocol, a joint effort by the World Resources Institute and the World Business Council for Sustainable Development. Some companies work with consultants, who may follow this or other guidelines. (See page 52 for another CO2 calculation tool.)

With a footprint in hand, a corporation can begin to pinpoint inefficiencies in its operations and begin to reduce its energy use. Simple things can make a big difference in both reducing carbon dioxide emissions and in streamlining operations. On its website, The Carbon Neutral Company notes the dual benefits to the climate and operational efficiency by using videoconferencing to cut down on air travel and shifting customer billing from paper to online statements. Just the process of looking for inefficiencies can pay off. In the exercise of figuring out how much electricity British broadcasting company BSkyB used, the corporation learned one of its facilities had been billed according to an estimated electricity reading for 15 years, says Ben Stimson, BSkyB’s Director of Corporate Responsibility. “There’s a definite advantage from the financial side,” Stimson says.

A second step for many corporations is to buy alternative energy when it’s available, or, when possible, to build alternative-fuel plants to power their facilities. The largest global manufacturing plant for SC Johnson, the consumer products company based in Racine, Wis., runs on 100 percent renewable power supplied by two cogeneration turbines that run on natural gas and waste methane gas from a public landfill.

After reducing internally and buying renewable energy, every company will be left with emissions. Often these are emissions from what News Corp. describes as “unavoidable” business practices, such as employee air travel, which can account for 25 percent of a company’s emissions, on average, according to Sue Welland, Founder and Creative Director of The Carbon Neutral Company. Here’s where offsets come into play.

This strategy of conserving, shifting to renewables and offsetting doesn’t always occur in a linear way. Internal reductions, or a shift to renewable power sources, can take time to show results, so The Carbon Neutral Company, for example, may advise a company to consider a higher proportion of offsets initially that can be reduced year by year as other reductions take hold. “What offsets allow you to do is get to zero by day one,” Welland says.

Buying Offset Projects

One reason the market for voluntary offsets seems scary, or even suspect, is the fact that it is voluntary. Unlike markets regulated by the Kyoto Protocol or the ones being developed in some regions of the United States, there are no uniformly accepted standards for projects claiming to reduce GHG emissions, no efficient or uniform pricing mechanism and no central registry to document offset purchases. Still, as more companies see the need to address climate change, the market for voluntary offsets is expected to grow and standards are evolving to meet the demand for credibility.

To be credible, an offset project should meet several criteria: the reductions should be real, measurable, verifiable, a surplus to what is required by regulation, and “additional,” says Peace, at the Pew Center on Global Climate Change. A project is additional—and this is a key criterion in the offsets market—when it is clearly evident the offset exists only because of financing from the voluntary carbon markets.

“However, if a project is clearly beyond ‘business as usual,’ meaning that it is adopting processes and technology not commonly employed in the market (and even better if you can demonstrate that it was developed or implemented primarily for climate-related benefits), I believe that these should also be considered valid offset type projects,” Peace added in an e-mail. Buyers also need to be sure the offset they buy hasn’t been double counted, an issue that may only be resolved by the development of global registries to track buyers and sellers.

Corporations may want to add their own internal criteria to this list. Erin Meezan at Interface suggests companies consider what they want the offset to accomplish in addition to emission reductions. At Interface, this internal criteria leads to support of emerging technologies as well as projects that engage its customers. Examples include the “re-moo-able energy” projects it helps finance on family farms.

Working with Providers

Interface invested in the farm offset projects through Native Energy, a provider majority-owned by Native Americans and based in Charlotte, Vt. Many corporations rely on providers such as Native Energy and The Carbon Neutral Company to lead them to credible projects. These and other providers have been developing reduction projects and selling investments in them for several years and have a track record of producing verifiable, additional projects. But new companies are opening their doors every day and some corporations worry about being led astray by an inexperienced or rogue provider.

Yahoo!, which announced plans on April 17 to become carbon neutral this year has issued what it calls a “carbon tender,” to find specific offset projects on its own, without the use of an intermediary. The Sunnyvale, Calif.-based Internet search provider will consider projects brought to them from providers—or aggregators, as they’re also known—but Yahoo! will conduct its own due diligence on each project it selects.

“At this point in the carbon market, we think it’s key to talk with the project developers to ensure the project meets our goals, even if the initial entry point is through an aggregator,” says Yahoo!’s Carlson. On its website, Yahoo! details what it’s looking for in a project: measurable results, verification, additionality, high quality and its own internal criteria it dubs “the purple gene,” which is “our playful way of saying we want to do this in a way that’s aligned with Yahoo!’s brand and culture,” Carlson says.

BSkyB’s strategy group chose to work with a provider to find offset projects and did its due diligence to choose the right provider, which in its case was The Carbon Neutral Company. The broadcasting company’s concern was finding not only high-quality, additional projects, but also ones that could be purchased at a specific price so that BSkyB could calculate the business cost of emitting carbon dioxide. With those criteria in mind, the company preferred to invest in construction of renewable energy projects and avoid tree-planting projects. Trees, of course, store carbon dioxide and can be an effective means of sequestering carbon, but they take time to grow. Planting a tree in 2007 won’t offset carbon dioxide emitted from powering an office building in the same year. “It’s too long a time frame,” says BSkyB’s Stimson. “It’s not an economic equation, which is really what carbon offsetting is about.”

Sequestering carbon by growing trees has other detractors who worry trees can be cut down, burn or die from drought, as the band Coldplay learned when it lost 10,000 mango trees planted in Karnataka, India, to offset the emissions from the production of their second album, “A Rush of Blood to the Head.” The Carbon Neutral Company, which supported the project, made up the offset for Coldplay with other projects. The offset provider supports small-scale, riskier projects such as this, but monitors them closely.

But growing trees and conserving forests can have real, measurable carbon benefits, if the projects are well designed and standards are developing to ensure the carbon benefits are real. Tropical deforestation accounts for 20 to 25 percent of all GHG emissions, making it the second leading cause of climate change after the power sector, according to Janson-Smith of the CCBA. “We should not forget tropical deforestation is a huge part of the climate change problem,” Janson-Smith says.

The CCBA—which includes companies such as BP, Intel and SC Johnson; nongovernmental organizations including the Center for Environmental Leadership in Business, The Nature Conservancy and the Wildlife Conservation Society; and research institutions—spent two years developing standards for projects that include growing trees as well as conserving forests. CCBA projects are designed to support local communities and protect biodiversity as well as minimize climate change. In February, it certified its first two projects according to the Climate, Community & Biodiversity Standards.

Developing Standards

Widespread efforts to develop standards for voluntary carbon offset projects, and thus encourage their use, are being closely watched by corporations, providers and consultants in this fledgling market. When the U.S. Green Building Association’s Leadership in Energy and Environmental Design criteria took hold, it helped catapult green building into standardization. “That kind of standard doesn’t exist yet in the offset world,” says Marnie Abramson, Principal with The Tower Group, which builds Leed-certified office buildings and has a goal of becoming carbon neutral by 2008.

The strictest criteria developed so far are the World Wildlife Fund’s Gold Standard. The initial intention of the Gold Standard was to ensure a higher level of environmental integrity for projects meeting the Kyoto Protocol’s Clean Development Mechanism criteria. The Clean Development Mechanism allows offset projects in developing countries to receive certified emissions reduction credits (CERs), which can be purchased to meet Kyoto targets.

The Gold Standard criteria are stricter on several levels. Only renewable energy and energy efficiency projects, not forestry projects, are considered “because we want to reward those projects that are shifting us from a dependence on oil,” says Jasmine Hyman, The Gold Standard’s Marketing Director. “A forestry project, no matter how good it is, is sponging up pollution that’s already happened.” Projects that meet the Gold Standard also must be “rigorously additional,” and provide
secondary environmental benefits for communities, such as a methane capture project in Southeast Asia that provides electricity for a bakery cooperative, Hyman says. “It’s saving the villagers money and generating a stream of carbon credits. For us, that’s real sustainable development,” she says.

The Gold Standard has registered seven projects and has 60 to 80 in the pipeline. According to Hyman, several project developers in the United States are striving to meet the Gold Standard criteria. Because of the stricter criteria, credits issued by Gold Standard projects trade at a premium.

Also being closely watched is the Voluntary Carbon Standard (VCS). The VCS is an effort by The Climate Group, an international nonprofit consortium of businesses and governments; the International Emissions Trading Association, a nonprofit business association dedicated to establishing an international framework for trading GHG emission reductions; and the World Economic Forum to create a global benchmark for voluntary GHG emission reduction projects. Two drafts of the standard have been issued for comment, and last March, companies began testing it. A final decision on the standard’s content will be made by the end of June, and the standard should be available for use by September, says Mark Kenber, Policy Director of The Climate Group.

The VCS responds to the need for offset buyers to know they are purchasing emission reductions that are real, verifiable, additional and not being double-counted.

“There is certainly demand,” Kenber says. The standard “doesn’t say anything about the goodness of the user. It says what you are getting is a real and additional emission reduction. Simple as that.”

The VCS will allow for the creation of Voluntary Emission Reduction Credits, or VCUs, which can be sold and traded in the voluntary carbon offset markets. Once the standard is established, the steering committee charged with developing the standard will define criteria for a public registry, and then will likely issue a request for proposals to choose one or more, Kenber says.

Also under development is a certification for GHG emission reduction products from the Center for Resource Solutions, creator of the Green-e certification for renewable energy products. Green-e Retail Greenhouse Gas Reduction Certificates will assure buyers their offset purchases meet criteria for real, verifiable, additional emission reductions. Lars Kvale, an analyst at the Center for Resource Solutions, says the program will work in partnership with the VCS or the Gold Standard and will serve as a stamp of approval for consumers who don’t have the resources to verify that a project has met the required standards. “We’re trying to set up a program for the lay consumer who doesn’t have time to do that due diligence,” Kvale says.

The voluntary carbon markets are fluid and uncertainty still exists, particularly as standards continue to develop and the regulatory landscape remains unclear. But corporations are forging ahead amid an urgency to take action in as considered a way as they can.

“We’re being humble and transparent,” says Yahoo!’s Carlson. “We’ve been really clear that we don’t know everything about this new market and we’re learning as we go.”

Abby Schultz, author of this article, is a freelance journalist specializing in business and environmental issues, who has written for The New York Times, Fast Company and Fortune Small Business.

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