Carbon Offsetting - Key Elements of Offset Standards

Clearly, no standard can ever be perfect, and as pointed out in the discussion above each of the currently available standards is based on a particular view of the voluntary offset market. Yet it is safe to say that notwithstanding these differences, the best and most successful standards will be those that are simple yet rigorous and have very wide support from carbon project developers, offset traders and buyers, environmental NGOs and the financial industry. A complete and fullfledged carbon offset standard must include the following three components¹:

• Accounting Standards
• Monitoring, Verification and Certification Standards
• Registration and Enforcement Systems

Accounting standards ensure that offsets are “real, additional, and permanent.” They include definitions and rules for the elements that are essential during the design and early implementation phase of a project. These include additionality and baseline methodologies, definitions about accepted project types and methodologies, validation of project activity etc (chapter 5.1-5.6).

Monitoring, Verification and Certification Standards ensure that offset projects perform as was predicted during the project design. Certification rules are used to quantify the actual carbon savings that can enter the market once the project is up and running. There is sometimes a lag time between the start of a project and when it starts producing carbon offsets. This is especially true for forestry projects – the trees have to grow for a few years before they have absorbed enough carbon that can be quantified and sold. Monitoring, verification and certification happen after validation and implementation of the project. Yet procedures and protocols for monitoring and verification have to be included very early on in the project design phase (Link).

Verification and certification are ex-post assessments of what has actually been produced, as opposed to validation which is the ex-ante assessment of whether a project qualifies against a standard, provided it is going to do what it promises in the project design documentation.

Registration and Enforcement Systems ensure that carbon offsets are only sold once and clarify ownership and enable trading of offsets. They must include a registry with publicly available information to uniquely identify offset projects and a system to transparently track ownership of offsets (Link).

In the following sections we discuss each of these elements in more detail and compare the voluntary offset standards to the CDM rules and regulations. A table at the end of each section, summarizes how each standard handles that particular issue.

Additionality and Baseline Methodologies

The topic of ‘additionality’ is the most fundamental − and contentious − issue in the carbon offset market. In theory, additionality answers a very simple question: Would the activity have occurred, holding all else constant, if the activity were not implemented as an offset project? Or more simply: Would the project have happened anyway? If the answer to that question is yes, the project is not additional.

Additionality makes intuitive sense: If I buy carbon offsets, I make the implicit claim that I forgo reducing my own emissions (i.e. I still drive my car) in exchange for paying someone to reduce their emissions in my stead. If I “neutralize” the emissions I caused while driving my car by buying offsets from someone who would have reduced their emissions anyway, regardless of my payment, I, in effect, have not neutralized my emissions but merely subsidized an activity that would have happened anyway.

Additionality is thus an essential element needed to ensure the integrity of any baseline-and-credit scheme. Yet additionality is very difficult to determine in practice. Many different tools have been developed to maximize the accuracy of additionality testing and to minimize the administrative burden for the project developer. There are two distinct approaches to additionality testing: Project based additionality testing and performance standards.

Project Based Additionality Testintg

Project based additionality testing evaluates each individual project on a case by case basis. The following is a short selection of additionality tests that are commonly used:

Which test is best suited to validate additionality depends on the type of project. An additionality test appropriate for one type of project (e.g., a simple regulatory test for methane flaring, where there is no reason to do the project if not required by law) might not be sufficient for other kinds of projects (e.g., energy efficiency, where there could be plenty of reasons for doing a project besides complying with regulations).

The main issue with project-based additionality testing is that the determination of whether a project is additional can be quite subjective. A developer can claim that their project’s IRR was too low without a carbon revenue stream, and that the carbon revenues therefore made the project viable. But who can really determine what level of IRR is acceptable to a given company, and thus whether the additionality demonstration is valid? Such additionality claims can only be tested with access to internal company information relating to the financing of the project, yet this information is in most cases confidential.

Performance Standards

Performance Standards try to address some of the weaknesses of project-based additionality tests in that they do not rely on examining each individual project but establish a threshold for technologies or processes to determine additionality. This approach is associated with simpler procedures and lower transaction costs for project developers. Performance standards are developed and/or approved by standard organizations and therefore shift much of the project developer’s administrative burden to the standard organisation. Drafting performance standards requires comprehensive data collection and verification, as well as regular updates. The political process to approve such performance standards may take a long time and may only be feasible for certain industries (e.g., small renewable heat and power, biomass, or small energy efficiency).

Performance Standards typically use aggregated data on project or technology characteristics to establish a threshold (e.g., a performance indicator such as an emissions rate or a market indicator such as a penetration rate) that must be met or exceeded in order for a project to be deemed additional. Performance Standards include among others positive technology lists and benchmark approaches.

The main problem with performance standards is that they may be too simple and broad. All activities whose emissions fall below the benchmark emissions are awarded credits, regardless of whether they would have taken place anyway. Projects that are non-additional are referred to as free-riders. One proposed solution to the problem of free-riders would be to discount offsets by the number of expected free riders. For example, if a benchmark is set at the 20^th percentile, we can expect 20% of projects to be free-riders. If all offsets were then discounted by 20%, the overall environmental integrity would be preserved. Yet discounting is not a perfect solution either since it may skew the results and favor non-additional projects, which by definition rely less on offset revenue.

To summarize, any additionality test, no matter how quantitative and seemingly objective, will always create some number of false positives (projects that appear additional although they are not) and some number of false negatives (projects that appear not to be additional although they are). The design of the test determines if it will err on the side of false positives or false negative. The judgment as to which is more acceptable is determined by a political process. It is important to understand that while false positives and false negatives both impair economic efficiency, only false positives undermine the environmental integrity of offsets. In other words, it is the false positives – offsets from non-additional projects – that lead to increases in emissions and therefore hamper climate protection goals. The most practical and viable option for additionality testing may mix elements of project based and benchmark approaches.

Additionality Requirements for Each Standard

Standard	Project-Specific Additionality or Performance Standards?	How is additionality determined?
CDM	Project-specific	Specified by individual methodologies or Additionality Tool version 4: Step 1: Regulatory Surplus Step 2: Investment analysis or Step 3: Barrier analysis. Step 4: Common Practice Step 5: Impact of CDM Registration
GS	Project-specific, same as CDM	Gold Standard CER and VER CDM Additionality Tool version 4 In addition for both CERs and VERs: Previous announcement checks required for all project types.
VCS	Project-specific or performance-based Currently approved additionality tests are all project-specific.	Project based test: Step 1: Regulatory Surplus Step 2: Implementation Barriers: Investment barrier or technological barrier or institutional barrier Step 3: Common Practice
VER+	Project-specific, same as CDM	Specific additionality requirements of CDM approved methodologies or Most recent version of CDM Additionality Tool Performance tests have not yet been developed
CCX	Primarily performance-based. No formal definition of additionality. Determinations are based on eligibility criteria, which are examined by the CCX Offsets Committee.	Additionality testing not as a distinct step. However, CCX rules explicitly define project eligibility requirements on the basis of these indicators: beyond/before regulatory requirements new projects highly unusual practices
VOS	Project-specific, same as CDM	Same as CDM or Gold Standard VER
CCBS	Project-specific	Specified by individual methodologies. Step 1: Regulatory Surplus Step 2: Barriers: Financial, Lack of Capacity, Institutional or Market Barriers or Common Practice
Plan Vivo	Project-specific	Project based test: Step 1: Regulatory Surplus Step 2: Financial and Step 3: Barriers test (e.g. lack of technical expertise or prohibitive social, traditional, political or cultural environments. Commercial forestry projects are excluded from participation).
GHG Protocol	No formal requirements for additionality determination. Discusses additionality conceptually with respect to baseline determination.	Generic criteria on how to establish additionality either through project-specific or performance-based approaches.
ISO 14064-2	No formal requirements for additionality determination. ISO doesn’t specify how additionality must be demonstrated.	Generic criteria on how to establish additionality either through project-specific or performance-based approaches.

Baselines

In order to calculate an offset project’s GHG benefits, a baseline must be established. This baseline expresses the business-as-usual scenario. In other words, it represents the counterfactual scenario of what would have happened if the project had not been implemented. The number of credits generated by the project is equal to the difference between emissions in the baseline scenario and emissions resulting from the project. The key difficulty is that the baseline scenario is a hypothetical scenario; by definition it describes another reality, one in which the activity is not implemented as an offset project. As that scenario will never occur, there is no fail-safe way to divine with certainty what the results of that scenario would have been.

The baseline must be explicit and concrete enough to allow an estimation of the corresponding GHG emissions, so that the benefits of the offset project may be calculated. Baselines should be calculated conservatively so as not to overestimate the achieved emissions reductions.

The baseline must be based on verifiable information sources and documented in a confirmable manner.

As with additionality, baselines can be established using project based or performance based approaches. These may either be the same as the approach used to determine additionality or different. Performance based tools may increase transparency and decrease costs; however, they must be well designed to avoid inaccuracies and to ensure environmental integrity. If the baseline is defined by a performance standard, it provides a credible estimate of reductions in aggregate. Each standard usually chooses one approach or the other, although some use a combination.

Some standards prescribe upfront the methods that project developers must use to estimate baseline emissions for each type of allowable project activity (top-down). Others allow project developers to propose appropriate methods for new types of projects, following general programme guidelines (bottom-up). A purely bottom-up standard (like the CDM) is one in which project developers must propose, and win approval for, appropriate methods for every project category. Some programs may be a mix of top-down and bottom-up.

Baselines can be static or dynamic. A static baseline does not change over time, whereas a dynamic one is updated periodically based on ex-post observations, and emission reductions are calculated based on the most current baseline.

Many standards have different levels of requirements for different classes of projects. For example, some might have simplified baseline methodologies for small scale projects.

Baseline Requirements for Each Standard

Standard	How are baselines determined?	How are methodologies determined and approved?
CDM	Most are project-specific, though some methodologies use Performance standards as well (e.g. recently approved high-efficiency coal plant methodology)	New methodologies are submitted to the CDM Methodology Panel, which reviews methodologies and submits its recommendations to the CDM EB, which makes the final decision.
GS	Gold Standard CER: CDM approved methodologies Gold Standard VER: CDM methodologies or Small Scale Working Group (SSC WG) or United Nations Development Programme (UNDP) MDG Carbon Facility or proposed new methodology approved by Gold Standard Technical Advisory Committee.	Gold Standard CER: CDM approved methodologies Gold Standard VER: New methodologies must be reviewed by two independent experts and are then approved by the Gold Standard Technical Advisory Committee.
VCS	Projects will use one of the VCS Programme approved methodologies. At present CDM methodologies have been approved under the VCS. Currently CCAR is going through the approval process. If approved, the CCAR methodologies will also be approved under the VCS Programme. New methodology must be approved through a double approval process. Performance standards or best practice approaches are allowed but have not yet been developed.	Any new methodologies approved under a GHG Programme (e.g. CDM) that has been approved under the VCS are automatically recognised. Other individual new methodologies must be reviewed and approved by two VCS accredited independent verifiers and are then accepted by the VCS Board (though the Board retains the right to examine each methodology).
VER+	CDM approved baseline and monitoring methodologies Baselines that conform with JI rules and are approved by auditor.	CDM approved methodologies in their most current version. If no CDM methodology is available, the project specific approach as defined for JI may be used. The proposed methodology is assessed and approved by the auditor in charge.
CCX	Baselines and methodologies are pre-defined for each specific project type. Some are project based, some are performance based.	New methodologies are reviewed and approved by the CCX Committee on Offsets.
VOS	Same as CDM or Gold Standard VER	Same as CDM or GS VER. INCIS may decide to recognise other standards, or the application of specific methodologies contained within those other standards, in the future.
CCBS	Baselines as defined by CDM LULUCF methodologies or IPCC’s Good Practice Guidance (IPCC GPG)	CDM LULUCF methodologies or IPCC’s Good Practice Guidance (IPCC GPG) New methodologies are reviewed and approved by CCBS-approved auditors.
Plan Vivo	Project-specific baselines are reviewed and approved by the Plan Vivo Foundation	Projects and new methodologies are reviewed and approved by the Plan Vivo Foundation using standard criteria.
GHG Protocol	Generic guidelines for determining projectspecific and performance standard baselines for any type of project.	N/A
ISO 14064-2	Generic guidelines for determining projectspecific and performance standard baselines for any type of project.	N/A

Project Boundaries and Leakage

Each project must define its boundaries, including physical, legal and organizational boundaries. This is necessary in order to calculate the emissions reductions accurately: all emissions reductions and increases within the project boundaries must be taken into account. Some standards require specifying a boundary encompassing all the effects a project has on GHG emissions. Others do not explicitly spell out rules and guidelines on determining boundaries.

Leakage is a project’s unintended effects on GHG emissions outside the project’s boundaries. For example, a project may reduce GHG emissions in one place, but cause an unintended increase in emissions elsewhere. Under some standards, leakage is explicitly accounted for by examining emissions outside the project’s boundaries. In many cases, it can be burdensome or impossible to trace every possible effect an individual project may have on GHG emissions. Standards therefore sometimes explicitly exclude certain types of leakage from project accounting. It is important to address leakage in bio-sequestration projects; this issue is further discussed for the biosequestration standards here.

Project Types

Carbon offset projects can be grouped by type of project. Most projects may be broadly categorized into bio-sequestration, industrial gases, methane, energy-efficiency, and renewable energy projects. The following chapter discusses each project category.

Not all project types are equally effective at delivering the emissions reductions that they initially set out to deliver. The CDM keeps statistics on what percentage of projected emissions are realized in each project category (see Appendix C). No such statistics currently exist for the voluntary market.

Biological Sequestration

Forestry mitigation projects can make a “very significant contribution to a low-cost global mitigation portfolio that provides synergies with adaptation and sustainable development” (IPCC 2007, WGIII). Historic data indicate that cumulative emissions from land use changes, predominantly deforestation, have contributed about a quarter of all GHG emissions (IPCC Special Report on Land Use, Land-Use Change And Forestry).

Projects that aim to reduce GHG emissions from land use practices are collectively called Land Use, Land-Use Change, and Forestry (LULUCF) activities. There are three broad types of LULUCF projects:

• Those that avoid emissions via conservation of existing carbon stocks (i.e. avoided deforestation), called Reduced Deforestation and Degradation (REDD).
• Those that increase carbon storage by sequestration (afforestation and reforestation).
• Those that increase carbon storage by soil management techniques (e.g. no-till agriculture).

“Tree projects” have a natural appeal, since they conjure up images of pristine and healthy ecosystems. Yet the reality of LULUCF projects is far more complex. The amount of carbon sequestered by forests depends upon a number of factors including tree age, growth rate, local climate, and soil quality. Climate change impacts on forest health and the trees’ ability to store carbon, as a result of increased temperatures, altered precipitation patterns, and changes in disturbance regimes (fire, insects, disease), are still largely unknown across the globe. Over time these uncertainties are expected to make the accurate measurement and calculation of LULUCF carbon sequestration projects more challenging and complex.

Leakage is of particular concern in LULUCF projects. Leakage is the unanticipated loss of carbon reductions outside the project boundary. For example, the reforestation of pastureland may drive local farmers to clear forests elsewhere for new pastures. Leakage can best be addressed through careful project design (e.g., incorporating project activities that reduce pressure on other lands), and any resulting leakage must be accounted for and subtracted if project calculations are to be considered credible and accurate.

Permanence is another issue that LULUCF projects must contend with. Permanence refers to the length of time that carbon will remain stored after being sequestered in vegetation. Forests can easily be destroyed by natural events such as fire, pests, or disease, or by illegal logging or burning. LULUCF projects can therefore only temporarily sequester carbon from the atmosphere.

Several trade offs exist in the design of effective forest management strategies which balance carbon storage along with a wide range of ecosystem services. Despite the fact that young forests have the greatest gross rate of carbon uptake, if an old growth forest is cut down and replaced with young fast-growing trees, it will take years to decades before the new forest will constitute a net carbon sink. This is because two-thirds of the carbon in terrestrial ecosystems is stored below ground. Clear cutting leads to large emissions of carbon from disturbed soils and debris decomposition. Projects that protect existing old growth forests are expected to provide the greatest carbon mitigation benefits (IPCC 2007, WGIII). Currently, emissions from deforestation are so great that stopping this emission source would have the greatest net impact on forest-related emissions.

Despite the importance of REDD (Reducing Emissions from Deforestation and Degradation), very few such projects have been implemented in the voluntary market, and CDM does not currently allow for REDD projects. The science to account for carbon storage in existing forests is very complicated. It can also be difficult to prove that the forest would have been cleared if it were not for the offset project, i.e. it may be difficult to prove the additionality of certain REDD projects.

Furthermore, it can be argued that deforestation is a demand-side problem, and that as long as the demand for biomass (fuel and timber) and land cannot be shifted and decreased, forestry offset projects in one area will only cause a change in the supply source rather than lower demand on the whole. In other words, none of the forestry standards are able to account for international leakage and market shifting. This argument holds true for certain sectors (e.g. timber demand) but may not do so for others, where good project design is able to affect supply and demand (e.g. by providing local livelihoods through sustainable harvesting, more sustainable and productive agriculture, increasing energy-efficiency and providing alternatives to wood fuel).

Over the long term, sustainable forest management strategies which aim to maintain or increase forest carbon stocks while providing ecosystem services and offering income for local communities will generate the largest sustained mitigation benefits (IPPC 2007, WGIII). Strategies that maximize both carbon storage and carbon uptake include protecting carbon rich old growth forests but allowing selective, well managed harvesting to increase carbon uptake of young trees, to create local economic opportunities, and to protect biodiversity.

Without doubt, exemplary LULUCF projects can address several global problems: they can sequester and store carbon, protect watersheds, offer economic opportunities for the local population, and conserve or restore biodiversity2. Conversely, poor-quality projects may result in a loss of biodiversity and the displacement of the local population. Although major international agreements call for integrated approaches to global problems (see section XX), there is little concrete guidance as to how to develop such holistic projects.

The currently available offset standards deal with the challenges of LULUCF projects in the following ways:

• Either excluding or strictly limiting LULUCF projects (Gold Standard, CDM)
• Imposing rules for LULUCF projects that specifically focus on maximizing biodiversity and social benefits (CCBS, Plan Vivo).
• Addressing issues of permanence by either issuing temporary offset credits (LULUCF CDM) or establishing carbon buffer zones which retain a portion of the project carbon credits and sales in case of forest loss and provide funding for reestablishment (VCS, Plan Vivo).

LULUCF projects have only reluctantly been included into the CDM and are currently excluded from the EU-ETS. As of early 2007, seven different afforestation/reforestation methodologies had been accepted by the CDM board. Yet of the total 827 projects registered in the CDM as of September 2007, only 1 is an afforestation/reforestation project (www.cdmpipeline.org/cdm-projects-type.htm).

Forestry and other land use projects play a much larger role in the voluntary offset market. In 2006, forestry accounted for 36% of the transaction volume in the voluntary market (Hamilton, 2007). Yet there is a noticeable difference between forestry’s role in the American and European markets. Forestry credits in the European market have decreased considerably due to concerns about additionality and a focus on clean technology investments. But forestry projects still play an important role in the American market. Two-thirds of the offsets that entered the voluntary market in the US in 2006 came from sequestration projects (Hamilton, 2007).

Industrial Gases

Some industrial gases have very high Global Warming Potentials³ (GWP). The destruction of these gases is therefore a very effective way to reduce GHGs. Yet industrial gas offset projects are controversial because although they are the cheapest to conduct and generate large numbers of offsets, they do not contribute to the path to a low-carbon economy and deliver few additional environmental and social benefits.

Few disagree that these industrial gases should either be destroyed or not produced in the first place, but the offset market does not appear to be the best way to reduce these emissions⁴. Some reports have indicated that the creation of an offset market for HFC-23 gases has created perverse incentives in China and India to start building new HCFC-22 facilities⁵ to increase revenue from offsets⁶. Many balk at the idea that heavily polluting industries such as these should be rewarded for the destruction of gases that should not have been produced in the first place (Financial Times, Jan 18, 2007). Furthermore, some research has shown that establishing an international fund to finance the capture and phasing out of HCFCs (via the World Bank, for example) would be much less expensive than reducing these emissions through the offset market (Wara, 2007⁷).

Furthermore, although industrial gas projects can generate large emission reductions, these projects are high-tech end-of-the-pipe applications with limited employment and local environmental benefits.

To counteract some of this criticism and to support sustainable development initiatives, some project developers have chosen to invest a portion of their gains into local schools, health care systems, etc. For example, 65% of the revenue from CER sales in China is collected as tax revenue by the government and is supposed to be used to support sustainable development initiatives.

Current CDM rules prohibit new capacity at HCFC-22 plants from earning carbon credits, but the issue will be reconsidered at the next meeting of the UN Subsidiary Body for Scientific and Technological Advice in June 2008. A range of different solutions have been proposed. These include, among others, continuing the ban on including HFC-23 from new HCFC-22 plants, and a tax on carbon credits generated by newer refrigerant plants, the proceeds of which would be channelled into a clean technology fund to invest in renewable technologies.

The exclusion of new HFC facilities from the CDM market might have the unanticipated effect of creating a large supply of these offsets in the voluntary market. New HFC producing facilities, which are no longer eligible under CDM, could potentially flood the VER market with a large supply of cheap offsets.

Nevertheless, because of these controversies, some standards exclude industrial gas projects altogether. The Gold Standard does not accept any industrial gas projects. Of those standards that accept all projects types, VER+ excludes all HFC projects, while the VCS and the VOS exclude HFC-23 destruction credits from new HCFC-22 plants.

In the CDM market, 34% of all CERs transacted in 2006 came from HFC destruction projects, down from 67% in 2005. N₂O destruction projects accounted for 13% of offsets transacted in 2006 (Capoor & Ambrosi, 2007). Yet despite this trend, N₂O and HFC projects are projected to account for 50%⁸ of all cumulative offsets sales under CDM by 2012. Industrial gas destruction accounted for 20% of VERs sold in the voluntary market in 2006 (Hamilton, 2007).

Methane Capture

Methane’s global warming potential is about 21 times greater than that of CO₂. Methane is produced and emitted by landfills, during wastewater treatment, in natural gas and petroleum systems, by agriculture (livestock and rice cultivation), and during coal mining. Methane is natural gas and can therefore be captured and used as a source of energy.

There are two types of methane projects. The first type captures and flares methane. Through combustion, methane gas is turned into less potent CO₂ and H₂O. Examples of such projects include the capture and flaring of landfill gas and of coal mining gas. The second type of project captures methane and uses it to produce either hot water or electricity. Such projects include those that capture and purify methane in wastewater treatment plants or landfills and use it for electricity production or the production of another form of energy.

Biofuel plants that use agricultural or forestry waste to produce electricity also use methane
– organic matter is anaerobically digested and the resulting methane is used to produce electricity
– but such biofuel projects are considered renewable energy projects rather than methane capture.

It is usually quite easy to establish additionality for methane projects because there is generally no other source of revenue from the activity aside from the sale of offsets. Yet methane offset projects could create disincentives to regulate landfills and agricultural emissions (e.g. from manure lagoons). Once methane capture and destruction becomes profitable, there is little incentive for project owners to support legislation that would mandate capture and destruction from all such sources. Yet such regulation would likely cover more sources, and thus would decrease emissions directly without generating offsets that would allow buyers to increase their emissions. In other words, the climate benefits of such regulation could be greater overall. This issue of perverse incentives that could stifle more effective general regulation holds true for all offset types

In 2006, methane projects accounted for approximately 3% of VERs sold in the voluntary market (Hamilton, 2007). In the regulatory market, 8% of all CDM projects are methane projects. These projects accounted for 11% of CERs in 2006 (Capoor & Ambrosi, 2007.)

Energy Efficiency

Energy efficient products or systems use less energy than conventional technology to perform the same task, such as a new car fleet that replaces old, less fuel-efficient vehicles. There is clearly great potential for energy efficiency projects (Weizsäcker & Lovins, 1997). Such projects are often quite cost effective because they save money over the long term through avoided fuel costs. In other words, such projects have a “payback”. Additionality tests for energy efficient projects must show that the revenue from the carbon offsets played a decisive role in making the projects viable.

Demand-side-management energy efficiency projects are held back by methodological challenges, such as additionality requirements for activities that are considered economically rational. Such demand-side energy efficiency projects are often small and disaggregated (e.g. distributing compact fluorescent bulbs or installing more efficient cooking stoves). Establishing a baseline, monitoring and evaluating energy efficiency projects can be challenging and labour-intensive. Consequently, such projects often have higher transition costs than large centralized offset projects⁹.

In 2006, energy efficiency projects made up 5% of offsets sold in the voluntary market (Hamilton, 2007). 9% of the CERs in 2006 came from energy efficiency and fuel switching projects. This is a large increase from 2005, when only 1% of the CERs originated from energy efficiency projects (Capoor & Ambrosi, 2007). Most CDM energy efficiency projects are implemented at large industrial facilities.

Renewable Energy

Renewable Energy (RE) projects include hydro, wind, and photovoltaic solar power, solar hot water and biomass power and heat production. Renewable energy projects are crucial for the long-term protection of the global climate because they help us move away from fossil fuel-based electricity and heat production to more benign forms of energy production. Although in theory this makes renewable energy projects ideal for the carbon offset market, it is sometimes difficult to establish the additionality of such projects.

Many renewable energy projects have high up-front capital costs. Legislative hurdles and local opposition can further complicate the implementation of such projects. Yet because most renewable energy projects have very low (biofuel) or no fuel costs (wind, solar, hydro), their operating costs are minimal once built.

As with all offset projects, additionality tests for renewable energy projects must determine that the projected revenue from the sale of offsets played a decisive factor in making the project viable. A lack of adequate additionality testing may be an issue when Renewable Energy Certificates (RECs) are converted to carbon offsets. Because RECs were created for a regulatory market with a cap, they are not designed to be tested for additionality (see Appendix A for a discussion on RECs). Not all renewable power projects are benign. Hydro power projects in particular are controversial because they can have large negative environmental and social impacts. Several of the standards therefore require that hydro projects above a certain size comply with The World Commission on Dams (WCD) Framework. The WCD was an independent, international, multi-stakeholder process which addressed the controversial issues associated with large dams. Its final report, Dams and Development: A New Framework for Decision-Making, was released in November 2000. The report outlines a framework for decision-making based on five core values: equity, sustainability, efficiency, participatory decision-making, and accountability.

In 2006, renewable energy projects made up approximately 33% of offsets sold in the voluntary market. Over half of those originated as RECs (Hamilton, 2007). In the regulatory market, 11% of all CDM projects are renewable energy projects, but only 4% of the CERs in 2006 came from RE projects (Capoor & Ambrosi, 2007).

Project Types Accepted by Each Standard

Standard	Accepted Project Types
CDM	Any10 except nuclear energy, new HCFC-22 facilities and avoided deforestation (REDD)
GS	Renewable energy (including methane-to-energy projects) and end-use energy efficiency. No large hydro above 15 MW
VCS	Any except projects that can reasonably be assumed to have generated GHG emissions primarily for the purpose of their subsequent reduction, removal or destruction (e.g. new HCFC-22 facilities)
VER+	Any except any HFC projects, nuclear power projects and hydro power projects exceeding 80MW Hydro projects exceeding 20MW with World Commission on Dams compliance only
CCX	Renewable energy, energy efficiency, HFC-23 destruction except from new HCFC-22 facilities, methane capture and destruction, forestry (including REDD) and agricultural practices
VOS	GS VERs: see above or CDM plus large hydro above 20 MW have to comply with WCD guidelines; no new HCFC-22 facilities.
CCBS	LULUCF
Plan Vivo	LULUCF except commercial forestry
GHG Protocol	Any
ISO 14064-2	Any

Project Location

Under CDM, offset projects can only be implemented in non-Annex 1 countries – countries that have no Kyoto obligation to reduce their emissions. There is high demand for projects implemented in the consumer’s home country. If these countries are signatories to the Kyoto Protocol and have emissions reductions requirements, then it is currently not possible to implement such projects without running into issues of double counting (see chapter 5.7.)

Carbon offset projects are implemented on all continents, yet there are some striking trends. China has been the single largest seller of CDM credits, accounting for 60% of the cumulative total. In 2006, 61% of all CERs came from projects in China, 12% from India, 10% from Latin America, and 3% from Africa¹¹ (Capoor & Ambrosi, 2007; see chart 4).

In the voluntary market, 43% of VERs came from projects in North America, 22% from Asia, 20% from Latin America, 6% from Europe and Russia, 6% from Africa, and 3% from Australia (Hamilton, 2007; see chart 5).

CERs Issues By Host Country and Region, 2006

VERs Issues by Host Country and Region, 2006

Start Date & Crediting Period

The ‘start date’ in the context of a carbon offset project refers to either the start date of the project activity itself or the start date of the crediting period. The ‘crediting period’ is the period during which a carbon offset project can generate verifiable and/or certifiable emissions reductions credits. The project start date is one of the parameters used by all carbon offset programs to determine the eligibility of a project for consideration. For example, if a project started before 2000, it is considered non-additional under CDM. More significantly, the start date of the crediting period is used to determine the starting point for calculating the emission reductions achieved by a project.

Project Start Dates

Under CDM, the project start date is defined as “the date on which the implementation or construction or real action of a project activity begins” resulting in actual GHG reductions or net GHG removals in the case of forestry carbon sequestration projects. The Gold Standard uses the same definition as CDM. The VCS 2007 defines the project start date somewhat differently as “the date on which the project reached financial closure.” While other schemes do not explicitly define project start date, they do specify earliest possible start dates for projects. For the purposes of accounting emissions reductions, the relevant start date of a carbon offset project is the date when the project starts to reduce or remove GHG emissions.

Standards specify the earliest possible start date of a project to limit the number of already implemented projects entering the pipeline. Such projects may be additional, but proof of additionality is more difficult to establish with projects that were fully implemented years ago. The rules on start date vary somewhat across standards (see table 6).

Crediting Period

Start Dates and Crediting Periods for Each Standard

Standard	Project Start Date Rules	Crediting Periods Fixed/Renewable	CDM Pre-registration Credits
CDM	Originally: 1/1/00, This rule has elapsed Currently: date of registration	10 yrs/ 3x7 yrs LULUCF: 30 yrs/ 3x20 yrs	Not allowed
GS	For Gold Standard CERs: as CDM For Gold Standard VERs: Maximum 2 years back from the date of GS registration; with earliest start date being 1 January 2006	10 yrs/ 3x7 yrs	Allowed for up to 1 year before CDM registration if the project is submitted for validation before January 31st 2008 and meets certain criteria
VCS	1/1/02; after 19/11/08: start date must be within 2 years of present date	3x10 yrs AFOLU: 20-100 yrs	Allowed. No further additionality proof required.
VER+	1/1/00; issues credits up to 2 years back from date of registration. This rule expires in 2009.	Extension possible up to 25 yrs for standard projects and 50 yrs for LULUCF projects	Allowed for the period between PDD publication in the Global Stakeholder Process and UNFCCC registration. No further additionality proof required.
CCX	Landfill methane & renewable energy: 1/1/99 Forestation & forest enrichment: 1/1/90 Destruction of HFC: 1/1/07	Renewable Energy: 6 years Soil Carbon: 5 years HFC: 4years All other projects: 8 years	Allowed. No further additionality proof required.
VOS	Same as CDM	As CDM or as GS VERs	Allowed. No further additionality proof required.
CCBS	No Start Date	N/A	N/A
Plan Vivo	No Start Date	Varies project-by-project; 5-15 years.	N/A
GHG Protocol	N/A	N/A	N/A
ISO 14064-2	N/A	N/A	N/A

Co-Benefits

Sustainable Development Criteria

In the offset industry, people like to talk about ‘gourmet offsets’ versus ‘minimum standard offsets.’ A minimum standard makes sure that offsets are real, not double counted and additional. Gourmet offsets are those that are sourced from projects that adhere to strict additionality standards and have strong social and environmental benefits (so called co-benefits or secondary benefits. Such offsets often fetch a considerably higher price in the voluntary carbon market.

The distinction between ‘minimum standard’ and ‘gourmet’ offsets is to some extent a useful shorthand, yet it also reveals that sustainability and development benefits are no longer seen as an integral requirement for a carbon offset. This holds true for the compliance market as well as the voluntary market. Yet the carbon offset mechanism was originally conceived as a mechanism that would not only yield climate benefits but also include co-benefits.

As the word ‘Development’ in the Clean Development Mechanism indicates, when CDM was approved by developing nations, it was specifically because offset projects were not only to provide cost-effective reductions for Annex 1 countries but also development benefits for the host countries. In other words, to qualify as a CDM project, the original intention was that a CDM project must not only have carbon benefits but also development benefits. This two-fold goal is still included in the CDM guidelines (Article 12 of the Kyoto Protocol).

In practice, however, the CDM has failed to consistently deliver such development and sustainability benefits. What anecdotal evidence has indicated for a while is corroborated by recent scientific analyses: A literature review (Holm Olsen, 2007) concludes that there is a trade-off between the CDM target of supplying cheap emission credits and the promotion of sustainable development, and that the former goal has taken precedence. Another study (Sutter and Parreño, 2007) evaluated registered CDM projects and concluded that none of the 16 analyzed projects score high on sustainability and “likelihood of real emissions reduction” simultaneously. They find that the large projects in their sample have a low sustainability score and that over 95% of reductions come from projects with a low score.

It is important to recognize that there is often a trade-off between maximising emissions reductions and increasing sustainability benefits. Projects that work on the grass-roots level and involve local populations are often small-scale and require much continuous support, capacity building and follow-up. Such projects are not primarily about maximizing emissions reductions but about providing financial alternatives to projects with high sustainability benefits.

Several initiatives are underway to support the growths of CDM projects with true development and sustainability benefits. Two UN initiatives focus specifically on linking development goals with carbon offset and energy projects:

Stakeholder Consultations

Stakeholders are individuals or organizations that are in some way affected by the project. In the case of a wind farm, for example, stakeholders include the project owner, the wind turbine supplier, the employees, the municipality, nearby inhabitants, and banks.

Stakeholder consultations are an important tool to minimize possible negative impacts of carbon offset projects. Because many offset projects are being carried out in countries where regulations are routinely poorly enforced, stakeholder consultations also function as a risk management tool. When regulations are poorly enforced, an investor is unable to tell whether appropriate due diligence has been carried out with respect to local environmental impacts, land rights or labour issues. Embedding stakeholder consultation in the project approval process is therefore a way for investors to gain more assurance that violations of either their investment principles or of local legislation are not taking place. In China, for example, stakeholder consultation is being prioritised by the government as a tool to improve enforcement of environmental legislation at the local level.

The evaluated offset standards require stakeholder involvement to varying degrees and also differ in terms of how specific the stakeholder involvement rules are spelled out. The CDM rules are quite general and require relevant local stakeholders to be consulted via “appropriate media.” The validator (DOE) needs to confirm that relevant stakeholders have indeed been consulted with appropriate media and that comments from local stakeholders have been appropriately taken into account during the validation. It is ultimately up to the DOE to judge whether local stakeholders have been consulted appropriately. Some countries require certain local stakeholders to be consulted as part of their regulation to obtain a construction license or the approval of the environmental impact assessment. Some countries, such as Brazil, have clearly defined rules as to which stakeholders have to be consulted.

Of the reviewed standards, the Gold Standard most proactively spells out stakeholder rules. The Gold Standard tries to ensure transparency and participation with clear rules at to what media is to be used, what type of information is to be presented, and what questions are to be asked of local stakeholders. For example, the GS details the documentation that needs to be made available to local stakeholders along with a questionnaire for the stakeholders to fill out. It also requires an additional local stakeholder consultation for CDM projects (i.e., once the PDD is finalized and the comments from the initial stakeholder consultation have been taken into account).

Co-benefit Requirements for Each Standard

Standard	Environmental Requirements	Social Requirements	Comments
CDM	Negative environmental impacts must be stated in the PDD and minimized.	The Kyoto Protocol requires that CDM projects enable developing countries to achieve sustainable development. Stakeholder consultation is required at initial project planning stage.	The sustainability criteria for CDM projects are developed by each individual host country and therefore vary. If required by the host country, an Environmental Impact Assessment (EIA) has to be done and findings included in the PDD.
GS	Must demonstrate environmental benefits. Major negative impacts that cannot be mitigated lead to project disqualification.	The project must demonstrate social, economic or technical development benefits. Major negative impacts that cannot be mitigated lead to project disqualification. Stakeholder consultation required at initial project planning stage. There are specific requirements as to which stakeholders have to actively be invited. Two public consultation rounds are required before validation is completed. There is a 60 day commenting period for stakeholders in parallel to validation process. For Gold Standard VER, no public international stakeholder consultation such as for CDM is required. NGO supporters of the Gold Standard must be included in all consultation rounds.	The Gold Standard provides a set of sustainable development indicators to support project developers’ efforts to define and assess co-benefits. EIA requirements are the same for CER and VER. The Gold Standard provides detailed documentation on how a stakeholder consultation has to be conducted and which requirements apply. The Gold Standard rules are more specific than under CDM. Micro-scale projects need only one stakeholder consultation round. The claimed co-benefits and impact mitigation measures must be monitored.
VCS	Must comply with local and national environmental laws.	The project document must include “relevant outcomes from stakeholder consultations and mechanisms for ongoing communication.” (VCS 2007, p. 14)	If required by the host country, an Environmental Impact Assessment (EIA) has to be done.
VER+	Negative environment impacts must be stated in the PDD and minimized.	Local stakeholder consultation required only - if required by national law of host country or - if project proponent cannot demonstrate that the project does not impact the vicinity.	If required by the host country, an Environmental Impact Assessment (EIA) has to be done.
CCX	Must comply with local and national environmental laws.	Must comply with local and national laws.	If required by the host country, an Environmental Impact Assessment (EIA) has to be done. For agriculture, land-use and forestry projects the proponent must identify potential negative environmental and/or socio- economic impacts and take steps to mitigate them.
VOS	Same as CDM or GS	Same as CDM or GS	Same as CDM or GS
CCBS	Must demonstrate environmental benefits. Major negative impacts that cannot be mitigated lead to project disqualification.	Must generate positive social and economic impacts. Stakeholder involvement is required and must be documented. 21-day public commenting period.	Extra points are given for positive environmental impacts such as use of native species and biodiversity protection. Extra points are given for capacity building and use of best practices in community involvement. The CCBS is intended to be applied early on during the project design phase, which is when the environmental and social outcomes are often “locked in”.
Plan Vivo	Must demonstrate environmental benefits.	Must demonstrate social benefits. Projects are required to increase capacity over time and promote extra activities contributing to wellbeing (e.g. micro-enterprises, fuel-efficient stoves etc.)	The Standard Manual includes explicit requirements for ecosystem and livelihood benefits and is reviewed periodically
GHG Protocol	N/A	N/A
ISO 14064-2	N/A	N/A

Role of Third Party Auditors

Aligned Interests Between Buyers and Sellers

In a typical market, the competing interests of buyer and seller create checks and balances: Producers try to maximize both price and the number of items sold or services rendered, whilst buyers try to lower the price and minimize the number of products they must purchase to satisfy their need. This system of checks and balances does not function in offset trading – there is an inherent conflict of interest in the current market design. Although there is competition on pricing – the supplier (project developer/funder) wants high prices, the offset buyer wants low – since both the supplier and buyer of carbon offsets aim to maximize the number of offsets produced, there is a strong financial incentive for both supplier and buyer to overestimate the baseline scenario and thus artificially inflate emission credits to increase profitability14. The purpose of a free market is to enable dynamic innovation and entrepreneurship. Free markets are not designed to protect public goods. Neither suppliers nor buyers of carbon offsets can therefore be reasonably expected to act altruistically and conservatively estimate a project’s reductions, as this would directly translate into decreased profits. In a “normal” market, the seller faces this same incentive, but it is balanced by the buyer’s incentive to ensure that the offsets are not overestimated.

This inherent alignment of interests is a profound design flaw of project-based carbon trading systems, which can only to partly be mitigated by rigorous monitoring and third-party validation and verification of offset projects. Most standards do require third-party auditors. The following sections detail validation and verification as well as the role of third-party auditors.

Independent Validation of Project Activity

The validation process is initiated during the planning and early implementation phase of a project. It confirms the sound planning of a project developer and the compliance with the chosen offset standard’s rules and regulations. The project has usually not been implemented at this stage and the validation neither comments on the actual performance of a project nor certifies any emissions reductions.

Monitoring and Independent Verification of Project Activity

Verification is an ex-post confirmation that the project was implemented and is performing according to design. Verification confirms and quantifies the amount of emission reductions.

Monitoring and verification standards are required to ensure that offset projects perform as expected.

Under CDM procedures, an accredited third-party auditor (Designated Operational Entity - DOE) must confirm that the claimed emissions reductions have actually occurred. To reduce conflict of interest, DOEs are not allowed to do validation and verification on the same project.

Project Approval: Auditors or Standard Boards

Under the CDM, upon completion of the validation or the verification process, the DOE submits the documents to the CDM Executive Board who will then approve or reject the project. Many of the voluntary offset standards also require the use of third-party auditors for project validation and verification. In other words, it is the auditors themselves that approve the projects. This is problematic for the reasons explained in the next two sections.

Conflicts of Interest: Auditors and Project Developers

Under both the CDM and voluntary offset standards, auditors are generally hired and paid by project developers. This creates a conflict of interest because the auditor will need to be impartial, yet may want to generously overlook issues and overestimate emission reductions in order to keep the customer. The CDM has tried to address this conflict of interest by stipulating that auditors are not allowed to provide any consulting services to project participants:

The DOE [Designated Operational Entity – CDM approved auditor] shall work in a credible, independent, non-discriminatory and transparent manner. The structure of the DOE shall safeguard impartiality of its operations. If the DOE is part of a larger operation, the DOE shall clearly define the links with other parts to demonstrate that no conflicts of interest exists. The DOE shall demonstrate that it is not involved in any commercial, financial or other processes which might influence its judgment or endanger trust in its independence and integrity. (CDM modalities & procedures, Appendix A, paragraph 2)

In the CDM, the additional approval process through the CDM Executive Board adds a layer of quality control because it is not solely up to auditors to approve or reject a project. Except for the Gold Standard and the CCX, the evaluated voluntary offset standards do not employ an additional approval process. Auditors themselves approve the projects. This lack of an additional approval process potentially exacerbates the conflict of interest for the project auditor.

In addition, the subjectivity that is inherent in any offset project validation process weakens the quality control function of the auditor. In every project review, there is a significant degree of subjective judgment involved. Auditors are paid by project developers and are given the power to make judgments about issues such as whether assumptions are “conservative”, whether a given barrier is substantial in a given country, whether a baseline and an additionality argument make sense, and whether data sources are legitimate.

To counterbalance these design flaws, many of the standards, including CDM, require a short public commenting period – for example, for review of the baseline documents and background information. It is nevertheless questionable whether these public commenting periods are sufficient to properly review the social and environmental consequences of projects.

Quality Control of Auditors

Under CDM’s accreditation standard,¹⁵ DOEs have to provide proof that they have the necessary competences to conduct project validation (e.g. experience and technical expertise with validating biomass plants). To ensure auditors’ quality, the CDM Executive Board has set up a regular surveillance system for DOEs, including on-site assessment of every DOE at least every three years. Furthermore, the CDM Executive Board is authorized to conduct “spot-check” activities (i.e. unscheduled surveillance) of DOEs at any time. Depending on the results of the spot check, the CDM EB can issue a warning to the DOE or in the most severe cases suspend its accreditation.

In 2006 the CDM EB conducted three spot checks, yet it did not suspend any DOEs or publish their names despite “several non-conformities of the DOE regarding both procedural and operational requirements”. Given the negative findings of all three spot-checks, the EB set up a regular surveillance system for DOEs, including on-site assessment of every DOE at least every three years.¹⁶

The voluntary standards evaluated in this report currently have no formal structures in place to assess and ensure the quality of the auditors’ work.

Validation, Verification and Third-Party Auditor Requirements

Standard	Requirements for Validation	Validation Approval Process	Requirements for Verification	Verification Approval Proccess	Third-party Requirements
CDM	Project Design Document (PDD) containing: Description of the project activity; Information on baseline methodology; Crediting period; Monitoring methodology and plan; Estimation of GHG emissions by sources; Environmental impacts; Stakeholders’ comments; Host nation approval.	Validation documents need to be approved by the CDM Executive Board. After approval, the project is officially registered.	Monitoring report (by project developer) including estimate of CERs generated. Verification report (by DOE) and certification report (by DOE) confirming the emissions reductions.	Project developers monitor project according to monitoring plans as given in the PDD. Monitoring reports are submitted to third-party auditor (DOE). DOE writes verification reports which are then submitted for approval to the CDM Executive Board.	Validation and verification have to be done by thirdparty auditors (Designated Operational Entities, DOEs). To avoid conflict of interest, validation and verification cannot be done by the same DOE.
GS	All CDM requirements plus additional GS requirements must be met (e.g. GS eligibility, previous announcement, scoring of sustainable development indicators, monitoring plan for sustainable indicators, detailed outcomes of both stakeholder consultations).	Validation documents need to be approved by the Gold Standard Technical Advisory Committee (TAC). Gold Standard TAC and Gold Standard supporter NGOs have six weeks to seek clarification and can request an in-depth audit of a project. After approval, the project is officially registered. Micro-scale projects can be submitted for an internal validation. Some are externally validated on a targeted random basis.	Monitoring report (by project developer) including estimate of CERs or VERs generated. Verification report including the GS-specific annex (including monitored sustain. dev. indicators) and statement (by DOE) confirming the emissions reductions and compliance of sustainable development indicators. Verification report including the GSspecific annex to be submitted to Gold Standard by CDMaccredited DOE. Gold Standard verification periods have to correspond to CDM verification periods.	Project developers monitor project according to monitoring plans as given in the PDD. Monitoring reports are submitted to third-party auditor (DOE). DOE writes verification reports. Gold Standard CER: submitted for approval to the CDM Executive Board and the Gold Standard TAC. Gold Standard VER: submitted for approval to the Gold Standard TAC. Micro-scale projects are selected to be verified on a targeted random basis. Both Gold Standard CER and VER: a 2-week review period precedes issuance during which the Gold Standard TAC and Gold Standard NGO supporters can ask for clarifications and corrective actions.	Registered DOEs DOEs conducting a first time validation of a Gold Standard PDD trigger a more in-depth audit of the project by the Gold Standard TAC, which also serves as accreditation procedure of the DOE to the Gold Standard. Validation and verification can only be done by the same DOE for small-scale and VER micro-scale projects.
VCS	The VCS Project Description (VCS PD), monitoring plan, environmental impacts, comments by stakeholders etc. are validated according to ISO 14064-3 requirements and VCS Programme requirements.	Validation documents are approved by the auditors. Validations are mandatory, and can be completed up front or at the time of the first verification.	Monitoring report (by project developer) including estimate of VCUs generated. ISO 14064-3 requirements using the VCS Verification Report template confirming the emissions reductions.	Project developers monitor project according to VCS PD. Monitoring reports are verified by third-party auditor. Auditor writes verification reports and also approves them and the emissions reductions. These are automatically approved by the VCS once authenticity and completeness of documents have been confirmed.	Registered CDM DOEs Certified auditors under ISO 140065 Auditors registered under JI Other auditors need to be certified by the VCS board.
VER+	JI or CDM PDD plus formal statement of compliance with VER+ criteria	Validation documents are approved by the auditors.	Monitoring report (by project developer) including estimate of VERs generated Verification report (by auditor) confirming the emissions reductions	Project developers monitor project according to PDD. Monitoring reports are submitted to third-party auditor who writes verification reports and also approves them and the emissions reductions17.	Validation and verification have to be done by third-party auditors (DOEs). Validation and verification can be done by the same DOE
CCX	CCX does not distinguish between validation and verification.	See verification.	Project proposal Independent verification report confirming the emissions reductions.	Verification documents are submitted for approval to the CCX Committee on Offsets.	Third-party auditors are approved by CCX for each project type.
VOS	Same as CDM or GS	Same as CDM or GS	Same as CDM or GS	For GS VERs: see above. For other VERs: project developers monitor project according to PDD. Monitoring reports are submitted to third-party auditor (DOE). DOE writes verification reports and also approves them and the emissions reductions.	Same as CDM or GS
CCBS	Fifteen required criteria and eight optional “pointscoring” criteria. Project ratings: Approved, Silver, Gold.	The CCB Alliance works closely with auditors, but it is ultimately the auditor who makes the decision to approve or reject a project.	Project documents and monitoring results reviewed by auditors.	Each project must be verified at least every five years. Because CCBS is only a project design standard, it does not verify quantified emissions reductions.	Registered DOEs for ‘Afforestation and Reforestation’ and accredited FSC auditors. Validation and verification can be done by the same auditor.
Plan Vivo	Report including: Project description Communication with national regulatory authorities. Monitoring protocol Technical specifications Size of risk buffer Financial records	Validation carried out by expert reviewers. All documentation reviewed and approved by the Plan Vivo Foundation. Projects are reviewed on a yearly basis through annual reporting.	Verification is currently not required for Plan Vivo projects but recommended.