Industry Caught in Carbon Smokescreen

Industry caught in carbon ‘smokescreen’

By Fiona Harvey and Stephen Fidler in London

Published: April 25 2007 22:07 | Last updated: April 25 2007 22:07

Companies and individuals rushing to go green have been spending millions on “carbon credit” projects that yield few if any environmental benefits.

A Financial Times investigation has uncovered widespread failings in the new markets for greenhouse gases, suggesting some organisations are paying for emissions reductions that do not take place.

Others are meanwhile making big profits from carbon trading for very small expenditure and in some cases for clean-ups that they would have made anyway.

The growing political salience of environmental politics has sparked a “green gold rush”, which has seen a dramatic expansion in the number of businesses offering both companies and individuals the chance to go “carbon neutral”, offsetting their own energy use by buying carbon credits that cancel out their contribution to global warming.

The burgeoning regulated market for carbon credits is expected to more than double in size to about $68.2bn by 2010, with the unregulated voluntary sector rising to $4bn in the same period.

The FT investigation found:

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

Francis Sullivan, environment adviser at HSBC, the UK’s biggest bank that went carbon-neutral in 2005, said he found “serious credibility concerns” in the offsetting market after evaluating it for several months.

“The police, the fraud squad and trading standards need to be looking into this. Otherwise people will lose faith in it,” he said.

These concerns led the bank to ignore the market and fund its own carbon reduction projects directly.

Some companies are benefiting by asking “green” consumers to pay them for cleaning up their own pollution. For instance, DuPont, the chemicals company, invites consumers to pay $4 to eliminate a tonne of carbon dioxide from its plant in Kentucky that produces a potent greenhouse gas called HFC-23. But the equipment required to reduce such gases is relatively cheap. DuPont refused to comment and declined to specify its earnings from the project, saying it was at too early a stage to discuss.

The FT has also found examples of companies setting up as carbon offsetters without appearing to have a clear idea of how the markets operate. In response to FT inquiries about its sourcing of carbon credits, one company, carbonvoucher.com, said it had not taken payments for offsets.

Blue Source, a US offsetting company, invites consumers to offset carbon emissions by investing in enhanced oil recovery, which pumps carbon dioxide into depleted oil wells to bring up the remaining oil. However, Blue Source said that because of the high price of oil, this process was often profitable in itself, meaning operators were making extra revenues from selling “carbon credits” for burying the carbon.

There is nothing illegal in these practices. However, some companies that are offsetting their emissions have avoided such projects because customers may find them controversial.

BP said it would not buy credits resulting from improvements in industrial efficiency or from most renewable energy projects in developed countries.

Additional reporting by Rebecca Bream

CO2 needs a price but taxes are the best way to set it

Published: April 25 2007 22:07 | Last updated: April 25 2007 22:07

The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.

Climate change poses a classic spill-over problem: individuals do not suffer the full burden of producing carbon dioxide, but society does. To equate the private cost to the higher social cost, governments can create markets for carbon, by using tradeable permits, or impose a tax.

So far, the preferred method has been tradeable permits. Creating markets for carbon has political advantages. They are easy to sign into law and even easier to execute. Instead of the optimal method of auctioning permits, governments have given them away. It is no wonder that energy producers are keen to participate in these schemes.

While short-term politics favour markets, taxes would be better in the long term, because industry needs certainty for investments years hence. A government committing to painful taxes signals the seriousness of its intentions.

Carbon taxes, offset by cuts in other taxes, are more difficult to eliminate than artificial markets.

Carbon markets have other problems. Above all, they fix the amount of carbon abated, not its price. Getting the amount of emissions a little bit wrong in any year would hardly upset the global climate. But excessive volatility or unduly high prices of quotas on carbon emissions might disrupt the economy severely. Taxes create needed certainty about prices, while markets in emission quotas create unnecessary certainty about the short-term quantity of emissions.

Both carbon taxes and markets put undue burden on the poor. Governments should counter such regressive carbon taxes by lowering taxes on labour. Yet most of the political appeal of markets is that they hide the true costs to consumers. That is why carbon markets exist in the first place. For this reason it is unlikely that governments would offset the invisible burden of markets by changing visible taxes.

Smart market design could overcome most problems with tradeable permits: price caps could prevent undue harm to the economy; and intelligent regulatory regimes could prevent other forms of gamesmanship. Yet markets are bound to be more complicated than taxes. When in doubt, keep it simple. Markets for carbon are potentially good. But taxes would be better.

Beware the carbon offsetting companies

By Fiona Harvey, Environment Correspondent

Published: April 25 2007 22:18 | Last updated: April 25 2007 22:18

Deciding to go “carbon neutral” in late 2004 was a pioneering step for HSBC. The bank’s board agreed that it should become the first big company to cancel out all of its impact on the climate.

“It was a leap of faith,” said Francis Sullivan, deputy head of group sustainable development at HSBC. “But we knew it was something we should do.”

First, the bank would cut its greenhouse gas output, and then offset the rest by funding emissions reductions elsewhere, such as buying better cooking stoves for remote settlements in Africa.

Since then, many more companies have announced plans to go carbon neutral, such as BSkyB, News Corp, Marks & Spencer, PwC, Aviva and Barclays. Some, including British Airways, BP, Expedia and Land Rover, offer customers the chance to offset emissions spent in using their products.

Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2 .

Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.

In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.

The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.

Most companies going carbon-neutral use intermediaries to buy offsets on their behalf. But after evaluating the markets for some months, HSBC decided not to. Mr Sullivan said the bank concluded that intermediaries “do not all add very much value, they do not all do this at the minimal cost, and they are not all truly credible”. He said: “The confusion in the market is still such that you have to do as much due diligence on these brokers as you do on the projects themselves.”

Other companies, however, have found the use of intermediaries beneficial. BSkyB said it valued projects identified by the Carbon Neutral Company, one of the biggest intermediaries, which is also used by Barclays. The bank said it had a good relationship with it and Climate Care, another big offsetting specialist.

Businesses are advised to check the offsetting companies’ credentials. One hedge fund manager, who asked not to be named, said he had been offered credits he did not trust because the intermediaries could show only a spreadsheet to prove their existence. “There are plenty of carbon cowboys out there, looking to make a quick buck,” he said.

Some brokers have recognised customers’ concerns by banding together to self-regulate. They have set industry benchmarks, such as the voluntary carbon standard, established by the International Emissions Trading Association, the Climate Group and the World Economic Forum, or the “gold standard”, backed by several environmental charities.

Unlike the Kyoto and EU markets, the voluntary market is unregulated, with no legally binding standards, giving rise to several potential problems:

●The risk of fraud, such as sale of credits from carbon reduction projects that do not exist. It is often difficult for buyers and brokers to verify the existence and effectiveness of projects as many are in remote areas.

●Funding of carbon reductions that could have happened anyway. In the jargon, they would not be “additional”. Under the Kyoto protocol, qualifying projects must be “additional” meaning, in most cases, that they would not be economically viable without carbon credits. The FT has, however, uncovered examples where carbon credits have merely provided another source of revenue to projects that would have happened anyway (see the story below).

●The risk of companies selling the same credits several times over. Under the Kyoto mechanism, carbon credits are tracked through the UN’s International Transaction Log, which records every purchase or sale. When companies are buying credits for offset, the credits should be “retired” and not used again. But on the voluntary market, there is no central register, so unscrupulous companies could “double count” or sell the same credits more than once.

Bill Sneyd, director of operations at the Carbon Neutral Company, said his organisation tried to ensure that the credits it supplied from project owners were not also sold elsewhere. It employs KPMG to audit its carbon credit accounts. But he acknowledged a serious problem in the voluntary market: “There is the possibility for double counting at the project developer side. The project developer could sell carbon to us and to others.”

He said a register of credits sold in the voluntary market was being set up that would meet similar standards to the UN’s transaction log.

Although the carbon-offsets market is booming, BP has struggled to find enough emissions reduction projects to meet its quality standards, says Kerryn Schrank, programme director. BP launched its Target Neutral programme last August, inviting motorists to pay an average £20 ($40, €29) to offset their emissions from a year’s driving.

Barclays has also found a lack of projects meeting its criteria. Andrew Flett, head of environmental management at the bank, said: “Of the projects identified as meeting our criteria, there were only credits available for 40 per cent [of our needs].” As a result, the bank bought its other offsets via the Kyoto market.

Reduced operations could bring gains

By Fiona Harvey and Chris Bryant

Published: April 25 2007 22:19 | Last updated: April 25 2007 22:19

A US company bought last year by a private equity group stands to make financial gains selling carbon credits that have resulted from reducing its operations.