Voluntary Carbon Offsets: Overview and Assessment

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Voluntary Carbon Offsets:

Overview and Assessment

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May 7, 2009

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RL34241

CRS Report for Congress

Prepared for Members and Committees of Congress

Voluntary Carbon Offsets: Overview and Assessment

Summary

Businesses and individuals are buying carbon offsets to reduce their “carbon footprint” or to

categorize an activity as “carbon neutral.” A carbon offset is a measurable avoidance, reduction,

or sequestration of carbon dioxide (CO2) or other greenhouse gas (GHG) emissions. Offsets

generally fall within the following four categories: biological sequestration, renewable energy,

energy efficiency, and reduction of non-CO2 emissions.

In terms of the carbon concentration in the atmosphere, an emission reduction, avoidance, or

sequestration is beneficial regardless of where or how it occurs. A credible offset equates to an

emission reduction from a direct emission source, such as a smokestack or exhaust pipe. The core

issue for carbon offset projects is: do they actually offset emissions generated elsewhere? If the

credibility of the voluntary offsets is uncertain, claims of carbon neutrality may be challenged.

Evidence suggests that not all offset projects are of equal quality, because they are developed

through a range of standards. In the voluntary market, there are no commonly accepted standards.

Although some standards are considered stringent, others are less so. Numerous companies and

organizations (domestic and international) sell carbon offsets to individuals or groups in the

international, voluntary carbon market. Recent studies have found a general correlation between

offset price and offset quality.

Due to the lack of common standards, some observers have referred to the market as the “wild

west.” This does not suggest that all carbon offsets are low quality, but that the consumer must

necessarily adopt a buyer-beware mentality when purchasing carbon offsets. This places the

responsibility on consumers to judge the quality of carbon offsets.

The viability of the voluntary offset market may influence future policy decisions regarding

climate change mitigation. For example, credible offsets could play an important role, particularly

in terms of cost-effectiveness, in an emissions control regime. There is some concern that the

range in the quality of voluntary market offsets may damage the overall credibility of carbon

offsets. If this occurs, it may affect policy decisions concerning whether or not to include offsets

as an option in a mandatory reduction program.

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Voluntary Carbon Offsets: Overview and Assessment

Contents

Introduction ................................................................................................................................1

What are Carbon Offsets? ...........................................................................................................1

Carbon Offset Integrity Issues .....................................................................................................2

Additionality.........................................................................................................................2

Measurement Challenges ......................................................................................................3

Baseline Determination ...................................................................................................3

Double Counting.............................................................................................................3

Permanence ..........................................................................................................................4

Carbon Offset Types and Potential Integrity Concerns .................................................................4

Biological Sequestration .......................................................................................................4

Renewable Energy Projects ...................................................................................................6

Energy Efficiency .................................................................................................................7

Reduction of Non-CO2 Emissions from Specific Sources ......................................................7

The Size of the Voluntary Carbon Offset Market .........................................................................9

Over-the-Counter (Retail) Offsets..........................................................................................9

Chicago Climate Exchange ................................................................................................. 10

Assessment of Carbon Offset Sellers ......................................................................................... 10

Conclusions .............................................................................................................................. 11

Tables

Table 1. Estimates of the Volume and Value of the Voluntary Carbon Market...............................9

Contacts

Author Contact Information ...................................................................................................... 12

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Voluntary Carbon Offsets: Overview and Assessment

Introduction

In the United States, and elsewhere, a growing number of organizations and individuals who are

not subject to mandatory emission caps are buying or selling carbon offsets. These exchanges are

voluntary because there is no requirement for these parties to curtail their greenhouse gas (GHG)

emissions. The motivation for exchanges can vary. Some businesses or organizations may be

seeking to enhance their public image. For example, buyers may be interested in offsetting some

or all of their GHG emissions from various activities, reducing their “carbon footprint,” or

becoming “carbon neutral.” Buyers might also be preparing for future mandatory federal GHG

emission reductions, getting into the market while prices are relatively low with the expectation

that today’s carbon offsets will be usable to achieve future federal emission ceilings or caps.

Sellers are interested in receiving income for various activities, which, without the voluntary

market, would likely not occur.

The concept of purchasing carbon offsets has spurred both interest and debate in recent years.

This report provides an overview of carbon offsets and examines some of the issues that are

generating debate (and controversy). Although there is some overlap of issues between voluntary

carbon offsets and the offsets used to comply with mandatory reduction regimes, this report

focuses on the voluntary offsets market. Unless otherwise stated, the carbon offsets in this report

refer to those exchanged in the voluntary market.

What are Carbon Offsets?

A carbon offset is a measurable avoidance, reduction, or sequestration of carbon dioxide (CO2) or

other greenhouse gas (GHG) emissions.1 Offsets generally fall within the following four

categories (discussed in greater detail later in the report): biological sequestration, renewable

energy, energy efficiency, and reduction of non-CO2 emissions.

Carbon offsets are sometimes described as project-based because they typically involve specific

projects or activities that reduce, avoid, or sequester emissions. Because offset projects can

involve different GHGs, they are quantified and described with a standard form of measure:

either metric tons of carbon-equivalents (mtC-e) or metric tons of CO2-equivalents (mtCO2-e).2

Six GHGs have been identified by the United Nations Framework Convention on Climate Change (UNFCCC) as

being those of major interest: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6),

hydrofluorocarbons (HFC), and perfluorocarbons (PFC). Recent GHG reduction proposals have also included nitrogen

trifluoride (NF3).

For measurement purposes, GHG emissions are represented as CO2-equivalents based on their contribution to global

warming in relation to CO2. Global warming potential (GWP) is an index of how much a GHG may contribute to

global warming over a period of time, typically 100 years. GWPs are used to compare gases to carbon dioxide, which

has a GWP of 1. For example, methane’s GWP is 25, and is thus 25 times more potent a GHG than CO2. The GWPs

listed in this report are from: Intergovernmental Panel on Climate Change, Climate Change 2007: The Physical Science

Basis (2007), p. 212.

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Voluntary Carbon Offsets: Overview and Assessment

To be considered a credible offset, the emissions reduced, avoided, or sequestered need to be

additional to business-as-usual: that is, what would have happened anyway. In the context of a

mandatory GHG emission reduction regime, an offset can come only from sources not covered by

the reduction program (i.e., outside the emissions cap).3 Emission reductions from regulated

sources would be required under the cap, and thus would not be additional. By comparison, a

reduction activity may be additional if it occurs from a source in a nation that does not limit the

source’s GHG emissions. As more nations (or U.S. states) establish mandatory caps or similar

standards on emission sources, the universe of potential carbon offsets will shrink.

Carbon Offset Integrity Issues

A primary concern regarding voluntary carbon offsets is their integrity. It is generally agreed that

a credible offset should equate to an emission reduction from a direct emission source, such as a

smokestack or exhaust pipe. Several criteria determine the integrity or quality of an offset project.

Additionality

This is generally considered to be the most significant factor that determines the integrity of the

carbon offset. Additionality refers to whether the offset project (e.g., wind farm) would have gone

forward on its own merits (or own financial benefits) without the support of the offset market. In

other words, would the project have happened anyway? If the project would have occurred

without the financial support of the offset buyer, the emission reductions generated from the

project would not be additional.

The additionality criterion is at the crux of an offset’s integrity, but additionality can be difficult

to assess in practice. The standards used to analyze a project’s additionality vary, and some

groups may downplay the importance of this attribute. An offset seller who employs a more

stringent additionality analysis will likely offer “higher quality” offsets.

This approach is part of the European Union’s (EU) Emission Trading Scheme (ETS), which the EU members use to

meet their Kyoto Protocol commitments. For more information, see CRS Report RL34150, Climate Change and the

EU Emissions Trading Scheme (ETS): Kyoto and Beyond, by (name redacted).

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Voluntary Carbon Offsets: Overview and Assessment

“Stackability” and Additionality

The concept of “stackability” is typically discussed in the context of biologicial sequestration offset projects. In

addition to decreasing atmospheric concentrations of GHGs, biological sequestration projects may provide nonclimate-related ecosystem services, such as improved water quality and wildlife habitat enhancement. Proponents of

“stackability” argue that offset project developers should be able to market these services separately and earn distinct

financial benefits for each ecosystem service (assuming a funding source exists that would support each service).

Under this reasoning, the financial rewards for different ecoystem services would be “stackable,” and the receipt of

funding from one source (e.g., buyers in the offset marketplace) would not preclude the receipt of funding from

another source (e.g., government grant program). For example, some argue that a soil sequestration project should

be able to generate offset credits for its GHG sequestration services and a Conservation Reserve Program (CRP)

payment for the project’s ability to provide erosion control.

Allowing an offset project to accrue stackable benefits may raise concerns of additionality. If non-climate-related

incentive programs or ecosystem service markets could provide financial support for a particular offset project,

observers may question whether the project would have happened anyway. In some situations, an additionality

assessment may be relatively straightforward. If the non-climate-related incentives stimulate activities that would

mitigate GHG emissions (as a secondary effect) without the support of the offset market, the activity would not likely

qualify as additional in terms of carbon offsets. On the other hand, some offset projects may not be economically

viable without multiple sources of funding—combining a payment from the offset market with grants from nonclimate-related government programs. Thus, in many situations a determination of additionality may entail some

degree of subjectivity.

Measurement Challenges

It is generally much simpler to measure and quantify an emission reduction from a direct source

than from an offset project. Two issues concerning measurement are further discussed below.

Baseline Determination

To determine the amount of emissions avoided by an offset project, project managers must

establish an emissions baseline: an estimate of the “business-as-usual” scenario or the emissions

that would have occurred without the project. If project managers inaccurately estimate the

baseline, the offsets sold may not match the actual reductions achieved. For example, an

overestimated baseline (projecting more emissions than would have been emitted in the project’s

absence) would generate an artificially high amount of offsets. Baseline measurement may

present technical challenges. In addition, project developers would have a financial incentive to

err on the high side of the baseline determination, because the higher the projected baseline, the

more offsets generated.

Double Counting

A carbon offset is meaningful if it is only counted once. To be credible, when an offset is sold, it

should be retired and not sold again or counted in other contexts. However, opportunities for

double-counting exist. For example, a U.S. buyer may purchase offsets generated through the

development of a wind farm in a country, state, or locality that has established GHG emissions

targets. The U.S. buyer will count the offsets, which may have been purchased to counter an

increase in personal air travel. In addition, the nation (state or locality), in which the wind farm is

located, may see an emissions reduction due to the wind farm. This decrease will be reflected in

the nation’s GHG emissions inventory. Thus, the offset project (wind farm) may replace other

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Voluntary Carbon Offsets: Overview and Assessment

reduction activities that the nation might have taken to meet its target. A tracking system needed

to avoid such double-counting does not exist.4

Some may argue that double-counting is less of a problem if the offset project occurs in a U.S.

state (county or city) with only a voluntary target (as opposed to a nation subject the Kyoto

Protocol). However, the impact would be the same if the state is eventually part of a federal

emissions reduction program, and the state is allowed to take credit for the earlier reductions

associated with the offset project. By taking credit for an earlier reduction, the state will need to

make fewer reductions to be in compliance with the new mandatory program.

Permanence

When carbon offsets are generated from a project, there should be confidence that the emission

offsets are permanent—that the emissions are not merely postponed. This characteristic is most

pertinent to biological sequestration projects, specifically forestry activities. For example, buyers

need some assurance that the land set aside for forests will not be used for a conflicting purpose

(e.g., logging or urban development) in the future. Although natural events (fires or pests) are

hard to control, human activity can be constrained through legal documents such as land

easements. In addition, an offset could come with a guarantee that it would be replaced if the

initial reduction is temporary.

Carbon Offset Types and Potential Integrity

Concerns

In the voluntary market, carbon offsets can be generated from multiple economic sectors. This

report discusses carbon offsets grouped into the four categories identified above. Each category

contains a list of possible carbon offset examples. Specific integrity issues may be associated with

particular offset categories. These issues are discussed below. The potential problems highlighted

below should not necessarily rule out entire carbon offset categories. If offset project developers

can address these potential obstacles, the offsets may be credible. However, it may be difficult for

offset buyers to know if these problems were addressed (as discussed later in the report).

Biological Sequestration

Trees, plants, and soils sequester carbon, thereby reducing its amount in the earth’s atmosphere. 5

Biological sequestration projects generally involve activities that either increase sequestration or

preserve an area’s existing sequestration ability that is under threat (e.g., from logging or

development). This offset category includes sequestration that results from activities related to

agriculture and forests, and is sometimes referred to as land use, land use change and forestry

(LULUCF) projects. Examples of these projects include:

See Anja Kollmuss, 2007, Carbon Offsets 101, World Watch.

For more information on these processes see CRS Report RL34059, The Carbon Cycle: Implications for Climate

Change and Congress, by (name redacted).

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Voluntary Carbon Offsets: Overview and Assessment

•

Planting trees on previously non-forested land (i.e., afforestation)

•

Planting trees on formerly forested land (i.e., reforestation)

•

Limiting deforestation by purchasing forested property and preserving the forests

with legal mechanisms (e.g., land easements)

•

Setting aside croplands from production to avoid emissions released during crop

production

•

Promoting practices that reduce soil disruption (e.g., conservation tillage)

Compared to the other offset categories, biological sequestration projects offer the most potential

in terms of volume (particularly forestry projects). However, this category is arguably the most

controversial, because of several integrity issues that are typically associated (or perceived to be

associated) with biological sequestration projects.

Some agricultural sequestration offsets may raise concerns of additionality: that is, the

sequestration activity would have happened regardless of the payments received from offset

buyers. For example, farmers may be able to generate offsets by conducting no-till operations on

their land, but for the offsets to be credible, the impetus to adopt this practice should be driven by

the financial gain from the offset market. If the no-till practice was part of normal operations

before the offset market, then the offset would fail the additionality test. There is anecdotal

evidence indicating that some farmers have been using the no-till technique for years, but still

received compensation for the offsets.6 If this is the case, this would be a fairly straightforward

example of a non-additional offset. Should this bar other farmers, who have not been practicing

conservation measures (e.g., no-till farming), from receiving offsets for initiating such measures?

Arguably the measures provide some benefit on their own (e.g., less fuel use), because some

farmers have been using the techniques for years. However, the offset incentive may be a primary

driver at some farms. This example demonstrates the difficulties associated with proving that a

project is additional.

Biological sequestration offset projects may present challenges in terms of measurement. This

issue is especially relevant to forestry-related offsets. The carbon cycle in trees and soils is

complex: variations across tree species, ages, and geographic locations increase the measurement

challenge. 7 In addition, other variables complicate the measurement of reductions from forestry

projects. For example, a recent study in the Proceedings of the National Academy of Sciences

stated:

We find that global-scale deforestation has a net cooling influence on Earth’s climate,

because the warming carbon-cycle effects of deforestation are overwhelmed by the net

cooling associated with changes in albedo8 and evapotranspiration.9 Latitude-specific

Jeff Goodell, 2006, “Capital Pollution Solution,” New York Times Magazine, July 30, 2006.

For more on these challenges, see CRS Report RL31432, Carbon Sequestration in Forests, by (name redacted); and

CRS Report R40236, Estimates of Carbon Mitigation Potential from Agricultural and Forestry Activities, by (name

redacted) et al.

Albedo refers to the reflectivity of the Earth’s surface. For more on this effect, see CRS Report RL33849, Climate

Change: Science and Policy Implications, by (name redacted).

Evapotranspiration is the sum of evaporation and transpiration. The transpiration aspect of evapotranspiration is

essentially evaporation of water from plant leaves. For more on this issue see the U.S Geological Survey website at

http://ga.water.usgs.gov/edu/watercycleevapotranspiration.html.

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deforestation experiments indicate that afforestation projects in the tropics would be clearly

beneficial in mitigating global-scale warming, but would be counterproductive if

implemented at high latitudes and would offer only marginal benefits in temperate regions.10

As mentioned earlier, biological sequestration projects often raise questions of permanence: that

is, whether the activity that generates offsets will continue. Although many observers expected

biological sequestration offsets to dominate the international market, this has not been observed

in practice. Concern of permanence has been one of the issues that has hindered the development

of biological sequestration offsets in developing nations.11

Renewable Energy Projects

Renewable energy sources generate less GHG emissions (wind and solar energy produce zero

emissions) than fossil fuels, particularly coal. Therefore, use of renewable energy sources would

avoid emissions that would have been generated by fossil fuel combustion. These avoided

emissions could be sold as carbon offsets. Historically, renewable energy sources—wind, solar,

biomass—have been more expensive (per unit of energy delivered) than fossil fuels in most

applications.12 Sales of renewable energy offsets may provide the financial support to make a

renewable energy more economically competitive with fossil fuels. Potential renewable energy

offset projects may include:

•

Constructing wind farms to generate electricity

•

Installing solar panels

•

Retrofitting boilers to accommodate biomass fuels

Some renewable energy offsets may raise concerns of additionality. Several offset sellers offer

renewable energy certificates or credits (RECs) as carbon offsets. One REC represents the

creation of 1 megawatt-hour of electricity from a renewable energy source. RECs generally

convey the environmental attributes of renewable energy projects, and RECs may be sold to

promote further use of renewable energy. However, a REC does not necessarily equate with a

carbon offset. A credible offset must be additional to the status quo; RECs are not subject to the

same standard. Although some offset sellers closely scrutinize the RECs they offer for sale as

offsets, there is no system or standard in place to ensure that RECs are additional.13

Several factors, other than CO2 emission reductions, may drive the development of a renewable

energy project. Although renewable energy has historically been more expensive, higher fossil

fuel prices and tax incentives14 have made renewable energy more competitive in recent years.

Moreover, many states have enacted or are developing Renewable Portfolio Standards (RPS). An

RPS requires that a certain amount or percentage of electricity is generated from renewable

Govindasamy Bala, et al, 2007, “Combined climate and carbon-cycle effects of large-scale deforestation,”

Proceedings of the National Academy of Scieneces, 104: 6550-6555.

Frank Lecocq and Philippe Ambrosi, 2007, The Clean Development Mechanism: History, Status, and Prospects,

Review of Environmental Economics and Policy, Winter 2007, pp. 134-151.

This comparison does not account for the externalities associated with fossil fuel combustion: air pollution,

environmental degradation, and health problems linked to emissions.

Anja Kollmuss and Benjamin Bowell, “Voluntary Offsets For Air-Travel Carbon Emissions Evaluations and

Recommendations of Voluntary Offset Companies,” Tufts Climate Initiative, Revised April 5, 2007, p. 13.

See CRS Report RL33578, Energy Tax Policy: History and Current Issues, by (name redacted).

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energy resources. Twenty-eight states have implemented or are developing some type of RPS.15

Although some sellers will not issue RECs that were counted towards an RPS, it is uncertain

whether all sellers follow this protocol. 16 These factors complicate the determination of

additionality regarding renewable energy offsets projects, particularly offsets based only on

RECs.

Energy Efficiency

An improvement in a system’s energy efficiency will require less energy to generate the same

output. Advances in energy efficiency generally require a financial investment. These capital

investments may pay off in the long run, but may be unprofitable in the short-term, particularly

for small businesses or in developing nations. Examples of possible energy efficiency offset

projects include:

•

Upgrading to more efficient appliances or machines

•

Supporting construction of more energy efficient buildings

•

Replacing incandescent light bulbs with fluorescent bulbs

Energy efficiency improvements are sometimes described as a “no regrets” policy, because the

improvements would likely provide net benefits (e.g., cost savings) regardless of their impact on

other concerns (climate change or energy independence). Thus, the issue of additionality may be

a particular concern for energy efficiency offsets. For example, in some cases, it may be difficult

to discern if the improvements would have been made regardless of the offset market.

Offset ownership is another potential challenge regarding some energy efficiency offsets. Energy

efficiency improvements may occur at a different location than the actual reduction in emissions.

For example, a business that runs its operations with purchased electricity will use less electricity

if energy efficiency improvements are made, but the actual emission reductions will be seen at a

power plant. This may create a double-counting situation. Although the federal government has

not set a mandatory GHG emission reduction, several states and local governments have enacted

limits.17 If the state counts the emission reductions at the electricity plant towards its goal, while

the business sells the offsets, the reductions will be counted twice. 18

Reduction of Non-CO2 Emissions from Specific Sources

There are multiple GHG emissions sources, whose emissions are not generally controlled through

law or regulation. These sources—primarily, agricultural, industrial, and waste management

facilities—emit non-CO2 GHGs as by-products during normal operations. In many cases, the

See EPA, Summary of State Clean Energy-Environment Policy Data Table (current as of January 1, 2007), at

http://www.epa.gov/cleanenergy/stateandlocal/activities.htm. Additional states identified by the Pew Center on Global

Climate Change, Map: States with Renewable Portfolio Standards, at http://www.pewclimate.org.

See Anja Kollmuss and Benjamin Bowell, “Voluntary Offsets For Air-Travel Carbon Emissions Evaluations and

Recommendations of Voluntary Offset Companies,” Tufts Climate Initiative, Revised April 5, 2007.

See CRS Report RL33812, Climate Change: Action by States To Address Greenhouse Gas Emissions, by (name redact

ed).

One way to address this potential dilemma is to restrict energy efficiency projects to only those that reduce or avoid

on-site combustion of fossil fuels.

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Voluntary Carbon Offsets: Overview and Assessment

individual sources emit relatively small volumes of gases, but there are a large number of

individual sources worldwide. In addition, these non-CO2 gases emitted have greater global

warming potentials (GWP) than carbon dioxide. 19 Offset projects in this category could provide

funding for emission control technology to capture these GHG emissions. Examples of emission

capture opportunities include:

•

Methane (CH4) emissions from landfills, livestock operations, or coal mines

(GWP = 25)

•

Nitrous oxide (N2O) emissions from agricultural operations or specific industrial

processes (GWP = 298)

•

Hydrofluorocarbon (HFC) emissions from specific industrial processes, such as

HFC-23 emissions from production of HCFC-22 (GWP of = 14,800)

•

Sulfur Hexafluoride (SF6) from specific industrial activities, such as

manufacturing of semiconductors (GWP = 22,800)

This offset category is relatively broad, as it can involve many different industrial activities. As

such, there are offset types in this category that are generally considered high quality, and others

that have generated some controversy. For example, methane capture (and destruction through

flaring) from landfills or coal mines has a reputation as a high quality offset. These projects are

relatively easy to measure and verify, and in many cases would not have occurred if not for the

offset market.

Supplementarity

This issue is perhaps more relevant within the context of a mandatory GHG reduction program, but it may have an

analogous application in a voluntary offset market. The Kyoto Protocol states that emissions credits (or carbon

offsets) must be “supplemental to domestic actions for the purpose of meeting quantified emission limitations and

reduction commitments....” (emphasis added).20 Proponents of supplementarity argue that carbon offsets are a means

of escaping or postponing real reductions.

This concept could also apply in the context of voluntary GHG reduction. Advocates of supplementarity may argue

that if parties (individuals or companies) want to achieve carbon neutrality, parties should focus primarily on reducing

their own emission-generating actions—for example, travel, vehicle choice, size of home or office, etc.—instead of

looking to counterbalance the emissions from lifestyle choices through the purchase of offsets.21

A GWP is an index of how much a GHG may, by its potency and quantity, contribute to global warming over a

period of time, typically 100 years. GWPs are used to compare a gas’s potency relative to carbon dioxide, which has a

GWP of 1. For example, methane’s GWP is 25, and is thus a more potent GHG than carbon dioxide by a factor of 25.

The GWPs listed in this report are from: Intergovernmental Panel on Climate Change, 2007, Climate Change 2007:

The Physical Science Basis, p. 212.

Article 17, Kyoto Protocol.

Taking this argument a step further, some have compared carbon offsets to indulgences that were sold during

medieval times: that is, purchasing offsets helps to assuage the guilt associated with carbon-intensive activities or

lifestyles. See, e.g., Kevin Smith, 2007, The Carbon Neutral Myth, Carbon Trade Watch, at

http://www.carbontradewatch.org/pubs/carbon_neutral_myth.pdf.

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Voluntary Carbon Offsets: Overview and Assessment

The Size of the Voluntary Carbon Offset Market

The precise size or value of the voluntary offset market is unknown, because there is currently no

registry or tracking system that follows exchanges in the voluntary market. However, several

organizations—the World Bank, 22 Point Carbon, 23 Ecosystem Marketplace24—have provided

estimates for recent years. Table 1 includes data from the last group.

Table 1. Estimates of the Volume and Value of the Voluntary Carbon Market

Year

Estimated Volume of Transactions

(in million metric tons of

CO2-equivalents, MtCO2-e)

Estimated Value of

Transactions

2004

11 MtCO2-e

$37 million

2005

11 MtCO2-e

$41 million

2006

25 MtCO2-e

$97 million

2007

65 MtCO2-e

$331million

Source: Ecosystem Marketplace, Forging a Frontier: State of the Voluntarsy Carbon Markets 2008 (2008).

Note: The above estimates include offsets from the Chicago Climate Exchance (CCX) and those in the overthe-counter (OTC) or retail market.

The estimates indicate that the size of the market has increased rapidly every year since 2004. The

World Bank report cites forecasts of increasing growth in coming years. One projection

(described as “optimistic” by the World Bank) indicates that the volume of transactions in the

international voluntary market will be 400 MtCO2-e by 2010.25 To put this figure in context, U.S.

GHG emissions were approximately 7,125 MtCO2-e in 2007.26

The primary components of the voluntary market are retail offsets and offsets generated through

the Chicago Climate Exchange. These markets, in addition to voluntary reporting and registry

programs, are discussed below.

Over-the-Counter (Retail) Offsets

In general, the voluntary offset market refers to retail or “over-the-counter” offsets that may be

purchased by anyone. Purchasing a retail offset is as simple as online shopping. More than 200

organizations—private and nonprofit entities—develop, provide, or sell retail offsets to

businesses and individuals in the voluntary market.27 The quality of the retail offsets in the

voluntary market varies considerably, largely because there are no commonly accepted standards.

World Bank, State and Trends of the Carbon Market 2008 (2008) and earlier versions.

Point Carbon, Carbon 2008 (2008) and earlier versions.

Ecosystem Marketplace, Forging a Frontier: State of the Voluntary Carbon Markets 2008, (2008).

The 2007 World Bank (p. 41) report cites ICF, 2006, Voluntary Carbon Offsets Market: Outlook 2007.

U.S. EPA (Draft), Inventory of U.S. Greenhouse Gas Emissions and Sinks:1990 – 2007 (2009).

In the 2008 Ecosystem Marketplace study (Forging a Frontier: State of the Voluntary Carbon Markets 2008),

approximately 150 offset suppliers responded to the survey. The study estimated that this number accounted for 73% of

the confirmed suppliers in the OTC market.

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Some sellers offer offsets that comply with standards generally regarded as quite stringent, such

as the CDM or the Gold Standard. Other sellers offer offsets that meet the seller’s self-established

guidelines, which may not be publicly available. These self-established protocols can vary

considerably, raising questions of integrity.

Chicago Climate Exchange

The Chicago Climate Exchange (CCX) was established in 2003 as a trading system for buyers

and sellers of offset projects to reduce GHG emissions. Buyers (i.e., GHG emitters) make

voluntary but legally binding commitments to meet GHG emission reduction targets; those who

emit more than their targets comply by purchasing CCX Carbon Financial Instrument (CFI)

contracts, which can be generated by qualifying carbon offset projects (from sellers). CCX has

guidelines and rules for determining eligible projects and their resulting carbon offsets. However,

recent studies have been critical of the quality of the offsets generated by the CCX.

Assessment of Carbon Offset Sellers

Numerous companies and organizations sell carbon offsets to individuals or groups in the

international, voluntary carbon market. The quality of the offsets may vary considerably, largely

because there are no commonly accepted standards. Some offset sellers offer offsets that comply

with standards that are generally regarded as the most stringent: for example, the Clean

Development Mechanism28 or the Gold Standard.29 These standards generally have a robust test

for additionality, as well as more substantial monitoring and verification procedures. As such,

offsets meeting these standards incur higher transaction costs, adding to the cost per ton of

carbon.

Some offset sellers offer offsets that meet the seller’s self-established guidelines. These selfestablished protocols can vary considerably, raising questions of integrity. Are the protocols

addressing additionality concerns? Are the offsets accounted in such a way as to avoid doublecounting? Are the offset projects verified by independent third parties? Assessing the standards

can be challenging for a consumer. 30 Moreover, some company’s standards are not made public,

but may be considered proprietary information. 31

The Clean Development Mechanism (CDM) was developed under the Kyoto Protocol. Projects are assessed on an

individual basis and must be approved by an Executive Board. An independent third-party verifies the projects

emission reductions. For more information, see http://unfccc.int/kyoto_protocol/items/2830.

The Gold Standard was developed by a group of non-governmental organizations. The Gold Standard sets

requirements beyond the CDM, but only applies to renewable and energy efficiency projects. See

http://www.cdmgoldstandard.org.

A 2008 study from the Stockholm Environment Institute reviewed different offset programs and the protocols used

by different programs and organizations. This review could serve as a useful resource for potential offset consumers

and policymakers designing offset protocols. See Anja Kollmuss et al., A Review of Offset Programs: Trading Systems,

Funds, Protocols, Standards and Retailers (2008), Stockholm Environment Institute.

For example, one report found it difficult to evaluate certain offset marketers, because the offset certification and

verification process was deemed proprietary. See Anja Kollmuss and Benjamin Bowell, 2007, Voluntary Offsets For

Air-Travel Carbon Emissions Evaluations and Recommendations of Voluntary Offset Companies, Tufts Climate

Initiative, Revised April 5, 2007.

Congressional Research Service

Voluntary Carbon Offsets: Overview and Assessment

Two studies examined approximately 30 companies and/or groups that sell carbon offsets on the

voluntary market.32 The following list highlights findings from the analyses:

•

The prices for carbon offsets range between $5 and $25 per ton of carbon.

•

Offset prices show a correlation with offset quality.

•

Overhead costs can vary substantially by seller. However, this factor may not be

a good indicator of offset quality. 33

•

The tax status of a seller (profit firm vs. nonprofit group) was not a good

indicator of offset quality.

Arguably, the most significant finding of the two studies is the general correlation between offset

price and offset quality. This correlation is more striking, considering the range of offset prices

($5 to $25 per ton of carbon reduced).

Possible Oversight from the Federal Trade Commission

The Federal Trade Commission (FTC) has taken preliminary actions that may lead to more specific oversight of the

voluntary offset market in the future. In January 2008, the FTC held a workshop on carbon offsets and the advertised

claims made by offset providers. In a parallel Federal Register notice (72 FR 66091, November 27, 2007), the FTC

requested public comment on its Guides for the Use of Environmental Marketing Claims (“Green Guides”). In the FTC’s

2009 Annual Report, it stated: “Research on consumer perception of green marketing claims also is underway, subject

to OMB approval, that will inform the Commission about how consumers understand words such as “eco friendly,”

“sustainable,” and “carbon neutral.”

Conclusions

Carbon offset purchases are intended to generate emission reductions that would not have

occurred otherwise. In terms of global climate change mitigation, an emission reduction,

avoidance, or sequestration is beneficial regardless of where or how it occurs. For example, a ton

of carbon reduced at a power plant will have the same atmospheric effect as a ton of carbon

reduced, avoided, or sequestered through an offset project.

The core issue for carbon offset projects is: do they actually offset emissions generated

elsewhere? If the credibility of the voluntary offsets is uncertain, claims of carbon neutrality may

lack merit. Evidence suggests that not all offset projects are of equal quality, because they are

developed through a range of standards. Although some standards are considered stringent, others

are less so. In some cases, the standards used are not even made available to the purchaser. Due to

the lack of common standards, some observers have referred to the current voluntary market as

the “wild west.” This does not suggest that all carbon offsets are low quality, but that the

consumer is forced to adopt a buyer-beware mentality when purchasing carbon offsets. This

places the responsibility on consumers to judge the quality of carbon offsets.

Ibid; Clean Air-Cool Planet, 2006, A Consumer’s Guide to Retail Carbon Offset Providers, prepared by Trexler

Climate + Energy Services (“Trexler Report”).

The Trexler report stated that low overhead costs may indicate that only minimal time was spent evaluating the

quality of the project.

Congressional Research Service

Voluntary Carbon Offsets: Overview and Assessment

The voluntary carbon offset market raises several issues that Congress may consider. The

viability—both actual and perceived—of the offset market may influence future policy decisions

regarding climate change. For instance, some people are concerned that the range in the quality of

voluntary market offsets may damage the overall credibility of carbon offsets.34 If this occurs, it

may affect policy decisions concerning whether or not to include offsets as an option in a

mandatory reduction program. This is an important policy question for Congress. Although some

oppose the use of offsets based on supplementarity concerns (see discussion above), other argue

that credible offsets would expand the compliance alternatives and likely lower the costs of a

GHG emissions reduction program.35

The voluntary program may inform the climate change policy debate in another manner. If

Congress were to enact a federal GHG emissions control program that included the use of offsets,

all of the integrity concerns—for example, additionality, permanence, accounting—would need to

be addressed in some fashion. The experiences gained in the voluntary market may help

policymakers develop standards or a process by which the integrity of offset projects could be

assessed.

Author Contact Information

(name redacted)

Analyst in Environmental Policy

/redacted/@crs.loc.gov, 7-....

See Trexler, Mark, and Kosloff, Laura, 2006, “Selling Carbon Neutrality,” Environmental Forum, March/April 2006;

and Hayes, David J., 2007, “Bring the U.S. into the Global Carbon Market,” The Environmental Forum, Vol.24, no. 4

(March/April 2007).

Both the Environmental Protection Agency (EPA) and the Energy Information Administration (EIA) analyzed the

costs associated with S. 280 (a cap-and-trade proposal that would allow the use of offsets). See, U.S. EPA, 2007, EPA

Analysis of The Climate Stewardship and Innovation Act of 2007; and EIA, 2007, Energy Market and Economic

Impacts of S. 280, the Climate Stewardship and Innovation Act of 2007.

Congressional Research Service

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