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Why does IDEAcarbon believe that carbon offsets reduce emissions?

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There is an equation to illustrate that carbon offsets do not reduce emissions: 1 – 1 = 0. Most people can understand this. If emissions are reduced in one place (-1) but through the sales of carbon credits emissions are allowed to continue somewhere else (+1) the overall result is zero. Unfortunately, IDEAcarbon does not understand this.

IDEAcarbon presents itself as a serious company. “We are at the cutting-edge of policy and market intelligence,” states the company’s website. IDEAcarbon was founded in 2007, by Shandi Modi (an economist) and Ian Johnson (former Vice President of the World Bank). Lord Nicolas Stern took part in the launch of the company. Stern is vice-president of IDEAcarbon’s parent company, IDEAglobal, and he’s on the advisory board of IDEAcarbon.

These are not carbon cowboys, then. So REDD-Monitor was surprised last week when IDEAcarbon tweeted that, “By definition additional offsets do not allow pollution to continue”. The context was Dan Nepstad’s response to Greenpeace’s report about REDD offsets in Chiapas.

The conversation on twitter is posted below. Of course this isn’t Nicolas Stern, Ian Johnson or Shandi Modi tweeting. But the same confusion is reflected on IDEAcarbon’s website, in this research note about financing REDD, for example:

“REDD+ is being presented to the private sector as an offsetting mechanism, a new financial market. This means that companies complying with domestic regulation of emissions can use the carbon saved by avoided deforestation to meet their targets rather than reduce emissions at home. It is therefore offered as a win-win opportunity: carbon emissions are reduced and money can be made.”

This is dreadfully confused. The second sentence seems to admit that there is no overall reduction – companies buy carbon credits “rather than reducing emissions at home”. The next sentence claims a “win-win opportunity” in which “emissions are reduced” and “money can be made”.

That offsets do not reduce emissions should not be a controversial point. Here are some proponents of carbon trading explaining that carbon trading does not reduce emissions:

  • Patrick Birley, the Chief Executive of the European Climate Exchange, November 2009: “It doesn’t reduce a single tonne of carbon going into the atmosphere. It’s got nothing to do with it. It’s all about the cap. The cap is the mechanism that produces a declining amount of carbon over the long term going into the atmosphere.”
  • Lex de Jonge, then-chair of the CDM Executive Board, December 2009: “CDM, at its best, is a zero sum game, because its credits are used to offset reduction obligations of Annex 1 countries.”
  • Sudeep Kodialbail, Lead Assessor, Climate Change Programme at SGS, October 2011: “If you look at the UNFCCC website, it’s very interesting when you read it because they don’t use the word reduce, they use the word stabilise.”

On its website, IDEAcarbon explains that “We believe that climate change is a positive business opportunity.” Hence the “win-win opportunity” and the “money can be made” attitude. But IDEAcarbon also claims to be, “open, honest and transparent”. Given the company’s statements on carbon offsets as a reduction of emissions, this is simply not true.

As the twitter discussion continued, IDEAcarbon changed its argument slightly. Instead of arguing that offsets reduce emissions, the argument for supporting offsets shifted to the argument that offsets “enable a higher overall level of ambition” in emissions reduction targets. (This is the same point that Christiana Figueres makes – Figueres was also an advisor of IDEAcarbon before she took up her current job as UNFCCC’s Executive Secretary.) I asked for evidence backing this claim of higher ambition. So far, IDEAcarbon’s only response is “the Australian ETS. It wouldn’t happen at all without offsets.”

Whether or not it would have happened without offsets is practically impossible to say, but the targets are certainly not ambitious in the short term: 5% below 2000 levels by 2020. The longer term target is better (a further 80% by 2050) but the nature of climate change is that the more we reduce immediately, the better. Offsets will of course only weaken these targets by allowing companies to buy carbon credits rather than reducing polluting emissions. And there are serious doubts that linking the EU carbon market by 2018 will succeed in reducing Australia’s emissions – especially if plans for nine new “mega mines” go ahead in Queensland.

But if there were any truth in the myth that offsets encourage governments to set more ambitious emissions reduction targets, then the UN climate negotiations would not be in a stalemate. More to the point, after the sale of one billion CDM credits, shouldn’t we be starting to see some reduction in concentrations of CO2 in the atmosphere? Or at least a reduction in the speed at which CO2 in the atmosphere is increasing. If not, how many carbon credits need to be sold before CO2 concentrations might start to reduce? As the graphs below show, sales of CDM credits are increasing steadily, as is the concentration of CO2 in the atmosphere. The only thing decreasing is the price of carbon credits.


PHOTO credit: The graph of Recent Mauna Loa CO2 is from NOAA. The sales of CDM credits and the price of CDM credits is from an Economist article, titled, “Complete Disaster in the Making”.

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  1. So it turns out that a company with two very senior ex-World Bankers (including a former ‘Chief Economist’) closely involved:

    a/ is unable to do basic arithmetic;
    b/ does not tell the truth;
    c/ is not consistent;
    d/ confuses making money with saving the planet.

    Absolutely no surprises there, then….

  2. @TreeFellas

    You have to understand that the only reason half the people are here in the Bank working on ‘climate’ is that they hope to go through the revolving door into the private sector and make a pile of $$$$$$ doing dodgy carbon deals.

    Tragically for them, the door has rusted shut, and now the only thing they can do is stay in the Bank and continue justifying their existences as long as possible. Serious people here treat this with the contempt it deserves, but with the Bank increasingly struggling to justify its own existence, climate trading looks like one of the few future growth markets.

  3. Surely the Advertising Standards Authority (ASA) in the UK could resolve this one. IDEACarbon have put out their pitch – “offsets reduce emissions”. How would the ASA judge that as accurate representation of the products and services IDEACarbon offer? As the above debate makes clear, both REDD Monitor and IDEACarbon seem convinced that the issue is clear – yet have failed to agree. Perhaps the ASA could due the third party that decides how offsets can be described when offers as products and services to the public at large. Is it allowed under the ASA to depict offsets as emissions reductions?

  4. Chris, in this article you have mathematically proved ideacarbon to be correct. In the first paragraph you say “if emissions are reduced in one place (-1)” that “reduced” is the offset credit, the Certified Emissions Reduction. Then in the Twitter conversation you say “abatement = negative emissions”. Therefore mathematically offset = abatement = negative emissions. That is the point, the behavior of the purchaser of the offset is a separate issue, the offset itself = negative emissions.

    I’m speaking in a personal capacity here, not for ideacarbon although I do work for them. I can tell you that the people who work there do so because we want to make a difference and help to reduce emissions. Neither I nor the company stands to gain anything financially from trying to help you understand how offsetting works, we’re simply trying to help you and your readers understand how emissions abatement actually works because we care about people not being misinformed. Misinformation and misunderstanding are as big a problem to the fight against climate change as enabling finance for abatement.

    Does the above explanation help at all?

  5. I think your equation is misleading. In the current scenario emissions in one place, say 1 tCO2, are added to emissions in another place, say 1 tCO2, and therefore under the current scenario you have 1 + 1 = 2 (eq.1), right?

    Under an offset-scenario, the fact that one CO2-polluter has to offset her 1 tCO2 by covering the necessary costs to reduce the 1 tCO2 of another polluter somewhere else (the idea, as you know it, is that reducing 1 tCO2 does not cost always the same everywhere and reductions should take place where it is the cheapest) turns the equation into 1 + 0 = 1 (eq.2), correct?

    If you compare both equations eq.1 and eq.2 you have a net reduction of 1 tCO2 or more generally a reduction of 50%, and not a zero reduction, as you state. I think the difference is that it is true that one polluter (if not responsible for reducing certain amount of emissions on its own, before considering offsetting) will continue to emit the same amount of CO2. However, when offsetting comes into the arithmetic, the overall emission level would be cut by half. Of course, that would be the case if all the potential pitfalls (additionality, permanence, etc) are overcome. But the system is well conceived.

  6. @tom greenwood (#4) – Thank you for this comment and thanks for being open about working for IDEAcarbon. (I understand that you are speaking in a personal capacity.)

    Here’s another quotation for you:

    “So far, the CDM has been a pure offset mechanism, where one tonne CO2 equivalent (tCO2e) reduction from a CDM project allows increasing emissions in the Annex B countries by one tonne[2]. Which options exist to develop the CDM further to also generate emissions reductions?”

    That’s from a report prepared for the German Federal Environment Agency, titled, “Options for utilizing the CDM for global emission reductions“. The question at the end would not be possible if CDM already generated emissions reductions.

    The footnote is kind of interesting too:

    “[2] Theoretically, full offsetting is no problem as long as the reduction from the CDM project is real and as long as incentives for introduction of emission reduction policies in developing countries are not distorted. A real emission reduction can only be achieved through activities that would not have happened otherwise and thus are ‘additional’ to business-as-usual. If CDM regulators lose sight of this crucial point, then the CDM will be generating meaningless paper credits that displace real reductions in industrialized countries. A study by Schneider (2007) concludes that about 40% of projects and 20% of the CER volume is unlikely to be additional. Michaelowa and Purohit (2007) find a high number of non-additional projects among a sample of 52 registered projects from India.”

    So, you are correct to say that it is possible that an offset project could reduce emissions in one place in the world. But there are several assumptions behind this statement. We have to assume that the project is additional, that there is no leakage, that the baseline is accurate and that the reduction is permanent. None of these assumptions are reasonable, as the scandal of the HFC-23 CDM credits illustrates.

    But with your comment that, “the behavior of the purchaser of the offset is a separate issue,” you give the game away. That would be like Walter White in the TV series Breaking Bad, manufacturing extremely high quality methamphetamine and arguing that, “the behaviour of the purchaser of the drug is a separate issue”. There is only one reason to buy meth, just like there is only one reason to buy carbon credits.

  7. @Renzo Giudice (#5) – Thanks, but I think your equations are misleading. Let’s take your equation one as the start point. 1 + 1 = 2. OK, I’ll accept that (emissions are taking place in both North and South).

    With offsets however the emissions are reduced in the South (assuming the various completely unreasonable assumptions outlined in my comment #6 above) and increased in the North (because a company in the North buys a carbon credit in order to pollute more). So equation two should read 2 + 0 = 2.

    That is in the absence of a cap, of course. But we’re not talking about a cap, we’re talking about carbon offsets. While a cap may reduce emissions, offsets don’t.

    The system is not “well conceived”. It’s been a disaster from start to finish. In order to address climate change we need to reduce emissions from fossil fuels. From the start, carbon trading has been a distraction from doing this. Compare how much time has been spent during the COPs on ever more complicated carbon trading mechanisms (including REDD) with how much time has been spent on ways of leaving fossil fuels in the ground.

    It’s worth reading what happening in 1997 at the Kyoto COP. First the US negotiators (led by Al Gore) reduced emissions reduction targets. Having done that, they destroyed the agreement by insisting that rich countries can buy their pathetically small emissions cuts from poor countries. That’s one of the reasons, as George Monbiot points out, “By ensuring that the rich nations would not make real cuts, Gore also guaranteed that the poor ones scoffed when we asked them to do as we don’t.”

  8. Isn’t the simple key to understanding the correct equation in the very term “offset”?? How much deconstructing does that actually take? It means, ‘Carry on doing something somewhere (1) but stopping doing an equivalent thing somewhere else instead (-1)’: 1 – 1 = 0.

    Which is enough to see us continuing to rush headlong into irreversible climate change but, as Chris points out, in the case of REDD, the equation is likely to be worse still: 1 – 0 = 1, because REDD will very likely only produce ‘hot air’ offset credits with no real emissions reduction values.

  9. @chrislang

    Ok I’m glad that we’re agreed that the creation of the offset credit itself (if additional, which i hope is what we’re discussing, of course non-additional offsets would be crazy but then no one trades those).

    I’m happy to discuss the behaviour of the purchaser as well. I think these very simplified sums people have been using are a bit too simple so I’ll introduce a slightly more real-world way of thinking about it.

    Business As Usual (BAU) is the emissions that a company would emit in the absence of any policy incentive to reduce emissions. What you’r saying is that buying offsets allows the company to continue with BAU at home. This is 100% true. Let’s say a company’s BAU emissions in a given year are 1m. If the company is not under an ETS it will emit 1m unless it buy voluntary offsets. Let’s say it buys 10k of voluntary offsets, then it’s total emissions will be 1m – 10k = 90k, i.e. an outright reduction.

    Now let’s take the same company but assumed it’s under and ETS which caps it’s emissions at 85k. Now it doesn’t have an option to emit 1m in total (BAU), instead it has choice to either abate 15k at home in which case its emissions will be 85k at home or it can can emit BAU at home and buy 15k of offsets, in which case its total emissions will be 1m -15k = 85k. The company can choose either approach as long as its TOTAL emissions are 85k.

    Can you see how in under all cases the purchasing of offsets actually reduces total emissions down from BAU?

    I think the mistake you are making is that you think that if a company’s BAU is 1m and it buys 10k offsets then it will increase its emissions at home to 1.01m, so the total emissions would be 1.01m -10k = 1m. So in that case offsets would not have reduced overall emissions. That’s not right though because BAU is defined as ‘what the company would emit in the absence of any policy incentives to reduce emissions’ so owning offsets wouldn’t increase it. In fact, since buying offsets costs money it ties up company money in reducing emissions, a side-effect is leaving less money to be spent on expanding activities which would increase emissions.

    Does this help?

  10. just realised there are typos in the sums in paragraphs 3 and 4.

    should read 1m – 10k = 990k, 1m – 15k = 985k,

  11. @Tom Greenwood

    Do you see that what you have perfectly clarified (#9) is that it is the ‘cap’ that reduces the emissions, not the ‘trade’. It is not the ‘purchasing of offsets’ that reduces emissions, this simply makes the reduction of emissions required under the cap a bit cheaper (possibly, but also less reliable).

    So the way to actually reduce emissions is to lower the cap – but I think it is clear enough now that the EU is politically incapable of doing so, so we are left with no other option but national regulatory reductions/taxes. These would have the same effect (as far as the atmosphere is concerned) as unilaterally ‘lowering the cap’ – only without the possibility of offsets.

  12. @treefellas

    I’m afraid that’s still not right. Setting a cap doesn’t actually reduce emissions, a cap is just a target. Either offset abatement or domestic abatment is how you meet that target. The abatement is the actual reduction.

  13. The idea that you are getting a job done when you reduce emissions in your company or buying an offset is at the heart of this issue, I believe. If you part from accepting the status quo and a “business as usual” approach, that seems reasonable.

    But those days are over. With thousands of people dying, millions losing their homes every year, the idea of “business as usual” is appalling.

    By now, most people interested in climate change have heard of 350ppm atmospheric CO2 is a hard natural cap if you will. If we exceed it for an extended period, humanity will suffer the transition to a hot planet without permanent ice. We are already over 390ppm today.
    The implication is pretty obvious: we must STOP burning fossil fuels as soon as we can.

    The transition to a post-carbon world economy is the urgent task of our generation. If offsets would help this transition, they would be great. But they don’t. They generate a life-support system for industries that must transform themselves or die out.

    Hope this helps for contextualizing.

    Here is a bit more detail to these arguments:

  14. Tom, of course it isn’t the cap in itself that reduces emissions but the actual abatement taking place. And a cap requires, by definition, that abatement to take place. So, as you argue yourself, this happens either via offsets or domestic cuts. Considering the circularity of this discussion so far, let me spell it out to avoid further misunderstandings: if a company under a legal cap decides to buy offsets, this means that this company won’t make domestic cuts corresponding to the offsets bought – hence the very notion of an offset. The alternative to buying offsets is to reduce emissions domestically. In other words: offsets bought under a cap will not offer emission reductions that wouldn’t have had to be made regardless.

    I’m afraid this is crystal clear. Offsets DO NOT reduce emissions in and of themselves.

  15. @Jens Clausen

    You’re absolutely right that in the case of a company subject to a legal cap the reductions would have to be made domestically if offsets were not allowed. I don’t see the relevance of this point to whether offsets reduce emissions or not?

    Look at it this way, you could just as well make the same argument for domestic abatement:

    “If a company under a legal cap chooses to abate its emissions domestically, since the cap its fixed, that means that more emissions are allowed to take place outside the cap, since fewer offsets are bought.” Therefore your argument would have to conclude that “domestic abatement DOES NOT reduces emissions in and of itself.” Doesn’t that sound ridiculous?

    Can you see how the two situations are a mirror image of each other? This equation has to balance.

    BAU – CAP = domestic abatement + offsets

    which can be rearranged to

    CAP = BAU – domestic abatement – offsets

    Of course the answer is that BOTH offsets and domestic abatement DO reduce emissions in and of themselves, but neither of them to beyond the level of the cap.

  16. @Jens Clausen

    Also, I think this is really important, caps don’t actually fully require abatement to take place, they have a price cap whereby the cap can be broken if the price of allowances goes too high. This comes back to the political reality. No government in reality can pass a carbon trading scheme in which the price could rise to, say, $1000. Instead they say, ‘if the price gets too high you can just pay a fixed fine for every tonne you emit over the cap.’ The level they set the fine at is called the price ceiling.

    This is where offsets reducing the average cost of abatement down is critical. By lowering the average cost of abatement, offsets help to keep the allowance price below the ‘price ceiling’ level at which the cap could be legally broken.

    The politically ‘bearable’ cost of abatement is critical in determining what the cap will be for different countries, since a tighter cap pushes allowance prices up (but a greater share of offsets pushes prices down). This is why having a greater share of offsets in total abatement means that tighter caps can be set.

  17. @Tom Greenwood.

    How would you apply the offsets model to Indonesia? Indonesia has said they will reduce emissions by 26% – 41% by 2020 – depending on how much international support they receive. Now, Indonesia does not seem to have grasped this yet, but if they sell a load of offsets to international buyers, presumably Indonesia can no longer “claim” those reductions as its own, as other people (companies or countries) will be claiming them in order to mitigate their failure to reduce emissions.

    Under the mathematical logic of offsets you have outlined, if Indonesia reduced 1 billion tonnes of CO2e through REDD+ without international support, and then sold 1 billion tonnes of REDD+ credits in the type of trading system being sought within the UNFCCC, or even in a voluntary market, how many emissions reductions could Indonesia claim from REDD+ in its national accounting?

  18. @papuaforesteye

    I think you’ve already answered that one yourself correctly already. The emissions reduction belongs to the owner of the offset. If you sell the offset you lose the claim to the emission reduction.

    This is literally accounted for in the case of annex b countries. If you generate an ERU offset you have to delete an AAU from your national accounts.

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