Creating Regulation for the
Voluntary Carbon Offset Market
Katie Morgan, 2L
I. Introduction
As President Obama encourages the U.S. Congress to send him a bill for a carbon cap and
trade program and pushes for a new global treaty, little is known about what the specifics of
either piece of legislation will be.1 While analysis of the President’s plan says it will mostly
target large industries, such as oil, electric, manufacturing, and coal, nothing has been said of
whether the plan will allow voluntary carbon offsets.2
As a market that has known to be wrought with fraud and confusion, it is difficult to see
carbon offsets fitting into the cap and trade program that already involves too many pieces that
do not fit the puzzle.3 Additionally, regulating an industry that is currently optional and gains
most of its business on the internet could give the regulatory body even more problems.
While, most likely, a cap and trade program will be the solution, or at least the answer to
calls to curb greenhouse gas emissions, it is hard to deny the emergence and potential role of
carbon offsets. With a global market that was estimated to be worth over $331 million in 2007,
and growing anywhere from 100 to 200 percent every year, there is no disputing a demand for
it.4 A voluntary carbon offset market offers a means of reversing climate change by allowing
1
Kim Chipman and Catherine Dodge, Obama Plan Has $79 Billion From Cap-and-Trade in 2012, Bloomberg News
(February 26, 2009), available at
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDT1Ybl.PccE&refer=home (last visited April 8,
2009).
2
John Broder, Obama’s Greenhouse Gas Gamble, The New York Times (February 27, 2009), available at
http://www.nytimes.com/2009/02/28/science/earth/28capntrade.html?ref=politics (last visited April 8, 2009).
3
Brown Calls on Feds for Carbon Offset Standards, Legal News Line (March 19, 2008), available at
http://www.legalnewsline.com/news/209421-brown-calls-on-feds-for-carbon-offset-standards (last visited April 8,
2009).
4
Jonathan Bardelline, Voluntary Carbon Market Tripled in Value in 2007, Mandatory Market Doubled, ClimateBiz
(May 12, 2008), available at http://www.climatebiz.com/news/2008/05/12/voluntary-carbon-market-tripled-value2007-mandatory-market-doubled (last visited April 8, 2009).
billions of individuals and entities not covered by a cap and trade program to contribute to the
reduction of greenhouse gases.5
In section two, this paper will give an overview of the voluntary carbon offset market as it
exists now. Section three will address many of the issues that threaten this market with
corruption every day. Besides the constant overhang of fraud, issues such as additionality,
permanence, measuring pollution, and ever-evolving technology are examined to encompass all
issues that need to be taken into consideration. Section four addresses the current regulation of
the carbon offset market on an international, national, regional, and state level. Finally, section
five of this paper will tackle possible scenarios on regulation for the carbon offset industry to
ensure that greenhouse gas reduction occurs, and the amount of fraud in offsets is decreased.
Regulation of the carbon offset market is paramount to its survival and reduction of greenhouse
gases that potentially will not be under a cap and trade program.6 Without regulation, the market
has no long term hope of surviving.
II.
Background
The term “carbon offset” has been the definition of many descriptions relating to climate
change and carbon. This paper will define carbon offset as a “measurable reduction, removal or
avoidance of greenhouse gas emissions purchased from a source that is used to compensate for
emissions from sources that may not be subject to a cap and trade program.”7
5
Australian Government, Department of Climate Change, Agenda Paper: Overarching Design Principles-Coverage
and Scope for Offsets (June 5, 2008), available at
http://www.climatechange.gov.au/emissionstrading/consultation/pubs/ets-roundtable4-paper2c-design.pdf , (last
visited April 9, 2008).
6
Id.
7
Richard M. Schwartz, Donna Mussio, David A. Zilberberg and Coleman Kennedy, United States: President-Elect
Obama´s Climate Change And Clean Energy Initiatives: The Risks And Opportunities Posed By The Greening Of
Referring to this definition for this paper’s focus, it mainly directs its attention towards the
voluntary carbon market. Hundreds of online companies are selling carbon offsets that
potentially would not be under a cap and trade program to individuals and entities to
counterbalance their carbon footprint from flying, driving, home, having an event or wedding, or
just for daily activities that produce carbon.8 While the motivation for most individuals is to
“green” their lifestyles, many entities are currently purchasing carbon offsets voluntary in hopes
if it is mandated they can use their already purchased offsets.9
These individuals may go to numerous websites and buy the equivalent of how much carbon
they expended.10 Currently, a person will pay approximately ten dollars per ton of carbon to
offset their usage.11 The money reportedly, then goes to projects in an area of your choice,
including three main realms, renewable energy, reforestation, or energy efficiency.12
For example, a large accounting firm wants to offset its carbon footprint it creates by flying
and driving its employees across the world to audits its client’s financial records. It also wants to
offset all the carbon it produces from daily office activities and resources used. Since this
company, like so many others is not mandatorily covered by a cap and trade program it may buy
a carbon offset for its activity at numerous carbon-offsetting websites. The company will also be
able to choose what type of project it wants its money to go to, renewable energy, reforestation,
or energy efficiency.
The American Economy (December 23, 2008), available at http://www.mondaq.com/article.asp?articleid=72008
(last visited April 8, 2009).
8
See Carbonfund.org calculator, Carbonfund.org, http://www.carbonfund.org/Calculators, (last visited April 8,
2009); United States Government Accountability Office, Carbon Offsets, The U.S. Voluntary Market is Growing,
but Quality Assurance Poses Challenges for Market Participants, at 2 (August 2008),
http://www.gao.gov/new.items/d081048.pdf (last visited April 8, 2009).
9
Supra note 4.
10
See generally, www.carbonfund.org, available at www.carbonfund.org (last visited April 8, 2009).
11
Supra note 8.
12
Anja Kollmuss and Benjamin Bowell, Tufts Climate Initiative, Voluntary Offsets For Air-Travel Carbon
Emissions, Evaluations and Recommendations of Voluntary Offset Companies (December 2006), available at
http://www.tufts.edu/tie/carbonoffsets/TCI_Carbon_Offsets_Paper_April-2-07.pdf, (last visited April 8, 2009).
The entities selling carbon offsets are not regulated, although some voluntarily comply and
agree to follow the rules set out by the Clean Development Mechanism and Joint
Implementation’s gold standard or to auditing by a third party.13 However, there are many
carbon offset providers that do not comply with any regulatory body.14 This does not mean that
they are fraudulent; however, consumers are not aware, nor do they have the extra protection
needed to ensure that their money is actually going to a carbon reducing project.15
The voluntary carbon offset market differs from a cap and trade program, such as the Kyoto
Protocol to the United Nations Framework Convention on Climate Change (UNFCCC).16 Kyoto
is a legally binding agreement for nations who choose to participate.17 Under Kyoto’s cap and
trade program, nations have “caps” or limits on the amount of emissions they can produce. Most
nations target heavy polluting industries to reduce their emissions by placing a cap on their
emissions that they cannot exceed.18 If the entity exceeds the amount, it must buy credits from
another, who has excess allowances or possibly from a carbon offset project under the Joint
Implementation (JI) or Clean Development Mechanism (CDM). 19 However, under the Kyoto
Protocol, and unlike the voluntary carbon offset market, this behavior is legally enforceable and
uses a trading program.20
13
Supra note 8; The Gold Standard, The Gold Standard Foundation, available at
http://www.cdmgoldstandard.org/about_goldstandard.php, (last visited April 8, 2009).
14
EcoBusiness Links, How Much Does Carbon Offsetting cost? Price Survey, available at
http://www.ecobusinesslinks.com/carbon_offset_wind_credits_carbon_reduction.htm, (last visited April 8, 2009).
15
Id.
16
United Nations, Kyoto Protocol to the United Nations Framework Convention on Climate Change (1998),
available at http://unfccc.int/resource/docs/convkp/kpeng.pdf, (last visited, April 8, 2009).
17
Id.
18
Id.
19
Id.
20
Id.
The voluntary carbon offset market is that, voluntary. No one must participate; it is another
way to reduce greenhouse gas emissions that otherwise would not have been reduced under a cap
and trade program.
III. Issues With Carbon Offsets
At first glance, carbon offsets appear to hold a promising future, with expectations offsets
will be over half a billion dollars per year business within the next few years.21 Digging deeper
than just its financial impact, uncovers an onslaught of unknowns and questions. Although fraud
looms over the idea with much worry, things like additionality, permanency, and measuring
offsets and the emissions they reduce are just a few things to be anxious about when considering
the regulation carbon offsets.22 Without a serious approach to resolve the many avenues to use
this market in a fraudulent manner, the carbon offset market has little hope to have a positive
effect on global climate change.
Fraud
While “nature does not fall for accounting schemes,” according to a leading researcher in the
carbon offsets market, Anja Kollmus, consumers of the voluntary carbon offset market have not
been so lucky.23 The issue of fraud lives and breathes off of all other negative issues regarding
carbon offsets. Additionality, permanency, verifiability, and enforceability, are all issues within
themselves but additionally are magnified by the use of fraud in the market. When there is a
21
Supra note 4.
Supra note 12.
23
Another Inconvenient Truth: Behind the Feel-good Hype of Carbon Offsets, Some of the Deals Don’t Deliver,
Business Week (March 26, 2007), available at
http://www.businessweek.com/magazine/content/07_13/b4027057.htm, (last visited April 8, 2009).
22
chance to negatively manipulate carbon offsets at every turn, how do consumers ever know if
what they are paying for, is what they are getting?
The business structure of the carbon offset industry contributes to its fraud. Although, it is
possibly its best friend for sales; it is its worst enemy for fraud. While it is easy for consumers
and beneficial for the industry to be able to purchase offsets with the click of a mouse, it shades
the transparency of the transactions.
Offsets are basically an intangible to the consumer. They are purchased for the general good
they do for the environment, but the majority of buyers are not going to travel to see the offset
project they funded or request the specifications for the project to ensure it passes an
additionality test. Further, fraud can occur with the best of intentions, due to a number of things
that can go wrong in the process including inaccuracies when measuring emissions which will be
discussed later on.24
As a result of growing concern on the integrity of carbon offsets, the Federal Trade
Commission in early 2008 announced that they would investigate the voluntary carbon offset
industry for a myriad of activities like the ones mentioned above, that may constitute fraud if
true.25 The results have not been released yet, but other studies have been done as well.
Specifically, the Financial Times reported that its international investigation on carbon offsets
revealed worthless credits that are not reducing emissions, brokerage companies receiving profits
from doing little to nothing, and overcharging for offsets that reduce fewer emissions than what
consumers paid for them.26
Fiona Harvey and Stephen Fidler, Industry Caught in Carbon ‘Smokescreen’, Financial Times (April 25, 2007),
available at http://www.ft.com/cms/s/0/48e334ce-f355-11db-9845-000b5df10621.html?nclick_check=1, (last visited
April 8, 2009).
25
Christopher Joyce, Carbon Offsets: Government Warns of Fraud Risk, National Public Radio (January 3, 2008),
available at http://www.npr.org/templates/story/story.php?storyId=17814838, (last visited April 8, 2009).
26
Supra note 24.
24
Individual states as well are calling on the federal government to research fraud in the carbon
offset market.27 With multiple entities drawing attention to the possibility of fraud, the
consensus seems to be that regulation will decrease the deception.28
Additionality
Additionality seems simple enough, but is one of the biggest factors that can affect the
integrity of a project.29 It begs the question, such as the Stockholm Environmental Institute has
formed, “would the activity have occurred, holding all else constant if the activity were not
implemented as an offset project?”30 In other words would the entity seeking offset money to
fund a project, gone ahead and completed the project anyway, even if they could not have
obtained the funding through selling offsets? If so, it is argued that these projects are not
additional and should be excluded from the offset market.31
How can it ever be truly determined if a project would not have occurred? This simple
question turns complicated when applied to actual projects and their sources of funding. With
such a difficult question to answer, it is difficult to begin to develop or edit a process to evaluate
an offset project for additionality.
27
Press Release, Office of the Attorney General of California, Brown Calls on FTC to Guard Against Fraud in the
Carbon Offset Market (January 25, 2008), available at, http://ag.ca.gov/newsalerts/release.php?id=1520, (last visited
April 8, 2009).
28
Supra note 24; 27.
29
Jonathan Ramseur, Congressional Research Service, The Role of Offsts in a Greenhouse Gas Emissions Cap-andTrade Program: Potential Benefits and Concerns (September 22, 2008), available at
http://www.ncseonline.org/nle/crsreports/08July/RL34436.pdf, (last visited April 8, 2009).
30
Anja Kollmuss, Michael Lazarus, Carrie Lee, and Clifford Polycarp, Stockholm Environment Institute, A Review
of Offset Programs: Trading Systems, Funds Protocols, Standards and Retailers (2008), at page 27, available at
http://www.sei-us.org/climate-and-energy/SEIOffsetReview08.pdf, (last visited April 8, 2009).
31
Id.
Depending on the entity, additionality is addressed in several different manners.32 Two main
but expansive methods of testing for additionality as well as the entire offset process have risen
to the top, the project specific approach and standardized or benchmarked approach.33
The project specific approach is an analysis that focuses on the investment test; whether a
project is dependent on offset revenue. It also takes into account whether the project has
overcome significant implementation roadblocks, known as the barrier test. Finally, the project
specific approach looks to the technology being implemented and how common it is, otherwise
known as the common practice test.34
The project specific approach is used by the Kyoto Protocol’s CDM and is considered a
bottom up approach.35 The CDM offers a voluntary methodological tool for demonstration and
assessment of additionality which employs five steps similar to the tests discussed above, into
consideration.36 Those five steps include identification of alternatives to the project activity;
investment analysis to determine that the proposed project activity is either, one, the most
economically or financially attractive, or two, not economically or financially feasible; barriers
analysis; and common practice analysis.37
Each step includes detailed questions to ask and factors to consider. The first step, identifies
alternatives to project activity is probably the least self explanatory. There, consideration of the
project’s compliance with mandatory regulations and laws is important. While some exceptions
may be made for unenforced regulations or laws, projects must be in compliance with the
32
Id.
Eron Bloomgarden and Mark Trexler, Another Look at Additionality, Environmental Finance (May 2008),
available at http://www.ecosecurities.com/Assets/13651/ef0508marfketview_p17_final.pdf, (last visited April 8,
2009).
34
Id.; Supra note 30.
35
Clean Development Mechanism, Methodological Tool: “Tool for the Demonstration and Assessment of
Additionality”, available at http://cdm.unfccc.int/Reference/tools/ls/meth_tool01.pdf, (last visited April 8, 2009).
36
Id.
37
Id.
33
jurisdiction’s laws and regulations even if they are contrary to objectives that lead to greenhouse
gas reductions.38
The second step analyzes whether either the project is the most economically or financially
attractive practice or not economically or financially feasible. Determining the best analysis is
important here. As different projects vary, so does the way they should be analyzed. The CDM
suggests using one of three options for an economic and financial evaluation: one, a simple cost
that considers the cost and the costs of alternatives; two, an investment comparison analysis,
identifying the financial indicator, such as IRR, NPV, cost benefit ratio, or unit cost of service; or
three, a benchmark analysis.39
Third, the CDM uses a barrier analysis to find out whether the proposed project faces barriers
that will prevent a proposed project from being implemented and do not prevent the proposed
project’s alternatives implementation. Within this analysis, it is important to identify barriers,
and then show that those identified barriers would prevent the proposed project from occurring
but not the alternatives. If this analysis does not assuage the identified barriers that prevent the
proposed project’s creation, then it is not additional.40
Finally, if the proposed project survives the three steps above, a common practice analysis is
completed, unless the project is the first of its kind. This includes looking at comparable projects
and taking into consideration any other options that are occurring with the same goal.41
The benchmarked approach is quickly becoming the preferred rather than the alternative to
the project based approach. It focuses less on the project and more on the amount of emissions it
38
Id.
Id.
40
Id.
41
Id.
39
reduces by its activity.42 Usually the benchmarked approach is a top-down analysis and creates a
benchmark for emissions across a certain area. Those that outperform the benchmark are
considered additional. A benchmarked approach minimizes the focus that is placed on projects
and the individual analysis needed for each one; however, it heavily increases the work done on
the front end and places a significant burden on ensuring that the measurement of emissions is
accurate.43 While cutting out a majority of the work for individuals, the benchmark approach
would need much work and accredited accuracy of its measurements to ensure that it was
assessing additionality correctly.
Leakage
The implementation and indirect after affects of a carbon offset project can result in
additional carbon emissions. Leakage is an increase in emissions due to the actual
implementation or construction of a carbon offset project or an increase outside of the project
boundary because of the project’s implementation.44
To better illustrate leakage due to implementation, an example is useful. Company A decides
to replant 200 acres of a remote part of a forest that has been destroyed by a human-made fire.
To get to that part of the forest with the supplies and equipment needed would require the
destruction of hundreds of other trees to create a road. Additionally, the kind of tree that is
native to that region is rare and saplings must grow for one year in a greenhouse powered with
electricity produced by coal. The emissions produced by the project before the trees would ever
42
Supra note 33.
Supra note 33; Anja Kollmuss, Clifford Polycarp, and Helge Zink, World Wildlife Fund, Stockholm Environment
Institute and Tricorona, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards
(2008), available at http://www.sei-us.org/wwf_offset_standards_execsum.pdf, (last visited April 8, 2009).
44
National Association of Local Government Environmental Professionals, Municipal Carbon Offsets (February 18,
2009), available at http://www.nalgep.org/ewebeditpro/items/O93F21094.pdf, (last visited April 8, 2009).
43
be planted would outweigh the possible emissions reduction. This example would be
considered leakage because of the project’s actual implementation.
Leakage outside of the project boundary is a larger worry and has been the main point of
criticism for the Kyoto Protocol.45 Critics cite that by cutting emissions in industrialized
countries, the entities that are heavy polluters will simply go to developing countries. Simply,
the emissions cut in theory in one country would be moved to another country instead of
eliminated.46
The latter is a mounting concern. While regulations may be created to prevent leakage from
carbon offset projects, the same cannot be said as easy for leakage outside of the project
boundary. The focus of this paper precludes an in depth discussion of leakage outside of the
project boundary, but it can be said that this remains a rising issue until all nations come on
board to reduce greenhouse gas emissions.
Permanence
Yet another roadblock on the path to success for carbon offsets is the permanence of a
project. Permanence is the idea that a carbon offset project will continue and therefore its
benefits to the environment including the reduction of greenhouse gases will be permanent and
irreversible.47 Whether a project will be permanent to continue to offset emissions usually
depends upon human activity and natural occurrences.48
Richard Black, Trade Can ‘Export’ CO2 Emissions, BBC News (December 19, 2005), available at
http://news.bbc.co.uk/2/hi/science/nature/4542104.stm, (last visited April 8, 2009).
46
Id.
47
Allison Atherton and Chris Riedy, Institute for Sustainable Futures, Carbon Offset Watch 2008 Assessment Report
(2008), available at
https://climatefriendly.com/skins/files/file/pdf/Carbon_Offset_Watch_Report.pdf?PHPSESSID=a8a1gua2avoe744rn
mh267kkr5, (last visited April 8, 2009).
48
Supra note 28 at 16.
45
Permanency is mostly a concern in reforestation projects.49 Since trees and plants are natural
carbon sequesters, they trap carbon in their structure until the plant or tree is destroyed, then the
carbon is released.50 Changes in title to property leading to destruction of plant or tree matter,
fire, and more do not only release carbon dioxide back into the atmosphere, they also make the
large amount of money and resources used to develop a project for naught. This problem has
already led to a decrease of funding to reforestation projects.51
Legally, permanence raises significant issues, specifically dealing with property rights and
who will face liability if the carbon is released.52 If carbon is sequestered in a forest, do the
rights belong with those who own the timber or the land?53 Who then is responsible for ensuring
that the carbon remains sequestered? A whole new realm of law will have to be created just to
deal with permanence.
Verifiability
The ability to register and track carbon offsets as well as the standards set for them plays into
the very idea of being able to regulate it.54 Regulation calls for standards and measures one is or
49
Supra note 30 at 96.
Kenneth Chomitz, The World Bank, Evaluating Carbon Offsets from Foresty and Energy Projects How Do They
Compare? (June 2000), at page 12, available at http://wwwwds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2000/06/27/000094946_0006130535049/Rendere
d/PDF/multi_page.pdf, (last visited April 8, 2009).
51
Richard Bayon, Katherine Hamilton, Douglas Higgins, and Guy Turner, The Katoomba Group’s Ecosystem
Marketplace, State of the Voluntary Carbon Markets 2007: Picking Up Steam (July 18, 2007), at page 27, available
at http://ecosystemmarketplace.com/documents/acrobat/StateoftheVoluntaryCarbonMarket18July_Final.pdf, (last
visited April 8, 2009).
52
Paul Curnow, Baker&McKenzie, Carbon Capture and Storage in the Carbon Market – Key Legal Issues
(December 2, 2005), at page 10, available at www.wbcsd.org/includes/getTarget.asp?type=d&id=MTc0ODI, (last
visited April 8, 2009).
53
Monica Restrepo, The World Bank, Legal Due Diligence for BioCF Projects (February 5, 2008), available at
http://74.125.95.132/search?q=cache:DQai9352_j0J:wbcarbonfinance.org/docs/Day_1_BioCF__Legal_due_diligence__MTR_02-0508_.ppt+legal+issues+with+permanence+carbon&cd=10&hl=en&ct=clnk&gl=us, (last visited April 8, 2009).
54
U.S. Forest Service, Carbon Market Opportunities for Private Forest Landowners,
http://www.na.fs.fed.us/ecosystemservices/carbon/glossary.shtm, (last visited April 8, 2009).
50
is not to exceed. With these expectations in mind, it is vital that carbon offset projects and the
standards in place for them are able and go through a complete verification to ensure none of the
negative issues that have been discussed above occur.
Verification of the entire carbon offset system is a daunting task. The overview of the
approach to assess additionality, mentioned above, alone, is only a small thread in total
verification of carbon offsets.55 Verification does not only involve setting standards and
measures. It also involves choosing the right science to develop the quantification, monitoring,
reporting, and verification of greenhouse gas emissions, reductions and, or removals.56 Selecting
the appropriate technology and science is an important leg for the integrity of an offset to stand.57
Although there is not a mandatory verification system in place, several third party entities
exist today that have created their own system.58 Presumably, the most widely known
verification system is the CDM’s gold standard.59 The gold standard sets out its verification
system as a set of screens that guide project proponents through the project development
process.60 The CDM itself does not actually perform the guide but rather the information is
checked by an independent, UNFCCCC-accredited organization.61
55
Supra note 33, 43.
American Carbon Registry, Carbon Accounting, available at http://www.americancarbonregistry.org/carbonaccounting/carbon-accounting/?searchterm=verify, (last visited April 8, 2009).
57
Id.
58
Id.
59
The Gold Standard, How Does it Work?, available at
http://www.cdmgoldstandard.org/how_does_it_work.php?id=17, (last visited April 8, 2009).
60
Id.
61
Id.
56
The CDM’s Gold Standard is essentially a project specific approach that is used for both
CDM projects and the voluntary offset market. However, it is important to note that this process
has been simplified for the voluntary offset market for easier application.62
To go even further, some carbon offset entities have their verification systems certified.
Certification differs from verification in that certification involves developing the standards a
project should meet when verified.63 The Climate, Community and Biodiversity Alliance is just
one entity offering to certify an offset verification system.64 Like verification, there are
numerous providers who offer certification to ensure the standards the verification system
employs are accurate as they possibly can be.65
Ethical
Are carbon offsets a way of absolving our environmental sins? Also referred to as a guilt tax,
buying your way out of responsibility, and paying to pollute, some have argued that carbon
offsets are a mechanism to make us feel better about our pollution in the world’s ever worsening
environmental situation.66
Whether the thought of redemption is present in an individual’s mind when purchasing a
carbon offset or he is just truly committed to cutting emissions is really of no concern to the
world’s environment. What matters is finding a solution and devoting everyone to it.
62
The Gold Standard, Differences Between the Gold Standard for CDM Projects and the Gold Standard for
Voluntary Offsets, available at http://www.cdmgoldstandard.org/uploads/file/differences_GS-CER_VER.pdf, (last
visited April 8, 2009).
63
Carbonfund.org, Carbon Offset Certification, available at
http://www.carbonfund.org/site/pages/our_projects/category/Verification, (last visited April 8, 2009).
64
The Climate, Community & Biodiversity Alliance, CCB Standards, available at http://www.climatestandards.org/, (last visited, April 8, 2009).
65
Supra note 63.
66
Dara Colwell, Carbon Offsets: Buying Your Way Out of Responsibility, Alternet (April 11, 2007), available at
http://www.alternet.org/environment/50077, (last visited April 8, 2008).
IV. Current Governmental Regulation in the Voluntary and Mandatory Carbon Offset
Market
Federal
Although the voluntary carbon offsets market is rapidly growing in the U.S., currently, there
is no regulation on the federal level. While there have been more than several attempts to
include carbon offsets under the guise of regulation, most of the proposals regarding offsets have
come in conjunction with regulation for a cap and trade program.67 As of yet, none have been
successful.68
The highlights of the regulation proposed for carbon offsets in the 110th Congress called
on the EPA to allow and administer a carbon offsets program, allow only reforestation projects,
allow any project that was approved, and while some regulation would not have permitted offset
projects to occur in foreign countries, separate legislation allowed up to thirty percent of the
entities’ total offsets to take place abroad.69 Most of these bills never saw the light of day on the
floor of the House or Senate, let alone passage. However, the proposed bills were more of toe in
a pool approach, testing the water to see who would support what and on which level when the
appropriate time arrived. 70 The reality for most of these bills if passed would have been the
veto power of former President Bush.
67
Supra, note 29.
Id.
69
Id.
70
Ceci Connolly and R. Jeffrey Smith, Obama Positioned to Quickly Reverse Bush Actions, The Washington Post
(November 9, 2008), available at http://www.washingtonpost.com/wpdyn/content/article/2008/11/08/AR2008110801856_pf.html, (last visited April 8, 2009).
68
State Level
States also have taken their own stab at writing legislation pertaining to carbon offsets. In its
2008 session, California attempted to pass several bills to regulate the voluntary carbon offset
market.71 While one focused more on the advertising of carbon offsets, the other, more
important to this discussion, defined a carbon offset and would have set a uniform standard for
companies marketing and selling offsets.72 Surprisingly to some, the failure of these two bills
came from a strong defense from environmental groups stating that the passage of either of these
bills would hurt the carbon offset industry by placing a large burden on entities selling them,
who could not bear the financial burden regulation would bring with it.73
Regional Level
At the regional level and foreshadowing the international level, there is existing regulation
for carbon offsets. However, that regulation for the most part only encompasses carbon offset
projects that are permitted to be used as allowances against an entity’s total compliance
obligation. Still, it is necessary to explore this regulation as it could possibly apply to the
voluntary market in the future.
States have started acting in conjunction with each other as regions to regulate carbon
emissions.74 The Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort composed
of ten Northeastern U.S. states to regulate carbon emissions from power plants via a cap and
71
Phil Burget, California Flirts with Regulatory Standards on Voluntary Carbon Offsets, LRQA (May 31, 2008),
available at http://www.lrqausa.com/california-carbon.aspx, (last visited April 8, 2009).
72
S.B. 1762, 2007-2008 Session, (Ca. 2008); A.B. 1851, 2007-2008 Session, (Ca. 2008).
73
Jeremy Schiffer, Voluntary Carbon Offset Market Escapes California’s Regulation Attempt, ClimateIntel
(September 2, 2008), available at http://climateintel.com/2008/09/02/voluntary-carbon-offset-market-escapescalifornias-regulation-attempt/, (last visited April 8, 2009).
74
Regional Greenhouse Gas Initiative, History, available at, http://www.rggi.org/about/history, (last visited April 8,
2009).
trade program with the option to expand the program in the future to other industry sectors.75
Although the focus is on a cap and trade program, RGGI does allow participants to reduce their
emissions by means of carbon offset projects outside of the industry.76 However, the use of
carbon offsets to reduce emission is limited currently. Carbon offset projects may only compose
a maximum of just over three percent of a power plant’s total compliance obligation during a
control period, but this may expand up to five or ten percent depending on the availability and
price to purchase regular allowances.77
RGGI allows carbon offset projects in any participating RGGI state that are landfill methane
capture and destruction, reduction in emissions of sulfur hexafluoride, sequestration of carbon
due to reforestation, reduction or avoidance of carbon emissions from natural gas, oil, or propane
end use combustion due to end-use energy efficiency, and avoided methane emissions from
agricultural manure management operations.78 RGGI further regulates offsets by having an
application process and regulations covering additionality and permanence issues.79 Project
applications are reviewed for the issues cited above, and a verification report and certification
statement must be signed by an independent third party evaluator in order to gain credit for a
carbon offset.80 RGGI also provides the manner in which to calculate emissions for each specific
offset project and the baseline for emissions that each project must hit in order to be qualified as
a carbon offset.81
75
These states include Maryland, Massachusetts, Rhode Island, Connecticut, Delaware, Maine, New Hampshire,
New Jersey, New York, and Vermont. Regional Greenhouse Gas Initiative, History, available at,
http://www.rggi.org/about/history, (last visited April 8, 2009).
76
Regional Greenhouse Gas Initiative, Offsets, available at http://www.rggi.org/offsets, (last visited April 8, 2009).
77
Id.
78
Regional Greenhouse Gas Initiative, Model Rule (December 31, 2008), at page 91, available at
http://www.rggi.org/docs/Model%20Rule%20Revised%2012.31.08.pdf, (last visited April 8, 2009).
79
Id.
80
Id.
81
Id.
RGGI’s regulation of carbon offsets is a cautionary tale of what it would take to regulate the
industry. Although carbon offsets may only make up around three percent of an entity’s
compliance obligation, close to one-third of the RGGI’s Model Rule, which is the basis for the
cap and trade program, pertains the regulation of offsets.82
International
Like the U.S., most countries do not regulate the voluntary carbon offset market.83 Those
participating in the Kyoto Protocol Clean Development Mechanism (CDM) or Joint
Implementation (JI) must follow heavy regulation similar to that of the RGGI. Once again, those
who have signed and ratified the Kyoto Protocol mostly focus on the reduction of their country’s
industrial emissions.84 Therefore, Kyoto’s regulation of carbon offset is directed toward industry
use and not the general consumption of the voluntary market.
The main difference between the CDM and JI is that the CDM allows a country committed to
the Kyoto Protocol to implement carbon offsets projects in a developing country to meet their
emission allowance from; while the JI only allows a non developing, Annex 1 or B countries, to
in implement a project in another Annex 1 or B country.85 However, the differences are more
pronounced between the regulations for each program.
Basically, the CDM is stricter than the JI. In addition to all other requirements, CDM
projects also have to meet sustainability criteria of the host country and shall not use Official
82
Regional Greenhouse Gas Initiative, Model Rule, available at http://www.rggi.org/about/history/model_rule, (last
visited April 8, 2009).
83
See generally, Katrina Brown, Esteve Corbera and Manuel Estrada, Tyndall Centre for Climate Change Research,
How Do Regulated and Voluntary Carbon-Offset Schemes Compare? (May 2008), available at
http://www.tyndall.ac.uk/publications/working_papers/twp116.pdf, (last visited April 8, 2009).
84
UNFCCC, About CDM, available at http://cdm.unfccc.int/about/index.html, (last visited April 8, 2009).
85
Id; UNFCCC, Joint Implementation, available at
http://unfccc.int/kyoto_protocol/mechanisms/joint_implementation/items/1674.php, (last visited April 8, 2009).
Development Assistance money to fund the project.86 Further, while CDM projects receive
verification from the Kyoto Protocol, countries participating in JI may generate some of their
own requirements for verification and may verify the project themselves.87
V. Regulating the Voluntary Carbon Offset Market
Regulation of the voluntary carbon offset market is not an exact science. There is no form
that can be duplicated from previous regulation when delving into this unchartered territory.
Yet, despite this hardship, regulation still must be created to develop and continue a successful
carbon offset market.
Regulation needs to be accurate and strong for people to gain confidence in the integrity of
the market and to affect the environment positively. Among the myriad of factors needed to
guarantee successful regulation of the market is science and the ever-developing technology in
this area. While this section will include discussion of various aspects regarding related science
and technology, much more focus will be placed upon the legal implications and considerations
of regulation.
To Regulate or not to Regulate, is that Even a Question?
Regulation of the voluntary carbon offset market does not come without its critics. Among
them are environmentalists stating that regulating the voluntary carbon offset market would be
86
Sustainable Energy Policy Concepts, The Flexible Mechanisms of the Kyoto Protocol, available at
http://www.ises.org/sepconew/Pages/CDM/1.html, (last visited April 8, 2009).
87
Id.
its demise.88 The cost of regulation would shut the door for many of the entities selling carbon
offsets, as many of them actually implementing the project as well operate on a non-profit
basis.89 Additionally, the argument can be extended to if entities did survive the cost of
regulation, they would probably have to raise their prices making offsets cost prohibitive for
many consumers.
Although these arguments have a valid basis, currently, there are already numerous carbon
offset providers adhering voluntarily to standards. 90 Many of the standards these entities already
meet would most likely be similar to future regulation. Further, there exists the possibility that
the government would allow third parties to verify and certify carbon offsets, leading to the
opportunity that some entities would not even have to change providers. Therefore, it cannot be
said that regulation would doom the voluntary carbon offset industry. Those who do not follow
standards or who are possibly regulated by a program with lax standards might be affected.
Additionally, it is hard to say if consumers would stop purchasing carbon offsets if the price
increased. Due to fact that the market is relatively new, there is little research on the makeup of
the market’s consumers. However, it is known that a consumer of carbon offsets receives
nothing tangible in return for his purchase. There is no exchange of money for a material good
or personal benefit from a service rendered. It probably can be safely assumed that many of the
purchasers of voluntary offsets do it either to benefit the environment or as a public relations
tactic for their company, and will probably continue to do it even with a price hike.91
88
Supra note 74.
Id.
90
Supra note 14.
91
Supra note 8; Adam Stein, TerraPass, Alternative Markets for Carbon Offset Projects, available at
http://www.epa.gov/landfill/conf/maine_workshop/5SteinAdam_Portland%20ME.pdf, (last visited April 8, 2009).
89
Regulating the voluntary carbon offset market must be done in order to protect consumers as
well as the environment. While some contend that regulation will put many carbon offset
entities out of business due to its cost and, or lose consumers to higher prices, the likelihood
remains that the integrity of the market will only continue to erode without appropriate
regulation. With this erosion, the beneficial environmental benefits that could have been gained
by carbon offset projects now and in the future will be lost.
Pointing Fingers: Who Should Regulate the Market?
When aiming for effective and realistic regulation, it is not only about how it should be
regulated, but also who should be regulating it. As discussed above, there are various levels of
government and entities across the world that already have created some sort of regulation, either
directly or indirectly, in regards to carbon offsets. Although climate change is a world-wide
problem, it is not necessarily the approach that should be taken with carbon offsets.
Reduction of greenhouse gases causing climate change across the world is the paramount
goal. However, strict adherence to an international program regulating the minute details of the
voluntary carbon offset market is impracticable. Still, regulation cannot differ drastically country
to country, as this will lead to a race to the bottom in our globalized society.
This once again highlights the complexity of regulation for the carbon offset market. In all,
regulation should come from a multi level basis. As the Kyoto Protocol has shown, getting
everyone to participate and agree on the same idea regarding climate change has not been easy or
achievable, however, that does not mean efforts should stop.92 The employment of the Kyoto
Protocol or a similar global program should be utilized for the voluntary carbon offset market for
oversight. Developing standards and surety pertaining to verification and certification at the top
ensures every country is on the same playing field.
More specific requirements should be set on the national level. This allows nations to tailor
the program to their own ideals as well as consider their own existing laws when developing new
regulation for carbon offsets. Things such as what types of projects should be allowed, who is
able to verify and certify projects, as well as sell offsets should be under consideration at the
national level. Allowing this type of freedom on the national level enables nations to become a
laboratory for innovation in carbon offsets and the pertinent regulation of it. If regulation is just
constrained to the international level it will defeat innovation and most likely be ineffective.
Within the U.S., the Federal Trade Commission is the most appropriate body to regulate the
retail side of voluntary carbon offsets while the Environmental Protection Agency should attack
the more technical topics of carbon offsets after legislation is passed.93 Some may see the EPA
as the only regulatory body needed, however, it lacks the ability to monitor the retail of carbon
offsets and protection of consumers unlike the FTC.94 Further, the FTC has taken steps already,
holding public hearings on the possibility of regulation of carbon offsets and updating its Green
Guides, a piece that would offer assistance to carbon offset advertisers to ensure their claims
were not misleading or false.95
92
Gwen Ifill, Kyoto Fallout, NewsHour (February 16, 2005), available at
http://www.pbs.org/newshour/bb/environment/jan-june05/kyoto_2-16.html, (last visited April 8, 2009).
93
Michael Wara, How Sustainable is My Company? Commercial Speech, Carbon Neutrality, and Offset
Quantification, Trends (July/August 2007)
94
Supra note 8.
95
FTC Guides for the Use of Environmental Marketing Claims, 16 C.F.R. § 260 (1996).
Minimizing the Issues with Effective Regulation
Regulation should decrease problems with permanence, additionality, fraud, and the other
issues mentioned beforehand, not exacerbate them by unrealistic expectations or undefined
barriers. The combination of these issues is one of the main reasons the carbon offset market
needs to be regulated, and therefore, will not succeed without appropriate consideration to these
topics.
Eliminating fraud within the market is primarily dependent on reducing problems with
additionality, permanence, leakage, and verification. Although added measures must be taken to
secure a market that retails largely over the internet, to hit fraud where it counts must start with
the issues.
Additionality
Strong guidelines need to be set on the international level for additionality. International
regulation and a benchmark approach is the best solution for additionality. It will ensure every
country is on the same level and cut out work that the project based approach needs for every
project.96 By implementing the benchmark approach, much work will be needed in the
beginning stages, but it releases countries from having to assess every project on an in depth
level which would potentially delay the process significantly.97
However, in order for the above to happen, a definition for what is additional needs to be
determined. Currently, one can surf the web and find multiple formulations of what is
96
97
Supra note 33; 43.
Id.
additional.98 Encompassing very subjective to very objective definitions, there is no coherence
on how to define additionality.99
The definition of additionality must be firm. Without it, any project that barely falls into one
of the project categories could be allowed. A given is that projects that must meet other legally
required mandates or laws, and projects already in existence should not be considered additional.
Besides a few red flags like those cited, it is hard to determine if any project is additional.
Answering the question “would it have happened anyway” is anyone’s guess. Most likely, the
question of whether a project is additional will be subjective no matter the amount of regulations
that go with it. While the law does not enjoy subjectivity, strict adherence in this situation could
lead to worthy projects being denied.
Verification and Certification
Verification and certification are highly scientific and technological and begin to slip into the
non legal realm as the main concern with both is getting the process accurate to ensure that
emissions are being reduced. However, regulation must be adopted that allows for verification
and certification standards to change with new discoveries on how to regulate emissions.
98
Guides for the Use of Environmental Marketing Claims: Carbon Offsets and Renewable Energy Certificates, FTC
Public Workshop, (2008) (comments of David Owens, Associate General Counsel, Anadarko Petroleum
Corporation), available at http://ftc.gov/os/comments/carbonworkshop/533254-00058.pdf, (last visited April 8,
2009).
99
Id.
Permanence
Two main legal issues exist in regards to permanence. The first being how does the
purchaser of a carbon offset ensure their project continues to sequester carbon, and two, who
legally owns the carbon and what if any are the property rights to it?100
Guaranteeing carbon remains sequestered, especially in forestry projects has had a relatively
uncomplicated answer, a conservation easement.101 A conservation easement running with the
land disallowing conversion of the land or timber rights would secure the continued
sequestration of carbon and the purchaser’s dollar.102 Currently, there are conservation
easements that are solely in place to retain the timber or natural vegetation on the land.103
The Internal Revenue Code and several states require that in order to receive a conservation
easement it must serve a valid conservation purpose.104 Legitimate arguments could go either
way to whether a carbon offset project is a valid conservation purpose, especially since profits
could be made on the sale of carbon offsets. This could launch those with conservation
easements on their land already to offer their property as a carbon offset project. However, if the
conservation easement already exists, this is not a form of additionality because the conservation
would have happened anyway. Therefore, regulation should be created to allow land that is part
of forestry carbon offset project to attain a conservation easement if one is not in place at the
time the land is acquired with proceeds.
100
Supra note 53.
James Olmsted, Capturing the Value of Appreciated Development Rights on Conservation Easement
Termination, 30 FALL Environs Envtl. L. & Pol'y J. 39 (2006), at 63.
102
Id.
103
Minnesota DNR, Minnesota Forests for the Future Program (Forest Legacy) Fact Sheet (January 25, 2009),
available at http://www.lohc.state.mn.us/materials/MNForestsFutureProgramFactSheet.pdf, (last visited April 8,
2009).
104
26 U.S.C.A. § 170(h) (2005); Daniel Aaronson and Michael Manuel, Conservation Easements and Climate
Change, Sustainable Development Law & Policy (May 6, 2008), available at
http://www.goldbergkohn.com/assets/attachments/110.pdf, (last visited April 8, 2009).
101
While the owner of the land could have a conservation easement placed on the land very
easy, a marketable concern for carbon offsets using easements is tax deductions.105 For many,
donating their land to a conservation easements is a way to minimize taxes.106 In most situations,
the land is used for a wildlife reserve or preservation of natural habitat, and the extraction of
minerals or other profits from the land is not allowed.107 One might be more than willing to
place the land into a conservation easement dedicated to a carbon offset project, but if someone
is profiting off it, should the original grantor still be allowed a tax deduction?
Of course, as of now the law does not address this issue. Offering a tax deduction to the
grantor, if they receive no monetary value in exchange should be allowed. Although they are
receiving an intangible benefit, they are not receiving a monetary one.
Property rights in carbon
Property rights in carbon need to be determined to avoid future disputes and problems.108
This issue brings up a definite question at what level, state, national or international, property
rights in carbon should be determined. If decided on the international level, property rights of
several countries could be offended, however, inconsistency country to country could lead to a
hard to administer program.
Additionally, consideration needs to be given to whether property rights in carbon should be
recognized as separate from the land, with the land, or rights to the trees, if any exist.109 Carbon
105
Aaronson and Maunel, supra note 105.
Id.
107
Supra note 105.
108
Supra note 53.
109
Id.
106
is a different creature than the typical profit a prende, timber or minerals rights. Once again,
there is no tangible good, and things are not taken from the land but rather reserved and stored.
Legislation should recognize carbon rights as its own interest.110 With the creation of a clear
right, less litigation can be avoided in the future.
VI.
Conclusion
Regulation of the voluntary carbon offset market is by no means an easy task. Most likely, it
will come with pitfalls and blunders in the initial stages of application. However, the reward for
recognizing its validity with regulation is reducing emissions that would not otherwise be
covered by a cap and trade. By creating regulation for the voluntary carbon offset market, it will
improve the integrity of the market and additional opportunities for greenhouse gas reductions.
110
For an in depth discussion on the argument for carbon as a separate property right, see generally, Samantha
Hepburn, Carbon Rights as New Property: Towards a Uniform Framework, available at
http://74.125.95.132/search?q=cache:WUQQz868ePUJ:law.anu.edu.au/News/Hepburnseminarpaper.doc+why+shou
ld+carbon+be+recognized+as+its+own+proeprty+interest&cd=1&hl=en&ct=clnk&gl=us, (last visited April 8,
2009).