is the online magazine of BSI Group, highlighting the vital role that standards play in today's business environment by helping organizations improve quality, save money, reduce risk and be more sustainable. Features include interviews with leading business figures, as well as news on the latest developments in management systems, standards, testing, healthcare and certification.
From Kyoto
to the carbon market
26 Oct 2007
Topics: Carbon market, Environment, Emissions trading, ETS, Climate change
The Kyoto Protocol has had a chequered first decade. Designed as an international agreement under the United Nations Framework Convention on Climate Change to commit to reducing emissions of carbon dioxide and other greenhouse gases, its place in the history books looked set for all the wrong reasons after the US and Australia refused to ratify it, and emerging markets like India and China were not required to sign up.
Despite these setbacks, positives have come from Kyoto. The Protocol played a large role in bringing climate change to the top of the international agenda. To date, 174 countries have ratified the Protocol, and 36 countries and the EC have set binding commitments for the reduction of greenhouse gases. It also introduced the concept of emissions trading as a mechanism whereby polluting companies can offset their excess emissions by purchasing carbon allowances and credits.
Such "Cap-and-Trade" schemes and the ability to buy and sell allowances and credits creates what amounts to a market for carbon emissions.
In a nutshell, Cap-and-Trade schemes involve a limit ("cap") being set, usually by the government, on a country's allowable emissions levels. Certain emission-producing companies or organizations within the "cap" are then allocated an allowance for specific emissions levels. If they emit beyond their allowance, they have to purchase additional allowances from those companies or organizations producing fewer emissions than their allowance or they can purchase credits from projects outside the "cap" that reduce or avoid carbon emissions in relation to business as usual.
In other words, they buy emissions allowances and/or credits to make up the difference.
The European Union Emission Trading Scheme (EU ETS) is one such scheme. According to the EC's Europa website, it is the "largest multi-country, multi-sector greenhouse gas emission trading scheme worldwide" and in 2006 accounted for almost $25bn of emissions trading. Regulated national emissions caps, emissions reductions and emissions trading in response to the Kyoto Protocol are often referred to as the regulated carbon market.
In addition to the regulated market, there are a growing number of businesses and individuals who seek to voluntarily offset their carbon footprint in an attempt to avert climate change. This voluntary market involves the purchase of carbon credits generated from projects that reduce or avoid greenhouse gas (GHG) emissions to offset their carbon footprint.
These market-based approaches, which offer genuine economic incentives for polluting companies to invest in carbon reduction, are increasingly being seen as the best hope for combating further climate change.
Making markets work
The task now is to make those systems work. One major challenge is ensuring long term credibility and stability in both the regulated and voluntary carbon markets.The first two years of the EU ETS, for example, saw wild fluctuations in the unit price of carbon allowances, ranging from nearly € 30 per tonne of carbon to as little as € 2. This occurred largely as a result of an initial over-allocation of carbon allowances by the EC to EU governments, and subsequently to businesses regulated by the EU ETS. Such wild swings do not sit well with big businesses that require long term price stability to commit to investments in emissions reduction technology.
Another challenge is the rapid growth of the voluntary market and the surge in popularity of carbon offsetting. What began as a way to fund the plantation of CO2-sequestering forests has become a sophisticated market valued at nearly $100m (2006). As well as becoming an acceptable business tool for mitigating CO2 emissions, it has also become something of a cause-celebre among the population at large, with airlines now offering offsetting against ticket purchases.
Again though, the rapid growth of the market, without a corresponding advance in offset standards and certification, has led many to question the credibility of the offsets purchased. Reputable offset companies now find themselves competing with "carbon cowboys", who in some cases have been known to sell the same carbon credits to multiple buyers and/or sell credits from projects that wouldn't meet the stipulation (in the regulated market) of "additionality" and thus don't actually reduce carbon emissions in relation to business as usual.
As a result, the voluntary market lacks credibility and is in desperate need for consensus around the standards and certification practices used to ensure the stability and effectiveness of the market as a means to reduce GHGs voluntarily.
"In the case of carbon trading, business does need a degree of certainty," says Geoffrey Lye, vice chairman of SustainAbility, a think tank and environmental consultancy. "It's clear that carbon will be the secondary currency of the 21st century, so we need to rehabilitate this market: if we can make the UK carbon positive, with an established carbon treasury, this would bring economic benefits as well."
Hewitt Roberts, director of global sustainability strategy at BSI Management Systems, agrees that a market-based approach is the best strategy for combating climate change, regardless whether it's voluntary offsetting or carbon trading in a regulated market: "The supply of allocations and the eligibility of offset credits must be such that they encourage technological innovations, emissions reduction, energy efficiency and investment in abatement solutions both inside and outside a cap," he says. Roberts argues that emission allocations should be conducted partially through auction in order to avoid them becoming a quasi-subsidy, as they currently resemble.
"Emission allocations, or at least a percentage of them, should be auctioned or sold as the free allocation of permits can create windfall profit scenarios for those receiving free allocations. It also distorts clean technology investment decisions and acts to disproportionately benefit some sectors over others. All of which adversely affects the market and hinders the overall objective of reducing greenhouse gases and reversing climate change."
Towards a green standard
The fact that longer established trading schemes such as the sulphur dioxide Cap-and-Trade scheme in the US are working more efficiently than the EU's own germinal effort offers encouragement that such early stage problems can be overcome. However, for any voluntary market to succeed in the long term, there will need to be a clear and acceptable set of rules against which to measure carbon footprint and emissions reduction.
In an effort to establish some kind of agreed guidelines, as many as seven standards specific to the voluntary offsetting market have been introduced worldwide. A number of other alternatives have been put forward, including a joint effort by BSI British Standards, the UK's Department for Environment, Food and Rural Affairs (Defra) and the UK government-sponsored Carbon Trust. They are developing a Publicly Available Specification (PAS) for the measurement of the embodied greenhouse gases (GHGs) in products and services, which is fundamental to both sides of the carbon market equation. As is explained on the Defra website (www.defra.gov.uk), "the aim of the work is to develop an agreed method for measuring embodied GHG emissions which can be applied across a wide range of product and service categories and their supply chains to enable companies to measure the GHG related impacts of their products and reduce them.
"Once completed the single standard will ensure a consistent and comparable approach to supply chain measurement of embodied GHGs across markets, it will help companies understand the life-cycle climate change impacts of their products and highlight significant emissions reduction opportunities. The intention is that this is the first step in moving towards an internationally agreed standard for measuring embodied GHG emissions."
As Climate Change and Environment Minister Ian Pearson pointed out when work on the PAS was first launched in May 2007:"The products that businesses make, buy and sell have an impact, both on climate change and the wider environment, at all stages from raw material to when the product is no longer required. [The resulting emissions] are created by the energy and other resources used, and in areas like production, transport and use of products as well as waste from packaging and discarded products.
"More and more, businesses are looking for ways to reduce their impact on the environment. To help them achieve that we need a reliable, consistent way to measure these impacts that businesses recognize, trust and understand. This is important work and will be fundamental in our efforts to move Britain towards a low-carbon economy in the decades ahead."
In addition to its work on this new GHG emissions PAS, BSI also offers greenhouse gas emissions verification services, for baseline emissions, annual emissions and project-based emissions reductions in any country globally.
Face the future
"Trying to ensure 'a ton of carbon is always a ton of carbon' is a laudable but Herculean task," says Roberts. "Some countries and governments may be affected by the more immediate consequences of climate change while others may not be affected for decades or generations. Some industry sectors or businesses may bear higher costs while others may enjoy economic benefit in our transformation to a more 'carbon capped' economy. As a result, the development of meaningful standards that are adopted universally brings with it a number of challenges. None of these are insurmountable however - and none are larger than the problem of climate change itself."
Lye of SustainAbility would like to see the efforts being put into standards development doubled, if we are to meet the ambitious carbon reduction targets: "We're calling for visionary rather than precautionary measures. There's an urgent need for standards to enable greater transparency and they need to come from an independent source. The big emitters are global organizations and, post-Kyoto, the global Cap-and-Trade schemes need global standards and global pricing whatever happens as we move into a carbon future."
Roberts agrees that the prognosis is not necessarily disaster: "While I believe that human beings are inherently sustainable and thus in the long run will develop effective market-based mechanisms to avert climate catastrophe, the immediate future of the carbon economy depends on the outcome of two significant and imminent events. The first is the December 2007 discussions in Bali between the Kyoto signatory countries, which aim to define the extent and nature of a post-Kyoto agreement. The second is the 2008 US presidential elections.
"We are at the very beginning of an exciting, irreversible and timely economic transformation to a low carbon economy and while we may not get it right every step of the way, we will be heading in the right direction," he concludes.
For more information on GHG emissions verification:www.bsigroup.com/oct07GHG
For more information on the GHG PAS:www.bsigroup.com/oct07GHGPAS
CASE STUDY: Successful first year for MS UK's carbon neutral programme
A recent successful carbon reduction programme by BSI Management Systems UK shows that reducing one's carbon footprint is not only attainable but desirable. Having committed itself to carbon neutrality with respect to the delivery of its certification and verification services, BSI Management Systems UK achieved a reduction of 10 per cent in its footprint in 2006. While some energy savings were met by moving to new premises, further savings were achieved through reductions in travel, with client manager mileage cut by over 200,000 miles andair travel cut by a massive 40 per cent. One beneficiary was the Forest of Marston Vale in Bedfordshire where, working with The CarbonNeutral Company, the company funded the planting of trees.
For more information: www.bsigroup.com/oct07carbonneutral
CASE STUDY: Living right
How do you ensure that a massively popular event, intended to promote the notion of sustainability, is itself sustainable? For Live Nation, the event producers behind the Live Earth project, the answer was to work with BSI to trial BS 8901, the world's first national standard on sustainable event management. Live Earth was a 24-hour, seven-continent concert series that brought together more than 100 musicians and two billion people, in order to "trigger a global movement to solve the climate crisis". The standard - which was out for consultation as a Draft for Public Comment (DPC) at the time of the event - sets out requirements for planning and managing sustainable events and provides a step by step guide to producing an event that does not compromise the surrounding environment, society or economy. Climate change, air quality, working conditions and local employment are just a few of the considerations to be made when planning an event, according to the new standard. The feedback from Live Nation was used by the BSI technical committee responsible for developing BS 8901 to produce the final draft of the standard. BS 8901 is applicable to event organizers, clients, venues and organizations in the supply chain.
For more information: www.bsigroup.com/oct07bs8901
Find out what JONATHON PORRIT thinks about emissions trading in the latest edition of Business Standards.
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