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**Testimony of Derik Broekhoff**

**before the House Select Committee on Energy Independence and Global
Warming**

**"Voluntary Carbon Offsets -- Getting What You Pay For"**

**July 18, 2007**

### Executive Summary

Carbon offsets are an innovative tool for allowing companies and
individuals to reduce greenhouse gas emissions beyond what they can
easily achieve on their own. In the past two years, interest in carbon
offsets has grown dramatically as companies and concerned consumers have
sought ways to help mitigate climate change. However, the global market
for voluntary carbon offsets is currently unregulated, which has led to
growing concerns about whether buyers are really getting what they are
paying for. Various non-government programs and initiatives have sought
to address these concerns by establishing standards. So far, none of
these initiatives has managed to establish all three required elements
of a true carbon offset commodity standard, namely: (1) accounting
standards for emission reductions; (2) project verification standards;
and (3) publicly reviewable registration and enforcement systems.

In the future, the domestic voluntary carbon offset market may be
largely superseded by a mandatory U.S. trading program for greenhouse
gas emissions. Even if it is, there may be grounds for government
oversight of the voluntary market today. Oversight may be desirable, for
example, to protect consumers and the public interest, to allow learning
for regulators, and to provide greater certainty for investors.
Oversight could take several forms, ranging from endorsing specific
(complete) standards and programs, to providing guidance or
certification for accounting standards, verifiers, and registries. In
general, oversight should build off the work of existing standards and
programs, and should seek to bring minimum standards of clarity,
consistency, and quality to how voluntary carbon offsets are defined and
guaranteed. Government oversight should not seek to limit the market,
but should encourage experimentation with different types of projects
subject to minimum standards.

### What are carbon offsets?

In simplest terms, a "carbon offset" is a purchased reduction in
greenhouse gas (GHG) emissions. Carbon offsets allow buyers to achieve a
particular GHG emissions goal without having to reduce their own
emissions directly.[^1] They are useful wherever direct emission
reductions would be too costly or difficult. A well-designed market for
carbon offsets can allow companies, organizations, and individuals to
achieve GHG emission reductions at lower cost, which ultimately means
they can afford do more to help avert climate change.

Carbon offsets can have other benefits as well. Offset revenues can help
spur investment in innovative technologies that help transition the
economy towards lower GHG emissions. Many types of projects that reduce
GHG emissions, such as renewable energy,

energy efficiency, transportation, and forestry projects, have
significant secondary environmental and social benefits.

Although the very first carbon offset project was voluntary,[^2] much of
the work to establish real markets for carbon offsets has been done in
the context of designing regulatory programs. Many experimental carbon
offset projects were undertaken in the 1990s, for example, in order to
inform negotiations under the Framework Convention on Climate Change
about the design of an international GHG emissions trading system.
Experience from these projects led to the creation of the "Clean
Development Mechanism" (CDM) under the Kyoto Protocol, which now
constitutes the largest functioning market for carbon offsets. Through
the CDM, emission reductions in developing countries can be used to
offset emissions in industrialized countries, whose total emissions are
capped. Credits issued for these offsets allow industrialized countries
to increase their emissions (effectively increasing the "cap"), on the
premise that net emissions to the atmosphere remain the same. The CDM is
also envisioned as a way to help less developed countries grow
sustainably through the transfer and deployment of beneficial
technologies and practices. A separate Kyoto Protocol mechanism, called
"Joint Implementation" (JI) recognizes carbon offsets from projects in
industrialized countries.

The global market for carbon offsets has grown dramatically over the
last few years since the CDM was formally established (Figure 1). In
2006, the total market value of CDM carbon offset credits was \$5.5
billion.

**Figure 1. Annual Volumes of Carbon Offset Transactions in Millions of
Tons of Carbon Dioxide Equivalent**

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height="2.8208333333333333in"}

Source: Capoor and Ambrosi 2007, *State and Trends of the Carbon Market
2007*. World Bank Institute, Washington, D.C.

### What is the voluntary carbon offset market?

Although the majority of carbon offset purchases in the world today are
by companies or governments seeking to comply with the Kyoto Protocol,
growing concerns about climate change have led to an interest in carbon
offsets among a much wider group of buyers. Demand for "voluntary"
carbon offsets comes from two distinct groups:

1.  **Wholesale buyers**. These are mainly companies seeking to reduce
    GHG emissions for reasons of social responsibility, public
    relations, or anticipation of future regulatory requirements (either
    to gain firsthand experience with carbon offset trading prior to
    regulation, or in hopes of gaining recognition under a future
    regime). In some cases, these buyers are purchasing and retiring
    offsets on behalf of customers. For example, they may offset the GHG
    emissions associated with the production or consumption of their
    products in order to offer a product that is "carbon neutral."
    Wholesale buyers currently dominate the voluntary carbon offset
    market; according to a recent survey, they were responsible for over
    60 percent of voluntary offset purchases in 2006.[^3] Around 20
    percent of wholesale purchases consist of carbon offsets purchased
    on behalf of customers.[^4]

2.  **Retail buyers**. These buyers consist of smaller organizations or
    individuals seeking to offset the GHG emissions for which they are
    personally responsible. They may be travelers who offset emission
    associated with their airplane flights; individuals or organizations
    who offset the emissions they cause in order to become "carbon
    neutral"; or conference and event organizers who wish to offer
    "carbon neutral" events. According to the IIED, these buyers are
    responsible for less than 40 percent of voluntary offset purchases,
    but they are a fast growing segment. The number of retail carbon
    offset providers in the United States and internationally has grown
    markedly in just the past two years.[^5]^,^ [^6]^,^ [^7]

The voluntary carbon offset market overall is growing rapidly. Worldwide
voluntary offset purchases amounted to around six million tons of
CO~2~-equivalent emission reductions in 2005, growing to over 10 million
tons in 2006.[^8] The total market value globally for the voluntary
offset market is now estimated at over \$100 million, with prices for
GHG emission reductions ranging anywhere from \$1 to nearly \$80 per ton
of CO~2~-equivalent.[^9] Although projections are always difficult in a
fledgling market, expectations are that the global market could reach a
size of 400 million tons by 2011 (including 250 million tons in the
United States),[^10]^,^ [^11] with a market value possibly rivaling that
of today's CDM market.

### What kinds of projects are being funded through the voluntary carbon offset market?

There are a vast number of technologies and practices that can be
employed to reduce GHG emissions for the purpose of generating offsets.
In addition, GHG emissions can be offset through certain kinds of land
use and forestry practices that remove CO~2~ from the atmosphere.
According to a survey from 2006, projects involving land use and
forestry practices are in fact the most common type being funded by
voluntary offset purchases.[^12] The next most common type of project
involves renewable energy production, followed by demand-side energy
efficiency improvements (Table 1).[^13] The proportion of actual
emission reductions or removals may be different from the numbers of
projects, however, since certain kinds of projects produce far greater
volumes of CO~2~-equivalent reductions than others. This is especially
true of projects involving non-CO~2~ gases (such as methane or HFCs),
whose contributions to atmospheric warming are many times higher than
CO~2~ on a per weight basis.

**Table 1. Types of Projects Funded by Voluntary Carbon Offset
Purchases**

  ---------------------------------------------- ------------------------
  **Type of Project**                            **Percentage by Number
                                                 of Projects**

  Land Use and Forestry                          56%

  Renewable Energy                               25%

  Demand-Side Energy Efficiency                  10%

  Fugitive Emissions (e.g., methane capture)     6%

  Supply-Side Energy Efficiency                  3%
  ---------------------------------------------- ------------------------

*Source:* Harris, E., 2006. *Working Paper on the Voluntary Carbon
Market: Current and Future Market Status, and Implications for
Development Benefits*. International Institute for Environment and
Development, London, October 2006.

### Can the voluntary carbon offset market really help to address climate change?

The answer to this question is partly a matter of perspective. Current
scientific evidence suggests that to mitigate the risk of dangerous
climate change, global GHG emissions must be reduced by 60 to 80 percent
by mid-century, [^14] equivalent to many billions of tons of annual
reductions. In this context, the contribution of the voluntary carbon
offset market -- even under the most optimistic demand scenarios -- is
likely to be small. Instead, globally coordinated mandatory policies
will be needed to drive significant near-term reductions in emissions
and achieve long-term stabilization of atmospheric GHG concentrations.

Voluntary carbon offset markets may still have a role to play. In
simplest terms, the magnitude of effort required is large, and every
little bit helps. Voluntary carbon offsets allow companies and
individuals to reduce emissions beyond what they could achieve on their
own, by tapping into project opportunities that would otherwise go
unexploited. The benefits of carbon offsets can be multiplied to the
extent they drive innovation in emission-reducing technologies and
create new markets for them. Finally, the voluntary offset market can
play a very significant role in educating the public about climate
change and about effective and affordable ways to mitigate it.
Ultimately, however, mandatory emissions trading systems, particularly
if they allow offset projects, are likely to subsume the advantages of a
voluntary regime.

### Won't demand for voluntary carbon offsets evaporate once we have mandatory regulations to control greenhouse gas emissions?

It makes sense that when governments implement policies requiring
reductions in GHG emissions, public interest in *further* voluntary
emissions reductions will diminish. It is quite likely that much of the
current demand for voluntary carbon offsets is driven by buyers'
concerns that governments are not going far enough yet to address
climate change. Nevertheless, it also seems likely that substantial
demand for voluntary GHG emission reductions can exist even where there
are regulatory requirements. "Carbon neutrality" has become a goal for
many companies seeking to attract customers by providing environmentally
friendly products and services. Likewise, growing awareness about
climate change has sparked an interest among many individuals to do
their part to help solve the problem. Given the magnitude of emission
reductions required, it is quite reasonable to expect that many firms
and individuals will continue to seek ways to cost-effectively mitigate
their "carbon footprints" even after mandatory GHG limits are in place.
In fact, a significant segment of the demand for voluntary carbon
offsets exists in Europe, where limits on GHG emissions are already in
place.

Perhaps a more central question is whether a separate system for
voluntary offsets will be required once a mandatory regime is in place.
If a mandatory regime encompasses all sectors and all types of projects,
this would not be necessary. However, if a mandatory were to begin with
limited coverage of project types, there is still likely to be a place
for a voluntary system, in large part to serve as a proving ground for
new types of technologies and projects.

### Why are some people concerned about the voluntary carbon offset market?

Voluntary carbon offsets have been traded in relatively small volumes
and on a demonstration basis since the late 1980s. Some organizations,
such as the Climate Trust in Oregon, have many years of experience in
purchasing and retiring offsets on behalf of clients or customers (the
Climate Trust was established in 1997 to assist new power plants in
Oregon to meet a state regulatory requirement for net CO~2~ emissions).
As the data above indicate, however, there has been a dramatic increase
in the last two years in the number of voluntary offset transactions,
with an accompanying expansion in the number of suppliers. Unlike the
Kyoto Protocol's CDM offset market, however, where there are clear
rules, standards, and oversight mechanisms, the voluntary market is
operating in a regulatory vacuum. Many observers are concerned about the
lack of standards and oversight for voluntary carbon offsets, and wonder
whether buyers are truly getting what they pay for, i.e., real emission
reductions.

The issue is not so much a question about the integrity of carbon offset
providers. Most suppliers in the market today are well-meaning private
companies and non-profit organizations that sincerely want to help their
customers do good for the environment. The questions that arise are
really about the definition of the "commodity" being sold. Carbon
offsets are an intangible good, and as such their value and integrity
depend entirely on how they are defined, represented, and guaranteed.
What the market lacks are common standards for how such representations
and guarantees are made and enforced.

### What elements are necessary for a carbon offset standard?

Much of the literature on carbon offsets (and nearly all aspiring
"standards") point out that credible offsets must be "real, surplus,
permanent, verifiable, and enforceable" -- or some variation of these
terms.[^15] Different sources do not always agree on the definitions of
these criteria, however, and having a "standard" for carbon offsets
really depends on how they are interpreted. What the criteria boil down
to are three things, all of which need some form of official
certification or oversight to create a true carbon offset "commodity":
(1) accounting standards; (2) monitoring and verification standards; and
(3) registration and enforcement systems.

**1. GHG Emission Reduction Accounting Standards**

Accounting standards address the actual quantification of GHG reductions
that carbon offsets represent. Accounting standards are a first-order
requirement for ensuring that a ton of emission reductions from one
project is the same as a ton from another, and ensure that offsets are
"real, surplus, and permanent."

As might be expected, a lot of work has been done over the years to
develop accounting standards for offsets. In December 2005, the World
Resources Institute (WRI) and the World Business Council for Sustainable
Development (WBCSD) published the *Greenhouse Gas Protocol for Project
Accounting* ("Project Protocol"), which provides a general framework for
quantifying emission reductions from offset projects, based on the
accumulated knowledge of an international group of experts from
businesses, governments, and environmental groups.[^16] It has since
been supplemented with two sector-specific accounting protocols, one for
land use and forestry projects, the other for renewable energy and
energy efficiency projects.[^17]^,^ [^18] These documents provide an
internationally recognized basis for the elaboration of detailed
accounting standards for specific types of projects.[^19] The largest
body of standard accounting methodologies established to date exists
under the Kyoto Protocol's Clean Development Mechanism. Very few of the
carbon offsets sold in the voluntary market, however, explicitly follow
the WRI/WBCSD Project Protocol or CDM methodologies.

Probably the most important part of offset project accounting is making
a determination about "additionality" -- that is, whether the purchase
of emission reductions really enabled (or induced) a project to happen,
or whether the purchase is essentially being wasted on a project that
would have happened anyway (in which case its emission reductions
effectively have zero value for the purpose of offsetting emissions).
Many would say that "additionality" is the key to the environmental
integrity of an offset purchase -- but it is also vexingly hard to
determine in many cases. It has proven very difficult to establish true
standards for additionality, and even the CDM requires regulators to
make essentially subjective judgments about it on a case-by-case basis.
Two recent reports on the voluntary carbon offset market suggest that
many providers do not clearly indicate how they determine the
additionality of their projects.[^20]^,^ [^21] A standard set of
guidance or criteria would aid the credibility of offset markets
tremendously.[^22]

**2. Monitoring and Verification Standards**

Monitoring and verification standards are required to ensure that offset
projects perform as expected and to quantify their actual emission
reductions. Monitoring protocols are generally developed in conjunction
with accounting protocols. Verification usually requires the services of
a third-party professional verifier, or a government regulator. If
third-party verifiers are used, they need to meet minimum qualifications
and have some expertise related to the types of projects they are
verifying. This is one of the biggest gaps in the voluntary carbon
offset market right now. Although there is a generic international
standard for the accreditation of verifiers (ISO 14065), and there are
certainly verifiers with well-established reputations for competence and
integrity, a publicly accountable certification process for verifiers
could greatly enhance the credibility of the voluntary offset market.

Finally, verification does not mean very much without clear accounting
and monitoring standards against which to verify. This emphasizes the
need to adopt common accounting and reporting standards.

**3. Registration and Enforcement Systems**

One concern about the voluntary offset market as it continues to grow is
the possibility that suppliers may sell the same reductions to multiple
buyers, because there is no central authority to track their
transactions. Related to this, questions can arise in some instances
about who "owns" emission reductions and who in fact has the right to
sell them. In some cases, multiple parties may conceivably lay claim to
the same reduction. For example, both the manufacturer and the installer
of energy efficient lightbulbs might want to claim the emission
reductions caused by the lightbulbs -- as might the owners of the power
plants where the reductions actually occur. Right now, establishing the
right to an offset reduction largely consists of making public marketing
claims and trying to exclude others from doing the same.

This is another area where some kind of oversight and public
accountability may be desirable. Key requirements (which might be
established either though federal policy, or more realistically, through
non-profit or commercial enterprises) are:

1.  A registry (or registries) containing publicly available information
    that can be used to uniquely identify offset projects.

2.  In the same registry system, a mechanism to assign unique
    identifiers (e.g., serial numbers) to offset credits generated by
    each project, and a system to transparently track their ownership
    and status (i.e., whether they've been "used" to offset emissions by
    someone).

3.  Contractual or legal standards that clearly identify the original
    "owner" of emission reductions, and that specify compensation
    mechanisms for GHG removals or reductions that are reversed (e.g.,
    re-emitted from destroyed forests) or not actually achieved.

### Is anyone trying to create standards for the voluntary carbon offset market?

To address the current shortcomings in the voluntary carbon offset
market, a number of organizations involved in the industry have
initiated efforts over the last two years to develop voluntary
standards. The first such standards were the WRI/WBCSD Project Protocol
(noted above) and the ISO 14064 standard.[^23] The WRI/WBCSD Project
Protocol is a set of guidance documents for offset project accounting,
while the ISO 14064 standard is a checklist of essential accounting
elements. Neither is a full-fledged standard for determining the
emission reductions for specific technologies or practices -- although
both together provide a toolkit for policymakers to create such
standards. Furthermore, while the ISO standard does cover verification
(and accreditation of verifiers under ISO 14065), neither the WRI/WBCSD
Project Protocol nor the ISO standards cover all three of the required
elements for a fully standardized carbon offset commodity noted above.

Other standard-setting efforts have tackled different pieces of the
puzzle. The California Climate Action Registry (CCAR) is developing a
series accounting standards for specific types of offset projects,
compatible with the WRI/WBCSD Project Protocol. So far they have
approved protocols for forestry sequestration projects and agricultural
methane digesters.[^24] Projects can be registered with CCAR, and CCAR
maintains a list of accredited verifiers. CCAR does not yet have a
facility for tracking trades or retiring offset credits, although this
may be developed in the future (possibly as part of the recently
announced multi-state Climate Registry).[^25] Similarly, the U.S.
Environmental Protection Agency Climate Leaders Program has begun
developing a set of standards for quantifying emission reductions for
several types of projects. These standards are still in draft form,
however, and would need to be supplemented with monitoring and
verification standards and a registry to establish a credible carbon
offset commodity.[^26]

The Center for Resource Solutions (CRS) has recently completed work on a
"Green-e GHG Product Standard."[^27] Under this standard, CRS will
certify carbon offsets that are created under programs that already have
credible accounting and verification standards in place. The CRS
standard does seek to provide an enforcement mechanism (by requiring
offset marketers to disclose information to buyers) but relies on other
programs for accounting and verification rules.

The Climate Group (based in London), the International Emissions Trading
Association, and the World Economic Forum are currently developing (with
stakeholder input) a global "Voluntary Carbon Standard" (VCS) that will
in principle cover accounting rules, verification standards (including
accreditation of verifiers), and the establishment of a registration and
enforcement system.[^28] Initially, the VCS will most likely reference
CDM accounting and verification standards, although it may incorporate
other standards over time. Its credibility will largely rest on the
decisions of designated verifiers, which will effectively be responsible
for its enforcement in place of a central regulatory authority.

The Chicago Climate Exchange (CCX) has operated a voluntary trading
system since 2003 that includes a carbon offset component. In principle
CCX offsets can be used to voluntarily offset emissions for companies
and individuals who are not CCX members, just as CDM offsets can (some
retail providers already offer to retire CCX offsets on behalf of
customers). The CCX program includes proprietary accounting rules,
verification standards, and a registry to track credits and project
information. One of the criticisms of the CCX, however, is that little
information is publicly available about its standards and individual
projects.

Other voluntary carbon offset standards, including the "CDM Gold
Standard," primarily reference the CDM's accounting and verification
requirements. They do not provide separate accreditation of verifiers,
nor have they established strong registry or enforcement systems.

In short, most of the "standards" developed under voluntary initiatives
to date do not incorporate all of the elements of a true carbon offset
commodity standard. Some of these initiatives could develop into
full-fledged standards and oversight programs, but are not there yet
(e.g., CCAR or Climate Leaders). The VCS may cover all the bases when it
is launched, but it may also have a loose oversight structure. The CCX
currently has a functioning offset commodity standard, but suffers from
lack of transparency and public accountability.

### Might these efforts eventually be sufficient, or is there a need for government oversight?

One answer to this question is "time will tell." Pieces of a full
voluntary offset standard are coming together under various initiatives,
and it is possible that the market will sort itself out as these pieces
either fall away or become incorporated into a single program or set of
programs. Currently, however, the proliferation of standards -- many of
which are incomplete -- is creating more confusion than clarity.

This risk with a "wait and see" approach is that the market may never
cohere around a single standard or program. Even fully established
standards are not all alike. Differences in accounting and verification
rules -- especially with respect to additionality -- can significantly
affect the "quality" of carbon offsets offered to the market. Many would
argue that it is not necessary to have unified quality standards, and
that buyers should be able to discriminate between different quality
offsets according to their needs. But given the complexity of carbon
offsets as a commodity, it is not clear that typical consumers could
effectively distinguish "good" quality from "bad" -- especially
unsophisticated buyers in the retail offset market. Allowing multiple
standards of varying quality could just as easily sow confusion and
skepticism among the buying public, a process that already seems to be
underway.

The consequences of skepticism about the voluntary offset market are
hard to predict. In the extreme case, the risk is that it could cause
the voluntary market to dissolve and foster opposition to the
development of mandatory offset programs. This could mean the loss of
significant low-cost opportunities for mitigating climate change.
Avoiding this outcome may require some kind of government oversight to
ensure a minimum level of consumer protection in the voluntary carbon
offset.

Ultimately, the government's focus should be on developing strong
mandatory offset programs that incorporate all three required elements
of a standard. As mentioned above, the true value of the voluntary
market may be as a proving ground for innovative project types not
incorporated in a mandatory regime. At the end of the day, however, we
are still talking about a commodity whose primary purpose is to benefit
the public good by helping to mitigate climate change. This alone argues
for public oversight in shaping the standards that define the
commodity's quality.

### Why should the government regulate voluntary carbon offset markets when future mandatory programs (e.g., a federal cap-and-trade system) could supersede them?

In principle, there is no reason why voluntary carbon offset markets and
mandatory regulatory programs cannot coexist. The real question is
whether mandatory regulations might render unnecessary the standards and
systems established under a voluntary market -- and whether that would
be a bad thing.

In fact, the prospect of mandatory regulations creates real risks for
the voluntary market. If a CO~2~ emissions cap is placed on power
plants, for example, no offset projects claiming to reduce emissions
from the power grid (e.g., renewables or energy efficiency projects)
could continue to make that claim (because a ton of emissions reduced
would simply free up an allowance that another power plant could use to
emit more). Moreover, a mandatory emissions trading program could
establish carbon offset rules and compel voluntary offset purchasers to
abide by those same rules.

Of course, one response to these risks is to say "let the buyer beware."
There are several reasons, however, why active regulation of the
voluntary market today may make sense:

-   *Buyers are looking for offsets now.* As the market data cited
    earlier indicate, demand in the voluntary carbon offset market is
    growing rapidly. The desire among consumers to voluntarily
    contribute to climate change mitigation is something that should be
    harnessed and encouraged. Waiting until a full-fledged mandatory
    trading program before establishing offset standards could stunt the
    market before it has a chance to develop and undermine receptivity
    to offsets in the future. And given that a public good is at stake,
    there may be sound reasons for intervention on the grounds of
    consumer protection.

-   *Voluntary offsets can inform the development of mandatory trading
    systems*. Initiating an oversight process for the voluntary offset
    market could actually assist with the development of a future
    mandatory program, by giving regulators hands-on experience with the
    evaluation and establishment of accounting standards, verification
    requirements, and registry systems.

-   *Mandatory and voluntary markets won't necessarily be redundant*. It
    is not necessarily the case that a mandatory program will fully
    supersede voluntary offset programs. Under a mandatory program, for
    example, the government might decide to allow only a limited number
    offset project types, leaving other more experimental
    emission-reducing opportunities open to voluntary demand. While
    government oversight of the voluntary market could be less
    restrictive (and should not discourage innovation), there may still
    be some need for minimum quality standards.

-   *Current oversight could provide certainty for the future*. One
    reason for government oversight today is to provide some assurance
    about the interaction of voluntary offset markets and mandatory
    programs in the future. Official endorsement of projects in certain
    sectors, for example, could indicate to voluntary offset buyers and
    sellers where they can safely invest their money to avoid conflict
    with future regulations. Oversight of the voluntary offset market
    could even form the basis of an "early action" crediting program for
    potentially regulated businesses. Policymakers must decide, however,
    whether they are willing to establish such precedents before a
    mandatory program is fully developed.

### What form should government regulation or oversight take?

There are basically two ways the federal government could help bring
consistency and credibility to the voluntary carbon offset market. The
first would be to officially endorse offset credits from a particular
program or trading system with its own credible oversight and
enforcement mechanisms. The second would be to provide guidance,
oversight, and/or enforcement for the voluntary market directly.

**Endorsing a Particular Program or Trading System**

The United Kingdom Department for Environment, Food, and Rural Affairs
(DEFRA) floated a \"best practice\" guideline for voluntary offsets
earlier this year recommending that only officially certified CDM
credits, or allowances issued under the European Union Emissions Trading
System, should be used for voluntary offsets. DEFRA's argument was
essentially that only offset credits (or tradable allowances) from these
mandatory programs currently meet all the required elements for a
credible carbon offset commodity.

Something similar could make sense for the United States. The question
would be which program(s) to endorse or certify. Currently, only the
Chicago Climate Exchange meets the basic requirements for a full
standard, but its lack of transparency has raised questions about its
credibility. Another alternative might be to endorse carbon offsets
credits issues under the Northeast Regional Greenhouse Gas Initiative
(RGGI), a multi-state cap-and-trade program for greenhouse gases. The
RGGI program, however, will not be operational until 2009. Other
programs mentioned above might qualify as well as they are further
developed or launched.

A "best practice" guideline like this would of course not be binding,
but could serve as a kind of quality benchmark for the market and
promote consistency.

**Establishing Guidance and Oversight for the Voluntary Carbon Offset
Market**

Direct oversight of the voluntary carbon offset market could take
several forms, with varying degrees of involvement. In essence, however,
it would involve ensuring that a consistent set of basic building blocks
for a credible carbon offset standard are in place: accounting
standards, verification standards, and registration and enforcement
systems.

The objective of government oversight should be to bring clarity and
consistency to how voluntary carbon offsets are defined and guaranteed.
Any regulation or guidance should build off the work of existing
standards and programs.

1\. Accounting Standards

As noted above, several organizations are developing offset project
accounting protocols applicable to specific types of projects in the
United States. These protocols and others could be tapped to form the
basis of a federal government "best practice" standard for voluntary
carbon offsets. Protocols to evaluate for inclusion would include those
developed by CCAR, the U.S. EPA Climate Leaders Program, RGGI, and the
CCX. CDM accounting methodologies could also be considered, particularly
for projects located in other countries, where protocols designed for
the United States may not apply. There is some overlap in coverage among
these programs' various protocols (each of them, for example, has a
separate protocol for agricultural methane projects), and any
differences will ultimately have to be reconciled. Federal guidance
designating "best practice" protocols for the voluntary offset market
could be tremendously helpful.

As noted above, one of the most critical carbon offset accounting issues
involves making determinations about "additionality." U.S. programs have
adopted a fundamentally different approach to additionality than the
CDM, based on setting benchmarks against which projects can be
objectively evaluated, rather than asking regulators to make subjective
judgments about individual projects. Both approaches are potentially
legitimate, but a standard set of guidance for additionality would
greatly aid the credibility of the voluntary market.

2\. Monitoring and Verification Standards

Of existing U.S. standards and programs, only CCAR and the CCX maintain
lists of accredited verifiers. Other standards rely primarily on
CDM-accredited verifiers. The VCS will formally accredit verifiers once
it is launched. Nevertheless, the credibility of the voluntary carbon
offset market would be enhanced by an official government accreditation
program, identifying qualified verifiers for specific types of projects
in the United States. A publicly accountable accreditation process could
lend confidence to the voluntary market, and would not have to preempt
or conflict with lists of verifiers maintained by existing programs.

3\. Registration and Enforcement

Various registries are being developed that could perform essential
disclosure and tracking functions for the voluntary carbon offset
market. CCAR is one such registry (although it does not yet track the
trading and retirement of credits), and the nascent multi-state Climate
Registry will be another. The VCS plans to certify a registry (or
multiple registries) to handle disclosure and tracking functions. The
CCX maintains a registry, but does not publicly disclose information.

It would not make sense to create an entirely new registry for the
voluntary carbon offset market. Nevertheless, there may be a compelling
government interest to certify registries to ensure that they disclose
essential information, and also to ensure that a proliferation of
independent registries does not lead to the double registering and
selling of the same GHG emission reductions.

Finally, the voluntary offset market would benefit from a clarification
in law or regulation of who owns the "property" rights to specific types
of emission reductions.

### Are there certain types of projects that should or should not be used to offset GHG emissions?

The universe of potential carbon offset projects is both large and
varied. If the goal of carbon offset markets is to achieve emission
reductions at the lowest possible cost, then it makes sense to cast a
wide net and include as many project types as possible. Nevertheless,
most carbon offset programs expressly forbid projects with potential
adverse social or environmental impacts (including, in nearly all cases,
projects involving nuclear power), and it makes sense to adopt this as a
minimum standard.

Some observers argue that carbon offsets should only come from projects
whose emission reductions are easy to quantify and verify. This is a
good general rule, but it should not be interpreted too strictly.
Generally, there is a tradeoff between projects that are "slam dunks"
for offset credibility, but have few other redeeming qualities (e.g.,
HFC destruction), and those whose effects are difficult to quantify or
verify, but have many secondary benefits (e.g., forestry). As noted
previously, the ultimate value of the voluntary offset market may be as
a tool for demonstrating innovative types of projects in areas that
would otherwise be unexploited. The role of government oversight should
be to ensure that accounting and verification methods follow basic
standards for quality, without categorically excluding projects that may
have multiple positive benefits.

Ultimately, a "portfolio" approach makes sense. Currently, the voluntary
carbon offset market appears dominated by forestry projects, which tend
to face significant quantification uncertainties. This points up the
need for credible accounting guidelines, such as those developed under
the WRI/WBCSD Project Protocol. The CDM market has faced an opposite
problem, however, where a large quantify of offsets have come from
projects whose reductions are easily quantified, but whose sustainable
development benefits are minimal.

[^1]: Because the effect of greenhouse gases is global, it does not
    matter where they are reduced.

[^2]: See Faeth, P., M. Trexler, and J.M. Kramer, 1989. *Forestry as a
    Response to Global Warming: An Analysis of the Guatemala
    Agroforestry and Carbon Sequestration Project.* World Resources
    Institute, Washington, D.C.

[^3]: Harris, E., 2006. *Working Paper on the Voluntary Carbon Market:
    Current and Future Market Status, and Implications for Development
    Benefits*. International Institute for Environment and Development,
    London, October 2006.

[^4]: Ibid.

[^5]: Hamilton, K., et al., 2006. *Offsetting Emissions: A Business
    Brief on the Voluntary Carbon Market.* Business for Social
    Responsibility and Ecosystem Marketplace, San Francisco.

[^6]: Clean Air-Cool Planet, 2006. *A Consumers' Guide to Retail Carbon
    Offset Providers*. Clean Air-Cool Planet, Portsmouth, New Hampshire.

[^7]: Kollmuss, A., and B. Bowell, 2006. *Voluntary Offsets for
    Air-Travel Carbon Emissions: Evaluations and Recommendations of
    Voluntary Offset Companies*. Tufts Climate Initiative, Boston.

[^8]: Capoor, K. and P. Ambrosi, 2007. *State and Trends of the Carbon
    Market 2007*. World Bank Institute, Washington, D.C.

[^9]: Ibid.

[^10]: ICF International, 2006. *Voluntary Carbon Offsets Market:
    Outlook 2007*, ICF International: London.

[^11]: Trexler , M., 2007. "US Demand?" presentation at the Point Carbon
    "Carbon Market Insights 2007" conference, Copenhagen, 13-15 March
    2007.

[^12]: Harris, E., 2006. *Working Paper on the Voluntary Carbon Market:
    Current and Future Market Status, and Implications for Development
    Benefits*. International Institute for Environment and Development,
    London, October 2006.

[^13]: Ibid.

[^14]: Intergovernmental Panel on Climate Change, 2007. *Climate Change
    2007 -- Mitigation of Climate Change: Working Group III Contribution
    to the Intergovernmental Panel on Climate Change Fourth Assessment
    Report.* Cambridge University Press.

[^15]: The concept of emission offsets originated under the "New Source
    Review" program established by the United States Clean Air Act of
    1977. Under this program, offsets are required to be "real,
    creditable, quantifiable, permanent, and federally enforceable."
    These basic criteria have been modified and adopted in general form
    under a variety of other offset programs, including programs for
    carbon offsets. The "surplus" criterion is generally added to
    distinguish offset reductions from reductions that would occur for
    other reasons. The criteria that carbon offsets must be "real,
    surplus, permanent, verifiable, and enforceable" are now the most
    frequently cited and are, for example, enshrined in the Memorandum
    of Understanding establishing the Regional Greenhouse Gas Initiative
    in the northeast United States. See, for example, Liepa, I., 2002.
    *Greenhouse Gas Offsets: An Introduction to Core Elements of an
    Offset Rule.* Climate Change Central, Alberta, Canada.

[^16]: Greenhalgh, S., D. Broekhoff, and F. Daviet, 2005. *The
    Greenhouse Gas Protocol for Project Accounting*. World Resources
    Institute and World Business Council for Sustainable Development,
    Washington, D.C. and Geneva.

[^17]: Greenhalgh, S., F. Daviet, and E. Weninger, 2006. *The Land Use,
    Land-Use Change, and Forestry Guidance for GHG Project Accounting.*
    World Resources Institute, Washington, D.C.

[^18]: Broekhoff, D., 2007 (forthcoming). *Guidelines for Quantifying
    GHG Reductions from Grid-Connected Electricity Projects*. World
    Resources Institute and World Business Council for Sustainable
    Development, Washington, D.C. and Geneva.

[^19]: The WRI/WBCSD *GHG Protocol: A Corporate Accounting and Reporting
    Standard* is the most widely used international accounting tool for
    government and business leaders to understand, quantify, and manage
    greenhouse gas emissions. For more information, see
    [http://www.ghgprotocol.org](http://www.ghgprotocol.org/).

[^20]: Clean Air-Cool Planet, 2006. *A Consumers' Guide to Retail Carbon
    Offset Providers*. Clean Air-Cool Planet, Portsmouth, New Hampshire.

[^21]: Kollmuss, A., and B. Bowell, 2006. *Voluntary Offsets for
    Air-Travel Carbon Emissions: Evaluations and Recommendations of
    Voluntary Offset Companies*. Tufts Climate Initiative, Boston.

[^22]: For further insight into establishing "additionality" standards,
    see Trexler, M., D. Broekhoff, and L. Kosloff, 2006. "A
    Statistically-Driven Approach to Offset-Based GHG Additionality
    Determinations: What Can We Learn?" in *Sustainable Development Law
    & Policy,* Volume VI, Issue 2, Winter 2006.

[^23]: ISO 14064, International Organization for Standardization,
    Geneva, Switzerland, 2006.

[^24]: See <http://www.climateregistry.org/PROTOCOLS/>.

[^25]: See <http://www.wri.org/climate/topic_content.cfm?cid=4460>.

[^26]: See <http://www.epa.gov/stateply/resources/optional.html#offset>.

[^27]: See <http://www.green-e.org/getcert_ghg_standard.shtml>

[^28]: See <http://www.v-c-s.org/>