Letting wealthy greenhouse gas producers buy their way out of cutting emissions with offsets is "profoundly unjust" and "threatens to make a mockery of science-based target setting," environmental group Friends of the Earth writes in a scathing report released today.
The group argues that international offsetting results in fewer emissions reductions globally, is largely unverifiable, and doesn't ensure positive sustainable development in developing countries.
"Offsetting does not work, will not work, and must be scrapped," said FOE President Brent Blackwelder.
"Instead, the world needs developed countries, especially the United States, to cut their own emissions first and fast and provide financing for adaptation and mitigation in developing countries."
The international community created offsets in the 1997 Kyoto Protocol to give big greenhouse gas emitters more flexibility in meeting their reduction targets. The proceeds were intended to help developing countries pay for emission-cutting projects, such as hydroelectric dam construction, that wouldn't have happened without financial assistance.
In practice, however, offsetting has allowed wealthy countries to continue polluting while paying developing nations to make their emissions cuts for them, often with project that would have been built anyway, meaning extra emissions cuts are lost, FOE writes.
The Siren Song of Offsets
In many cases, buying offsets has proven to be cheaper for major emitters than paying for the technology to cut their own emissions at home. Offset credits purchased for Kyoto's Clean Development Mechanism (CDM) projects currently cost around $19 per metric ton of CO2-equivalent reduced, and that price is likely to fall to around $15 later this year, according to a forecast from analyst Trevor Sikorski of Barclays Capital. In contrast, the cost for California cement producers to switch from coal to cleaner natural gas would be close to $119 per metric ton of CO2 reduced, Stanford researchers calculate.
According to the FOE report, so many offsets are now being purchased through the CDM that offsets are likely to shift the burden for about half of the European Union's promised carbon reductions through 2020 to developing nations.
The U.S. now appears to be headed down the same path: The American Clean Energy and Security Act (ACES) that passed the House in June would allow up 2 billion offset credits a year, equal to about a quarter of all annual U.S. emissions. A recent ACES analysis by the Energy Information Administration suggests that, given the potential of offsets as a low-cost compliance option, any emissions cap would likely be met less by reductions of CO2 at home, and more by offsets used aboard.
International offsets are also on the verge of expanding. When world leaders meet in Copenhagen in December, adding offsets for forest projects, through REDD, and other sectors such as nuclear power will be on the table. The EU is recommending credit banking and sectoral credits be added, as well.
Offsets Abroad, Pollution at Home
These growing numbers of offsets don't cut global emissions as effectively as Kyoto supporters assumed, FOE and experts say.
"Between a third and two-thirds" of CDM offsets do not represent actual emission cuts, estimates David Victor, head of Stanford's energy and sustainable development program.
Part of the problem, write Victor and colleague Michael Wara, is that the CDM executive board relies on third-party verifiers, who are paid by the project developers, and there is scant oversight of the process.
An example of how the system can go wrong is the use of offsets to reduce HFCs, a potent greenhouse gas as much 11,900 times more damaging that CO2. The costs of capturing and destroying HFC-23 at refrigerant plants is so low that many Western plants have voluntarily eliminated the gases. They were added to the CDM to persuade developing countries to stop venting HFCs, explain Victor and Wara.
"Unfortunately, close scrutiny of the economics of HFC-23 projects revealed that they were, in many senses, too good to be true. Our work and the work of others showed that the sale of carbon credits generated from HFC-23 capture is far more valuable than production of the refrigerant gas that leads to its creation in the first place," Victor and Wara write.
"Thus, refrigerant manufacturers were transformed overnight by the CDM into ventures that generated large volumes of CERs (certified emission reduction credits), with a sideline in the manufacture of industrial gases."
FOE anticipates the top international offset projects by 2012 to be HFC destruction, followed by hydro power, electricity from waste gases or energy, energy from landfill gas, N2O destruction, and wind power, with China, India and Brazil the leading participants.
Reforestation projects pose another potential loophole. While preserving natural forests can preserve important carbon sinks, the Kyoto Protocol also counts as offset qualifiers monoculture plantations that hold less carbon and may eventually be cut down for profit, which would wipe out their CO2 reduction value.
Not all the approved offsets are necessary, either. In fact, many CDM projects would have taken place anyway, the group writes.
Take the Xiaogushan, Gansu, hydro project for example. A 2003 report from the Asian Development Bank said hydro would be the cheapest option for expanding electricity generation in Gansu, regardless of CDM money. Yet, the developers claimed it was too risky without CDM support. To get support, they had to claim the project was not financial viable without it.
China has more than 200 dams like this in the CDM validation stage, FOE writes. According to International Rivers, hydro developers regularly underestimate the power the dams will produce to make them appear financially not viable without CDM support.
India's Tanjavur natural gas power plant is another example. The developers say the internal rate of return without CDM would be 15.3 percent and that "all power projects in India are considered viable only if the guaranteed returns of 16% on the capital are ensured." However, that 16% is under dispute.
The U.S. General Accounting Office points out in a 2009 report that it's impossible to know if an offset project would have happened on its own or if it was truly additional, as CDM rules are supposed to require. Yet, the GAO report notes that
"additionality is fundamental to the credibility of offsets because only offsets that are additional to business-as-usual activities result in new environmental benefits."
'Suicide to Base Our Future on Offsets'
FOE recommends that the U.S. government reject proposals for new offsetting programs, including those for forests, and work to scrap the CDM. Instead, it says, developed countries should "provide just compensation to developing countries for adaptation and the unavoidable impacts of climate change."
FOE also wants the U.S. to commit to reducing its own emissions by at least 40% below 1990 levels by 2020 – without offsetting.
"It is suicide to base our future on offsets. Offsets provide the illusion of taking action to stop global warming when in fact they often allow emissions to rise," said Michael Despines of Friends of the Earth, one of the authors of the report. "People need to realize how dangerous offsets can be—they provide a false sense of security but often do not deliver as promised."