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Developing a Carbon Conscience:A Portrait and Assessment of the VoluntaryCarbon Offset Market


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Acknowledgments

I would like to thank everyone who shared with me their experiences in the Voluntary CarbonOffset Market - their insight and perspectives greatly contributed to this report.As well, I would like to thank The Anderson Grant, for providing me with the support to visitseveral different offset projects in Latin America.Last, I would like to thank Professors Martha Matsuoka and Robert Gottlieb for their help andsupport throughout the research process.


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Table of Contents

Executive Summary....... 5

The History of Carbon Offsets ..... 7

How did we get ourselves into this mess?

An Overview of Climate ActionTimeline

Economic Support of Market-Based Strategies to Fight Climate Change

The Creation of the Voluntary Carbon Offset MarketAre We Headed in the Wrong Direction?

Who Supports Carbon Offset and Why

Who Opposes Carbon Offsets and Why

Distinctions of Voluntary Markets (VCM)

Structure of the Voluntary Carbon Offset Market... 17

Project DevelopersRenewable Energy Certificates (RECs)

Certifiers and Verifiers

RegistriesVendors

Types of Vendors

Price

Multi-stage process of selling

Consumers

Who They Are

Sources of Offset Purchases

Consumer Motivations

Consumer Variations Related to the CCX

Three Illustrations of the Voluntary Carbon Offset Market... 24

Introduction


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The Body Shop (Consumer)

What we can learn from The Body Shop

Live Climate (Consumer)What we can learn from Live Climate

Illustration #3 Van Eck Forest 53

Pacific Forest Trust (Project Developer)

What we can learn from Pacific Forest Trust

The California Climate Action Registry (CCAR) (Certifier/ Registry)What we can learn from The California Climate Action Registry

Scientific Certification Systems (Verifier)

What we can learn from Scientific Certification SystemsBeGreenNow.com (Vendor)

What we can learn from BeGreenNow.com

Politicians (consumers)

What we can learn from the politicians experience

Natsource (Vendor/ Broker)

What we can learn from Natsource

3 Degrees Inc (Vendor /Broker)

What we can learn from 3 Degrees Inc.Save the Planet and Win.com (Vendor)

What we can learn from SavethePlanetandWin.com

Conclusions: Looking Forward.. 67

Glossary..... 70

Appendix 1 73

Appendix 2.... 73

Bibliography..... 74


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Executive Summary

With the increasing recognition of the significance and impact of global warming,attention now turns to the best strategies available to stop it, or at least slow down the release ofgreenhouse gas emissions into the environment. This report focuses on one of the most debated,market-based, approaches to fighting global warming carbon offsets. Offset projects reducegreenhouse gas emissions through a variety of ways, such as planting trees or installing solarpanels, which create pollution credits that can then be traded. Several different markets havearisen to facilitate the exchange of carbon offsets. In the United States, a lack of political actionhas created a gap regarding any mandatory climate change policy. In this absence, a voluntarycarbon offset market (VCM) has arisen. This report is intended to create an understanding andan analysis of the voluntary carbon offset market for those who are interested in and/orconcerned about its implementation.

The development of carbon offset markets were supported by economists who believedmarket mechanisms were the best way to address climate change, and believed that offsetsshould be included as a supplement to a regulated pollution-trading/ cap-and-trade system.Supporters of this approach cite: economic efficiency, encouragement of technological

innovation, ability to track and measure, potential to create public awareness, ability to beimplemented quickly, and the possibility of co-benefits in offset projects. Opponents of thisapproach cite: failure of the market to inspire real personal or institutional change, uncertaintyaround the science of offset projects, the inability to measure and track offset creation, negativeeffects of offset projects on local communities and organizations, and the potential that offsetscreate for greenwashing.

In order to determine how these arguments manifest themselves, the report includes threeillustrations of different project models: Return to Forest, a reforestation project in Nicaragua;

Tecnosol, an alternative energy company in Nicaragua; and the van Eck Forest, a reforestationproject in Northern California. Each illustration follows the process that brought together thegroups involved (project developers, vendors, verifiers, registries, and consumers). Byevaluating these project models, four trends were observed:


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compliance markets will be critical. For example, the registry involved in the van Eck

Forest project (the American Carbon Registry) began as a government entity, but is now a

private organization. This relationship presents the challenges the voluntary system mayface when climate change policy is enacted. It is clear throughout the illustrations that a

voluntary system needs complimentary governmental policy; the challenge will be finding

a balance between the two.

4. The current approach of most VCM players does not inspire real personal, institutional,or political change by their consumers. For example, the vendor of the Return to Forest

(CarbonFund.org), encourages their consumers to reduce what they can and offset what

they cant. However, there is no way to guarantee that the consumers are actuallymaking changes to their own lifestyles. Even more, there is no connection between the

sale of carbon offsets and larger institutional and political change.

In moving forward, the four conclusions from the illustrations should be carefullyconsidered. First, a way must be found in which offset funding can support community-basedprojects without manipulating the missions of organizations or diverting critical resources from

other projects. A partial solution to this conflict may be shifting the perspective around offsetfrom complete funding source to partial funding source, or raising the price of offsets to reflect

their true value. Second, future discussions of the funding and certification processes must

determine whether the market should continue to follow the trend of being comprehensive (and

complex) or if there is an effective way to streamline the process in a way that makes it more

accessible to consumers and less of a burden on project developers. Third, the relationship

between the current voluntary market and a future U.S. regulatory-based compliance-based

market will be critical and should be included in the details of any future global warming policy.

Last, the current system needs to be reevaluated to encourage consumers to more activelyparticipate in the fight against global warming. For example, consumers of offsets should bemobilized to become a political force; which could include lobbying politicians on global

i li j i i i ll i i hil ll f f h


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The History of Carbon Offsets

How did we get ourselves into this mess?In 1859 when Edwin L. Drake dug the first oil well in Pennsylvania, he could not have

predicted the effect oil would have on out world. Drakes well produced twenty-five barrelsdaily; today the U.S. consumes over twenty million barrels of crude oil and petroleum productsevery day.1 The exploitation of this natural resource has lead to an Earth that is completely outof balance. We are now just beginning to fully understand the effects our dangerous addiction tooil has had. Emissions of CO2, created by the burning of oil, have increased by 35 percent from1990 to 2006.2 This influx of CO2 into our atmosphere traps heat from the sun and heats up our

Earth to temperatures that disrupt the fragile ecosystems that support human life. If we do notchange the direction in which our society is heading, our Earth will eventually becomeuninhabitable. In 2005, prominent NASA scientist, James Hansen concluded that by 2015 wewould hit a tipping point in our atmosphere, where the damage done to our Earth would beirreversible.3 Today, that gives us approximately seven years to reduce the CO2 we release intothe atmosphere. While the precise number of years can be debated, Hansens findingsdramatically points to the immediate need for action about our carbon footprint, including our oiladdiction.An Overview of Climate Action

The first major step towards addressing the issues of climate change occurred in 1988with the creation of the Intergovernmental Panel on Climate Change (IPCC). The goal of theIPCC is to provide the decision-makers and others interested in climate change with anobjective source of information about climate change.4 In 1990 the IPCC released their firstreport, recommending that an international treaty was needed in order to mobilize aninternational effort to reduce CO2 and other greenhouse gasses. The recommendation of the

IPCC led to the creation of the United Nations Framework Convention on Climate Change(UNFCCC), which was signed in 1992 by 192 UN member states at the Rio Earth Summit. TheUNFCCC went into effect in 1994, and set up a framework under which governments:

- Gather and share information on greenhouse gas emissions, national policies and


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commits countries to GHG emissions, where the original convention only encouraged them to doso. The Protocol sets binding targets for 37 industrialized countries and the European

community for reducing greenhouse gas (GHG) emissions. These amount to an average of fiveper cent against 1990 levels over the five-year period 2008-2012.6 However, many still believethat the protocol will not work to solve climate change because of the absence of key signatories,including the United States.

Following the 1997 Kyoto negotiations, annual meetings continued with all members ofthe UNFCCC todiscuss progress towards meeting their climate goals and the mechanisms theywill use to achieve those goals. Even though the United States didnt sign the Kyoto Protocol,they had a strong influence in its creation and the subsequent negotiations. The first influence

the US had was simply the sheer number of US representatives who attended the Kyotonegotiations and subsequent UNFCC negotiations. For example, In the 2000 UNFCCC climatenegotiations the US fielded 150 well-equipped delegates, housing them in a luxury hotel andsending well-rested and well-briefed representatives to every working group meeting.Meanwhile, Mozambique had to put up its three harried delegates in a noisy youth hosteloccupied largely by Chinese tourists.7 This unbalance of resources gave the US a largeadvantage during negotiations. Officials of most countries had neither the background nor thestaff to work out in time how to counter, or even understand, a complicated pollution-trading

policy jargon developed by the US and influenced by Northern Corporations.8This pollution-trading, market-based US approach to the Kyoto negotiations ultimately

led to the inclusion of The Kyoto mechanisms in 2001 during the Marrakech Accords. Thesemechanisms are options that allow countries to avoid reducing their own countries emissions bypurchasing emissions credits. The three mechanisms include: Emissions trading, JointImplementation (JI), and Clean Development Mechanism (CDM). Emissions trading allowscountries that have not met their GHG emissions reduction target to purchase the extra emissionsreductions from countries that have exceeded their goals. Joint Implementation allows countriescommitted to reaching the level of GHG emissions outlined in Kyoto (know as Annex Bcountries) to create an emissions-reduction or emissions-removal project in another Annex Bcountry9 as a way to reduce their emissions. Last, Clean Development Mechanisms allow for


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Economic Support of Market-Based Strategies to Fight Climate Change

The idea of pollution trading originated with the work of economist Ronald Coase duringthe middle of last century. Coase argued that [P]ollution is doing something bad and good.People dont pollute because they like polluting. They do it because its a cheaper way ofproducing something else. The cheaper way of producing something else is the good; the loss invalue that you get from the pollution is the bad. Youve got to compare the two. Thats the way

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Timeline of Climate Change Action1859 First oil well discovered

1950- 1970 - Growing concern about the rising temperatures of the Earth

1968 Economist J.H. Dales builds upon theories of past economists to outline the support of pollution credits and market

mechanisms as a way to fight environmental issues.

1977 Freeman Dyson outlines the support for the use of forests to trap CO2 in his essay Can we Control the Carbon Dioxidein the Atmosphere?1988 Creation of Intergovernmental Panel on Climate Change (IPCC)

1989 Applied Energy Services Inc. (AES) uses a reforestation project in Guatemala to offset emissions from a new power

facility in Connecticut

1990 Clean Air Act caps levels of Sulfur Dioxide in US factories to fight Acid Rain

1990 IPCC releases report recommending an international treaty on GHG emissions

1992 Rio Earth Summit and the signing of the United Nations Framework Convention on Climate Change (UNFCCC)

1996 Future Forests, the first voluntary offset company, is founded

1997 Kyoto Protocol ratified2000 Creation of the Chicago Climate Exchange (CCX), the only voluntary exchange in the U.S.

2001 Marrakech Accords finalize Flexible Mechanisms for CDM and JI projects and the inclusion of sinks2003 Future Forests offsets emissions of Rolling Stones tour

2005 Future Forests changes i ts name to The Carbon Neutral Company to reflect a shift away from forestry offset projects torenewable energy.

2005 World Bank estimates VCM formed under 1 percent of global carbon markets, however forecasts a 40-fold growth by

2010.

2005 Montreal Action Plan developed during the United Nations Climate Change Convention (UNCCC) to continue climate

change action after the 2012 end-date of the Kyoto Protocol

2006 AB32 passed in the state of California to address global warming through

2009- Future meeting of UNFCC members to discuss continued climate action


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the Rights in an open market and the consequent establishment of an explicit price for the rightto discharge a ton of wastes into water (or air) system results in a theoretically efficient

allocation of anti-pollution effort as between different dischargers (Dales, 107). A modelsimilar to the one outlined by Dales was used in the 1990 Clean Air Act Amendments thatcreated caps on the levels of Sulfur Dioxide that factories could emit, in order to reduce acidrain. The success of this program inspired the use of trading systems to address otherenvironmental issues, including the Mechanisms in the Kyoto Protocol and the European Unionemissions trading market.

The Incorporation of Offsets

While these economic models explain the use of a simple trading program (like theEmissions Trading Kyoto Mechanism), offset programs, like JI and CDM projects, are morecomplicated and require additional explanation. Offset programs are based on the sameeconomic principles of the buying and selling of pollution credits to control pollution whileencouraging economic efficiency. However, instead of simply buying extra credits from othercountries/firms that have those extra credits to sell, offset projects create new credits that,arguably, would have not existed beforehand. These credits are created by subtracting theemissions of the world that has the project in it from the emissions of an other-wise identical

possible world that doesnt.15Such offset projects exist in several different forms. See the Appendix I for a detailed list

of project types. The fist involves the planting of trees to re-absorb carbon that has been releasedinto the atmosphere. This was the original carbon offset idea proposed by physicist FreemanDyson in 1977. In his report Can we Control the Carbon Dioxide in the Atmosphere? Dysonoutlines how the carbon dioxide generated by burning fossil fuels can theoretically becontrolled by growing trees.16 In theory, these projects generate carbon credits by cancelingthe initial carbon dioxide output and creating an overall carbon balance of zero.

A second way that has evolved to offset carbon is by promoting the use of alternativeenergy. These projects create solar, methane, wind, geothermal, and hydroelectric sources ofpower. In this scenario, diverting the use of oil as a source of power to one that doesnt release


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smaller scale; most participants are individual and small businesses. As the name indicates,participants in this market are not required to reduce their emissions, but are doing so on an

entirely voluntary basis. Some have hypothesized that Americans feel the need to participate inthe VCM because the U.S. does not participate in Kyotos mandatory markets, and they feel aneed to fight global warming

While still small in comparison to markets and projects that fall under the KyotoMechanisms, the voluntary market is rapidly growing. In 2005, the World Bank estimate[d],the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tones ofcarbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold tobe worth $4bn.17

Recently the inclusion of Kyoto mechanisms has spurred a huge growth in the VCM.However, the first voluntary offset project began in 1989. Applied Energy Services, Inc. (AES),a U.S. power-producing company, had plans to build a new facility in Connecticut. However,state officials wanted them to include in their plans a way in which they would reduce the carbonemissions. One cost-effective technique that was proposed was for AES to invest in areforestation project in Guatemala, run by the organization CARE. In this way, AES couldmitigate their carbon emissions from the plant in Connecticut with the trees being planted inGuatemala. Many consider the project to be unsuccessful for several reasons, which will be

discussed further in the next section.However, despite the lack of success with CAREs carbon-offset project, the concept was

not discarded. Several years later, in 1996, members of the band the Clash along with otherentrepreneurs, founded the company Future Forests. Future Forests became the first company inthe voluntary market to sell carbon offsets at a significant scale.18 The founders used theirconnections with other celebrities to make the company and their efforts well-known. Forexample, in 2003, Future Forests organized the planting of 2,800 trees to offset the emissionsfrom the Rolling Stones tour.19 This strategy has been used by many other celebrities to improvetheir image, and consequently demonstrates the opportunity to obtain excellent publicity for agroup like Future Forests as well as for other carbon offset companies who have celebrity clients.

However, in 2005, Future Forests changed its name to The Carbon Neutral Company.


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climate change.21 Today, The Carbon Neutral Company continues to be an important player inthe VCM as more and more offset providers arise. While no longer directly connected with The

Clash, The Carbon Neutral Co., along with may other, similar, retailers provides celebrities andanyone else who wishes to lead a carbon-neutral life with the opportunity to offset theiremissions.

Included in the growth of the voluntary carbon market was the creation of the ChicagoClimate Exchange (CCX) in 2000. Members include corporations, governments, anduniversities; for example: Ford Motor Co, The city of Portland, and the University of Minnesota.While members voluntary join, once they sign the contract with CCX, they are legally requiredto reduce their emissions to certain levels. Up to 50% of this reduction can be done through the

purchase of offsets.

Are We Headed in the Wrong Direction?

Who Supports Carbon Offset and WhyTo understand the significant role the idea of offsets has had in shaping our approaches to

the problem of global warming, it is important to examine their effectiveness. As previouslydiscussed, the economic arguments support the idea that market-driven approaches (including

offsets) address the issue of Global Warming, while encouraging competition and technologicaladvancement. Within our market-oriented, capitalist system, such an approach seems wellsuited. As the name indicates, global warming is a global problem that must be addressed atvery large scales. Supporters of offsets, and other market-based solutions to environmentalproblems, argue that only a system that creates economic incentives to fight global warming willbe able solve such a far-reaching problem and keep all parties accountable.

Supporters of offsets and pollution trading also argue that by allocating pollution creditsto specific industries, it is easier to measure exactly how much pollution is being reduced andhow much pollution is still being emitted. A cap-and-trade system is a moretransparent/traceable system than a tax program because taxes create indirect results; whereastrading schemes create direct, measurable results. A down-side of pollution trading/cap and


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A fourth argument in support of carbon markets is described in a report by ElizabethHarris published by the International Institute for Environment and Development (IIED). Harris

argues that the system of offsets offers a means to achieve a huge volume of emissionsreductions quickly with the resources available. 22 Because Global Warming is such a pressingissue, it will take time to set up a new system that will address the issue at a sufficient scale.Harris argues that the carbon offset market should not be rejected because it creates at leastsome positive and much needed early action, whilst cost effective technologies, policies andpractices are implemented at home to improve efficiencies and produce low carbon energy overthe longer term.23 While offset markets may not be a permanent solution, they are a way todetermine and inspire approaches for further-reaching change.

Another argument in support of offset projects cites that rich nations emit adisproportionate amount of carbon, while less-developed nations end up suffering most of theconsequences because of their location closer to the equator, and because they lack the resourcesto adapt to the changing climate. With this reasoning, it is the responsibility of rich nations toreverse the damages their emissions have created. Offset projects provide unfairly impactedregions with resources to fight Global Warming and its impacts.

In addition, some argue that carbon offset projects also provide co-benefits to thecommunities in which they are located. For example, a reforestation project can increase the

biodiversity of an area, or a solar panel project eliminates harmful fumes from impoverishedhomes. In this way, offset projects can fight global warming and simultaneously solve othersocial and environmental issues.

Who Opposes Carbon Offsets and Why

Conversely, many argue that the theory behind carbon offsets is flawed. These criticsargue that carbon offsets fail to accomplish their goal of reducing GHG emissions. Theassumption of offsets is that people first will reduce their own carbon emissions as much as theycan, and then pay to offset what is impossible to eliminate from their own routine. In reality


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how much carbon is actually being offset, especially in forest projects.25 Many groups are tryingto figure out way to determine how to address theses issues by creating protocols that determine

if offsets can be quantified in a scientifically accepted manner.Another argument against offsets is that the project would have happened even if the

offset money was not provided. The Royal Institute for International Affairs produced a reportthat explained the impossibility of measure and defining savings that are additional to those thatwould have occurred in the absence of emissions credits.26 In other words, money paid to offsetprojects may not be leading to any new reduction of GHG emissions. Thus these carbon marketsprojects that would have happened any way are said to be lacking additionality, the term usedto describe additional carbon emission reductions beyond business as usual activities.

Another factor skewing the emission credits worth is the way offset companies recordthem, which has been compared to an Enron-style of accounting, in which carbon credits arecounted before they actually take effect. In carbon markets, this process is known as the ex-ante sale of offsets. For example, if a person wants to offset one ton of carbon that they alreadyemitted, it may take several years before the offset project will make up for that release of carbonin the atmosphere. Credits are counted as taking effect immediately, when in reality the effect ithas is much slower. In this way, emissions continue to rise much faster than offset companiesclaim.

Aside from the fact that these offset projects may actually be increasing the amount ofGHG emitted into our atmosphere, many times these projects also have a detrimental effect onlocal communities. The first carbon offset project by CARE in 1989, mentioned earlier, providesa good example of how a carbon offset project can misconstrue perceptions of how much carbonis actually being diverted from the atmosphere, and negatively impact the local community theproject aimed to support. The project plan called for some 40,000 smallholder farmers [to] plant50 million pine and eucalyptus trees in the course of establishing 12,000 hectares of communitywoodlots, 60,000 hectares of agro forestry and 2,880 kilometers of live fences.27 The projectalso incorporated a training program for community members so that the program could becomesustainable. However, as CARE began to plan the reforestation project in Guatemala, thedesigners didnt sufficiently grasp what the project would mean for farmers in their local

28


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International Instituted for Environment and Development (IIED) explains: there can often be atrade-off between community benefits and robust carbon benefits large projects, such as HFC

[Hydrofluorocarbons] capture and landfill-to-energy projects have fewer benefits to localcommunities, but their carbon benefits are relatively certain and predictable and they are much

easier to monitor.30 Currently the CDM and many voluntary means of project assessment donot explicitly include community requirements, this leaves poor communities vulnerable toexploitation by offset project developers.

This lack of understanding about the real effects of seemingly environmentally friendlypractices can be related to a trend know as green-washing. For example, while it may bepopular for an individual to install solar panels on their house, drive a hybrid, or buy carbon

offsets, they might not be precisely sure what effect they are having on the environment. Beingable to live green becomes the top priority, while the actual environmental impacts one hasbecomes secondary. This focus on individual behavior is encouraged by large corporations whosee the green market as a way to sell their product, even if it doesnt actually have trueenvironmental goals. This focus also deflects attention from the companys (and largersystems) responsibility for the reduction of carbon emissions. For example, in 2000 BPinvested $45 million in solar energy. However it spent more than four times as much on re-branding itself with the green-sounding slogan Beyond Petroleum.31 And of course the $45

million they invested in solar energy pales in comparison to the billions of dollars spent on theextraction and production of oil. In this way, corporations can seem like do-gooders when inreality they havent taken any of the more difficult actions to effect real change.

Another way in which opponents argue that offsets allow polluters to continue pollutingis through the relationship it creates between rich and poor nations. Supporters of the carbonmarkets see the overall system of carbon offsets as a way for rich nations to give back to theimpoverished nations that are unfairly affected by the effects of global warming. However,others take a different perspective and see the market as having impoverished nations clean upand take responsibility for the actions of the over-polluting rich nations.

A final argument against the use of carbon offset projects is that the goals and mission oforganizations can get lost in the process of verifying the carbon offsets. Before CARE undertook


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Those who support the market argue that voluntary markets provide a valuable opportunity toindividuals and groups who are not legally required to participate in reducing their emission

under Kyoto or other requirements. Especially in the United States, many people argue that thevoluntary market is filing a void created by inaction on the part of our government. This pre-compliance investment in the environment can also help companies to prepare for a situation inthe future when there are compliance-based markets.

The voluntary market is also seen as an opportunity to expand the ideas and techniquesrelated to offsets. While the Kyoto Mechanisms are restricted to specific criteria for theirprojects, there are no similar regulations constraining voluntary projects. In this light, thevoluntary market is seen as a test-bed and may, with time, pave the way for much wider

compliance regimes, with the power to generate substantially more reductions.35However, others do not believe that a voluntary offset market will help to improve the

current approaches. The system that has been created in order to legitimize the carbon creditsproduced by voluntary offset projects has been a source of concern for critics. The lack oftransparency and regulation allows for numbers to be fudged and participants to be exploited.Because there is no central registry in the voluntary market, it is easy to sell credits several times,or sell a credit that overestimates its benefits. Anyone can create sell offsets on the VCM, whichcreates opportunities for exploitation. This ability to manipulate and the lack of structure or

regulation also creates an opportunity for corporations and powerful institutions to mold themarket into a structure that benefits their business more than the environment. These flaws in theVoluntary Carbon Market have been increasingly exposed through the media, creatingskepticism and distrust of offset projects and offset vendors.


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Structure of the Voluntary Carbon Offset Market

The second part of this report will evaluate each level of the Voluntary Carbon OffsetMarket (VCM) in order to foster a better understanding of the mechanisms that facilitate thetrading of voluntary offsets (known as Verified/Voluntary Emissions Reductions (VERs)).There is no generic model that can be applied to all offset projects, but there are general trendsthat exist. The VCM parallels the CDM model set up by Kyoto, in that it consists of six basicplayers: consumers, vendors, registries, verifiers, validators and project developers.However, as discussed in Voluntary Carbon Markets, and International Business Guide to WhatThey are and How They Work: it is difficult to depict the [voluntary] market properly using a

linear supply chain because a single participant can occupy more than one role.36 For example,a project certifier may also sell credits, or a consumer may skip the middleman and buy directlyfrom project developers instead of vendors. No matter how many organizations are involved inthe process, most VCM projects, in some form, include the six main components outlined below.

A leading source of information about the VCM comes from the annual report releasedby Ecosystems Marketplace/New Carbon Finance (EM/NCF). Both organizations are researchinstitutions that work on market-based approaches to environmental issues. Their first reportwas released in 2007, followed by a second report in 2008. The report collects its data fromonline surveys of suppliers, brokers, and carbon credit accounting registries.37 They alsoutilized figures available from brokerage firms. With this approach they were able to accessinformation from about 73% of the market. This was enough to perform an analysis, althoughthey admit it is not a perfect representation because of the nature of their survey.

Within their survey EM/NCF makes an important distinction within the VCM. Theydivide the market into two distinct, yet interwoven entities the Chicago Climate Exchange(CCX) and the Over the Counter (OTC) market. EM/NCF defines the OTC market as anything

outside of the CCX in the voluntary market. These transactions are not driven by an emissioncap and are extremely fragmented and variable. The EM/NCF report attempts to analyze theseentities separately, however as we will see, many times it is difficult to entirely separate the twofrom each other. Because of this overlap, I will use Voluntary Carbon Market (VCM) in


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developers can be for-profit organizations, non-profit organizations, or public sector agenciesthat are interested in seeding the market39.

There is no restriction on the scale of voluntary offset projects. However many timessmall projects have difficulty entering the market if they are not producing enough VERs.Projects in the VCM are located in both developing and developed countries. This varies fromthe regulated, Kyoto market where CDM projects are in developing countries and JI projects arein developed countries. A last distinction between VCM projects is the level of involvement ofstakeholders. Stakeholders are defined as individuals or groups in the community that areinvolved in or affected by the project. Sometimes stakeholders will play a large role in thedevelopment of the project, while other times their input is limited.

Renewable Energy Certificates (RECs) a parallel (but intersecting) market

A source of confusion and debate is the intersection of the Renewable Energy Certificates(RECs) and the VCM. Typically one REC is proof that 1 megawatt-hour (MWh) of electricitycame from a renewable source of energy (solar, wind, geothermal, etc.). This renewable energyis then mixed into the energy grid, where energy from all sources (including coal/oil) is availableto the consumer. A REC doesnt represent the energy itself, but is a mechanism created toincentivize and promote the use of renewable energy. RECs are a similar market-based approach

to reducing GHG emissions and also exist in both compliance and voluntary markets.There is currently no national policy involving RECs; however in the US, twenty-five

states participate in a compliance market under Renewable Portfolio Standard (RPS) policies.For example, California has required that 20% of their energy will come from renewable sourcesby 2010.40 This is accomplished by requiring energy companies to create their own sources ofrenewable energy or buy RECs from renewable sources (most still created by privatecompanies). The voluntary market participants are motivated by the same factors as VCMparticipants (a general desire to be seen as environmentally conscious). In fact, many timesRECs are converted into VERs to be sold on in the VCM. This relationship has been the sourceof much debate, and will continue to be addressed through out this report.


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also choose to use the CDM/JI protocols to certify their projects and still sell some of the creditsin the VCM as VERs.

In addition to the initial certification process, a third-party validation component has beenadded to many of the certification processes. The processes have been included to ensure thatthe initial certification process has not been influenced by people who are close to the project andare motivated to skew calculations to make the project fit the requirements. Sometimes thecertification protocol requires the third-party validation while other times registries, vendors orconsumers may be the ones who require the additional step. According to EC/NCF, in 2007,about 87% of OTC credits were certified by a third-party.42 All CCX credits are verified by athird-party.

Quality assurance process

Source:United States Government Accountability Office. Carbon Offsets. August 2008.


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transactions. Some registries have chosen to only accept projects that have been certified undertheir own protocols, while others accept a variety of standards. Most registries also offer the

option to retire purchased offsets, to ensure that they cannot be re-sold and counted twice. Manytimes this is not done because people are buying the VERs with the intention of reselling them(for example brokers who are described below).

Vendors Selling the offsets

Types of VendorsThe number of vendors selling credits in the OTC market has risen from 65 before 2002

to 148 in 2007.44

Vendors are people/organizations that connect consumers with offset projects.In order to facilitate the purchase of the carbon credits, several different models of vendors havearisen that can either be categorized as non-profit organizations or for-profit organizations. Non-profit organizations have typically used carbon offset sales as a way to fund their variousenvironmental projects/agendas. These organizations typically sell their offsets to individualsand businesses via a website.

For-profit vendors place more emphasis on tax-deductions and sales or investmentmodels as a way to sell carbon credits. In the past several years there has been a significant

increase in the percentage of for-profit vendors. According to the study by EM/NCF, before2006, non-and for-profits split the market supply almost 50/50. However in 2007, 90% of allvoluntary transactions were supplied by for-profit entities, up from 60% in 2006.45 Thisincrease is part of the overall growth in the market during this time, and may be partially fueledby the strong possibility of a developing compliance market in the US, and the economicopportunities this presents.

Included in the For-profit entities in the market are Investors, Brokers, and Exchanges.There are much fewer investors in the VCM (OTC and CCX) market than in the regulatedmarkets, seeing as these type of transactions are more necessary in voluntary systems. However,in 2005 the first voluntary carbon offset fund was founded, the Cheyne Climate Wedge Fund.This fund invests in high-quality offsets to sell to large-scale corporate buyers. While investors


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explained above, in order to purchase the credits from the exchange, consumers must become amember and sign a contract committing them to cap their emissions to a certain level.

PriceThe Ecosystems Marketplace survey found that from 2006 to 2007 the price to offset one

ton of CO2 rose from $4.10 to $6.10. It was cheapest to buy the credit directly from the ProjectDeveloper (5.0/tCO2e) and was most expensive to buy credits from a vendors/retailers(11.3/tCO2e). This was explained with the rational that the consumer purchasing directly froma project developer paid the lowest price, while customers purchasing smaller batches of creditsonline in the comfort of their homes from a retailer paid the highest price.49

Multi-stage process of selling

Many times not just one type of vendor is involved in a transaction. For example, OTCvendors may sell credits generated from CCX projects; brokers may purchase credits from non-profit websites to then sell on to their clients; or one nonprofit organization may buy credits froma different nonprofit organization. This multi-stage process of selling credits makes it difficult todefine simple pathways that credits follow.

Consumers Offsetting your carbon footprint

Who They Are

The demand/money generated for the offset project comes from offset consumers.According to EM/NCF, 79% of OTC consumers in 2007 were for-profit businesses. Amongthese purchases, approximately two-thirds of their credits were purchased to immediately offsetemissions, with the remaining third bought for investment purposes.50The rest of the demandcame from non-governmental organizations (13%), individuals (5%), government (0.4%) andother (3%). An overwhelming percentage of OTC consumers are located in developed countries:EU (47%), USA (34%), Australia/New Zealand (8%), and Canada (3%). Less than 1% of


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Sources of Offset PurchasesTypically, four different types of emission-producing activities are identified: internal

emissions, product life cycle emissions, event emissions, and individual emissions.53 Internalemissions account for the majority of carbon offsets purchased in the voluntary market. Itincludes companies, non-profit organizations, or governmental agencies [that] purchase carboncredits in order to offset emissions generated by their facilities and employees in the course ofdoing business.54 Product life cycle emissions are less prevalent as a motivator. It refers toemission generated by the use of a specific product (know as indirect or external emissions); inmost cases these products will then be marketed as carbon-neutral. Event emissions are created

Possible transactions in the VCM

Modified from the original source: United States Government Accountability Office.Carbon Offsets. August 2008.


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Another motivation mentioned by many companies is the need to prepare for potentialregulations that will be enacted in the future.57

Non-profits appear to be driven by public relations and mission-driven goals (such asreforestation or sustainable development). Governments at local, regional, and federal levelshave begun to offset their emissions for slightly different reasons. Governments may bemotivated to become involved in the market as a way to attract investment aimed at solvingenvironmental problems, and as a way to improve their political image based on strong publicinterest to act on climate change.

Last, individuals seem to deviate most in their motivation for the purchase of carbonoffsets. In the US, retailers of carbon credits say the top reason consumers cite for buying

carbon credits is a desire for independence from oil.58

More generally, individual consumerspurchase credits with the intention of addressing global warming in reaction to governmentinaction. As well, many also argue that the motivation for individual purchase of offsets is dueto a feeling of guilt about their over-consuming lifestyle. This then may contribute to the factthat most consumers are located in developed countries were carbon footprints are typicallymuch larger.

Consumer Variations Related to the CCX

Its important to remember that these explanations do not necessarily apply to consumersin the Chicago Climate Exchange. Similar to Kyoto participants, CCX members are buyingoffsets to meet their voluntary cap-and-trade-commitments. Therefore, the co-benefits of a creditis irrelevant as long as it meets the CCX eligibility criteria and can be used for compliance.Many times offsets provide a cheap alternative to changing the corporations practices to attain100% of the emission reduction. While the reasons that institutions joined the CCX may besimilar to those buying directly from the OTC (marketing, corporate responsibility, preparationfor future policy), the motivation to purchase the offset and support the offset project is simply tomeet their cap in the most economically efficient manner. While this distinction is small, itcauses huge differences in the types of offsets purchased. CCX members are simply looking forthe cheapest offset, while other OTC consumers care more about the story behind the projects


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Three Illustrations of the Voluntary Carbon Offset Market

Introduction

Over the course of January 2009 to April 2009, interviews were conducted with differentplayers involved in three different projects that generate carbon credits sold in the voluntarycarbon offset market. The three projects were identified from the list of survey respondentsprovided in the appendix of the 2008 report by Ecosystem Marketplace and New CarbonFinance.

Projects were selected with similarities and differences that allowed for meaningful

comparisons. Two projects are located in a developing country (Nicaragua) and one is located ina developed country (The U.S.). As well, the projects sell their carbon credits through varioustypes of vendors. While the projects appear on many different websites, the main vendors areCarbonFund.org, E+Co, and BeGreenNow.com, all of whom have varying approaches to the saleof carbon offsets. Projects also vary in type; one involves alternative energy projects using solarpanels and two are reforestation projects. These project types were selected because they areboth mainstream and high profile. Alternative Energy projects constituted 12%, whilereforestation projects constituted 12% of the Over The Counter (OTC) market. These types ofprojects also suggest feel-good components that the Ecosystem Marketplace/New CarbonFinance report identifies as an important quality that OTC consumers look for.60

Interviews were conducted with participants at every level of the process, including:Local project participants (stakeholders), local project directors, project verifiers, projectregistries, offset vendors, and consumer organizations/individuals. These interviews, along withdocument reviews, were used to construct profiles and case studies of each of the three projects.These profiles were compared to the literature and debates outlined in the previous sections of

this report. The purpose of these comparisons is to provide a snapshot of the current market, andto determine how the debates manifest themselves in a variety of projects.These illustrations aim to highlight several different project models that have arisen

within the VCM. By describing several different relationships/ approaches to selling carbon


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Illustration #1 Return to Forest

Paso Pacifico (Project Developer)Paso Pacifico is a small NGO based out of California, with a second office in Managua,

Nicaragua. Paso Pacificos mission is to restore and conserve the natural ecosystems alongCentral Americas Pacific slope thereby ensuring the connectivity and function of wildlifehabitat."

61This mission is accomplished through several different projects including:

conservation projects, agriculture projects, vocational training for women, environmentaleducation campaigns, smaller reforestation projects, and a large reforestation project entitled

Return to Forest. This last project plans to restore a biological corridor in The Paso del Istmo,located in southwestern Nicaragua. This area is particularly important because of the recentinflux of foreign tourism that brings new investment, but also threatens the local communities.The Return to Forest project is also Paso Pacifico's first project to incorporate carbon offsets.

The planning process for the Return to the Forest project began in 2006. In 2007 theorganization began to identify interested landowners in the area with whom they wanted towork. They ultimately identified eight different landowners in the Paso del Istmo area, with atotal of 406 hectares (1003 acres) of land.

62Many landowners were discouraged from

participating in the project because they had to legally commit their land to reforestation for fortyyears. The eight landowners are all economically secure, because committing their land toreforestation does not make them money; most times it actually results in a loss of money. Mostlandowners still use part of their land for cattle ranching or real estate development to fund theirwork. As well, the three landowners I interviewed all also had other sources of income.

Paso Pacifico provides the trees and forestry knowledge for the landowners, however thelandowners are still responsible for hiring workers to maintain the forest. Paso Pacifico providesfunding to the landowners that covers about half of the expenses needed to hire these workers.Paso Pacifico receives their funding from grants, donations, and the selling of carbon credits.Carbon credits were not always part of their business model; however the Return to ForestProject was designed from the beginning with the inclusion of carbon offsets. As executive


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the price they receive for their offsetting, Dr. Otterstrom said that it was based on the price of theChicago Climate Exchange (CCX) which ranges from $2-$6 per ton. This means that in total, the

project will receive $340,000 $1,020,000 for their carbon offsetting. They will receive all ofthe offset money over five years. However the project is legally required to continue for fortyyears. This process of receiving money for offsetting before the actual offsetting occurs is calledex-ante. However it is important to note that reforestation is most expensive in the first fiveyears. Also, in order to prevent leakage (new emissions created by the project activities thatare not accounted for), all emissions created by the project (ie, trucks driving to the reforestationareas, or plane trips to Nicaragua) must be deducted from the final amount of tons Paso Pacificosells.

What we can learn fromPaso Pacifico

Do carbon goals coincide with other environmental and community goals? If they do are they

incidental/secondary to the process?

As the Paso Pacifico experience indicates, carbon offsets, alone, are not an economically

sustainable way to fund environmentally beneficial reforestation projects. This is not to say thatthe offsets are an insignificant part of the funding for Return to Forest. Everyone interviewedagreed that carbon offsets were vital to the continuation of the program. However, unlike otherprojects (such as the African stove projects by E+Co, discussed later), reforestation projectsgenerate fewer carbon offset funds than are needed to sustain the project. While it is generally arule in sustainable development projects to not give things away for free, all the landowners Ispoke with agreed that projects like this one must become more financially viable if they are to

become more widespread.As well, the fact that the land had to be legally committed to reforestation for forty yearsis an extremely large economic commitment that many poorer farmers were unable to make.None of the landowners were participating in the project for economic reasons; all were


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a species not indigenous to the region and does not have the community benefits like those in thePaso Pacifico project. Aside from selling the teak harvested from the forests, Precious Woods

sells carbon offsets from the sequestration of 300,000 tons of CO2 emissions on 600 acres ofland within 10 years.65 This means that Paso Pacifico sequesters four tons of carbon/acre eachyear, while Precious Woods sequesters 50 tons/acre every year of their project.

According to a press release released jointly by Precious Woods and the World Bank:By leveraging its timber activities with the sale of carbon emission reductions to Kyotocompliant countries, the Precious Woods Group is expecting to generate an additional highlyprofitable turnover of $2-3 million per year on an ongoing basis.66 These facts bring up thequestion: what is the difference between sustainable development and abusing environmental

markets to make a profit? Even though Precious Woods creates more carbon offsets and is moreeconomically sustainable, it is ultimately detrimental to the environment because it is notpromoting biodiversity or other secondary effects that the Paso Pacifico's project does.

The Precious Woods project has also had negative affects on the Paso Pacifico Project.The two projects are in the same slopping area; and because the Precious Wood land is located ata higher elevation than Paso Pacificos land, this puts Paso Pacificos land in danger of any run-off that comes from Precious Woods plots. Paso Pacifico has submitted several complaintsabout the Precious Woods project, however they have received no cooperation from Precious

Woods. If the first phase of the Precious Wood's project goes well, the World Bank has plans toexpand the project.67 This could have extremely detrimental effects to Paso Pacifico's goals ofcreating a biological corridor and preserving the current community.

Carbon funding for reforestation projects many times does not coincide with the mission of theproject. The contrast between the Precious Wood's and Paso Pacifico's projects also raises thequestion: what is the balance between having additional benefits and effective carbonsequestration? Many times there is a disconnect between the mission of an organization and themotivation to receive carbon offsets. As Dr. Sarah Otterstrom stated, "The benefits of carbonoffsets need not be limited to carbon sequestration. Through reforestation projects, carbon offsetscan also contribute to protecting watersheds, improving livelihoods, and saving endangered

68


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Forestry offset projects must be large enough in scale, which many times can lead to

complicated community collaborations. Most times, it is difficult to find one area forreforestation that is realistic for a carbon offset project. Paso Pacifico solved this problem bycompiling eight different areas. However, this compilation carries with it another entire set oforganizational issues. None of the areas are connected, making it more logistically difficultwhen overseeing the project. As well, Paso Pacifico has contracts with eight differentlandowners, instead of just one. The in-country director, Liza Gonzalez, identified this as one ofthe biggest challenges of the project and explained that it would be much easier if the projectwere only taking place in one area, with one landowner.

Are there efforts to make the market more transparent? Is more clarification needed in the VCM?

Funding streams for many carbon offset projects are indirect and imprecise. The incorporationof ex-ante (funding a project completely before the project is completed) leads to difficulty intransparency. The reason why the project is receiving offset money becomes difficult toevaluate, and skepticism arises about the offsets still being created in twenty to forty years. As

well, the way that Paso Pacifico distributes the money from offsets equally between landownersinstead of based on their offsetting capacity, may lead to confusion and skepticism about theiruse of carbon offset funding.

Complete understanding of the project is difficult to achieve with stakeholders. Many of thelandowners (or stakeholders known more generally throughout offset projects), did not fullyunderstand the way in which carbon offsets were incorporated into the project. For example, onelandowner owned several hotels, and thought that he could use his reforestation to make theclaim that his hotel was more environmentally friendly. However he failed to understand thatother people were using his project to make that claim. As well, several landowners expressedconfusion about why they weren't receiving more money from their carbon offsetting, and were


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the paperwork is so complicated, only five farms in all of Nicaragua receive this break. If thesystem was more streamlined, more people could benefit from this option. While Paso Pacifico

is clearly doing worthwhile work, it appeared that much more could be accomplished with thesupport of national and local governments.

CarbonFund.org (Vendor)CarbonFund.org began selling offsets as a non-profit organization in 2003. They were

founded with the mission to lead "the fight against global warming, making it easy and

affordable for any individual, business or organization to eliminate their climate impact andhastening the transformation to a clean energy future. These goals are met by: Climate changeeducation, Carbon offsets and reductions, and Public outreach." Since their inception,Carbonfund.org has offset 1.8 million tons of carbon. 70

Originally, one of the eight landowners from the Return to Forest Project approachedCarbonFund.org on his own about the prospect of selling carbon credits from a reforestation hewas planning on his land. CarbonFund.org responded that his land would not sequester asufficient amount of carbon on its own, and an individual relationship with him would not be

realistic. As well, they preferred to work with a non-profit organization on such a project.Through this initial interaction with the individual landowner, CarbonFund.org became aware ofPaso Pacifico's work and they approached them to see if they would be interested in workingtogether. By partnering with CarbonFund.org, Paso Pacifico is able to sell all their credits fromthe eight landowners to CarbonFund.org, who would then sell them to individuals and businessesin the US and Europe. Paso Pacifico was also encouraged to partner with CarbonFund.orgbecause they were willing to pay ex-ante.

To accomplish their offsetting, they partner with both reforestation projects (Return to

Forest being one of two others) and Renewable energy/ Energy efficiency projects. According toJennifer Haws, CarbonFund.org only supports the type of projects in which you can attribute acarbon equivalent. When purchasing offsets, CarbonFund.org places a bid for how much they


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to choose to either support reforestation projects or energy project, or they can letCarbonFund.org choose for them. CarbonFund.org also provides consumers the option to attain

a CarbonFree product certificate or to become a Zero Carbon member. These options forconsumers will be discussed in greater detail in the consumer section. Once a consumerpurchases credits from CarbonFund.org, those credits are retired, meaning they will not beresold. CarbonFund uses the Environmental Resource Trust (discussed in more detail in theTecnosol case study) in order to audit their purchases and make sure the contributions matchtheir offset purchases.73

What we can learn from CarbonFund.org



Power relationship between vendor and project developer force developers to conform tovendors offset criteria instead of their own community needs. CarbonFund.org claims to turndown over 95% of all projects submitted to them.

74This practice of rejecting projects was also

seen in the landowners initial contact with CabonFund.org. Vendors are typically in a positionof power over project developers because they have the infrastructure needed to sell the creditscreated by the project. This power dynamic allows project developers to shape what type/size ofprojects flourish in the market. This system of selling through vendors may cause the marked tooverlook smaller or different projects that have climate benefits as well as community andenvironmental benefits. It also creates a top-down approach where carbon vendors are shapingprojects, instead of the local community making the decisions.


Price discrepancies create skepticism about the market. The way in which CarbonFund.org


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CarbonFund is purchasing the appropriate amount of offsets, however this process is also notmade transparent to the public. This situation leads to the question: Is saying you wont use a

credit enough to guarantee it wont be resold, or should there be more oversight? In part theVCM received bad publicity because people and organizations were not following though ontheir claims.

Discrepancies in project descriptions on websites. The way in which CarbonFund.org describesthe RTF project on the website is misleading in that it makes the project appear in one arealarger than Central Park.76 However, in reality, the project occurs over eight smaller parcels,which may not be as compelling to consumers. Again, some of these generalizations about

projects may be necessary in marketing the offsets generated. However the question is raised:how detailed must project descriptions be identified in order to maintain transparency, yet stillkeep consumer interest?

Does the current approach of most VCM players inspire personal, institutional and/or political

change by their consumers?

Averages skew the objective of offsetting. The use of averages in both calculating footprints anddetermining the price of offsets creates inaccurate calculations and transactions that do notprecisely represent the emissions created and the VERs needed to offset those emissions. Forexample, if you want to offset the emissions for you car, CarbonFund.org allows you to choose apreset amount of carbon to offset, depending on the fuel efficiency of your car. However, thisoption does not ask you how many miles a year you drive your car. The other option allows youto calculate your fuel efficiency depending on the make and model of your car and asks you to

approximate the miles driven each year. Even so, this option does not include options likemaintenance/up-keep or carpooling that could reduce the emissions emitted. This maydiscourage consumers from participating in these activities as much because they feel that theyhave done all that they can do by offsetting.


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Inability to measure if consumers are reducing what they can. A supporting argument for the

VCM is that it encourages consumers (and individual specifically) to analyze their own carbonfootprint and make lifestyle changes before purchasing offsets. However, in reality this criticallook at individuals own contribution does not happen through the carbon calculators offered bymost vendors. CarbonFund attempts to make changes in the lifestyles of its consumers with itsmotto Reduce what you can, offset what you cant. They provide tips on the website on how toreduce their carbon footprints. However ultimately vendors have no control over this. AsHawse from CarbonFund explains if someone wants to keep driving their Hummer and offsettheir Hummer, there is nothing we can do about it.

.Rain Forest Alliance and Climate Community Biodiversity Alliance (Certifier/Verifier)

Rainforest Alliance has been working in forest certification since 1990. Since then, theyhave worked in 65 countries and have certified over forty million hectares of forest. They arecertified to be third party auditors for CCBA, The Chicago Climate Exchange, The VoluntaryCarbon Standard, and Plan Vivo. Each of these standards require different levels of accreditationand training to audit, and each standard provides a different set of indicators that must bemeasured and recorded in the project. In order to certify the CCBA standards, third-party

auditors must be accredited by the Forest Stewardship Council (FSC), of which RainforestAlliance is a founding member.

CCBA's mission is to develop and promote "rigorous standards for evaluating land-basedcarbon projects."77 CCBA only provides the standards for project design and development, theydo not provide a registry or emissions reductions standards. As explained in a report by theWorld Wildlife Fund, "the CCB verification does not include a quantitative certification of thecarbon benefit but is a qualitative evaluation that confirms carbon benefits as well as theenvironmental and social benefits of the project."78 CCBA recommends that their standards be

used in combination with other standards that have mechanisms for carbon accounting, such asCDM standards or other VCM standards. In the case of the RTF project, Paso Pacifico usedapproved CDM methodology for the restoration of degraded lands through reforestation (known


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market."80 The alliance is made up of research institutions, corporations and NGOs. The currentmembers include: six companies (BP, Intel, SC Johnson, Sustainable, Forestry Management,

Weyerhaeuser and GFA Envest) and five NGOs (Conservation International, CARE, RainforestAlliance, The Nature Conservancy and the Wildlife Conservation Society).81 Memberinstitutions provide funding for CCBA along with foundation grants.

Before CarbonFund.org would sell Paso Pacifico's credits, the project had to be validatedand certified. Carbonfund.org contacted Rainforest Aliance, a third-party certifier, to perform aClimate Community Biodiversity Alliance (CCBA) validation on the project. RainforestAlliance then contracted with Paso Pacifico to carry out the validation. Jeffrey Hayward, aRainforest Alliance auditor, explained that contracts are typically made between the verifier and

the actual project developers, not the offset vendors.To begin the validation process, Paso Pacifico had to provide a Project Design Document

(PDD) to Rainforest Alliance. The 90 page document details the criteria set out by CCBA.82These categories provide a comprehensive understanding of the impacts that the project willhave on the climate, the community and the biodiversity in the area (hence the name ClimateCommunity Biodiversity Alliance certification). Once the PDD was compiled by Paso Pacifico,Rainforest Alliance reviewed the document and sent two Rainforest Alliance auditors toNicaragua for five days to audit the project. The audit involved a sampling of the information in

the PDD, to make sure the information was representative. The auditors met with project staff,landowners, and community members to gain a better understanding of the project. At the endof the audit, a forty-page validation assessment report was produced by Rainforest Alliance.The exact price for the Return to Forest validation could not be released by the RainforestAlliance because the contract they hold with Paso Pacifico. In general, a project of that size inLatin America costs about $8,000- $12,000 to verify. This money covers professional fees forthe auditors and other staff of Rainforest Alliance that administer contractual elements of thevalidation. Paso Pacifico raised this money through grants and donations, as well as recouping

some of the costs with the sale of the offsets.In five years, verification is required by CCBA to make sure the project is staying on track withtheir original plan, and still maintaining the offsetting requirements. There is currently no


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Equal emphasis on Climate Community and Biodiversity presents a difficult balance. There is

clearly merit in CCBA's goal to measure the offset project's effects not only on global warming,but also on the community and other aspects of the environment. However, again this leads us tothe question: what is the main goal/motivation of the project - global warming or the 'secondarybenefits?"

The majority of responsibility is placed on project developers to validate the project. PasoPacifico was required to produce all of the information for the PDD and pay the fees for thevalidation process. They were then also required to host the Rainforest Alliance auditors and

provide them with any additional information they requested. In many ways this makes sense,seeing that Paso Pacifico best understands the project. However this responsibility ofverification on top of all of their other endeavors overextends an already overextendedorganization.


The validation and verification processes present 'chicken and egg' problems. Because of thenature of the way carbon projects have to come together (especially in the case of reforestation),the investment to make a project possible depends on whether the project is well conceived andis given a good certification. However, that investment and certification cannot actually bejustified until the project is verified years later. This leads to hesitation in investment in theseex-ante credits, because carbon credits are being sold/verified before they are actually created.

Lack of registry makes double selling of offsets more likely. Because it is the responsibility ofthe project developer to register the emissions reductions, it makes the double selling ofemissions much more probable, especially when a project is selling ex-ante credits. If CCBAprovided a registry for all emissions they certified, this would encourage more of their projects to


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attributed to the recent criticism in these areas about the VCM.

Stakeholder participation is difficult to define. In many cases, the language used to define co-benefits is very general. This allows flexibility for project developers to address the issue in away that fits the project best yet it also places more onus on the auditors judgment when makingthe assessment."83 For example, Jeffery Hayward of Rainforest Alliance explained that therelationship between project developer and stakeholder varies between projects. Some includestakeholders from the inception of the project (like Paso Pacifico) and other project designsinclude stakeholders later on in the process. Either way, the relationship between projectdeveloper and stakeholder is always a difficult one to evaluate. In the audit, "the auditors

observed through interviews with community members, landowners, and local officials that theproject has excellent relationships with the local stakeholders." This was also something Iobserved during my time in Nicaragua with Paso Pacifico; Paso Pacifico was respectedthroughout the community. However, the relationships must be explored deeper to addresssome of the misunderstanding and concerns of the landowners previously mentioned.

The validation process is difficult to understand for non-scientists. Much of the language in thePDD and the Validation Assessment Report is heavily based in scientific jargon and theory. For

example, in the PDD they reference the " Brown allometric equation for moist forest."84 Fornon-scientists, this concept is inaccessible. This is the nature of calculating carbon sequestration;complicated scientific calculations are needed to determine actual sequestration amounts. Inpart, this is the role of the third party auditors to validate these calculations, however thetechnical validation process discourages a true understanding of projects for others participatingin the market who are left to blindly trust the calculations being made. This then raises a largerquestion about how much is necessary for consumers to really understand about the projects theyare investing in; this will be addressed in more detail in the consumer section.

Does the VCM need complimentary governmental/compliance systems to accomplish its climate


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experimentation in the carbon market, and promotes innovation that can benefit future carbonmarkets.85

The concept has much validity, however it can also be argued that it could beundermining the efforts of the regulated market, and their efforts to reduce emissions through acap and trade system.

Businesses and Individuals (Consumers)Once the CCB certification was attained, the carbon generated from the Return to Forest

Project could finally be sold through CarbonFund.org. About 80% of the consumers at

CarbonFund.org are businesses, while the other 20% are individuals. There are several differentways in which businesses and individuals can offset their emissions, outlined below.

One unique option CarbonFund.org offers is the CarbonFree certification. CurrentlyCarbonFund.org has awarded this certification to eight different companies including: AprilThird Studios, Grounds for Change, Motorola, LTS Press, Monarch Beverages, and severalothers. The CarbonFree certification is a product-specific certification where a third partyorganization performs a Life-Cycle Assessment. This is a several month long process in whichthe emissions of a specific product are determined from the production source to the final

consumption destination. For example, the coffee company Grounds for Change calculated howmuch carbon their propane roasters emit, how much carbon is emitted during transport, etc. Thisprocess cost several thousand dollars, according to Kelsey Marshall, the staff member in chargeof the CarbonFree certification at Grounds for Change. Within this Life-Cycle Assessment, it isdetermined where the carbon footprint of the product could be reduced. In the case of Groundsfor Change, this was not a huge change because they were already conscious of theirenvironmental impact (they had already attained organic, fair trade, and shade growncertification as well as using renewable energy wherever they could). Once the company has

determined how much carbon they emit, they purchase the appropriate amount of offsets to maketheir product CarbonFree. This certification is used as a way to market their product (it is put onpackaging and promotional materials). While they can't determine if the certification has directly


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What we can learn from consumers

Does the current approach of most VCM players inspire personal, institutional and/or political

change by their consumers?

Averages skew consumer perceptions of their actual effects on climate change. As describedabove, these disconnects and generalizations created by the use of averages in emissioncalculations and offset pricing allow consumers to only consider their carbon footprints on asuperficial level, and dont encourage them to really think about all the factors that are affecting

their contribution to Global Warming. However, some argue that these are necessarygeneralizations if the VCM is to become a significant player in fighting Global Warming. Ifemission calculations are too specific, or offset prices vary too much, people will be discouragedfrom participating.

The motivation for becoming CarbonFree or 'Carbon Neutral' is unclear. One of the maincriticisms of most environmental certifications used for marketing is that they lead togreenwashing. Companies can use certifications like the CarbonFree certification to improve

their companies image without effecting any real change. Grounds for Change demonstrates acompany founded with clear social and environmental concerns, so the idea of green washing isless pertinent to their situation. However the true challenge in growing a certification like theCarbonFree certification will be to include companies whose first priority is not social orenvironmental. For example, Motorola has developed a CarbonFree cell phone, but this is justone of many products that they develop. However now that they have one green product, theycan use it to demonstrate a commitment to the environment, and possibly brand their wholecompany as greener.

As for individual motivation, many times it is more driven by a personal desire to effectchange, however sometimes this is still unclear. CarbonFund.org sends a certification toindividuals who become Zero Carbon Members, demonstrating that even individuals are driven


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Jennifer Hawse at CarbonFund.org explained that consumers are given the option of choosingthe type of project they would like to support with their offsets, however the majority of

consumers choose the basket option that allows CarbonFund to delegate which project is funded.While this could just be demonstrating consumers trust in the expertise of CarbonFund, it mayalso be an indicator that consumers are not thoroughly investigating their purchase. This couldalso be a sign of minimal consideration of the real use and effects of offsets. To someconsumers, offsets are just a quick, easy way to help the environment and they are not requiredto think about it more than making a donation.


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Illustration #2 Tecnosol

Tecnosol (Project Developer)

Tecnosol is a Nicaraguan alternative energy company with a main office in the capital, andtwelve other branch offices throughout Nicaragua. The company was founded in 1995 bypresident and general manager Vladimir Delagneu. The company grew extremely slowly; by1998 they were still only selling about four or five panels per month because people were stillunaware of the technology. However today the trend is finally catching on and Tecnosolemploys over 100 people and has expanded to their 12 branch offices. Despite difficult

economic conditions, the company has still been able to double its sales each year.97

Since 1998 Tecnosol has installed close to 20,000 solar panels throughout Nicaragua.98

The majority of solar panels are installed in rural areas that are not connected to the normalpower grid. Tecnosol currently serves over 300 rural communities. These communities areidentified at community fairs; through advertising on the radio and billboards; and by word ofmouth. According to Mr. Delagneu, no one knew who Tecnosol was before; however todayTecnosol is synonymous with solar panels in Nicaragua and has made strong connections in themany communities they work. Delagneu places emphasis on the fact that Tecnosol is solving

energy problems while simultaneously helping the environment; this is the purpose andinspiration of the company. Mr. Delagneu and the other Tecnosol workers I spoke with seemedtruly dedicated and appeared to really believe in this approach.

A typical solar panel ranges in price from approximately $400 to $1,000 depending onthe size of the panel. Tecnosol offers finance programs through the Nicaraguan government forfamilies who cannot pay the full cost. I visited four homes with Tecnosol solar panels in theMira Flor Reserve in Estel, Nicaragua. The way the four families had paid for their panelsvaried. For example, one family sold a cow and paid cash up front for their panel while anotherfamily had taken out a loan from a local bank. After the initial purchase, the only thing thefamily must buy is the battery that needs to be replaced every three years. Tecnosol pledges torepair any other problems with the panels, as long as the damage was not the fault of the family.


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What we can learn from Tecnosol



Carbon offsets alone cannot fund solar offset projects. Because of the price of the solar panelsand the amount of offsets they create, they are not as attractive of an option as other projecttypes. However, just because they are not as economically sustainable as other options, doesntmean they should be discarded from the offset markets.


Funding streams for many carbon offset projects are indirect and imprecise. Tecnosol uses themoney that comes from the carbon offset to hold workshops and trainings for their employees,not directly for installing more solar panels. While ultimately this money promotes the growth

of Tecnosol and solar panels in Nicaragua, it is not as direct as it as made to appear on thesurface. Some consumers of the offsets may believe that the money they give directly helps toinstall a solar panel on a Nicaragua house. In reality the funding stream is much morecomplicated and indirect. Erik Wurster from E+Co explains that this is a conflict specificallyrelate to solar panels; because the technology is still so expensive, direct subsidies are difficult.With cheaper alternative energy technology, it is easier for carbon offsets to directly fund theinstallation.

Complete understanding of the project is difficult to attain with stakeholders. All families Ispoke with that had purchased solar panels from Tecnosol were not aware that their solar panelswere creating carbon offsets that would then be sold. However, this level of understanding in


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E+Co (Vendor)E+Co was founded on the philosophy that there is a demand for clean and affordable

energy in developing countries and this demand can be satisfied by local entrepreneurs.

99

Theyapproach this philosophy using three different, complimentary strategies: capitol investment,business development, and carbon finance. Through their capitol investment, E+Co providesloans from $25,000-$1.3 million to small local renewable energy businesses that employ 10-150people. Companies must fulfill certain criterion, such as being located in one of the 28developing countries where E+Co works100; having clear social and environmental benefits; andshowing potential for economic stability and growth. Before the companies receive the loan,they must develop a business plan with the help of E+Co and the Enterprise Development

Services (EDS). This ensures that the business will be able to efficiently use the money to growtheir business. Lastly, E+Co provides the support for their companies to sell the carbon creditsgenerated by their projects. Many times small organizations are too small on their own to sellthe carbon credits they generate, so E+Co provides this opportunity for them.

million tons of carbon dioxide emissions and mobilizing $172 million of co-financing.103E+Cos business plan is evident in their experience with Tecnosol. In 2001, BUN-CA,

E+Cos local business developer identified Tecnosol as a potential candidate for their EnterpriseDevelopment Service (EDS). With the EDS, E+Co helped Tecnosol with their business plan.

Part of this included a market study that found that 91.4 percent of the population in four targetregions in Nicaragua did not have access to electricity, and 60 percent of the population in thosetarget regions had a strong interest in the companys products and could afford them.104 The

entire EDS process took E+Co and Tecnosol almost two years. Once this process was complete,Tecnosol received its first loan of $100,000 that they were to pay over two years at 11% interest.The purpose of the loan was to finance additional inventory purchases, to expand their market,and provide short term credit to their customers.105 In 2004 Tecnosol received a second loanfrom E+Co; this loan was for $200,000, to be paid over four years at 11% interest and was also

intended to expand Tecnosols business. These first two loans have now been paid in full, andTecnosol is on its third loan from E+Co. This loan was awarded in 2007 for $1 million forworking capital and financial systems.106


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Around the same time Tecnosol began their second loan, they also started a pilot programwith E+Co to receive carbon offset funding. The carbon that is offset is calculated by a standard

that accounts for the elimination of kerosene use (discussed more in ERT section). Every threemonths Tecnosol tells how many solar panels were sold and E+Co calculates how much theyoffset with this kerosene standard. According to Erik Wurster, a Manager of Carbon Finance atE+Co, a typical $400 solar panel will offset about 1 ton of carbon per year. With their solarpanels, Tecnosol is projected to offset about 20,000 tons of carbon over the next 20 years.107

Several times each year Tecnosol informs E+Co of how many solar panels they havesold. E+Co sells the offsets from the installation of these panels for $4 - $21 per ton. Accordingto Wurster, the market determines these prices and what consumers are willing to pay. E+Co

takes about half of this money from Tecnosols offsets and uses it to better develop their EDSprogram. Even though this money is not going directly back into Tecnosol, they indirectlybenefit from this money through the business development services. Wurster argues that withoutEDS, Tecnosol would not exist in its current size and form, and the carbon revenues have helpedto fund these services.

What we can learn form E+Co

Do carbon goals coincide with other environmental and community goals? If they do are theyincidental/secondary to the process?

Certain projects are more sustainable using carbon offsets than others. Wurster comparedTecnosol (one of E+Cos first projects) with one of their current investments in W. Africa. Inthis project they are investing in a cook stove technology that burns less wood and produces lesssmoke. A $10 stove will produce about 1.5 tons of carbon credits a year, compared toTecnosols $400 panels that produce 1 ton. They can also have the potential/demand to installabout 20,000 stoves a year. Depending on how many stoves are added each year to the project,this can lead to the project offsetting 15,000 90,000 tons of carbon each year (compared to the20,000 tons over 20 years with Tecnosol).


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It is difficult for small organizations to sell carbon credits alone. E+Co provides a resource forsmall projects that would otherwise not be able to sell offsets because they do not create enough

on their own to be significant. Tecnosol, for example, would never be able to sell the offsetsthey create without the help of E+Co. As well, E+Co provided the money needed to certify theproject, relieving Tecnosol of a huge economic burden. This kind of partnership will beimportant to keep in mind as the carbon markets continue to grow; a way must be found toensure smaller projects are not excluded from the market because they are still worthwhileprojects. E+Co could provide an important model of how to include smaller projects in futuremarkets.

Combining large capitol investment with smaller sales of carbon offsets, brings into question theeconomic efficiency of carbon offsets. This combination of capital investment coupled withoffsets works well in the renewable energy market. However it brings up the question of whatcarbon offsets are really

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