The Colours of Carbon: Oikos Young Scholars Entrepreneurship Academy 2011

The Colours of Carbon
oikos Young Scholars Entrepreneurship Academy 2011

Cleantech Entrepreneurship, Finance and Policy

This is a work in progress. Please do not cite without permission of the author.
Sebastian Thomas
School of Business
The University of Queensland
St Lucia QLD 4072
Australia
seth.thomas@uq.edu.au
Abstract
Carbon offset projects in developing countries are one of the principal mechanisms designed to
reduce greenhouse gas emissions and promote sustainable development yet have critical
limitations in both areas. This paper presents a framework for categorizing offset projects
according to four general approaches: (1) efficiency (Brown); innovation (Yellow), terrestrial
carbon sequestration (Green) or sequestration in aquatic environments (Blue). The Colours of
Carbon framework is an analytical tool, a policy instrument, an interpretive device and a means
to facilitate an integrated portfolio approach to offset project development. Analysis of 7615
registered and pending offset projects reveals that 98.3% are Brown or Yellow, and only 1.7% is
Green or Blue. While all carbon credits are measured to the same base standard, different
project types offer a variety of benefits for ecosystems and society. Application of the framework
would have the potential to (1) help redirect demand in carbon markets toward projects with
greater sustainability benefits; (2) allow for cost-effective, integrated mitigation and adaptation
strategies by promoting a portfolio approach to project development; (3) clarify and support
corporate social responsibility initiatives; and (4) offer a powerful interpretive tool to engage
consumers with the global carbon offset infrastructure.
oikos Young Scholars Entrepreneurship Academy 2011: Cleantech Entrepreneurship, Finance and Policy 1
The Colours of Carbon Sebastian Thomas
Introduction
There is a broad consensus that human industrial activities and land use practices are contributing to environmental changes that will have major impacts on the Earths social systems and biodiversity (IPCC, 2007; Rosenzweig et al., 2008; Smith et al., 2009; New et al.,
2011). While reducing greenhouse gas (GHG) emissions remains a priority, and ultimately
requires decarbonisation of the current energy system, it is now clear that adaptation to
the impacts of climate change is necessary. Thus, while innovation and policy in zero emission energy sources is increasingly important it is imperative that societies also commit to
building their adaptive capacity. This involves reducing vulnerability and enhancing resilience in social-ecological and economic systems, including communities and firms.
The role of carbon dioxide is critical in the planetary greenhouse effect that is driving climatic changes (Lacis et al., 2010). The international strategic policy response to the challenge of climate change has established carbon as the currency of a new global market
that relies heavily on emission offsets generated by project activities in developing countries (Kossoy and Ambrosi, 2010). There is, however, widespread uncertainty and scepticism about the value of carbon offsets (Akter et al., 2009).
Here we present a framework to characterize the nature of offset projects. The framework
is used to outline policies that will help structure and direct carbon markets in order to
achieve climate change mitigation as well as socio-economic and ecological benefits. Governments, communities and private sector organisations would benefit from using the Colours of Carbon in the design of emission trading schemes and abatement strategies, conservation programs and strategic planning for resilience in social-ecological systems. The
value of the Colours of Carbon framework lies in its potential to achieve four important
outcomes: (1) directing demand in carbon markets toward desirable but less financially
attractive projects and activities with greater sustainability benefits; (2) allowing for costeffective, integrated mitigation and adaptation strategies by promoting a portfolio approach to project development; (3) clarifying and supporting corporate social responsibility
initiatives; and (4) offering a powerful interpretive tool to engage consumers with the
global carbon offset market.
The Trouble with Offsets

The majority of emission reduction projects are implemented through the Clean Development Mechanism (CDM) established by the Kyoto Protocol to the United Nations Framework
Convention on Climate Change (UNFCCC). The CDM is intended to reduce emissions and
promote sustainable development (UNFCCC, 1998). CDM projects operate within parameters stipulated in registered methodologies, and offsets are generated through projects
registered with the CDM Executive Board. The international carbon market is growing rapidly, with over US$6.5 billion in project-based transactions in 2008 and total transacted
value exceeding US$140 billion in 2009 (Kossoy and Ambrosi, 2010). CDM offsets serve as
one of the primary means for firms in industrialized nations to achieve net reportable
emissions reductions (Ellis et al., 2007; Spash, 2010).
The CDM has been criticized, however, for its lack of positive ecological outcomes and the
disproportionate representation of certain project sectors and countries, and has arguably
failed in its mandate to achieve sustainable development (Olsen, 2007; Sutter and Parreo,
2007; Boyd et al., 2009). As a consequence, there is widespread uncertainty about the in2
oikos Young Scholars Entrepreneurship Academy 2011: Cleantech Entrepreneurship, Finance and Policy
tegrity of offsets and this has impeded progress in implementing effective climate change
mitigation and adaptation policies. Voluntary offset schemes have been established partly
in order to address the perceived inadequacies of the CDM. Emission reductions credits
generated through voluntary mechanisms, however, represent a small fraction of the global market (Hamilton et al., 2010; Kossoy and Ambrosi, 2010).
The Colours of Carbon framework

Offset project methodologies achieve reductions through avoidance, reduction, destruction
or sequestration of emissions. The framework presented here assigns to each methodology
a colour label that describes the nature of its carbon management. The analysis involved
the application of the framework across 201 methodologies registered under the CDM and
numerous voluntary mechanisms (Voluntary Carbon Standard, Gold Standard, Chicago Climate Exchange, Plan Vivo, CarbonFix, Social Carbon, ISO 14064-2 and Brasil Mata Viva) and
7615 projects in the CDM and voluntary pipelines. Data was sourced from the United Nations Environment Program (UNEP) Risoe Centre CDM Pipeline Database (UNEP 2010), the
Markit Environmental Registry (Markit, 2011), the Gold Standard Registry (The Gold Standard, 2011) and the Chicago Climate Exchange (CCX, 2011).
Brown methodologies represent improvements or efficiency in existing methods rather
than innovation, and include decomposition and burial of captured emissions of industrial
gases, energy efficiency, landfill gas capture, recovery of fugitive emissions, some fuel
switching, cement production and CO2 capture. Yellow methodologies involve alternative
development pathways including renewable energy provision from sources such as wind,
solar and geothermal power, as well as transport, energy distribution systems and some
fuel switching. Green methodologies directly sequester carbon in soils or in vegetation by
accreting new biomass. Blue carbon projects also involve sequestration, but in aquatic environments, and can increase carbon stocks in existing vegetation and soils as well as
through production of new biomass.
Almost two thirds of all methodologies are Brown and 61% of projects are Yellow (Figure
1). While a tenth of all methodologies are Green, there are only 128 Green projects, less
than 1.7% of the total. Half of all Green projects occur in voluntary schemes. Ten CDM
methodologies account for 77% of all projects in the regulated market. Two of these, both
involving electricity generation from renewable sources, account for nearly half of all CDM
projects (23.8% and 23.4% respectively) (UNEP, 2010). There is a single Blue carbon methodology and one such CDM project (currently at the validation stage) that involves mangrove afforestation in tidal wetlands around several small islands in Indonesia. There are as
yet no methodologies featuring seagrasses or salt marsh vegetation.
Figure 1: Analysis of offset methodologies and projects using the Colours of Carbon
framework1.
It is estimated that by 2020 CDM projects employing Brown methodologies will have generated 4.92 billion certified emissions reductions (CERs) measured in metric tons of carbon
dioxide equivalent (tCO2e), more than 60% of the total (UNEP, 2010). Yellow projects will
have achieved reductions of nearly 3.14 billion CERs, almost 40%. In contrast, Green and
Blue projects will have accounted for less than 76 million CERs, less than 1% of total emission reductions by 2020. There is a clear imbalance between the expected reductions from
different project types, with Green and Blue projects significantly under-represented,
which is anomalous given the importance of the ocean (over 70% of Earth's surface) and
land-ocean-atmosphere feedbacks in the global climate system (McAlpine et al., 2010).
The absence of Blue carbon from the climate policy discourse is a striking deficiency (The
Katoomba Group 2010) as the ocean is a dominant component of the global carbon cycle
and more than half of all carbon accumulated in vegetation through photosynthesis is in
marine organisms (Nelleman et al., 2009). Vegetated coastal ecosystems including man-
Projects include Registered, In Process, At Validation and Rejected. Registered projects

include those that have already been issued with certified emissions reductions and those that have
not; In Process includes projects requesting registration, under review, or that have had reviews
or corrections requested by the CDM Executive Board; At Validation includes projects being
assessed by Designated Operational Entities; Rejected includes projects rejected by the CDM
Executive Board or voluntary scheme administrators, withdrawn by project developers, and projects
that have been rejected or terminated in the validation process by Designated Operational Entities.
Some of the 7615 projects employ multiple methodologies. In these cases the Colour is assigned
based on the principal methodology of the project.
4
grove forests, salt marshes and seagrass meadows are immensely important ecological resources and largely unregarded. These areas provide vital ecosystems services including
the provision of habitat, production of food, regulation of local climate and disease vectors, nutrient cycling and pollination, stabilization and protection of coastal areas and are
highly effective carbon sinks (Nellemann et al., 2009). Blue carbon projects not only generate these ancillary benefits but develop the adaptive capacity and social-ecological resilience of coastal communities that are likely to be disproportionately affected by the biophysical impacts of climate change (Adger et al., 2005).
The dearth of Green and Blue projects in existing international climate policy structures
stems from practical and informational constraints, issues of leakage, data deficiency,
cost-effectiveness, permanence, and even charisma (Duarte et al., 2008; Boyd et al., 2009;
Thomas et al., 2010). Perhaps the most significant constraint is the construct of permanence. Green and Blue offsets are currently considered temporary, and temporary CERs
are excluded from the largest existing carbon market, the European Union Emissions Trading Scheme, as well as the Australian National Carbon Offset Standard. Yellow and Brown
offsets are far more common as these types of projects provide a more attractive investment proposition than Green and Blue projects from a financial point of view, rather than
from a public benefit perspective. Yellow and Brown projects generate larger quantities of
emission reductions more quickly than do Green and Blue projects.
Policy approaches and benefits of the Colours of Carbon framework

Differentiation based on project type or quotas is considered a means of reforming offset
mechanisms (Bakker et al. 2011). If firms covered by emission trading schemes were required to buy a certain proportion of their offset acquisitions from particular types of projects, then demand for such projects would be dramatically increased. Previous examples
of this approach to policy formation have been highly successful. The Australian Mandatory
Renewable Energy Target (MRET), for example, which commenced in 2001, imposed a legal
liability on wholesale purchasers of electricity to proportionately contribute toward the
generation of 9500 gigawatt hours (GWh) of renewable energy annually by 2010 above and
beyond business as usual scenarios. The first review of the MRET, in 2003, found that investment in renewables resulting from the legislation was so substantial that the 2010 target would be met by 2007 (Tambling et al., 2003).
Structuring policy instruments in this way would make projects with desirable sustainability outcomes competitive investment propositions and drive finance to sectoral constrained
by issues including permanence, leakage, accountability and independent verification of
outcomes, which in conjunction with the high costs of carbon measurement are the main
reasons why these types of mitigation have not been fully adopted. Green and Blue offset
projects would become increasingly competitive with Brown and Yellow projects, because
if demand exceeded supply, buyers would pay more, and perhaps be prepared to pay in
advance for offsets from projects before the carbon was sequestered. This type of policy
approach would help reduce the data deficiencies and high transaction costs associated
with natural resource-based projects.
The framework also allows for the development of cost-effective, integrated mitigation
and adaptation strategies by promoting a portfolio approach to project development. Project activities could be managed across a catchment, landscape or region as part of integrated programs of activities. Cost-efficient activities such as landfill gas capture, run-of
river hydroelectricity generation and carbon forestry could be combined with more expensive but desirable activities, such as biomass-based power generation and coastal mangrove reforestation. This notion of integrated offset portfolios should be attractive to
firms, communities and governments alike.
At the same time, firms should declare the colour of their offset acquisitions in public reports. This would facilitate stakeholder understanding, promote transparency and more
accurately reflect corporate social responsibility. The widespread adoption of this framework might also reshape the role of intermediaries (such as banks) in the global carbon
market. Intermediaries have featured prominently in the growth of the market to date,
and while this has provided necessary liquidity, offsets have been commoditised to the
detriment of mitigation and sustainability outcomes. The bundling of offsets of all types
for the purposes of price risk mitigation has benefits for business cost management but
does little to promote the fundamental objectives of offset schemes. The framework
would encourage reform of these types of financial instruments through the inclusion of
sustainability criteria in the design of bundled portfolios.
Finally, the framework offers a straightforward, powerful means of explaining carbon offsets to consumers. As an interpretive device, the framework has the potential to improve
public understanding of carbon markets, clarify corporate investment strategies and government development approaches, and empower consumers to make informed purchasing
decisions (cf. Eyre 2010). The clarity and flexibility of the framework will also appeal to
businesses wishing to participate in offset schemes.
Facing Future Tides

The lack of effective policy responses to climate change and continued increases in emissions imply that impacts will continue to grow in frequency and intensity (Rosenzweig et
al., 2008; Smith et al., 2009; Sokolov et al., 2009). A realistic response to current projections recognizes that mitigation alone is no longer sufficient adaptation is a necessity,
particularly in developing countries and coastal zones. The most desirable policy approaches are those that incorporate emissions abatement and adaptive measures in coherent strategies to achieve a range of local sustainability outcomes. Project activities that
generate offsets through sequestration of atmospheric CO2 while enhancing adaptive capacity should be actively pursued and supported in policy frameworks.
The need for effective mitigation and adaptation strategies is becoming increasingly urgent
(Smith et al., 2009). There are efforts to improve the uptake of Green and Blue projects
through voluntary accreditation schemes but these play a minor role in the carbon marketplace (Hamilton et al., 2010; Kollmuss et al., 2010; Kossoy and Ambrosi, 2010). Pricing
carbon remains a contentious issue in some industrialized countries, yet appears to be inevitable, and at present there are political opportunities to reform the existing regulatory
system (centred on UNFCCC initiatives, and the domestic climate policies of wealthier nations), which has admirable intentions but is not achieving its goals. Those charged with
the design of cap-and-trade emissions trading schemes, or related carbon pricing schemes
in Europe, the USA, Japan, Canada, New Zealand and Australia have an opportunity to invigorate investment in Green and Blue offset projects, encouraging the wide range of environmental and social benefits these generate. Using the same methods that have supported investment in Yellow methodologies, policy-makers should implement measures to support Green and Blue offset activities as these types of projects offer substantial value in
6
terms of carbon sequestration, and enhancing ecological resilience and social adaptation
to climate change. Encouraging investment in this way would help to overcome many of
the constraints on the development of Green and Blue projects including delayed revenue
returns and burdensome transaction costs. There are many ways this endorsement can be
achieved, including through the establishment of quota systems and differential pricing
(Castro and Michaelowa, 2009; Schneider, 2009).
Conclusions
Existing policy mechanisms and market instruments designed to mitigate climate change
and achieve sustainable development are largely failing to promote positive social and environmental outcomes. The Colours of Carbon framework can be easily communicated and
understood by the public. It offers an effective market mechanism for the promotion of
better sustainability outcomes a system with minimal transaction costs, fundamentally
driven by buyer demand, yet sufficiently robust and rigorous to be meaningful. Widespread
adoption of the framework should drive demand for Green and Blue offset projects and
therefore invigorate investment and development in those sectors. These types of methodologies are likely to achieve real and significant emissions reductions, protect and enhance
ecological systems and biodiversity, promote social sustainability by improving resource
security and livelihoods, offer protection from geophysical climate change impacts, and
contribute to the overall resilience and adaptive capacity of threatened human communities and biological systems.
Efficiency, innovation and carbon-oriented environmental management are all necessary
components of climate mitigation and adaptation strategy, yet all carbon is not created
equal. The Colours of Carbon framework will allow policy instruments and market mechanisms to reflect this fact.
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oikos Young Scholars Entrepreneurship Academy 2011