The case for a carbon offsetting kitemark

The UK needs to lead the way in creating a gold standard for carbon offsets, say former energy secretaries Andrea Leadsom and Amber Rudd

By Rt Hon Andrea Leadsom DBE MP and Rt Hon Amber Rudd

October 31, 2021

On the path to ending climate change, we are on the cusp of nothing less than a green industrial revolution. Whether it’s harnessing the wind or hydrogen, or creating ‘green steel’, there are extraordinary leaps being made. History shows us however, that every industrial revolution requires a set of compromises and a lot of difficult choices.

One of those compromises is expressed in the term ‘Net Zero’ itself: to achieve a stable level of carbon emissions in the atmosphere, the world will need to offset some unavoidable emissions. Achieving absolute zero emissions globally by 2050 is impossible from where we are today, but the challenge of Net Zero is definitely within our reach through the use of high-quality carbon offsets, from carbon capture technologies to peatland restoration.

How much greenhouse gas will need offsetting depends on the different scenarios for reducing global emissions. The UN’s Intergovernmental Panel on Climate Change (IPCC), the world’s foremost scientific authority on climate change, expects that the world will need 100-1,000 billion tonnes of CO2 to be actively removed from the atmosphere by the end of the century if we are to avoid catastrophe. That’s equivalent to about 1.4 billion tonnes per year. To put that in context, the USA’s total emissions in 2019 were around 5 billion tonnes.

This will need to happen whilst we also reduce our other carbon emissions to almost zero, which will require a global switch to zero-carbon energy sources such as renewables and nuclear, as well as finding radical new ways to perform industrial processes such as cement, fertiliser and steel production. Calls for absolute zero are simply not realistic.

Cement, steel and fertiliser (among many other commodities) are so fundamental to our way of life that we cannot just flip a switch. New technologies in those sectors are being developed, but deployment and cost reductions take time. In some cases, we will be pleasantly surprised, as we were in the UK with our rapid innovations and cost reductions in offshore wind. In others, we will be disappointed. But in all circumstances, we must expect carbon emissions to still be around in 2050.

A top priority must be to reduce the damage that we are already doing: our atmosphere already contains too much greenhouse gas, meaning that every new tree grown

should be for the purpose of reversing the damage already done, not simply providing cover for yet more emissions. This means that offsets must be used only where carbon intensive technologies are unavoidable for the time being.

The question, therefore, is not whether we should offset emissions, but how we are going to do it. Governance must be water-tight; accounting processes must be rigorous; communication must be crystal clear. Anything less than this risks inaccuracy at best and climate-damaging fraud at worst.

Many major firms have already declared Net Zero targets. Microsoft has said it will be carbon negative by 2030 and then go on to remove its historical emissions by 2050.[1] Shell has committed to being Net Zero by 2050.[2] Many other firms have adopted similar goals. This clearly demonstrates the commitment of business as well as the creative spirit of enterprise in achieving Net Zero.

The dates and the details of these individual Net Zero commitments vary, but most of these action plans involve a significant element of carbon offsetting. Yet the market for carbon offsets has a long way to go before an acceptable level of maturity, pricing and accountability is in place.

In a world where investors – both retail and institutional – express a desire for companies to deliver against climate targets, it is a matter of fiduciary duty to ensure that these Net Zero strategies pass muster.

At the same time, consumers are also actively trying to shift their own buying patterns towards firms that share their values on the environment. Government regulation must support their ambition. However, too often firms who make claims about carbon offset are unregulated and unaudited. Not only that but the price of carbon offset can be wildly inaccurate. For example, airlines are offering carbon offset options to passengers that price carbon at around €8-18 per tonne of carbon dioxide[3] – a 65-75% discount compared to the EU’s recent traded price of around €55 per tonne.

Decarbonisation should be the first choice for every organisation in the world, ahead of carbon offset. The fact that carbon offsets are currently trading at a significant discount to the traded carbon price is a concern as it results in minimal incentive to decarbonise versus offset. Price discovery is critical to accurately incentivising the right behaviour.

Progress underway

The EU and UK both operate compliance-based carbon markets. That is, we require certain industries (energy-intensive industry, power generators and domestic/European aviation) to

pay for their carbon emissions via tradeable allowances. The removal of permits over time, not to mention other policy measures, means the price should go up, depending on how quickly new low-carbon technologies fall in price.

Outside these industries, voluntary carbon offsets create a form of carbon pricing. However, as mentioned above, this carbon pricing mechanism is far below the level necessary for a meaningful transition, mainly because the benchmark for offsets is currently set too low. Accusations of greenwashing abound. These markets need maturity and standards if they are to realise their significant potential in fighting climate change.

Well-developed Voluntary Carbon Markets (VCMs) will help to improve transparency and accounting, as well as funnelling private capital into climate solutions beyond compliance industries. These non-traded sectors, such as agriculture and forestry, can also bring a host of co-benefits, from economic development to biodiversity investment and human health improvements.

This also creates a smoother glide path for currently non-traded industries to be brought under the remit of compliance markets later on, which will reduce future policy complexity and economic pain.

Mark Carney, the former Governor of the Bank of England, and Bill Winters, CEO of Standard Chartered, have made huge strides towards developing a better marketplace for carbon offsets. Their Taskforce for Scaling Voluntary Carbon Markets (TSVCM) has made important contributions to setting the necessary frameworks, not least a governance body to help oversee them.

Other programmes, such as the Voluntary Carbon Markets Integrity Initiative (VCMII), the Business Alliance to Scale Climate Solutions and the Carbon Pricing Leadership Coalition, are building on this agenda to develop standards and mobilise finance into Voluntary Carbon Markets. The VCMII in particular brings an additional focus on integrity and the need for civil society to help to develop the rules of VCMs.

All of this is helpful in moving the agenda forward, but we argue that the UK Government should take a leading global role in setting a ‘gold standard’ for carbon offsets. This standard should take the form of a UK Government ‘kitemark’ for verified, high-quality carbon offsets. Such an intervention by the UK would send a signal that VCMs have a major role to play. It would also send a signal to the market that those who do invest in high-quality offset products will have the confidence of the state.

Setting the Standard

A government-backed ‘British Carbon Offset Standard’ (BCOS) kitemark would provide assurances to buyers and sellers that their carbon offsets had achieved the very highest standard. A product or service bearing the BCOS kitemark would tell its buyer that its embedded emissions had (in part or in whole) been cancelled out through a reliable and long-lasting offset. The kitemark will play an important role in improving the standards of existing voluntary carbon markets.

On the demand side, a BCOS kitemark would provide confidence that funds have been spent well and have made a difference. For example, companies could use BCOS-certified offsets to assure investors that the ‘Net’ in their Net Zero transition plans was meaningful. That will not just provide peace of mind, but protection from future ESG regulatory risks, since it reduces exposure to climate-related public policies.

Similarly, consumers can be confident the carbon emissions from their international air miles or their online shopping deliveries really have been offset using a high-quality BCOS-certified offset . The sale of truly zero-carbon products based on such ‘gold standard’ credentials will likely become common.

The kitemark would also provide confidence on the supply side, since it would effectively provide government assurance to any technologies or business models recognised by the scheme. Everything from carbon capture technologies to peatland restoration projects will be able to attract investment.

Permanent CCS in geological reservoirs could become the gold standard of offsetting techniques, but this requires heavy private and public investment. The UK’s own commitment to carbon capture usage and storage would promote investment, jobs and growth in the UK as a result of a trusted carbon offset sector.

The BCOS would also facilitate investment in partner countries who were ambitious to redevelop their own lost forests, waterways and other precious carbon stores.

Pricing of a global offset market should be subject to clear regulation. Unrealistically low carbon offsets are usually based on poor verification. A carbon price of £5 per tonne is unlikely to cover the costs of ground preparation, planting, protection and long-term management of a tonne of carbon even in such a relatively simply offset as planting a new tree. Carbon

pricing should reflect the real costs of offsets spread over a long time period.

A team of researchers at Oxford University has set out four high level ‘Principles for Net Zero Aligned Carbon Offsetting’.[4] These ‘Oxford Principles’ make it clear that the focus of offsets should be on removal of carbon already in the atmosphere, not on avoided emissions such as investing in renewable energy projects.

To act as a gold standard, the kitemark would therefore need to focus on carbon removal schemes, not on avoided emissions. Similarly, it should prioritise long-term arrangements such as geological storage or mineralised carbon and long-term legal contracts, such as conservation covenants for land sector projects. It is good to see the UK aiming to include negative emissions technologies in its Emissions Trading Scheme, which would support this approach.

To create momentum and demand for the kitemark, the Government should integrate it into

public procurement rules. The UK Government spends £290 billion per year on procurement, and in June 2021 announced that any procurement contract over £5 million should require the counterparty to have a Net Zero-aligned emissions reduction plan. Any such plan is likely to rely, at least in part, on carbon offsets.

The governing body of the BCOS kitemark would police its use and misuse in a similar way to other assurance schemes, such as the Forest Stewardship Council (FSC) and Red Tractor.

Time to set another world-leading standard

The UK has been a leader in many climate-related fields. We have set a world-leading framework for science-led policy through the Climate Change Act. We have substantially decarbonised our electricity system and invested heavily in new technologies, from hydrogen to carbon capture and storage and small modular reactors.

We have committed to decarbonising road transport through a 2030 phase-out of new petrol and diesel cars, which will now be delivered in large part through a California-style Zero-Emission Vehicle (ZEV) Mandate, which will require manufacturers to sell more ZEVs each year.

Finally, the UK has created world-leading standards in green finance. All of these efforts are aimed at reducing emissions and are tested against high standards. Offsets represent the crucial ‘Net’ in ‘Net Zero’ and must meet the same level of assurance. The UK can lead the world in this vital missing piece of the jigsaw on our road to global decarbonisation.

Notes

[1] B.Smith (Jan 2021), “One year later: The path to carbon negative – a progress report on our climate ‘moonshot’”, Microsoft.

[2] J.Ambrose (Apr 2020), “Shell unveils plans to become net-zero carbon company by 2050”, The Guardian.

[3] J.Guthrie (Sep 2021), “Why airline schemes for easing guilt over flying are dodgy”, Financial Times.

[4] Allen et al (Sep 2020), “The Oxford Principles for Net Zero Aligned Carbon Offsetting”, Oxford University.