3. Carbon Offset Quality

Arguably the most important aspect of an offset company is the quality of its project portfolio. High quality carbon offsets must clearly demonstrate additionality, avoid double counting, have a realistically calculated baseline and emissions reduction projection, account for leakage and be permanent. In the following sections we explore each of these issues.

3.1 Additionality (this section was rewritten for revision 1.2)
The topic of ‘additionality’ is hotly debated. In theory, it answers a very simple question: Would the project have happened, holding everything else constant, if the carbon offsets from it could not be sold? Or more simply: Would the project have happened anyway? If the answer to that is yes, the project is not additional.
Some argue that instead of debating additionality, it is more important that emissions trading mechanisms are put in place without being bogged down by too may details, such as additionality, and that these trading frameworks and mechanisms will change and adjust as they mature.

Although we agree that policies to avert climate change should be implemented swiftly, we disagree that additionality can be treated lightly. If I buy carbon offsets, I make the implicit claim that I forgo reducing my own emissions (i.e. I still fly) but in exchange I pay someone to reduce their emission in my stead. If I buy carbon offsets to “neutralize” the emissions I caused during air travel from someone who would have reduced their emissions anyway, regardless of my payment, I, in effect, have not only wasted my money, but I also have not neutralized my emissions. It is not necessary that the project is happening solely because of the carbon credits it produces but the anticipated benefits of the carbon offsets have to be a decisive factor for pursuing the project.

What makes additionality so difficult an issue is not its theoretical definition, but its application in practice. In fact, there is no way to determine with absolute certainty if a project is additional or not. Instead, many different additionality tests and eligibility criteria have been developed to maximize the accuracy of additionality testing .

The following is a short selection of additionality tests that are commonly used:

Legal and Regulatory Additionality Test
If the project is implemented to fulfill official policies, regulations, or industry standards it cannot be considered additional. If the project goes beyond compliance, it might be additional but more tests are required to determine that. For example, an energy efficiency project might be implemented because of its cost savings and would in this case not be additional.

Financial Test
This test assumes that an offset project is additional if it would have a lower than acceptable rate of return without revenue from carbon offsets. In other words, the revenue from the carbon offsets is a decisive reason for implementing a project. In theory, the financial test measures additionality very well, but in reality there may be projects whose finances make them look non-additional Yet they may still be "additional" because of non-monetary barriers.

Barriers Test
This test looks at implementation barriers, such as local resistance, lack of know-how, institutional barriers, etc. If the project succeeds in overcoming significant non-financial barriers that the business-as-usual alternative would not have to face the project is considered additional.

Common Practice Test
If the project employs technologies that are very commonly used, it might not be additional because it is likely that the carbon offset benefits do not play a decisive role in making the project viable.

It is important to point out that there is no single test for additionality. Which test is best suited to validate additionality depends on the type of project. An additionality test for one type of project (e.g., a simple regulatory test for methane flaring, where there is no reason to do the project if not required by law) might not be sufficient for other kinds of projects (e.g., energy efficiency, where there could be plenty of reasons for doing a project besides complying with regulations).

Also, additionality tests are always to some extent subjective, because the assumptions that underlie even the strictest additionality test are determined by the objectives that the additionality test is trying to fulfill. These objectives cannot be scientifically determined or tested, because they are not technical but political in nature and must therefore be discussed and standardized by policy makers .

To illustrate this, here a simplified example: to apply a regulatory test on an energy-efficiency project, a third party verifying company determines the parameters for additionality based on their analysis of the situation. In some cases, an improvement of 10% over the statutory requirements may be considered additional, but in other cases, where, for example, the policy is considered very minimal (e.g. a building code with minimal energy-efficiency requirements), the project would need to exceed the minimum standards by at least 50%.

The discussion about additionality shows one of the weaknesses of project-based emissions reductions policies. Cap-and-trade systems, or purely regulatory action such as efficiency standards and carbon taxes, avoid the issue of additionality altogether. This is one reason we strongly advocate robust regulatory action and see value in the voluntary emissions trade market only insofar as it can spur innovation and carbon reductions even in a hostile political environment.

It is never possible to establish with certainty what would have happened in the absence of a particular project, and clearly there is potential for abuse. For example, there are strong financial incentives for the seller (project financier and implementer) as well as the offset buyer to overestimate the “business-as-usual” baselines and thus artificially inflate emission credits for improved performance. There is clearly a need for strict monitoring and third-party verification of carbon projects. Although the risks of “cheating” are real and substantial, it is also important to recognize that additionality rules that are too stringent can hamper project implementation.

The debate over additionality is especially fierce surrounding the issue of converting Renewable Energy Credits (RECs) to carbon offset credits. More details on this discussion can be found in section 3.3.

While all of these concerns are hard to address, voluntary offset companies must deal with them to some degree when choosing projects. It is usually the certification and verification organizations that ensure additionality.

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3.2 Double Counting (last edited for revision 1.3)
Unfortunately, it is all too easy to double count emissions reductions; that is, to have multiple stakeholders take credit for them. A hypothetical extreme example would be an electricity provider who builds a wind farm and then sells their power at a premium as ‘green power’ to local customers but also sells their carbon credits and their Renewable Energy Credits (RECs), and uses the wind farm to qualify for Renewable Portfolio Standards. In addition, if the wind farm was located in a state or country that has a legislated cap on carbon emissions or needs to reduce its emissions under the Kyoto protocol, the wind farm would also count toward that state’s or country’s emissions reductions goal. In this extreme example, the emissions reductions from the wind farm are counted 6 times!

Some of these double counting issues are easily addressed:
• Offset companies must retire their offsets once they sell them (i. e. they can only be sold once).
• Offset companies must ensure that carbon offsets from renewable energy projects are not also sold as Renewable Energy Credits.
• Utilities that sell RECs from Renewable Energy Projects are prohibited to use that project to qualify for Renewable Portfolio Standards.

Other double counting issues are more difficult to address: For example, if a US citizen were to buy offsets that are then are invested in a wind farm project in Canada, he will take credit for these emissions reductions. But Canada will also count the resulting reduction in carbon emissions from the new wind farm toward their emission reductions goals that they are required to meet as signatories of the Kyoto protocol.

This means, not only are the emissions double counted but the wind farm has effectively replaced another set of emissions reduction measures that Canada would have had to take in order to meet its Kyoto requirements. Viewed this way, it can be argued that the wind farm does not have any net carbon benefits. On the other hand, a valid counter argument can be made that such a wind farm project would stimulate the renewable energy industry in Canada and might therefore encourage further renewable energy projects and a move towards a low carbon economy.

It can also be argued that because of the uncertain future of the Kyoto agreement and because international environmental agreements are notorious for their unenforceability, it is unclear how seriously countries take their treaty obligations. In other words, in our hypothetical answer, Canada might not take any actions to reduce their carbon emissions and withdraw their commitment to Kyoto. In this case, the wind farm would be additional and paradoxically the double counting issues would be less serious. The same would hold true if the wind farm was build in the US, which has not ratified the Kyoto agreement.

These national double counting problems could be addressed if Annex 1 countries with emissions reduction obligations would retire AAU credits for all the VERs that are created through the voluntary market. We are unaware of any country that currently has such regulation in place.

Double counting issues also apply on a more local level: if a region, state, county or city has enacted a emissions reduction target – even if it is just a voluntary one – any emissions that are created in that area but then sold as VERs in the voluntary market must not also be counted in that jurisdiction’s emissions inventory. Although double counting on a national level is currently not a problem in the US, but more localized double counting problems remain an issue.

For example, the Climate Trust buys offsets from the City of Portland for two of their building energy efficiency programs. Yet, in 1993, the city of Portland became the first U.S. city to adopt a strategy to reduce emissions of carbon dioxide (CO2). Their Local Action Plan on Global Warming calls for a reduction of carbon dioxide emissions to 10 percent below 1990 levels by 2010. According to their webpage:

“Local greenhouse gas emissions are now less than 1 percent above 1990 levels – a key benchmark of the international Kyoto Protocol – and emissions have declined in each of the past four years.”

“On a per capita basis, Portland and Multnomah County emissions have fallen 12.5% since 1993, an achievement likely unequalled in any other major U.S. city.” (http://www.portlandonline.com/osd/index.cfm?c=41896, last accessed 11/27/06)

The carbon offsets that the Climate Trust buys from the City of Portland are also counted in the cities’ greenhouse gas inventory. The Climate Trust responded to our concern:

The Climate Trust does allow entities who are a part of a voluntary reduction program to claim credit for the reductions that result from a given offset project. We do not, however, allow entities to claim credit if they are a part of a regulatory regime. Our position is that early-moving companies should be able to claim some economic benefit for their actions. The City of Portland has worked hard and their offset projects are of high quality.
(e-mail communication, 2/14/07, CarbonCounter.org)

Additional legislation is needed to avoid double counting of voluntary offsets generated in Annex I countries (see section 5) and in areas that have sub-national emissions reductions obligations or goals (e.g. California or RGGI). An international registry for VERs (similar to that which exists for CERs created by CDM projects) is needed to minimize fraudulent double counting.

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3.3 Types of Carbon Credits (last edited for revision 1.3)
Voluntary offset companies can operate either within or outside of the Kyoto framework. The advantage of working within Kyoto is that emissions reductions (CERs or ERUs) are verified under a unified regulatory framework. All CERs have to be verified by a Designated Operational Entity (DOE )(4). DOEs are liable for any emissions credits wrongly certified. If they overstate the savings, they are responsible for delivering the missiong emissions credits. Experience shows that this type of rigor squeezes out about 40% from the initially claimed tons in a CDM project. (Dietrich Brockhagen, e-mail communication 3-29-07)

Yet the administrative burden for CDM projects is larger than in a more informal market. Projects that do not fall under the Kyoto mechanisms are more difficult to verify, since there are no clear guidelines and third party certification is done at the discretion of the offset company. That means that the quality of Verified Emissions Reductions (VERs) can vary greatly. This makes it harder for the consumer to be sure her emissions are truly offset by the VERs she buys.

Sometimes projects in developing countries are not registered as CDM projects because they are too small. myclimate estimates that a carbon offset project must reduce at least 5,000 metric tons of CO2 per year in order justify the CDM transaction costs . Such projects can still adhere to high standards, for example they can be implemented using the Gold Standard’s new standards for VER generating projects — projects that are outside of the Kyoto Protocol.

Table 1: International Carbon Trading and Project Mechanism

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Renewable Energy Credits (RECs) (last edited for revision 1.2)
One REC represents the delivery of one megawatt-hour of renewable power to the total energy infrastructure. RECs can be sold and traded independent of the electricity produced. RECs are traded both in mandatory and in voluntary markets. RECs are sold in the voluntary market based on the assumption that they represent the environmental benefits when electricity is generated from renewable resources instead of fossil fuels, like coal and natural gas. It is important to understand the difference between "mandatory" or "compliance" RECs and voluntary RECs. Because mandatory RECs are simply an instrument for meeting a quota, there is no concern or implication about their "environmental benefits." It's only in the voluntary markets, where RECs are sold solely because the buyer is interested in their environmental benefits, that their true environmental value needs to be evaluated, rated, and certified.

RECs are frequently turned into carbon credits by multiplying them by a factor that accounts for the avoided CO2 emissions. In theory, it does not matter if RECs are sold as RECs or as carbon credits as long as they are not double counted and are additional. Yet in practice assuring additionality is very difficult.

Voluntary market RECs generally do not have to adhere to the same strict additionality standards as carbon offsets (VERs.) Green-e certified RECs, for example, have to come from renewable energy plants that were built after 1997 and cannot be counted towards Renewable Portfolio Standards or any other legal requirements. Although these two requirements are important, they do not fully address additionality. Because of the economic benefits of many renewable energy projects, such as wind farms, it is especially difficult to determine additionality with RECs. Some companies clearly state that their RECs have to comply with the same additionality criteria as carbon offsets (VERs.) In this case, RECs are a credible alternative to VERs. Yet most companies do not make this distinction.

This is not to say that none of the available RECs are additional. Some developers explicitly state that the revenue from RECs played a decisive role making the project viable:

"In all 8 wind energy projects that CEI [Community Energy] has developed or helped to finance with
Renewable Energy Credit (REC) marketing efforts, REC revenue streams were explicitly
valued (based on voluntary market customer contracts or market projections) and vital to
project feasibility. As the industry continues to evolve, reliable REC revenue steams will
be even more critical to flipping the economics of wind energy in the positive direction."
Brent Beerley, Vice President, CEI

Quote taken from: How Voluntary Markets for Renewable Energy Support Meaningful Reductions in GHG Emissions November 30, 2006, discussion draft, available at http://green-e.org/docs/RE_and_GHG_Q&A_v2.pdf (last accessed 1/26/2007)

Yet the issue remains that there is currently no standard and verification available that ensures RECs are additional.

To summarize, we would like to distinguish between the sale of RECs and the sale of RECs-converted-to-carbon-credits (RECscc). RECs do not need to fulfill additionality criteria because they do not claim to neutralize any carbon emissions. They just claim to be from renewable sources and therefore are almost completely pollution- and carbon-free. Yet RECscc do claim to offset carbon emissions. Therefore if RECscc are sold to someone who wants to offset their air travel emissions, additionality becomes vital to make such offsets credible. RECscc can only claim to do so if the benefits of the sale of the RECs were a decisive factor in pursuing the project. Because there are currently no clear guidelines available to ensure additionality in RECscc, we consider RECscc less desirable (lower quality) than CERs or VERs that fulfill strict additionality standards. Green-e, the main certifying body of RECs in the US is currently developing new, stricter standards for RECscc (see Green-e).

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Forward Purchasing of Offsets (FPO) / Future offsets (5) (last edited for revision 1.3)
Carbon offset companies can purchase carbon offsets that have already been achieved or that will happen in the future. Forward Purchasing of Offsets (FPO) carries the risk of buying credits that might not happen if the project fails or underperforms. On the other hand, it is often the financial investments in such future offsets (5) that will allow a project to actually be implemented – in other words, FPO can be an effective tool in reducing risks that otherwise could prevent the project from being implemented.

FPO does not guarantee additionality, but most additional projects need to secure upfront offset funding. It is much easier to implement financially additional projects if customers can be found who are willing to pay upfront than if the project needs to secure funding from lenders with the expectation that the debt will be paid off later by customers purchasing carbon reductions. (Conversely, non-additional projects by definition do not depend on any offset funding - so they can afford to go forward and wait for customers to pay for their "reductions" in the future.) Therefore, forward purchasing can be an incentive for additional projects, in other words, FPO does not guarantee additionality, but on balance will lead to more additional projects than a "pay-as-you-go" approach. Additionality needs to be substantiated regardless of whether one is purchasing forward credits or current year credits it's central to the claim about offsetting emissions.

A distinction needs to be made between contracts of forward purchases and contracts of forward crediting. With forward purchases, the buyer invests the money upfront but does not get the credits until they are actually produced. This is how most CDM projects are financed. Yet in the voluntary market, offset purchasers are often unwilling to make long-term commitments, especially in the context of offsetting air travel, where purchasers offset one flight at a time, or a year of flying at a time.

With forward crediting, the buyer pays and also gets the offsets credited upfront, despite the fact that they will only be produced in the future.

Tom Stoddard from Native Energy:
With such a contract, an offset marketer agrees to purchase the project’s long-term offset output upfront, and then sells shares of that future output up front, with each share sized to produce an estimated quantity of carbon offsets over a specified period of time.

The quantity of offsets may not be guaranteed. Marketers of offsets (and the projects for which the future offsets model is most useful), are typically not well enough capitalized to guarantee a project’s future performance. In addition, insurance products insuring the volume of an offset project’s future output are not available. This leaves most marketers of future offsets estimating rather than guaranteeing the future offset quantity. Marketers of future offsets should discount the expected future offset quantity, as a means to reduce the risk of project underperformance. Adequate discounting of the expected offset quantity can result in the projects enabled by future offsets performing as well or better than estimated, on average. (e-mail communication, 2-28-07)

Clearly, forward crediting carries the risk of claiming credits as real that may or may not happen in the future. Being conservative when calculating the estimated offsets and discounting them to allow for underperformance are legitimate tools to reduce the risk of these forward crediting mechanisms. Nevertheless, they can be a risky proposition and consumers should be encouraged to opt for companies that fully disclose both the risks and how those risks are mitigated by discounting.

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Bundled offsets
Bundled offsets are emissions that do not come from one single project but are, similar to a Mutual Fund, a collection of offsets from various projects. If all the offsets in the bundle come from high quality emissions reductions projects, then bundling is a valuable approach to insure against risks, for example from future offsets, and to lower prices. For example, myclimate offers two different offset portfolios to their clients. The more expensive one includes offsets that come with more external benefits (e.g. bringing new technologies and know-how to very remote areas), while the less expensive one includes projects that have lower implementation costs.

Bundling offsets is problematic if low quality emissions reductions are mixed into the portfolio. For example, the Chicago Climate Exchange offers bundled offsets that include project based emissions as well as emissions reductions achieved by member corporations that went above their emissions reductions target. These emissions reductions, although laudable, are not the same as offset reductions created through offset projects alone. They raise issues of overabundancy, double counting, and transparency. This is especially true since CCX’s standards and verifications procedures are proprietary.

Because the voluntary carbon market is so young, we recommend consumers act as conservatively as possible and buy carbon offsets with highest standards of certification and verification, even if those currently carry higher transaction costs.

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3.4 Standards and Verification (last edited for revision 1.3)
To address concerns of additionality, monitoring and verification companies often involve a third party and use internationally recognized criteria. Standards set criteria by which projects are chosen and evaluated. Such standards may include criteria for: type of project, impact on local communities, additionality and leakage . These standards may be set by the offset company itself or a third party. These standards allow for better project comparison and evaluation.

Standards alone cannot ensure the quality of a project. It is only through the validation and verification of these standards that projects can reliably be evaluated. Verification consists of the periodic monitoring and review of ongoing projects in addition to an evaluation after the project period has ended. The monitoring ensures that the project is meeting goals and operating properly. For example, if a project involves installing stoves, monitoring allows for assurance that the stoves are working and are being used.

End-of-project verification ensures that the carbon emissions have been reduced by the amount intended. It is particularly important to have a third party involved at this point as there is an obvious incentive for project financers and offset buyers to see that projects have met their goals. Independent verification is crucial for the credibility of emission reduction projects. Below is a description of the most frequently used standards and verification procedures.

Clean Development Mechanism (CDM)
http://cdm.unfccc.int/
Used by: atmosfair, myclimate, and (update 1.3: The CarbonNeutral Company)

As mentioned earlier, the CDM is part of the United Nations Framework Convention on Climate Change (UNFCCC). As the largest regulatory project-based mechanism, the CDM offers the public or private sector in developed nations the opportunity to purchase carbon credits from offset projects in developing nations. CDM is involved in setting standards and verifying projects. Certified Emissions Reductions (CERs) are verified and certified by authorized third parties (Designated Operational Entities.) CDM standards are stringent and robust yet have high transaction costs so that usually only large projects are registered. CDM requires strict additionality for certification of carbon offset projects. For validation and verification procedures, see footnote (4).

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Gold Standard and Voluntary Gold Standard
www.cdmgoldstandard.org/
Used for all their projects by: atmosfair, myclimate, Climate friendly

The Gold Standard was developed by a network of non-government organizations, which sets higher standards than the CDM. It is endorsed by 42 NGOs worldwide. Gold Standard projects include renewable energy or energy efficiency technologies. (No sequestration projects are accepted). The Gold Standard requires strict additionality for certification of the carbon offset projects. For a project to be selected, these standards must be met and are checked by a UNFCCC-accredited organization. Monitoring and verification is also done by these organizations to ensure the benefits are realized.

Gold Standard projects take into account differing environmental, social and economical factors to maximize the secondary benefits and to minimize the negative impacts of a project. It actively encourages local participation in project design, and seeks to maximize sustainable development benefits.
Gold Standard projects are usually CDM projects. Because of the high transaction costs of CDM/Gold Standard the projects are usually large scale.

There are currently eight projects registered as Gold Standard projects. Information about them can be accessed at: www.cdmgoldstandard.org/projects.php

Voluntary Gold Standard
For smaller projects that are not CDM registered a Voluntary Gold Standard (VGS) was released in spring of 2006. The aim was to simplify procedures and to reduce transaction costs for small scale projects while still maintaining high quality standards. VGS can only be used in non-Annex 1 countries.

The Gold Standard is the most rigorous standard available to date. Although adhering to the Gold Standard incurs higher transaction costs and can therefore lead to higher prices for consumers, we strongly recommend purchasing offsets that follow these strict guidelines.

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Voluntary Carbon Standard (last edited for revision 1.3)
Used by: The CarbonNeutral Company

The Climate Group (TCG), the International Emissions Trading Association (IETA) and the World Economic Forum Global Greenhouse Register (WEF) jointly develop the Voluntary Carbon Standard (VCS). Version 1 of the Standard was published in 2006. The goal of the VCS is to provide “a certification tool that is designed to give users confidence that voluntary project-based GHG emission reductions are real, measurable, permanent, additional and independently verified” (The Climate Group)

Carbon offsets that are certified and verified through the VCS are called Voluntary Carbon Units (VCUs). VCUs are fungible, tradable and registered: VCS established an international registry for its VCUs which is sited at the Bank of New York.

The Voluntary Carbon Standard Version 2 is currently being developed. A draft of the VCS version 2 can be downloaded at http://theclimategroup.org/assets/Voluntary_Carbon_Standard_Version_2_final.pdf

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Chicago Climate Exchange (CCX) (last edited for revision 1.2)
www.chicagoclimatex.com/
Used by: Carbonfund, Cleanairpass, TerraPass

The Chicago Climate Exchange is a voluntary cap-and-trade emission trading system. CCX operates mainly in the US but also has members and affiliates in Canada and Mexico. Members commit to reduce their emissions by a certain amount each year, measured against their original baseline. Companies that achieve reductions that go above the commitment can sell these emissions reductions as CCX’s commodities called Carbon Financial Investments (CFIs.) Companies can also invest in external carbon projects which are implemented in the US, Canada, Mexico and Brazil. These projects involve mostly methane capture and carbon sequestration though forestry and no-till agriculture. The offset from these projects are also tradable as CFIs.

The CCX certification and verification process is proprietary. It is therefore difficult to evaluate the quality of CCX’s carbon offsets. Several NGOs have criticized the CCX for its loopholes, lack of clearly defined additionality criteria and a general lack of transparency (Dale, 2006).

In addition, many of the member companies of CCX have over-complied with their commitments. This has led to an overabundancy of CFIs. In a cap-and-trade system, it is most important that the cap is set at a high enough level so the system produces meaningful reductions that go beyond business-as-usual. Additionality is not of concern because it is the cap on the emissions that helps achieve real reductions. To give an example: if the cap on a hypothetical cap-and-trade system is 1000 tons of CO2 and I buy 100 tons and retire them, I have in effect created a scarcity of available credits. That means the price of the still available credits will likely go up and companies will have to work harder to create additional credits. If, on the other hand, there is an overabundancy of credits and I buy some of those credits, I have in effect just reduced some of the excess credits that are available.

CCX has certainly demonstrated a very innovative and valuable approach to carbon trading. Yet, because of a lack of transparency, the current overabundancy of CFIs, and to a lesser degree because of their focus on bio-sequestration in their external offset projects, we advocate that consumers minimize purchasing voluntary offsets that were generated through CCX.

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Green-e
www.green-e.org
Used by: NativeEnergy, TerraPass, Carbonfund

Green-e is run by the Center for Resource Solutions (CRS), a US-based non-profit company that measures and verifies a range of renewable energy projects. Green-e both sets standards for US renewable energy projects and verifies the projects. Green-e certified Renewable Energy Credits (RECs) have to be generated by power plants that were built after 1997 and they cannot be used to also meet regulatory portfolio standards.

RECs can be sold and traded independent of the electricity produced both in mandatory and in voluntary markets. As mentioned earlier, RECs do not have to adhere to the same strict additionality standards as carbon offsets. Because of the economic benefits of many renewable energy projects, such as wind farms, it is especially difficult to determine additionality with RECs.

CRS is currently working on developing new, stricter standards for RECs that are converted to carbon offsets. We strongly support efforts to develop clear, transparent and strict rules for selling RECs into the voluntary carbon market. Given how important renewable energy production will be in guiding us towards a low-carbon future, we support the financing of renewable energy projects though voluntary carbon offset companies, as long as the project are of high quality, fulfill strict additionality standards and are not double counted.

CRS is currently (as of January 2007) working on developing new, stricter standards for RECs that are converted to carbon offsets (3).

We strongly support efforts to develop clear, transparent and strict rules for selling RECs into the voluntary carbon market. Given how important renewable energy production will be in guiding us towards a low-carbon future, we support the financing of renewable energy projects though voluntary carbon offset companies, as long as the project are of high quality, fulfill strict additionality standards and are not double counted.

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Notes:

1 Allowances are the unit of compliance that are traded in cap and trade programs.

2 Credits (Offsets) are emission reductions that an emitter has achieved in excess of any required reductions. The excess amount is the credit and can be sold on the market.

3 The draft version of these guidelines are available here. Stakeholder comments accepted until January 31st, 2007. The comment form is available here.

4 A Designated Operational Entity (DOE) is a company accredited by the CDM Executive Boards that checks whether projects are fulfilling CDM criteria. Each CDM project must be validated and verified.

Validation is done once before initial project approval. Verification is done periodically after the project has been approved or registered.

Validation
Based on the project design document (PDD), the DOE will evaluate and validate the proposed CDM project, confirming :
1 – Parties are voluntarily participating
2 – Stakeholders have been invited to comment
3 – Project participants have submitted documentation on environmental impacts to the DOE
4 – The project will result in greenhouse gas reductions that are additional
5 – A methodology has been adopted in accordance with CDM rules
6 – Provisions for monitoring, verification and reporting are in accordance with CDM rules
7 – The project complies with all other CDM rules

The DOE then issues a validation report, and requests registration of the project though the CDM Executive Board

Verification
CDM project are monitored or "verified" after the project has been approved or registered by the CDM Executive Board. After the project has been registered by the Executive Board, the DOE periodically checks (usually once a year) whether emission reduction have actually taken place. It will then request that the EB issue CER’s accordingly, based on this verification report. It is only after verification that CER's are actually delivered.
(This footnote was modified from: http://www.cseindia.org/programme/geg/cdm_faq.htm#doe, accessed 4-2-07)

5 The phrase “future offset” was replaced with “forward purchases of offsets (FPO)” in revision 1.3 of this paper. This is to distinguish between forward purchasing and forward crediting. As explained in this chapter, we do recommend forward purchasing but are wary of forward crediting.

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