Captured by Carbon Offsets?

(Photo courtesy of focalplane @ flickr. Used under the Creative Commons license.)

Amongst friends the other day, a group discussion over carbon offsets decamped into a group debate. Two sides formed, the debate got hot, and I tried to get out. Who knew market mechanisms could be so provocative?

The trouble began over the issue of standards in the voluntary market. Whereas offset projects undertaken as a Clean Development Mechanism (CDM) have to go through multiple stages of rigorous review, the voluntary offset market has so equivalent. Though there are multiple industry standards, there is no single, agreed-upon standard, no regulated process for certification, no required central registry. As a result, those who purchase voluntary offsets (largely corporations and individuals) often don't know what they're paying for.

The possibilities of where your money could go, and what it could pay for, are endless. As one Audubon article pointed out, you could be paying to plant monoculture forests -- in other words, an unnatural forest. Other companies use the money to subsidize wind and solar projects.  

The point is not that all voluntary offsets are harmful. Indeed, there worthy projects out there, and some good standards are emerging quite rapidly.

The history of the voluntary market has been as short as it has been short. The market has effectively been in existence in 1989, though it has taken off in the last five years. Since 2002, the number of firms offering carbon credits has grown by over 200%. In one year alone, between 2005 and 2006, the over the counter market grew by 200% as well. Surveys show that 68% of these projects are sold to North American clients.

With this growth, comes an increased risk of deception. The market is growing rapidly upon principles that are still poorly understood and poorly regulated, if they're regulated at all.

This flexibility is the catch: it feeds both market growth and consumer risk. Unburdened by the regulatory hurdles of other offset projects under Kyoto or EU-ETS, the voluntary market a greater breadth in its clientele, and is able to access certain areas - like avoided deforestation project, and African projects - with greater depth.

With this flexibility comes risk. It's what one report called a "'buyer-beware' market." Think of it like depositing money into a savings account, without the guarantee that your money would be put into savings.

It's clear that quality will be the driving factor in the market's short-term growth. There is a need for agreed upon standards. Just where these standards come from, however, is contentious. This is where my friends broke out, and down, into two groups: those who trust the market, and those who don't.

The first group trusted the market to generate its own standards. The thinking was that the market would naturally cluster around the firms offering the highest quality product.

The second group felt that the government should intervene only to help set standards. If there was a relevant lesson from the credit crisis, it's not to trust poorly understood, abstract market principles, especially during periods of high growth. In this instance, intervention could come in the form of the highly successful LEED standards in the States.

Partway through the debate, it occurred to me that this is not a debate easily resolved through argument. It's a fundamentally different approach to how markets should work.

But that doesn't mean people shouldn't use them - especially in the short-term, when there are limited alternative options. And so, if you do use them, here's some advice:

1.    Do your homework. Before you purchase an offset, know what you're buying. It's like anything else: would you spend money on a suit before trying it on?

2.    If you can't do your homework, than follow the signs. A few leading organizations have developed insignias you can follow, including: VCS, The Gold Standard and VER+.

3.    And if you trust neither, than consider investing the money in a green fund. I particularly like (and am invested in) Winslow Green Growth, but there are a few others out there for you to choose from.