Fledgling Carbon Offset Business

Heightening Interest in Carbon Offsetting

Providers offering carbon offsetting frameworks have been appearing primarily in Europe for over ten years. Following a rapid increase, the number of these providers currently stands at over 100 worldwide. The carbon offsetting market totaled US$330 million (about JPY 35 billion) in 2007, a year-on-year increase of over three-fold. It is predicted that the market size will balloon to JPY 2 trillion by 2010. There are many systems which make it possible to easily purchase necessary carbon credit online; this encourages voluntary demand from individuals interested in the global warming problem. As with Google’s announcement to become carbon neutral by offsetting emission from its data centers, the demand from voluntary efforts by companies cannot be ignored.

Offset business is starting to pick up domestically as well. Nearly ten offset providers have emerged since the end of 2007 and are launching a series of services. The development of offset products has also been active. Various products are starting to be proposed such as carbon offset 2008 New Year’s cards; Seven and i Holdings eco-bags that come with carbon credits starting in 2008; JTB travel products that come with carbon credits; sales services for carbon credits from information terminals at Lawson outlets; Nissan automobiles that come with carbon credits; Keikyu department store gift products that come with carbon credits; and energy-saving electric lights from Matsushita Electric Works that come with the option to purchase carbon credits.

Demerits of Carbon Offsets

The main purposes of carbon offsetting are to: 1. Increase easy opportunities for individuals and companies to fight global warming; 2. Raise awareness on global environmental problems; 3. Secure cheaper methods for emission reduction; 4. Understand the economic value of reducing greenhouse gases such as CO2.

The price at which major domestic providers sell emissions credit is JPY 4,000 – 5,000 per CO2 ton. This price compares favorably to the futures price for carbon credits in Europe (EU Emission Allowance; as of September 5, the end of 2008 price is 24.4 Euros or roughly JPY 3,900), where emission reductions are mandatory, and is also relatively high compared to the Nikkei-JBIC Carbon Quotation Index (JPY 3,230 as of September 8) opened in April.

Put differently, even with a comparatively high price there are still those seeking to purchase. This shows that the demand for offset business is high even within Japan.

On the other hand, the following are pointed to as problems created by carbon offsetting: 1. There is no guarantee that offsets will actually lead to emission reductions; 2. Various providers offer offset products using their own standards, raising concerns about the reliability of quality.

Credit guaranteed by the Kyoto Protocol (Certified Emission Reduction: CER) and credit from voluntary standards (Voluntary Emission Reduction: VER) are both handled as credit for carbon offsets. VER is less reliable than CER; prices are varied, and there cases where it is bought and sold at a few dollars per CO2 ton.

Moreover, because there is no globally unified management record for VER, there is also the danger of double-counting where what is traded as CER is also used as VER.

To ensure reliability, there is a movement to limit the credit that can be used for offsetting to CER. For example, the offset voluntary standards introduced by the British government in February will involve only CER for the foreseeable future. In addition, the credit handled by domestic Japanese providers is CER. The use of CER was also recommended in the Ministry of the Environment’s February announcement regarding guidelines for carbon offsetting.

There are also demerits in limiting to CER. For example, it is possible that the market would shrink and the unit price would increase, which would limit market participants. Moreover, because CER is credit that follows overseas emission reduction projects, there are concerns that funds would not flow into domestic emission reduction activities. It could become a situation where only certification agencies profit. Selecting VER in the US and Europe is particularly attractive to help control the greenhouse effect produced by substances and projects outside of the Kyoto Protocol, as well as to avoid the costs and time required by CDM certification. Movements to standardize minimum requirements among VER certification agencies are also progressing.

Towards Healthy Growth of Carbon Offset Business

It is expected that demand for offset business will grow in the future. The supply of credit for offsets, as well as the preceding step of business that will make the emissions of companies and individuals transparent, should become more heavily emphasized.

Of course, carbon offsetting is not a miracle remedy for global warming. It is essential that after sufficiently understanding the significance of and issues regarding offsetting, offset business be utilized flexibly to circulate the flow of funds that will promote domestic emission reduction activity.

A framework that will ensure credit reliability is necessary for the healthy growth of offset business. If offsets are to be thought of as creating an opportunity for combating global warming, they should be designed with minimal rules on preventing double-counting and information disclosure, and avoid contracting the market with stricter standards. Reevaluation of voluntary offset standards with consideration of the significance of VER is already being promoted in the UK. Efforts to establish common rules have begun this year in Japan. It is important that the formation of these rules is pursued carefully and with awareness of the significance of carbon offsets. and with awareness of the significance of carbon offsets.