Domestic Offset Schemes

Type:
Technical Option | Non-Technical Option | Generic Example
Theme:
Climate | Energy | Land Use | Other | Transport | Waste

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Summary

Climate change is the headline environmental issue of our day. The policy responses take a variety of forms both voluntary and mandatory, and operate at many geographical levels from intercontinental to localised regions. Action principally takes the form of directly or indirectly reducing emissions of greenhouse gases. In Europe, the principal policy stimuli are the UNFCCC Kyoto Protocol targets to 2012 and the European Commission 2020 traded and non-traded sectoral targets established under the Climate & Energy package of 2008. Under the former, European countries have the opportunity to purchase carbon credits to support the drive towards compliance, whilst under the latter, the EU Emissions Trading Scheme (EU ETS) regulates emissions from key players in the power and industry sectors. 

ETS-sector target should be met through participation in the trading scheme, therefore the more significant challenge facing European Governments and policy makers is how to meet the non-ETS sector’s emissions target. The non-traded sector is made up principally of transport, agriculture, and domestic & commercial activities. In many European countries these sectors are not subject to any greenhouse gas emissions (GHGs) specific pricing policies, and arguably lack sufficient incentive for change on the scale necessary for compliance. A potential policy option for EU Member State’s non-traded sectors is the introduction of a scheme for domestic offset projects.

The main perceived reason for establishing a domestic offsetting scheme is that it is seen as a mechanism to stimulate further emission reductions and abatement investments in the non-traded sector. A scheme supporting domestic offset projects offers a new stimulus for emission reduction opportunities and technology innovation in sectors not subject to the emission constraints of the traded sector. It achieves this by extending the concept of emissions trading, and a greater appreciation of the associated value and cost of GHGs to non-ETS sectors. This can serve to create an important link between the traded and non-traded sectors, and provides a price signal that can stimulate investment and innovation in decarbonising technologies and measures. This can provide benefits in the form of innovation, enterprise opportunity and environmental branding within the economy. The benefit nationally, in terms of compliance, can come through a variety of discounting approaches applied to generated credits (e.g. tax credit generation), or a longer-term strategy, whereby the benefits from projects that outlive the crediting period.

 

Implementation

Offsets themselves are an established component of international emissions reduction frameworks. The concept of domestic offsets is similar to the international offsetting mechanisms of Joint Implementation (JI) and the Clean Development Mechanism (CDM) provided for under the Kyoto Protocol and recognised for compliance use within the EU ETS. The German Federal Ministry for the Environment note that domestic offsets can be viewed as a form of ‘unilateral JI’ in that they generate emission reduction certificates but that the project activity is actually carried out in the investor country (see German Federal Ministry). At a European level domestic offsets were not officially recognised in EU climate policy until 2009 when amendments to the EU Emissions Trading Directive (European Commission, 2009) resulted in the official introduction of the domestic offsets concept to the climate policy arena. Article 24a of the emissions trading Directive notes:
[implementing] measures for issuing allowances or credits in respect of projects administered by Member States that reduce greenhouse gas emissions not covered by the Community scheme may be adopted



Where governments and policymakers opt to develop a domestic offsets scheme they must ensure that the developed domestic offset legislative structure is based on a sound and efficient methodological framework. This framework must include the establishment of emissions measuring and monitoring protocols, of project eligibility criteria (additionality, permanence, avoidance of leakage and double counting), and assurances of consistency with national greenhouse gas emissions inventories: 


• Emissions measuring, reporting & verification – For the integrity of a domestic emissions offset scheme the associated generated project emissions reductions must be accurately measured, reported and verified (MRV). Traditionally emissions reductions arising from emissions trading schemes or offset projects are measured, reported and verified in accordance with international standards or best practice. Established MRV standards and guidelines including the UNFCCC guidelines, the World Resource Institute’s Greenhouse Gas Protocol for Project Accounting, International Standards Organisation 14064 and 14065 Protocols, JI and CDM Rules, Practices and Procedures manual, along with MRV criteria for existing offsets (Gold Standard, Climate Action Reserve, Voluntary Carbon Standard, Chicago Climate Exchange, Regional Greenhouse Gas Initiative); 


• Additionality – in assessing the quality of an offset project, projects must demonstrate proof of additionality. According to the Climate Trust (2007) additionality is a policy term by which an assessment is made regarding whether or not an offset project’s emissions reductions are in addition to a business-as-usual scenario. Additionality is the metric by which an offset project demonstrates that it is resulting in real, measurable reductions in greenhouse gas emission levels. Demonstration of project additionality is generally achieved via a project specific assessment or performance standard/sectoral assessment. The CDM Executive Board’s ‘Methodological tool for the demonstration and assessment of additionality’ generally forms the basis of most additionality assessments;  


• Permanence – there exists the possibility that offset emission reductions may sometimes be reversed by human activity and/or acts of nature. This issue is particularly pertinent for emissions offsets associated with land use projects. With such projects carbon sequestered in soils, forests and plants can be released into the atmosphere and the offset negated as a result of environmental events such as forest fires, pest infestations as well as human activities such as logging and land clearance. As a result permanence may be viewed as a type of project risk associated with specific types of offset project types with the attainment of permanence a desirable goal for any offset credit. The Congressional Budget Office in its 2009 report highlights some options currently deployed to protect offset permanence. Some of these options include: the requirement of legal assurances that carbon will remain stored; the detainment of a portion of credits generated by a specific offset project in a reserve for compensatory use in the event of any carbon storage reversal; and the assignment of expiration dates to offset credits such that once these dates are passed credits can no longer be used; 


• Leakage – leakage can be looked upon as an increase in greenhouse gas emissions outside an offset’s project boundary that occurs as a result of the offset project activity. The Congressional Budget Office (2009) highlight that leakage has the potential to reduce the net effect of offset activities on greenhouse gas emissions and that it can be difficult to identify and quantify. The Congressional Budget Office (2009) note that offset programmes generally attempt to deal with leakage – by requiring certain design features that minimise leakage and by applying discounts to offset activities when issuing credits to account for leakage that cannot be avoided. 

Related to this methodological framework requirement, a further fundamental consideration for a domestic offset scheme is simply that offsets are not all the same. A principal task facing the project team is identification of which non-ETS sectors are best suited to support the development of domestic offset projects and whether a sectoral or project based approach should be adopted for domestic offset implementation. Within non-traded sectors project developers must what type of domestic offset project types potentially exist. Table 1 provides an example of potential domestic offset project types for the non-traded sectors. 

Table 1 Potential Offset Project Types for the non-traded sectors
 

Non-Traded Sector Potential Project Type
Agriculture & Forestry

Biomass use projects

Changes in animal waste management systems

Nitrogen-based fertilsiation reductions

Agricultural land use change

Methane capture & recovery from agricultural processes

Forest carbon sequestration

Afforestation & reforestation projects

Buildings

Public & service sector building management & imrpovement (heating, ventilation & air conditioning upgrades; window replacement; lighting retrofits; improved insulation)

Replacement of fossil fuel boilers

Shifting to lower carbon energy sources

Chagnes in commercial refrigeration systems

Industry (non-ETS)

Improved solid waste management

Improved wastewater management

Methane capture & recovery from landfills

Chemical industry process emission reductions

Natural gas transport emission leak reductions

Transport

Deploymeny of innovative transport technologies

Urban passenger transit initiatives

Goods transport modal shift

 

Additionally one of the most significant challenges that a country developing a domestic offset scheme will face during development of its methodological framework will be developing a project credit certification system that will detail the type of carbon asset/domestic offset credit that will be offered in return for the project related emissions reductions. Credits can be broadly divided into those with the potential for use in a compliance setting, and those which may only qualify for voluntary market status (lower value, unlikely to be accepted in a compliance setting). There presently exist two primary options in a post-2012 environment for establishing domestic offset assets to be used in a compliance setting. These are the use of a future UNFCCC mechanism (potentially identified as a post-2012 JI), or use of article 24a under the EU ETS. Trade of credits generated under a domestic offset scheme can potentially have important implications for scheme development, credit attractiveness to credit markets, investment decisions of domestic offset project developers, and national greenhouse gas inventory accounting.

In Europe domestic offsetting schemes currently exist in two forms – pilot (including those countries at an investigative stage) or operational. Domestic offsetting is presently at a pilot phase in Austria, Ireland, Sweden and the Netherlands with Germany and France both having operational schemes.

 

Impact

Governments and policy makers introducing a domestic offsets scheme would expect it to impact on those sectors of the economy not covered by the EUETS and bring about emissions reductions within these sectors. Policy makers would envisage a domestic offsets scheme supporting economy decarbonisation and GHG abatement.

Costs & Benefits

The principal costs associated with domestic offset development are associated with initial start up costs and direct administrative costs once the scheme is operational:
• Start-up costs refer to costs related to the design and implementation of domestic offset legislative structure and methodological framework; 
• Administrative costs will cover costs associated with the day to day running of the domestic offset scheme including the costs of assessing additionality, leakage, permanence, MRV and credit issuance.

Principal benefits associated with domestic offset schemes are:
• Increased GHG emissions reductions in non-traded sectors;
• Stimulated investment and innovation in decarbonising technologies and abatement measures in the non-traded sector;
• Potential growth in direct and indirect enterprises such as those services associated with offset credit generation, registry development and credit trading. 


 

Evidence & Reference

Climate Trust, 2007. Determining the Additionality of Greenhouse Gas Reduction Projects. Portland, Oregon.

Congressional Budget Office, 2009. The Use of Offsets to Reduce Greenhouse Gases. Washington.

European Commission, 2009. Directive 2009/29/EC of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community. Brussels.

European Commission, 2003. Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. Brussels.

German Federal Minsitry for the Environment - Domestic Offset Projects: http://www.jiko-bmu.de/english/background_information/introduction_cdm_ji/special_project_types/domestic_offset_projects/doc/453.php
 

Modelling this Measure

The modelling of a domestic offsets scheme will be very much dependent on the non-traded sector that is analysed along with the type of domestic offset project that is deployed. Each non-traded sector and specific project type will influence the level of activity, share of a given control and behavioural change in a different manner. 


Site Entry Created by Policy Measures Admin on Dec 09, 2010
Edited by J A Kelly

Reference This Source

Policymeasures.com (2017). Domestic Offset Schemes. Available:
www.policymeasures.com/measures/detail/domestic-offset-schemes Last accessed: 21st November 2017

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