Carbon Offsetting as a Strategic Business Device

It’s clear — with all the studies, news, and fora on climate change, carbon emissions, and sustainable development — action is required. And fast. But, how does an organization alter its mode of business and rise to a new level of competition? What are the options? Where to start?
The ‘carbon tax vs. cap & trade’ deliberation still rages on. It’s unfortunately become a polarized ‘either/or’ debate while each mechanism is used in an attempt to address the emissions issue on different geo-political and socio-economic levels and for varying commercial interests. Both serve as disincentives to waste energy and pollute, but currently leave some uncertainty as to whether they will significantly reduce emissions and/or be reinvested in energy efficiency or renewable energy projects.
Offset and Allocate to Energy Efficiency and Renewable Energy Projects
Carbon offsetting is another component of the carbon market that deserves, and is increasingly receiving, attention. A carbon offset is a credit for absorbing or reducing greenhouse gas emissions (GHG), measured in tons of CO2-equivalent (tCO2e), which would have otherwise remained in the atmosphere. Organizations, in addition to governments and individuals, have the option to purchase credits from others through emissions reduction or renewable energy projects.
Offsetting is a mechanism to reduce energy waste, avoid deforestation, and shift dependence on fossil fuels to alternative energy. Renewable energy, generated from natural sources (e.g. sunlight, wind, rain, tides, and geothermal heat), can be an alternative if the methods used have low environmental impact. Technologies include solar power, wind power, hydroelectricity, micro-hydro, biomass, and biofuels.
Why Offset Your Business?
The voluntary carbon market, developed in 1989 before the regulatory market, has grown rapidly since 2005. “Much of the demand driving the voluntary carbon markets comes from the developed and more environmentally aware markets in North America and Europe,” reports The Katoomba Group. “[B]usinesses were the largest buyers [of carbon credits] by volume in this market, but contrary to expectations, anticipation of future regulations did not appear to be the main motivation for purchases. According to buyers surveyed, their main motivations for participation in the market were corporate social responsibility and to ‘walk the talk’ in terms of environmental stewardship.”
Corporate Social Responsibility is the raison d’être, but offsetting is also a viable business strategy. The market is experiencing increasing energy costs, greenwashing, and accountability demands from customers, shareholders, financial institutions, and employees. Carbon offsetting together with CSR – integrating societal and environmental imperatives with the organization’s economic interests — could be a competitive differentiator for a business.
1. Cost Savings – Combining Energy Conservation and Carbon Offsetting
Rising energy costs are a high concern among senior management in Canadian companies. Increasing carbon tax rates exacerbates the situation for B.C. companies. Businesses that measure and monitor their carbon footprint are cognizant of their energy waste and impact on climate change. They are in a better position to manage their carbon footprints, take action to become energy efficient, and realize a decrease in operational costs – including facilities (e.g. buildings, vehicle fleets), business travel, supply sources, and processes (manufacturing and industrial sectors).
Carbon offsetting is a practical next step for companies who cannot further reduce emissions within a targeted timeframe:

• Contingent upon how the carbon market and offsetting mechanisms are structured, “the inclusion of project-based transactions into the carbon market can further reduce the cost of compliance by generating credits that might be cheaper than allowances,” according to an International Institute for Environment and Development (IIED) report. This is likely the case with smaller scale, community-based projects.

• The voluntary carbon market is generally less complex with fewer stringent guidelines, limited bureaucracy, and generally lower transaction costs compared to the regulated international offset market.

Even for regulated emitters under the emergent regulated carbon market within B.C., the “initial mandate of the [Pacific Carbon Trust] is to offer credible, low-cost offsets to meet public sector demand for offsets necessary to meet its targets for a carbon-neutral public sector”, according to the B.C. government. The Pacific Carbon Trust, a Crown corporation set up to meet the government’s target of a carbon-neutral public sector by 2010, “will only acquire offsets from projects that are located in B.C. … and may also acquire and retire offsets for individuals and B.C. businesses.”
Cost savings are also intangible: There is a growing need for companies to align their actions with stakeholders’ interests.
2. Confidence and Credibility with Customers, Shareholders, and Employees
Corporate Social Responsibility (CSR) is a concept with growing currency in Canada. Stakeholders are looking for proof of corporate responsibility in operational improvements and carbon offsets.
Canadian securities regulators introduced rules in 2001-2002 requiring listed companies to describe their “fundamental” social and environmental policies and the steps they are taking to implement them. “The disclosure of sustainability information by companies on the Toronto Stock Exchange (TSX) Composite Index is now common practice, with 80% including some environmental or social information in their annual or stand-alone sustainability reports, up from 70% in 2005,” according to a Stratos Inc. 2008 report. In fact, “corporate sustainability reporting is a core business strategy [element] at 47 of the 265 companies in the TSX Composite Index”.
A joint study by Ipsos Reid and the Canadian Business for Social Responsibility (CBSR) found that, “68% of the Canadian public is paying attention to issues related to corporate social responsibility.” The Gandalf Group corroborated those findings, reporting that “three quarters of Canadians take into account the environmental impact of their actions when they buy a product.” More specifically, as per a TNS Canadian Facts survey, “about half of Canadians (49 percent) say they are very likely to refuse to buy a product from a company based on hearing negative news about the organization… 28 percent have refused to purchase a product from a company that they believe has a poor reputation.”
Carbon registries that list verifiable offset projects can enhance the credibility of business offsetters – both voluntary and regulated – in their environmentally-, and possibly socially-, responsible endeavours. These registries basically act as accounting tools developed to facilitate voluntary or regulatory reporting of verified offset projects and to screen double-counting and double-selling of credits. Some registries in the voluntary carbon market to note are:

• WWF Gold Standard: originally developed by the WWF to ensure high quality projects Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implement (JI) instrument in the regulated carbon market. In 2006, they launched a methodology for voluntary offset projects in developing countries (CDM) and “is in the midst of creating a registry for their voluntary credits,” reports The Katoomba Group.

• The Climate Registry: a non-profit created to record and track the greenhouse gas emissions of businesses, municipalities and other organizations in 31 U.S. states (covering over 70% of the US population), and 3 Canadian provinces. The registry complies with ISO14064-3:2007 standards and verification process.

• Chicago Climate Exchange: launched in 2003, is a registry for the voluntary carbon market. According to the CCX, members sign legally-bound contracts consisting of allowances and offsets as per emissions baselines. A non-governmental regulator for all securities firms in the U.S., Financial Industry Regulatory Authority, is CCX’s regulatory service provider monitoring all trading activity and reviewing 3rd party verifiers reports for offset projects. Project developers must obtain independent 3rd-party verification from an approved list of verifiers before registering offset credits on CCX.

• GLOBE Foundation: based in Vancouver, announced in July the formation of the GLOBE Carbon Registry which records transactions of voluntary carbon offsets that conform to internationally recognized standards. It will, “ensure carbon credit integrity by issuing a unique serial number to each posted credit thus preventing double counting, allowing chain of custody control from creation to retirement, and recording transactions of carbon offsets that conform to internationally recognized GHG quantification standards.” A non-profit, the GLOBE Foundation was established to find practical, business-oriented solutions to environmental issues and to promote the business case for sustainable development.

A Gandalf Group 2008 survey showed that “consumers look most favourably on companies that reduce their packaging or use renewable fuels in their processes. They are considerably less enthusiastic about companies that buy carbon offsets to boost their green credentials.” The socially-responsible eco-savvy customer looks for significant reductions in GHG emissions as a result of changes in business operations and practices.
Canadian “shareholders (41% of the population) hold companies responsible to treat employees, community and environment fairly,” according to Environics International’s (now known as GlobeScan Incorporated) Corporate Social Responsibility Monitor (2001). A 2003 Environics poll conducted for Environment Canada revealed, “9 out of 10 Canadian shareholders wanted fund managers to take environmental and social performance into account when valuing companies.” In a 2004 GlobeScan survey, “while 17 percent of Canadian respondents indicated that they had read a corporate social or environmental report, 77 percent indicated an interest in learning more about corporate social responsibility. In addition, 71 percent noted their belief that consumers can make a difference in how responsibly a company behaves.”
Shareholders require greater risk management in light of not only globalization and energy shortages, but also the environmental effects on society, possibilities of consumer boycotts, tarnished reputations, and liabilities. Registered carbon offsets enable companies to communicate their offset investments effectively.
A recent Kenexa Research Institute cross-cultural study found that employees’ motivation and opinions of senior management are influenced by an organization’s environmental initiatives. The results indicate that “among the 13 countries surveyed, more than half (54%) of workers state their favorability with their organization’s participation in ‘green’ initiatives… Employees who have favorable views of their company’s ‘green’ activities also have more favorable opinions of their management. They are much more likely to feel that senior managers have the ability to deal with company challenges, demonstrate that employees are important to the success of the company, and provide employees with a clear picture of the company’s direction. In addition, these employees are also more likely to believe that senior management supports and practices high standards of ethical conduct, and is more trustworthy.”
3. Competitive Differentiator
At the end of the day, it’s the bottom line that drives most businesses. Some may still argue that it is pointless for non-regulated organizations to expend money and time to reduce emissions, much less purchase carbon offsets. However, escalating energy costs are eating into profits. B.C.’s carbon tax, set to increase each year up to 2012, adds to the cost.
Another scenario arises, begging the question: If a given business has reduced its energy waste and operational costs, then why bother to further offset GHG emissions? Answer, first with a question: What’s the difference between one company and its competitor, besides price and quality service? Offsetting could differentiate that business from its competitors who’ve taken similar carbon and operational cost reduction measures. Progressive companies will select high-quality carbon offset projects that yield a large impact on climate change while meeting social requirements and commercial interests. Long-term benefits include:

• Goodwill and branding: registering certified, verifiable offset projects defines and communicates an organization’s genuine environmental activities.

• Local economic development together with biodiversity protection: quality of life increases for customers, communities, and employees. Subsequently, organizations retain or attract loyal employees and customers while gaining revenue. Companies may also, over time, help to mitigate jurisdictional health costs which, in turn, reduces health insurance rates.

• Green technology: businesses essentially subsidize alternative energy projects via carbon offsetting. Environmentally sustainable energy — generated from solar power, wind power, hydroelectricity, or biomass — reduces reliance on oil and, in turn, provides lower-cost energy for businesses.

Given the high demands in the marketplace, companies seek out and capitalize on competitive differentiators. If your competitors have not realized the value of carbon offsetting as a tactical if not strategic device, then you should.
Where to Start
Talk to a reputable carbon management consultant and offsetter. Audit, inventory, and manage GHG emissions. Register and communicate your carbon offsets.
If your company is based in B.C., there is a carbon offset provider in your backyard. Offsetters Climate Neutral Society provides carbon management consulting services, develops high quality carbon offset projects, and offers carbon credits to offset emissions. All projects focused on energy efficiency and renewable energy are verified by qualified third parties and follow ISO 14064 standards. The Vancouver-based company adheres to the Greenhouse Gas Protocol, an evolving international accounting and reporting standard for GHG emissions. Partners and clients include: The Natural Step Canada, Vancouver Convention and Exhibition Centre, VanCity, Intrawest, and Tourism Whistler.
Bear in mind that the carbon market – both regulated and voluntary – is in its formative stages.
Several certification standards exist with generally the same protocols, there being no single internationally-accepted certification standard. The IIED report found that “some of the existing retail providers adhere to even higher standards of additionality and sustainable development than demanded by the [WWF’s] CDM [for offset projects in developing countries], others employ less rigorous project standards and verification methods.” The term ‘additionality’ is a defining attribute of carbon offsets because the funding enables GHG reductions in an offset project which would not otherwise occur.
Yet, the less stringent guidelines of the voluntary carbon market may or may not reflect the quality of the projects. The price of the project is a general indicator of its quality – a key determining factor for buyers (and sellers) in the voluntary carbon market.
Corporate Social Responsibility makes good business sense. Irresponsibility is unsustainable in the long-run given escalating energy costs, a new carbon tax, increasing market demands for sustainability, and potential liabilities. Carbon offsetting is a device to meet and exceed emission reduction targets while meeting an organization’s social and economic interests.
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Service Providers:
Offsetters
http://www.offsetters.ca/

GLOBE Foundation
http://www.globe.ca/

Canadian Business for Social Responsibility (CBSR)
http://www.cbsr.ca/
Resources:
The Katoomba Group, EcoSystem Marketplace, ‘State of the Voluntary Carbon Markets 2007: Picking Up Steam‘
http://ecosystemmarketplace.com/documents/acrobat/StateoftheVoluntaryCarbonMarket18July_Final.pdf
International Institute for Environment and Development (IIED), ‘Exploring the Market for Voluntary Carbon Offsets‘ (2006) – by Nadaa Taiyab.
http://www.iied.org/pubs/pdfs/15502IIED.pdf
Stratos Inc., ‘Canadian Corporate Sustainability Reporting: Best Practices 2008‘
http://www.stratos-sts.com/publications/Best_Practice_Study_2008.pdf
Ipsos-Reid
http://www.ipsos.ca/
The Gandalf Group
http://www.gandalfgroup.ca/
GlobeScan Incorporated (formerly Environics International)
http://www.globescan.com/
TNS Canadian Facts
http://www.tns-cf.com/
Kenexa Research Institute
http://www.kenexa.com/