Blog: Carbon offsetting – how to avoid the pitfalls

2 July 2020

Should local authority planning policies use carbon-offsetting as a way of enabling new development to be net-zero carbon? Yes, but only in the absence of something better, says CSE’s Dan Stone ...


Local authorities’ zero-carbon planning policies often include provision for carbon offsetting schemes. These are based on the idea that once developments achieve required levels of carbon savings on-site through highly efficient building fabric and on-site renewables, developers pay into a fund allowing third-parties to save or sequester the remaining carbon emissions elsewhere - for example by planting trees or insulating public buildings. The net effect is that the development is – or is supposed to be – net zero carbon.

But are carbon-offsetting schemes really the way to go?

I’ve spent a great deal of time researching and advising local planning authorities on setting up carbon offsetting regimes to support their zero carbon planning policies. They are certainly, currently, the best we’ve got, and if administered well should be able to fund lots of really good additional carbon saving projects. So yes councils should adopt these policies and approaches in the short term. A “necessary evil” if you like.

But carbon offset schemes are actually a huge commitment for local authorities to deliver on, and if they go into it too casually or half-cocked, they won’t be able to achieve all the carbon savings they are promising. At their worst, carbon offset schemes can be little better than fig leaves, allowing us to carry on as we are, enabling us to say that development is net zero carbon even when it’s not, obscuring the more fundamental changes needed in our current development model and how we design buildings.

Ultimately we can’t escape the truth that we need to build genuinely zero carbon buildings.

In advising councils on how to administer their carbon offset regimes, what to spend carbon offset payments on, and how to integrate these regimes within planning processes, we’ve done a lot of thinking about the pros and cons as they apply to the planning system. Overall, we’re dubious about carbon offsetting, and here’s why …

1) Carbon offsetting is an avoidance technique that allows us to carry on emitting 

The best way to achieve carbon savings is to change the carbon emitting behaviour, e.g. stop flying, and build genuinely zero carbon homes. Carbon offsetting essentially says it’s OK to continue as we are if we merely throw around a little bit of money (though often not enough) in order to pay back the carbon debt.

In the context of a binding commitment to achieving net zero carbon emissions by 2050, allowing a carbon emitting development to go ahead because it funds the retrofitting of another building makes no sense, because within the next 30 years all buildings will need to be zero carbon. Unless grid electricity and heat generation is entirely decarbonised, it still leaves a relatively newly constructed carbon emitting building that may itself need to be retrofitted in the future to reduce these emissions, at much higher overall cost.

And (assuming developers are economically rational actors) there is a risk that, if the carbon price that developers pay to offset their emissions is lower than the cost of achieving carbon savings onsite, they’ll be incentivised to simply pay more into the carbon-offset fund and build less efficient buildings.

There’s no getting away from the fact that to get to net zero, we need to actually build zero or carbon negative buildings, and the sooner the better. From this perspective, carbon offsetting should only be seen as a stop-gap until planning regulations, development economics and the development industry deliver true carbon neutral or carbon positive developments on-site.

2) Carbon offsetting doesn’t fully offset the residual carbon emissions from new developments

Firstly there is an acknowledgement that, the way carbon offsetting schemes are currently set up, 1:1 carbon savings are unlikely to be achieved. So while a developer might pay a contribution calculated to offset 50 tonnes of CO2, the offset projects funded will probably save less than that.

There is also inherent uncertainty about the amount of carbon a new development will generate over its lifetime. Currently, this is calculated to cover a 30-year period from the date of the planning agreement, the assumption being that within 30 years grid electricity will have fully decarbonised. But while grid electricity is de-carbonising quickly, if full decarbonisation takes longer or doesn’t occur at all, the residual emissions from development will be under-reported.

There’s further uncertainty about the pace at which emissions will be saved by carbon offsetting. Carbon savings are calculated according to the lifetime of the measures funded; this varies according to the project type, but could be multiple decades in the case of carbon sequestration through tree planting, or 25 years for renewable energy projects. As a result, even assuming that projects launch quickly after the completion of the development whose carbon emissions are being offset, the current system does not guarantee equivalence between the rate of carbon generation from new developments and the rate of carbon saving through offset activities

As a result there are tensions between how carbon offsetting currently operates and hard deadlines for achieving zero carbon emissions. If carbon offsetting is an instrument to deliver net zero emissions by a particular date (e.g. 2030 for Bristol’s Climate Emergency Declaration, 2038 for Greater Manchester’s) then the carbon saved by offsetting must surely also be saved by this deadline? The way carbon offsetting currently works within the planning system does not allow for this.

An alternative approach is to think about the rate of residual carbon generation from a development (tonnes per year) rather than the overall carbon debt. In this scenario developments would need to fund sufficient offset measures so that the carbon saved or sequestered per year is equal to that emitted by the development per year, achieving thereby equilibrium of ongoing emissions. However, the implications of this approach, including the cost to developers and whether such a system would be feasible to administer, are not yet clear.

3) It’s difficult to tell if carbon savings achieved through offsets are additional to what would have happened anyway

In a world where we have to do everything (that is reduce or sequester all emissions) how can you tell that the emissions saved by the offset payment are really additional to what would have happened anyway?  Isn’t there an ongoing temptation – especially in times of austerity - to pay for existing energy efficiency and retrofitting projects from carbon offset funds, meaning that no further step towards zero carbon has actually been taken?

We estimated that a joint carbon offset regime for the four West of England authorities (Bristol, Bath & North East Somerset, South Gloucestershire and North Somerset) would generate a fund pot of £64m-£422m by 2036, depending on the policy scenario adopted. A possible carbon offset regime for the Greater Manchester Combined Authority (ten local authorities) could generate an even larger pot, depending on the policy scenario and carbon price adopted.

With such a significant funding streams, it could be easy to imagine that the carbon offset fund can pay for the wholescale decarbonisation of the region. The reality of course is that all that this activity is achieving is compensating roughly for the additional carbon emissions from new development, getting the authority close to stand-still in terms of the residual carbon emissions from new development. Unless carbon offset funded programmes are additional to what local authorities are doing through their climate emergency plans, the carbon emissions from our existing building stock remain untouched.

In fact to achieve decarbonisation, climate emergency action plans produced by local authorities must secure a great deal more investment. The Bristol Net Zero report published by CSE for Bristol council estimates the capital investment cost of decarbonising the city by 2030 to be in the order of £5bn–£7bn.

And of course, inevitably, cash-strapped departments within councils will seek to use carbon offset funding for projects less directly related to carbon reduction and sequestration. Therefore really strong processes need to be in place to ensure that carbon-offset funds are only invested in projects which actually generate carbon savings, and that savings are genuinely additional to what would otherwise have happened. We recommend that no carbon-offset funding is allocated without a transparent assessment process measuring applications against defined criteria, and that a board of some kind is appointed to run the fund, assess applications, direct spending and monitor the balance between the rate of residual emission generation from development and the rate of carbon offsetting.

4) How to actually deliver the carbon savings you’ve promised?

Requiring carbon-offset contributions from developers is really a contract: that the council will deliver or enable the carbon savings that the developer can’t (or won’t). Given the scale of development in some areas, and the cumulative amount of carbon to be offset, this is no small undertaking. Without defined structures and processes to stimulate new markets and opportunities for carbon saving measures, there’s a danger that carbon offset funds will pile up, unspent; we’ve seen this in many London authorities, where 75% of funds collected since 1 October 2016 remain unspent (note).

It follows that if carbon-offset funds aren’t spent, the council is failing to deliver on its side of the agreement, and is undermining the rationale for requiring these contributions in the first place. When asked to provide carbon offset contributions, developers will justifiably ask whether and previous contributions were spent and what they funded, and for evidence of the carbon savings they created. If contributions aren’t spent within a reasonable time frame, a convincing argument can be made that the contribution can’t have been necessary to make the development acceptable (one of the three tests for planning obligations), and were unjustified. In any event, if contributions are unspent after five years developers can ask for them to be returned.

And simply from the point of view of the climate emergency, if carbon offset payments are not been spent at the rate they are being received, then carbon is being saved or sequestered at a slower rate that it is being emitted, and the carbon debt is building up.

While carbon offset funds can of course pay for existing carbon saving programmes to be expanded, this isn’t enough to take us sufficiently forward. To ensure additionality, funds need mainly to stimulate new markets for carbon saving activities and new activities, and this is a significant challenge that requires new thinking and staff resources. The administration of a council’s carbon offset fund cannot therefore just be added to someone’s existing job, for example that of a planning officer or Section 106 officer without the right skills or experience.

We recommend that an open application process is created to stimulate and attract carbon saving projects from council departments, the market and community that would be unviable without subsidy, for example community energy projects or insulation schemes. Applications should be proportionate to the scale of the funding provided, the emissions to be saved and the risk profile of projects. Programmes of standardised measures, low unit cost, low risk and lower variability of carbon savings (such as the many domestic insulation programmes, run by council housing departments) should be required to apply to the fund just once as a whole programme, with detailed implementation targets, specifications, predicted carbon savings and reporting processes and timetables. Once approved, it should be as simple as possible for residents, communities or businesses to access funding through these programmes.

Bespoke projects with higher unit costs, higher risks or higher variability of carbon savings (e.g. large renewable energy or community energy projects requiring planning permission or even an environmental impact assessment) would need to apply individually to the fund.

It goes without saying that all funded measures need monitoring to assess if carbon savings are being met - either on a project by project basis in the case of large renewable energy projects, or programme by programme in the case of mass retrofitting projects. Without careful monitoring and reporting, carbon offsetting could also easily convince local authorities that they are radically reducing overall carbon emissions within their districts, when in reality they are at best be just halting, or slowing the pace of increase.

5) How to direct funding

While developers pay a single price for their carbon emissions (e.g. £95 per tonne in London), the costs of actually delivering carbon savings varies according measure. Some - like draught-proofing homes or installing loft insulation - are really cheap. But once these are delivered (once all the lofts are lagged) achieving further savings, for example through whole house retrofits or externally insulating homes, gets more expensive.

When it comes to retrofitting our building stock, there are decisions to be made as whether to fund fewer, expensive “deep” retrofits, taking buildings to near zero carbon, or more “shallow” retrofits targeting less ambitious carbon reductions (assuming we’re not funding both). Shallow retrofits will be cheaper in the short-term and could benefit more people experiencing fuel poverty, but could be more expensive in the long-run if these buildings need to be retrofitted again.

The projects which haven’t already been delivered by existing market mechanisms, where additionality can best be demonstrated, will tend to be the more expensive carbon savings, so there are tensions between additionality and cost effectiveness.

The carbon offset board should maintain oversight of the strategic direction of the fund, its performance in saving or sequestering carbon, the mix of carbon offset projects being funded, and set the priorities given to cost, innovation and timeframes. The ultimate objective to save carbon is not political, but how and where carbon savings are achieved and how funding is distributed certainly is. Decisions as to where funds are directed and the proportions given to different project types will all have distributional impacts. It is reasonable therefore that elected politicians should have oversight of the fund to align it with their strategic objectives.

Conclusion

Having set out all our reservations, and while stressing that levying carbon offset payments will always be second best to true zero-carbon building, we at CSE nevertheless support carbon offsetting as a way to achieve net zero carbon development in the short to medium term, until the regulatory regime, development economics and the development industry deliver true carbon neutral or carbon positive developments on-site.

Carbon offset regimes have huge potential to fund carbon reduction measures which would otherwise not occur, to stimulate new markets and activities and to combine with other funding streams to deliver social and environmental benefits beyond carbon saving. It has significant scope to move new development closer to being zero carbon than it would otherwise be. However, it comes with a number of elephant traps, and if this potential is to be achieved, these need to be explicitly addressed through scheme setup and administration.


CSE's report Carbon offsetting in the West of England for the West of England Authorities

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