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Don't Offset Your CO2 Emissions, Retire Them

Date: 23-Jul-08
Country: UK
Author: Michael Szabo

Lewer is co-founder of a new online carbon offset company called Carbon Retirement (www.carbonretirement.com), which launched on July 15.

Carbon Retirement offers consumers and companies a novel approach to offsetting their carbon footprint by letting them dip into the European Union's Emissions Trading Scheme, the 27-nation bloc's flagship weapon in fighting climate change.

Now in its second phase running from 2008-2012, the EU scheme sets an emissions cap for its heavy industry and allocates a fixed number of permits, called EUAs, each allowing the bearer to pollute or trade the equivalent of one tonne of carbon dioxide (CO2).

While traditional offset vendors sell verified emission reduction credits generated by clean energy projects like hydro dams and wind farms, often in developing countries, Carbon Retirement buys and "retires" EU permits on behalf of its clients.

By retiring the EUAs, Carbon Retirement removes them from the market, rendering them unusable by the heavy-polluting companies. This equates to one less tonne of CO2 that the 12,000 or so participating installations are able to emit.

The idea for Carbon Retirement was conceived late last year when Lewer and his friends were planning a ski trip to France. The group looked into offsetting the emissions from their flights with the traditional offset certificates.
"We are environmentalists, the kind of customers of a typical carbon offset company," Lewer told Reuters.

"But we found that although most offsets seemed environmentally-sound, the market as a whole seemed really complex and difficult to evaluate."

Although global trade in voluntary offets more than tripled in 2007 to 65 million tonnes of CO2 sold for some US$330 million, accusations of poor quality offsets and double-counting continue to plague the market.

"It struck us that the EUA retirement process was one that could address all these problems," Lewer said.

HOW IT WORKS

After an offset purchase is made on its website, Carbon Retirement buys the corresponding EUAs on the spot market, from CO2 exchanges like EXAA in Austria and Climex in the Netherlands. Spot EUAs currently trade around 24.50 euros (US$38.93) a tonne.

Carbon Retirement charges a 10 percent premium on spot EUA prices to cover costs, and an additional five percent for unexpected price volatility between the initial sale and when Carbon Retirement buys them from the market.

"If the price rises in that time, we lose money, but if it drops significantly, we use any windfall profits to retire more EUAs ... The 10 percent mark-up is all we keep," Lewer said.

In the first phase of the EU's scheme (2005-2007), the market was long, meaning too many permits were allocated to participants. The EUA market crashed as a result.

"Had we launched this in phase 1, any EUAs sold would have been environmentally worthless," Lewer said.

Carbon market analysts collectively forecast a short market in the second phase based on tighter caps set last year by the European Commission, a view also shared by Lewer.

"(We) have a fairly high degree of confidence that phase 2 will be short ... and with every EUA we retire, we're helping to make it even shorter."

With tighter supply comes higher prices, and analysts estimate that EUAs, which are also closely correlated to oil and power, could rise as high as 100 euros a tonne of CO2 if energy prices continue to climb.

Traditional offsets command between three and seven euros.

"If EUAs get a lot more expensive, it obviously makes it a more difficult sell for us, particularly to our corporate clients," Lewer said.

"If you look at our business model, it's evident that we're never going to make millions out of this. This is predominantly an environmentally-motivated project."

Lewer would not say how many EUAs Carbon Retirement has sold so far, nor would he predict how many it is expecting to sell.

"Our ult

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