Voluntary Carbon Offsetting

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

ABSTRACT

ABSTRAKT

LIST OF FIGURES

LIST OF TABLES

LIST OF ABBREVIATIONS

1 INTRODUCTION
1.1 General Situation
1.2 Objective
1.3 Relevance
1.4 Research Design
1.5 Limitations

2 HISTORICAL BACKGROUND
2.1 Political Context
2.1.1 Stockholm Conference
2.1.2 Earth Summit Rio de Janeiro
2.1.3 Kyoto Protocol
2.1.4 Earth Summit Johannesburg
2.2 Corporate Responses
2.2.1 Increased Awareness of Environmental Responsibility
2.2.2 Mechanisms to Encourage Corporate Greening

3 AVIATION AND ENVIRONMENT
3.1 Emissions from the Transport Sector
3.2 Relevant Aviation Emissions
3.3 Growth of Aviation

4 THE CARBON TRADING MARKET
4.1 Kyoto Protocol Market
4.1.1 Mechanisms under the Kyoto Protocol
4.1.2 Reporting and Compliance
4.1.3 Parties Involved
4.2 Carbon Markets
4.2.1 Types of Markets
4.2.2 Market Volume and Values
4.3 EU Emission Trading Scheme
4.3.1 General Description of the ETS
4.3.2 Values and Volume
4.3.3 Environmental Impact of ETS
4.4 Emission Trading Scheme for Airlines
4.4.1 Proposal of the European Commission
4.4.2 Key Elements of the Proposal
4.4.3 Current Positions
4.4.4 Impact Study

5 VOLUNTARY CARBON OFFSETTING
5.1 General Introduction
5.1.1 Voluntary Market opposed to Kyoto Protocol
5.1.2 Definition and Terms
5.1.3 Interested Parties
5.1.4 Trading Volume and Price
5.1.5 Price Comparison to ETS
5.1.6 Carbon Offset Quality
5.1.7 Types of Projects
5.2 Standards
5.2.1 Clean Development Mechanism
5.2.2 Gold Standard
5.2.3 Voluntary Gold Standard
5.2.4 Voluntary Carbon Standard
5.2.5 VER Projects
5.3 Company’s Perspective
5.3.1 Steps in achieving carbon neutrality
5.3.2 Advantages of Carbon Offsetting
5.3.3 Risks and Disadvantages
5.4 Double Offsetting Effect with ETS
5.5 Environmental Relevance

6 VOLUNTARY CARBON OFFSETTING BY PASSENGERS
6.1 Carbon Offsetting in the Airline Industry
6.1.1 Scandinavian Airlines Group
6.1.2 British Airways
6.1.3 Silverjet
6.1.4 Air Canada
6.1.5 Lufthansa
6.1.6 Air France
6.1.7 Other Airlines
6.2 Carbon Offset Providers
6.3 Comparison of Selected Providers
6.3.1 Key Points of the Comparison
6.3.2 Atmosfair
6.3.3 The Carbon Neutral Company
6.3.4 Climate Care
6.3.5 Myclimate
6.3.6 Summary and Highlights
6.3.7 Sample Route Calculations
6.4 Critical Discussion

7 NON CARBON INITIATIVES
7.1 Biosphere Connections
7.2 Telecommuting
7.3 Environmental Reporting

8 CONCLUSION

REFERENCES

APPENDIX

ACKNOWLEDGEMENTS

I am particularly grateful to Dr. Anton Novak, Head of Environmental Affairs of Austrian Airlines AG, for inspiring me with this topic and providing me with guidance and support during the completion of this work. The knowledge shared and the information given, granted me great assistance. It was a great pleasure for me having the opportunity to combine my particular interest for the airline industry with the current issues of climate change and its impact on corporate conduct.

Furthermore, I would like to thank Mag. Christopher Schwand for coaching me during the work on this thesis. I express my gratitude for providing me with valuable recommendations and comments. His effort to share his experience in scientific writing and give practical advice for sound working is very much appreciated.

Many thanks also go to all other persons who accompanied me during the last year: all those who and gave inspiration and support through discussions, ideas and thoughts. I am especially thankful to those who are supporting me in my decisions and always endow me with great trust.

ABSTRACT

The urgent need to address climate change has stimulated tremendous interest, and growth, in the voluntary carbon markets. In the light of aviation’s harmful impact on the climate, European airlines increasingly commit to voluntary carbon offsetting. Given the novelty and yet the complexity of the voluntary carbon market comprehensive studies and guiding principles have been somewhat limited. Recommendations whether voluntary carbon offsetting could constitute a useful tool within an environmental responsible business strategy have been restricted. Especially the area of retail carbon offset providers the market is intransparent and obscure and lacks clear guidelines. This study structures the main components of voluntary as well as mandatory carbon markets and allows getting an organized description of these markets. Four retail carbon offset providers of particular relevance for Austrian Airlines were investigated and analyzed in this study. The results clearly indicate that quality, transparency and prices of the explored carbon offset providers differ substantially: The offset providers Atmosfair and Myclimate seem to constitute a more legitimate choice for a carbon offset provider, than the providers The Carbon Neutral Company and Climate Care. Findings suggest that voluntary carbon offsetting could serve as a useful tool to enhance corporate image, to present an opportunity to the customer to offset some of the individual emissions and to decrease emissions that cannot be reduced elsewhere. While constituting a valuable method to demonstrate environmental commitment, the study detects however, that voluntary carbon offsetting should preferably not be perused as a sole means of an environmental strategy but rather complete a set of multiple approaches and modes.

ABSTRAKT

Die durch den Klimawandel hervorgerufenen veränderten Anforderungen an die Wirtschaft und ihre aktiv agierenden Unternehmen, stimulierten enormes Interesse, sowie ansehnliches Wachstum, an den freiwilligen Emissionshandelsmärkten. Mit Bedacht auf die abträglichen Auswirkungen der Luftfahrtindustrie auf das Klima, bekennen sich europäische Fluglinien zunehmend zur freiwilligen Neutralisierung der klimawirksamen Emissionen. Aufgrund der Neuheit und der Komplexität dieses Marktes, ist die Anzahl der kompakten Studien darüber bisher jedoch limitiert. Verlässliche Handlungshinweise und Richtlinien zur Frage, ob die freiwillige Kompensation von schädlichen Emissionen ein wertvolles Instrument innerhalb einer Umweltstrategie darstelle, sind nur begrenzt verfügbar. Besonders im Bereich der unterschiedlichen Anbieter von Dienstleistungen zum freiwilligen Emissionshandel präsentiert sich der Markt undurchsichtig und verworren. Die vorliegende Diplomarbeit strukturiert und beschreibt die wesentlichen Komponenten der freiwilligen und auch der verpflichtenden Emissionshandelsmärkte. Eine Auswahl der Anbieter von freiwilligen Kompensationsmaßnahmen mit besonderer Relevanz für Austrian Airlines, wird in dieser Arbeit analysiert und durchleuchtet. Die Ergebnisse implizieren erhebliche Unterschiede in der Qualität der Klimaschutzprojekte, in der Transparenz der Berechnung der Kompensationsmenge und in den verrechneten Preisen der vier untersuchten Anbieter: Zwei der Dienstleistungsanbieter, Atmosfair und Myclimate, scheinen eine legitimere Wahl als The Carbon Neutral Company und Climate Care darzustellen. Die Resultate der Analyse legen nahe, dass das freiwillige Kompensieren von Treibhausgasemissionen verschiedene Zwecke nützlich erfüllt: Die Verbesserung des Unternehmensimages, die Möglichkeit für den Kunden seine Flugreise CO₂-neutral zu gestalten, und die Reduktion von Emissionen, die nicht durch andere Maßnahmen vermindert werden können. Die Untersuchungen zeigen allerdings auf, dass die freiwillige Kompensation von klimaschädlichen Emissionen keinesfalls das alleinige Medium einer wirksamen Umweltstrategie darstellen sollte. Vielmehr dient es dazu, eine Komposition von vielfältigen Methoden und Vorgehensweisen zu vervollständigen.

LIST OF FIGURES

Figure 1: Net Official Development Assistance

Figure 2: Percentage of Facilities with EMS

Figure 3: Global GHG Emissions

Figure 4: Global Transport CO₂ Emissions by Mode

Figure 5: Aviation Traffic Development

Figure 6: International Passenger Growth and Global GDP

Figure 7: Share of Aviation of Total EU27 CO₂ Emissions

Figure 8: Values and Volume of Total Carbon Market

Figure 9: Distribution of Market Segments

Figure 10: Percentage of EUA Trades

Figure 11: EUA Price March

Figure 12: Project-based Emission Reductions Transactions

Figure 13: Price per Ton of CO₂ Offset

Figure 14: Route Calculation Vienna-London

Figure 15: Route Calculation Vienna-New York

Figure 16: Route Calculation Vienna-Tokyo

Figure 17: Route Calculation Vienna-Frankfurt

Figure 18: Route Calculation Vienna-Budapest

LIST OF TABLES

Table 1: Transport’s Share of CO₂ Emissions

Table 2: Annex B Countries in the Kyoto Protocol

Table 3: Annual Volumes on Main Allowances Markets

Table 4: Main Units Traded

Table 5: Types of Projects

Table 6: Airlines and their Relations to Offset Providers

Table 7: List of Carbon Offset Providers

Table 8: Top Retail Offset Providers

LIST OF ABBREVIATIONS

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1 INTRODUCTION

1.1 General Situation

Ever since the Intergovernmental Panel on Climate Change (IPCC) published its first Assessment Report in 1990, public awareness and attention to climate change increased tremendously. During the last 15 years there was continuing presence in the media of the issue, whereby particular interest was awakened to include the issue of climate change and its anthropogenic impact in business activities.

Out of all the emissions CO₂ emissions are considered to be the biggest contributor to the human impact on climate change, while they are simultaneously also the best researched ones. Consequently, corporations are on the one hand trying to find techniques how to reduce their own emissions and thereby contribute their share to environmental protection. On the other hand, being an environmentally friendly company can also be used to enhance the corporate image. A lot of people are concerned about the human impact on climate change and therefore feel somewhat guilty if they produce emissions. Besides regulations, standards and market-based incentives, like emission trading schemes or taxes and charges, companies also engage in voluntary initiatives, for example industry agreements or auditing systems. One way of a voluntary commitment leading to the reduction of CO₂ emissions is carbon offsetting. In carbon offsetting a voluntary payment as a compensation for own emissions is made, while the payment is used for a project that should reduce CO₂ emissions elsewhere. In the past years a whole sector of industry has grown to deal with carbon offsetting: carbon offset providers offer programs who act as a third party carry out the respective projects, while corporations present the opportunity of carbon offsetting to their customers to become carbon neutral on a voluntary basis.

1.2 Objective

The author’s main objective is to give a clear an analysis of the voluntary carbon trading market. The author deems it necessary to inform the reader about historical developments in environmental policy making and describe how corporations got more and more involved in the issue of environmental protection.

After classifying and explaining, where voluntary carbon offsetting finds its place in the big picture of carbon markets, the voluntary carbon market is dealt with in greater detail. This paper shall deal with the advantages and disadvantages of engaging in voluntary carbon offsetting and furthermore describe the steps that need to be taken to become a partner of an offset provider. To complete the picture, some competitors are looked at, who already have experience in dealing with carbon offsetting.

Moreover, after a general analysis, this paper will investigate various carbon offset providers from the viewpoint of airlines. A comparison of the different offset providers will be given, especially with respect to the various methods of calculating the price. Furthermore a comparison of the cost calculation of major routes of Austrian Airlines will be undertaken.

All of this together shall be the basis for a further decision making, whether voluntary carbon offsetting can be a suitable initiative for Austrian Airlines and whether Austrian Airlines will pursue the option of carbon offsetting or not.

Besides the analysis of the Carbon Offsetting Market, this thesis shall also shortly describe other current actions and possible future initiatives with environmental relevance.

In the course of dealing with these objectives the following questions have to be answered:

1. What is the core structure of the voluntary carbon market?
2. How does the voluntary carbon market differ from the regulatory market?
3. Which companies offers to sell carbon offsets?
4. What is the quality of the carbon offsets sold?
5. How do the carbon offset providers calculate the price?
6. What prices would be calculated for example routes of Austrian Airlines?
7. Does voluntary carbon offsetting actually help to reduce emissions?
Based on these questions the research question of this diploma thesis is as follows:

Can voluntary carbon offsetting serve as a useful tool for Austrian Airlines to show environmental commitment and reduce the impact of aviation to climate change?

1.3 Relevance

This thesis is a work on demand of the Austrian Airlines AG to address a specific issue especially relevant for this company. The significance of this thesis is founded on the notion that the voluntary carbon market is quite new to providers and consumers and clear regulations, structures and standards are still lacking. In the midst of a decision making process, Austrian Airlines deemed it necessary to acquire a clear picture about the voluntary carbon offsetting. Nevertheless, the voluntary carbon trading market is of relevance also to other companies, as environmental protection becomes increasingly relevant to consumers and governmental action might not be enough to satisfy consumer’s demands in a competing market.

1.4 Research Design

For the composition of this work, the author made primarily use of secondary literature such as books and scientific articles and publications. Internal documents and communication with Austrian Airlines employees gave profound basis for this work. Furthermore, specific publications from governments and regulatory bodies were considered relevant. The internet was considered as a very valuable source for up-to-date information.

1.5 Limitations

Talking about the analysis of carbon offset providers, it should be noted that this study does not display a full picture but rather concentrates on four of the voluntary carbon offset providers in existing in the world wide voluntary carbon market. This analysis has focused on those carbon offset providers, which are relevant in the airline industry or have been chosen already by other airlines and can be considered as exploratory. At the same time it is essential to point out that the author did not conduct a comprehensive due diligence on all different levels but rather intended to provide a clear and understandable analysis of the selected offset providers. Notwithstanding its limitations, this study may offer insight to the whole structure of the carbon market, including the voluntary carbon market, and does suggest some foundations for decision-making of whether to pursue a strategy which includes voluntary carbon offsetting or not.

2 HISTORICAL BACKGROUND

2.1 Political Context

Since pollution does not remain within national borders, environmental concerns must be addressed by the international community. Environmental issues of international solicitude include air pollution, such as the greenhouse effect or acid rain, water pollution like ocean dumping, oil spills, and pesticide runoffs, soil erosion and degradation or extinction of plant and animal species. (Emerson (2004), p. 513) However, it was not always clear, that environmental issues have to be tackled on an international level. The following chapter will lay out the evolvement of an international awareness and intergovernmental collaboration to enforce environmental regulation and fight environmental problems on a common basis.

2.1.1 Stockholm Conference

One of the first official international conventions on environment took place in 1972 in Stockholm under the title “The United Nations Conference on Human Environment”, which is now also widely referred to as the Stockholm Conference. (Engfeldt (2002), n.p.a.). This United Nations (UN) convention established the starting point for further development of international cooperation in environment and sustainable development.

The Report of the United Nations Conference on Human Environment (UNEP (1972a), n.p.a.) lists three main actions that have been taken by the Conference: Namely those are an “Action Plan for the Human Environment”, an “Action Plan” and a “Declaration of the United Nations Conference on Human Environment”. As stated in the Declaration (UNEP (1972b), n.p.a.) “[…] having considered the need for a common outlook and for common principles to inspire and guide the peoples of the world in the preservation and enhancement of the human environment”, the Stockholm Conference was the first intergovernmental meeting, proclaiming a desire and a need to commonly address environmental issues and enforce sustainable development.

After the Stockholm Conference there was a wave of establishment of environmental ministries and agencies in many countries. These environmental ministries, along with newly created non-governmental organizations and intergovernmental organizations on environmental issues, were of particular importance for further carrying on what was agreed on. In addition the formation of the United Nations Environment Programme (UNEP) by the United Nations General Assembly ((UNEP (1972c), n.p.a.) was of particular importance, to promote the results of the Conference. It is furthermore noteworthy that the Stockholm Conference contributed a big part to the development of international law on environmental issues, which is often said to be the biggest success of the Conference. (Engfeldt (2002), n.p.a.)

After the Stockholm Conference was celebrated as a great achievement, “various factors, among them the oil crises, contributed to a certain loss of momentum in the 1970s” as stated by ENGFELDT (ibid.) who served as permanent representative to the UNEP since 1993 and for the Ministry of the Environment in Stockholm since 1998 (United Nations Chronicle (2002), n.p.a.). One could see a lack of consistency and coherence between the governments and the national ministries on environment a one of the possible causes for this decline of progress. In reply to this diminishing enthusiasm the UN General Assembly established a special independent Commission, under the chairmanship of Gro Harlem Brundtland, who was then Prime Minister of Norway. The conclusions of this “Brundtland Commission” were published in 1987, which is generally known as “The Brundtland Report” or the official title of the report “Our Common Future”. (UN Documents Cooperation Circles (1987), n.p.a.) The Brundtland Commission seems to have fulfilled its purpose: Along with positive outlooks for the economy and serious emerging threats for the environment the interest on sustainable development rose again. It created new awareness and prepared the way for future summits. The Brundtland Report served as a basic document for the Rio Conference, which marks the next milestone for environmental legislation. (Engfeldt (2002), n.p.a.)

2.1.2 Earth Summit Rio de Janeiro

The UN Conference on Environment and Development in 1992 in Rio de Janeiro in Brazil, also just referred to as the Rio Conference or “Earth Summit” was the most obvious direct consequence of the Brundtland Commission’s work. (Dresner (2002), p. 38) Delegates from 172 nations included UN officials, government leaders, members of non-governmental organizations (NGOs) and representatives of businesses, scientific communities and other groups. (Emerson (2004), p. 513)The Earth Summit in Rio resulted in the adoption of five documents, with “The Rio Declaration on Environment and Development” and the Agenda 21 being the key documents. The Earth Summit generated, next to “The Rio Declaration on the Environment and Development”, also referred to as the “27 Principles”, and the Agenda 21, also “The United Nations Framework Convention on Climate Change (UNFCCC)”, “Convention on Biological Diversity” and a “Statement of Forest Principles. (Keating (1993), n.p.a.) As becomes clear later on in this paper, the creation of the UNFCCC can be considered of particular importance, since it turns to be one of the major bodies in international environmental policy making.

As stated by ENGFELDT (2002, n.p.a.), the Rio Declaration represents a delicate balance of principles; among them are common and differentiated responsibility, polluter pays, precaution and liability. The Forest Principles reflected a hard-fought first global consensus on forests, which has since been further developed. Agenda 21 is a detailed blueprint for action into the twenty-first century, with a focus on integrating environment considerations in development, and also covering action at the national level, underlining national responsibility. The following agreement can be mentioned as one of the one of the most remarkable declaration made: The industrial countries consented to the reduction “of the emission of gases thought to cause global warming to 1990 levels by the year 2000”. (Emerson (2004), p. 513)Summing up the development from the Stockholm Conference in 1972 to the Rio Summit in 1992 one can clearly say that the focus shifted from international cooperation on environmental issues as such, to the relationship between environment and development and the statement that economic progress has to be linked to environmental protection (ibid.).

Furthermore, the Commission was also showing the cost of the implementation in order to raise the awareness for the need of additional funds. Most of the countries reinforced their commitment of providing Official Development Assistance ODA of 0.7% of gross national product for official aid. The money may be provided on a bilateral basis from donor to recipient or through an organization like the World Bank or the UN. With adopting the Agenda 21, the governments of industrialized countries are also recognizing the fact that they have to bear bigger burden or fighting pollution as the poor countries produce relatively less pollution. Nowadays, according to the Organization for Economic Co-operation and Development (OECD) (OECD Factbook (2006), n.p.a.), the share of the national income devoted to the Official Development Assistance is a way of showing a countries commitment to international development. The graph below shows that most of the countries were below the target of 0.7% of the gross national product in the year 2004. In the graph the 22 member countries of the Development Assistance Committee (DAC) are displayed.

Figure 1: Net Official Development Assistance (% of gross national income 2004)

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Source: OECD Factbook (2006), n.p.a.

The Rio Conference of 1992 was celebrated a huge success, however, the review five years later was seen as a disappointment. DRESNER (2002, p. 46) explains, that environment and sustainable development “sank down the international agenda”. Review Committees were finding that the commitments have not been fulfilled and agreements have not been carried out and that. The level of financial aid that is provided by the countries was decreasing and progress on climate change or reducing toxic emissions were rather minor. Furthermore a lack of cooperation between the various institutions was found. Other goals like reducing the excessive consumption and production in industrialized countries and issues with regard to social equity and poverty have not improved. Also the final document of the conference was rather disappointing without major breakthroughs, and mainly very shallow formulations that reflect compromise instead of commitment. (Engfeldt (2002), n.p.a.) Another summit, determined to reflect on the achievements should follow in five years later in Johannesburg.

2.1.3 Kyoto Protocol

In December 1997 the UNFCCC, created in 1992 at the UN Summit in Rio de Janeiro, met in Kyoto, Japan. The UNFCCC adopted the Kyoto Protocol, which intended to combat global warming by reducing six greenhouse gases (GHG) in 38 industrialized countries. (Emerson (2004), p. 513) Under the Kyoto Protocol, industrialized countries are required to reduce their emissions of six GHGs on average by 5.2 % below the 1990 level during the first “commitment period” from 2008 to 2012. These six GHGs are CO₂, which is the most important one, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. There are no emission targets for developing countries. (European Union (2005a), p. 1)

2.1.4 Earth Summit Johannesburg

The World Summit on Sustainable Development WSSD or Earth Summit 2002 took place in Johannesburg in South Africa ten years after the summit in Rio de Janeiro. The summits main goal was to again asses the progress on the implementation that has been made since the Rio summit. No new programs were on the table for the Johannesburg summit, the focus was on ensuring the implementation of the existing documents from the Summit in 1992, such as the Agenda 21 or the Convention on Biological Diversity. (Heinrich Böll Foundation (2003), n.p.a.)

2.2 Corporate Responses

2.2.1 Increased Awareness of Environmental Responsibility

Within the world of business the main aim for corporations has historically been to make money and increase the shareholder value. As RIONDA (2002, p. 1) wrote, “corporate financial responsibility has been the sole bottom line driving force.” “One of the enduring legacies of the sustainable development debate of the 1980s has been a quest of greater integration of the economy and the environment” states ECKERSLEY ((1995, p. 1), cited by Lynes (2004, p. 22)). In the last decade, a movement defining broader corporate responsibilities has gathered momentum. Companies show commitment for local communities, for working conditions, for ethical practices and for the environment. This concept is known as corporate social responsibility (CSR), and is comprised of the totality of the corporate financial, social and environmental performance when conduction its business. (Rionda (2002), p. 1) Another definition of Corporate Social Responsibility would be that CSR demands that businesses manage the economic, social and environmental impacts of their operations to maximize the benefits and minimize the downsides. (CSR Network (2007), n.p.a.)

Within the totalitarian concept of CSR environmental management makes up a key part. The concept of an Environmental Management System (EMS) represents a collection of internal efforts at policymaking, planning and implementations (Coglianese/Nash (2001), p. 2). In the early 1990, in the wake of the Brundtland Report (1987) and the much celebrated Rio Conference (1992), governments began adopting neo-liberal economic management philosophies. BAKAN ((2004), n.p.a., cited in Lynes (2004, p. 3) explains that governments, who took a rather regulatory role in the 1970s and 1980s, are putting “the onus” now on businesses to take responsibility for their actions. The concepts of corporate greening and environmental commitment emerged as a new way of managing a firm. LYNES ((2004, p. 7) cites KOEGH and POLONSKY (1998, p. 38)), who deal with corporate greening and its definitions, and states environmental commitment “as both a process and a result through which organizational members display environmental concerns.” An increased awareness of the companies with regard to environmental management can be supported by an OECD report released in 2007. In the report “Business and the Environment – Policy Incentives and Corporate Responses” the OECD (2007, n.p.a.) investigated the role of different policy tools in encouraging clean production strategies. An empirical study undertaken in seven OECD countries (Canada, France, Germany, Hungary, Japan, Norway, and United States) included more than 4000 facilities (OECD (2007), p. 7). The OECD report concluded that overall 39% respondents of the survey stated that they have an EMS.

Figure 2: Percentage of Facilities with EMS

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Source: OECD (2007a), p. 31

Figure 2 implies that the highest percentage of facilities with an EMS can be found in the USA, while Japan shows the maximum number of International Standardization Organization (ISO) -certified EMS. Furthermore, 70% of the facilities reported “that somebody had been explicitly designated as being responsible for environmental matters […]” (ibid., p 31f.). Some implications of the ISO – certification are to be given later.

Companies have discovered various motivators with respect to corporate environmental commitment. LYNES (2007, p. 31) summarized five main motivators: Firstly, financial benefits through reducing cost and increasing efficiency, by cutting resource, use and waste generation. Furthermore, an entity could acquire a competitive advantage over its direct competitors, through the implantation of an environmental management system. Thirdly, image enhancement may serve as a driving force, such as enhancing a positive image in the marketplace. While image enhancement is rather an intrinsic motivator, stakeholder pressures, coming from the outside might also be a main reason for environmental commitment. Pressure could come from customers, industry members, bank and insurance companies or other community groups. As a last motivator, mentioned by LYNES (ibid.), the desire to avoid any delay in regulatory action is stated. Some lines later in this paper, when different mechanisms to encourage corporate greening are explained, regulatory actions and some others of these motivators will be mentioned again.

Referring back to the historical developments of the 1980s and 1990s, ECKERSLEY ((1995, p. 1), quoted by Lynes (2004, p. 22)), maintains the idea that “a significant by-product of this quest [international environmental policy making, note from the author] has been growing interest in the potential of market-based instruments of environmental policy as a supplement, or in some cases, an alternative, to the traditional approach of setting environmental standards by direct legal regulation.” But what are market based instruments in contrast to legal requirements and how can they contribute to environmental protection?

2.2.2 Mechanisms to Encourage Corporate Greening

LYNES (2004, p. 22) classifies three main mechanisms to foster corporate greening: Compliance-based incentives, market-based incentives and value-based incentives.

As mentioned above the traditional form of encouraging corporate greening has been one of compliance regulation and government control, which is here classified as compliance-based incentives. However, governments moved away from that viewpoint, as environmental managements proved to be more and more a complex interplay of many different factors and knowledge from many different sides, such as scientist groups, industry experts, managers or environmental experts is needed. ECKERSLEY ((1995, p. 1), cited by Lynes (2004, p. 24)) explains, that the realization that governments and regulatory bodies cannot alone implement sustainable development and management practices has stimulated the exploration of market-based and mixed instruments.

Market-based incentives, which are also referred to as economic instruments, can be used to strengthen market incentives, reduce compliance costs and provide greater flexibility for businesses (Lynes (2004), p. 24). According to the definition of UNEP (2006, p. 3) “Economic instruments are measures that provide economic incentives for sustainable economic development and disincentives for practices that degrade the environment or deplete natural resources. Economic instruments include charges, pollution taxes, tradable pollution permits, transferable development rights and payments for environmental services, among others.” International Environmental Taxation can be named as a concrete example for a market-based incentive or an economic instrument to encourage corporate greening. This tax could be used to increase the price of the good and generate revenue for its sustainable provision. Such taxes that have already proposed in the past include (ibid., p. 193): An international foreign exchange transaction tax (also know as the Tobin Tax), an international carbon tax on energy fuels or an international airport tax. Another market-based incentive, mentioned by UNEP (ibid. p. 3) are the internationally transferable emission permits. These permits, allocated to pollutants, are tradable across borders. They are established by an international agreement and have been included as an instrument under the Kyoto Protocol. (ibid., p. 190) An own chapter of this thesis is dedicated to the topic of internationally tradable emission permits, as well as the domestically tradable emission permits, such the EU Emission Trading Scheme (ETS), and are to be discussed later in this paper, including a detailed analysis and description.

Along with compliance-based incentives and market-based incentives, which have already been dealt with, LYNES (2004, p. 22) mentioned value-based incentives as a third mechanism to encourage corporate greening, such as voluntary engagements, which is where voluntary carbon offsetting comes into the picture. The emergence of corporate social responsibility and the increasing “privatization of the responsibilities for environmental management” (ibid., p. 25) led to the formation of various voluntary corporate environmental incentives. However, definitions with regard to the classification of voluntary incentives may differ. The UNEP (2006, p. 167ff) deals with voluntary environmental incentives under the broader term of “Economic Instruments”, which was previously classified as market-based incentive. However, in the course of this paper the author will stay with the classification given by LYNES (2006, p. 25). Value-based environmental agreements include voluntary agreements negotiated by companies or groups of parties, and information-based instruments. Information-based instruments can be defined as “Methods of informing the public about how eco-friendly a product is. This can be done by labeling, rating, or other techniques.” (UNEP (2006), p. 168) Rating and labeling with internationally recognized standards, facilitate the identification and implementation of profitable cost cutting opportunities (Gibson (2000), p. 12). Within the last years two main environmental management systems have emerged, that many companies use to manage the environmental effects of the company’s activities. There are basically two relevant systems that can be mentioned here: Eco-management and Audit Scheme (EMAS) and ISO 14001. (Freimann/Walther (2002), p. 2) The ISO 14001 is a worldwide standard privately run by the International Organization for Standardization. ISO (2007, n.p.a.) states that “ISO 14001:2004” is a standard “which gives the requirements for environmental management systems, confirms its global relevance for organizations wishing to operate in an environmentally sustainable manner.” The second environmental management scheme EMAS was introduced by the European Union (EU) in 1995 (UNEP (2006), p. 167) and is run as a state run system. Organizations that are registered with EMAS are legally compliant, run an environment management system and report on their environmental performance (European Commission (2007a, n.p.a.).

Looking at both of these EMSs FREIMANN and WALTHER (2002, p. 2) conducted a comparison study. The researchers concluded that in “the core of the EMS, the structure of the management system, ISO 14001 and EMAS were quite similar. […] Both systems include specific organizational measures to avoid pollution and damages of the environment and intend to improve the environmental performance of a company. They force participating companies not only to implement particular measures (like environmental policy, aims and program) but also to carry out periodical internal checks and external audits by independent auditors.”

The question might be raised why the topic of corporate responses to environmental concerns and the classification of the various incentives to encourage corporate cleaning are relevant for this study about voluntary carbon offsetting? From the author’s point of view, the answer can be given as follows: Trying to put the detailed analysis of voluntary carbon offsetting and its implications into a bigger picture, voluntary carbon offsetting can be clearly identified as value-based incentive, along with other measures such as environmental labeling or reporting.

Summing up this first part on the historical context of corporate environmentalism, The subsequent statements can be made: The historical development of international environmentalism has seen some major events, which have been mentioned earlier in this paper: Stockholm Conference (1972), Brundtland Report (1987), Rio Summit (1992), adoption of the Kyoto Protocol (1997) and the Johannesburg Summit (2002). After having outlined the main milestones in a brief overview the author furthermore points out the corporate responses to international environmental concern and mentions some concepts that have emerged, such as Corporate Social Responsibility or Environmental Management Schemes. Moreover, a classification of different incentives to encourage corporate cleaning is described, with some examples given for compliance-based incentives, market-based incentives and value-based incentives. Within these three classifications the tool of voluntary carbon offsetting, which is the main topic of this thesis, comes in when speaking about value-based incentives for fostering corporate greening.

The next chapter will, in order to give a complete picture about the relevance of the voluntary carbon offset market for the aviation industry, outline the main implications and interdependences of environment and aviation, along with the environmental impact of the aviation industry.

3 AVIATION AND ENVIRONMENT

3.1 Emissions from the Transport Sector

As we have seen in the first chapter of this thesis, climate change and the need of CO₂ emissions reductions has been the topic of international discussion and agreements since the 1970s, and more seriously since the 1990s. The transport sector climate change policy was explicitly addressed at the G8 Summit in 2005 in Gleneagles (OECD (2007), p. 18; G8 Gleneagles (2005), n.p.a.).

Recently CO₂ emissions from the transport sector have attracted the attention of policy makers, transport industry and public. The main reason for this new attraction is the strong growth in this sector, as stated by the OECD (2005), p. 12): “More recently, transport has been the fastest growing sector in terms of emissions.” According to the International Energy Agency (IEA (2004), p. 22) worldwide CO₂ emissions from fuel combustion, across all sectors, increased by 21% between 1990 and 2003. For OECD (2005, p. 12) countries the increase was 16%, with an annual average growth rate of 1.2%. Looking at the growth of CO₂ emissions from the transport sector, the rate is even higher. During the same time period, between 1990 and 2003, transport sector emissions grew by 31% worldwide.

Looking at the percentage share of CO₂ emissions from fuel combustion of the world’s transport in 2003 in Table 1, the International Energy Agency (IEA (2005),p. 23) presents the following picture: Out of the world’s total CO₂ emissions from fuel combustion in the year 2003 24% can be allocated to the transport sector. Taking only the OECD countries into account, the percentage share of the transport sector goes up to 30%.

Table 1: Transport’s Share of CO₂ Emissions

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Source: adapted from IEA (2005), p. 23

The IPCC (2007, p. 36) states in its Fourth Assessment Report on Climate Change, that “Global GHG emissions due to human activities have grown since pre-industrial times, with an increase of 70% between 1970 and 2004.” According to the calculation of the IPCC (ibid.) the transport sector accounts for a share of 13.1% of all the global anthropogenic GHG emissions, as can be seen in Figure 3.

Figure 3: Global GHG Emissions

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Source: adapted from IPCC (2007), p. 36

Looking only at CO₂ emissions of the global transport sector, transportation, including road, rail, inland waterways shipping and air transport, accounted according to the Emissions Database for Global Atmospheric Research (cited in Association of European Airlines (2007a); p. 3) for 19.2% in 2000. If this number is further split down, the emissions from aviation contribute about 2% of all anthropogenic CO₂ emissions. (Sausen/Schumann (2007), p. 1; ACA (2007), p. 1). The Emissions Database for Global Atmospheric Research (cited in Association of European Airlines (2007a); p. 3) presents the same picture and states a 2.2% of all global CO₂ emissions are caused by aviation.

Figure 4: Global Transport CO₂ Emissions by Mode

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Source: Emissions Database for Global Atmospheric Research, (cited in AEA (2007a), p. 3)

According to the OECD (2007, p. 90) there is increasing concern about the growing share of aviation emissions of the total transport sector emissions. The share in total transport emissions is relatively small; however, rates of growth are relatively higher. So, as suggested earlier, the high rates of growth are not only causing concern in the total transport industry, they do so even more in the aviation sector. The first major study on the impact of GHG emissions and other emissions specifically from aviation was released by the IPCC in 1999. This report attracted a lot of attention to the climate impact of aviation. However, it has been receiving increased attention, in particular, since the European Commission ((European Commission (2006a), n.p.a.) published a concept for including aviation into the European ETS in 2006. As SAUSEN and SCHUMANN (2007, p. 1) imply, the climate impact of aviation has been receiving even more additional attention since the IPCC (2007) published its Fourth Assessment Report on Climate Change in 2007. This Fourth Assessment Report very much strengthened the assumption that global warming is caused by human activity: “There is very high confidence that the global average net effect of human activities since 1750 has been one of warming […]” (ibid., p. 37). It is further stated that “The largest growth in GHG emissions between 1970 and 2004 has come from energy supply, transport and industry, while residential and commercial buildings, forestry (including deforestation) and agriculture sectors have been growing at a lower rate.” (ibid., p. 36)

When raising the question how much transport should contribute to the worldwide emissions reductions the OECD (2007, p. 9) concludes that by far the largest emission reductions are expected to be achieved in power and heat production. “Transport […] is therefore expected to contribute correspondingly less to overall emission reduction strategies. “

Talking about emission reduction policies for the aviation sector, the UN International Civil Aviation Organization (ICAO) was delegated the responsibility to develop a strategy to reduce emissions from international aviation. So far ICAO countries have not agreed on a common GHG reduction policy. The endorsement of the concept of an open, international emissions trading system has been the only common statement so far. (ibid. p. 14) Further examination on the development of an emission trading scheme and the inclusion of the aviation sector in such a scheme will be made in chapter 4 of this thesis, when emission management and offsetting for airlines will be dealt with in greater detail.

3.2 Relevant Aviation Emissions

The IPCC (2007, p. 36) confirms, that the main impact of man-made emissions to climate change is made up by carbon dioxide (CO₂) emissions. However, aviation also emits other gases and particles affecting climate change (Sausen/Schumann (2007), p. 1).

During flight, aircraft engines emit carbon dioxide, oxides of nitrogen, oxides of sulphur, water vapor, hydrocarbons and particles. These emissions alter the composition of the atmosphere in several of ways, both directly and indirectly. (RC (2002), p. 9) This statement was first explicitly made by the IPCC (1999, p. 3), where it says in their Special Report in Aviation and the Global Atmosphere: “Aircraft emit gases and particles directly into the upper troposphere and lower stratosphere where they have an impact on atmospheric composition. These gases and particles alter the concentration of atmospheric GHGs, including carbon dioxide (CO₂), ozone (O3), and methane (CH4); trigger formation of condensation trails (contrails); and may increase cirrus cloudiness - all of which contribute to climate change.” The following types or air emissions released by an aircraft could be identified (Lynes (2004), p. 54; AEA (2007a), p. 1): Carbon dioxide (CO₂); methane (CH4); fluorocarbons (HFCs, PFCs); nitrous oxides (N2O); sulphur hexafluoride (SF6). These are all GHGs whose rising concentration in global atmosphere are, according to the IPCC (1999, p.2) likely to cause an average rise in temperature. Additionally the condensation trails (contrails) occurring during a flight might have some impact on the atmosphere. (Lynes (2004), p. 54)

Emissions from GHG emissions from aviation are unique, compared to the rest of the transport sector, because the majority of emissions occur above the earth’s surface in an altitude range of 9 to 13 kilometers. (OECD (2007), p. 90) A report by the Royal Commission on Environmental Pollution (RC (2002), p. 9ff.) supports this idea and further states that “The impact of aircraft emissions can be very different depending whether they are in the upper troposphere or the lower stratosphere.” This has the result that they have a considerably different effect on climate mechanisms. (OECD (2007) p. 90) The IPCC estimated in their Special Report on Aviation and Environment that the overall impact on global warming of aircraft could be between two and four times that of their CO₂ emissions alone, though there is no scientific consensus about the size of this multiplier. The EU, for instance, assumes a factor of two. (n.a.a. (2006a), n.p.a.) The OECD (2007, p. 90) maintains that scientific understanding on the effect on climate change is still improving.

3.3 Growth of Aviation

As has been mentioned the growth of the aviation industry and its share in total emission is an issue of major concern. Air transport has experienced rapid expansion since the Second World War. Scheduled domestic and international air traffic has increased from some 9 million passengers in 1945 to over a billion and a half in 1999. On average, passenger traffic has grown at about 10% annually. The growth rates, however, varied significantly from very high, exceeding 20% a year in the first post-war decade, to moderate growth rates in recent decades, as the air transport market has become more mature. (ICAO (2001), p. 1)

Figure 5: Aviation Traffic Development

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Source: ICAO (2001, p.18)

The following Figure 6 displays that there has been negative growth in only two instances: in the year of the second Gulf War in 1991 and in 2001 after the terrorist attacks on the World Trade Centre in New York.

Figure 6: International Passenger Growth and Global GDP

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Source: IATA (2007a)

As mentioned earlier, one of the big concerns about the CO₂ emissions from aviation is their high growth rate. The Economist (n.a.a. (2006a), n.p.a.) introduces an article in the print edition with: “Aviation is a relatively small source of the emissions blamed for global warming, but its share is growing the fastest.” What are the projections for global aviation growth and which speed of growth can be expected?

In 1999 the IPCC states that “Global passenger air travel […] is projected to grow by about 5% per year between 1990 and 2015” (IPCC (1999), p. 4). The ICAO has a similar projection: Passenger traffic worldwide, according to the ICAO (2001, p. 2), is projected to grow for the period 1997-2020 at an average annual rate of 4.5%. The International Air Transport Association’s (IATA) latest forecast shows that passenger and freight demand growth will continue to boost airline revenues over the next years until 2011. Compared to 2006 growth levels, international passenger growth is expected to slow slightly, and domestic passenger growth to improve slightly, led by strong growth in the Chinese and Indian domestic markets. (IATA (2007a), p. 1)

Along with a growth in passenger traffic also the emissions from the aviation industry are growing. According to the European Conference of Ministers of Transport the growth in international and domestic air transport CO₂ emissions shows a steady upward trend. The OECD (2007, p. 90) states an annual average growth rate of CO₂ emissions from air transport of 3.2%, in the period between 1996 and 2000. According to the European Federation for Transport and Environment (2007, p. 2) emissions from international aviation have risen by 90% between 1990 and 2005. In 2005 they accounted for 6.3% of the total emissions, and 23% of transport emissions. In 1990, these figures were 3.8%. The European Federation for Transport and Environment also confirms that Emissions from international aviation have been growing at higher rates than those of transport as a whole.

Figure 7: Share of Aviation of Total EU27 CO₂ Emissions

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Source: European Federation for Transport and Environment (2007, p. 3)

The preceding figure presents the evolution of international aviation CO₂ emissions since 1990 and its contribution to total EU-27 CO₂ emissions. Emissions from international aviation grew 90% between 1990 and 2005. This growth rate concludes at an annual growth of 4.4%, which confirms the figure given earlier by the ICAO (2001, p. 2). The increase between 2004 and 2005 was even higher at 5.1%. The European Federation for Transport and Environment (2007, p. 3) suggests that “the contribution of the sector to global emissions continues to increase rapidly.”

4 THE CARBON TRADING MARKET

The international carbon trading market has shown increased relevance in terms of values and volumes traded. (World Bank (2007), p.10) With a specific focus on the opportunities under the Kyoto Protocol and the implementation of the EU ETS, the following chapter will lay out how the carbon trading market is structured and what the different levels of execution there are.

4.1 Kyoto Protocol Market

The Kyoto Protocol, building on the UNFCCC, was adopted by consensus at the third session of the Conference of the Parties (COP3) in December 1997. The protocol sets legally binding targets and timetables for cutting the greenhouse-gas emissions of participating industrialized countries, also referred to as Annex I Parties, for the period from entering into force (2005) until 2012. In 2002 all fifteen then-members of the EU ratified the Kyoto Protocol. The Protocol (UNFCCC (2004), n.p.a.) entered into force in February 2005, 90 days after ratification of the document by the Russian Federation. (ibid. (2007), n.p.a.)

The developed countries which signed the Protocol commit to reducing their collective emissions of six key GHGs by a group target of at least 5 %. The individual country targets, shown in Table 2, are defined in the Annex B in the Kyoto Protocol and vary from nation to nation. The EU committed to an overall target of 8% and distributed different rates to its member states internally, which range from a 28% reduction by Luxembourg to a 27% increase by Portugal. Each country has to come up with a National Allocation Plan (NAP) to assigned the CO₂ tons to its companies. Of all the industrialized countries the Kyoto Protocol has not been ratified by the USA, Australia, Lichtenstein and Monaco. (ibid.)

Under the Protocol six GHGs are covered, the emission target will be calculated as an average over five years from 2008 to 2012. Cuts in the three most important gases carbon dioxide (CO₂), methane (CH4), and nitrous oxide (N20) will be measured against the base year of 1990; the cuts of three long-lived industrial gases (hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6)) can be measured against either a 1990 or 1995 baseline, which is subject to each country’s decision. (European Union (2007), n.p.a.)

Table 2: Annex B Countries in the Kyoto Protocol

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Source: adapted from UNFCCC (2007), n.p.a.

To achieve their targets, Annex I Parties must put in place domestic policies and measures. The Protocol provides an indicative list of policies and measures that might help countries to achieve their goals. Furthermore, the protocol defines detailed rules, which govern the extent to which emissions and removals from certain sectors can be counted under the Protocol, and which activities in which sectors are eligible. All of these rules for the implementation of the Protocol are set out in the Marrakesh Accords. (UNFCC (2007), n.p.a.)

4.1.1 Mechanisms under the Kyoto Protocol

Frequently asked questions

What is the main objective of this document?

The author's main objective is to provide a clear analysis of the voluntary carbon trading market. It aims to inform the reader about historical developments in environmental policy making and how corporations became increasingly involved in environmental protection.

What key questions does this document aim to answer?

The document seeks to answer questions such as: What is the core structure of the voluntary carbon market? How does the voluntary carbon market differ from the regulatory market? Which companies offer to sell carbon offsets? What is the quality of the carbon offsets sold? How do carbon offset providers calculate their prices? What prices would be calculated for example routes of Austrian Airlines? Does voluntary carbon offsetting actually help to reduce emissions?

What research question is the document based on?

The research question of this diploma thesis is: Can voluntary carbon offsetting serve as a useful tool for Austrian Airlines to show environmental commitment and reduce the impact of aviation to climate change?

What is the relevance of this study?

The thesis is relevant due to the novelty of the voluntary carbon market and the lack of clear regulations, structures, and standards. Austrian Airlines commissioned the study to gain a clear picture of voluntary carbon offsetting before making strategic decisions. The topic is also relevant to other companies as environmental protection becomes increasingly important to consumers.

What are the limitations of the study?

The analysis of carbon offset providers does not provide a complete picture of the entire voluntary carbon market but concentrates on a selected few. The study focused on providers relevant to the airline industry or those already chosen by other airlines and can be considered exploratory. A comprehensive due diligence on all different levels has not been done.

What is the significance of the Stockholm Conference (1972)?

The Stockholm Conference was one of the first official international conventions on environment and established the starting point for further development of international cooperation in environment and sustainable development.

What was the outcome of the Earth Summit in Rio de Janeiro (1992)?

The Earth Summit resulted in the adoption of five documents, including "The Rio Declaration on Environment and Development" and the Agenda 21. It also led to the creation of the UNFCCC, Convention on Biological Diversity, and a Statement of Forest Principles.

What is the Kyoto Protocol?

The Kyoto Protocol, adopted in December 1997, aims to combat global warming by reducing greenhouse gas emissions in participating industrialized countries (Annex I Parties) during the period from 2005 to 2012.

What happened at the Earth Summit in Johannesburg (2002)?

The Earth Summit in Johannesburg aimed to assess the progress made on the implementation of agreements from the Rio Summit in 1992, such as the Agenda 21 and the Convention on Biological Diversity.

What is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility (CSR) demands that businesses manage the economic, social, and environmental impacts of their operations to maximize the benefits and minimize the downsides.

What are Environmental Management Systems (EMS)?

An Environmental Management System (EMS) represents a collection of internal efforts at policymaking, planning, and implementation within a company concerning environmental issues.

What are the different mechanisms to encourage corporate greening?

There are three main mechanisms: Compliance-based incentives, market-based incentives, and value-based incentives.

What are market-based incentives?

Market-based incentives, also known as economic instruments, provide economic incentives for sustainable economic development and disincentives for practices that degrade the environment or deplete natural resources. Examples include charges, pollution taxes, and tradable pollution permits.

What are value-based incentives?

Value-based incentives, such as voluntary engagements, are where voluntary carbon offsetting comes into the picture. Value-based environmental agreements include voluntary agreements negotiated by companies or groups of parties, and information-based instruments like eco-labeling.

What are the two main environmental management systems that companies use?

The two main systems are Eco-management and Audit Scheme (EMAS) and ISO 14001.

What percentage of global GHG emissions does the transport sector account for?

According to the IPCC (2007), the transport sector accounts for approximately 13.1% of all global anthropogenic GHG emissions.

How much do aviation emissions contribute to all anthropogenic CO2 emissions?

Emissions from aviation contribute about 2% of all anthropogenic CO2 emissions.

What are the relevant aviation emissions?

During flight, aircraft engines emit carbon dioxide, oxides of nitrogen, oxides of sulphur, water vapor, hydrocarbons and particles.

How is the carbon trading market structured?

The carbon trading market is structured around the Kyoto Protocol and the EU Emission Trading Scheme (ETS). The Kyoto Protocol defines mechanisms such as Joint Implementation (JI), Clean Development Mechanism (CDM), and Emissions Trading to achieve emission targets.

What are the mechanisms under the Kyoto Protocol?

The three mechanisms created by the UNFCCC are Joint Implementation (JI), Clean Development Mechanism (CDM) and Emissions Trading.