B.C.’s ‘Carbon Neutral’ Controversy

The bet was that collecting a carbon tax and investing in offsets would create a whole new “green economy.” Five years into B.C.’s experiment in legislated carbon neutrality, where’s the payback?

Imagine a vast green swath of pristine forest, wetland and lakefront, where the owner gets paid to simply let the trees grow. Like a green ATM, the forest dispenses money. Such a place exists today in B.C., across 55,000 wild hectares in the Kootenays. It’s called Darkwoods, and when the project was announced in June last year it was the largest carbon-offset forestry deal ever forged in North America. The Nature Conservancy of Canada, which had bought the land in advance of the deal, earned over $4 million on the sale of carbon offsets.

From concept to close, the agreement took more than three years to finalize, during which time a small group of highly specialized project developers, verifiers and auditors set to work putting a value on the carbon stored in the Darkwoods forest. The carbon stored in the leaves, wood and roots of the trees was ultimately packaged into financial instruments known as carbon offsets, in effect putting a dollar value on each tonne of carbon stored in the trees.

Darkwoods is one of about 20 carbon-offset projects created in B.C. to date, many of which have been made possible by legislation that required the B.C. public service to be “carbon neutral” by 2010. And while this legislation has lowered emissions and nurtured the growth of a made-in-B.C. industry specializing in creating carbon offsets, it has also stirred up controversy that refuses to go away.

What exactly is a carbon offset? Darkwoods offers an example that sheds some light on this arcane concept. If a polluter releases greenhouse gases into the atmosphere, it can “offset” those emissions by paying to guarantee that an equal amount of carbon remains stored safely somewhere else, in this case, in Kootenay forests protected for this express purpose. While the polluter may not have actually reduced its own emissions, buying a Darkwoods carbon offset guarantees an equivalent amount of carbon has been stored somewhere else. Offsetting emissions by contributing to Darkwoods lowers B.C.’s total contribution to global climate change, the theory goes, because the geographic location of the emissions saving is irrelevant, as long as the project creates real and permanent reductions in the quantity of greenhouse gas emissions entering the atmosphere.

B.C. is at the forefront of this carbon-offset “industry” – a cluster of emerging expertise required to evaluate, measure, audit and validate carbon offsets – largely because of legislation enacted in 2007 that requires the B.C. public service to reduce its carbon emissions to zero. Getting to zero is largely an accounting exercise, where public bodies like schools and hospitals must first reduce their real emissions from such sources as paper and heating as much as they can, and then pay to offset the rest. And while it is impossible to run a school or hospital without burning fossil fuel, legislated “carbon neutrality” is technically possible if the public sector can counter the emissions it cannot eliminate by buying offsets.

To make these offset purchases possible, the Pacific Carbon Trust, a B.C. Crown corporation, was hastily created in 2008 to find and sell the carbon offsets needed. (The legislation specified that all offsets have to originate in B.C.) The trust would then take the public money spent on offsets and reinvest it outside of government on greenhouse gas reduction projects across B.C. to help meet ambitious Campbell-era legislated emission targets requiring the province to lower its total greenhouse gas emissions by a full third from 2007 levels by 2020. (Carbon-neutral government was intended as one of the ways B.C. hoped to lower its emissions to hit these overall, province-wide emission targets.) In the process, the Pacific Carbon Trust would stimulate the growth of a B.C. private-sector industry, giving the province a head start to becoming a world centre of a new industry.

But four years after the trust was created, public-sector carbon neutrality has ignited a firestorm of criticism fanned by the likes of Independent MLA for Cariboo North and former NDP forestry critic Bob Simpson, who has gone as far as tabling a private member’s bill aimed at repealing mandatory carbon neutrality. “Carbon-neutral government is nonsense,” Simpson told BCBusiness in late February. “They’re forcing public-sector entities with fixed budgets to pay from their operating budgets back to this Pacific Carbon Trust; meanwhile, the government’s new industrial strategy is going to put emissions through the roof.”

This, despite the fact that, on paper at least, the Pacific Carbon Trust has achieved results. In June 2011, B.C. announced it was the first public service in North America to declare carbon neutrality, thanks to the nearly 730,000 tonnes worth of carbon acquired by the trust and then sold in the form of offsets to government for just over $18 million. And true to its founding vision, the Pacific Carbon Trust has nurtured the growth of a sophisticated cluster of private-sector project developers, validators, verifiers and associated expertise. “We started the company with little more than an empty office, no staff, a clear mandate and good support from the government,” says Scott MacDonald, CEO of the Pacific Carbon Trust. “Over the last three years we’ve been quite successful in achieving our mandate.”

But these successes have not stopped Premier Christy Clark from imposing a review of most of Gordon Campbell’s North America-leading climate policies, including the trust and the mandated carbon-neutral government. And while Clark insists she is taking the climate-action file of her predecessor seriously, she has simultaneously launched a new “B.C. Jobs Plan” economic agenda anchored by mine expansion, carbon-intensive natural gas and liquefied natural gas development, which threatens to jeopardize B.C.’s legislated goal of reducing its emissions – the very targets carbon-neutral government and the trust, among other measures, were created to achieve.

The Pacific Carbon Trust’s origins can be traced back to Gordon Campbell’s unlikely climate conversion in 2006. Convinced that B.C. and North America would take a massive GDP hit if it did not act quickly against human-caused climate change, Campbell whipped his government into action. In the space of about a year, a flurry of legislation was passed – around 10 pieces in all – transforming B.C. from a climate-action laggard to a North American leader. At the heart of the plan were legally binding targets requiring B.C. to cut provincial greenhouse gas emissions by 33 per cent by 2020 compared to 2007 levels, and by 80 per cent by 2050. Those requirements remain in force today.

To begin the task of meeting these targets, a revenue-neutral carbon tax was introduced, as well as a plan to join a California-led regional cap-and-trade system that would see B.C. cap the allowable emissions of its biggest polluters.

But it was the introduction of carbon-neutral government that pushed both the Pacific Carbon Trust and B.C.’s nascent cluster of private-sector carbon project developers, auditors, verifiers and enablers into existence. To lower their greenhouse gas emissions to zero, school districts, Crown corporations, hospitals and most other government bodies would first carefully measure their energy use from buildings, fleets, equipment and paper, then reduce them as much as possible with the help of $75 million in government funds. The last big step was to pay the Pacific Carbon Trust cash to offset every tonne that remained.

Instead of imposing on the public service the Herculean task of sourcing B.C. carbon offsets – which, for the most part, did not exist yet – the Pacific Carbon Trust was given a monopoly over sourcing and selling carbon offsets to government. Scott MacDonald, a former east Vancouver schoolteacher who rose through the ranks of the Ministry of Education all the way to assistant deputy minister, was recruited as CEO. He reports that the learning curve was steep from day one. “When we first started this naively three years ago, we thought we would be able to hang out a shingle and say we are buying offsets and have a surplus of product showing up at our door to buy,” says MacDonald. “We quickly found that wasn’t the case.”

The original intention was that the Pacific Carbon Trust would become a government procurement agent, leaving the development of projects and the actual creation of offsets to existing and emerging private-sector companies. At the time, the most common types of projects fit three basic descriptions: forest carbon-sequestration projects like Darkwoods; fuel switching, where a less carbon-intensive fuel is substituted for common fossil fuels; and energy efficiency, where some new innovation reduces energy needs, like insulating the windows of energy-intensive greenhouse vegetable-growing operations.

MacDonald and his colleagues at the trust soon found themselves investing increasing effort in writing and clarifying the rules (known as “protocols”) for creating offset projects in B.C., educating the industry and hand-holding to encourage companies with potential projects to connect to the needed expertise and conform to the quality standards set out by B.C.’s offset regulations.

The long lead times and upfront investment required on behalf of the private sector to finalize projects emerged as a problem, particularly after the economic downturn in the fall of 2008. Getting a project from conception to completion can take anywhere from a year to two years. Those behind the project must develop a suitable methodology for creating the offset project, akin to a recipe book or set of rules. A third-party validator ensures that the proposed carbon offsets are unique, additional (not the result of business as usual), verifiable, permanent, real and measurable. Once validated, the project can move forward. A third-party verifier must then confirm the quantity of offset tonnes created by the project and these offsets are then posted on a registry, which tracks the movement of the offsets. Once all those steps are completed, carbon offsets (measured in tonnes) are ready for sale. Many projects do not make it to completion.

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Darkwoods was a huge deal for the fledgling Pacific Carbon Trust. This single source of offsets provided more than half of the 729,782 tonnes worth of carbon offsets needed in 2010 by the public sector to offset its emissions and to make it carbon neutral on paper. This reliance on a single project underscored the need for the trust to diversify its offset sources beyond forest sequestration, notably from projects involving energy efficiency and fuel switching.

To diversify its portfolio further and nurture B.C. as a leader in this industry, MacDonald says, the Pacific Carbon Trust has pursued projects that haven’t been attempted anywhere else. He is particularly excited about the trust’s plan to buy carbon offsets from a project where novel technologies will be used to track the fuel consumption of big diesel transport trucks. The project was led by the newly formed Carbon Offset Aggregation Cooperative of B.C., which owns a carbon protocol methodology (or set of accepted rules) for calculating, reporting and selling carbon offsets from “efficiencies” in industrial vehicles. Private trucking companies can join the co-op and track the individual fuel usage of every vehicle; meanwhile, a program of improved driving techniques, aerodynamics and mechanical maintenance is implemented to save fuel. Members of the co-op save cash on fuel, there are fewer emissions going into the atmosphere and each member receives a dividend based on the offsets sold.

B.C.’s pine-beetle-ravaged Interior is another area that is expected to yield opportunities for carbon-offset projects, says David Rokoss, director of compliance markets at Vancouver-based offset developer Ecosystem Restoration Associates Inc. In particular, Rokoss says, there is big potential for fuel-switching projects, where carbon credits can be earned by transitioning from fossil fuels such as diesel to beetle-killed “biowaste.” And in late January this year, the B.C. government initiated a plan to make carbon offset revenue available to private-sector companies and First Nations as an incentive to replant beetle-degraded lands in the B.C. Interior.

The Pacific Carbon Trust notes that it does not just hand public money to the private sector: a trust spokesperson told BCBusiness that the projects it has invested in to date have cost $300 million in private capital to complete. Every dollar the trust contributes through the purchase of offsets spurs an average of $8 in private-sector investment.

James Tansey, CEO and co-founder of Offsetters Clean Technology Inc., which developed the Interior truck-logger project, says the Pacific Carbon Trust and the market created by mandatory carbon neutrality have been a huge boon to B.C.’s cluster of growing private-sector carbon-offset expertise. “That investment by the government in building that initial market has created the most sophisticated and well-developed high-quality carbon market in North America by far,” he says. “Nobody else has the kind of supporting industries around it, or the diversity of offset projects, anywhere in North America.”

Yet with these gains have come significant costs to the B.C. public service that provided the initial captive market. In 2010 the public sector paid $18.2 million for carbon offsets. School districts were among the hardest hit, including Surrey ($496,892), Vancouver ($406,094) and Richmond ($182,387).

In the case of the Darkwoods project, the Canadian Centre for Policy Alternatives conducted its own research and concluded that the Pacific Carbon Trust acquired the offsets for about $5.70 a tonne and charged the public service – that are legally bound to buy them – $25 a tonne. The trust will not reveal specific figures, citing competitive and contractual restrictions, but says these numbers are incorrect and adds that it returns any surplus to the public sector to support energy efficiency.

MLA Bob Simpson reserves much of his ire for companies such as EnCana Corp., which sold 84,000 tonnes of carbon offsets to the Pacific Carbon Trust in May 2011 from a northeast B.C. offset project that reduced emissions from routine gas flaring. If B.C. were serious about fighting climate change, says Simpson, it would not focus on emissions from the public sector, which comprise less than one per cent of B.C.’s total emissions: “The emissions that are the problem are in the government’s industrial strategy.”

The fix Simpson proposes in his private member’s bill is simple: keep the Pacific Carbon Trust, but repeal the legislated carbon-neutral government that forces schools and hospitals to pay for offsets developed to benefit the private sector. (Simpson concedes, however, that his bill will have died by the time the Legislature adjourns for the summer at the end of May.) He draws inspiration from Alberta, where the biggest emitters pay $15 a tonne, which goes into a technology fund used to finance new carbon-alternative technology. Simpson says B.C.’s biggest polluters should be forced to do the same, particularly to deal with B.C.’s so-called non-combustible “process emissions” from such activities as gas flaring and cement manufacturing; these comprise up to 25 per cent of B.C.’s total greenhouse gas emissions from all sectors, and are currently not covered by any cap or tax. Put a cost on those emissions, Simpson says, and that money could be paid directly into the Pacific Carbon Trust, which in turn could give it back to industry to reduce emissions in novel ways.

Hadi Dowlatabadi, a professor at UBC’s Institute for Resources, Environment and Sustainability, has an even simpler idea: “Why not just regulate this stuff? I don’t see why you have to use public money or market forces to address [emissions] at all. With regulation, you can say natural-gas production, or whatever, must have the following carbon footprint, full stop. Tell them to internalize all their costs. Why should the Pacific Carbon Trust pay for it by taking money from the public sector?”

On the latter question, the B.C. government is open to change. Environment Minister Terry Lake told BCBusiness he understands public concern about public dollars from schools and hospitals going to the Pacific Carbon Trust and the private sector. He says the B.C. government plans to put a “firewall” between public and private-sector money by creating a pool of cash that the public sector can access for its own energy-efficiency projects. “The challenge,” he says, “is to find a pool of money that the public sector, particularly school boards, could access so that they have the extra capital to reduce greenhouse gas emissions.”

There’s also room for improvements to the Pacific Carbon Trust. “We need to look at the price we’re charging for those offsets,” says Lake. He’s particularly concerned that there might be a significant difference between what the trust is charging the public sector for offsets and what it is paying the private sector to buy those offsets. “If it’s a wide gap, let’s narrow that gap by reducing the cost of the carbon to the public sector,” he says.

Improvements are needed, but what has been lost in the discussion, says Lake, is the fact that B.C.’s public sector has made enormous reductions in its greenhouse gas emissions since the carbon-neutral policy emerged, and that in turn will continue to net big savings from reduced energy costs. The province, to date, has spent $75 million to bankroll 247 energy-saving projects across the public sector to get emissions down, and once they’re completed the projects are expected to reduce carbon output by over 36,000 tonnes, create 500 jobs and save organizations about $12.6 million in annual energy costs.

And one thing that will not change, says Lake, is B.C.’s legislated emission targets, the underlying reason the Pacific Carbon Trust and the goal of a carbon-neutral government were created in the first place. But even as he says this, a sweeping government review of Gordon Campbell’s climate-action legacy moves forward behind the scenes, amid visions of pipelines, open-pit copper mines and new shale-gas plays.

Considering the gargantuan new greenhouse gas emissions on the industrial horizon and concerns about B.C. competing in a world largely unconstrained by serious climate policy, it’s hard to see how the targets will be anything but aspirational once the smoke clears.

“The targets are not under review,” Lake repeats when pressed on the challenges of hitting B.C.’s climate goals. “2020 will come fast, but it’s still eight years away.”