Worlds apart, but the future is balanced between them

Suddenly, UK companies want to finance environmentally friendly initiatives in developing countries. Either business leaders have turned green campaigners, or we are seeing the rise of the next major global commodity - carbon

Khayelitsha, on the outskirts of Cape Town, is the third-largest township in South Africa. It was set up in the 1950s when apartheid laws banned black people from living in the cities. Unwittingly, it now finds itself on the front line of a different conflict: Tony Blair's crusade against global warming.

British government ministers had earmarked an environmentally friendly housing project in the township as a way of making the UK presidency of the G8 last year "carbon neutral". The Government would cancel out the 2,700 tons of carbon emissions resulting from the presidency by investing in a scheme to kit out 2,230 homes in the township with solar panels and roof insulation. But after all the rhetoric, the project is running one year behind schedule, and only 10 homes have so far been refitted.

Organisers complain that it took far longer than expected to get their plans approved by the understaffed UN body that monitors these carbon offsetting projects. The South African management company, Agama Energy, blames politicians for requiring them to source the materials and labour for the project locally. Being socially as well as environmentally responsible is too ambitious, says Agama's managing director, Glynn Morris.

It is not just governments that invest in projects such as this. A growing number of companies - some more enthusiastically than others - are adopting carbon offsetting and encountering similar problems to those highlighted by the Khayelitsha initiative. They are looking at ways not just of reducing their own energy consumption but of investing in unrelated, renewable energy projects, usually overseas, to cancel out the pollution they make at home. Their critics claim they are using carbon offsetting as a way to avoid having to cut their own levels of pollution.

So what's behind companies' sudden interest in climate change - and can carbon offsetting actually work?

A committee of MPs last week called on the Government to tax the airline industry's carbon emissions.

Unlike motorists, the aviation industry in the UK is not subject to a fuel tax (petrol is taxed, but not aviation fuel), and now emits twice as much carbon as it did in 1990. According to the United Nations Framework Convention on Climate Change (UNFCCC), the UK transport sector - which includes only domestic flights - accounted for a fifth of total UK carbon emissions between 1990 and 2003. In comparison, power stations were responsible for just under half, but the aviation industry is more visible and an easier target for politicians.

Jonathan Shopley, chief executive of the Carbon Neutral Company, which helps companies reduce and offset their emissions, says airlines realise some sort of tax on pollution is inevitable. Some aviation companies are already privately looking at ways of offsetting their emissions in preparation for when regulators start clamping down, he says.

Admittedly, some of these attempts are half-hearted. British Airways, for example, allows passengers to make their flights carbon neutral by paying an extra surcharge when they purchase their tickets; the money raised is used to fund carbon-offsetting schemes. But the surcharge is not heavily marketed.

For those companies that produce less pollution than airlines, it is much easier to go "carbon neutral". The broadcaster BSkyB announced in May that it had become carbon neutral, advised by the Carbon Neutral Company. The hedge fund manager Man Group and the HSBC bank have done the same.

Doug Johnston, head of corporate responsibility services at the accountancy firm Ernst & Young, says this is a relatively easy way for office-based businesses to generate good publicity. "It's interesting that the companies that have recently made public commitments about carbon neutrality are those that tend to have a limited carbon footprint themselves."

David Wellington from Climate Care, a consultancy similar to the Carbon Neutral Company, admits that the emissions offset by UK companies in this way is a "drop in the ocean". But the popularity of such schemes has grown hugely in the past five years. Mr Wellington estimates that last year a maximum of 500,000 tons of carbon was offset, compared with around 5,000 tons five years previously. A total of 153 million tons was emitted last year in the UK, according to government figures.

James Cameron, vice-chairman and co-founder of the specialist merchant bank Climate Change Capital, estimates that around €5bn (£3.4bn) is currently being invested in carbon reduction programmes globally. He reckons about three-quarters of this comes from governments and the public sector, and a quarter from the private sector. "But in 10 years' time, carbon will be a major globally traded commodity like oil," he argues.

The biggest incentive for offsetting carbon comes from the much-maligned European Union emissions trading scheme. Introduced last year, the obligatory scheme sets individual caps or allocations on carbon emissions for manufacturers and other heavy industry in all the EU countries. If companies pollute more than this, they have to balance their books by buying in carbon credits from others who have polluted less than their allocations require. The scheme has created a market for carbon, where credits can be bought and sold like any other commodity. But the price of carbon plunged earlier this year when it emerged that most countries - with the exception of the UK - had set allocations for industry that were actually above the companies' carbon emission levels, thus undermining the whole scheme.

To avoid polluting above their allocations, companies have the option of investing in renewable projects overseas that can be offset against their own emissions. Mr Cameron says that many are taking this option because it is cheaper than cutting their own emissions. Climate Change Capital has over $100m of clients' money invested in these projects. The European Commission promises that the next phase of the scheme, from 2008-12, will be much tougher, meaning that more companies will seek out carbon offsetting schemes.

Mr Cameron rejects the criticism that carbon offsetting is cheating - cutting other people's emissions rather than your own. "It doesn't matter where you take out the emissions. A ton of carbon is a ton of carbon wherever it is."

Another argument against mandatory emissions reduction laws, such as the EU trading scheme, is that it damages European competitiveness, particularly against the developing world where these rules do not exist. "It would be completely unreasonable to expect countries where hundreds of millions of people are living on $1 per day to have the same targets as Europe," Mr Cameron says.

But since many of the offsetting projects Western firms are investing in are in countries such as China and India, he believes this will help emerging economies become pioneers in developing clean technologies and so cut their emissions in the long term.

One big challenge for carbon offsetting is accountability and transparency in what is an embryonic but hugely complex process. Information is scarce and not easy to understand. The unit in the UNFCCC that monitors carbon offsetting projects, the Clean Development Mechanism (CDM), has only a couple of dozen staff. There are around 260 offsetting projects registered with the CDM, but another 800 waiting for approval. An official from SouthSouthNorth, one of the agencies working in Khayelitsha, says lack of resources meant it took several years to get their project registered. A spokesman for the UNFCCC admits the CDM does not have the resources to monitor these projects, to make sure they are reducing emissions as they are supposed to. At the moment, they rely on participants' honesty and enthusiasm. No globally recognised and obligatory standard or form of regulation yet exists.

Some of these renewable projects may get built anyway, regardless of whether they received financing for carbon offsetting. Mr Shopley concedes this but argues: "Coal-fired power stations will be replaced in time by low-carbon alternatives. But if we can accelerate the process we should do it."

Despite the teething problems and the doubts - and there are many - carbon offsetting is a novel and creative way of tackling climate change. But the lofty ideals are often let down by bad execution. While mistakes will be made in any new market, these must be ironed out quickly before the public becomes cynical and switches off. Getting the Khayelitsha project off the ground would be a good start.

Carbon Offsetting: The great corporate clean-up: steps being taken to cut emissions

BSkyB

Has introduced "carbon credit cards" for employees, which work like supermarket loyalty cards. Staff earn points for things such as cycling in to the office. The points go towards a prize draw with 10 eco-friendly holidays on offer.

Land Rover

Announced last month it would invest in energy-efficiency and renewable-energy projects up to 2008 to offset more than 750,000 tons of carbon.

British Airways

Passengers can use the airline's website to work out the emissions created by their flight and make an equivalent contribution to carbon-offsetting projects.

Carbon Neutral Company

Allows holidaymakers to make their holidays carbon free. Two years ago around 20 people per month were using this service; now around 100 per week do.

Norwich & Peterborough

The building society offers a "carbon neutral" mortgage, planting 40 trees (eight a year for five years) on the borrower's behalf. "This offsets carbon dioxide emissions from the property against the estimated absorption rate of new trees," says a spokeswoman.