Canadian Carbon Audit Report Delayed Amid Charges Of Bias And Overreach

UPDATED: 16:32 GMT Adds comment from Auditor General’s office

27 March 2013 | By all accounts, Duke Carl von Wí¼rttemberg loved Darkwoods and shared it with his neighbors.   After buying the 55,000-hectare Canadian wilderness as a refuge from the Cold War in 1967, he harvested just 57,000 cubic meters of timber per year and let the general public wander its trails.

But when he put the property on the auction block in 2005*, the Nature Conservancy Canada (NCC) feared the worst. After all, NCC reasoned, the odds of finding another eccentric German duke were slim at best, and this was prime timberland.

So NCC approached von Wí¼rttemberg with an offer to save large swathes of the land for posterity. In order to finance the deal, NCC then created the Darkwoods Forest Carbon Project which would earn carbon credits for the trees it saved and then use those credits to help finance both the purchase and upkeep of the land.

Many of those credits were then purchased by the Pacific Carbon Trust, a government-owned entity that uses carbon credits generated within British Columbia to offset emissions of schools, hospitals, and government agencies across the province.

Over the past year, provincial Auditor General John Doyle has been examining both the Project and the Trust as part of a performance audit or value for money audit that examines not just the accounting, but the management of an organization or program. Critics say that, in this case, the process ran amok, with inexperienced auditors either getting in over their heads or intentionally trying to discredit the program.

Assistant Auditor General Morris Sydor disputes the characterization, but says he’s prohibited from commenting until after the report is released.

“Once our report is public and you have had a chance to review it, I would be happy to talk to you to clear up the misinformation,” he says.

Originally slated for release on Tuesday, the audit report was shelved indefinitely by Bill Barisoff, the Speaker of British Columbia’s Legislative Assembly, after leaked letters revealed the degree of anger over the way the audit was being carried out. In a statement, Barisoff’s office said the report was being delayed not because of its content, but because of the leaks.

“Since a breach of Parliament may have occurred, the report will not be distributed until the Speaker has concluded his discussions with the Auditor General,” the statement said.

Ecosystem Marketplace spoke to people close to the audit and identified three areas of contention. First, say project proponents, the audit lacked transparency and expertise – with Doyle refusing to disclose which outside experts he’d contracted to support the audit and no known carbon experts being identified as participants. Second, project proponents say Doyle disregarded the rules of carbon accounting – a move akin to a corporate auditor discarding generally-accepted accounting principles and instead writing his own. Third, they say he ignored evidence – going so far as to conclude the discovery phase of the audit before all questions were answered.

To understand the accusations, it helps to examine the Trust and the Projects themselves

Carbon-Neutral Government

The audit focused on the Pacific Carbon Trust and its administration of British Columbia’s Carbon-Neutral Government program, which buys carbon offsets in the private market and then sells them to government entities across British Columbia. All of those offsets must originate in the province, and all must be verified and validated according to recognized third-party standards. Several governments around the world see the program as a template for their own initiatives, but it has drawn fire at home for the high price it charges government agencies.

“Back when the program was created, the Ministry of Environment set the price we charge at $25 per ton,” says Scott MacDonald, the Trust’s Chief Executive Officer. “They did this for two reasons: first, to provide an incentive for the public-sector to reduce emissions, and second, to give us enough flexibility to buy the kinds of quality offsets we need within British Columbia.”

Over time, however, the Trust has managed to buy credits well below C$25 per ton, at a cost that MacDonald says averages between C$11 and C$12 per ton – a differential that helped spark the audit over a year ago.

“There were reasons the price was set up the way it was, and all the money has been put back into government,” MacDonald says. “Now we’re four years in, and the Minister has committed to reviewing the price”

Within the Trust’s portfolio, the audit focused on two projects: Darkwoods and a gas-flaring project.

The Darkwoods Deal

The project began in 2008, when Darkwoods was on the block. NCC pre-empted regional loggers with a lowball offer of C$125 million. Their offer, however contained an embedded promise to manage the land sustainably. NCC then cobbled together external commitments of C$60 million, including C$25 million from the government, and used carbon credits to help cover its part of the purchase as well as provide for long-term upkeep.

To calculate the number of credits generated, they used rules prescribed by the Verified Carbon Standard (VCS) to determine what another buyer would likely do with the land, and then they compared this to what they planned to do.

“These are rules that have evolved over 15 years of peer review and debate,” says David Antonioli, Chief Executive Officer of the VCS Association. “It’s how a standard works – whether it’s an accounting standard or a carbon standard: you get agreement on the rules, and you follow the rules, and you create a process for updating the rules over time. But you don’t just let anyone come in and arbitrarily change something that hundreds of people have already agreed on.”

In this case, NCC calculated its credits by following a common procedure used by forest-carbon projects around the world: it compared Darkwoods to similar properties in the same region, then it examined the financial demands of for-profit logging companies, and finally it determined the number of trees it would save by keeping the property out of the hands of loggers.

They found that if Darkwoods continued to harvest just 50,000 square meters per year, it would have to miraculously achieve a profit margin about twice that of surrounding logging operations to equal a rate of return comparable to surrounding timberland – and that’s assuming a 4% cost of capital, which in turn assumes a zero risk of default. Going a step further, they saw that, if the new owners did what every owner in the area had done, the older trees would be gone in about 15 years to jump-start a 100-year rotation period of planting and harvesting. Using the econometric model and the regional precedent, they projected a rate of deforestation that standard logging practices would generate, and used this as their baseline.

NCC then developed an improved forest management (IFM) strategy and calculated its own rate of tree loss. Then it drew up a project methodology that would generate carbon credits for the difference between the baseline approach and NCC’s IFM approach and sent the methodology through the VCS wringer – which meant sending it to groups of experts who try and poke holes in the methodology. After making a few adjustments, the project won approval and started issuing credits.

Specific Points of Contention

In letters to Doyle and interviews with Ecosystem Marketplace, project proponents identified several points of contention.

Additionality: Antonioli says that auditors either failed to understand or willfully ignored standard practices for determining whether a project is “additional”, meaning whether the carbon offsets actually caused the reductions. Specifically, he says auditors didn’t understand the concept of “regulatory surplus” – or whether the project was trying to earn credits for doing something it was already required to do by law.

In his letters and in an interview with Ecosystem Marketplace, he provided two examples. First, he says, auditors focused on a so-called “Eco-Gift” that NCC had received from the government to help it complete the purchase. The Eco-Gift came with conditions requiring it to preserve most of the land, but it also came after NCC had presented its carbon proposal to the government.

“The auditors kept saying that the conditions of the Eco-Gift were somehow a pre-existing regulation, which meant the project didn’t meet the criteria for regulatory surplus,” Antonioli says. “But that’s not what it was. The Eco-Gift was just another piece of the financing puzzle, and the conditions simply said that (NCC) had better do what they say they will do with it. The fact, however, is that if NCC had not purchased the land, then the grant would not have given, and if they didn’t have the carbon component, they would not have purchased the land.”

On another occasion, he says, the auditors criticized VCS for not following the same protocol as California’s Climate Action Reserve (CAR) – a different standard specific to the state of California.

“It was the last point of discussion after a very long day,” says Antonioli. “They pulled out this attestation form that CAR requires project developers to fill out. It basically says that I, the project proponent, hereby state that there are no regulations requiring me to take these actions, etc. Well, it’s echoes information we require as part of the project documentation, but CAR adds more legal language to it, and the auditors wanted (NCC) to sign this.”

Although not required under VCS, Antonioli asked NCC President and CEO John Lounds to draw up an affidavit stating that the project met the criteria of regulatory surplus, and Lounds complied. Then Antonioli sent it to the auditors and waited for a response.

“They ignored it,” he says. “We went to them and said, ‘Here you are. Is this what you need?’ Then we waited for a reply, but they completely ignored it.

The Baseline: Several project proponents said auditors questioned the methods used to determine the project baseline.

“The Auditor General seems to be saying that a rational forester would recognize the long-term benefits of a balanced harvest approach and would not pursue liquidation logging, but would instead pursue a sustainable harvest,” says James Tansey, an associate professor at the University of British Columbia’s Sauder School of Business and founder of Offsetters, one of the companies that purchased credits from Darkwoods.

“But there’s no basis and no precedent for that, and we have no idea why they think it’s defensible,” he says, adding that overreach on the part of government auditors adds an element of risk that puts all carbon markets at risk.

“If the carbon process is at risk because an unqualified auditor enters into the equation, it makes it difficult for us to enter in and take risk on the system,” he says. “This kind of audit activity is a real risk for something that you’re calling a market, and shouldn’t be within the scope of the program.”

Rules vs Methodology: Project proponents also said that auditors failed to differentiate between VCS’s rules and the individual project’s methodology. The rules are general guidelines for designing specific projects, but the methodology is the project’s own set of rules, which must be created in accordance with the more general rules.

Transparency: Finally, proponents said the process lacked transparency. Although Doyle claimed to be consulting various experts, he refused to offer names and also denied a freedom of information act request on the grounds that experts needed to remain confidential.

One of the few experts the Auditor General did cite was University of Ottawa Law Professor Stewart Elgie, who told MacDonald that he had not heard from the auditor in more than seven months.

* We initially stated the property had been put on the market in 2008, but in fact it was put on the market in 2005. NCC completed its purchase in 2008.

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