Voluntary Carbon Market

Voluntary Carbon Market

In order to preserve a high probability of keeping global temperature increase below 2 degrees Centigrade, current climate science suggests that atmospheric CO2 concentrations need to peak below 450ppm. This requires global emissions to peak in the next decade and decline to roughly 80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006). Such dramatic emissions reductions require a sharp move away from fossil fuel, significant improvements in energy efficiency and substantial reorganisation of our current economic system. This transition can only be achieved by far-reaching national and international climate policies.

Carbon offsetting is an increasingly popular means of taking action. By paying someone else to reduce GHG emissions elsewhere, the purchaser of a carbon offset aims to compensate for – or “offset” – their own emissions. Individuals seek to offset their travel emissions and companies claim “climate neutrality” by buying large quantities of carbon offsets to “neutralize” their carbon footprint or that of their products.

Trends in the Market1

At least 65 million tonnes of carbon credits were transacted in 2007, a
165% increase over 2006 and a nearly 200% increase for the
over-the-counter market only, with a total market value of $331 million

• The average price paid to offset one tonne of CO2 or equivalent
greenhouse gases rose 49% from 2006 to 2007, from $4.10/tonne to
$6.10/tonne.  Prices ranged from as a low as $1.80/tonne to as high as
$300/tonne.

• Volume in the over-the-counter (OTC) market nearly tripled in 2007, to
42 million tonnes of carbon credits. Combined with the 23 million tonnes
transacted on the CCX in 2007, a confirmed total volume of 65 million
tonnes was transacted in the voluntary carbon market in 2007.

• Ecosystem Marketplace and New Carbon Finance valued the international
OTC market at $258 million in 2007.  Together with the CCX, which was
valued at $72 million, the global voluntary market was worth a total of
$331 million in 2007. This more than triples the 2006 market value of $97
million.

• In the OTC market, energy efficiency, renewable energy, methane
destruction, and forestry/land based projects were the most dominant
project types in 2007.

• The percentage of projects sourced from Asia nearly doubled, from 22% in
2006 to 39% in 2007, while the percentage of projects sourced from Africa
actually declined both in market share (6% to 2%) and in absolute terms.

• Buyers of voluntary credits tend to purchase offsets that most closely
resemble those of the compliance market rather than indulge in the sort of
experimentation and innovation that many believe the markets offer.

Compliance and Voluntary Carbon Market

Carbon offset markets exist both under compliance schemes and as voluntary programs.

Compliance markets are created and regulated by mandatory regional , national, and international carbon reduction regimes, such as the Kyoto Protocol and the European Union’s Emissions Trading Scheme. A voluntary carbont market functions outside of the compliance markets, enabling companies and individuals to purchase carbon offsets on a voluntary basis. With more than € 20 billion traded in 2006 (Capoor & Ambrosi, 2007), voluntary carbon markets are already a substantial economic force and will likely grow considerably over the coming years. The voluntary carbon market, although much smaller than the compliance market, (€62.6 million in 2006; Hamilton, 2007) is also growing rapidly.

This WWF report discusses the role of the voluntary carbon market and provides an overview and guide to the most important currently available voluntary carbon offset standards using the Clean Development Mechanism (CDM) as a benchmark . The report compares the standards side-by-side and outlines the most pertinent aspects of each.

The evaluated standards are:

• Clean Development Mechanism (CDM)
• Gold Standard (GS)
• Voluntary Carbon Standard 2007 (VCS 2007)
• VER+
• The Voluntary Offset Standard (VOS)
• Chicago Climate Exchange (CCX)
• The Climate, Community & Biodiversity Standards (CCBS)
• Plan Vivo System
• ISO 14064-2
• GHG Protocol for Project Accounting

Carbon offset markets have been promoted as an important part of the solution to the climate crisis because of their economic and environmental efficiency and their potential to deliver sustainability co-benefits through technology transfer and capacity building. The voluntary offset market in particular has been promoted for the following reasons:

Possibility of Broad Participation
The voluntary carbon market enables those in unregulated sectors or countries that have not ratified Kyoto, such as the US, to offset their emissions. All monetary figures were converted to euros, using the exchange rate from Feb, 5, 2008 of 1 USD = 0.67 euros. Standard fees listed in USD were left unchanged. The terms GHG offset standard and carbon offset standard are used as synonyms.

Preparation for Future Participation
The voluntary carbon market enables companies to gain experience with carbon inventories, emissions reductions and carbon markets. This may facilitate future participation in a regulated cap-and-trade system.

Innovation and Experimentation
Because the voluntary market is not subject to the same level of oversight, management, and regulation as the compliance market, project developers are more flexible to implement projects that might otherwise not be viable (e.g. projects that are too small or too disaggregated).

Corporate Goodwill
Corporations can benefit from the positive public relations associated with the voluntaryreduction of emissions.

Most importantly, voluntary and compliance offset mechanisms have the potential to strengthen climate policies and address equity concerns:

Cost-effectiveness that allows for deeper caps or voluntary commitments.
By decreasing the costs of reductions, offsets can in principle make a compulsory mandate more politically feasible and a voluntary target more attractive, thereby accelerating the pace at which nations, companies, and individuals commit to reductions.

Higher overall reductions without compromising equity concerns.
One of the greatest challenges of climate protection is how to achieve the deep global emissions reductions required while also addressing the development needs of the poor. Historically, developed nations have been responsible for a much larger share of the increase in atmospheric GHG concentrations than developing countries. But to achieve climate stabilisation, emissions must be curbed in all countries, both rich and poor. Offsets may be one way out of the conundrum of needing to achieve steep global emissions reductions while at the same time allowing poor nations to develop.

This has not been the case thus far because the emissions reductions undertaken have been too small to be significant. Small reduction targets allow participants to tinker at the margins and avoid the kind of restructuring that is needed to achieve
climate stabilizations. While taking on considerable domestic emissions reductions, industrialized countries could, through offsets, help finance the transition to low-carbon economies in developing nations. In other words, offsets might allow equity to be decoupled from efficiency, and thus enable a burden-sharing arrangement that involves wealthier countries facilitating mitigation efforts in poorer countries .

Yet carbon offsetting is not without its critics. A recent flurry of media reports has criticised the poor quality of carbon offsets projects in both the compliance and the voluntary carbon market (e.g. Financial Times, 2007). Recent research reports have pointed out that a significant number of offsets come from projects that would have been implemented anyway (i. e. are non-additional, see section 5.1) (Schneider, 2007; Haya, 2007).

Critics have also raised concerns over equality and fairness based on the argument that carbon offsetting enables developed nations to perpetuate unsustainable lifestyles by funding carbon projects in developing countries. Some argue that these projects rarely lead to benefits for the host community, and have gone so far as to call the offset market a form of carbon colonialism (Eraker, 2000). Others assert that accounting methods for offsets are too inaccurate to justify claims of real emission reductions or to support the achievement of ‘carbon neutrality.’ The voluntary offset market in particular has been criticised for its lack of transparency, quality assurance and third-party standards.

To address these shortcomings, over a dozen voluntary offset standards have been developed in the last few years. Each standard has a slightly different focus and none has so far managed to establish itself as the industry standard. Some closely mirror compliance market standards, while others take For an in-depth analysis of such a potential climate and equity framework, see the Greenhouse Development Rights
Framework (Baer et al 2007) a more lenient approach in order to lessen the administrative burden and enable as many credits as possible to enter the market.

Certain standards are limited to particular project types (e.g. forestry) while others exclude some project types in order to focus on the social benefits of carbon projects.It is important to note that the vast majority of voluntary offsets are currently not certified by any third-party standard. This is likely to change over the coming years.

Sources:

1. Trends in the Market – Ecosystem Marketplace and New Carbon Finance State of the Voluntary Carbon Markets report available at www.ecosystemmarketplace.com and
www.newcarbonfinance.com

WWF Germany, March 2008, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Clifford Polycarp (SEI-US). Full report is available as a PDF here.