VOLUNTARY CARBON MARKET
Entities operating in voluntary markets are typically located in countries that did not ratify the Kyoto Protocol. Examples of these countries include the U.S., China, and India. As a result, there is no legally binding requirement to reduce emissions. In these markets legally binding caps are not imposed. Instead, companies and other entities choose to voluntarily commit themselves to emission reduction targets and use carbon credits as a means to meet self-imposed commitments. Major corporations purchase carbon credits to proactively position themselves against future compliance markets and to improve their environmental image as part of their CSR, Corporate and Social Responsibility.
This has proven to increase sales figures because many U.S. Consumers would prefer to purchase from companies that have sound environmental commitments. Voluntary markets are modelled after the UNFCC framework, the CDM, and JI and draw upon them for guidance. In the absence of the UNFCC and mechanisms such as CDM and JI, voluntary standards and protocols have been developed to ensure that credits pass through appropriate scientific scrutiny and are accurately registered and transacted correctly. Examples of these standards include the Climate Action Reserve (CAR), the Voluntary Carbon Standard (VCS), and others. The presence of these standards ensures that emissions reductions are real, quantifiable, and transparent to avoid fraud.
The voluntary carbon market is small in comparison to mandatory markets at 1% - 2% of total transaction volumes. Carbon credits offered in the voluntary market can be CERs and ERUs, but what is most typically offered in Voluntary markets are Verified Emissions Reductions (VERs). VERs have been verified using an independent auditor.
The largest consumer of Voluntary carbon credits is for-profit businesses whose main motivations include carbon credit purchase for:
a) Retirement (Enhanced Branding and Carbon Footprint Reductions)
b) Investment and Resale
c) Pre-compliance
Buyers purchasing for retirement purposes typically do so to offset internal carbon emissions goals.
These types of purchasers include major U.S. corporations such as the Home Depot, Ford, and Wal-Mart to name a few. In most cases, retiring credits grants the consumer the right to make green marketing claims which can help boost sales, access a broader market segment, and build relationships with suppliers and vendors. Others purchase credits for resale purposes or use them as a pre-compliance mechanism in anticipation of future cap and trade policies.
In a recent publication by Ecosystem Marketplace and Bloomberg New Energy Finance (State of the Voluntary Carbon Markets report for 2010) the Voluntary market had a difficult year in 2009 characterized by a shrinking market. This is understandable given the impact the economic crisis has had on corporations in the U.S. However, the positive news for the voluntary markets, especially in the U.S., is that the infrastructure to support voluntary markets was strengthened in 2009 and industry specialists believe that the market is emerging and has solid growth potential despite the current lack of political will for a national cap and trade system in the U.S.
COMPLIANCE CARBON MARKET
The main driving force that established the framework for mandatory carbon markets comes from the United Nations Framework for Climate Change (UNFCC). Important components to come from the UNFCC include the Kyoto Protocol, Clean Development Mechanism (CDM), and Joint Implementation Mechanisms (JI). Under the Kyoto Protocol, ratifying countries (U.S. not included), committed to legally binding emissions reduction targets. The CDM and JI are mechanisms that ratifying countries can use to meet emissions reduction targets by allowing entities to commercialize and purchase carbon credits under a cap and trade system. Under the cap and trade system, the largest being the European Union Emissions Trading System (EU ETS), greenhouse gas emitting entities such as businesses and utilities are issued permits to emit specified quantities of greenhouse gases. Generally, entities can comply one of two ways. First they can invest in costly technology to help meet emissions reduction targets. Second, if an entity does not have the means to make such an investment, it can purchase carbon credits for the carbon emissions that exceed permitted levels.
The largest mandatory carbon market is the European Union Emissions Trading System (EU ETS). The EU ETS represents approximately 84% of the carbon market and 78% of total value. In this system carbon credits generated under CDM mechanisms are called Certified Emissions Reductions (CERs) and carbon credits generated under JI mechanisms are called Emissions Reduction Units (ERUs). In 2008, this mandatory market grew to $118 billion in 2008, rising 87% from 2007 (New Carbon Finance, 2009).
In the first quarter of 2009, this market continued to grow in volume. Mandatory markets have continued to grow into the first quarter of 2009; however credit prices have recently declined due to increased scientific rigor required to verify certain credits and the global recession. It is unlikely that the U.S. will pass legislation establishing a mandatory cap and trade scheme in near future. However, in the U.S. legally binding state and regional cap and trade schemes are beginning to gain traction such as the Western Climate Initiative and the Regional Greenhouse Gas Initiative covering parts of the northeast. These systems function similar to Kyoto in that participating parties commit to legally binding emissions reduction targets. Most notable, is the recent development of a mandatory cap and trade system by the State of California to be administered by the State’s Air Resources Board. This scheme is considered groundbreaking and may serve as a model for the rest of the Country. The California Cap and Trade scheme is anticipated to generate $20 billion dollars in annual revenue. The development and political support of this system, sends market signals that even in the absence of U.S. cap and trade legislation, states and regional bodies maintain their commitments to developing carbon markets.
GMO only deal in spot trade credits that trade in the Voluntary Carbon market, private investors should be wary if offered forward credits or compliance credits. Read our Buyers Guide.
For more information about Carbon Trading visit our website www.gmouk.com
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