An Introduction to the Voluntary Carbon Market (or the Private Sector’s Response to a Lack of...

An Introduction to the An Introduction to the Voluntary Carbon Voluntary Carbon MarketMarket(or the Private Sector’s Response to (or the Private Sector’s Response to a Lack of Carbon Regulation)a Lack of Carbon Regulation)

Jennifer ClymerJennifer Clymer

February 11, 2009February 11, 2009

22

Compliance vs. Compliance vs. Voluntary MarketsVoluntary Markets

Compliance marketsCompliance markets– KyotoKyoto– U.S. State and Regional ProgramsU.S. State and Regional Programs– Non-U.S. National and Regional Non-U.S. National and Regional

ProgramsPrograms

Voluntary marketsVoluntary markets– Chicago Climate Exchange (CCX)Chicago Climate Exchange (CCX)– Over-the-Counter (OTC)Over-the-Counter (OTC)

33

The Voluntary Market is The Voluntary Market is Older Than You May Older Than You May

ThinkThink 11stst recorded voluntary carbon offset in 1988 recorded voluntary carbon offset in 1988

Market began picking up steam after U.S. Market began picking up steam after U.S. rejected Kyoto in 2001rejected Kyoto in 2001

– Since 2002, offset sales increased by more than Since 2002, offset sales increased by more than 4X4X

And really took off in past few yearsAnd really took off in past few years

– B/t 2006-2007, offset sales nearly tripled while B/t 2006-2007, offset sales nearly tripled while the value of the market more than tripledthe value of the market more than tripled

44

Chicago Climate Chicago Climate Exchange (CCX)Exchange (CCX)

Voluntary, legally binding, membership-Voluntary, legally binding, membership-based cap-and-trade program began in based cap-and-trade program began in 20032003

Expanded to EU, New York, the Northeast, Expanded to EU, New York, the Northeast, and Montrealand Montreal

Unit = Carbon Financial Instrument (CFI) Unit = Carbon Financial Instrument (CFI) = 100 metric tons CO= 100 metric tons CO22ee

– No distinction between project-based offset No distinction between project-based offset and compliance allowanceand compliance allowance

55

Over-the-Counter Over-the-Counter (OTC)(OTC)

Voluntary agreements made on a Voluntary agreements made on a contractual basiscontractual basis

EU and US make up majority EU and US make up majority (77%) of market(77%) of market

Unit = Verified (or Voluntary) Unit = Verified (or Voluntary) Emission Reduction Unit (VER)Emission Reduction Unit (VER)

66

Summary of Offset Summary of Offset TypesTypes

Project Project MechanisMechanis

mm

RegulatorRegulatory y

FrameworFrameworkk

TradablTradable Unite Unit

Applicable Applicable CountriesCountries

CDMCDM KyotoKyoto CERCER Developing Kyoto Developing Kyoto countries w/o countries w/o reduction targetsreduction targets

JIJI KyotoKyoto ERUERU Developed Kyoto Developed Kyoto countries w/ reduction countries w/ reduction targetstargets

OTCOTC NoneNone VERVER Primarily EU & US, but Primarily EU & US, but anywhereanywhere

CCXCCX NoneNone CFICFI Primarily US, but also Primarily US, but also Canada & MexicoCanada & Mexico

77

Buyers are Primarily Buyers are Primarily European and European and

AmericanAmericanLocation of Offset Purchasers by Volume of

Offsets Purchased, 2007

US, 34%

EU, 47%

Unknown, 8%

Canada, 3%

Other , 1%

Australia / New

Zealand, 8%

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

88

Businesses Purchases Businesses Purchases the Majority of Offsetsthe Majority of Offsets

Type of Offset Purchasers by Volume of Offsets Purchased, 2007

NGOs, 13%

Government 0.4%

Businesses, 79%

Individuals, 5%

Other, 3%

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

99

Offset Purchases Offset Purchases Primarily Motivated by Primarily Motivated by

PR ConcernsPR Concerns In 2007, main motivations included:In 2007, main motivations included:

– Corporate Social ResponsibilityCorporate Social Responsibility

– PR/BrandingPR/Branding

Surprisingly, pre-compliance concerns less Surprisingly, pre-compliance concerns less importantimportant

More than half of purchasers offset More than half of purchasers offset organizational emissions rather than organizational emissions rather than trips/eventstrips/events

1010

Offset Sales are Offset Sales are Booming in Tons…Booming in Tons…

2007 OTC+CCX sales = 65M metric 2007 OTC+CCX sales = 65M metric tonstons

(2% of Kyoto market at 3B metric tons)(2% of Kyoto market at 3B metric tons)

– 42M metric tons (65%) from OTC42M metric tons (65%) from OTC

Annual growth, 2006-2007: ~200%Annual growth, 2006-2007: ~200%

– 23M metric tons (35%) from CCX23M metric tons (35%) from CCX

Annual growth, 2006-2007: ~120%Annual growth, 2006-2007: ~120%

1111

……and in Dollarsand in Dollars

2007 CCX+OTC sales = $331M2007 CCX+OTC sales = $331M

(0.5% of Kyoto market at $66B)(0.5% of Kyoto market at $66B)

– $258M (78%) from OTC$258M (78%) from OTC Annual growth, 2006-2007: ~350%Annual growth, 2006-2007: ~350%

– $72M (22%) from CCX$72M (22%) from CCX Annual growth, 2006-2007: ~90%Annual growth, 2006-2007: ~90%

1212

Renewables & Energy Renewables & Energy Efficiency are the Main Efficiency are the Main

Offset TypesOffset Types

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

Offset Project Types, 2007

Energy Efficiency, 18%

Other, 11%

Fuel Switching, 9%

Forestry, 15%

Methane, 16%

Renewable Energy, 31%

1313

Offsets Primarily Originate Offsets Primarily Originate in Asia, US, & Europein Asia, US, & Europe

Offset Projects by Location, 2007

Asia, 39%

N. America, 27%

Europe & Russia, 13%

Latin America, 7%

Australia / New Zealand,

7%

Africa, 2%

Other, 6%

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

1414

Offsets are NOT Offsets are NOT Always Genuine Always Genuine

ReductionsReductions Concern in CDM/JI markets that projects do not Concern in CDM/JI markets that projects do not

generate claimed GHG reductionsgenerate claimed GHG reductions– LFG projects historically produce 50% of promised LFG projects historically produce 50% of promised

reductionsreductions

– NN22O projects historically produce >100% of promised O projects historically produce >100% of promised reductionsreductions

Additionality concernsAdditionality concerns– Especially with RE and EE projectsEspecially with RE and EE projects

Double counting concernsDouble counting concerns– Especially with RE and voluntary commitmentsEspecially with RE and voluntary commitments

Sustainability concernsSustainability concerns

1515

Quality Concerns Led Quality Concerns Led to an Offset Standard to an Offset Standard

RaceRace No standardization in voluntary marketNo standardization in voluntary market

– Up to purchaser to demand specific standardUp to purchaser to demand specific standard

Each standard has its own methodologies Each standard has its own methodologies for calculating GHG reductionsfor calculating GHG reductions

– 114 for Kyoto market (“CDM Methodologies”)114 for Kyoto market (“CDM Methodologies”)

– Hundreds for non-Kyoto marketsHundreds for non-Kyoto markets

– More in the works!More in the works!

1616

Voluntary Carbon Voluntary Carbon Standard is the Leading Standard is the Leading

StandardStandardOffset Standards Used, 2007

VOS, 3% None, 0.4%

Retailer, 2%

GHG Friendly, 6%

CCX, 7%

VER+, 9%

Gold Standard, 9%

Other, 19%

VCS, 29%

CDM / JI, 16%

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

1717

Numerous Factors Numerous Factors Influence Offset PriceInfluence Offset Price

Project development costsProject development costs– Project type, size, and locationProject type, size, and location

– 33rdrd party certification costs party certification costs

Vintage of offsetsVintage of offsets– Future price discounted due to increased uncertaintyFuture price discounted due to increased uncertainty

Transaction costsTransaction costs increase with each intermediaryincrease with each intermediary– Developer 2007 mean price: $5.00/metric ton Developer 2007 mean price: $5.00/metric ton

– Retailer 2007 mean price: $11.30/metric tonRetailer 2007 mean price: $11.30/metric ton Non-profit vs. for profit status of providerNon-profit vs. for profit status of provider

– Non-profit tax deduction if offsets retired on behalf of purchaserNon-profit tax deduction if offsets retired on behalf of purchaser

1818

Offset Prices Are Offset Prices Are Lowest in the US & EULowest in the US & EU

Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

Offset Price by Project Location

$8.60

$11.70

$13.70

$8.60 $8.50$7.10

$5.80$4.50

$5.20

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Africa

Mixe

d

Austra

lia /

NZ

Latin

Am

erica

Midd

le Eas

t

Canad

aAsia EU US

Project Location

Pri

ce

($

)

1919

Questions?Questions?

jennifer.clymer@austinenergy.comjennifer.clymer@austinenergy.com

(512) 322-6188(512) 322-6188