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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
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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)
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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
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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
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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%
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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
$16.00
Africa
Mixe
d
Austra
lia /
NZ
Latin
Am
erica
Midd
le Eas
t
Canad
aAsia EU US
Project Location
Pri
ce
($
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