1. The Mandatory Corporate Market - companies purchase to offset their emissions in order to meet a mandatory cap, such as is imposed by the Kyoto Protocol or a scheme such as the Greenhouse Gas Abatement Scheme in NSW. As a commodity market, it doesn't matter to the purchaser where the offsets originate.
2. The Voluntary Market - individuals, governments, NGOs and corporations who purchase for reasons other than meeting mandatory targets, such as combating climate change, encouraging environmentally-friendly behaviour, assisting third world communities, etc. The action is defined as voluntary so long as the credits will not be used to meet a regulatory target. They are purchasing a branded product, packaged and bundled with more attributes than simply being a commodity carbon credit. The action is defined as voluntary so long as the credits will not be used to meet a regulatory target.
There are two more dimensions in the market:
1. The wholesale market:large volumes of offsets made available by operators who can demonstrate that they have prevented emissions by developing renewable energy projects or who can demonstrate that they have 'sequestered' CO2.
2. The retail market: companies and organisations that invest in offset projects and then sell off portions of the emission reductions in relatively small quantities with a mark-up.
Mandatory purchasers can choose a particular type of wholesale offsets (eg. foregone vegetation clearing) for image reasons. Eg. coal miners and power generation companies are known to favour environmental projects.
The image/"meaning behind the source"/emotional content of an offset - such as a solar energy project in a underdeveloped country - can add make it more valuable to the buyer. By 'bundling' benefits into the offset package, promoters can create what is called 'gourmet' carbon. Naturally these offsets can command a higher price.
The retail market is currently quite small, but is growing rapidly. Several service providers have reported a doubling of sales each year for the past two years.
Standards, protocols, and verification methods used to regulate mainstream carbon
offsets include:
1. CDM/JI Standard – set by international regulatory authorities
2. The Gold Standard – created by consortium of NGOs for energy projects
3. The Climate, Community, and Biodiversity (CCB) Standards – created by
consortium of NGOs and private sector for land-based sinks projects
4. Self developed standards – created by individual providers
The majority of retail providers adopt self developed standards and
verification procedures, rather than following the CDM and Gold Standard guidelines.
Voluntary markets are largely unregulated. 'Voluntary markets can maintain environmental integrity without the precise quantification, unambiguous ownership requirements, and in-depth M&V protocols required of compliance markets," says Dr. Mark Trexler whom we met in Washington last October. "The voluntary market has the flexibility to encourage innovation. It may be able to provide the most benefit to small-scale projects and technologies that the regulatory market tends to overlook (either because the projects fail to meet a required threshold or because they are too small to bear the high transaction costs often associated with regulatory offsets)," he says. Dr Trexler is the president of Trexler Climate + Energy Services, Inc., an energy and environmental policy consulting firm based in Portland, Oregon.
Prices vary enormously, from US$5 - US$35 or more per tCO2e. Brokers generally charge a 7.5% commission. Websites generally have a carbon calculator, where individuals can calculate emissions from flying, driving their cars, or their total yearly emissions.
"Sustainable development benefits of projects on offer from retail providers vary from projects with little benefits to local communities, to projects in which communities are key participants, to projects that address biodiversity and communities," says Nadaa Taiyab of the International Institute for Environment and Development. The majority of retailers appear to focus on forestry projects.
"Buyers if voluntary offsets are not buying a ‘product’ so much as they are giving to a cause. The calculation of carbon emissions is simply a way of defining the size of their contribution," she says. They are paying for a service: not just the offset, but also access, convenience, and quality assurance.
Carbon Farmers of Australia is operating firmly in the voluntary market, selling gourmet carbon.
FACTS ABOUT VOLUNTARY CARBON MARKETS
√ The first voluntary transaction occurred in 1989 when US power company AES Corp. invested in agroforestry projects in Guatemala.
√ The start-up capital needed to register a project for the mandatory compliance carbon market can be beyond many projects. Voluntary projects avoid these bottlenecks.
√ The market for voluntary offsets is estimated to have doubled between 2006 and 2007 to 100 million tonnes.
(See Bayon, R., Hawn, A., Hamilton, K., "Voluntary Carbon Markets", Earthscan, 2007)
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