State of the Voluntary Carbon Markets Report Launched

The State of the Voluntary Carbon Markets 2013 has been published today (30 May) at the Carbon Expo conference and exhibition in Barcelona.

The report aims to assess the current situation of the voluntary carbon market by surveying key market players and examining trends and experiences over the past year.

The 2013 report shows that the value of the voluntary carbon market increased as a percentage of the total market, mainly because the value of Voluntary Emissions Reductions (VERs) remained buoyant in comparison to Certified Emissions Reductions (CERs).

The report states that during the past year, the private sector has provided $523 million of funding for projects that cut carbon emissions. $80 million of this has been used to fund and develop projects that distribute clean cookstoves and water filtration devices. These projects cut carbon, but also have numerous other social and environmental benefits including creating jobs, improving families’ health, reducing pressure on resources, and reducing household expenditure.

In response to the report, Jamal Gore, Managing Director of Carbon Clear said:

“Carbon Clear has long been a supporter of carbon offset projects that provide jobs, improve health and strengthen communities around the world. As the developer of the Darfur low-smoke stoves project – the first registered carbon project in a conflict zone, we are delighted that demand for cookstove projects has doubled. This growth shows that customers continue to value these types of high-impact, charismatic carbon projects.”

The executive summary of the report is here.

More information about the Carbon Clear Sudan Cookstove Project is available here.

Voluntary Offsets and the Backloading Brouhaha

My previous posts about "backloading" and the EU ETS have focused on the implications for the compliance markets in Europe and elsewhere. In compliance markets, government regulators set the rules governing the supply of emission reduction allowances and offset credits.  They also govern demand by setting the emissions targets that firms must meet by making internal reductions or purchasing permits and offsets.

Now I'd like to focus on what the backloading debate means for the voluntary carbon markets.  The short answer is that backloading will have little direct impact, but the reasons are worth a longer discussion.

The voluntary market is much smaller than its government-created sibling, but it is difficult to overestimate its importance. The voluntary market is self-regulating.  Its carbon offset credits are issued by independent standards bodies, and an increasing number of its largest market makers  follow a Code of Practice governing how they do business.

This self regulation makes the voluntary markets exceptionally flexible and a source of innovation that helps improve the slower and more bureacratic compliance markets.  All four of the protocols initially approved in California's cap-and-trade system were developed initially under the Climate Action Reserve, a voluntary carbon standard. A number of the carbon credit innovations that were pioneered by bodies such as the Gold Standard and the Verified Carbon Standard have allowed the United Nations carbon credit system to expand beyond large, industrial project types like refrigerant destruction, large hydropower and waste heat recovery. The project types favored by the voluntary carbon market, like clean cookstoves, village lighting, forest conservation and water purification can deliver greater sustainable development and have helped bring the benefits of carbon finance to poorer nations.

Voluntary market innovation is not limited to the projects. It's notable that California's fledgeling carbon market California has decided to use for its cap-and-trade transactions two private sector registries that were created for  the voluntary carbon market to - due in large part to their responsiveness, quality and cost-effectiveness.  And when the British government launched a short-lived effort to develop its own voluntary offset quality scheme, the market launched a more thorough and far-reaching system, twelve months faster, and for only one-tenth of the cost.

But perhaps the most important point that helps understand what makes the voluntary market special is that its carbon offset buyers choose to buy carbon credits! Voluntary market buyers take action of their own accord beyond or in advance of legislation to tackle their climate change impact. 

This difference more than anything helps explain why the backloading brouhaha has little direct impact on the voluntary market. In the compliance market, emitters tend to reduce their emissions just enough to avoid paying penalties. If they cannot meet their reduction targets, they tend to buy just enough offset credits (called CERs) and allowances (EUAs) to avoid those penalties. And when those firms find they have exceeded their reduction targets? They sell their surplus allowances, even if their footprint is still far above zero.  The economic recession made it very easy for many companies in the EU ETS to meet their reduction targets, nearly eliminating demand for allowances and offsets.  Supply and demand - too many permits and insufficient demand drives CER and EUA prices in the compliance markets towards zero.

Compare that to buyer behaviour in the voluntary carbon market.  The demand drivers for carbon credits could not be more different. Here companies pledge to reduce their net emissions - often
to zero - through a combination of internal reductions and voluntary offset credits. When voluntary customers fail to meet their reduction targets, they must buy more carbon credits to make up the difference.  When they exceed those targets, they buy fewer credits - but they keep buying.  Their reduction goals are sufficiently ambitious that it would be nearly impossible to reduce demand for offset credits to zero - at least for the foreseeable future.

Buyer behaviour in the voluntary market differs from the compliance market in another way.  Absent the carrot and stick of government regulation, buyers use their carbon management programmes as a way to demonstrate good citizenship.  As a result, many companies seek carbon offset credits from projects that do much more than reduce greenhouse gas emissions.  Emission reduction projects that improve local livelihoods help corporate offset customers achieve their broader CSR goals.  After all, which would you rather have on the cover of your CSR report, a photo of an industrial gas destruction project, or a photo of a family enjoying the benefits of solar powered lighting and safe drinking water? It is the value of these co-benefits that helps maintain prices in the voluntary carbon market, even during an economic recession.

With such different motivations for buyer behaviour compared to the compliance market, it is little wonder that the impact of policy measures like backloading would have little direct impact on the voluntary market.

However, compliance market policy failures can have an indirect impact on prices in the voluntary market. Actors in the compliance market have begun to take notice of the relative buoyancy of voluntary prices.  In September 2012 the UN Framework Convention on Climate Change included the following statement in its meeting notes:

"Project participants and others engaged in the [Clean Development Mechanism] will soon be able to voluntarily cancel their CERs into an account in the CDM registry at the UNFCCC secretariat in Bonn, Germany. This could encourage expanded use of CERs for voluntary emission reduction, such as by companies using credits as part of a social responsibility programme, by event organizers wanting to offset their emissions, or even by individuals wishing to reduce their carbon footprint."

Just a few months later Christiana Figueres, the head of the UNFCCC, made the following Tweet:

It appears that a number of people are hoping that the relatively buoyant voluntary market can support CDM  by serving as a source of demand for compliance credits.  This is a great idea in theory.  However, the primary CDM market was created to feed national and regional compliance schemes.  The promise of CDM has mobilised a tremendous amount of climate finance to feed the compliance market.  In 2011, the latest year for which figures are available, CDM was five times larger than the voluntary carbon market.  Since that time, we have seen record issuances of carbon credits on the CDM.

It would be wonderful if demand in the voluntary market expanded rapidly enough to absorb the surplus from the CDM (or at least from the CDM's more community-oriented and renewable energy projects).  The short-term impact of such an influx, however, would be to overwhelm completely the absorptive capacity of the voluntary market, driving prices towards zero and removing incentives to develop new and innovative voluntary projects.  It would be akin to fitting all the passengers from the Titanic into one lifeboat.  Rather than rescuing the compliance market, we would damage the voluntary carbon market, perhaps irreparably.

It's clear, then, that for all its inherent strengths, the voluntary carbon market remains vulnerable to poorly executed attempts to rescue elements of the compliance market. The most robust and sustainable fix for the compliance market's woes remains in the realm of politics. More specifically, national and regional leaders must show the courage to set ambitious reduction targets that accelerate the pace of action to fight climate change.  The depressed prices on the EU ETS show that companies have been able to meet their current emissions reductions obligations more easily than we ever thought possible.  Deepening emission reduction targets will accelerate the transition to a lower-carbon economy and strengthen the carbon markets by driving demand for compliance carbon credits and provide a sustained boost to prices.

Meanwhile, the voluntary carbon markets will continue doing what they do best: driving innovation and providing a vehicle for companies who want to take action beyond compliance to demonstrate their environmental leadership.

(Jamal Gore is Managing Director of carbon management firm Carbon Clear.)

More on the CRC and Carbon Offsets

One of the reasons participation in the UK's Carbon Reduction Commitment Energy Efficiency Scheme is a poor alternative to offsetting your company's carbon emissions is that the Government has no obligation to use your CRC "tax" payments to spur greenhouse gas reductions. A second reason is because, by DECC's own admission, the £12 per tonne permit price "may have a marginal effect on decisions to invest in energy efficiency relative to overall energy prices".

Pulling back to look at the big picture provides us yet another reason why companies participating in the CRC should not abandon carbon offsetting as a tool to fight climate change: the CRC ignores a huge portion of most companies' carbon footprint.

The CRC focuses on emissions from stationary energy consumption - particularly the use of electricity and gas in buildings.  In traditional carbon reporting parlance, the CRC focuses on Scope 1 and 2 energy emissions.  It does not cover other types of Scope 1 emissions - from refrigerant leaks, from land use and forestry activities, or from burning fuel to power a company's vehicles. The CRC is also silent on most Scope 3 emissions, which come from third party activities undertaken on the company's behalf. This includes taxis, commercial air travel, hotels, and outsourced goods and services.  Finally, even that limited CRC footprint is focused only on a company's UK operations - all emissions from overseas assets are excluded.

From the point of view of government regulators, these exclusions make sense. After all, the UK would risk an international outcry if it unilaterally imposed a carbon tax on company operations in, say Germany or China. And with buildings responsible for the lion's share of UK emissions, there is a strong case for focusing on this area.

For many companies, however, an emphasis solely on the CRC footprint marks a retreat from best practice.  The GHG Protocol and ISO 14064 reporting standards require firms to report all Scope 1 emission sources, not just energy, and recommend further that firms measure and report their Scope 3 emissions whenever possible. Therefore, relying on the CRC footprint would not be enough to demonstrate a firm's low-carbon leadership - even if the CRC were to begin driving investment into emission reductions on a massive scale.

For professional services firms the situation is even worse. Business travel often represents more than 50% of the carbon footprint of a major accounting firm, consultancy or auditor. As a recent  infographic in the New York Times demonstrates, frequent long-haul flights can easily swamp an individual's or company's other emission reduction efforts.  The problem for professional services is that these companies are selling time and brainpower. They are often most effective when they can sit side by side with their clients to solve business problems.  And when their clients are all over the globe, that means they have to travel. A lot. Many of these companies are CRC participants, but their CRC performance says little about their overall GHG impact.

Let me be clear: the CRC has helped us make progress in our efforts to decarbonise the UK economy. It has raise awareness of climate change among finance directors and other corporate leaders in a way that would be difficult to accomplish with voluntary measures alone.  Furthermore, it gives government the tools to drive further reductions in future. However, corporates who wish to demonstrate their low-carbon leadership must go further. They can set ambitious near- and long-term reduction targets that go beyond compliance, and they can invest in verified carbon offset credits that achieve guaranteed emission reductions, right here and now.

Jamal Gore is Director at carbon management specialist firm Carbon Clear. All opinions are his own.

Carbon Offsets and the CRC "Tax"

One of the more surprising findings from Carbon Clear's 2012 research into the carbon performance of the FTSE 100 was the fact that only a small fraction of the country's largest companies offset their  greenhouse gas emissions.  In follow up conversations with some of these firms, representatives gave me a number of reasons why they don't offset, but one rationale has been cropping up with increasing frequency. To paraphrase: "We don't need to offset to demonstrate our low-carbon committment because we're paying the CRC tax."

Such a view might seem reasonable, but falls short of the mark.

The CRC requires large firms that are not covered under the EU ETS to report their energy emissions and pay a £12/tonne permit fee to the Government.  In an ideal world, those accumulated payments would go towards a range of emission reduction activities, from tree planting and forest restoration to incentives for clean energy investment, to support for energy efficiency in homes and offices. However, CRC revenues, estimated at over £1 billion, are not earmarked for green initiatives. The money goes into general revenues.

I'll say that again: There is no direct link between CRC payments and Government spending on emission reduction measures.

At best, the CRC drives emission reductions by helping companies become more aware of their energy consumption, and by very slightly increasing firms' energy bills. These measures will undoubtedly have some impact.  But with energy a relatively minor expense at most companies covered by the CRC, and permit fees equal to only about 10% of electricity costs, these incentives are relatively weak.

Many sustainability experts hoped that the CRC's Performance League Table (PLT) would provide a reputational driver that encourages firms to reduce their emissions, but there is little evidence to suggest the PLT has had much impact.  In its first year, PLT rank was assigned based on implementation of Early Action Metrics that would help a company collect better data, not on emission reductions.

The second round of league table results has been delayed for several months, apparently because so many companies have asked to refile their data with the Environment Agency. What is more, the currently delayed league table will be the last of its kind after Government announced in December 2012 that this element of the CRC will be scrapped. So much for reputational incentives.

All of this makes very tenuous the link between CRC participation and ambitious efforts to tackle companies' climate change impact.  To be clear, the CRC has helped to put climate change and carbon reporting on the corporate agenda in the UK, and many firms will use the increased awareness of their energy consumption to drive savings.  However, most of the resultant savings will be at the margin, and as we have noted previously the vast majority of a company's greenhouse gas emissions will continue unabated, and then remain in the atmosphere for decades or centuries.

There are only two real ways to tackle a company's carbon impact when it matters most - that is, right now.  The first is to reduce net emissions within the company's footprint boundary - through energy efficiency, behaviour change, process improvements, reforestation and other measures.  The second is to reduce emissions outside the company's footprint boundary, at the same rate or greater than the company's own emissions - by supporting verifiable emission reductions from another source. That second approach is called "offsetting".

Taken together, ambitious internal reductions and high quality offsetting form the core of a comprehensive carbon management strategy.

The CRC remains a legal requirement for many UK companies and it can make a contribution to the low-carbon agenda.  But tax or not, the CRC is not a substitute for carbon offsets when it comes to fighting climate change.

ICROA's Code of Best Practice

Today I'm shepherding our third annual audit of Carbon Clear's compliance with the ICROA Code of Best Practice.

ICROA, or the International Carbon Reduction and Offsetting Alliance, is a self-regulatory industry body established in 2008 by Carbon Clear and seven other reputable carbon offset providers in Europe, the United States and Australia.  We came together to promote good practice for offset-inclusive carbon management, and to make sure customers and other stakeholders continue to have confidence in the voluntary carbon market.

It's not easy for a company or non-profit organisation to become an ICROA member.  First there are the membership requirements, which include having an established track record delivering carbon management products and services, a minimum annual turnover (revenue) threshold, and checks on the applicant's  reputation.  Member companies commit to volunteering time and resources to strengthen ICROA and its voluntary carbon market work, which may go beyond their day-to-day commercial activities.

Most importantly, members must comply with ICROA's Code of Best Practice.  It is the Code and annual compliance audit that distinguishes ICROA from other membership and lobbying bodies in the carbon market.  I have chaired ICROA's Policy Working Group from the beginning and have therefore been intimately involved in the development and implementation of the Code of Practice.

In summary, the ICROA Code of Practice requires members to:

1. Measure organisational or product and service carbon footprints to internationally recognised standards like ISO 14064-1, the WRI GHG Protocol, or PAS 2050.  Where members do not provide this service themselves, they must ensure that their subcontractors follow these standards;
2. Encourage customers to set ambitious greenhouse gas reduction targets and help them identify opportunities to reduce their footprint;
3. Help customers achieve zero net carbon emissions for all or part of their footprint via the use of carbon offsets from an ICROA-approved carbon credit standard.  Approved standards include American Carbon Registry, CarbonFix, the Verified Carbon Standard, the Climate Action Reserve, the Gold Standard, and of course the Clean Development Mechanism. (The ICROA Policy Working Group takes the lead in evaluating the suitability of carbon credit standards.)  Carbon credits must be shown to be real, measurable, permanent, additional, verifiable, and unique.
4. Retire carbon offset credits in a traceable independent registry after they have been sold to ensure those offsets are permanently matched against specific customer greenhouse gas emissions.
5. Work with customers to ensure they are communicating their carbon footprint, reduction and offset activities accurately.
6. Submit to an annual audit and report member compliance (or non-compliance) to the ICROA Secretariat.

The ICROA Code goes far beyond the requirements of the ill-fated Quality Assurance Scheme, which was  announced by DEFRA in the UK in 2007, finally launched by DECC in 2009 and abandoned in 2011.  It much more closely resembles the PAS 2060 "carbon neutrality" specification launched by BSI in 2010, which takes a similar "measure, reduce and offset" approach.

I believe the work of ICROA and its members is to some extent responsible for the rapidly growing maturity of the voluntary carbon market.  We are regularly approached by carbon offset providers who wish to become members, and push them to demonstrate good practice.  Even more interestingly, the carbon credit standards themselves often approach ICROA to be evaluated and added to the approved list.  A final proof point: last year, ICROA merged with the International Emissions Trading Association (IETA), in recognition of the growing importance of the voluntary carbon market.

Indeed, I don't think it would be a huge stretch to claim that ICROA and its members have helped to keep the voluntary carbon market buoyant even as the compliance market struggles with depressed prices and reduced demand for credits.  As I noted a few days ago, customers in the voluntary carbon market offset for a variety of reasons, but the environmental integrity of the carbon offset process is key to the buying decision.

No one enjoys an audit, but the knowledge that this annual process helps to strengthen the carbon market and reassures our customers makes the ICROA compliance audit that much more bearable.

Who's Afraid of Low Carbon Prices? Part 2: The Voluntary Market

This is Part 2 of my post about what low carbon prices tell us about the carbon markets.  Contrary to expectations, the price signals tell a good news story about the voluntary market.

I've now attended three of the four Africa Carbon Forum events held to date.  It's been interesting to see how views about the voluntary carbon market have changed over time.  At the Nairobi conference in 2010, the voluntary market was mostly ignored, save for a few buyers and sellers hovering around the margins of an event focused on the Clean Development Mechanism (CDM). 

In 2011, the Gold Standard and organisations supporting voluntary market projects spent their time lobbying - mostly successfully - for the CDM to adopt some of the rules (regarding suppressed demand, evolving baselines and the like) that have made the voluntary market a more  welcoming place for projects that improve the livelihoods of local communities.

In 2012, ACF delegates regarded the voluntary market in a new light.  The European Union's spokesperson stressed that, starting next year, they would only allow compliance credits from project types and countries where carbon finance could make a real commitment to sustainable development (regular readers will know that sustainable development benefits have always figured highly in Carbon Clear's project selection criteria).  Meanwhile, an entire panel session was devoted to discussion how the CDM could be reformed to stress social and environmental co-benefits, and the Gold Standard was invited to participate to share how it has been successfully pursuing this goal with its voluntary protocols.  With the European Union limiting carbon purchases from middle-income developing countries, delegates wondered whether it would be left to the voluntary markets - along with the ill-defined "new market mechanisms" - to continue driving the low-carbon transition in those economies.

And on the last day, one African delegate had the temerity to ask whether we would end up in a situation where all the "good" carbon projects ended up in the voluntary market, while all the generic or "bad" projects (to use his descriptions) would go to the compliance market.

What a change!  There was a time when offset customers were told that the voluntary market was full of cowboys and had a long way to go to match the environmental integrity of the compliance market.  The fact of the matter is that much of the voluntary market has matured rapidly and can now match or exceed the compliance market in terms of environmental integrity.  In addition, the price signals in the voluntary market perhaps tell us more than those in the compliance market about the future of the carbon markets.

The first thing to note about carbon prices in the voluntary market is that they have been less volatile than in the compliance market.  Verified Carbon Standard prices dropped in tandem with the Clean Development Mechanism after the 2008 economic downturn, but then stopped falling.  As a result, the price spread between generic VCS credits and CDM credits is only around €2, far narrower than it was in 2008.  The second thing to note is that projects that deliver non-carbon benefits have fallen less in price.  VCS credits that have undergone certification against a social or environmental quality screen like Social Carbon or Climate, Community and Biodiversity sell for the same price as CDM credits, if not more.  Gold Standard voluntary credits, which undergo strict social and environmental checks, have fared even better despite a huge quantity of new supply on the market.

Why is the oft-neglected voluntary market holding up better than the compliance market?  The first clue is in the name. 

Compliance buyers buy carbon credits mainly to avoid fines and penalties for exceeding their government-mandated targets.  They only buy when they must. As the name suggests, voluntary market buyers are not required to offset their emissions.  They do it because they want to - or more accurately, because it makes business sense to buy carbon credits.

In the voluntary market, companies offset their emissions for many reasons, for example, to establish an internal price of carbon in advance of regulation.  They offset their emissions to present new and innovative offerings to the market, to  engage their staff and customers, to demonstrate their corporate social responsibiltiy leadership, and more.  These business drivers don't depend on the economic cycle for their relevance, at least not as much as those driving the compliance market.  The result?  When the economy slowed, companies in the voluntary market paused, then continued to offset their emissions.

As for the delegate who asked whether the "good" carbon projects would all end up in the voluntary market?  His question reflected the fact that some voluntary customers want more than an emission reduction.  To be sure, with the costs of climate change becoming more apparent day by day, we should be supporting as many projects as possible that offer robust greenhouse gas reductions.  But for companies committed to corporate social responsibility, projects that offer broader sustainable development benefits can help them achieve multiple objectives simultaneously.  Indeed, as I have argued before, those broader benefits may be the main reason many companies invest, with the carbon market serving merely as the vehicle.  When presented to the right customers, such projects are relatively immune to market fluctuations.

In summary, the differing price responses to the economic downturn in the compliance and voluntary markets demonstrates how different these two markets truly are.  Companies that choose to go beyond compliance and offset their emissions voluntarily often make a long term commitment that helps moderate prices in the voluntary market.  Encouragingly, these price signals are encouraging developers to bring more projects to market that provide multiple community and environmental benefits beyond carbon reductions.

Happy Birthday, Carbon Clear!

 
Six years ago today, Carbon Clear was incorporated in the UK.  Back in 2005, the global carbon market was a very different place:

• The Kyoto Protocol had just entered into force
• The EU-ETS had just started operation
• Al Gore’s “An InconvenientTruth” had not yet been released
• ISO 14064-1 had not been released
• The Gold Standard did not exist
• The Voluntary (now Verified) Carbon Standard had not been released
• The UK Dept for Energy andClimate Change did not exist
•  The International Carbon Reduction and Offset Alliance (ICROA) did not exist

A lot has changed since 2005.  We've been priviliged to witness - and contribute to - the growth and evolution of a thriving ecosystem of companies, institutions and individuals committed to the transition to a low-carbon future.

It's been a successful and busy six years at Carbon Clear, but there is still much more to do.  We look forward to helping our customers and partners transform their relationship with carbon.


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