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Carbon Markets

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Voluntary Markets

Regulatory Markets

Emission Trading

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Projected Growth in the Global Carbon Market 2004-2020

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The value of the global carbon market has been increasing steadily (see Figure). With the impending addition of US and Canadian regulatory markets, the market is anticipated to grow exponentially in value from $300 million US in 2011 to $2 trillion by 2020. By 2020, carbon is expected to be one of the largest traded commodities in the world (New Carbon Finance, 2009). In light of these developments, carbon offset projects have become a highly favorable investment opportunity.

Source: New Carbon Finance

Voluntary Carbon Markets

Recent growth trends in the Voluntary Carbon Market

The voluntary carbon offset market allows companies, public bodies and individuals the opportunity to purchase credits generated from projects that either prevent or reduce an amount of carbon entering the atmosphere, or that capture carbon from the atmosphere. This market functions outside of the compliance market (the Kyoto Protocol, for example). Participation in the voluntary market is beneficial because: 1. It enables individuals and businesses in unregulated sectors or countries that have not ratified the Kyoto Protocol, to offset their emissions. 2. Companies can gain experience with carbon inventories, emissions reductions and carbon markets. This will facilitate future participation in regulated cap-and-trade systems currently under development. 3. The voluntary market is not subject to the same level of oversight, management, and regulation as the compliance market. Project developers therefore have more flexibility to implement projects that might otherwise not be viable (projects that are too small or too disaggregated, for example) or fall outside of those permitted within the compliance market. 4. Corporations can benefit from the positive public relations associated with the voluntary reduction of emissions.

In the voluntary carbon market, carbon offsets are derived and sold as Verified Emission Reductions (VERs), a measure that follows strict accounting standards but is flexible enough that VERs can be acquired at relatively low cost as compared to, for example, Kyoto compliant offsets. At present, however, VERs cannot be used to meet emission allowances in the regulatory market. The VER market has increased more than 30-fold since 2003 (to $705 million US in 2008; upper left Figure). Forestry based carbon projects have flourished in this market and have been increasing in size relative to other project types (see lower left). In North America, the voluntary market is divided between the Chicago Climate Exchange (CCX) and the Over The Counter (OTC) market. The CCX is a voluntary yet legally binding cap-and-trade emission scheme whereby members commit to capped emission reductions and must purchase allowances from other members or offset excess emissions. The OTC market requires no legally binding commitments and is utilized by individuals and organizations with a desire to offset emissions.

3GreenTree has developed a number of projects for the voluntary market (click here to see a few examples).

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Registered offsets by project type on the CCX (2007 vs. 2008)

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Regulatory Carbon Markets

Countries around the world have adopted a series of international agreements with the objective of mitigating the risk of climate change by actively reducing greenhouse gas (GHG) emissions. The first of these agreements was the United Nations Framework Convention on Climate Change (UNFCCC). In 1992, 154 countries (including Canada and the US) signed the UNFCCC in Rio de Janeiro. The key objective of the Convention was for countries to work towards stabilizing atmospheric GHG levels. Commitments were voluntary though countries agreed to meet regularly at a series of ‘Conference of the Parties’ or ‘COP’ to discuss the implementation of the Conventions objectives.

COP-1 (Berlin 1995) and COP-2 (Geneva 1996) established specific targets and timeframes for GHG reductions and emphasized the importance of developing legally binding commitments. At the third COP in Kyoto, Japan (1997), member countries adopted the Kyoto Protocol (also known as the Kyoto Accord). To date, a total of 183 countries have signed and ratified the Protocol. One exception is the US. It signed the Protocol in November 1998 but has not yet ratified. The Protocol provides for the following:

  • GHG emission-reduction targets for each country
  • A GHG emission-trading program
  • Further meetings to establish penalties for failure to meet targets and the rules and regulations of the new emission trading program

The Protocol establishes three market-based mechanisms aimed at giving countries flexibility around carbon offsets:

  • Emissions Trading: the buying and selling of emissions credits among developed countries. If a country goes over its emissions target for one year, while another falls under its targets, that country may buy the unused emission credits to meet its target.
  • Joint Implementation (JI): one industrialized country can receive emissions credits for a specific project undertaken in another industrialized country. Both countries must be listed within Annex I of the UNFCCC.
  • Clean Development Mechanism (CDM): developed (Annex I) countries can receive an emissions credit for financing projects that reduce emissions in developing (non Annex I) countries.

Projects that are compliant with the CDM mechanism generate Certified Emissions Reductions (CERs), while those compliant with the JI mechanism generate Emissions Reduction Units (ERUs). CERs and ERUs can be sold through emissions trading. Prices for these Kyoto-based offsets are typically higher than the VERs generated within the voluntary market.

Emission Trading Systems

Europe

• The European Union Emission Trading System (EU ETS), for example, is the largest multi-national, emissions trading scheme in the world (in 2008, 2,982.0 million tCO2e, valued at $94,971.7 million USD, were traded). Kyoto-based credits are entirely fungible within the EU ETS.

• The EU ETS currently encompasses more than 10,000 installations in the energy and industrial sectors that are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.

Forest carbon projects are currently permitted to a limited extent. This may change after the upcoming international climate change meetings in Copenhagen (Dec. 2009).

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Canada

As a signatory to the Kyoto Protocol, Canada has failed to meet its emission targets.

A national cap and trade system is under development and expected in 2010. Details regarding protocols for generating carbon offsets have not been finalized. The Federal government, however, has indicated that the Canadian system will be entirely consistent with the US greenhouse gas regulations currently being developed in the US Senate.

Forest carbon projects will be allowed within the Canadian (and US) system.

United States

• A new cap and trade system is under development as set out in the Waxman/Markey Bill (passed by the House of Representatives), and the Kerry-Boxer Senate Bill (now under debate in the Senate)

• The system will permit regulated industries to collectively acquire 2 billion tons of CO2e offset credits per annum, with a larger proportion coming from domestic projects relative to international projects. The relative proportion of each type of offset has yet to be finalized.

• Protocols specified by the Climate Action Reserve (see www.climateactionreserve.org/) are most likely to be the accepted standard though additional standards (the Voluntary Carbon Standard, for example) are also under consideration.

 

3GreenTree has the tools and experience to develop and implement projects consistent with any regulatory framework. Contact us to learn more...

 

Copyright 2012 3GreenTree Ecosystem Services Ltd.

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The offset market has been an important instrument for businesses to achieve their emission allowances. In 2008, a total of 1,046.7 million tCO2e worth $24,219.6 million USD were traded to meet Kyoto obligations, mostly as direct transactions with carbon offset project developers. There are also formal trading systems that serve the Kyoto market.