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Special Report: Carbon Offsets 2010


What started with carbon could lead to instruments valuing the full range of ecosystem services

Uchindile-Mapanda Reforestation Project, Tanzania: local workers seeding out plants
Uchindile-Mapanda Reforestation Project, Tanzania: local workers seeding out plants
Perhaps because they are by their nature optimistic, many offset providers are bullish about their long-term prospects. Based on the views of 200 market participants, the Ecosystem Marketplace Bloomberg New Energy Finance (EMBNEF) report forecasts that the voluntary carbon market will increase in size more than fourfold to 400 million tonnes CO2 in 2012, doubling to 800Mt in 2015 and rising a further 50% to 1.2 billion tonnes by 2020.

Despite this sentiment, most admit that the immediate future is open to debate. Carbon Clear managing director Jamal Gore likens making market predictions to “crystal ball gazing”, referring to the recession, post-Copenhagen uncertainty, concerns over carbon credit supply and new legislation such as the UK Carbon Reduction Commitment (CRC) Energy Efficiency scheme as contributory factors.

The recession is dampening demand, starving projects of matched capital and buyers of funds. It has also taken the eyes of the general public and the media off climate change, compounding a general dip in confidence caused by the ‘Climategate’ row that kicked off late last year. The vacuum following the Copenhagen climate summit in December has deprived carbon financiers of clarity, and hopes are not high for the next summit in Cancun this December. Restricted offset supply is a potential risk for the compliance markets, with likely knock-on effects for the voluntary sector.

In addition to the uncertainty created by the lack of any real progress at Copenhagen is the damage caused to public perception around the whole issue of climate change. Many lobbyists, including the UN itself, warned that Copenhagen was “the last chance to save the world”. The failure of the participants to seize the opportunity it presented, combined with the sustained attacks on areas of climate science around the same time, has left the public wondering how great a threat climate change truly is. Some businesses therefore regard the need to demonstrate climate awareness and action as a lower priority than they did a year ago.

As well as these large-scale uncertainties, regional carbon trading initiatives are also influencing the shape and form of the voluntary market. On the up-side, these are stimulating carbon accounting and innovation. On the down-side, there is a risk they could end up diverting budget and human resources.

The UK CRC Energy Efficiency Scheme was launched in April this year, obliging an estimated 3,000 businesses and organisations to forward-buy carbon credits based on projected energy consumption. This cost will be refunded, net of a penalty or rebate based on energy reduction performance, and shown in a public league table. Bound parties will be unsure of their position in the league table, and hence uncertain about costs and public relations implications, until mid-2011. This could tie up carbon budgets until then, with businesses reluctant to buy two sets of credits for different purposes.


But although the UK is at the forefront of much innovation and development of the voluntary market, it is by no means the only influence. As Scott McGregor of Camco put it: “There is an evolving patchwork of regulated markets, including the EU, US and Japan. Voluntary markets fill the gaps, offering those businesses not caught under legislation the chance to demonstrate their credentials, price carbon into their decision-making and pre-empt legislation which may be around the corner.”

But once this legislation is passed, it could have profound implications for the voluntary markets. It depends on its target emitters. Should regulations in the US and China aim for top-tier polluters as the EU emissions trading system does, they will not influence voluntary markets too strongly. But should they target traditional voluntary offset buyers like consumer-facing brands, as the CRC scheme does in part, carbon budgets could be diverted and voluntary markets could suffer.

Frankfurt-based First Climate is an asset manager, project developer and retailer to large corporates, with about a fifth of its business in the voluntary sector. Sascha Lafeld, the firm’s founder and commercial developer, identifies big potential for Chinese growth. He explained: “I can see similarities to where the European market started seven years ago. But in China, there is firm government control and unified public action, and they have the European template to work from. I expect action to be much swifter here.”

In the USA, voluntary demand is rising, despite a host of negative forces in play. According to a Gallup poll in March, fewer Americans are concerned about the threat posed by global warming than since records began 13 years ago, while 48% do not believe it is happening at all. The chances of federal or state cap-and-trade legislation look slimmer than ever.

However, low offset prices are attracting new voluntary and pre-compliance buyers. Furthermore, many carbon professionals remain optimistic that legislation will eventually be passed, according to a recent survey by Point Carbon News. In both China and the US, regulation is likely to start with larger polluters, leaving space for the voluntary markets to operate. But there are no guarantees.

The voluntary markets continue to bring much needed finance and infrastructure to developing countries. South America’s future is bright, with the drive for Reduced Emissions from Deforestation and Degradation (REDD) and REDD+ through the voluntary markets. Brazil’s climate fund recently surpassed $100m and the Voluntary Amazon fund, an important testing ground, has received pledges of up to $1bn from Norway. Preparatory work, such as establishing forestry monitoring systems, is now under way using cash pledged at Copenhagen.

Another benefit of carbon finance is longevity. Aid funders often shift finance regularly around topical development projects or regions. The need for monitoring and verification means that offset finance supports a project for its lifetime, making it a long-term bet.

Environmental service economy

Voluntary market players are also considering the protection of other ecological systems. The Gold Standard is not ruling out the potential to overlay its criteria on markets for water, black carbon (such as biochar) and other ecosystem services.

As we have seen with the recent furore about hydrofluorocarbon projects, there is still much to do in the wider carbon markets. The voluntary sector is leading the way, and in many cases now sets the benchmark. This is not only testament to the work that has put in place stronger standards, but also to the flexibility and adaptability of voluntary credits and their ability to deliver wider benefits beyond carbon.

Voluntary carbon offsetting has gone through a watershed: indiscriminate offsetting without attention to projects or that is based on broader carbon management strategies is a thing of the past. Weaker offset propositions have been culled and buyers have become more sophisticated, developing offset in new directions and devising their own initiatives.

While the puff has been taken out of the heady optimism of 2007, the grip of the invisible green hand of carbon capitalism is strengthening. As Voluntary Carbon Standard chief executive David Antonioli put it: “When we have a perfectly seamless, fully fungible network of interlinked carbon markets then we will have reached the holy grail, and we can go home with the job done.”