Appendix C – Carbon Markets

As King Henry said at Agincourt – one day, we will look back and either be happy we did, or else wish we had; the choice is ours.

T.S. Elliot:
Between the idea and the reality, Between the motion and the act Falls the Shadow.  Between the conception and the creation, Between the emotion and the response Falls the Shadow.

Leaders must try to shine some light on a pathway through this terra incognita that lies between where we are and where we need to go. ( FWD). ALQ Outline:

The Economic Value of Carbon Credits
a.   The Dollars: 1 ton of ice =  348,000 BTUs This displaces 24# of coal (Avg. 14,500 BTU/# coal x 24 = 348,000) 1 Target iceberg has about 43,500,000 million BTU:

    1 Target iceberg = 125,000,000 tons x 348,000 BTU/ton =  Total BTUs of 43,500,000,000,000 in one target iceberg 43,500,000,000,000/14,500 = 300,000,000 # of coal displaced 300,000,000 / 2,000 = 150,000 tons of coal displaced Carbon conversion factor for CO2 = 2.86 (Avg??) 150,000 tons x 2.86 conversion = 429,000 tons CO2 offset in one Target Iceberg As of October, 2009, Carbon Financial Instruments are trading for 10 cents per metric tonne on the Chicago Climate Exchange.

Some authors wonder if the investors are reacting to the Hockey Stick Implosion news? As reported on WUWT, less than one month ago it was 25 cents a tonne, and a year ago it was over 1 dollar.  The all time high was May 2008 at over 7 dollars a tonne. At the moment, carbon credit dollars ae marginal in the iceberg product calculations and, even at higher dollar values,  it would take work to meet the additionality tests as most commonly defined.  However, the situation is very fluid and markets highly volatile.  With expiration of Kyoto in 2012, and the 15th Convention of the Parties (to the Kyoto Treaty itself), to be held in Copenhagen at the United Nations Climate Change Conference, December 7 – 18, 2009, one needs to cast a watchful eye. The iceberg project appears to have its core viability separate and apart from the issues of climate change, other than that there is growing drought throughout the planet, regardless of the science underlying the paleoclimatological debate and the politicians’ efforts. Despite currently low market values for carbon credits, the area should not be ignored, and we should certainly utilize  appropriate consultants in fashioning a component of revenue and in presenting all of the beneficial aspects of the iceberg project.  

  • How calculated:

The data below is taken from the Energy Information Administration of the U.S. Department Of Energy and found in an article originally published in Energy Information Administration, Quarterly Coal Report,January-April 1994, DOE/EIA-0121(94/Q1) (Washington, DC, August 1994), pp. 1-8). 

The carbon dioxide emission factors in this article are expressed in terms of the energy content of coal as pounds of carbon dioxide per million Btu. Carbon dioxide (CO2) forms during coal combustion when one atom of carbon (C) unites with two atoms of oxygen (O) from the air. Because the atomic weight of carbon is 12 and that of oxygen is 16, the atomic weight of carbon dioxide is 44. Based on that ratio, and assuming complete combustion, 1 pound of carbon combines with 2.667 pounds of oxygen to produce 3.667 pounds of carbon dioxide. For example, coal with a carbon content of 78 percent and a heating value of 14,000 Btu per pound emits about 204.3 pounds of carbon dioxide per million Btu when completely burned.(5) Complete combustion of 1 short ton (2,000 pounds) of this coal will generate about 5,720 pounds (2.86 short tons) of carbon dioxide

Methodology and Statistical Checks

EIA's carbon dioxide emission factors were derived from data in the EIA Coal Analysis File, one of the most comprehensive data sources on U.S. coal quality by coalbed and coal-producing county. Most of the samples in the file were taken from coal shipments to U.S. Government facilities, from tipples and from mines. From the more than 60,000 coal samples in the File, 5,426 were identified as containing data on heat value and the ultimate analysis(6) needed for developing the relationship between carbon and heat content of the coal, that is, the carbon dioxide emission factors. Coal rank was assigned to each sample according to the standard classification method developed by the American Society for Testing and Materials. These data observations (samples) covered all of the major and most of the minor coal-producing States (Table FE1). Except for Arizona, North Dakota, and Texas, all of the major coal-producing States were considered to have a sufficiently large number of data observations to yield reliable emission factors.

The ratio of carbon to heat content was computed for each of the 5,426 selected coal samples by coal rank and State of origin under the assumption that all of the carbon in the coal is converted to carbon dioxide during combustion.(7) Variations in the ratios were observed across both coal rank and State of origin. Analysis was performed to determine whether these variations were statistically significant and to ensure that other factors pertaining to the samples (that is, the year the sample was collected and the degree of cleaning the sample received) were not significantly responsible for the observed variations.

The statistical analyses (Table FE3) indicated that:
    (1) There are statistically significant differences in carbon dioxide emission factors across both coal rank and State of origin.
    (2) Coal rank and State of origin each explain approximately 80 percent of the variation in carbon dioxide emission factors.
    (3) State of origin combined with coal rank is a slightly more powerful explanatory variable than either coal rank or State of origin alone.

Carbon Dioxide Emission Factors by Coal Rank and State of Origin

The (arithmetic) average emission factors obtained from the individual samples (assuming complete combustion) (Table FE4) confirm the long-recognized finding that anthracite emits the largest amount of carbon dioxide per million Btu, followed by lignite, subbituminous coal, and bituminous coal. The high carbon dioxide emission factor for anthracite reflects the coal's relatively small hydrogen content, which lowers its heating value. In pounds of carbon dioxide per million Btu, U.S. average factors are 227.4 for anthracite, 216.3 for lignite, 211.9 for subbituminous coal, and 205.3 for bituminous coal.

In general, the carbon dioxide emission factors are lowest for coal produced in States east of the Mississippi River (Figure FE1), where the predominant coals are bituminous in rank and therefore have relatively low emission factors. By comparison, the coal deposits in the West are largely subbituminous coals, which have relatively high emission factors. In a broad sense, the geographic differences reflect the greater degree of coalification--the process that transformed plant material into coal under the influence of heat and pressure--in the coal-bearing areas in the East.

In the Appalachian Coal Basin, the emission factors for bituminous coal range from a low of 202.8 pounds of carbon dioxide per million Btu in Ohio to a high of 210.2 in Maryland. Pennsylvania anthracite, which is produced in small amounts, has the highest emission factor among all coal ranks (227.4). For Illinois Basin coal, all bituminous in rank, the emission factors are relatively uniform, ranging from 203.2 in western Kentucky to 203.6 in Indiana.

The emission factors for coal consumption involving combustion are based on the assumption that all of the carbon in coal is converted to carbon dioxide during combustion. Actually, a very small percentage of the carbon in coal is not oxidized during combustion. The emission factors in Table FE5 can be adjusted to reflect incomplete combustion.

The mix of rank and origin of coal consumed in the United States has changed substantially in the past two decades, reflecting shifts to Western low-sulfur subbituminous coal and lignite, predominantly for electricity generation. Further changes are expected in the coming years, especially due to the Clean Air Act Amendments of 1990, which will encourage switches from high-sulfur Eastern bituminous coal to low-sulfur Western subbituminous coal.

The shift in the mix of coal ranks consumed becomes apparent when production by coal rank in 1980 is compared with that in 1992, as most production was for domestic consumption.

In 1980, bituminous coal comprised 76 percent of the total, but by 1992 its share dropped to 65 percent. By contrast, the share for subbituminous coal rose from 18 percent in 1980 to 25 percent in 1992, while the share for lignite grew from 6 percent to 9 percent. Anthracite's share was about 1 percent in both years. Because lower rank coals have relatively high carbon dioxide emission factors, increased use of these coals caused the national average carbon dioxide emission factor to rise from 206.5 pounds per million Btu in 1980 to 207.6 pounds per million Btu in 1992.

The change in mix of coal ranks produced reflects the large sectorial and regional shifts in coal consumption that have occurred in the past two decades. The electric utility sector dominates coal consumption, and its share has grown substantially. Of total coal consumption in 1992, electric utilities accounted for 87 percent, up from 81 percent in 1980, due mostly to increases in utility coal consumption west of the Mississippi River.
The share held by low-rank coals in the electric utility sector increased substantially.

Subbituminous coal rose from 24 percent in 1980 to 31 percent in 1992, and lignite grew from 7 to 10 percent during the period. In contrast, bituminous coal fell from 69 percent in 1980 to 58 percent in 1992. The share held by anthracite (about 1 percent) did not change.

From a different source:

www.Junkscience.com, January  24, 2008, “Capturing Carbon Pipe Dreams” by Steven Milloy:
But perhaps the most sobering assessment cited by the CRS comes from the United Nations Intergovernmental Panel on Climate Change (IPCC), the group that has the official lead in selling climate hysteria. The IPCC estimates that the per ton cost of CO2 mitigation ranges from $31 to $71 for a coal-fired power plant.

Given that one ton of coal produces about 1.8 tons of CO2 and using the midpoint of the IPCC’s estimated cost range ($51), the per ton cost of CO2 mitigation for one ton of coal is $92. As the current price of coal is about $10 per ton and the price of transporting that coal to an electric power plant averages about $25, capturing and sequestering CO2 could effectively raise the effective price of coal to power plants from $35 per ton to $127 per ton -- a 362 percent increase.

That sort of increase would likely dramatically impact electric bills. Since about one-third of the cost of electricity is fuel, tripling fuel costs could double the price of coal-fired electricity. To the extent that higher coal costs drove power plants to switch from coal to natural gas, the additional demand for gas would force those prices higher as well. By the way, electricity produced from natural gas already costs about four times as much as from coal.

Why there is a carbon market
c.   Nature of the carbon market:       i. Regulated       ii.Voluntary

d.   What makes a high quality carbon credit?
e.   Carbon Issues:
      Regulated vs. voluntary
      Values & pricing differentials and closure REC vs. Carbon Credit and the interrelationship Additionality Thermal Credits may be different than Carbon Credits…perhaps two types of credits – flush out – not sure.

f.    Consultants & Costs

g.   Certification Criteria                                    
      i. Criteria       ii. Names & Websites Marginalia:    ________(??)
      Thirsty People
      Thermal Credit & Clean Electricity
      Carbon Credits (different than the thermal credit)
      Carbon Credit Basics  


Synopsis of Voluntary Carbon Markets

By:  Ricardo Bayon   Amanda Hawn  & Katherine Hamilton

Outside of the Kyoto Treaty, business leaders in both political parties have taken significant steps to position their companies as leaders in addressing the crisis over climate and have adopted policies that not only reduce CO2 but make their companies zero carbon.  Many of them have discovered a way to increase profits and productivity by eliminating their contributions to global warming pollution.  A key contributor to the movement to freeze and then reduce carbon emissions and a remarkable area of commercial and policy innovation, is the voluntary carbon market.  This is particularly so in the current absence of a worldwide regulatory system for carbon reduction. 

Atmospheric CO2 levels are now higher than they have been for at least the last 650,000 years (NOAA, 2008).

Carbon markets help channel resources towards the most cost-effective means of reducing greenhouse gas emissions.  At the same time, they punish (monetarily) those who emit more than an established quota, and reward (again, monetarily) those who emit less.  This changes the economics of energy technologies, making technologies that emit less carbon more competitive vis-à-vis their carbon-intensive counterparts.  By turning units of pollution into units of property, the system makes it possible to exchange pollution over broad geographic locations.

The term ‘carbon market’ refers to the buying and selling of emission credits that have been either distributed by a regulatory body or generated by greenhouse gas (“GHG”) emissions reductions projects, respectively.  Six GHGs are generally included in “carbon’ markets:  carbon dioxide, methane, nitrous oxide, sculpture hexafluoride, hydrofluorocarbons and perfluorocarbons.

GHG emissions reductions are traded in the form of carbon credits, which represent the reduction of GHGs equal to 1 metric ton (tonne) of carbon dioxide equivalent (tCo2e), the most common  GHG.

GHG methane has a global warming potential (“GWP”) roughly 23 times greater than CO2, hence 1 tonne of methane equals about 23 tCo2e.  Likewise, other gases have different equivalences in terms of tCO2e, with some of them (perfluorcarbons) worth thousands of tones of CO2e).

Carbon credits can be accrued through two different types of transactions.  In project-based transactions, emissions credits are the result of emissions reductions achieved by a specific carbon offset project.  Allowance-based-transactions involve the trading of issued allowances (also known as permits) created and allocated by regulators under a cap-and-trade regime.  In cap-and-trade, the regulatory authority caps the quantity of emissions that participants are permitted to emit and issues a number of tradable allowance units equal to the cap.  Participants who reduce their emissions internally beyond required levels can sell unused allowance to other participants at whatever price the market will bear.  Likewise, participants who exceed their required levels can purchase extra allowances from participants who outperformed their emissions targets.

The global carbon market can be separated into two sub-markets:  the compliance (or regulatory) and voluntary markets.  Because the voluntary market inherently does not operate under a universal cap, all carbon credits purchased in the voluntary market are project-based transactions (with the exception of those traded on the Chicago Climate Exchange).  (Bayon at p. 5).

There are a number of compliance (regulated) cap-and-trade carbon markets around the world, and most are underpinned in one way or another by the Kyoto Protocol.  The Kyoto Protocol’s authors created three major ‘flexibility mechanisms’ in order to provide the treaty’s signatories with a cost-effective means of achieving their GHG emission reduction targets. 

These mechanisms are the basis for the regulated international compliance carbon market, and they are: 

    a.         Emissions trading
    b.         Joint Implementation (“JI” and utilizing Emission Reduction Units (‘ERU”))
    c.         Clean Development Mechanism  (“CDM”) (Bayon at p. 7 more detail available)

The World Bank estimates that in 2007, buyers contracted for 551 million tones (“Mt”) of Co2e in the primary CDM market of the Kyoto Protocol.  Analysts put the total value of the CDM market (primary and secondary) in 2007 at over US $12 billion.  The JI market of the Kyoto Protocol is believed to have traded only 41 Mt of carbon and to have been worth around US$499 million the same year (p. 7, citing Capoor and Ambrosi, 2008).

To meet their Kyoto treaty obligations, countries have established (or are establishing) national or regional emissions trading. …..It has been estimated that the global carbon market traded nearly 5 billion tones of carbon credits in 2008 and was worth £92 billion (Point Carbon, 2009). 

The explosive growth of the global compliance carbon market under the Kyoto Protocol has meant that prices for carbon credits have been extremely volative, with carbon trading anywhere from £7 to £32 a tonne (Point Carbon, 2006).  Despite this volatility, carbon markets around the world have matured, and in 2008 the global carbon market was valued at a whopping US$64 billion (£47 billion) (Capoor and Ambrosi, 2008).
(Bayon at p. 8).

The World Bank estimated that the total capitalization of carbon investment vehicles could top US$13 billion in 2008 (Capoor and Ambrosi, 2008)(p.  8). The World Bank’s State and Trends of the Carbon Market 2008  report suggests the level of sophistication to which the compliance carbon market has evolved and matured:

Financial institutions have entered the carbon world acquiring pioneering carbon aggregators and building a base for origination of carbon assets globally.  An increasing number of carbon contracts and carbon-based derivatives are becoming available.  Specialized companies and institutions have sprung up to service several aspects of the carbon value chain; some have begun to pair carbon finance with more traditional skills found in other commodity markets.

Several dedicated funds focusing on developing and participating in Greenfield projects have been launched (i.e., these funds are either partially replenished with carbon revenue streams or account with the sale of the credits to meet investor expectations of return).  Large international banks have established structured origination teams to pick up principal positions in carbon-rich projects and have set up carbon trading desks, seeking arbitrage opportunities.  Financial institutions offer products that reduce or transfer risk, for instance by offering delivery guarantees for carbon assets in the secondary market. (Bayon at pp.8-9)

In the United States, some two dozen states have initiated their own regulations alone or in conjunction with others.  GHG emissions markets exist or may soon exist under the following regimes:

Oregon Standard Regional Greenhouse Gas Initiative (“RGGI”) – a regional cap-and-trade system comprised of ten states – Connecticut, Delaware, Maryland, Massachusetts, Maine, New Hampshire, New Jersey, New York, Rhode Island and Vermont).

California’s Global Warming Solutions Ace (“AB 32”)
The Western Climate Initiative (“WCI”) -  An emerging regional trading market the currently includes seven US states (California, New Mexico, Oregon, Washington, Arizona Utah and Montana) as well as four Canadian provinces (British Columbia, Manitoba, Quebec and Ontario). 

Midwestern Regional GHG Program – A regional cap-and-trade programme currently consisting of member states Iowa, Illinois, Kansas, Minnesota, Wisconsin, Michigan and Manitoba (Canada).

In Australia, the state of New South Wales (“NSW”) launched the NSW Greenhouse Gas Abatement Scheme on 1 January 2003, two years before the first trade ever took place on the EU ETS… The NSW Greenhouse Gas Reduction Scheme (“GGAS”) is a mandatory, stat-level cap-and-trade programme designed to reduce GHG emissions associated with the production and use of electricity, and to develop and encourage activities to offset the production of GHGs…If a regulated emitter exceeds its target, it has the choice of either paying a penalty of AU$11.50 (about US$9) per tCo2e or purchasing New South Wales Greenhouse Abatement Certificates (“NGACs”).  NGACs can be generated by approved providers with projects in the state that led to low-emissions electricity generation, improved energy efficiency, biological Co2 sequestration, or reduced on site emissions not directly related to electricity consumption.  The initiative does NOT accept credits, such as CERs or ERUs, from outside of the state.  The NSW GGAS traded some 25 million certificates in 2007 for a total market value of US$224 million (£164 million).  (p.11)

According to the World Bank,  outside of the Kyoto markets, the NSW GGAS is the world’s largest regulated cap-and-trade GHG market, with about 25MtCo2e traded in 2007 and an estimated value of US$224 million (Capoor and Ambrosi, 2008).  (p. 11). After years of holding out, Australia ratified the Kyoto Protocol in 2007, soon after the inauguration of new Prime Minister Kevin Rudd.  According to the current government, a national emissions trading scheme will be launched in Australia no later than 2010.
(Capoor and Ambrosi, 2008)(p. 11).

The emissions reductions driven by current state and regional schemes in Australia and the US are tiny compared to those mandated by the Kyoto Protocol, and the emissions reductions driven by the Kyoto Protocol are tiny compared to those many or most scientists deem necessary. 

Mark Kenber, head of policy strategy at The Climate Group in London, says, ‘The policies that we see around the world are nowhere near what the science suggests we need.’ Kyoto expires in 2012.  There is a world conference in Copenhagen in 2009 to secure new commitments and further extension, renewal,
or alteration of the Kyoto Accords. (ALQ commentary).

Hundreds of companies – ranging from Google to General Electric – have now incorporated the idea of carbon offsetting into corporate sustainability plans, spawning a global voluntary market worth an estimated $331 million in 2007 (Hamilton, et al., 2008)(p.12) 

Much like the credits traded in a regulated cap-and-trade scheme, voluntary offset projects generate credits equal to the removal or avoided emission of 1 tonne of CO2… Institutions claiming to have offset their GHG emissions must retire credits purchased.

Voluntary Carbon Markets

Many private companies hope to reduce their “carbon footprint” for philanthropic and marketing reasons, not because of being forced to do so by legislation or global treaty.  Their voluntary actions drive the voluntary market.

The voluntary markets do not rely on legally mandated reductions to generate demand.  As a result, they sometimes suffer from fragmentation and a lack of widely available impartial information.  The fragmented and opaque nature of the voluntary markets can, in large part, be attributed to the fact that they are composed of deals that are negotiated on a case-by-case basis, and that many of these deals require neither that the carbon credits undergo a uniform certification or verification process nor registration with any centeral body.  As a result, there are almost as many types of carbon transactions on the voluntary markets as there are buyers and sellers; a variety of businesses and non-profits based on different models sell a range of products, certified to a wide array of standards. The lack of uniformity, transparency and registration in the voluntary markets has won them a great deal of criticism from some environmentalists.  There are real risks of non-delivery.  Some carbon credits are of higher quality than others. The markets are in an on-going process of consolidation and finding regimes for certification, third party verification, standards for determining “additionality” (discussed below), and otherwise engaged in a process of growth, change and maturation as a market and as a commodity. (ALQ summary) Despite the shortcomings of the voluntary markets, many feel they are fast-evolving arenas with some distinct and important advantages over the regulated carbon markets.

Voluntary credits are, in general, more flexible, faster, and cheaper than regulated credits. (Bayon at p. 14). In their State of the Voluntary Carbon Markets 2008 report, Ecosystem Marketplace and New Carbon Finance presented in table below a tracking of the following volumes of millions of tones/yr, although both the number of transactions and the related
volumes is likely to be significantly greater:

Year (millions tones/yr)


(Bayon at p. 15)

Voluntary markets volume Pe-2002


(ALQ Note:  So…what are our numbers?  How many tons of CO2 equivalent for credits in a Target Iceberg?) At present there are several related and unrelated efforts underway to make the voluntary carbon markets more ‘investor-friendly’ by creating registries, documenting the size of the markets and standardizing the credits being sold.  Verification standards and the use of third-party verifiers have become a ‘must-do’ for many retailers and developers seeking to sell high quality offsets.  As of late 2008, more than a dozen standards had emerged to verify or provide guidelines for offset project development in the voluntary markets. 

Carbon credit registries are springing up to track credit transactions and ownership as well as reduce the risk that a single credit can be sold to more than one buyer. Several new registries were launched during the first four months of 2008 alone, including the New Zealand-based registry and exchange TZ1, the California Climate Action Registry’s Climate Action Reserve, and The Gold Standard’s Registry for VERs (the latter two set up by market infrastructure provider APX).  (Bayon at p. 16).

How The Voluntary Markets Operate

A project or project idea is generated, the resulting emission reductions are quantified and verified to some standard to create carbon credits, the credits are sold to intermediaries, and the intermediaries sell them on to businesses and individuals (Figure 2.1 of text describes project types, attributes, etc., Bayon at pp. 21-24)… In some cases, project developers may skip stage two and/or three of this sequence, selling either verified or unverified credits directly to consumers.

Project Creation

Some projects start simply as a concept or idea and may not begin until a buyer supplies funding…Project developers come in all stripes and sizes (discussed somewhat).  Buyers can choose to provide carbon financing for specific types of projects and support specific co-benefits (e.g. benefits for biodiversity or benefits for local communities), in addition to greenhouse gas (GHG) reductions. 

A key difference is the type of project used to generate emission reductions.  At the broadest level, offset projects can be categorized as those reducing GHG emissions at the source and those reducing GHG levels in the atmosphere through sequestration (See Appendix 1 of Bayon for more detailed description of the different kinds of offset projects and respective advantages and disadvantages).

Project types discussed include a Fossil fuel category where there is energy efficiency as fossil fuel use is decreased by utilizing it more efficiently.  Co-benefits include cost savings; supports clean technology and reduces fossil fuel dependency and co-pollutants such as Sox, PM and VOCs.  “If savings are greater than costs the need for carbon finance should be considered.” (Bayon at p. 21).

Project Validation and Credit Verification

This entails the process of getting a product recognized by the market.  While credits originating from Clean Development Mechanism (“CDM”) projects are referred to as Certified Emissions Reductions (“CERs”), offset credits in the voluntary market are often referred to as Verified (or Voluntary Emission Reductions (“VERs”).   The term embodies the ideal of legitimate third party verification.  Quantifying and verifying GHG emission reductions require significant technical expertise and monitoring throughout the project lifespan. 

Credit verification occurs when third party verifiers confirm that emission reductions have occurred.  A few major considerations guide almost all considerations of credit quality (Hamilton, 206):

Additionality The project must create reductions over and beyond a business-as-usual scenario, and there must be some assurance that the project would not occur without the funding provided by carbon credits (See below).

PermanenceThe project must be able to guarantee GHG mitigation over the stated time period.  This is especially important in long-term projects, such as ex ante (pre-pay) reforestation in which risks such as a fire would affect the delivery of credits. 

Leakage The project must not transfer emissions to another location outside the project area.  Leakage occurs when emission reductions at one site or point of time indirectly drive increased emissions from another activity outside of the project boundary.  For example, if a forestry project limits logging in one area, developers should consider the possibility that the source of deforestation will move and simply occur elsewhere.

Double AccountingThe project must avoid double accounting when more than one organization takes credit for owning or retiring offsets. 

Co-benefits:  While the primary goal of carbon credits is to offset GHGs, many types of projects provide additional benefits, such as reduction of other pollutants, contributions to local communities, or habitat for biodiversity.  Co-benefits range dramatically between project types, but are an important factor for many individuals and institutions purchasing emission reductions voluntarily.  Co-benefits may also represent additional revenue streams for investors.  Electricity sales, sales of other pollution credits, or timber sales represent financial co-benefits.  It is important, however, that customers understand which co-benefits have been parceled off and which will remain ‘bundled’ with the carbon offset.  It is also important to understand who gets a project’s co-benefits.

When a project’s emission reductions have been verified in accordance with a particular certification standard and endorsed by the organization issuing the certification, it is common to say that the resulting carbon credits have been certified.  In the Kyoto market, CERs refer to carbon credits that have been approved by the CDM Executive Board.  Certification in the voluntary markets is a more general term suggesting that an institution with a recognized set of requirements has endorsed the credits in question with a stamp of approval.  Most project developers finance the verification of their carbon emissions reductions before selling them to either intermediaries or end consumers in the voluntary markets…Third party verification is a requirement of the CDM and for most standards, but it is not required in the ‘over-the-counter’ (OTC) market and is not always utilized (thought its utilization is increasing).

In response to the high transaction costs and confusion caused by the wide range of offerings in the voluntary markets, more than a dozen organizations have developed standards of certification programmes.  In 2007, the cost of verifying a project to the Community, Climate and Biodiversity (CCB) Standards ranged from $5400 to $15,400.  Likewise, the cost of having a credit validated and issued by the VER+ Standard ranged from $7700 to $23,100 in 2007 (Kollmuss, et al., 2008).  (Bayon at p. 27).

Major certification programmes/standards available or soon to be available for the voluntary carbon offset markets as of mid-2008, (and which may bear on icebergs and their products and co-benefits) include:

Gold Standard for VERs:   A third party standard for carbon credits generated by renewable energy and energy efficiency projects with sustainable development benefits.  Version 20 was released in October, 2008.

Greenhouse Friendly:  An Australian government programme that works with independent verifiers to certify both Australia-based offset projects and carbon neutral products/services.

Social Carbon:   A project design standard based on a sustainable livelihoods approach that focuses on the welfare and potential of local communities as well as their natural resources.  It has been used to verify forestry, hydrology and fuel switching projects in Latin America and Portugal.

VER+:  A third party standard for offsets based on CDM and JI verification methodologies.

Voluntary Carbon Standard:  A third party standard for ‘ex post’ offsets with its own brand for VCS certified offsets (called Voluntary Carbon Units, or VCUs).  VCS 2007 is the most recent version of the standard.  (With ex-ante accounting, credits are sold before they are produced; in ex post accounting they're sold after they are produced).

Appendix 2 to the Bayon book lists some of the standards and certification programmes available for voluntary carbon credits.

Additionality:  An important concept for most additionality requirements is what is considered to be the baseline:  the ‘hypothetical description of what would have most likely occurred in the absence of any considerations about climate change mitigation’ (WBCSD/WRI, 2008).  In order to establish that a GHG offset project has reduced emissions beyond those expected in the baseline, a variety of tests for additionality are used.  Five additionality tests are outlined by the World Resources Institute (“WRI”)/World Business Council for Sustainable Development (“WBCSD”) Greenhouse Gas Protocol for Project Accounting, a widely accepted standard for project accounting:

Investment:  To pass this test, also known as ‘financial additionality’, developers must prove that potential revenue from the sale of carbon credits is a decisive reason for implementing a project that otherwise would not have occurred.  The CDM additionality requirements are based on this concept.>

:  In order to pass the technology test for additionality, developers must show that the primary benefit derived from the technology used was the reduction of GHG emissions.

Regulatory:  The test for regulatory additionality requires that a project reduce emissions below the level required by law.

Common Practice:  Similarly, developers must prove that the project reduces GHG emissions more than similar projects employing ‘common practice.’

Timing:  Some standards require developers to demonstrate that they initiated their project after a specific date.  The idea is that the timing of a project can help determine whether or not it was undertaken with the expectation of carbon financing.

Stakeholders regularly debate which tests to use as proof of additionally in the voluntary market.  The WRI/WBCSD Protocol states, ‘setting the stringency of additionality rules involves a balancing act’ (www.ghgprotocol.org/).  Since there is no ‘technically correct’ answer to the question of additionality, opinions on the ideal stringency of additionality in the voluntary market range dramatically. ( Bayon for more discussion, p. 30).

Product Distribution

Retailers and carbon fund managers generally select and maintain investments in a portfolio of projects that generate credits over time. Retailers sell offsets directly to institutional or individual buyers, usually in small amounts and via the internet, from a portfolio of emission reductions that they own.  Ecosystem Marketplace has confirmed at least 200 suppliers of voluntary credits (Hamilton, et al., 2008).(p.29).

Aggregators and wholesalers sell offsets in bulk and often have ownership of a portfolio of credits.  The typically work on or through exchanges.  On the Chicago Climate Exchange (“CCX”), aggregators oversee the verification of the projects they work with, trade on behalf of project owners and make sure projects comply with CCX requirements.  Wholesalers buy emission reductions from project developers and sell them in large quantities to final (usually large institutional) buyers. Brokers work to facilitate transactions between institutions and offset project developers but do not take ownership of credits. Whereas exchanges are preferred for large transaction volumes, frequent trades and standardized products or contracts, brokers are typically used for trading non-standardized products or contracts, often in smaller volumes (Kollmuss et al., 2008).  Brokers currently working in the voluntary markets include Evolution Markets, MF Global Limited and CantorCO2e, and others.

Exchanges exist for trading voluntary carbon credits.  Currently, the largest exchange in the world trading voluntary carbon credits is the CCX, and access to the exchange is restricted to members.  Recently, a handful of other exchanges, including the Asia Carbon Exchange, the Green Exchange, and Climex have either opened themselves up to VER trades generally or announced that they would soon do so, though as of late 2008, the number of credits traded via these other exchanges was limited.


Registries track carbon credit transactions and ownership, reducing the risk that a single credit can be sold to more than one buyer.  Registries have come to be seen as a fundamental tool allowing for market efficiency and legitimacy.   Registries can be grouped into two categories:  emissions inventories and carbon credit accounting systems.  Carbon credit accounting registries are designed specifically to track the trades.  Mitchell Fierstein of Cheyne Capital Management Ltd describes the carbon markets as creating ‘a substantial new commoditized, fungible asset class.’  To keep tabs on this asset class, credit accounting registries track only verified emission reductions after they have become carbon credits, often utilize serial numbers as an accounting tool, and generally incorporate screening requirements such as third party verification to a specific off set standard.  Accounting registries include Bank of New York’s Global Registry and Custody Service; the verifier TUV SUD’s Blue Registry; APX; TZ1; and several registries connected with offset standards.

Some registries even track both emission reductions and carbon credit sales, such as Environment Resources Trust’s (“ERT”) American Carbon Registry (formerly known as the GHG Registry) and CCAR.

Product “Consumption”

Carbon credits are generally consumed in order to offset one of four types of emissions:

Institutional Emissions
Companies, non-profit organizations and government agencies may purchase carbon credits in order to offset the emissions generated by their facilities and employees in the course of doing business, such as emissions from commuting, energy use, manufacturing, etc.  These emissions are often referred to s direct or internal emissions.  In 2007, two-thirds of entities purchasing voluntary offsets did so to offset their total or a portion of their institutional emissions (Hamilton, et al., 2008). (Bayon at p.33).

Product Life Cycle Emissions
Companies, to date, have been less willing to offset the emissions generated by the use of their products (known as their indirect or external emissions) as they have been the emissions associated with their manufacture.   The share of offsets purchased for product life cycle emissions remains small, at 3 per cent of total volume transacted in both 2006 and 2007.  Carbon neutral products generally carry a price premium and are marketed as carbon neutral in much the same way that organically produced food products are marketed as environmentally sound.
Event Emissions.
Individual Emissions.

How Does The Market Work

While organizations that offset events, activities or products tend to purchase offsets from retailers, large corporations with commitments to carbon neutrality generally skip this step and work directly with project developers or brokers, who connect them with project developers.


Price Trends

It is difficult to get a price read on the wholesale price of carbon credits.  Surveying the marketplace the authors found that prices for the OTC voluntary credits in 2007 covered a wide spread, ranging from $1.80 to $300/tCO2e, with the average price being $6.10/tCO2e (Hamilton et al., 208).  This is almost twice the price of the average CCX credit price ($3.15/CO2e) in 2007.  This price differential can be explained by the varying sources of demand driving buyers of credits in each market.  Much like players participating in a regulated market, CCX members are buying offsets to meet their voluntary cap-and-trade commitments; hence, the average CCX credit price is lower because the co-benefits of a credit are irrelevant.  (Bayon at p. 35-36)      

What’s Driving The Market

Individual consumers, private sector institutions and public sector institutions are driving the market.  So far, the financial sector and the insurance industry seem to be at the head of the class when it comes to structuring products and services that might allow them to profit from the carbon market. (Bayon at p. 38).

Reinsurance giant Swiss Re developed the world’s first insurance product for CDM transaction risk for RNK Capital, insuring against the uncertainty of project registration under the Kyoto Protocol.  According to Ben Lashkari, head of emissions at Swiss Re’s Environmental and Commodity Markets, “The Policy provides liquidity, it provides confidence, and it basically makes the carbon market more of a mature, functioning market.’ (Hall, 2006)(Bayon at p.39). American International Group, Inc. (AIG) recently developed a product aimed at ethanol producers, specifically providing insurance to lenders in case of a delay in production due to the use of largely untested technology. (Bayon at p. 39).

Private companies, in general, participate in the voluntary markets for the following reasons:
Corporate responsibility, public relations/branding; investment; pre-compliance buys; climate-influenced business model; and product sales. (Bayon at p. 39-40).

Public sector institutions include local, regional, and federal governments as voluntary buyers of carbon credits, but at a low volume.  Eight cities are registered as full members of the CCX (Aspen, Berkeley, Boulder, Chicago, Fargo, Oakland, Portland, and Melbourne, Australia).   So are three counties.  The UK government recently announced it would buy carbon credits in order to make all of its operations carbon neutral. There are also a number of corporate foundations, universities and political organizations, both national and international – that have taken it upon themselves to seed the voluntary carbon markets by stepping in as buyers of carbon credits. 

Evolving Financial Instruments

As market size, climate legislation and interest in carbon neutrality have increased, so has institutional investment in the voluntary carbon markets.  ICF International reported 54 carbon funds, the majority focused on the regulated market, managing 12 billion euros in 2007 (Zwick, 2007).  While they’re not nearly as present as they are in the regulated markets, carbon funds focused specifically on voluntary carbon offsets have begun to emerge.  Cheyne Capital Management Limited started the Cheyne Carbon Fund (formerly known as the Cheyne Climate Wedge Fund), the world’s first voluntary carbon offset fund, in July, 2005.  The fund identifies purchases and manages carbon offset s for large-scale corporate and institutional buyers.  ‘Recognizing the substantial demand and need for the creation of a credible commoditized asset class in fungible voluntary carbon credits in 2005 provided by creditworthy counterparties,’ remarked Mitchell Feierstein, Senior Portfolio Adviser to the fund, ‘we developed a high quality standardized offset product for use by our numerous Fortune 500 clients.’ (Bayon at p. 41).

Additionally, more carbon funds initially focused on compliance credits are adding voluntary offset credits to their portfolios.  These include European Carbon Fund, and The World Bank’s carbon funds.

Market Trends

The market is far from mainstream at this point and uncertainty abounds.  Fortunately, registries, standards and exchanges are evolving to help streamline the voluntary carbon markets and consolidate market information as potential buyers push for increased transparency.  It should become easier, then, for buyers and sellers to grasp both the risks and the opportunities associated with this dynamic market in the coming years. (Bayon at p. 42).

RECs vs Offsets:

There is an issue over the appropriate use of renewable energy certificates (RECs) as offsets in the voluntary carbon markets.  One side maintains RECs cannot be converted into carbon offsets and cross over to the voluntary carbon markets. With RECs you are claiming an indirect reduction somewhere else on the grid that may or may not happen, and clarity of ownership of the reduction is uncertain.  Ownership is hard to prove.  Using RECs as offsets creates a host of conceptual problems.  All of them can be traced to the fact that at its core, an REC guarantees clean energy generation, not carbon emission reductions. The other side of the argument argues that carbon finance should support renewable energy projects in the US much as it does internationally.  The question is not whether RECs are offsets, but whether building new additional renewable energy generation in the US reduces GHG emissions.  Clearly, they do.

What are RECs and how are they traded? And, How does the REC market interact with the carbon market?

Programmes have been established that separate renewable electricity generation into two commodities:

  • RECs representing the green attributes, or social and environmental benefits, of renewable energy generation.
  • Electricity produced by a renewable generator delivered to the grid, where it blends with electricity from conventional generators in a generic ‘soup’ of electrons following the path of least resistance. 

Like the global carbon market, the US REC market features both compliance and voluntary segments. (Bayon at p. 46, by Bird & Wright of National Renewable Energy Laboratory in Lakewood, CO).

States with aggressive Renewable Portfolio Standards (“RPS”) schemes are creating significant demand for RECs, and this demand will accelerate in future years as renewable energy targets increase and new policies take effect.  Colorado has recently expanded its RPS targets from 10% to 20% by 2020. (See Bayon chart at p. 47). RECs allows the consumer to support renewable energy development through certificate purchases regardless of where they are located geographically, without having to switch to an alternative electricity provider. Stand-alone RECs are marketed to non-residential consumers such as businesses, universities and government agencies.  Recently, unbundled RECs have been the fastest growing portion of the voluntary renewable energy market. 

The second main type of transaction in the voluntary market is the sale of green energy products (with RECs embedded in them) to consumers who are willing to pay price premiums associated with the development of renewable energy sources.


For residential and small commercial customers, RECs often sell for US$15/MWh to $25/MWh (($0.15-$0.025 per kWh), but prices can vary and change quickly over short periods of time. RECs sold to large non-residential consumers sometimes sell at considerable volume discounts.  REC prices for voluntary markets have risen in the first half of 2008, compared to previous years.  According to date from Evolution Markets, an REC broker, wholesale prices for voluntary RECs in the first half of 2008 were in the order of about $5/MWh or higher, with variability among regions and renewable energy technologies, compared to prices as low as about $2/MWh in 2007 (Evolution Markets, 2007, 2008).  The price increases have resulted from increases in both compliance and voluntary market demand, as a number of very large purchases have occurred in the marketplace.  In addition, many states have adopted new RPS policies or increased their renewable energy targets.  (Bayon at p. 49).


The two largest certifiers of RECs for the voluntary market in the US are the Center for Resource Solutions (CRS) and the Environmental Resources Trust (ERT).  A certification standard, Green-e Energy, requires all of the environmental attributes, including the carbon benefits, to be included in the REC.  It is the most widely used certification standard in the US, with more than 70 different marketers offering Green-e Energy certified RECs.  Sales of Green-e Energy certified RECs totaled more than 13 million MWh in 2007, an increase of nearly 60 per cent over 2006 levels (CRS, 2006, 2008).  The renewable energy used cannot come from a facility that has been mandated by a government agency or produced in order to satisfy a government RPS.  All Green-e energy certified products undergo annual audits on power generation and marketing claims. 

RECs and the voluntary carbon markets:

There is an increasing convergence of the voluntary markets for RECs and carbon offsets.  Voluntary Carbon Markets Synopsis Notes 9-22-09 – 9-29-09 Commencing at Bayon at p. 52 (make sure I have in earlier draft the two questions from page 51 bottom and top of page 52): In recent years, there has been significant debate about the role of RECs as carbon offsets.  Proponents assert that RECs should be considered suitable carbon offsets because zero-emitting renewable energy sources create real emissions benefits when they operate and displace fossil fuel-based generation.  They argue that RECs can be converted to carbon offsets by determining the amount of CO2 that is displaced when renewable energy facilities operate in lieu of fossil fuel-burning power plants.

Others argue that RECs cannot be used as offsets because they do not result in additional carbon emissions reductions.  They propose that because REC revenues are insufficient by themselves to drive the development of new renewable energy projects, any emissions reductions are not above and beyond business as usual.   This undercuts the additionality requirement that is at the heart of carbon offsets, and could devalue the voluntary carbon offset market.  This is because the RECs are “non-additional”.

To address the lack of consumer standards for carbon offsets, the CRS recently launched a new certification standard, Green-e Climate, which is separate from Green-e Energy, covering retail GHG products sourced from renewable energy facilities as well as other GHG reductions certified to other third party standards.  As part of developing this new Green-e Climate programme, a new protocol was created to address issues related to additionality ownership and RECs for renewable energy facilities in the U.S.  (Bayon at p. 52).

This Green-e Climate Protocol addresses additionality by requiring that renewable energy facilities meet a series of additionality tests, including a performance-based test in order to become eligible for selling carbon offsets.  The Green-e Climate programme also includes a methodology for calculating the emissions benefits from renewable energy generation that involves considering baseline emissions from the current generation mix in comparison to those expected from new facilities.  To date, a number of retail carbon offset projects have been certified under the programme and are selling Green-e Climate offsets in the US as well as to other domestic and international offset projects (CRS, 2008). 

Impact Of Emerging Carbon Regulation:
Just as some carbon market participants fear the expansion of the voluntary REC market could undermine the voluntary carbon market’s ability to drive real benefits, some participants in the REC market have similar concerns about carbon markets.  They are concerned that the future expansion of carbon markets in the US could impinge upon the ability of the US REC market to contribute to GHG emission reductions.  If emission allowances in a regulated cap-and-trade scheme are granted exclusively to existing emitters rather than renewable energy facilities, then any emission reductions resulting from renewable generation that displaces fossil fuel generation will simply allow the fossil fuel plants to retire fewer allowances.  And since these extra allowances can then be sold to other fossil fuel plants enabling them to increase their emissions, the renewable generation would not result in net emissions reductions.  Although the renewable facilities would be adding more electricity to the grid, they would have failed to reduce emissions on a system-wide scale.  ‘Under a cap-and-trade system, the only way to reduce air pollution for the associated pollutant is to reduce the number of allowances.’ Explains Rob Harmon, of the Bonneville Environmental Foundation.  “Without the ability to claim air quality improvements, the demand for new renewable energy will likely be substantially reduced.’

The Regional Greenhouse Gas Initiative (RGGI), which became the first cap-and-trade programme to cover a portion of the US when it took effect in the northeast in 2009, has a mechanism for addressing concerns by allowing voluntary REC markets to provide carbon benefits in the capped market.   WORK
(Clearly define cap and trade…).
(Bayon at p. 53).

Does renewable energy reduce GHG emissions?
Renewable energy projects are used across the globe as carbon offsets projects under the Kyoto treaty. Bayon at p.55).
When customers buy RECs as CO2 reductions, under what circumstances are these purchases meaningful?
Bayon at p. 55).

RECs are the standard unit of measurement of renewable energy across the country.  While it is true that all renewable energy projects generate RECs, not all RECs are eligible for use as carbon offsets in the voluntary market.   A useful shorthand for determining if carbon offset projects are meaningful is abbreviated R-S-V-P-E:  Real, Surplus (or ‘Additional’), Verifiable, Permanent and Enforceable.  Real =  metered output of renewable energy facility.  One REC is created when 1 MWh of renewable energy is actually delivered to the grid.  This backs out fossil fuel generation resources, offsetting CO3 emissions, resulting in real reductions of CO2 emissions.  Surplus is an area of controversy (one of several).  Verifiable – in late 207 and 2008, government sponsored REC tracking systems began rolling out across the country.  These tracking systems brand each REC generated with a unique serial number to ensure that each REC can be counted once and only once and that the owner of each REC can be clearly identified.   Permanent – when renewable energy facilities operate, fossil fuel resources burn less fossil fuel.  Those emissions reductions occur at the time of generation, and they do not “leak” back into the system later.  Therefore the reductions are permanent.  Enforceable – In the US there is currently no national regulation of CO2 emissions.  Because the government has not asserted a right of ownership or otherwise modified the CO2 property right, the RECs and any associated emissions reductions therein belong first to the party owning the renewable generating facility that creates the emissions reductions, and then to any party to whom they sell the REC.  This is consistent with the international practices adopted by the Clean Development Mechanism under the Kyoto Protocol as well as the majority of standards operating within the voluntary carbon markets. (Bayon at p. 56).

More On Additionality:
There are several elements in the additionality debate.  The first question one must ask is, “surplus to what?”  Under Green-e Standards, no renewable energy or RECs that are crated under any mandate (like a Renewable Portfolio Standard) can be sold into the voluntary market.  In addition, no renewable energy or RECs that are being claimed by a utility as serving its customers can be sold into the voluntary market.  For example, under Green-e rules, a statement from a utility such as ‘we’re using wind power’ prohibits the sale of those RECs into the voluntary market.  Those RECs are considered to be ‘rate-based’, which means that a project has its costs covered by all of a utility’s customers (i.e. its rate base), in which case the benefits of the project belong to the same customers.  In addition, Green-e considers ALL renewable energy projects built before 1997 (when the voluntary green power market began) to be rate-based and ineligible to be sold into the voluntary market under Green-e rules.  Finally, the Green-e Climate standard excludes all facilities build prior to 2005.  The result is that the vast majority of the renewable energy being generated in the US is not available to generate RECs for sale into voluntary markets under Green-e rules.  There are a range of additionality tests in the carbon markets.  They can be boiled down to just two competing theories:  he Project-by-project financial test (used primarily in the Kyoto Clean Development Mechanism programme), and the performance test, most commonly used for US-based projects. (see Bayon at pp. 57- 59).  Under the project by project financial additionality test, if the outside party determined that the projects would not have been built without the REC premium, it would qualify.  If the outside party determined that the project would have been built regardless of the REC premium, it would not qualify.  The test has several problems associated with it. 

Renewables don’t just need to be profitable to be built; they need to be more profitable and less risky than fossil fuel plants.  In reality, it is impossible say some to create an objective “financial additionality” test.  Even if it were possible, such a test is not a good idea when the major issue of the day is not whether renewable energy is profitable, but whether it is more or less profitable than developing coal-fired facilities.  The Bonneville Environment Foundation (BEF) believes that transparent determinations of additionality, the presence of a functioning REC market, and Green-e rules, provide the necessary demonstration of additionality – and that project-by-project financial yardstick tests are excessively burdensome, frequently inaccurate and not transparent.

Performance based additionality tests set up clear rules regarding which projects can sell their carbon emission reduction value to the market, and which cannot.  Performance tests typically require three core elements for a project to be eligible:  (1)  The project must use one of the technology types from an approved list (E.G. Green-e Energy allows wind, solar, landfill and other biogas, small low-impact hydropower, and certain biomass types.  The California Climate Action Registry allows projects that capture and destroy landfill methane and livestock methane).

WORK (2) The project must have built after a certain cut-off date (e.g Green-e projects must be built after 2005). (3) The project must not have been mandated to be built by law, regulators or courts.  This approach eliminates any bureaucratic barer to market entry by allowing participation of projects which are deemed, based on conservative analysis, to have been incentivized by the voluntary carbon market. (Bayon at p. 59).

Either buying Green certified RECs or offsets from renewable energy projects puts more renewable energy into the grid and hence reduces carbon emissions, or it does not.  If the most cost-effective way to reduce carbon emissions is to transform the electricity grid from coal to wind, why would one not want to incentivize renewable energy projects?

Renewable energy is used all over the world as a mechanism to create carbon offsets.  Those offsets are calculated under a variety of national and international standards in this new marketplace. 

RECs to carbon offsets:  What’s the right exchange rate?
WORK:  WHATS THE DIFFERENCE BETWEEN AN REC AND A CONVENTIONAL CARBON OFFDSET?  (Bayon at p. 60). The conversion of RECs to carbon offsets (also called GHG offsets) has become increasingly common.  RECs originally sold for $20-30/MWh when carbon offsets were selling for $2-5/tonne;  the prices, however, have been converging.  Do RECs and offsets represent comparable environmental commodities that should be fungible in the same environmental commodity market? (Bayon at p. 60)

Anatomy of an REC:
An REC represents a single MWh of electricity produced from a qualifying renewable energy technology.  Attributes or benefits are informally acknowledged to include the reductions in GHG emissions from the production of electricity at a fossil fuel power generating facility. 

RECs are currently circulated in three markets:  (1) the compliance electricity generation market, where purchased to comply with Renewable Portfolio Standard (RPS) requirements; (2) the voluntary ‘green power’ market; and (3) the voluntary GHG offset market, where consumers seeking to go ‘carbon neutral’ purchase RECs that have been re-branded as carbon offsets.  Purveyors of these ‘carbon’ offsets assure buyers that RECs can be used to offset one’s direct and indirect GHG emissions, and at a cheaper price than purchasing traditional carbon offsets.  (Sounds like there is a quality and risk analysis…)

A recent analysis concluded that US investors considering building a new renewable energy facility need a minimum guaranteed revenue stream of $70 to $80 per MWh (Gillenwater, 2007). (Bayon at p. 61)  REC revenue will usually not materially affect the development of new renewable energy sources.  There are several factors that argue against the use of RECs as carbon offsets, most prominent among them the lack of an additionality test for RECs, and the resulting “business-as-usual” nature of what is usually being purchased.

Anatomy of a Carbon Credit:
A carbon offset is conceptually different from an REC.  It represents an action that prevents the emission (or causes the sequestration) of 1 ton of CO2e (the metric by which different GHGs can be expressed in common units).  In order to generate a carbon offset you must first estimate the no-project-emission baseline, calculate the with-project emissions, and quantify the difference. 

The concept of additionality is integral to the function of carbon offsets; an ‘additional’ emissions reduction is one that would not have occurred in the absence of a market for carbon credits. 

Additionality is most easy to demonstrate when the only revenue source a project has is carbon offset revenue, but that is by no means a prerequisite.  In fact, renewable energy projects can clearly be additional as well.  There are solar rural electrification, energy efficiency and other projects in developing countries where one could clearly point to the carbon offset market as the means by which the project was able to proceed.

For buyers looking to reduce their carbon footprint by purchasing offsets, RECs do not provide the same environmental commodity as carbon offsets. (Bayon at p. 63). To se an REC as a carbon credit, one must make the assumption that coupling an REC with a MWh of fossil fuel electricity effectively renders the fossil fuel electricity carbon-free, as assumption that not everyone may agree with.  (NOTE:  Isn't this fundamentally different than what we do with use of iceberg thermal content in the power cycle?  Don’t we derive (??) the carbon emission?)(Bayon at p. 63).

RECs and carbon offsets are two fundamentally different instruments, created to achieve different goals, governed by different standards, and quantified in different ways.  As long as RECs and carbon offsets are kept separate they can peacefully coexist.  In fact, REC sales can go a long way in reducing many companies’ GHG inventories.  But treating RECs and carbon offsets as fungible when in fact they are quite different commodities, only serves to confuse and undercut the legitimacy and efficiency of the voluntary carbon market.

As REC prices have fallen and carbon offset prices have risen, price-conscious consumers are understandably seduced by the promise of low-cost emission reductions.  However, if they’re not getting “additional” reductions for their money, they are being deceived.

The US Department of energy’s Green Power Network offers a current list of companies offering certificate-based green power products:  www.ere.energy.gov/greenpower/markets/certificates.shtml?page=2.   (Bayon at p. 65)

Varying Expert Opinions:
An Economist (Janet Peace, Pew Center on Global Climate Change):
Industry benefits from learning about trading and risk management in a voluntary market because prices are likely lower than they would be under a mandatory system.  It is noteworthy that participants on the Chicago Climate Exchange (CCX) have typically paid less than $5 per metric ton of CO2 since CCX began operating (CCX, 2007).  (Bayon at p. 67-68)

According to the State of the Voluntary Carbon Markets 2008 report (Hamilton et al, 2008), the EU accounts for 47 per cent of buyer transactions in the voluntary markets.

The need for consistency and credibility has been recognized by participants in the voluntary market, including CCX, World Resources Institute, the Climate Group, Climate Wedge, the California Climate Action Registry (CCAR), and others who have attempted to create a credible definition.  To date, however, the definition of an offset is still not uniform and buyers must closely scrutinize the quality of their carbon purchases.  WORK:  What makes a high quality offset?

A Conservationist:
Ben Vitale, Conservation International. Today’s compliance markets do not come close to substantially reducing the potential impacts of dangerous levels of climate change at or below the 400 parts per million (ppm) CO2 that many scientists advise, although recent commitments to reduce emissions at least 50 percent by 2050 begin to make a more earnest attempt.  (Bayon at p. 70).

A key role of voluntary markets should be to push innovation and fund creative solutions ahead of, and in addition to, regulation. (Bayon at p. 71). An emphasis on tangible projects accruing multiple benefits (i.e. carbon emission reductions, biodiversity conservation and community livelihoods) with broad stakeholder engagement is particularly important…(Bayon at p. 71).

There are many multiple-benefit projects that must sell both compliance and voluntary carbon credits in order to be financially viable.  (Bayon at p. 71).  One such project is Conservation International’s Ankeniheny-Zahamena Corridor Restoration and Protection Project in Madagascar.  This project seeks to produce Kyoto CDM certified emissions reductions and voluntary emissions reductions produced by avoiding the burning of tropical forest, as well as biodiversity protection and sustainable community livelihoods.  The project expects to obtain as much as one-third to one-half of the required project financing from the marketing of carbon credits. (Bayon at p. 71-73).

WORK:  How to define our credits?  Where most marketable?  At what pricing?

The voluntary market may not peak for a decade or more depending on the level of limits and breadth of solutions established by global climate change regulation and resulting compliance markets. (p. 74).

It is safe to say that the voluntary carbon markets will be larger in 2020 than they are now.  Since the magnitude of global climate change is so large, and the current pace of policy interventions is so slow, voluntary carbon markets could continue transacting hundreds of millions of dollars annually before truly effective compliance carbon markets are up and running at the scale required to avoid dangerous climate change. (Bayon at p. 74).

Change, it seems, is happening, but it needs to happen more quickly and on a larger scale.  Fortunately, thee is room for hope:  when John Doerr and Vinod Khosla – the venture capitalists who first backed global giants such as Google and Sun Microsystems – and other investors began funding new green technologies to deploy in the growing economies of India, China and Brazil as well as the industrialized countries, it is a strong signal that the gloves have come off, and entrepreneurs are ready to begin developing solutions that make both commercial and environmental sense in this carbon-constrained world.  (Bayon at p. 75).

A Project Developer’s Perspective
David Patrick Ross and Martha Isabel Ruiz Corzo, Bosque Sustentable. In connection with the carbon sequestration project in the Sierra Gorda of Mexico, there has been a sale of 5,230 emission reductions credits to the UN Foundation.  This is the first for the project.  As part of its commitment to carbon neutral operations, the UN Foundation used the methodology of the WRI/WBCSD GHG Protocol and tools provided by the World Resources Institute to calculate the total amount of its historical CO2 emissions from electricity consumption, heating and cooling, and air travel of employees at its Washington DC and New York offices.  With pro bono legal services generously proved [sic] by Baker & McKenzie, the UN Foundation then purchased an equivalent amount of carbon offsets from Bosque Sustentable, which received the assistance of the Mexican Center for Environmental Law.  (Bayon at 75-78).

An NGO’s Perspective:
Ben Henneke, Clean Air Cool Planet
Power plants all over the world represent 20-24 percent of the carbon emissions, and there are few technologies for dramatically increasing efficiency or reducing their carbon footprints.  ..Even if we had the political will to cut emissions directly from the power sector by one-third (a nearly impossible technical and engineering task under current conditions), we would only be able to reduce GHGs by 6 or 7 per cent.  This is not nearly enough, not even 10 percent of what is needed. The forestry sector even has the potential to go from contributing to the global problem to becoming the biggest solution to the problem.  Proper incentives for forestry could mean a 30 per cent change in GHG emissions by eliminating deforestation and reforesting at half the rate we have been destroying the forests.  Reforestation can create dramatic, real carbon sinks, create benefits to the people who live in or near the forest and improve water supplies to those in the cities.  Reforestation can decrease poverty, create jobs and encourage economic development all at the same time. 

We will also see an explosion in voluntary actions taken by millions, and then billions of people to reduce their own carbon footprint and to supply this newly created market for carbon reductions.  There will be all kinds of supply – not just wind power projects, or methane destruction projects, or industrial gas destruction projects – but an amazing array of voluntary actions and new ideas. (Bayon at p. 81)

The policy maker’s job is to create predictable demand.  They must create the demand through shortage of allowances (rather than an over supply) and a tax or tax-like price impact that will allow people to rationally change their behaviours to reduce their emissions of GHGs and seek ways to sequester carb on. 

A Retailer’s Perspective:
Bill Sneyd and Jonathan Shopley: The Carbon Neutral Company.
The Carbon Neutral Company soled its first credit in 1997… Governments’ support of voluntary action as a complement to regulation include, amongst other things, a self regulatory body for entities serving the voluntary market, The International Carbon Reduction and Offset Alliance (ICROA) – has been formed.

The Carbon Trust, a company set up by the UK government to accelerate the transition to a low carbon economy, recently launched a Carbon Reduction Standard that explicitly excludes the use of offsets in claiming emissions reductions… (Bayon at p. 83)…
The prevailing scientific and economic consensus reflected in the IPCC’s 4th Assessment Report (2007) and the Stern Report (2007) is that an absolute reduction of 60-80 per cent in global GHG emissions is required by mid-century to prevent material damage to the world’s economy.  If anything, the scientific position is hardening, with the consensus moving towards the upper end of this range. (Bayon at p. 83) (Pre Copenhagen Analysis).

Accounting systems for carbon credits have become increasingly sophisticated.  Project proponents must now demonstrate that they have considered a number of baseline scenarios; the impacts of the project outside the project boundaries have to be properly accounted for (leakage); an appropriate monitoring plan has to be developed and followed (exactly); and the outputs must be independently verified in order for credits to be issued.  In addition, project documentation is made public and open to third party challenge. (Bayon at p. 85).

A Credit Originator’s Perspective:
Environmental commodity markets are emerging as a preferred mechanism for addressing increasingly complicated environmental objectives, from biodiversity loss to climate change.  As we develop these new markets, standards that hold environmental commodities to a minimum level of quality are increasingly seen as critical to the integrity of the voluntary carbon markets.

In the voluntary carbon markets, additionality is the key to ensuring market credibility.  However, as the voluntary markets have rapidly expanded in recent years, with a diverse and growing group of verified emissions reduction (VER) providers, a common test for project additionality has been elusive. A good additionality scoring tool would be helpful, but must be careful in balancing false positives against false negatives. (Bayon at pp. 87-89).

An Investors Perspective:
David Brand and Marisa Meizlish, New Forests Companies (whose entire business focused on carbon markets were born, notably in the 90’s, including Ecosecurities, Future Forests) (now The CarbonNeutral Company), Natsource, Cantor CO2e and Evolution Markets.

Retail carbon companies have proliferated, and there are now more than 90 worldwide.  (Bayon at p. 90).

Buyers now want standardized offsets with real evidence of additionality and truly independent verification of the reductions.  There is also a growing demand for projects that have other social and environmental benefits, such as local employment or biodiversity protection. (Bayon at p. 91).

A Buyer’s Perspective:
Erin Meezon, Interface, Inc.
A few standards have clearly won more trust than others – primarily the VCS  and the Gold Standard for VERs. Today, there are templates available for buyers and both the International Emissions Trading Association (IETA) and the American Bar Association have standard documents (Bayon at p. 98).

With the evolution of standards like the Gold Standard for VERs and the VCS, which are essentially verification programmes with additionality tests inherent in them, we can simply purchase offsets already verified to these standards or to the CDM standard.

In retrospect, a second weakness of our early purchase programme and offset purchasing in the early days was the lack of retirement mechanisms. (Bayon at p. 98). In the early days, not only did we not sign multi-year purchase agreements, but we didn’t even think to ask for options on future tons, whether at a fixed or negotiable prices.

Lastly, we significantly under-marketed our carbon neutral product programme – in large part because we were not sure how to communicate it clearly to customers. (Bayon at p. 99).

We are asking sellers up front what level of disclosure they can provide on projects, and using this as an assessment of whether or not to buy the offsets. (Bayon at p. 100). Finally, we need more ways for corporations to have long-term investment in and support of projects that really make a difference to the planet.  (Bayon at p. 100).

A Bank’s Perspective:
Lorna Slade, HSBC
In 2005, HSC became the world’s first major bank – and FTSE 100 Company – to achieve carbon neutrality.  (The Hong Kong & Shanghai Banking Corporation was formed in 1865 and is said to be the world’s largest bank).

Why has HSBC chosen to lead on the issue of climate change when it is not subject to any climate change legislation?  Francis Sullivan, HSBC’s Adviser on the Environment, explains:  HSBC believes that climate change is the greatest single environmental, social and economic challenge facing the business community this century.  Being carbon neutral reflects our desire to confront this challenge in a proactive and productive way.

HSBC purchases VERs from projects approved and registered (but not yet certified) by the CDM Executive Board and may purchase offsets through a number of offset providers or brokers, as well as from project owners and the bank’s own clients.  Extensive due diligence is undertaken on all potential offset projects.  In addition, all offsets are validated and verified to recognized market standards by an independent third party.

HSBC seeks to procure emissions reductions that meet the following criteria:

  • Additionality – that is, the underlying project would not have occurred in the absence of carbon finance.
  • The underlying project should support the transition to a low carbon economy.
  • The underlying project should have clearly defined, long-term sustainable development  benefits.
Information about these projects is made publicly available on the HSBC website (www.hsbc.com ). “[HSBC’s] ongoing commitment to carbon neutrality is part of a holistic strategy,” says Jon Williams, former Head of Group Sustainable Development at HSBC.  “this includes not only the carbon footprint of [the company’s]  property portfolio and purchasing decisions, but also [its] core business activities of lending and investing.”  (Bayon at p. 102)

The Future Of Voluntary Carbon Markets
Though it is not yet self-evident that the voluntary markets for GHGs will ever become large and robust, it is increasingly certain that these markets are growing at a rapid clip:  from a few million tons three years ago to over 100 million tons in 2008.  (Bayon at p. 105) Carbon markets are beginning to sprout in all shapes and forms across the US.  And, since the country is one of the world’s top two largest emitters (the other one being China) of GHGs, any markets that develop in the US could be relatively large.

Gourmet Carbon:
In a market where buyers are only interested in complying with regulations and where credits are completely fungible (i.e. the regulated market), buyers will naturally gravitate towards those credits with the least cost.  Buyers in the voluntary markets, on the other hand, are likely to be a bit pickier about the carbon they end up buying.  Since buyers are in this game voluntarily, they will be looking for the carbon that will give them the biggest political, public relations and/or “ethical” bang for their buck. 

The voluntary markets appear to be gravitating towards a value-added model; one that seeks to provide what we might call “gourmet carbon,” where the provenance and feel-good attributes of the carbon play an increasingly important role.

The commodity carbon vs. gourmet carbon divide has implications for the price elasticity of carbon offsets in the two markets.  (p. 107)

Note:  We are in need of certifiers and verifiers and a good consultant.

Appendix 1:  Offset Project Types:
Carbon credits take the form of either rights to pollute (allowances) or project-based greenhouse gas (GHG) emissions reductions (offsets).  Offset projects generate carbon credits by reducing any of the six GHGs identified by the Kyoto Protocol:  carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons.  Projects can be classified into three main categories:  those that reduce the occurrence of GHG-emitting activities, those that destroy GHGs and those that reduce GHG levels in the atmosphere via sequestration. 

Emission Reduction Projects: 
Fossil Fuel emissions reduction projects:
The burning of fossil fuels is the leading cause of human-generated GHG emissions.  Projects may reduce the use of fossil fuel directly or indirectly.  Projects reducing emissions directly do so at the source.  They include energy efficiency projects, fuel switches, power plant upgrades and off-grid renewable energy projects, such as small-scale hydro, wind and biomass.  For example, the Climate Trust creates offsets generated by a paper manufacturing efficiency project, which reduces CO2 emissions over a “business-as-usual” scenario by utilizing recycled paper feedstocks and equipment retrofits to increase the energy efficiency of the manufacturing process.  The Solar Electric Light Fund (SELF) generates emissions reductions from solar energy projects that replace diesel generators in countries around the world, from Nigeria to the Solomon Islands.

Fossil fuel reduction projects offer several important benefits in addition to GHG emission reduction.  They often result in numerous environmental and human health co-benefits by avoiding the generation of air pollutants such as carbon monoxide, nitrous oxide (another GHG), nitrogen dioxide, particulate matter and sulphur dioxide.  Reducing fossil fuel use may also provide national security benefits by way of decreasing dependence on fossil fuels, “green” job creation, incentivizing technology transfer among countries and long-term cost savings (via energy efficiency projects).  Small off-grid renewable energy projects may offer the additional benefit of reduced deforestation by relieving pressure on wood-based fuel sources. 
(Bayon at p. 114).

Emissions destruction projects
Unlike CO2, gases such as methane can be captured and flared into less potent GHGs, reducing their GWP, and sometimes used as sources of electricity.  Projects involving methane destruction are the most common GHG destruction projects in the voluntary markets, especially in the retail market.  However, credits from the destruction of other potent GHGs such as hydrofluorocarbons (HFCs) are also available.

Methane projects:
In some cases, a methane project may create two streams of revenue:  one from the sale of the direct methane destruction and the other from the sale of an REC.  Generating electricity from methane projects can also increase the project’s return on investment to the extent that carbon financing is not deemed a necessary incentive for project creation. Methane projects occur with respect to livestock, landfills, & coal mines. 

Industrial GHG destruction:
Like methane, trifluoromethane (HFC-23_ and nitrous oxide (N20) are Kyoto-regulated gases that can be destroyed.  Major sources of N20 include agricultural activities, fossil fuel combustion, nitric acid production and solid waste burning.   (Bayon at p. 117)

Sequestration Projects:
Land Use Projects
Forestry Projects
Soil Projects - Critics of agricultural sequestration have noted that agricultural carbon projects generally would not pass a “financial” additionality test because they do not capture enough carbon to provide a necessary financial incentive for changing farming practices.  (Bayon at p. 119)

Geological sequestration:  Carbon capture and sequestration
In 2007, credits from Carbon Capture and Storage (“CCS”) projects comprised only 1 per cent of the transacted voluntary market volume (Hamilton et al., 2008), and in researching for the Bayon book, the authors found only one organization selling CCS credits into the market.  This organization, Blue Source (in partnership with Natursource), has sold credits from captured waste CO2 injected into fields to access hard-to-reach oil reserves. CCS projects may be profitable without carbon finance (because of profits from oil or gas recovery, for instance), and as such, they will likely fail the investment additionality test.  (p. 120).    

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