CRAIG PIRRONG

1
Voluntary Carbon Markets

• CRAIG PIRRONG
• February, 2009

2
Basic Markets

• Exchange TradedCCX
• Over-the-counterV-OTC
• Verified OTC
• Voluntary OTC
• OTC markets are primarily brokered markets, e.g.,
  Evolution Markets, Inc.
• V-OTC primarily a market for offsets

3
V-OTC Market Facts

• Small compared to regulated markets
• 2006 data13.4 MtCO2e worth about 54 mm
• About 43 percent of offsets sourced in North
  America
• 30 percent sourced in EU
• 10 percent Australia
• Very diverse products/projects

4
Why Volunteer?

• Diverse motives for voluntary market
  participation
• Sustainability reporting
• Corporate responsibility
• Branding/marketing/sales
• Anticipation of regulation

5
Where Do Credits Come From, Daddy?

• Very diverse sources of credits, primarily from
  offset projects
• 43 percent in N. America, 20 percent in S.
  America
• 36 percent forestry related (aforestation,
  reforestation, avoided deforestation)
• 33 percent renewable energy
• 20 percent industrial gases
• Remainder from methane, energy efficiency, other

6
Forestry Projects

• Although Australia (NSW) and Kyoto permit
  forestry-related (more generally LULUCF)
  credits, this accounts for a small fraction of
  CDM credits under Kyoto
• As a result, most forestry projects currently
  trade V-OTC
• There was considerable hostility to
  forestry-carbon in the EU due to questions of
  permanence
• No such hostility yet in N. America
• Possibility of insuring forestry projects has
  been mooted

7
RECs VERs

• Renewable energy credits (RECs) the other major
  source of V-OTC creditsabout 17 percent
• Grid-connected renewable energy projects
• How do you translate kWh into CO2?
• The standards issue raises its ugly head
• About 15 percent of voluntary credits comes from
  off-grid renewable energy projects

8
Verification Issues

• There is tremendous heterogeneity among projects
• There are a variety of alternative standards and
  certification schemes
• Offset and project quality (6)
• Offset sellers, products, services, claims of
  carbon neutrality (3)
• Retailer created standards
• More proposed by the day, it seems
• With so many standards (15 in 2007!), theres no
  standard

9
Registry

• Need to keep track of whats out there, and
  whats been bought and sold
• 9 in existence as of 2007
• Each operates under different standards

10
Prices

• Substantial variability in prices
• Variability across categories
• But also, substantial variability within
  categories
• Buyers very concerned about the quality of the
  offset
• A ton is not a ton is not a ton
• Additionality
• Third party verification/certification
• Use of registries
• This price variability indicates that this is not
  yet a commodity or a commodity market
• Theres a very long way to go

11
The Value Chain

• A variety of participants in the value chain
• Project developers
• Aggregators
• Wholesalers
• Brokers
• Retailers