Voluntary Carbon Standards

A 2010 report by the World Bank (2010) valued the global carbon market at $143 billion in 2009. Within the global carbon and emissions market there are two types of emissions trading: allowance-based and project/credit-based. Allowance based emissions trading operates within the carbon compliance market and refers to the trade of carbon allowances and credits for compliance use by those who have emissions targets established under emissions trading schemes and/or the Kyoto Protocol. Compliance based schemes currently operate in the EU (EU ETS), Australasia and at state level in the United States. 

Distinct from allowance-based trading is the concept of project/credit based trading. Credit/project based trading is the trade of emission credits that are issued in response to a specific evaluated activity or project which delivers ‘approved’ emission reductions. The carbon project/credit market can be divided into the compliance market and the voluntary market. Within the compliance market demand is generated by legislative responsibilities and a regulatory framework, whereas demand in the voluntary market is derived from an elective desire to purchase offset credits. In 2009 project/credit based trading was dominated by compliance market activity, notably the CDM*. The primary CDM market was worth approximately US$2.7billion or slightly less than 2% of the global carbon market in 2009 (World Bank, 2010). While the CDM has established itself as the second most valuable and traded component of the global carbon market, relative to the dominant EU ETS, there exists a number of current criticisms regarding the mechanism itself that maybe limiting maximisation of its potential. In brief these criticisms centre on 5 key areas: technical issues, capacity issues, transaction costs, post-2012 uncertainty and institutional issues. A second Kyoto flexible mechanism is Joint Implementation (JI)**. Trade in this project-based mechanism totalled $354m in 2009. 

Trading volumes and value in the voluntary market are substantially lower in comparison to those seen in the compliance market. At present credits in the voluntary market cannot be used in the compliance market and are consequently of lower market value. The voluntary market principally enables businesses, individuals, NGOs and governments to offset their emissions by purchasing offset credits endorsed by one of a variety of voluntary emissions reduction standards. Such voluntary emissions reductions standards include the Gold Standard, Voluntary Carbon Standard (VCS), Climate Action Reserve (CAR), Voluntary Offset Standard (VOS) and the Voluntary Emission Reduction Plus (VER+). The World Bank (2010) valued 2009 trade in the voluntary market at $338m, equating to 0.23% of the global carbon market. One of the most significant issues with the voluntary market is a perceived lack of rules and regulations. At present concerns exist that the minimal establishment of quality standards for some standards provides for an environment where some low quality emissions reductions can gain certification and find their way into the voluntary market place. In addition, the voluntary market suffers from a lack of consistency in conformity with, and application of, what the compliance market generally perceive as essential carbon credit criteria, i.e. assurance of the proper treatment of additionality, leakage, permanence and application of rigorous emissions offset monitoring, reporting and verification protocols. Development of the voluntary market is also restricted by the non fungibility of its carbon offsets in compliance markets. It seems logical that the greatest stimulus for voluntary market development would be if voluntary credits were to become fungible in the compliance market. However, for this to happen the voluntary market will need legislative approval from those same compliance markets. With continued development of the global carbon market it is likely that this will occur in due course (notably for the more robust of voluntary standards) and that the main challenge for voluntary market operators will be to demonstrate adherence to the criteria that emerge as the gateway for such a transition. The implementation section below details some of the key criteria that any voluntary carbon standard and its associated credits would most likely have to comply with in order to gain acceptance into the compliance market. 
 

* The CDM – Clean Development Mechanism¬ – is one of the 3 flexible mechanisms provided for in the Kyoto Protocol to help countries comply with their emissions target in a cost effective manner. The CDM allows developed countries or private to carry out certain emissions reducing projects t in developing countries. In return for their project investment developed countries or project investors are allocated Certified Emissions Reduction (CERs) units for the actual amount of greenhouse gas emissions reduction achieved. CERs can be used by project developers to meet personal emissions targets or sold on the international carbon market.  

** Joint Implementation differs only from the CDM in that projects take place in developed countries or countries with economies in transition. The credits generated under JI projects are known as Emissions Reductions Units (ERUs) and may be used for compliance purposes or sold on the international market. 

This section details key criteria that the compliance market would likely want voluntary carbon standards to comply with in order for them and their associated credits to cross over from the voluntary market to the compliance market. The criteria focuses on the treatment of 4 main factors: additionality, leakage, permanence and emissions measuring, reporting and verification. 

Additionality
In assessing the quality of offset projects and associated credits, carbon standards must ensure that accepted projects demonstrate proof of additionality. According to the Climate Trust (2007) additionality is a policy term by which an assessment is made regarding whether or not an offset project’s emissions reductions are in addition to a business-as-usual scenario. Additionality is the metric by which an offset project demonstrates that it is resulting in real, measurable reductions in greenhouse gas emission levels. Demonstration of project additionality is generally achieved via a project specific assessment or performance standard/sectoral assessment. The CDM Executive Board’s ‘Methodological tool for the demonstration and assessment of additionality’ generally forms the basis of most additionality assessments. The CDM assessment for additionality stipulates that assuming that a project is not required by law, and that it was implemented after the potential for offsets revenues existed, these additionality tests boil down to a series of questions: 
• Is the return on project investment, without offset revenues, too low for the project owner to make the investment? If so, and if the prospect of offset revenues raises the expected return to an adequate level, the project is additional. 
• If the return on investment without offset revenues is or would be adequate, does the project owner, without offset revenues, lack access to the capital to make the investment? If so, and the offset revenues provide the necessary capital, or enable access to it (such as providing the down-payment), the project is additional. 
• If the return is adequate and capital is available without offset revenues, are there other barriers to implementation – technical barriers, for example – that offset revenues can overcome? If so, the project is additional. 
• If the return is adequate, capital is available, and there is no technical barriers, is the project the first or substantially the first of its kind in the particular market, region or application? If it is the first or substantially the first of its kind, it is by definition not business as usual, and so is additional

Leakage
The compliance market will insist that credits endorsed by carbon standards have addressed the threat/issue of leakage. Leakage can be looked upon as an increase in greenhouse gas emissions outside an offset’s project boundary that occurs as a result of the offset project activity. The Congressional Budget Office (2009) highlight that leakage has the potential to reduce the net effect of offset activities on greenhouse gas emissions and that it can be difficult to identify and quantify. The Congressional Budget Office (2009) note that offset programmes generally attempt to deal with leakage – by requiring certain design features that minimise leakage and by applying discounts to offset activities when issuing credits to account for leakage that cannot be avoided. 

Permanence 
The compliance market will want carbon standards to ensure that they have properly dealt with the permanence issue. Permanence refers to the possibility that offset emission reductions may sometimes be reversed by human activity and/or acts of nature. This issue is particularly pertinent for emissions offsets associated with land use projects. With such projects carbon sequestered in soils, forests and plants can be released into the atmosphere and the offset negated as a result of environmental events such as forest fires, pest infestations as well as human activities such as logging and land clearance. As a result permanence may be viewed as a type of project risk associated with specific types of offset project types with the attainment of permanence a desirable goal for any offset credit. The Congressional Budget Office in its 2009 report highlights some options currently deployed to protect offset permanence. Some of these options include: the requirement of legal assurances that carbon will remain stored; the detainment of a portion of credits generated by a specific offset project in a reserve for compensatory use in the event of any carbon storage reversal; and the assignment of expiration dates to offset credits such that once these dates are passed credits can no longer be used. 

Emissions Measuring, Reporting & Verification 
For the integrity of a carbon standard the associated generated project emissions reductions must be accurately measured, reported and verified (MRV). To increase their prospects of gaining entry to the compliance market voluntary carbon standards will have to insist on certain minimum levels of greenhouse gas accounting from their accepted projects. Traditionally emissions reductions arising from emissions trading schemes or offset projects are measured, reported and verified in accordance with international standards or best practice. Established MRV standards and guidelines including the UNFCCC guidelines, the World Resource Institute’s Greenhouse Gas Protocol for Project Accounting, International Standards Organisation 14064 and 14065 Protocols, JI and CDM Rules, Practices and Procedures manual. It is plausible that the compliance market could insist on voluntary standards utilising some of these established MRV protocols.

While the existence of a registry is central to the operationalisation of any carbon standards, carbon standards operating in the compliance market are likely to be required to ensure that their registries and credits at a minimum comply with the following criteria:
• Serial numbers with traceability of projects
• Unambiguous ownership
• Open to public inspection
• Double counting checks
• Project type filtering

 

The voluntary market principally enables businesses, individuals, NGOs and governments to offset their emissions by purchasing offset credits endorsed by one of a variety of voluntary emissions reduction standards. 

The modelling of a voluntary carbon standard will be very much dependent on the characteristics of the carbon standard analysed along the emissions offset project types that are accepted under the chosen standard. Each carbon standard and its associated project types will influence the level of activity and share of a given control. 

Climate Trust, 2007. Determining the Additionality of Greenhouse Gas Reduction Projects. Portland, Oregon.

Congressional Budget Office, 2009. The Use of Offsets to Reduce Greenhouse Gases. Washington.

O’Toole, D., 2010. Crossing Over to Compliance: Linking Voluntary Carbon Standards to the Mandatory Market. Report for the Green IFSC Working Group. Captured Carbon. Limerick.

World Bank, 2010. State and Trends of the Carbon Market 2010. Washington.