The State and Trends in the Voluntary Carbon Market

Dan Barry, Arreon CarbonNovember 19, 2007

dan.barry@arreon.com

Voluntary Market

The voluntary market is the trading of carbon credits outside of compliance schemes (i.e. Kyoto’s CDM, EU ETS etc.)

Desire to participate in the absence of a formal framework

Voluntary Market at A Glance• Demand generally fueled by;

– CSR, – voluntarily reducing carbon footprints, or – preemption of a compliance market

• Based almost exclusively on project-based credits

• No umbrella regulator– Many standards– Higher quality standard = higher price

• In comparison with compliance markets, voluntary markets are less mature and trade in lower volumes

Key Market Statistics

• By end of Q3 2007, traded approx. 55 million tonnes of CO2e– More than double the volume traded in

all of 2006

• U.S. markets represents approx. 60% of all traded volumes

• Prices range from 2-16 USD per tonne of CO2

Historically Traded Volumes

Source: New Energy Finance/Point Carbon

01020304050607080

Pre 2002 2002 2003 2004 2005 2006 2007(expect)

tonn

es o

f CO

2 (m

illio

ns)

Voluntary Transactions by Project Type

Energy Efficiency 5%

Forestry 33%

Renewables33%

IndustrialGas 20%

Methane3%

Mixed/Other3%

Source: New Carbon Finance

The Traded Commodity• More flexible than Kyoto-based markets

– Demand for credits, not regulatory policy, creates the commodity

• Most commonly traded voluntary credit is the “Verified Emission Reduction” or VER– Credit that has already been generated– Verified by a third party standards body– Similar to CER, but does not require UN certification

• Other types– UN certified CERs– Prospective Emission Reductions (PERs)

• Transaction settled before ERs are delivered (not in forward contracts)

• Typically used for forestry projects– Emission Reductions (ERs)

• Credits that have been generated but have not been verified

VER vs. CER

• CER is CER, VER is not a VER– There is one type of CER, assessed and

certified by the UN– There are many types of VERs, assessed

and verified by different bodies

• VER requires marketing and packaging– a CER is generally used for Kyoto

compliance, VERs are used for other reasons

The Link Between Quality & Price• Wide price range: $2-16 USD

• Credits that are assessed according to more stringent standards are sold for higher prices

• Credits that are better marketed are sold for higher prices

• What determines quality of projects?– Project Type – Project Location– Additionality– Transparency– Environmental co-benefits– Social co-benefits– Reputation of Seller

Prices By Project Type

• The Chicago Climate Exchange, the largest voluntary climate exchange – Historical price range $1.50 - $ 4.00– Nov 15 price: $2.05

Registries and Standards

• Under CDM, UN acts as standard and registry

• Role of a standard– Sets assessment guidelines/regulations

• Role of a registry– Manages the movement of credits– Assures that one credit is not sold to two owners

• For VERs, without UN regulation, different standards and registries have been created to fill this role– Each has different regulations

Creating the Commodity: Key Market Standards

Standard Name

Sponsor Volume Certified

Project Types

Additionality Requirement

Registry

Gold Standard Gold Standard Organiz.

350,000 Renewable energy, Energy efficiency

Same as UN Gold Standard database

VER+ TUV SUD 383,932 Any except nuclear and large hydro

Same as UN Blue Registry

Voluntary Carbon Standard (VCS)

IETA, Climate Group, World Economic Forum

1,860,000 15 specific categories

Includes performance standards, barrier analysis

TBD

Voluntary 0ffset Standard (VOS)

Int’l Carbon Investor Services

Not available Any except nuclear, HFC-23, large hydro

Same as UN n/a

Community Climate Biodiversity (CCBA)

CARE, Nature Conservatory, Rainforest Alliance, others

45,695 Land use, land use change, forestry

Various, financial, political barriers, common practice, etc

CCBA database

Carbon FinancialInstrument

Chicago Climate Exchange (CCX)

15,000,000 Methane, soil, forestry, renewables

Performance standards, barrier analysis

CCXSource: Point Carbon

Gold Standard

• Markets itself has most stringent VER standard

• Similar to EB CDM guidance

• Requires additional environmental and stakeholder assessment screens

• Explicitly bans certain project types (i.e. forestry)

• Most projects cannot meet these standards

VER+

• Sponsored by TÜV SÜD

• Additionality/baseline requirements set according to CDM methodologies

• Projects after 2000 qualify

• Credits are recorded in TÜV SÜD’s Blue Registry

Voluntary Carbon Standard (VCS)• Sponsored by the Climate Group, IETA,

World Economic Forum

• Version 1+2 guidelines have been released (final version expected to be published this week)

• Credits must be “real, quantifiable, additional and permanent project-based emission reductions”

• Credits are placed into VCS registry

The Chicago Climate Exchange• Based in Chicago, Illinois, U.S.A.

• Voluntary, legally binding cap and trade system– Members pledge to reduce emissions– Trades “CFI”

• Allocated to members• Project based projects can become CFIs

• Current Price around $2 USD

• End of Q2 07, CCX traded 26.3 million tonnes of CO2e

Preferred Standards/ Certification Procedures

Source: Ecosystem Marketplace and NCF Survey

Voluntary Market:Opportunities for Project Owners • Provides alternative revenue source

for emissions reducing projects when…– CDM projects start generating electricity

before they are registered

– Projects do not have an approved CDM methodology

– Projects are otherwise not eligible for CDM

Voluntary Market:Opportunities for Project Owners

Source: Ecosystem Marketplace and NCF Survey

Voluntary Market:Opportunities for Project Owners • Increase awareness and understanding;

– When VERs are relevant to their project

– How to maximise the value of their VERs• Early stage development• Price expectations• Project packaging

– How the voluntary market differs from the Kyoto market

• What drives the voluntary market?

Voluntary Market:Interaction with the Aggregators • More so than CDM, need aggregators to

access the tailored transaction market– Forward purchasing contracts– Brokerage agreements

Source: Ecosystem Marketplace and NCF Survey

Benefits of Voluntary Markets?

Desire to participate in the absence of a formal framework

Source: Ecosystem Marketplace and NCF Survey

Benefits of Voluntary Markets• Sectors which practically can’t be

capped– Services sectors, individuals etc.

• Prior to an obligatory scheme– Experience / capacity building (Gov. and

industry)

– Early action credit– Hybrid markets (e.g. Japan)

Arreon Carbon

• Specialises in the origination and delivery of Chinese VERs and CERs

• Over one hundred emission reduction projects in a variety of technology areas

• Financially backed by Credit Suisse International and Mandra Group

Thank You

dan.barry@arreon.com