An Introduction to the Voluntary Carbon Markets

An Introduction to the Voluntary Carbon Markets

By Grattan MacGiffinManaging Director, Global Sustainable Trading Limited

EOI, MadridFebruary 16, 2011

Global Sustainable Trading Limited is a part of the Global Sustainable Group Ltd. Offices in Boston, London, Paris and

Izmir.

A little joke…

El doctor llama por teléfono a su paciente:

‘Vera, tengo una noticia buena y otra mala’.

‘Bueno... dígame primero la buena’.

‘Los resultados del análisis indican que le quedan 24 horas de vida.’

‘Pero, bueno, ¿eso es la buena noticia? ¿Entonces cuál es la mala’?

‘Que llevo intentando localizarle desde ayer’.

An Introduction to the Voluntary Carbon Markets

• Introduction

• Definitions

• Historic data

• Components of a VER offset

• VER pricing

• Transacting VERs

• VCM versus Regulated Emissions market

• The future

• Questions

Definitions

• “In a voluntary carbon market, an entity (company, individual, or another ‘emitter’) volunteers to offset its carbon emissions by purchasing carbon allowances from a third party, who then takes this money and uses it towards a project that will reduce carbon in the atmosphere.” National Renewable Energy Lab

• “Voluntary Emission Reductions (VERs) are carbon credits that are not certified by the United Nations under the Kyoto Protocol. Some companies and individuals choose to buy carbon credits resulting from carbon-cutting projects that are not certified by the UN, in order to meet their own carbon reduction objectives.” Financial Times, London

Historic Volume in the Voluntary Markets

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Historic Value in the Voluntary Markets

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

2009 – 2010 Trends

• 2009 started strongly, ended quietly• Linkages and infrastructure building a key theme• Better information• Impacts of recessions and regulation• Carbon+

The components of a VER offset

• These include…• Standard• Project type (‘methodology’)• Location• Vintage

Offset Standards in the Voluntary Carbon Markets, 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Standard, 2008 v 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Project Type, 2008 v 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Land-Based Credits Sold OTC, 2008 v 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Project Location, 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Location and Project Type

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Location and Project Type

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Transaction Volume by Vintage, 2008 v 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Pricing

Average Credit Price by Project Type, 2008 v 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Typical Market Pricing Summary

Transacting VERs

Issues in Transacting VERs

Not commoditised

No guarantees of enduring appeal

Changing fashions

Beauty in the eye of the beholder

Interference from external agencies e.g. delays by UN, 3rd party verifiers

Legislative uncertainty

Occasional bad press

= HARD WORK!

Transaction Volume by Type of Buyer, 2009

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Mo

nito

ring

Rep

ort

up

load

Offset

Role of Registry Infrastructure in the Building Blocks of an Environmental Market

Creation and / or Allocation of Credits

Traders / Brokers /

Investment Banks

Exchanges and Clearing Houses

Settlement

Project Funders e.g. banks,

investors, non-profits

Owners/Operators of environmental market project

Cre

dit

Issuan

ce

VerificationProject Operation

Project Validation

Project Design

Pen

din

g

Issuan

ce

Units

Marketplace: Trading of Credits and Allowances

Buyers Domestic ETS

participants Governments Banks Traders Retailers Corporate Buyers Long term

Investors Speculative

Buyers

Tra

ck T

ransfe

rs

Tra

ck R

etirem

en

t

Usage

Tra

ck T

ransfe

rsC

onn

ectivity

Reg

ister

Proje

cts

Markit Environmental Registry System

Allowances (tradable permits/credits) allocated to regulated entities

Post T

rade

In

forma

tion

&

Se

rvices

Ma

rket

Esta

blish

me

nt

Service

s

Governments and regulatory

agencies

Credits created

Transaction Volume by Registry Utilised, 2009

21%

17%

15%10%

8%

8%

7%

4%

1%

0.1%1% 7%

APX (VCS)

CAR

CCX

Caisse des Depots

Markit

Gold Standard

ACR

CDM

NSW GGAS

BlueRegistry

Internal Registry

Remaining

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Tips

• SELLERs

• Select standard carefully

• Understand what is selling

• Have all info in Registry account

• Consider sale size/vintages

• Commit to sell

• Speak to experts

• Don’t cut corners

• Be realistic!

• Aim for repeat business

• BUYERs

• Assess carefully what you need

• Understand what is available

• Have Registry account ready

• Buy only what you need

• Commit to buy

• Speak to experts

• Accept unforeseen delays

• Be realistic!

• Aim for repeat business

Regulated Emissions Market v Voluntary Carbon Market

Transaction Volumes and Values, Global Carbon Market, 2008 and 09

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

The Future…

Projected Market Growth for the Voluntary Carbon Markets, according to Participants

Source: “State of the Voluntary Carbon Markets 2010”, Ecosystem Marketplace and Bloomberg New Energy Finance

Likely Scenarios..?

• Bounce back to upward growth trend in global VCM

• Continued evolution of standards and market transparency

• More REDD; more African projects

• More Innovation of new project methodologies e.g. water filters

• Broader base of investment – health, education; aid, development budgets

• More forward trading as market matures

• US offsets and trading to dominate growth e.g. CaT, WCI

Mucho Gracias!grattan@gteglobal.org00 44 7733 365303