The voluntary OTC offset market refers to all voluntary sales and purchases of carbon credits (mostly project-based emissions reductions credits) outside of the Chicago Climate Exchange.
Market Features and Rules
Outside of the CCX, one finds a wide range of voluntary transactions that make up a
voluntary market that is not driven by an emissions cap. Because this market is not part of
a cap-and-trade system, where emission allowances can be traded, almost all carbon
offsets purchased in this voluntary market originate from project-based transactions.
Hence, this market can be referred to as the voluntary offsets market. Because it does
not operate via a formal exchange, it can also be referred to as the voluntary Over-the-
Counter (OTC) market. Credits in this market are generally referred to as Verified (or Voluntary, depending on the source) Emissions Reductions (VERs), or simply as carbon offsets.
Because voluntary offset market demand is not driven by a cap, especially in the retail
market, the demand curve for offset purchases has as much in common with the markets
for Fair Trade or organic cotton as it does with the EU ETS. Buyer motivations include
wanting to manage their climate change impacts, an interest in innovative philanthropy,
public relations benefits, the need to prepare for (or deter) federal regulations, and plans
to re-sell credits for a profit.
This voluntary OTC carbon market has been defined by its lack of rules and regulation. However, in the past two years, organizations have developed more than a dozen third-party standards and methodologies to which project developers can have their emissions reductions certified, helping to ensure baseline quality in the marketplace. Standards created for this marketplace include: the Voluntary Carbon Standard (VCS), VER+, Green-e Climate, CCX, the California Climate Action Registry (CCAR), Voluntary Offset Standard, ISO 140464 (a project design standard), and the Australian government's Greenhouse Friendly certification. Several standards–such as the Gold Standard, Climate Community and Biodiversity (CCB) Standards, Social Carbon, and Plan Vivo)– go beyond certifying baseline offset credit quality, and also assure environmental and social co-benefits of the offset project.
Building on the establishment of standards, a new feature of the voluntary carbon market infrastructure is sprouting up across the globe: carbon credit registries. These registries are designed to track credit transactions and ownership as well as reduce the risk that a single credit can be sold to more than one buyer. Dozens of GHG registries exist around the world, but not all of them serve the same purpose. In general, existing registries can be divided into two different categories: emissions-tracking registries and carbon-credit accounting registries. When dealing with a commodity as intangible as a carbon credit, such registries are crucial, but they have not been prevalent in the OTC market until recently. Some standard providers maintain registries in-house, while others are teaming with registry providers from other organizations. Additionally, some registries remain distinct infrastructure providers unaffiliated with a particular standard.
Suppliers in the OTC market include retailers selling offsets online, conservation organizations hoping to harness the power of carbon finance, developers of potential JI or CDM projects with credits that - for a range of reasons - cannot currently be sold into the regulated markets, project developers primarily interested in generating VERs, and aggregators of credits. Depending on their position in the supply chain, sellers can be categorized into four major types:
Project developers: Develop GHG emissions reduction projects and may sell carbon to aggregators, retailers, or final customers.
Aggregators/Wholesalers: Only sell offsets in bulk and often have ownership of a portfolio of credits.
Retailers: Sell small amounts of credits to individuals or organizations, usually online, and have ownership of a portfolio of credits.
In some cases VERs also pass through brokers, who do not own credits but facilitate transactions between sellers and buyers.
Within the voluntary OTC market, these definitions are often blurred, and organizations frequently operate in more than one category type. Many suppliers, for instance, are also engaged in business activities other than selling VERs. For example, most major brokerage firms dealing in VERs also transact in the regulated markets or in other emissions markets.
Type of Credit Buyers by Volume
Buyers in this market cover a range of entities, including unregulated corporations, non- governmental organizations, local municipalities, and universities, as well as individuals. Ecosystem Marketplace's State of the Voluntary Carbon Markets 2008 study found the following distribution of OTC offset buyers in 2007:
Government Voluntary Purchasing Programs
In several cases, governments have instituted voluntary emission reduction and carbon
offset purchasing programs.
Japan's Keidanren Voluntary Action Plan on the Environment
Japan's Kyoto commitment is to reduce GHG emissions to 6% below its 1990 levels within the first commitment period from 2008 to 2012. One aspect of the country's reduction strategy is the Keidanren Voluntary Action Plan, which encompasses 58 different Japanese business associations and includes 35 industry participants from the energy, mining, and construction industries. Member companies in the Keidanren Voluntary Action Plan have committed to stabilizing their collective emissions to 1990 levels by 2010. Despite lacking legally binding emissions reduction requirements, the Keidanren Voluntary Action Plan is positioned as a Kyoto Protocol Target Achievement Plan. Offset credits are, in theory, purchased voluntarily. However, the only viable offsets are from Kyoto mechanisms (Clean Development Mechanism / Joint Implementation), with purchases being accounted for on a national registry system and used to meet Kyoto commitments. Hence, we have not included Keidanren purchases in our quantitative analysis of the voluntary carbon markets.
Australia's Greenhouse Challenge Plus
The Australian government's Greenhouse Challenge Plus program was created to help Australian companies improve energy efficiency and reduce GHG emissions. Like the United States' Environmental Protection Agency's (US EPA) Climate Leaders program, this program includes emissions reduction progress reporting and technical assistance. A particularly unique aspect of the Greenhouse Challenge Plus program is the Greenhouse Friendly Initiative, which certifies credits from emissions abatement programs as well as 'carbon neutral' claims. Although this initiative is part of a government program, we have chosen to include as much information as possible from this program in our analysis of the voluntary carbon markets because the program is based on purchases made by non-regulated entities. It is thus purely voluntary, as GHG emissions are not yet regulated at a national level. Furthermore, the program allows entities to utilize credits that are not part of a regulatory system.
Market Activity, Volume, and Value
Trading activity and prices per tonne have been growing steadily. A confirmed 42.1 MtCO2e were transacted on the OTC voluntary offset markets in 2007. Using a volume-weighted average price of carbon in these markets of $6.10 per tonne of CO2e, Ecosystem Marketplace and New Carbon Finance estimate that the voluntary OTC market was worth US$258.4 million in 2007. It is important to note that this estimate is conservative and represents only confirmed transactions.
Forestry Credits Registered
Survey results for the State of the Voluntary Carbon Markets 2008 report found three types of projects dominating this market in 2007: renewable energy, energy efficiency, methane destruction, and forestry. Of these, forestry accounted for 15% of the transaction volume. This represents a significant decrease in market share occupied by forestry projects since 2005, when a study by New Forests for the Ecosystem Marketplace on the retail carbon market found that about half of retailer credits originated from forestry projects. In 2006, Ecosystem Marketplace and New Carbon Finance found that forestry was still the most popular project by transaction volume, weighing in at 37% of the market. By 2007, the market share of forestry credits had dropped by over 20 percentage points from the year prior, though they remain popular on the voluntary OTC market.
The predominance of forestry credits in voluntary carbon markets, especially in their early years, is not surprising. The first carbon credits ever transacted were generated by a forestry project back in 1988. While forestry sequestration projects are widely accepted under the New South Wales Greenhouse Gas Abatement Scheme, their credits must be from local projects. In other words, outside of Australia, the Kyoto and voluntary markets are the only two outlets for forest-related sequestration credits. Compared to Kyoto markets, it's clear that the voluntary carbon markets play a critical role in financing sequestration projects. In 2007 and 2006, less than 1% of CDM credits were sourced via approved forestry projects or the broader Kyoto category defined as "Land Use, Land Use Change and Forestry (LULUCF)" methodologies.
LULUCF projects may not only face lower financing and bureaucratic hurdles in the voluntary markets, but may also be valued more highly for providing benefits to communities, to biodiversity, and to other values which voluntary buyers care about. They may, in other words, be more "charismatic." While not all forestry projects can boast high sustainable development co-benefits, and several projects have been criticized for negative social or environmental impacts, many projects (especially native forestry projects) do in fact result in ancillary social and environmental benefits beyond sequestration. Moreover, LULUCF credits may be appealing because many consumers have an understanding of the role trees play in the carbon cycle (versus the role that the industry-generated HFC23, for instance, plays in climate change, which may be harder for the average consumer to conceptualize).