William M. Ferretti, Ph.D., Sr. Policy Advisor, VCS Regional Voluntary Carbon Markets - Alternatives to the Kyoto Protocol Market 4/30/2019 William M. Ferretti, Ph.D., Sr. Policy Advisor, VCS

Overview New paradigm for climate financing Developing voluntary carbon markets Introduction to the VCS 4/30/2019

New paradigm for climate financing Continued emphasis on commitments to tackling GHG emissions Copenhagen a good start, but need to go further Need for clearly laid out plans and objectives Self-reliance Developing domestic initiatives (eg, markets) Domestic capacity building, including MRV Development agency resources as start-up capital Pay-for-performance Delivering results Carbon markets as a useful model 4/30/2019

What does new paradigm mean? Reduced dependence on outside financial resources Leverage existing programs/frameworks Make your strategy depend on local circumstances Developing domestic infrastructure and skills (capacity) Unleash domestic innovation 4/30/2019

Lessons from the CDM Reduced emissions (1 billion tCO2e) Fostered significant private-sector investment (US $215 billion) Demonstrated new pay-for-performance model However….. CDM market has been a “buyers market “ setting conditions on suppliers Low demand given anemic growth in EU EU decision to accept only LDC CERs post 2012 CDM has been restrictive regarding the types of activities that could be credited 4/30/2019

Enter the voluntary carbon market (VCM) Source: Ecosystem Marketplace and Bloomberg New Energy Finance, Developing Dimension: State of the Voluntary Carbon Markets 2012, May 2012 4/30/2019

VCM is small, but it is robust Strong supply Variety of project types and standards Many options for buyers Steady and growing demand Facts Value of 2011 OTC transactions highest ever Prices resilient (and increasing) 54% of VER purchases and retirements by corporates for purely voluntary reasons Mechanism to regulate supply and demand exists Corporates with commitments Not formal, but effective 4/30/2019

Uneven distribution of demand Volume and Value Transacted By Buyer Region and Top Country Locations, OTC 2011 Growth in last 3 years: Carbon Expo 2006 – VCM didn’t really feature Carbon Expo 2007 – VCM featured as the poor relations and the regulated market was concerned there might be a ruckus Carbon Expo 2008 – VCM started to become part of the establishment, eg JPM Climate Care takeover / coming out party So we see figures around the growth... 3-5m in 2004, to 65m last year It will continue to grow, though no-one quite knows how much Companies are the main engine of growth, though NGOs 13%, individuals 5%, govt less than 1% Motivations vary widely – will look at this later... Source: Ecosystem Marketplace and Bloomberg New Energy Finance, Developing Dimension: State of the Voluntary Carbon Markets 2012, May 2012 4/30/2019 8

VCM has matured significantly Infrastructure Innovation Linking sustainable development New methodological approaches New project types and moving towards jurisdictional approaches Effective engagement with stakeholders Credibility 4/30/2019

Why has this occurred? Overall corporate awareness, AND Countries/entities taking leadership position Australia National Carbon Offset Standard (NCOS) Costa Rica C-Neutral Program World Bank’s Partnership for Market Readiness Includes Brazil, Chile, Colombia, Costa Rica and Mexico 4/30/2019

Introduction to the VCS The VCS Association (VCSA ) Non-profit organization Headquartered in Washington, DC New offices in Santiago, Chile and Beijing, China Established by leading NGOs (IETA, WBCSD, The Climate Group, WEF) to: Provide a global benchmark and framework for the voluntary carbon market Foster innovation within a context of quality, credibility and transparency Demonstrate workable frameworks that can be incorporated into compliance regimes worldwide Funded primarily by VCU levy ($0.10 per VCU) 4/30/2019

VCS Program 4/30/2019

Verified Carbon Units (VCUs) Core Elements Additional Certifications Recognized by VCS (Thailand) 4/30/2019

Methodologies 20 approved VCS methodologies in the following sectors: Energy and energy consumption (5) Mining (2) Industrial gases, ODS (2) Reduced emissions from deforestation & avoided degradation - REDD (6) Improved forest management (4) Sustainable agricultural land management (1) 21 methodologies under development, including: Transport (3) Construction (3) Energy consumption (1) Manufacturing (fuel switching) (1) Agriculture, Forestry and Other Land Use (AFOLU) (13) Methodology developers include the Pacific Forest Trust (British Columbia government), World Bank, Food and Agriculture Organization (FAO), private sector, non-profits 4/30/2019

Liquidity… 880+ projects 100,000,000 + VCUs India: 260 China: 193 Projects by Country 880+ projects 100,000,000 + VCUs India: 260 China: 193 Brazil: 68 U.S.: 40 Thailand: 32 4/30/2019

VCUs Issued by Sectoral Scope 4/30/2019

Use of third party standards in VCM (OTC), 2011 Growth in last 3 years: Carbon Expo 2006 – VCM didn’t really feature Carbon Expo 2007 – VCM featured as the poor relations and the regulated market was concerned there might be a ruckus Carbon Expo 2008 – VCM started to become part of the establishment, eg JPM Climate Care takeover / coming out party So we see figures around the growth... 3-5m in 2004, to 65m last year It will continue to grow, though no-one quite knows how much Companies are the main engine of growth, though NGOs 13%, individuals 5%, govt less than 1% Motivations vary widely – will look at this later... Source: Ecosystem Marketplace, Bloomberg New Energy Finance, Developing Dimension: State of the Voluntary Carbon Markets 2012 17

Use of third-party standards, forestry Source: Diaz D. et al, (2011) State of the Forest Carbon Market 2011, From Canopy to Capital, Ecosystem Marketplace 4/30/2019 18

Looking Ahead - Crediting Frameworks of the Future Standardized approaches VCS developed framework for approaches that standardize elements of additionality and/or the crediting baseline, for a given class of project activity: Activity Methods (positive lists) Performance Methods (performance benchmark) Crediting jurisdiction programs, esp. REDD+ VCS developed guidance and criteria for jurisdictional REDD programs to enable crediting at multiple scales (project, state/province and national) Create a pathway for projects to “nest” within larger scale jurisdictional programs (both sub-national and national) Develop best practice nested accounting and crediting at jurisdictional scales 4/30/2019

Conclusions We have a new paradigm for GHG-related financing Largely influenced by the (positive) experience of the CDM ‘Pay-for-performance’ concept will dominate Will emphasize domestic infrastructure (MRV, capacity) Will emphasize domestic/regional demand development Voluntary carbon markets provide good example Can help build infrastructure (methodologies, accreditation systems, registries) Less exposed to outside circumstances/decisions Foster innovation 4/30/2019

Thank you Will Ferretti Senior Policy Advisor wferretti@v-c-s.org VCS Association 1730 Rhode Island Avenue, NW Suite 803 Washington, DC 20036 www.v-c-s.org 4/30/2019