An Introduction to the Voluntary Carbon Market (or the Private Sector’s Response to a Lack of Carbon Regulation) Jennifer Clymer February 11, 2009

2 Compliance vs. Voluntary Markets Compliance markets Compliance markets –Kyoto –U.S. State and Regional Programs –Non-U.S. National and Regional Programs Voluntary markets Voluntary markets –Chicago Climate Exchange (CCX) –Over-the-Counter (OTC)

3 The Voluntary Market is Older Than You May Think 1 st recorded voluntary carbon offset in st recorded voluntary carbon offset in 1988 Market began picking up steam after U.S. rejected Kyoto in 2001 Market began picking up steam after U.S. rejected Kyoto in 2001 –Since 2002, offset sales increased by more than 4X And really took off in past few years And really took off in past few years –B/t , offset sales nearly tripled while the value of the market more than tripled

4 Chicago Climate Exchange (CCX) Voluntary, legally binding, membership-based cap-and-trade program began in 2003 Voluntary, legally binding, membership-based cap-and-trade program began in 2003 Expanded to EU, New York, the Northeast, and Montreal Expanded to EU, New York, the Northeast, and Montreal Unit = Carbon Financial Instrument (CFI) = 100 metric tons CO 2 e Unit = Carbon Financial Instrument (CFI) = 100 metric tons CO 2 e –No distinction between project-based offset and compliance allowance

5 Over-the-Counter (OTC) Voluntary agreements made on a contractual basis Voluntary agreements made on a contractual basis EU and US make up majority (77%) of market EU and US make up majority (77%) of market Unit = Verified (or Voluntary) Emission Reduction Unit (VER) Unit = Verified (or Voluntary) Emission Reduction Unit (VER)

6 Summary of Offset Types Project Mechanism Regulatory Framework Tradable Unit Applicable Countries CDMKyotoCER Developing Kyoto countries w/o reduction targets JIKyotoERU Developed Kyoto countries w/ reduction targets OTCNoneVER Primarily EU & US, but anywhere CCXNoneCFI Primarily US, but also Canada & Mexico

7 Buyers are Primarily European and American Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

8 Businesses Purchases the Majority of Offsets Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

9 Offset Purchases Primarily Motivated by PR Concerns In 2007, main motivations included: In 2007, main motivations included: –Corporate Social Responsibility –PR/Branding Surprisingly, pre-compliance concerns less important Surprisingly, pre-compliance concerns less important More than half of purchasers offset organizational emissions rather than trips/events More than half of purchasers offset organizational emissions rather than trips/events

10 Offset Sales are Booming in Tons… 2007 OTC+CCX sales = 65M metric tons 2007 OTC+CCX sales = 65M metric tons (2% of Kyoto market at 3B metric tons) –42M metric tons (65%) from OTC Annual growth, : ~200% Annual growth, : ~200% –23M metric tons (35%) from CCX Annual growth, : ~120% Annual growth, : ~120%

11 …and in Dollars 2007 CCX+OTC sales = $331M 2007 CCX+OTC sales = $331M (0.5% of Kyoto market at $66B) –$258M (78%) from OTC Annual growth, : ~350% Annual growth, : ~350% –$72M (22%) from CCX Annual growth, : ~90% Annual growth, : ~90%

12 Renewables & Energy Efficiency are the Main Offset Types Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

13 Offsets Primarily Originate in Asia, US, & Europe Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

14 Offsets are NOT Always Genuine Reductions Concern in CDM/JI markets that projects do not generate claimed GHG reductions Concern in CDM/JI markets that projects do not generate claimed GHG reductions –LFG projects historically produce 50% of promised reductions –N 2 O projects historically produce >100% of promised reductions Additionality concerns Additionality concerns –Especially with RE and EE projects Double counting concerns Double counting concerns –Especially with RE and voluntary commitments Sustainability concerns Sustainability concerns

15 Quality Concerns Led to an Offset Standard Race No standardization in voluntary market No standardization in voluntary market –Up to purchaser to demand specific standard Each standard has its own methodologies for calculating GHG reductions Each standard has its own methodologies for calculating GHG reductions –114 for Kyoto market (“CDM Methodologies”) –Hundreds for non-Kyoto markets –More in the works!

16 Voluntary Carbon Standard is the Leading Standard Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

17 Numerous Factors Influence Offset Price Project development costs Project development costs –Project type, size, and location –3 rd party certification costs Vintage of offsets Vintage of offsets –Future price discounted due to increased uncertainty Transaction costs increase with each intermediary Transaction costs increase with each intermediary –Developer 2007 mean price: $5.00/metric ton –Retailer 2007 mean price: $11.30/metric ton Non-profit vs. for profit status of provider Non-profit vs. for profit status of provider –Non-profit tax deduction if offsets retired on behalf of purchaser

18 Offset Prices Are Lowest in the US & EU Source: Ecosystem Marketplace and New Carbon Finance, Forging a Frontier: State of the Voluntary Carbon Markets 2008

19 Questions? (512)