1. An initiative of the ACP Group of States funded by the European Union Global Climate Change Alliance: Intra-ACP Programme Training Module Climate Change Finance Module 5 – Introduction to the Voluntary Carbon Market Ms Isabelle Mamaty Senior Expert Climate Support Facility

2. Module Structure  Functioning of Voluntary carbon markets: VER concept  Voluntary carbon market project procedures: standards, registries …  Voluntary carbon market project types  Voluntary carbon market vs. CDM project  Voluntary carbon market opportunities in developing countries 2

3. What is the Voluntary Market ?  Companies and individuals take responsibility for offsetting their own emissions as well as entities that purchase “pre-compliance” offsets.  They co-exist with compliance markets that are driven by regulated caps on GHG emissions  There are two types of voluntary market: cap-and- trade and offset 3

4. Functioning of the Voluntary Carbone Market  Uses Carbon Credits  Generated through a project based system  Uses a Baseline – Project Emissions  Similar to CDM procedures (many projects use same methodologies)  Additionality verified by independent third party  The volume of carbon credits transacted voluntarily in 2010 represents less than a 0.3% share of the global carbon markets 4

5. Voluntary Cap- and-Trade  Cap-and-Trade (a limit on emissions of countries, regions, sectors)  Successful mandatory cap-and-trade examples: SO2 (US), European Trading Scheme (EU ETS)  There are no voluntary cap-and-trade markets functioning at present but a number of countries and regions of the world are considering them e.g. California, USA 5

6. What is being traded?  Emission reductions  Measured in tonnes of Carbon Dioxide (tCO 2 )  Also called offsets or  Verified or Voluntary Emission Reductions (VER) 6

7. VER Concept  Voluntary Emission Reduction (VER) is a type of carbon offset exchanged in the voluntary or 'Over-the-Counter' (OTC) market for carbon credits  VERs are usually created by projects which have been verified outside of the Kyoto Protocol.  1 VER = 1 tonne of CO 2 emissions.  VERs may be developed and calculated in compliance with one of several VER standards. These set-out rules define how emission reductions are measured. Standards provider assurance for buyer of VERs. At a minimum, all VERs should be verified by an independent third-party. 7

8. Voluntary Carbon Market buyers (1)  Who buys carbon credits?  Companies, NGOs and individuals  For?  Offsetting activities and products (travel, books, music festivals)  Pre-compliance with mandatory schemes  Why?  Competitive advantage: Public relations, Branding, Corporate Social Responsibility  Investment/Resale 8

9. Voluntary Carbone Market buyers (2) Purely voluntary buyers:  Organisations, companies or individuals not subject to mandatory emission reductions  Purchase CO2 emission credits and remove them from the market  In order to offset their own emissions  Motivation = ethical thinking or corporate social responsibility (CSR) Pre-compliance buyers:  Companies buying credits in anticipation of a mandatory market being established in the future  They expect that by buying now they will benefit from a lower price than will prevail once emissions reductions are mandatory 9

10. Voluntary Carbone Market Suppliers  Project Developers: Develop GHG emissions- reduction projects and sell the VERs  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 might have ownership of a portfolio of credits  Brokers: Do not own credits, but facilitate transactions between sellers and buyers. 10

11. Emission reduction principle 11 GHG Emissions Time Project Emissions Baseline Emissions Emission Reductions Projects that reduce or avoid carbon emissions are the source of credits in the voluntary carbon markets

12. Additionality  Similar to CDM projects: Additionality is a principal condition for the eligibility of any project in the voluntary carbon market.  Additionality is the requirement that the greenhouse gas emissions after implementation of a project activity are lower than those that would have occurred in the most plausible alternative scenario to the implementation of this project activity 12

13. Existing Standards and Methodologies  There are various standards, certification processes, and emissions registry services, but no standard is universally accepted.  However some standards are now widely recognized and accepted as a proof of credibility such as : the Voluntary Gold Standard; the GHG Protocol for Project Accounting; and the Climate, Community and Biodiversity Project Design Standards … 13

14. Existing Standards and Methodologies  Full-fledged Standards include accounting, monitoring and registration o Gold Standard o Voluntary Carbon Standard 2007 (VCS 2007) o VER+ o Chicago Climate Exchange (CCX)  Offset Standard Screens accept project under other standards o Voluntary offset Standard (VOS)  Bio-Sequestration Standards are sector specific standard (ex; forestry) o VCS AFOLU standard o Climate, Community &Biodiversity Standards (CDBS): CDM methodologies o Plan Vivo System  Offset Accounting Protocols provide definitions and procedures to account for GHG reductions from offset projects o GHG Protocol o ISO14064 14

15. Forest-based Standards  Plan Vivo: project specific methodologies  CarbonFix  BMV Standard  Forest Carbon Standard International  Forest-specific standards made up one third of all active standards in 2010 15

16. Registries  Verified carbon reduction are converted to a saleable asset  Credits have unique ID  Transferred from seller to buyer’s account  Examples: Gold Standard Registry, VCS Registry, Markit Registry, ACR, J-VER and others  Many standards have their own registries 16

17. How to Develop a project You have an idea for a project which reduces or avoids carbon emissions 1.The project requires some extra financing or needs some assistance to secure finance 2.It should contribute to the sustainable development of the local community 3.Get your partners together 4.Write a Project Idea Note (PIN) 5.Decide on a Standard to use 6.Present project to credit buyers 7.Get funding for your Project Design Document (PDD) 17

18. Different steps of Project Development Process 1. PROJECT IDEA AND PRELIMINARY ASSESSMENT 2. PROJECT DESIGN AND PLANNING 3. DEVELOPING A PROJECT DESIGN DOCUMENT 4. REVIEW PROJECT ACTIVITIES AND DEVELOP PROJECT IMPLEMNTATION STRATEGY 5. FINALISING FINANCING AND INVESTMENT ARRANGEMENTS 6. APPROVALS, VALIDATION AND REGISTRATION 7. IMPLEMENTATION AND MONITORING 8. VERIFICATION AND ISSUANCE This process takes between 1 and 3 years or more… Projects can generate income for 10 years or more

19. Voluntary Carbon Market: Project types The top Three Voluntary Market Projects in 2010:  REDD / Avoided Conversion: 29%  Landfill methane: 16%  Wind: 11% 19

20. Other Voluntary market project types  Run-of-river hydro  Agricultural soil  Improved Forest management  Livestock methane  Energy efficiency  Biomass 20

21. Price related to Project characteristics (1)  Project type is one of the most significant factors influencing price  Examples in 2010: o Two of the highest average prices: Solar ($16/tCO 2 e) and biomass projects o Medium: (4-8/tCO 2 e) forestry, run-of- river hydro and landfill o Lowest: large hydro ($1.7/tCO 2 e) and agricultural soil credits ($1.2/tCO 2 e) 21

22. Price related to Project characteristics (2)  Project location can also influence the price  Project environmental impacts  Contribution to local community – social impacts  Project size  Which Standard used e.g. Gold Standard or VCS for renewables, Plan Vivo for Forestry, SOCIALCARBON for projects with social benefits 22

23. Issues/ constraints for the Voluntary carbon market  Generally lower price than CDM (but not always)  Quality assurance  Transparency  Many different buyers – market is changing  Many standards and registries: can be confusing  Market is still small – just 0.3% of the global carbon market 23

24. Voluntary vs. Compliance (1) VoluntaryCompliance CommodityVERCER PriceVariable accordingly with standard and project (typically around USD2-6) Higher (around USD 11) CoverageVoluntary/worldwideAnnex 1 countries Market sizeSmallerLarger Volume2009: 98 MtCO 2 2010: 131 MtCO 2 2009: 7,437 MtCO 2 2010: 6,692 MtCO 2 RegulationNo Formal regulationUNFCC Executive Board (EB) MethodologiesCDM, Verified Carbon Standard (VSC), Gold Standard and Others Approved by EB Independent Third PartyCDM DOEs and OthersDOEs and EB

25. Voluntary vs. CDM (2)  Less bureaucratic / reduced transactions cost  Cheaper to generate credits  Flexibility and Innovation - niche/new sectors not covered by CDM  Can contribute more to sustainable development  Value for co-benefits: environmental & social contributions  Easier to register forestry projects 25

26. Turning words into action 26

27. Discussion  Questions and answers  Discussion and sharing of experiences concerning the development of the voluntary carbon market projects 27 Have you ever developed a voluntary carbon market project in your sector or at your level ? what are the institutional and capacity needs in your organisation to do so?

28. Where to get the information? Site markit:  http://www.markit.com/en/ http://www.markit.com/en/ Carbon Finance website of the World Bank:  http://carbonfinance.org http://carbonfinance.org 28

29. Case studies  Presentation of case studies of projects relevant to the country needs. 29

30. Thank you Contact: Dr. Pendo MARO, ACP Secretariat pendomaro@acp.int or +32 495 281 494 www.gcca.eu/intra-acp www.gcca.eu/intra-acp