1. CRAIG PIRRONG February, 2009 Voluntary Carbon Markets

2. Basic Markets Exchange Traded—CCX Over-the-counter—V-OTC  “Verified OTC”  “Voluntary OTC” OTC markets are primarily brokered markets, e.g., Evolution Markets, Inc. V-OTC primarily a market for offsets

3. V-OTC Market Facts Small compared to regulated markets 2006 data—13.4 MtCO2e worth about $54 mm About 43 percent of offsets sourced in North America 30 percent sourced in EU 10 percent Australia Very diverse products/projects

4. Why Volunteer? Diverse motives for voluntary market participation  Sustainability reporting  Corporate responsibility  Branding/marketing/sales  Anticipation of regulation

5. Where Do Credits Come From, Daddy? Very diverse sources of credits, primarily from offset projects 43 percent in N. America, 20 percent in S. America 36 percent forestry related (aforestation, reforestation, avoided deforestation) 33 percent renewable energy 20 percent industrial gases Remainder from methane, energy efficiency, “other”

6. Forestry Projects Although Australia (NSW) and Kyoto permit forestry-related (more generally “LULUCF”) credits, this accounts for a small fraction of CDM credits under Kyoto As a result, most forestry projects currently trade V- OTC There was considerable hostility to forestry-carbon in the EU due to questions of permanence No such hostility yet in N. America Possibility of insuring forestry projects has been mooted

7. RECs & VERs Renewable energy credits (RECs) the other major source of V-OTC credits—about 17 percent Grid-connected renewable energy projects How do you translate kWh into CO2? The standards issue raises its ugly head About 15 percent of voluntary credits comes from “off-grid” renewable energy projects

8. Verification Issues There is tremendous heterogeneity among projects There are a variety of alternative standards and certification schemes  Offset and project quality (6+)  Offset sellers, products, services, claims of carbon neutrality (3)  Retailer created standards More proposed by the day, it seems With so many standards (15 in 2007!), there’s no standard

9. Registry Need to keep track of what’s out there, and what’s been bought and sold 9 in existence as of 2007 Each operates under different standards

10. Prices Substantial variability in prices Variability across categories But also, substantial variability within categories Buyers very concerned about the “quality” of the offset A ton is not a ton is not a ton  Additionality  Third party verification/certification  Use of registries This price variability indicates that this is not yet a “commodity” or a commodity market There’s a very long way to go

11. The Value Chain A variety of participants in the value chain  Project developers  Aggregators  Wholesalers  Brokers  Retailers