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Policing the voluntary carbon market

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  • Greenhouse Gas Management Institute

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COMMENTARY
nature reports climate change | VOL 6 | NOVEMBER 2007 | www.nature.com/reports/climatechange 85
Policing the voluntary
carbon market
MICHAEL GILLENWATER1,2,*, DERIK BROEKHOFF3, MARK TREXLER4, JASMINE HYMAN5
AND ROB FOWLER6
Voluntary greenhouse-gas emission offset markets are in need of government oversight.
Numerous opinion polls have
indicated that concern over global
climate change has risen dramatically
in the US and elsewhere1,2,3. One tangible
measure of this growing concern has been
the emergence of voluntary greenhouse-
gas (GHG) o set markets, in which
businesses and consumers purchase GHG
reductions instead of directly reducing
their own emissions4.
A GHG ‘o set’ is an intangible
economic commodity that represents
the avoidance or sequestration of GHG
emissions. GHG o sets are derived from
distinct projects, involving anything from
low-carbon energy production, to energy
e ciency measures, the destruction
of GHGs such as methane and nitrous
oxide, and tree planting and soil carbon
enhancement activities. O sets o er buyers
a potentially lower-cost alternative to
reducing their own emissions (Fig. 1).  e
geographic source of GHG emissions is
irrelevant to their climate change impact.
erefore, GHG emission reductions are a
global, rather than local, public good and
can be traded in a global market5.
Although currently small in
comparison to regulated o set markets
under the Kyoto Protocol, voluntary o set
markets are growing rapidly (Table 1),
especially in the United States, and could
expand tenfold by 20106. Even the US
House of Representatives is preparing to
enter the voluntary o set market as a buyer
under its Green Capital Initiative7.
e purchase of GHG o sets is
economically rational in cases where
reducing emissions attributable to one’s own
activities is more costly. Paying someone else
to pollute less may be wiser — both for the
purchaser and for society as a whole — than
reducing pollution oneself because more
emissions can be reduced for a given
expenditure of resources.  e atmosphere
bene ts to the extent that an o set reduction
is equivalent to an emission reduction made
directly by the purchaser. Recently, however,
o sets have been widely criticized in the
media as to whether they represent real
emission reductions8,9,10,11.
GHG o set transactions face three
fundamental challenges. First, a common
and credible procedure is necessary for
selecting emission reduction projects
made possible by o set credit sales and
for quantifying the reductions achieved
against a business-as-usual (BAU) baseline
in which no speci c actions are taken to
reduce GHG emissions. Second, credible
monitoring is needed to verify that
reductions actually occur as claimed.  ird,
unambiguous property rights over emission
reduction credits are essential for markets
to operate e ectively.
ese challenges are not unique to
o set markets, but they are symptomatic
of markets that trade in commodities
representing public goods. Such markets
do not arise naturally or function e ciently
without assigned property rights, rules
governing transactions, and oversight12.
Consumers need credible information on
the quality of what they are purchasing.
Similar problems exist with the development
of product standards, such as for organic
Before After Before After
Buyer Offset project
GHG emissions
Baseline emissions
Actual emissions
E
m
i
ss
i
on re
d
uct
i
on c
l
a
i
m
$
Figure 1 GHG offset transaction.
COMMENTARY
86 nature reports climate change | VOL 6 | NOVEMBER 2007 | www.nature.com/reports/climatechange
food or sustainable forest products. For
voluntary GHG o sets, commonly accepted
de nitions of quality are currently lacking.
Although GHG o set markets appear
to be expanding on their own, there is a
serious risk of their collapse due to a lack of
standards, policing and credibility.
What has proven most vexing for those
involved in GHG o set markets is de ning
‘additionality’.  is is a key factor determining
a project’s eligibility to sell credits.  e crucial
question is whether the added revenue or
other resources gained from selling GHG
o set credits somehow enables a project’s
implementation, or if the extra revenue
simply lines the pockets of those who would
have implemented the project anyway? In
markets for public goods that lack some form
of mandated quotas (for example, emission
caps), additionality determinations serve
the function of maintaining scarcity in the
marketplace. Without them, GHG o sets
representing business-as-usual reductions
will tend to  ood the market.
ere is no correct technique for
determining additionality because it
involves the evaluation of counterfactual
circumstances. No test for additionality
can provide certainty about what would
have happened otherwise.  e challenge
is akin to statistical hypothesis testing.
Adopt tests that are too stringent and one
risks disqualifying many truly additional
projects, thus restricting o set supplies
and increasing their prices. But adopt tests
that are too lenient, and the market will be
dominated by ‘free riders’ who would have
implemented their projects anyway.
Adding to this challenge is the fact that
the appropriate set of additionality tests
varies from one type of project to another.
For projects that involve  aring of methane
from land lls, for example, excluding
projects that are required by law or
regulation may be su cient to ensure that
the majority of projects are additional. But
for some energy-e ciency or renewable-
energy projects, such as investments in
wind turbines, more thorough tests are
needed to di erentiate additional from
BAU projects.  e solution to additionality
lies in adopting tests that will achieve a
balance of ‘false negatives’ (that is, truly
additional projects mistakenly classi ed
as business-as-usual) and ‘false positives
(that is, BAU projects classi ed as
additional)13. One of the key problems with
voluntary GHG o sets is that no central
authority exists to manage this balance
across the entire market
A second challenge for GHG o sets
has to do with monitoring and veri cation
to assure that o sets are being achieved
in the manner and quantity promised.
Generally, independent third-party
veri cation of o set projects against
a common standard is necessary for
consumers to have a reliable and unbiased
source of information on o set quality.
Analogously, we do not expect consumers
of organic food to monitor the farming
practices of their food suppliers. Yet, for
voluntary carbon o sets, there is no agreed
standard for monitoring methods or the
appropriate frequency and requirements
for veri cation. Determining appropriate
monitoring and veri cation standards
requires balancing costs — which,
if too high, might drive away more
cost-e ective projects — with the need
for environmental integrity.
Finally, GHG o sets face the challenge
of determining ownership of a particular
emission reduction. Ownership of o set
credits is relatively unambiguous in some
cases, but in other cases it is fraught
with complications. For example, the
rights to make speci c environmental
claims are o en disputed with energy-
e ciency or renewable-energy projects
where investors, equipment suppliers,
utilities and electricity customers are
all involved. Legal mechanisms are not
yet in place to disallow two parties from
selling the same reduction or to prevent
a single party from selling a reduction to
multiple buyers. Consistent rules that will
promote investment and market e ciency
are needed, as well as registries to foster
transparency of transactions and track
the retirement of o sets used to make
emission reduction claims.
A number of organizations involved in
the voluntary o set market are developing
standards in an attempt to address these
challenges. But it is not clear if any of these
standards will gain market acceptance
or have the ability to police the practices
of market participants. To date, none of
them has adequately addressed all three
of the aforementioned challenges for
establishing a true o set ‘commodity’
(that is, project eligibility, monitoring and
veri cation procedures, and enforcement of
ownership)14. Although the consequences
are di cult to predict, the confusion
produced by a host of independent
‘standards’ operating in a regulatory vacuum
has the potential to discredit market-based
environmental policies with the public as a
means of addressing climate change.
Environmental commodity markets
are inherently more susceptible to
market failures than traditional markets
because the commodity transacted is both
intangible and represents a public good.
Where buyers cannot easily evaluate the
quality of a good or service, there is a clear
need for quality assurance mechanisms.
Without such mechanisms, competitive
pressures force sellers to minimize quality
and limit transparency.  e result will be
that bad projects will drive good projects
out of the market.
Some governments are beginning to
respond to the need for oversight of these
voluntary markets. In January 2007, the
UK’s Department of Environment and
Rural A airs dra ed a code of best practice
for the voluntary GHG o set market15, and
in July 2007, the Australian government
announced that it would provide a
government-administered program for
businesses and households to become
carbon neutral’ via approved o sets16,17.
Although government intervention
is no guarantee that the challenges
discussed above will be effectively
addressed, we find these efforts
laudable, and call on the US and other
governments to follow the example of the
UK and Australia by setting standards
and overseeing the voluntary GHG offset
marketplace. Specifically, governments
should initially develop best-practice
guidelines that address the three key
challenges described above.
These voluntary guidelines should
immediately be followed by a more
thorough process of standard setting,
with a board to approve project eligibility
criteria, accounting methodologies, as
well as monitoring, registration and
public reporting requirements. Ideally,
governments should build off the
existing work under the United Nations
Framework Convention on Climate
Table 1 Size of GHG emissions trading markets
4
2006 volume
(million tons CO
2
equivalents)
2006 value
(US$ million)
GHG offset market
Total Voluntary Market 23.7 91
Voluntary OTC* 13.4 54.9
Chicago Climate Exchange
10.3 36.1
Other GHG trading schemes
EU Emissions Trading Scheme
1,101 24,357
Clean Development Mechanism 475 5,257
* ‘Over-the-counter’
North America’s only marketplace for integrating voluntary legally binding emissions reductions with emissions trading and offsets for
greenhouse gases.
Launched in January 2005, the largest regulatory-based multi-country, multi-sector GHG emissions trading scheme worldwide.
COMMENTARY
nature reports climate change | VOL 6 | NOVEMBER 2007 | www.nature.com/reports/climatechange 87
Change and its Clean Development
Mechanism18 (which allows developed
countries to invest in projects that reduce
emissions in developing countries as an
alternative to more expensive emission
reductions in their own countries),
New South Wales’ Greenhouse Gas
Reduction Scheme19 (which requires
electricity retailers and other parties to
meet mandatory targets for reducing
or offsetting their emissions from the
electricity they supply or use), and
existing non-governmental organization
efforts20. Furthermore, they should
cooperate in their standard setting
processes to harmonize rules and create
a globally-recognized and homogeneous
GHG offset commodity for voluntary
markets. The US Department of
Agriculture has developed a similar
process of bilateral cross-recognitions
of standards for organic food labels that
may serve as a useful model.
Ultimately, mandatory government
policy must be our primary approach
to dealing with climate change and the
GHG emissions that cause it. However,
voluntary GHG o set markets can
contribute to emissions mitigation and
sustainable development objectives while
government-mandated schemes are under
development. Voluntary markets can also
foster innovation through new technologies
and project types still under evaluation
by compliance emission markets. While
governments focus on developing a
consensus on GHG mitigation policies, or
more stringent policies, the voluntary o set
market, with proper government oversight,
has the potential to play a signi cant role in
mitigating future climate change.
References
1. Bannon, B. et al. Americans’ Evaluations of Policies to Reduce
Greenhouse Gas Emissions (New Scientist Magazine, Resources
for the Future, Stanford University, 2007); http://media.
newscientist.com/data/images/ns/av/global_warming_poll_
stanford.pdf
2. http://sequestration.mit.edu/research/survey2006.html
3. http://www.globescan.com/news_archives/csr_climatechange.html
4. Hamilton, K. et al. State of the Voluntary Carbon Market 2007:
Picking Up Steam (EcoSystem Marketplace and New Carbon
Finance, 2007); http://ecosystemmarketplace.com/documents/
acrobat/Stateo heVoluntaryCarbonMarket17July.pdf
5. Jacobs, M. e Green Economy (Pluto, London, 1991).
6. http://www.ic .com/Newsroom/carbon-o sets-2006.asp
7. http://speaker.gov/issues?id=0023
8. Revkin, A. Carbon-neutral is hip, but is it green?
New York Times, April 29 2007.
9. Harvey, F. & Fidler, S. Industry caught in carbon ‘smokescreen’.
Financial Times, April 25 2007.
10. Carbon o sets: Sins of emission. e Economist,
August 14 2006. Nature 444, 976–977 (2006).
11. Neumayer, E., Weak versus Strong Sustainability
(Edward Elgar Publishing, Cheltenham, 2003).
12. Trexler, M. C. et al. Sustainable Development Law & Policy VI
(2), 30 (2006).
13. Broekho , D. Linking Markets for GHG Reductions: Can It Be
Done? (International Network for Environmental Compliance
and Enforcement, 2007); http://www.inece.org/emissions/
dublin/Broekho .pdf
14. DEFRA Establishing a voluntary code of best practice for the
provision of carbon o setting to UK customers; http://www.defra.
gov.uk/corporate/consult/carbono setting-cop/index.htm
15. http://www.house.gov/apps/list/press/global_warming/
July18o setFTC.shtml 16. http://www.greenhouse.gov.
au/greenhousefriendly/index.html
17. http://cdm.unfccc.int/
18. http://www.greenhousegas.nsw.gov.au
19. Broekho , D. Vo lun tar y C arb on O  sets — Getting What You
Paid For (World Resources Institute, 2007); http://pdf.wri.
org/20070718_broekho _testimony.pdf
1Princeton University; 2Greenhouse Gas
Experts Network; 3World Resources Institute;
4EcoSecurities; 5 e Gold Standard;
6Abatement Solutions — Asia Paci c
*e-mail: gillenwater@alum.mit.edu
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State of the Voluntary Carbon Market 2007: Picking Up Steam (EcoSystem Marketplace and New Carbon Finance
  • K Hamilton
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