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Agricultural waste collection or CDM bio-mass project Malavalli, India.
Making Sense o the Voluntary Carbon Market
A Comparison o Carbon Ofset StandardsAnja Kollmuss (SEI-US), Helge Zink (Tricorona), Cliford Polycarp (SEI-US)
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Published by: WWF Germany
Title: Making Sense o the Voluntary Carbon Market: A Comparison o Carbon Oset Standards
Authors: Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Cliord Polycarp (SEI-US)
Graphic Design: Tyler Kemp-Benedict
Date: March 2008
Copyright 2008 by the Stockholm Environment Institute and Tricorona. This publication may be re-
produced in whole or in part and in any orm or educational or non-proft services without special
permission rom the copyright holder, provided acknowledgement o the source is made. No use o
this publication may be made or resale or any other commercial purpose without written permis-
sion o the copyright holders.
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Making Sense o the Voluntary Carbon MarketA Comparison o Carbon Oset StandardsAnja Kollmuss (SEI-US), Helge Zink (Tricorona), Cliord Polycarp (SEI-US)
Table o cotets Ackowledgemets iii
About the Authors iii
About This Report iv
Executive Summar v
1 Itroductio 1
2 Market Overview 2
21 Compliance Market 422 Voluntary Carbon Markets 623 Voluntary and Compliance Carbon Market Size 6
3 How Oset Projects Are Implemeted 831 The Stages o the CDM Project Cycle 832 Who Is Who in a Carbon Oset Project 11
4 The Role o the Volutar Market 12
5 Ke Elemets o Oset Stadards 1451 Additionality and Baseline Methodologies 15
511 Project Based Additionality Testing 15
512 Perormance Standards 16513 Additionality Requirements or Each StandardAdditionality Requirements or Each Standard 17
514 Baselines 18
515 Baseline Requirements or Each StandardBaseline Requirements or Each Standard 19
516 Project Boundaries and Leakage 2052 Project Types 20
521 Biological Sequestration 20522 Industrial Gases 22523 Methane Capture 23524 Energy Eciency 24525 Renewable Energy 24
526 Project Types Accepted by Each StandardProject Types Accepted by Each Standard 2 5
53 Project Location 2554 Start Date & Crediting Period 26
541 Start Dates and Crediting Periods or Each StandardStart Dates and Crediting Periods or Each Standard 2 8
55 Co-Benets 28551 Sustainable Development Criteria 28552 Stakeholder Consultations 31
553 Co-Benets Requirements or Each StandardCo-Benets Requirements or Each Standard 32
56 Role o Third Party Auditors 33561 Aligned Interests Between Buyers and Sellers 33
562 Independent Validation o Project Activity 33563 Monitoring and Independent Verication o Project Activity 34
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i i
564 Project Approval: Auditors or Standard Boards 35565 Conficts o Interest: Auditors and Project Developers 35566 Quality Control o Auditors 36
567 Project Auditing Requirements or Each StandardProject Auditing Requirements or Each Standard 3 6
57 Registries 39
571 Registries Used by Each StandardRegistries Used by Each Standard 4 0
58 Double Counting 40581 Project Locations and Rules on Annex B Countries or Each StandardProject Locations and Rules on Annex B Countries or Each Standard 4 2
6 Oset Trasactios 4261 Pricing o Osets 42
611 Project Costs 42612 A Common Misunderstanding: The Project Share Pitall 43
62 Oset Market Prices 43
621 Pricing o Osets or Each StandardPricing o Osets or Each Standard 4 4
63 Choosing the Right Contract Terms 45631 Low Transaction Risk: Prompt Delivery o Existing Osets 46
632 Medium Transaction Risk: Forward Delivery o Future Osets 46633 High Transaction Risk: Forward Crediting o Ex-ante Osets 47634 How Providers Can Reduce Delivery Risk 47
7 Review o Stadards Used I the Volutar Oset Market 4 871 Oset Standard Types 4872 Full-fedged Standards 49
Clea Developmet MechaismClea Developmet Mechaism 49
Gold StadardGold Stadard 5 4
Volutar Carbo Stadard 2007 VCS 2007Volutar Carbo Stadard 2007 VCS 2007 5 8
VER+VER+ 63
Chicago Climate Exchage CCXChicago Climate Exchage CCX 6 673 Oset Standard Screens 71
Volutar Oset Stadard VOSVolutar Oset Stadard VOS 71
74 Bio-Sequestration Standards 72
CDM Aorestatio ad Reorestatio Stadard CDM A/RCDM Aorestatio ad Reorestatio Stadard CDM A/R 7 2
VCS AFOLU StadardVCS AFOLU Stadard 74
The Climate, Commuit & Biodiversit Stadards CCBSThe Climate, Commuit & Biodiversit Stadards CCBS 76
Pla Vivo SstemPla Vivo Sstem 79
75 Oset Accounting Protocols 79
GHG Protocol or Project AccoutigGHG Protocol or Project Accoutig 83
ISO 14064ISO 14064 85
8 Govermetal Actio to Regulate the Volutar Market 87
9 Overall Stadard Ratigs & Coclusios 8 8
Reereces 9 4
Appendix A: Reewable Eerg Certicates RECs 97
Appendix B: CDM Additioalit Tool 100
Appendix C: Realized CDM Emissios Reductios 102
Appendix D: Glossar 103
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i i i
Ackowledgemets
The authors would like to thank the ollowing reviewers or their comments and suggestions: Derik
Broekho, Barbara Haya, Toby Janson-Smith, Michael Schlup, Jutta Rothe, Anja Wucke, Michael
Lazarus, and Ben Pearson
The authors would like to thank Heather Angstrom or proo-reading and editing and Susanne
Heli-Hestvik and Ann Strmberg or their contributions and comments
We would urther like to thank the ollowing people who have reviewed and commented on the
ollowing sections:
Joanna Durbin (CCBS)
Nathan Clark and Scott Subler (CCX)
Meinrad Brer and Caitlin Sparks (Gold Standard)
Patrick Hardy (ISO 14064)
Alexa Morrison and Sarah Carter (Plan Vivo)
Michael Gillenwater (RECs)
Markus Kndlseder and Martin Schrder (VER+)
Edwin Aalders, Josh Harris, and Mark Kenber (VCS)
Olivia Hartridge (VOS)
About the Authors
Aja Kollmuss works or the Stockholm Environment Institutes US Center, an independent non-
prot research organisation dedicated to science-based policy change or a sustainable uture Her
research areas include carbon markets, residential energy eciency, and environmental education
www.sei-us.org
anjakollmuss@sei-usorg
Helge Zikworks or the Swedish Tricorona group, a major investor in carbon reduction projects
and expert in carbon credit commercialization Helge works in the mandatory and voluntary carbonmarkets dealing with risk management and quality control
www.tricorona.com
helgezink@tricoronacom
Cliord Polcarp is a graduate student at The Fletcher School o Law and Diplomacy He works as
a research intern at the Stockholm Environment Institute He has worked on carbon oset projects
and climate change policy or the Centre or Science and Environment, the British High Commission
and EcoSecurities in India
http://www.sei-us.org/mailto:[email protected]://www.tricorona.com/mailto:[email protected]:[email protected]://www.tricorona.com/mailto:[email protected]://www.sei-us.org/8/14/2019 Making Sense of the Voluntary Carbon Market. A Comparison of Carbon Offset Standards
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i v
About This Report
This report discusses the role o the voluntary carbon market and provides an overview o the most
important currently available carbon oset standards It compares the ollowing standards side-by-
side, outlining the most pertinent aspects o each:
Clean Development Mechanism (CDM)
Gold Standard (GS)
Voluntary Carbon Standard (VCS)
VER+
The Voluntary Oset Standard (VOS)
Chicago Climate Exchange (CCX)
The Climate, Community & Biodiversity Standards (CCBS)
Plan Vivo System
ISO 14064-2
WRI/WBCSD GHG Protocol or Project Accounting
The report is meant to be a comprehensive reerence To maximize the readability and transparencyo the report, we distinguish between the ollowing types o inormation:
Background inormationdescribes principles and mechanisms o the oset market ingeneral This report uses the CDM as the baseline standard against which all the other
standards are compared It also includes an explanation o the CDM project cycle and the
main actors involved in CDM oset projects The inormation in these sections is presented
as objectively as possible and with minimal editorializing The appendices include urther
background inormation Background inormation appears in black.
Standard Comparisons and Summariesinclude specic inormation about each standardas well as comparison tables The inormation in these sections is presented as objectively as
possible and with minimal editorializing Standard comparisons and descriptions are titled in
blue or on a blue background.
Authors Commentsare sections where the authors express their opinions and valuejudgmentsEditorial comments and opinions about each standard can be ound at the end
o the standard description In their brie comments, the authors ocus on what they consider
the main strengths and weaknesses o each standard Editorial comments are indicated by a
vertical bar on the let.
Many o the standards we have reviewed are young and have ew implemented projects Our
assessment relies on comparing the requirements o each standard and does not include project
comparisons Judging the standards based on their perormance in the real world will be impossible
until at least a ew projects have been implemented under each o them
We hope that the layout and structure o this paper will allow a diverse audience o consumers,
oset proessionals and project developers to nd the inormation they are looking or
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vExEcut ivE Summary
Executive SummarIn order to preserve a high probability o keeping global temperature increase below 2 degrees
Centigrade, current climate science suggests that atmospheric CO2 concentrations need to peak
below 450ppm This requires global emissions to peak in the next decade and decline to roughly
80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006) Such dramatic emissions
reductions require a sharp move away rom ossil uel, signicant improvements in energy eciency
and substantial reorganisation o our current economic system This transition can only be achieved
by ar-reaching national and international climate policies
Carbon osetting is an increasingly popular means o taking action By paying someone else to
reduce GHG emissions elsewhere, the purchaser o a carbon oset aims to compensate or or
oset their own emissions Individuals seek to oset their travel emissions and companies claim
climate neutrality by buying large quantities o carbon osets to neutralize their carbon ootprint
or that o their products
Carbon oset markets exist both under compliace schemes and as volutar programs
Compliance markets are created and regulated by mandatory regional , national, and international
carbon reduction regimes, such as the Kyoto Protocol and the European Unions Emissions
Trading Scheme Voluntary oset markets unction outside o the compliance markets and enable
companies and individuals to purchase carbon osets on a voluntary basis (see chapter 22) With
more than 20 billion traded in 2006 (Capoor & Ambrosi, 2007), carbon markets are already a
substantial economic orce and will likely grow considerably over the coming years The voluntary
market, although much smaller than the compliance market, (626 million in 2006; Hamilton, 2007)
is also growing rapidly
This report discusses the role o the voluntary carbon oset market and provides an overview and
guide to the most important currently available voluntary carbon oset standards using the Clean
Development Mechanism (CDM) as a benchmark The report compares the standards side-by-side
and outlines the most pertinent aspects o each The evaluated standards are:
Clean Development Mechanism (CDM) Gold Standard (GS)
Voluntary Carbon Standard 2007 (VCS 2007)
VER+
The Voluntary Oset Standard (VOS)
Chicago Climate Exchange (CCX)
The Climate, Community & Biodiversity Standards (CCBS)
Plan Vivo System
ISO 14064-2
GHG Protocol or Project Accounting
Carbon oset markets have been promoted as an important part o the solution to the climate crisis
because o their economic and environmental eciency and their potential to deliver sustainability
co-benets through technology transer and capacity building The voluntary oset market in
particular has been promoted or the ollowing reasons:
Possibility o Broad ParticipationThe voluntary carbon market enables those in unregulated sectors or countries that have not
ratied Kyoto, such as the US, to oset their emissions
All monetary gures were converted to euros, using the exchange rate rom Feb, 5, 2008 o 1 USD = 067 eurosStandard ees listed in USD were let unchanged
The terms GHG oset standardand carbon oset standardare used as synonyms
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v i ExEcut ivE Summary
Preparation or Future ParticipationThe voluntary carbon market enables companies to gain experience with carbon inventories,
emissions reductions and carbon markets This may acilitate uture participation in a regulated
cap-and-trade system
Innovation and ExperimentationBecause the voluntary market is not subject to the same level o oversight, management, and
regulation as the compliance market, project developers are more fexible to implement projectsthat might otherwise not be viable (eg projects that are too small or too disaggregated)
Corporate GoodwillCorporations can benet rom the positive public relations associated with the voluntary
reduction o emissions
Most importantly, voluntary and compliance oset mechanisms have the potential to strengthen
climate policies and address equity concerns:
Cost-eectiveness that allows or deeper caps or voluntary commitments.By decreasing the costs o reductions, osets can in principle make a compulsory mandate more
politically easible and a voluntary target more attractive, thereby accelerating the pace at which
nations, companies, and individuals commit to reductions
Higher overall reductions without compromising equity concerns.One o the greatest challenges o climate protection is how to achieve the deep global emissions
reductions required while also addressing the development needs o the poor Historically,
developed nations have been responsible or a much larger share o the increase in atmospheric
GHG concentrations than developing countries But to achieve climate stabilisation, emissions
must be curbed in all countries, both rich and poor Osets may be one way out o the
conundrum o needing to achieve steep global emissions reductions while at the same time
allowing poor nations to develop This has not been the case thus ar because the emissions
reductions undertaken have been too small to be signicant Small reduction targets allow
participants to tinker at the margins and avoid the kind o restructuring that is needed to achieveclimate stabilizations While taking on considerable domestic emissions reductions, industrialized
countries could, through osets, help nance the transition to low-carbon economies in
developing nations In other words, osets might allow equity to be decoupled rom eciency,
and thus enable a burden-sharing arrangement that involves wealthier countries acilitating
mitigation eorts in poorer countries
Yet carbon osetting is not without its critics A recent furry o media reports has criticised the poor
quality o carbon osets projects in both the compliance and the voluntary market (eg Financial
Times, 2007) Recent research reports have pointed out that a signicant number o osets come
rom projects that would have been implemented anyway (i e are non-additional, see section 51)
(Schneider, 2007; Haya, 2007) Critics have also raised concerns over equality and airness based
on the argument that carbon osetting enables developed nations to perpetuate unsustainableliestyles by unding carbon projects in developing countries Some argue that these projects rarely
lead to benets or the host community, and have gone so ar as to call the oset market a orm
o carbon colonialism (Eraker, 2000) Others assert that accounting methods or osets are too
inaccurate to justiy claims o real emission reductions or to support the achievement o carbon
neutrality The voluntary oset market in particular has been criticised or its lack o transparency,
quality assurance and third-party standards
To address these shortcomings, over a dozen voluntary oset standards have been developed in the
last ew years Each standard has a slightly dierent ocus and none has so ar managed to establish
itsel as the industry standard Some closely mirror compliance market standards, while others take
For an in-depth analysis o such a potential climate and equity ramework, see the Greenhouse Development RightsFramework(Baer et al 2007)
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v i iExEcut ivE Summary
a more lenient approach in order to lessen the administrative burden and enable as many credits as
possible to enter the market Certain standards are limited to particular project types (eg orestry)
while others exclude some project types in order to ocus on the social benets o carbon projects
It is important to note that the vast majority o voluntary osets are currently not certied by any
third-party standard This is likely to change over the coming years
Geeral Stadard Iormatio
The summary table provides broad comparisons and summaries o the standards Each o the
criteria is briefy put in context and explained below
Main SupportersMain Supporters lists the type o stakeholder associated with each standard Each o the
reviewed standards has been developed and is supported by dierent groups o stakeholders
The types o stakeholders refect to some extent the goal o the standard
Market ShareNot all standards are equally infuential Market Share indicates the size o each o the standards,
and thus to some extent refects the standards importance
Price o OsetsPrice o Osets indicates the cost o one oset representing the reduction o 1 tonne o CO2e
Oset prices depend on many dierent parameters, such as the type o project, the location,
market demand, stringency o the standard requirements, etc The pricing given in this column
indicates average prices or dierent projects as o early 2008 (see chapter 7)
Authors CommentsThe Authors comments state the perceived goal o each standard and any relevant inormation
about the standard More in-depth commentary and inormation about each standard can be
ound in chapter 7
AdditioalitAdditionality tests attempt to establish whether an oset project would have happened anyway
A major limitation o oset systems based on project-based mitigation is that emission reductions
have to be measured against a counteractual reality The emissions that would have occurred i the
market or osets did not exist need to be estimated in order to calculate the quantity o emissions
reductions that the project achieved This hypothetical reality cannot be proven; instead, it must be
inerred and its denition is always to some extent subjective (see chapter 51)
Additionality Tests (relative to CDM)The CDM additionality tool (see appendix B) most commonly used or testing the additionality o
CDM projects was developed careully over several years In this column it is used as a reerence
against which the other standards project-based additionality testing procedures are compared:+ Requirements go beyond and are more stringent than CDM rules
Requirements are less stringent than CDM
= Requirements are the same or very similar to CDM
N/A Not Applicable
Although the CDM additionality tool is well respected, it does not guarantee that only additional
projects are approved Recent reports have shown that despite the act that the additionality tool
is required or all CDM projects, it is likely that a signicant number o non-additional projects
are registered (Schneider, 2007; Haya, 2007) Similar studies have not yet been carried out or VER
projects It is thereore impossible to know i VER standards likely have a higher or lower percentage
o additional projects It remains to be seen how well these standards will succeed in implementingtheir additionality requirements
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v i i i ExEcut ivE Summary
Some o the standards, such as the VCS and the VER+, plan to develop perormance-based
additionality tools (also called benchmark tools) By shiting the tasks o establishing a baseline
rom the project developer to the standard-setting organisation, benchmark tools could potentially
increase transparency and decrease administrative burden or project developers Yet such
approaches also harbour the danger o certiying too many ree riders Benchmark rules will have to
be closely examined to ensure that they minimize or mitigate the eects o non-additional osets
(see chapter 51)
Approval Process
Although oset markets are relatively straightorward in principle, they have been anything but
straightorward to implement in practice In part, this may be attributed to the inevitable birthing
pains associated with creating institutions and stabilizing new markets But problems also arise
rom inherent structural problems inherent in the conception o oset markets Oset markets
lack a critical competitive check ound in well unctioning markets, in which the interests o buyer
and seller are naturally balanced against each other In oset markets, both the seller andthe
buyer benet rom maximizing the number o osets a project generates This issue can partially
be mitigated by imposing stringent requirements or auditors and an additional approval process
though the standard organisation (see chapter 56)Another confict o interest arises rom the act that auditors are currently chosen and paid by a
projects developer There is thus pressure on auditors to approve projects in order to preserve
their business relationships with the developers This compromises the auditors independence
and neutrality To account or this dynamic, oset markets need an administrative inrastructure to
ensure that auditors estimates o project reductions are reasonable
Third-party Verication RequiredTo minimize the number o ree riders, most standards require third-part auditors to veriy the
emissions reductions
Separation o Verication and Approval Process
Fundamental dierences exist among standards as to how projects are reviewed and approvedUnder the CDM, projects are veried by third-party auditors and then reviewed, approved
or rejected by the CDM Executive Board Most voluntary oset standards do not have such a
body to review and approve the projects ater the auditors have veried them Projects are
simply approved by the auditors themselves The lack o a standard body which approves
projects exacerbates conficts o interest, particularly where auditors are selected and paid or
by the project developer None o the voluntary standards have specic procedures in place to
review the approved auditors nor to allow or sanctions against or the discrediting o an under-
perorming auditor (see chapter 56)
Registry
Carbon oset registries keep track o osets and are vital in minimizing the risk o double-counting, that is, having multiple stakeholders take credit or the same oset Registries also
clariy ownership o osets (see chapter 57)
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i xExEcut ivE Summary
Oset Project Iormatio
Each standard accepts dierent types o oset projects The CDM, or example accepts all projects
that reduce the six GHGs listed in the Kyoto Protocol, with the exception o the protection o
existing orests (REDD), nuclear energy, and HFC destruction rom new acilities (see chapter 52)
Project TypesREDD = Reduced Emissions rom Degradation and Deorestation
EE = Energy Eciency
RE = Renewable Energy
LULUCF = Land Use, Land-Use Change and Forestry = Bio-Sequestration
Excludes Project Types with High Chance o Adverse ImpactsSome project types are more likely to have adverse social and environmental impacts Some
standards thereore exclude these projects types, such as tree plantations and monocultures
which are detrimental to biodiversity and can negatively impact watersheds or large hydro
projects, which can displace large numbers o people
Sustaiable Developmet
Co-benets are social and environmental benets that go beyond the GHG reduction benetso oset projects Such benets include job creation, improved local air quality, protected and
enhanced biodiversity, etc The Clean Development Mechanism (CDM) was approved by developing
nations specically because oset projects were not only to provide cost-eective reductions or
Annex 1 countries but also development benets or the host countries In other words, to qualiy
as a CDM project, the original intention was that a CDM project would have to deliver development
benets In practice, the CDM has ailed to consistently deliver such development and sustainability
benets (Holm Olsen, 2007; Sutter and Parreo, 2007; see chapter 55)
Co-Benets (relative to CDM)Voluntary standards vary in their requirements or co-benets This column highlights the co-
benet requirements o each standard, comparing them to the requirements o the CDMMany o the voluntary carbon oset standards that have been developed in the last ew years
represent a step in the right direction They help address some o the weaknesses in the current
osetting process and oster climate mitigation projects The voluntary market in particular has
helped to shape climate actions in countries that have thus ar been reluctant to enact strong
policies Even with ar reaching cap-and-trade policies expected to be enacted in the medium term,
there will likely always be room or a voluntary market The demand or voluntary osets will come
rom private and corporate actors who wish to go beyond regulatory requirements and will be
supplied by mitigation projects in sectors that are not capped Well-designed standards will help
the voluntary market mature and grow
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x ExEcut ivE Summary
MainSupporters
MarketShare
AdditionalityTests
(relativetoCDM)
Third-partyVerication
Required
SeparationoVerication
andApprovalProcess
Registry
ProjectTypes
ExcludesProjectTypes
withhighchanceo
adverseimpacts
Co-Benets(relativeto
CDM)
PriceoOfsets
Clea Developmet MechaismClea Developmet Mechaism
UNFCCC Parties large = yes yes yesAll minus
REDD, newHFC, nuclear
no = 1430
Authors Commets: The CDM is part o the Kyoto protocol and aims to create economic eciency while also deliveringdevelopment co-benets or poorer nations It has been successull in generating large numbers o osetsWhether it also has delivered the promised development co-benets is questionable
Gold StadardGold Stadard
Environmental NGOs(eg WWF)
small butgrowing =/+1 yes yes Planned EE, RE only yes +
VERs: 1020CERs: up to 10premium
Authors Commets: The GS aims to enhance the quality o carbon osets and increase their co-benets by improving andexpanding on the CDM processes 1 For large scale projects the GS requirements are the same as or CDMYet unlike CDM, the GS also requires the CDM additionality tool also or small-scale projects
Volutar Carbo Stadard 2007 VCS 2007Volutar Carbo Stadard 2007 VCS 2007
Carbon Market Actors(eg IETA)
new; likelyto be large =2 yes no Planned
All minusnew HFC
no - 515 3
Authors Commets: The VCS aims to be a universal, base-quality standard with reduced administrative burden and costs2 The VCS plans to develop perormance based additionality tests These tools have not yet beendeveloped and are thus not included in this rating 3 Prices are or projects implemented under VCS ver 1
VER+VER+
Carbon Market Actors
(eg TV SD)
small but
growing= yes no yes CDM minus
large hydro
yes - 515
Authors Commets: VER+ oers a similar approach to CDM or project developers already amiliar with CDM procedures orprojects types that all outside o the scope o CDM
Chicago Climate Exchage CCXChicago Climate Exchage CCX
CCX Members andCarbon Market Actors
large in theUS - yes yes yes All no - 1231
4
Authors Commets: CCX was a pioneer in establishing a US carbon market Its oset standard is part o its cap-and-tradeprogramme 4 Sales in USD: $18-45 per metric tonne (October 07-February 08)
Volutar Oset Stadard VOSVolutar Oset Stadard VOS
Financial Industry andCarbon Market Actors
N/A = yes no Planned CDM minuslarge hydro yes = N/A
Authors Commets: VOS closely ollows CDM requirements and aims to decrease risks or oset buyers in the voluntary market
Climate, Commuit ad Biodiversit Stadards CCBSClimate, Commuit ad Biodiversit Stadards CCBS
EnvironmentalNGOs (eg NatureConservancy) andlarge corporations
large orLULUCF = yes
5 no N/A LULUCF yes + 510
Authors Commets: The CCBS aims to support sustainable development and conserve biodiversity5The CCBS is a Project Design Standard only and does not veriy quantied emissions reductions
Pla VivoPla Vivo
Environmental andsocial NGOs
very small = no no yes 6 LULUCF yes + 2595
Authors Commets:Plan Vivo aims to provide sustainable rural livelihoods through carbon nance 6 It veries and sells ex-antecredits only Third party verication is not required but recommended
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1i n troduct ion
1 ItroductioCarbon, the currency o a new world order(Paul Kelly, The Australian, 21 March 2007)
Public awareness o the threat o climate change has risen sharply in the last couple o years and an
increasing number o businesses, organizations and individuals are looking to minimize their impact
on the climate
To eectively address the threat o climate change, we need comprehensive and stringent policiesto reduce greenhouse gas (GHG) emissions at national and international levels At the same time,
voluntary individual and corporate climate action can be essential or creating the public awareness
and constituency needed or policy change
Individuals and organizations can most eectively lower their own carbon ootprints by improving
energy eciency (eg in their homes, oces, or actories), relying on lower-emission products (eg
buying locally grown ood), and changing consumption patterns (eg home size, travel choices)
Beyond this, carbon osets are gaining prominence as a tool to compensate or emissions By
paying someone else to absorb or avoid the release o a tonne o CO2 elsewhere, the purchaser o a
carbon oset can aim to compensate or or, in principle, oset their own emissions This is possible
because climate change is a non-localized problem; greenhouse gases spread evenly throughoutthe atmosphere, so reducing them anywhere contributes to overall climate protection
Yet carbon osetting is not without its critics A recent furry o media reports has criticized the poor
quality o carbon osets projects in both the compliance and the voluntary market (eg Financial
Times, 2007) Recent research reports have pointed out that a signicant number o osest come
rom projects that would have been implemented anyway (i e are non-additional, see chapter 51)
(Schneider, 2007; Haya 2007) Many have also raised issues o equality and airness based on the
argument that carbon osetting enables developed nations to perpetuate unsustainable liestyles
by unding carbon projects in developing countries Some critics have pointed out that these oset
projects rarely lead to benets or the host community and have gone as ar as calling the oset
market as a orm o carbon colonialism (Eraker, 2000) Others assert that accounting methods or the
osets are too inaccurate to justiy claims o real emission reductions or to support the achievemento carbon neutrality
Despite these critiques, the carbon markets are growing rapidly With more than 20 billion traded
in 2006 (Capoor & Ambrosi, 2007), carbon markets are already a substantial economic orce and will
likely grow considerably over the coming years It is thereore important to ocus the discussion on
how to use these markets most eectively to:
Contribute to climate protection through real and additional, permanent, and veriablegreenhouse gas (GHG) reductions, while limiting unintended negative consequences
Reduce GHG emissions in an economically ecient way
Enhance the social and environmental benets to project hosts
Stimulate social and technological innovation and participation by new actors sectors andgroups
Create and build constituencies or more eective and comprehensive national andinternational solutions
Avoid perverse incentives that could stymie broader climate protection actions and policies
Synergistically work with other climate protection measures
Carbon osetand carbon creditare synonymous terms, yet the term carbon creditis more oten used when reerringto the compliance markets, such as CDM The term carbon osetis more oten used when reerring to the voluntary
market
All monetary gures were converted to euros, using the exchange rate rom Feb, 5, 2008 o 1 USD = 067 eurosStandard ees listed in USD were let unchanged
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2 markEt ovErv i Ew
The voluntary oset industry has recognized the need or quality assurance in order to restore the
credibility o the oset market Over a dozen voluntary oset standards have been developed in the
last ew years Yet no single standard has so ar managed to establish itsel as the industry standard
Each standard has a slightly dierent ocus Some closely mirror compliance market standards,
while others take a more lenient approach in order to lessen the administrative burden and enable
as many credits as possible to enter the market Certain standards are limited to particular project
types (eg orestry), while others exclude some project types in order to ocus on the social benets
o carbon projects It is important to note that the vast majority o voluntary osets are currently notcertied by a third-party standard This is likely to change over the coming yearsThe next chapters
provide an overview o the carbon markets in general and the compliance and voluntary oset
markets
2 Market OverviewIn order to understand the carbon markets, it is important to recognize the dierences between
two undamentally dierent types o carbon commodities, allowances and osets, and the systems
that create them The rst, allowances, are created by cap-and-trade systems The second, osets orcarbon credits, are created by baseline-and-credit systems (also sometimes called a project-based
system)
Under a cap-ad-trade sstem, an overall cap is set to achieve emissions reductions Each o the
participants within a cap-and-trade system (usually countries, regions or industries) is allocated a
certain number o allowances based on an emissions reduction target In a cap-and-trade system
the cap constitutes a nite supply o allowances, set by regulation and political negotiation These
allowances are then neither created nor removed, but merely traded among participants This nite
supply creates a scarcity and drives the demand and price or allowances
A cap-and-trade system aims to internalize (some o) the costs o emissions, and thus drives
actors to seek cost-eective means to reduce their emissions The challenge in a cap-and-tradeprogramme is to determine the appropriate level at which to set the cap, which should be stringent
enough to induce the desired level and rate o change, while minimizing overall economic costs
A baselie-ad-credit sstem in contrast,does not entail a nite supply o allowances It does
not involve projects that are implemented under the umbrella o a cap-and-trade system Rather,
more credits are generated with each new project implemented These credits can then be used by
buyers to comply with a regulatory emission target, to oset an emitting activity (such as an airline
fight), or to be a carbon neutral organisation with zero net emissions
In a baseline-and-credit system a carbon oset buyer can only legitimately claim to oset his
emissions i the emissions reductions come rom a project that would not have happened anyway
This concept is called additioalit in the carbon markets, and reers to the requirement that []reductions in emissions [] are additional to any that would occur in the absence o the certied
project activity (Kyoto Protocol in Article 125) Under a cap-and-trade system it is the cap and the
allocations rules that drives demand, and determines the level o emissions reduction Activities that
are undertaken in response to the pressure o the cap thereore do not need to prove that they are
additional Additionality is discussed in detail in chapter 51
Cap-and-trade systems oten allow or a certain number o osets to come rom emissions
reductions that are generated by projects that are not covered under the cap (ie rom baseline-
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and-credit systems) Under a cap-and-trade system the covered sources (or example power
producers) have an obligation to reduce their emissions I these covered sources cannot buy
osets, they will have to reduce their emissions in some other way (eg by buying allowances or
by increasing eciency in their plants) I they can buy osets and these come rom projects that
are ully additional, then the osets replace reductions that the cap-and-trade participant would
have had to otherwise achieve himsel In other words, under a cap-and-trade system, osets do
not lead to emissions reductions beyond the target set by the cap but only cause a geographical
shit in where the emissions reduction occurs Thereore, non-additional osets sold into a cap-and-trade system will actually lead to an increase in emissions since the buyer will not have reduced his
emissions and the seller will not have oset this increase in emissions
In a voluntary system, on the other hand, individuals and companies are not required to reduce their
emissions We can thereore assume that they would only do so to a limited extent The availability
o osets enables them to go beyond what they would have done anyway to reduce their own
emissions The availability o osets in the voluntary market may thereore lead to additional
emissions reduction that would not have happened without the availability o osets Buyers in
the voluntary market can only claim a unique, incremental oset reduction i the reduction is
additional Yet even without additionality tests, the oset market might induce reductions that
would not have happened otherwise, because the market will bring investment to some projectsat the margin But without clearly established additionality, there is no one-to-one correspondence
between each credit sold and an additional tonne o reductions
tablE 1 : Distinguishing Features o Cap-and-Trade and Baseline-and-Credit Systems
Features Cap-and-trade Baseline-and-credit
Exchanged
commodity
Allowances Carbon Credits
Quantity available Determined by overall cap Generated by each new project
Market dynamic Buyers and sellers have competing and
mutually balanced interests in allowancestrades
Buyers and sellers both have an interest
in maximizing the osets generated bya project
Sources Covered Usually high emitters such as the energysector and energy intensive industries
As dened by each standard Not limitedto just high emitting sectors
Independent third
party
Minor role in veriying emissions inventories Fundamental role in veriying thecredibility o the counteractual baselineand thus the authenticity (additionality)o the claimed emission reductions
Emissions impact
o trade
Neutral, as is ensured by zero-sum nature oallowance trades
Neutral, providing projects are additionalOtherwise, net increase in emissions
Possible decrease in emissions in thevoluntary market
Cap-and-trade systems exist almost exclusively in the compliance market Baseline-and-credit
systemsexist both in the compliance and in the voluntary market All currently established cap-and-
trade programs allow or a limited use o osets and have an associated oset programme:
For example, the EU-ETS allows or CDM credits (CERs) to be used interchangeably with their allowances (EUAs) In thecase o the EU-ETS, it is the countries themselves who set the limit on what percentage o CERs are allowed into their
system Allowing CERs will de-acto increase the number o available allowances and thereore raises the cap On theother hand, it makes achieving reductions potentially more cost eective
An exception to this is the Chicago Climate Exchange which is a voluntary but legally binding cap-and-trade regime
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tablE 2 : Types o Carbon Trading Programs
Type o Programme Cap-and-TradeAssociated Baseline-and-Credit (Oset)
Programme
Compliance Market Emissions Trading under KyotoProtocol
CDM & JI
EU-ETS CDM & JI
RGGI RGGI Oset Programme
Western Climate Initiative under development
Voluntary Market Chicago Climate Exchange (CCX) CCX Oset Programme
Except or the CCX Oset Programme, voluntary oset standards are independent o and unction
outside o a cap-and-trade system The ollowing sections provide a brie overview o the
compliance and the voluntary markets
2.1 Compliace Market
Carbon markets exist both under compliance schemes and as voluntary programs Compliance
markets are created and regulated by mandatory national, regional or international carbon
reduction regimes
Cap-ad-Trade Sstems
Emissions Trading Under the Kyoto ProtocolThe Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC)
established a cap-and-trade system that imposes national caps on the greenhouse gas
emissions o developed countries that have ratied the Protocol (called Annex B countries)
Each participating country is assigned an emissions target and the corresponding number o
allowances called Assigned Amount Units, or AAUs On average, this cap requires participatingcountries to reduce their emissions 52% below their 1990 baseline between 2008 and 2012
Countries must meet their targets within a designated period o time by:
reducing their own emissions; and/or
trading emissions allowances with countries that have a surplus o allowances This ensuresthat the overall costs o reducing emissions are kept as low as possible; and/or
meeting their targets by purchasing carbon credits: to urther increase cost-eectiveness oemissions reductions, the Kyoto Protocol also established so-called Flexible Mechanisms: the
Clean Development Mechanism (CDM) and Joint Implementation (JI)
European Union Emissions Trading Scheme
The Kyoto Protocol enables a group o several Annex I countries to join together and orma so-called bubble that is given an overall emissions cap and is treated as a single entity or
compliance purposes The 15 original member states o the EU ormed such a bubble and
created the EU Emissions Trading Scheme (EU-ETS) The EU-ETS is a company-based cap-and
trade system which came into orce in 2005 Under this cap-and-trade scheme, emissions are
capped and allowances may be traded among countries The EU-ETS is the largest mandatory
Although the Gold Standard also certies CDM credits, it is a voluntary standard
Annex 1 or Annex B?In practice, Annex 1 o the UNFCCC Covetio and Annex B o the Koto Protocol are used almost interchangeablyHowever, strictly speaking, it is the Aex 1 countries that can invest inJI/ CDM projects as well as host JI projects,
ando-Aex 1
countries that can host CDM projects, even though it is the Annex B countries that have the emissionreduction obligations under the Protocol Note that Belorus and Turkey are listed in Annex 1 but not Annex B; and thatCroatia, Liechtenstein, Monaco and Slovenia are listed in Annex B but not Annex 1(source: www.cdmcapacity.org/glossary.html)
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cap-and-trade scheme to date In 2006, it traded 11 billion metric tonnes o CO2e, valued at
over 16 billion There are currently several cap-and-tradecompliance schemes that operateindependently o the Kyoto Protocol All o these also incorporate a baseline-and-credit
component to their programme Three examples are:
New South Wales GHG Abatement Scheme (NSW GHGAS)The NSW GHGAS in Australia aims to reduce greenhouse gas emissions rom the power sector
It achieves this by using project-based activities to oset the production o greenhouse gasemissions The programme was established in 2003
Regional Greenhouse Gas Initiative (RGGI)RGGI is a multi-state regional cap-and-trade programme or the power sector in the Northeast
United States The RGGI cap-and-trade programme is proposed to start in 2009 and lead to a
stabilisation o emissions at current levels (an average o 2002-2004 levels) by 2015, ollowed by
a 10% reduction in emissions between 2015 and 2020 Some o the programme reductions will
be achieved outside the electricity sector through emissions oset projects Osets serve as the
primary cost containment mechanism in RGGI; i allowance prices rise above trigger prices, the
ability or regulated sources to use osets increases
Western Climate Initiative (WCI)The WCI is a collaboration o 5 Western US stated and British Columbia launched in early 2007
The initiative set a goal o reducing greenhouse gas emissions by 15% rom 2005 levels by 2020
and requires partners to develop a market-based, multi-sector mechanism to help achieve that
goal, and participate in a cross-border greenhouse gas (GHG) registry
Baselie-ad-Credit Sstems Used withi Cap-ad-Trade
The Clean Development Mechanism (CDM)The CDM allows Annex I countries to partly meet their Kyoto targets by nancing carbon
emission reductions projects in developing countries Such projects are arguably more cost-
eective than projects implemented in richer nations because developing countries have on
average lower energy eciencies, lower labor costs, weaker regulatory requirements, and lessadvanced technologies The CDM is also meant to deliver sustainable development benets to
the host country CDM projects generate emissions credits called Certied Emissions Reductions
or CERs one CER is equal to one tonne o carbon dioxide equivalent which are then bought
and traded (see chapter 71 or more details on the CDM)
Joint Implementation (JI)Joint Implementation works similarly to CDM, with the exception that the host country is not
a developing nation but another Annex I country The tradable units rom JI projects are called
Emissions Reductions Units (ERUs) It is not strictly a baseline-and-credit system since it also has
aspects o a cap-and-trade system, and, notably, both participants have an overall reduction
targetThe value o both JI and CDM projects has more than doubled in recent years, reaching a
combined total o USD 5 billion (EUR 39 billion) in 2006 (Capoor & Ambrosi, 2007) Since JI
ocially starts in 2008, it is not surprising that over 90% o the credits transacted in these
markets were produced by CDM projects
The EU-ETS Linking DirectiveThe EU Linking Directive, which was passed in 2004, allows operators in phase 2 o the ETS to use
credits rom Joint Implementation (JI) and the Clean Development Mechanism (CDM) to meet
their targets in place o emission cuts within the EU Member States speciy a limit up to which
individual installations will be able to use external credits to comply with the ETS These limits
vary between 0% (Estonia) and 22% (Germany) o allowances There are also restrictions on use oCERs rom orestry projects and rom certain types o large hydro projects
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22 Volutar Carbo MarketsThe voluntary carbon markets unction outside o the compliance market They enable businesses,
governments, NGOs, and individuals to oset their emissions by purchasing osets that were
created either through CDM or in the voluntary market The latter are called VERs (Veried or
Voluntary Emissions Reductions) It is noteworthy that about 17% o the osets sold in the voluntary
market in 2006 were sourced rom CDM projects (Hamilton, 2007)
chart 1 : Carbon Osets in the Compliance and in the Voluntary Market
Unlike under CDM, there are no established rules and regulations or the voluntary carbon
market On the positive side, voluntary markets can serve as a testing eld or new procedures,
methodologies and technologies that may later be included in regulatory schemes Voluntary
markets allow or experimentation and innovation because projects can be implemented with ewer
transaction costs than CDM or other compliance market projects Voluntary markets also serve as
a niche or micro projects that are too small to warrant the administrative burden o CDM or or
projects currently not covered under compliance schemes On the negative side, the lack o quality
control has led to the production o some low quality VERs, such as those generated rom projectsthat appear likely to have happened anyway (see chapter 51 on additionality)
23 Volutar ad Compliace Carbo Market SizeCompared to the compliance market, trading volumes in the voluntary market are much smaller
because demand is created only by voluntary wish to buy osets whereas in a compliance market,
demand is created by a regulatory instrument Because there is much lower demand, because
quality standards are not widely established, and because they are not ungible in compliance
markets, carbon osets sold in the voluntary market tend to be cheaper than those sold in the
compliance market
When compliance market credits are used or voluntary osetting, they are retired, thus do not go towards assisting or
meeting any legally-binding reduction targets
According to project developers, carbon oset project must reduce at least 5,000 metric tonnes o CO2 per year in orderjustiy the CDM transaction costs (myclimate, personal communication)
comPliancE
markEt
voluntary
markEt
vErS
cErs
comPliancE
markEt
voluntary
markEt
vErS
cErs
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chart 2 : Oset Trading Volumes in the Kyoto and in the Voluntary Markets
(Source: Capoor, 2007; Hamilton 2007)
In 2006, 23 million tonnes o CO2e were traded at a value o 626 million (Hamilton, 2007) in the
voluntary market the trading value o the compliance market, including allowances and credits
was 23 billion in 2006 The value o CDM and JI credits was 38 billion in 2006 (Capoor and &
Ambrosi, 2007) Nevertheless, the voluntary carbon market has grown dramatically over the last
couple o years According to a recent report, the voluntary oset market grew 200% between 2005
and 2006 (Hamilton, 2007)
45%
10%
17%
7%
2%
13%
1%
5%
Kyoto Projects (CDM and JI)
Total Volume in 2006: 466 MtCO2
Industrial Gases
EnergyEciency
Renewable Energy
Forestry
Methane from Coal Minin
Methane from Landlls
Methane fromLivestock
Other
Voluntary Oset Projects
Total Volume in 2006: 13 MtCO2
(excluding CCX transaction of 10.3MtCO2)
33%
5%
20%
36%
3%1%
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how offSEt ProjEctS arE imPlEmEntEd
3 How Oset Projects Are Implemeted
31 The Stages o the CDM Project CcleThis chapter provides a brie overview o how oset projects are developed under the CDM The
CDM has established detailed guidelines and procedures or project developers Although the
project development process or projects implemented under a voluntary oset standard aresomewhat dierent rom CDM procedures, the CDM project cycle can serve as a rame o reerence
to analyze the dierent standards
The CDM Executive Board (CDM EB) requires that all CDM projects ollow a set o project
development steps that are reerred to as the project cycle CDM project activities can only deliver
Certied Emission Reductions (CERs) i the project itsel and its successul operation have been
approved by the CDM EB Each stage o the project cycle is outlined below
chart 3 : The CDM Project Cycle
Entity
(PDD)
Entity
(PDD)
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how offSEt ProjEctS arE imPlEmEntEd
Project Desig
The Project Design stage includes developing a project concept, choosing or developing a
baseline and monitoring methodology, and stakeholder consultations All o these elements are
documented in the project design document (PDD)
Project ConceptA easibility study o a potential CDM project is conducted to assess the technical easibility,
investment requirements, development and operational costs, expected returns, administrative
and legal hurdles, and project risks and pitalls Based on the results o the easibility study, the
project owner will decide whether or not to continue development o the potential CDM project
MethodologyA CDM methodology denes the rules that a project developer needs to ollow to establish a
project baseline and to determine project additionality (see chapter 51), to calculate emission
reductions and to monitor the parameters (eg electricity produced by the project) used to
estimate actual emission reductions It is a generic recipe that can be applied to dierent projects
within a given project type (eg renewable power production) and applicability conditions
(eg grid-connected) I no approved methodology exists or a specic project type, a project
developer can submit a new methodology or approval to the CDM Methodology Panel
236 methodologies have been submitted or approval, 110 have been rejected, 28 are pending
and 98 methodologies have been approved so ar
Project Design Document (PDD)The Project Design Document (PDD) describes the CDM project activity in detail and orms
the basis or all uture planning and administrative procedures It contains a description o
the chosen technology and explains the methodology used to dene the baseline scenario,
to conrm additionality and to calculate emission reductions It also contains inormation on
the monitoring o all relevant technical parameters (eg temperature, gas fow rates, electricity
productions, operation hours, etc) including, how monitoring procedures will be established,
measurements will be made, quality will be controlled, and records will be stored and accessedIt contains an estimate o the volume o emission reductions achieved by the project Finally, it
documents how the project contributes to sustainable development
The PDD plays a central role in project development It serves as the basis or evaluating all
carbon credit transactions and contract proposals or a CDM project The PDD is used throughout
the implementation phase to ensure that the project perorms according to the parameters
outlined in the document
Stakeholder Consultation(s)CDM projects are required to provide evidence that the projects activities will not adversely
impact local populations and other relevant stakeholders To ensure that all relevant stakeholders
have been provided an opportunity to comment on the proposed CDM project, the projectdeveloper must inorm them about the project through appropriate orms o media The project
developer must respond to all stakeholder comments, and describe a course o action to
minimize negative impacts The outcomes o the stakeholder consultations must be documented
in the Project Design Document (PDD)
The Methodologies Panel (Meth Panel) was established to develop recommendations to the Executive Board on
guidelines or methodologies or baselines and monitoring plans, and to prepare recommendations on submittedproposals or new baseline and monitoring methodologies
UNEP, November 2007
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1 0 how offSEt ProjEctS arE imPlEmEntEd
Project ValidatioAter the project developer has written the PDD, an independent UN-approved third-party auditor
conducts the project validation Under CDM auditors are called Designated Operational Entitiesor DOEs The process o CDM project validation normally consists o our phases:
a desk review o the PDD,
on-site visits and ollow-up interviews with project stakeholders,
a 30 day public comment period ater the PDD has been made available through the internet resolution o outstanding issues, and
the issuance o the nal validation report and written by the DOE
Ater completion, the validation report and the PDD are submitted to the CDM Executive Board or
review and registration
Host Coutr ApprovalFinal acceptance o a CDM project by the CDM EB is not possible without the approval o the
projects host country The project documentation must be submitted to the relevant authority
which checks the project activity against national rules and regulations and conrms the projects
compliance with the host countrys sustainability criteria This screening process and host countryrequirements vary rom country to country
Project RegistratioThe registration o a project by the CDM EB as a CDM project is a major step in the CDM project
cycle The CDM EBs decision to register a project is based on the review o the PDD and the
validation report and public eedback Once the CDM EB approves a project it is ocially registered
as a CDM project
Project ImplemetatioThe project can begin implementation anytime during the project cycle However, i the project is
implemented beore it is registered by the CDM Executive Board, then the project developer has tosupply documentary evidence proving that they considered CDM revenues at the time o planning
the project The documentary evidence must be supplied at the time o seeking CDM registration I
documentary evidence is not supplied, then the project is likely to be rejected on the grounds that
it is not additional
Project MoitorigProject developers are required to maintain records measuring the emission reduction achieved
during the operation phase These records, maintained in a monitoring report, must be in
accordance with the parameters and procedures laid out in the original PDD that was validated by
the DOE and registered by the CDM EB Emission reductions are issued based on the monitoring
report Thereore, a project developer will make the trade-o between having continuous CERincome (many short monitoring periods) and lower administrative costs (long monitoring periods)
There are no requirements as to how long or short a monitoring period must be as they ranges rom
a ew weeks to several years
Project VericatioThe monitoring that the project developer has done is then evaluated and approved by a DOE To
minimize confict o interest, the validating DOE cannot also conduct project verication A dierent
auditor must be chosen or this taskThis is called Project Verication The project developer has
to submit the monitoring report to the DOE along with relevant supporting documents The DOE
undertakes a desk review o the report to ensure that the monitoring has been carried out in
accordance with the procedures laid out in the original PDD The DOE may also undertake a sitevisit, i necessary Following the desk review and site visit, the DOE prepares a drat verication
report highlighting any issues in the process Once the project developer resolves these issues, the
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DOE prepares the nal verication and certication report, which also quanties the actual emission
reductions achieved by the project
Verication is done at time intervals reely chosen by the project developer or project owner and
is usually a consideration between having low costs (long intervals) and requent sales revenues
(short intervals)
Project CerticatioThe verication report is submitted to the CDM EB or certication and issuance o CERs The issuedCERs are then transerred to the CDM registry account o the relevant project participant ater the
mandatory ees are paid to the UNFCCC secretariat
CommercializatioAt the commercialization stage, a project developer sells the carbon credits rom a project to a
prospective buyer The credits can either be sold directly to a company that requires it to meet its
legally binding or voluntary emission reduction obligations or it can be sold to a trading company
that acilitates the transaction between the seller and the end user o the credits
A contract to sell the carbon credits rom a project can be signed at any stage during the project
development cycle Depending on the project developers risk appetite, some will sign contracts asearly as the planning stage (ie orward contracts), lock in the price and other terms, and insulate
themselves rom the risks o price volatility while others will wait until the credits are generated,
certied and issued beore selling them (ie spot market sales) The project developer usually
receives payment or the credits only ater they have been delivered However, in a ew cases, a
project developer may receive an advance payment This is usually done i the project developer
wants to bridge an investment gap or needs to meet cash fow requirements during the projects
implementation (see chapter 63)
32 Who Is Who i a Carbo Oset Project
Designing, implementing and operating a carbon oset project requires the involvement o alarge number o parties, stakeholders and authorities Even though the parties involved dier rom
project to project some general categories and types o stakeholders can be dened as ollows
Project OwnerThe operator and owner o the physical installation where the emission reduction project takes
place can be any private person, company or other organisation
Project DevelopersA person or organisation with the intention to develop an emission reduction project could be
the project owner, a consultant or specialized services provider
Project FundersBanks, private equity rms, private investors, non-prot organizations and other organizations
may lend or invest equity to und a project Some o the standards have rules to what kind o
unding, aside rom the oset revenue, are acceptable or an oset project
StakeholdersStakeholders are individuals and organizations that are directly or indirectly aected by the
emission reduction project Stakeholders include the parties interested in developing a specic
project (eg owner, developer, under, local population, host community), parties aected by the
project (eg local population, host community environmental and human rights advocates) and
national and international authorities
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1 2 thE rolE of thE voluntary markEt
Third Party Auditors Validators and VeriersThe CDM and many o the voluntary oset standards require a third-party auditor to validate
and veriy a projects climate saving potential and achieved emission reductions Under CDM the
auditors are called Designated Operational Entities (DOEs) To minimize confict o interest, the
validating DOE cannot also conduct project verication
Standards Organisation
In the absence o national and international legislation, standard organizations dene a set orules and criteria or voluntary emission reduction credits
Brokers and ExchangesIn the wholesale market, emission oset buyers and sellers can have a transaction acilitated by
brokers or exchanges Exchanges are usually preerred or requent trades or large volumes o
products with standardized contracts or products, while brokers typically arrange transactions
or non-standardized products, occasionally traded and oten in small volumes
TraderProessional emission reduction traders purchase and sell emission reductions by taking
advantage o market price distortions and arbitrage possibilities
Oset ProvidersOset providers act as aggregators and retailers between project developers and buyers They
provide a convenient way or consumers and businesses to access a portolio o project osets
Final buyersIndividuals and organizations purchase carbon osets or counterbalancing GHG emissions
Thereore, the nal buyer has no interest in reselling the oset but will prompt the retirement o
the underlying carbon oset
4 The Role o the Volutar MarketAter giving a brie overview about how oset projects are developed, we now examine how
the voluntary markets dier rom CDM and how the standards that have been developed or the
voluntary market approach carbon project management
Key dierences exist between the mandatory and voluntary markets Unlike the ormer, voluntary
markets do not implement any particular policy mandates The mandatory and voluntary markets
occupy dierent but overlapping niches As chart 1 shows, the voluntary oset market is currently
ed by two distinct oset streams: osets that originate in the compliance market (eg CERs rom
CDM projects) and osets that are created in the voluntary market (Veried Emissions Reductions
VERs) In other words, voluntary oset buyers can choose i they want to buy osets that come rom
CDM or JI projects or osets that come rom projects implemented exclusively or the voluntaryoset market
In order to better understand the voluntary market, it is helpul to ask what role it should play in
protecting the climate and contributing to sustainable development Compared to the compliance
market, trading volumes are minimal in the voluntary market (see chart 2) The voluntary market
does currently not make signicant contribution to reducing GHGs Furthermore, eective uture
climate policy will necessarily involve a gradual transition rom voluntary to mandatory action, and
eventual regulation (through allowance markets or other policies) o many o the actors currently
involved in the voluntary market While there will likely always be a voluntary oset market to serve
those individuals or companies who want to push the envelope beyond what is possible through
internal reductions and evolving regulation, a key role o the voluntary market is to shape the rules
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1 thE rolE of thE voluntary markEt
and procedures or osets in uture compliance markets. In other words, the voluntary market can
be used as a testing ground or procedures, methodologies and technologies The voluntary market
can help achieve emissions reductions with projects that are too small or CDM, projects set in
countries without a Kyoto target, or reductions that are ineligible or CDM or ormal reasons other
than quality (eg China CDM requires major Chinese ownership in project)
The opinions on how the voluntary market can best do this, vary signicantly To clariy this ongoing
discussion, we distinguish below between three main points o view The distinction between theseviewpoints is somewhat theoretical since most market participants have views that synthesize
aspects o all three approaches Yet juxtaposing these three views helps explaining the dierences
in how the voluntary market is perceived
A. Volutar Market Should Closel Follow, or Build Upo CDMThere are those, among them the governments o the UK and Norway (see chapter 8), who
argue that under the current market situation voluntary buyers can minimize their risk by buying
compliance credits because the legal and procedural requirements or CERs are already well
established The current voluntary oset market is seen as potentially undercutting the compliance
market with cheaper osets that are not clearly additional and sending the wrong price signals
Since the public and the media oten do not distinguish between the compliance and the voluntarymarket, there is also a risk o damaging the reputation o compliance markets To secure quality
and transparency in the voluntary market, it is argued that voluntary oset standards should
closely ollow CDM procedures and apply them to VERs (eg the CDM approach to additionality, the
documentation o reductions, and the monitoring and verication processes)
Standards that share this viewpoint include VER+ and the Voluntary Oset Standard (VOS)
B. Volutar Market Should Be More Striget tha CDMSome have taken this argument even urther and have created standards with the explicit goal o
enhancing the quality o osets rom both markets by requiring explicit social and environmental
benets as well as strict accounting standards (see chapter 55 on Co-Benets)
Standards that espouse this viewpoint include the Gold Standard and the Climate Community &
Biodiversity (CCB) Standard
C. Volutar Market Should Complemet ad Be Dieret From CDMOn the other end o the spectrum are those who argue that voluntary oset standards should
be less stringent and bureaucratic than the standards in the mandatory markets They agree that
the voluntary market can serve as a testing ground or uture policy but they argue that in order
to preserve the voluntary markets creativity and innovation it must be protected rom too many
bureaucratic requirements They distinguish between the compliance market, where regulatory
obligations must met, and the voluntary market, were no such obligations exist and where the
emphasis is on creating a market or innovative projects with as little administrative burden as
possible
Most carbon oset providers who do not use a third party standard but ollow their own procedures
all under this category The Voluntary Carbon Standard (VCS) also adheres more closely to this
viewpoint Although VCS incorporates many o the CDM procedures and guidelines, it is in principal
a standard that looks to loosen the requirements or VER projects to allow or more fexibility and
innovation
The tension between these dierent viewpoints on the proper unction o the voluntary market has
shaped the markets recent development As with any complex issue, the devil lies in the details
This implies that i the voluntary market is successul, it will become obsolete in its current orm in the medium termasmore comprehensive and eective mandatory policies are put in place Yet there may always be a need or voluntarymarkets to serve sectors that are not included in compliance schemes
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All sides have contributed to the discussion on the role the voluntary carbon market can play to
urther climate protection Numerous new standards and registries have been introduced over the
last couple o years and the competition among carbon oset standards has increased dramatically
since large nancial institutions, businesses, and industries have gotten involved in the carbon
trade In the next section we will discuss the elements that are necessary to create an eective
carbon oset standard
5 Ke Elemets o Oset StadardsCarbon osets are an intangible good, and as such their value and integrity depend entirely on how
they are dened, represented, and guaranteed. What the market lacks are common standards or how
such representations and guarantees are made and enorced (Broekho, 2007)
Clearly, no standard can ever be perect, and as pointed out in the discussion above each o the
currently available standards is based on a particular view o the voluntary oset market Yet it is
sae to say that notwithstanding these dierences, the best and most successul standards will be
those that are simple yet rigorous and have very wide support rom carbon project developers,
oset traders and buyers, environmental NGOs and the nancial industry A complete and ull-
fedged carbon oset standard must include the ollowing three components:
Accounting Standards
Monitoring, Verication and Certication Standards
Registration and Enorcement Systems
Accoutig stadards ensure that osets are real, additional, and permanent They include
denitions and rules or the elements that are essential during the design and early implementation
phase o a project These include additionality and baseline methodologies, denitions about
accepted project types and methodologies, validation o project activity etc (chapter 51-56)
Moitorig, Vericatio ad Certicatio Stadards ensure that oset projects perorm aswas predicted during the project design Certication rules are used to quantiy the actual carbon
savings that can enter the market once the project is up and running There is sometimes a lag time
between the start o a project and when it starts producing carbon osets This is especially true or
orestry projects the trees have to grow or a ew years beore they have absorbed enough carbon
that can be quantied and sold Monitoring, verication and certication happen ater validation
and implementation o the project Yet procedures and protocols or monitoring and verication
have to be included very early on in the project design phase (chapter 56)
Verication and certication are ex-postassessments o what has actually been produced, as
opposed to validation which is the ex-ante assessment o whether a project qualies against a
standard, provided it is going to do what it promises in the project design documentation. Registratio ad Eorcemet Sstems esure that carbon osets are only sold once and
clariy ownership and enable trading o osets They must include a registry with publicly available
inormation to uniquely identiy oset projects and a system to transparently track ownership o
osets (chapter 57)
In the ollowing sections we discuss each o these elements in more detail and compare the
voluntary oset standards to the CDM rules and regulations A table at the end o each section,
summarizes how each standard handles that particular issue
Much o the content in this section is based on the analysis o Derik Broekhos (World Resources Institute) Testimonybeore The House Select Committee on Energy Independence and Global Warming, US House O Representatives, July18, 2007;http://pd.wri.org/20070718_broekho_testimony.pd
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51 Additioalit ad Baselie MethodologiesOsets are an imaginary commodity created by deducting what you hope happens rom what you
guess would have happened.(Dan Welch quoted in The Guardian, June 16 2007)
The topic o additionality is the most undamental and contentious issue in the carbon oset
market In theory, additionality answers a very simple question: Would the activity have occurred,
holding all else constant, i the activity were not implemented as an oset project? Or more simply:
Would the project have happened anyway? I the answer to that question is yes, the project is not
additional
Additionality makes intuitive sense: I I buy carbon osets, I make the implicit claim that I orgo
reducing my own emissions (ie I still drive my car) in exchange or paying someone to reduce
their emissions in my stead I I neutralize the emissions I caused while driving my car by buying
osets rom someone who would have reduced their emissions anyway, regardless o my payment,
I, in eect, have not neutralized my emissions but merely subsidized an activity that would have
happened anyway
Additionality is thus an essential element needed to ensure the integrity o any baseline-and-credit
scheme Yet additionality is very dicult to determine in practice Many dierent tools have been
developed to maximize the accuracy o additionality testing and to minimize the administrative
burden or the project developer There are two distinct approaches to additionality testing: Project
based additionality testing and perormance standards
511 Project Based Additioalit TestigProject based additionality testing evaluates each individual project on a case by case basis The
ollowing is a short selection o additionality tests that are commonly used:
Legal and Regulatory Additionality Test (Regulatory Surplus)I the project is implemented to ull ocial policies, regulations, or industry standards, it cannot
be considered additional I the project goes beyond compliance (regulatory surplus), it may be
additional, but more tests are required to conrm this For example, an energy eciency projectmight be implemented because o its cost savings and would in this case not be additional
Investment TestThis test assumes that an oset project is additional i it would have a lower than acceptable
rate o return without revenue rom the sale o carbon osets In other words, the revenue
rom the carbon osets must be a decisive reason or implementing a project The investment
test is consistent with a microeconomic view o behaviours, and in theory would be a perect
additionality test But in reality there may be projects whose nances make them look non-
additional that are still additional because o existing non-monetary barriers
Barriers Test
This test looks at implementation barriers, such as local resistance, lack o know-how, institutionalbarriers, etc I the project succeeds in overcoming signicant non-nancial barriers that the
business-as-usual alternative would not have had to ace, the project is considered additional
Common Practice TestI the project employs technologies that are very commonly used, it might not be additional
because it is likely that the carbon oset benets do not play a decisive role in making the
project viable
Which test is best suited to validate additionality depends on the type o project An additionality
test appropriate or one type o project (eg, a simple regulatory test or methane faring, where
there is no reason to do the project i not required by law) might not be sucient or other kinds o
projects (eg, energy eciency, where there could be plenty o reasons or doing a project besidescomplying with regulations)
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The main issue with project-based additionality testing is that the determination o whether a
project is additional can be quite subjective A developer can claim that their projects IRR was too
low without a carbon revenue stream, and that the carbon revenues thereore made the project
viable But who can really determine what level o IRR is acceptable to a given company, and thus
whether the additionality demonstration is valid? Such additionality claims can only be tested with
access to internal company inormation relating to the nancing o the project, yet this inormation
is in most cases condential
512 Perormace StadardsPerormance Standards try to address some o the weaknesses o project-based additionality
tests in that they do not rely on examining each individual project but establish a threshold or
technologies or processes to determine additionality This approach is associated with simpler
procedures and lower transaction costs or project developers Perormance standards are
developed and/or approved by standard organizations and