Making Sense of the Voluntary Carbon Market. A Comparison of Carbon Offset Standards

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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/


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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)
http://www.cdmcapacity.org/glossary.htmlhttp://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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7markEt ovErv i Ew

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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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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1 4 kEy E lEmEntS of offSEt S tandardS

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
http://pdf.wri.org/20070718_broekhoff_testimony.pdfhttp://pdf.wri.org/20070718_broekhoff_testimony.pdfhttp://pdf.wri.org/20070718_broekhoff_testimony.pdf


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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

Documents

Making Sense of the Voluntary Carbon Market. A Comparison of Carbon Offset Standards