Voluntary Carbon market is fast becoming big business

If anyone had doubts about the importance of the voluntary carbon market they would certainly have been overcome by the announcement last month by Merrill Lynch of a new carbon offset service to assist businesses to reduce emissions through voluntary offsets.

In partnership with ICF International, Merrill Lynch's new Green and Gold initiative is the latest in a series of moves by major financial institutions to position themselves in a market valued by Abyd Karmail, Merrill Lynch's managing director and global head of carbon emissions at over of $70 billion.

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Merrill Lynch intends to provide clients with the highest sustainability carbon emission offsets and access to its full suite of proprietary carbon finance products. Carbon credits offered include those that meet the Gold Standard VER, Gold Standard CDM, and Climate, Community, and Biodiversity Alliance (CCBA) standards which carry the endorsement of leading environmental and conservation NGOs.

Merrill Lynch is but one of many major financial houses that have entered this fast growing component of the carbon credit marketplace.

In 2007 Morgan Stanley, another global financial institution with assets of nearly $800 billion, launched the world's first carbon bank, with services that allowed clients to compile their emissions inventory and calculate their carbon footprint using ISO 14064 standards. Morgan Stanley's Commodities Group procures and cancels carbon credits equivalent to a client's verified carbon footprint. By 2011, Morgan Stanley will have invested upwards of $3.5 billion into the carbon market, and expects very high returns when the current Kyoto Protocol expires in 2012.

Barclays, one of the UK's leading financial institutions has been involved in carbon trading since 2005. It was the first UK bank to set up a dedicated carbon trading desk to help clients, and is one of the most active players in the emissions trading market, having traded some 300 million tonnes as of 2007. As part of its own carbon neutral strategy, Barclays also produces its own brand of high quality offsets. So far Barclays has produced over 200,000 tonnes of its own tradable carbon credits.

The Voluntary Carbon Market

Many are confused about the carbon trading market, and in particular about the difference between the company carbon trading, and the legislated carbon market. Only in Europe are large companies in specific sectors mandated by law to buy carbon offset credits if they exceed legal pollution limits. The European Union Emissions Trading System (EU ETS)

Voluntary carbon offset trading comes stems from a variety of sources - people trying to offset their carbon footprints, businesses seeking to reduce their greenhouse gas emissions, or major events trying to be carbon neutral, such as the Olympics, the Super Bowl, etc.

Carbon offsets can come from many sources. The "State of the Voluntary Carbon Markets 2007”³ market report claims that the voluntary carbon offset market is dominated by three types of projects: forestry sequestration (36%), i.e. the avoidance of deforestation or the planting of new forests; renewable energy (33%) - generating power with clean, renewable sources (such as wind or solar) instead of dirtier fossil fuels; and industrial gases (30%) - containing and storing the emissions created by industry so that they are not released into the atmosphere.

As noted earlier, the voluntary carbon offset market is expanding at an astounding rate. According to 2007 report, the global voluntary carbon market was worth roughly $91 million in 2006, with 23.7 million tons of carbon dioxide equivalent (MtCO2e) traded. Trades in other carbon-related financial products, such as derivatives and futures, are also posting double-digit gains each year.

Enticed by the possibility of high returns, financial institutions have flooded into the voluntary carbon market, working as carbon ”˜brokers' helping bringing integrity to the market and helping small companies continue to participate in carbon trading. While heavily polluting industries, particularly in the energy, cement, and metals production sectors have experience with carbon trading (largely because they are required to buy offsets in the EU-ETS, small companies can be overwhelmed by the complexities of the carbon market.

This has created a demand for financial intermediaries to help companies navigate the emissions trading scene while at the same time, generating significant profits. Business leaders around the globe now realize that going green is not an unbearable plight but rather a win-win situation.

A derivative benefit of growing participation from financial institutions in the carbon market is the establishment of market integrity. The carbon market has always been susceptible to bogus credits or double counting of credits. Such credits allow for an increase in greenhouse gas emissions, as purchasers are able to emit emissions that were never offset.

Acting as intermediaries, these financial institutions screen all incoming credits against strict criteria and international standards, before being passed on to clients.

"The market must continue to grow on a foundation of environmental integrity," said Merrill Lynch's Abyd Karmali. "Demand in the rapidly growing voluntary carbon offsets market is shifting towards emission reductions that provide stakeholders with an independent guarantee of environmental sustainability and credibility."

The GLOBE Carbon Registry, managed by the GLOBE Foundation of Canada, takes this one step further. The GLOBE Carbon Registry, which will be available in July of 2008, will ensure market integrity by issuing a unique serial number to each posted credit, avoiding double counting and allowing chain of custody control from creation to retirement.

The GLOBE Carbon Registry will also record transactions of carbon offsets that conform to internationally recognized or other transparently described greenhouse gas quantification standards. The registry will list which party (consultant and/or company) verified each credit and to which standard it was verified. This will allow purchasers to choose from the highest quality offsets, while eliminating producers or verifiers of poor offsets.

Summary

Though still in its infancy, the voluntary carbon trading market is one of the fastest growing markets on the planet. Although there have been some growing pains, the increasing participation of some of the world's biggest financial players is expected to smooth out the road ahead and define the voluntary carbon market as an innovative model of a market-based solution to global environmental problems.

The 'State of the Voluntary Carbon Markets 2007: Picking Up Steam' is a comprehensive quantitative assessment of the voluntary carbon market with information on prices and volumes traded, as well as an analysis of current trends and buyer motivations. The report includes data gathered from both buyers and sellers and offers a detailed summary of the nature of transactions in the voluntary carbon sector and predicted growth.

  • The Executive Summary is available here
  • The full report is available here

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