It seems a price on the CO2 in air can be determined, and lots of people will buy it, said Denise Farrell, Environmental Capital, at a meeting of ICLEI-Local Governments for Sustainability USA. In a session that explored how cities and local communities can access voluntary carbon markets to finance landfill gas elimination, wetland restoration, or reforestation projects, experts said carbon credits “can create project revenue” even without a national, regulated carbon market in place.
Lisa Jacobson, Business Council for Sustainable Energy, said the idea of a carbon market “took a huge hit” on Capitol Hill during the recent debate on the comprehensive climate and energy bill. However, there is still a growing bottom-up call for market-based approaches that can “generate revenue for good projects.”
What Is a Carbon Market?
A carbon market can be defined as a process of measuring and monitoring the reduction of greenhouse gas (GHG) emissions. There are two major types of markets: regulatory markets which are used for verified greenhouse gas (GHG) emission reductions, and voluntary markets, which is the option available in most of the U.S. The E.U. currently has a regulated market, formed under the Kyoto Protocol. Under the Kyoto system, developed countries can buy GHG emission offsets structured and verified by the Clean Development Mechanism (CDM), which provides funds to developing countries for their GHG reduction projects. The U.S. has never signed on to the Kyoto Protocol so largely operates in voluntary markets (except for California, which has its own regulated market).
Dealing with environmental pollution through a cap and trade system, which Jacobson said will now “need a new name,” is an approach that has some history in the U.S. The approach already exists under the Clean Air Act and has been used for reducing other types of environmental air pollution. In the system proposed for GHG emissions, the government would set a cap, the E.P.A. would issue allowances equal to the cap, and capped utilities and other entities would need to retire allowances at the end of the year equal to their annual emissions. “If they are short, they can purchase allowances or they can buy offsets.”
Offsets are a financial tool designed to reduce emissions efficiently. An entity can purchase and retire offsets. One offset is usually equal to one metric ton of CO2 (or even methane). These offsets are called carbon credits when they are used for an environmental compliance program.
The American Carbon Registry (ACR), California Climate Action Registry, WWF’s Gold Standard, and the Voluntary Carbon Standard are all ways to register local GHG emissions reduction projects but each have different methodologies. Unfortunately, however, it seems registering a project’s GHG emission reductions isn’t so quick and easy. The emissions reductions still need to be verified by a 3rd party to ensure they are “real, surplus, additional, permanent, net of leakage, fungible, and transferable.”
To be viable, the GHG emission reduction projects “can’t be business as usual.” The project designers must be targeting GHG emission reductions as a key goal. Kyoto mandates credits need to be enough to justify the project. “Real” implies they must be verifiable. “Permanent” means projects can’t be reversed. “Net of leakage” relates to the boundaries of a project, and forestry projects are especially complex in this regard. This means that “landfill methane gas capture projects are the easiest because the gas can be destroyed. Forests are the hardest because, over time, trees grow or parts of the forest gets cut down. Also, you have to estimate GHG emission reductions over a 100 year period but verify annually,” said Farrell. Other complex issues involve ownership. “Who owns the emission reductions?”
Accessing Voluntary Carbon Markets to Finance Projects Now
In 2009, some 94 million tons of GHG emissions worth nearly $400 million were traded. Despite the debate on Capitol Hill, the market has been growing, says Farrell. While there are a range of voluntary or regulated markets for nutrients, water, wetlands, and other ecosystem services, project designers seeking to tap the existing voluntary carbon market can’t get “credit in multiple places.” The concept of ecosystem services is all about “aggregating the benefits along the value chain.” In comparison, carbon markets are just about isolating out and verifying the GHG emission reductions. So while a project may provide ecosystem services naturally, designers can’t financially benefit from both markets at the same time. In other words, either benefit from an environmental market or design the project to generate GHG emission reduction revenue, says Farrell. “Carbon finance has to be central to the inception of the project.”
Beyond defining the project so it meets the criteria of a registry, the project designers must also actively seek out a potential buyer. “Some projects involving selling credits in five-year increments or by year” and buyers may be interested in one over the other. Designers need to put together the project with prospective buyers, which are mostly large corporations seeking to offset their own emissions through corporate responsibility programs. Google, for instance, is buying a lot of carbon credits but is mostly interested in “charismatic carbon,” or projects that have high-profile GHG emission reductions. Walmart and other major retail firms are buying carbon to meet the terms of disclosure rules. The E.P.A.’s Climate Leader program is also a place to find some of the 300 major corporate buyers of carbon, who need to purchase a set number of tons to meet their climate leader goals. Lastly, E.U. hedge funds are also buying up American emissions. “They think the crazy Americans are totally undervaluing their carbon.”
Given the growth in demand for carbon, cities and communities are now in a position to create their own carbon mitigation projects (or even voluntary markets). “There’s lots of buyer interest in the projects of municipalities and public authorities because they are reputable agents.” Plus, municipal records are “transparent and open to the public.” Farrell sees composting, recycling, and green building efficiency as potential carbon markets, but “says you have to find buyers” interested in these specific areas.
Farrell argued that the future of the voluntary markets will be shaped by what happens on Capitol Hill. “Will existing credits be absorbed into a new federal system?” If it passes, Proposition 23 in California will also have a major impact on the Western Climate Initiative and “ripple effects” on the price of carbon throughout the U.S.
Image credit: Michigan Department of Natural Resources and Environment