Voluntary Carbon Fills Compliance Void

18 February 2010 | Last week, Ecosystem Marketplace reported that a major formal voluntary carbon standard has verified its first carbon credits from projects that reduce greenhouse-gas emissions from deforestation and forest degradation (REDD).

It’s the kind of mechanism that was pioneered and vastly improved in the voluntary carbon markets long before regulators felt comfortable enough to formally admit REDD mechanisms into an international compliance carbon market. Now, REDD is considered to be one of the few success stories at UN climate talks over the past few years.

Though small in comparison to the UN’s Kyoto (and post-Kyoto?) carbon markets, the US state of California’s cap-and-trade scheme is another program soon to hit the market, aiming to start in 2012. This market also employs protocols for project development that originated in the voluntary carbon market, adopting four protocols from the Climate Action Reserve (CAR) that can be used to generate early action credits. The program’s compliance-grade protocols will also be based on CAR’s designs.

Finally, voluntary third-party standards – including CAR, the Voluntary Carbon Standard (VCS) and their advisers – are engaging governments around the world to pioneer accounting systems for REDD projects and policies to co-exist within national and sub-national forestry efforts.

Now more than ever – and especially as compliance carbon markets face continued controversy – it is important to recognize and learn from these and other voluntary carbon mechanisms to foster market integrity as a whole.

But even as the voluntary carbon market becomes increasingly integrated with compliance markets worldwide, we continue to observe a niche of voluntary buyers who give the market its name and finance its frontier innovations – and will persist in the marketplace with or without government signals.

The Role of Voluntary Carbon Markets

Companies, organizations and individuals use the voluntary carbon market to set and achieve scientifically informed targets, using a combination of internal and external reductions (i.e. offsets). Companies can make and honor real commitments to significantly reduce their emissions.

The voluntary carbon market plays different roles in different countries and regions. In developed countries that are part of the Kyoto Protocol, the voluntary market makes it possible for companies and individuals who are not covered by existing climate legislation to receive carbon credits for significantly reducing their emissions.

Even companies with existing compliance obligations have made reduction commitments “above and beyond” their obligation by buying voluntary credits.

Companies located in industrialized countries that don’t have domestic cap-and-trade legislation (i.e. the U.S. and Australia) can also use the voluntary market for “pre-compliance purposes.” They learn how the carbon markets and impending legislation would work in practice – and hope to be recognized for taking “early action” to reduce emissions.

In the Global South, companies in middle income countries – particularly those involved in European supply chains – are also taking voluntary action to reduce their emissions.

The voluntary carbon market offers corporate leaders a unique opportunity to show real leadership through action rather than spouting empty rhetoric. Contrast this with business leaders who signed up to the Copenhagen Communiqué on Climate Change – which urged governments to sign a global deal at the 2009 Conference of Parties mandating deep, immediate reductions in emissions but didn’t see results.

While international and domestic climate negotiations stagnate, corporate leaders can actually lead. By voluntarily providing critical funding to emissions reduction projects in the developing world, corporations show true leadership ahead of being mandated to do so by governments. And they have already done so, to the tune of US$387 million invested in voluntary carbon credits in 2009. Indices like the FTSE4Good and the Dow Jones Sustainability Group Index have significantly incentivized corporates to become involved in the voluntary carbon market. This involvement has had a direct impact on the companies’ market capitalization.

But the global financial crisis threw a wrench in the voluntary carbon market’s previously unstoppable expansion. You see, companies that aren’t legally required to reduce their emissions do so voluntarily and these commitments are often integrated into a company’s Corporate Social Responsibility (CSR) and marketing budget – which is ultimately discretionary. And tough business climates squeeze discretionary budgets first.

In countries without a cap-and-trade programme in sight, pre-compliance activity is slowing down in the voluntary carbon marketplace. There is a limit on how much preparatory action can be taken under continued uncertainty and these countries have been in pre-compliance mode since as early as 2008!

How can the Voluntary Carbon Market Meet these Challenges Head on?

Despite the slow-down in pre-compliance activity, the voluntary carbon market is still equipped to achieve exponential growth if it is able to recognize and communicate its assets – like high quality independent, robust third-party standards which require independent validation and verification to ensure that the offset credits certified are permanent, additional and real.

Standards like CAR and VCS – and also the Gold Standard and CarbonFix forestry standard, among others – have independent registries so that the offsets can be tracked from origination to retirement. This helps create a more transparent and accountable market.

High quality VER standards also demonstrate how the voluntary carbon market is creating the types of projects which were envisaged with the creation of the Kyoto Protocol: emission reduction projects that are delivering real carbon reductions and social and development benefits.

For example, offset projects in the voluntary market are much more likely to be located in poorer regions which haven’t benefited as much from the compliance market’s Clean Development Mechanism (CDM). In these countries, high quality voluntary market offset projects are making tangible contributions to poverty alleviation, sustainable development and helping achieve the somewhat elusive Millennium Development Goals.

The voluntary carbon market’s high quality VER standards provide some specific and unique benefits: CAR focuses on the North American market. The Gold Standard provides premium development benefits. The VCS is renowned for its innovation particularly with its AFOLU forestry and land use programme and its tagging system which combines Voluntary Carbon Units (VCUs) with SOCIALCARBON sustainable development or CCBA biodiversity standards.

The development of forestry standards – ala VCS REDD methodologies – are a great example of where the voluntary market reaches sectors that other markets cannot reach. The compliance carbon market is now trailing as the voluntary market leads on developing standards to certify high quality and permanent forestry offsets which are combined with robust insurance mechanisms.

The voluntary market is creating innovative new programs, such as the Gold Standard VER methodology for cook stove projects, which significantly reduces deforestation and alleviates respiratory health issues. This market is developing projects that are adaptable and flexible and provide the range of benefits that customers are looking for when they voluntarily reduce their emissions.

Who Else can Help Maximize the Voluntary Carbon Market’s Potential?

Governments, NGOs and the media around the world can continue to provide support, guidance and constructive criticism for the voluntary market – joining organisations like ICROA, with its self-regulatory, externally audited Code that helps promote best practice.

NGOs in particular will benefit from embracing carbon finance from the voluntary carbon market as a solution to their objectives for increasing sustainable development and reducing environmental degradation.

Companies that make emission reduction commitments using the voluntary market must also be duly recognised so that not making these commitments becomes the rare exception. Responsible voluntary market players need to continue promoting transparency and accountability by using high quality offset credits.

The voluntary carbon market has spent a lot of time apologising for the small percentage and often historical instances of project failure. The market now needs to spend more time capitalising on the unique benefits and value that it provides.

In these times of hesitation and delay, the voluntary carbon market is providing a viable alternative to the international and domestic legislative gridlock. In many countries, the voluntary market is the only option for companies that do not yet have legal carbon reduction requirements but that want and need to take action. Describe last year as “the size of a mouse [with] the roar of a lion,” the voluntary carbon market must be championed so that in the coming years it will also become the size of a lion.