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Voluntary Carbon Markets: An International Business Guide to What They Are and How They Work

Bayon, R, Hawn, A, and Hamilton, K, (Second Edition 2009) Earthscan, 160 pages, £23.70 (including delivery on Amazon).

The central point of this book is the difference between 'certified' emissions reductions (CERs) traded on 'official' markets such as the EU Emissions Trading Scheme (EU ETS) and 'voluntary' emissions reductions (VERs) traded freely among organisations and individuals who have no legal obligation to reduce greenhouse gas (GHG) emissions. For an emissions reduction to be officially certified as a 'CER' an executive board organised by the United Nations has to agree that the reduction conforms to a set of strict conditions guaranteeing the reduction's legitimacy. With approval, an originator can then sell the CERs to a company required by law to reduce its GHG emissions. A company cannot buy VERs to meet its requirements under Kyoto. VERs originate from the same kinds of projects (industrial gas destruction, methane capture, energy efficiency) but sellers and buyers exchange them based on a standard they agree among themselves, or no standard at all, and not on the official Kyoto standard.

According to the authors, in 2008 total global markets for GHG emission reductions traded nearly 5 billion tonnes of both types of reductions, voluntary and certified. The 65 million tonnes traded voluntarily (in 2007) accounts for between about 1.3 and 2.0 percent of total trade volume in all global emission reduction markets.

Several of the many (20) contributors to this book note that society should clearly not rely on voluntary carbon markets alone to make serious progress toward GHG-reduction targets. Trading volumes are far too small, voluntary markets effectively 'coat-tail' on the authority of the compliance market, and concern persists over whether all VERs truly result in net emissions reductions.

However, voluntary carbon markets probably move us toward legally-binding targets indirectly. Voluntary markets seem to be more creative and agile at finding ways to originate and transact emissions reductions less expensively than the 'compliance' markets. Getting a CER-generating project approved under Kyoto can cost up to $350,000 which dashes many smaller projects' hopes of certifying their reductions under Kyoto. It also seems that companies not yet obliged to reduce their GHG emissions tap into voluntary markets to figure out what liabilities and opportunities they will face the day legally-binding targets do arrive.

HSBC crops up several times as an example of a company which has purchased VERs as one step to becoming a carbon-neutral company, even though HSBC presently has no legal obligation to do so. One might reasonably wonder why HSBC did not just buy all the 'official' CERs it needed to offset its emissions directly from the compliance market, rather than heavily researching a credible VER supplier and dealing with the semi-transparency of the voluntary carbon market, as it did.

One of HSBC's key motivations for buying VERs was needing to understand how future obligations to reduce GHG emissions will affect the way it manages risk to its assets, designs financial products and adapts to the changing needs of clients. Another motivation is that VERs are a lot less expensive. The average price of a tonne of carbon as a VER is about EUR 4.11 while the spot price for an equivalent CER on the European Climate Exchange at the time of writing is EUR 13.44. However the value of the institutional learning HSBC won through the carbon neutrality initiative probably dwarfs the difference in cost. It may be no coincidence that two years later HSBC's structured finance team put together a noteworthy deal for an agricultural products distributor and flourochemicals company in India in which it created a pre-payment facility secured on CERs.

Do not expect an exhaustively-researched volume narrated by a single expert author. Rather, Voluntary Carbon Markets conveys the fragmented and rapidly changing nature of voluntary markets though a collection of widely-divergent perspectives on these markets written by VER project originators, retailers, wholesalers, brokers, registrars and exchange managers. A number of distracting typographical errors reflect poorly on the publisher, not the authors. The content would benefit any business economist who has not yet begun to think seriously about how his or her business will fare in a carbon-constrained world.

David Grover
London School of Economics

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