Voluntary Carbon Market Grew in 2010; REDD Drives Demand for Forestry Credits

WASHINGTON, D.C.--The volume of transactions in the global voluntary carbon market grew 34 percent in 2010, according to a report released June 2 by the analysis groups Ecosystem Marketplace and Bloomberg New Energy Finance.

That growth--from 98 million metric tons of carbon dioxide-equivalent traded in the global voluntary market in 2009 to 131.2 million metric tons in 2010--marked a recovery after a dip in transactions in 2009, the report said.

Most of the 2010 transaction took place in the over-the-counter market rather than through a centralized exchange. The volume on the over-the-counter market reached a record high of 127.9 million metric tons, accounting for 97 percent of the voluntary carbon market.

In contrast, carbon markets operating under mandatory emissions reduction schemes shrank for the first time in 2010, according to a World Bank report released June 1. (See related story.)

“As the global financial crisis gave way to recovery, voluntary buyers recommitted their discretionary income to offsetting emissions,” the June 2 report said, citing one reason for the growth in the voluntary market.

While the volume of transactions grew, the value of the market stayed about the same, with the average price on the over-the-counter market dropping from $6.50 per ton in 2009 to $6 per ton in 2010, in part due to “a handful of large, low-priced trades,” the report said.

The report, Back to the Future: State of the Voluntary Carbon Markets 2011, is based on data provided and online surveys completed by “offset project developers, wholesalers, brokers, and retailers as well as carbon credit-accounting registries and exchanges participating in the voluntary carbon markets.”

Land-Based Projects Lead.

When split by type of emissions offset project, land-based projects such as those focused on preventing deforestation, had the largest volume at 28 million metric tons. Next were offset credits generated by projects that capture methane from landfills, which were popular in early 2010 before it became clear that the U.S. government would not pass legislation regulating greenhouse gas emissions. Though they remained the second largest type of project, landfill offsets saw a drop in volume from 2009.

“Pre-compliance buyers lined up for landfill methane credits in 2009 and early 2010--only to have any remaining hopes of a U.S. climate bill dashed by mid-year,” the report said. “Even the California [upcoming cap-and-trade] program’s recognition of some livestock methane credits could not prevent methane projects from declining transaction volumes.”

U.N. Program Drives Demand.

In contrast, forestry projects saw growth from about 3 million metric tons in 2009 to about 18 million metric tons in 2010, making up 45 percent of emissions credits that reported the project type.

Those projects are linked to the United Nations-backed Reducing Emissions from Deforestation and Forest Degradation in Developing Countries program, to which developed countries had pledged $4.5 billion in aid by the 2009 international climate change negotiations in Copenhagen, according to the report.

“Thus, non-market funding dwarfed the whole of forest market activity before or since,” the report said.

The report quoted an offsets company official who said he thought the private voluntary market would remain interested in forest offsets.

“How the private sector will be involved over the long term is still unclear but I think it will be hard to call demand for REDD a bubble,” Zubair Zakir, the head of carbon sourcing for the CarbonNeutral Co., said in the report. The voluntary market is “taking faith in the fact that forests are so important that any compliance schemes that exist ultimately would take these credits--and if not a compliance scheme, there will be other investments available.”

Verified Carbon Standard Leads Peers.

The popularity of REDD-related credits played a large role in the Verified Carbon Standard (VCS) maintaining its position as the most popular third-party verification program.

VCS-verified forestry credits totaled 14.1 million metric tons of carbon dioxide-equivalent. In total, 27.7 million metric tons of VCS-verified credits moved through the voluntary carbon market.

The report said the Voluntary Carbon Standard’s continued top billing was also attributable to “a diverse portfolio of technologies” including renewable energy.

The Climate, Community, and Biodiversity Project Design Standards, which verify additional social and biodiversity-related benefits of emissions offset projects rather than the greenhouse gas offsetting activity itself, had the second-largest volume of certified credits transacted, in part because CCB certification is usually used in conjunction with a second standard, often VCS.

The third most popular standard was the Climate Action Reserve protocols, despite a drop of 1 million metric tons from 2009. Climate Action Reserve President Gary Gero attributed the drop to holders’ reluctance to sell those offsets until the California emissions program is implemented. Offsets that meet the Climate Action Reserve protocol are expected to be accepted under that program.

“People are anticipating that the credits they’re holding will soon be convertible into a regulatory unit,” he said in the report, “so they’re reluctant to sell today when they could either use them for compliance or sell them for a lot more in the near future.”

Of the buyers of Climate Action Reserve credits, 96 percent were in the United States and most cited pre-compliance rather than other drivers such as public relations as the reason for purchasing credits.

Overall, transactions by U.S. buyers fell from 21.8 million metric tons in 2009 to 19.2 million metric tons in 2010.

“While the volume of credits purchased by purely voluntary buyers in the U.S. held steady from 2009-2010 … demand from both pre-compliance buyers and U.S.-based resellers fell sharply as regulatory uncertainty induced what one supplier called 'climate change fatigue,’ ” the report said.

Respondents Optimistic.

In 2009, the top three standards were VCS, the Climate Action Reserve, and the Chicago Climate Exchange. The Chicago Climate Exchange ended its emissions reductions program, in which its offsets could be used, at the end of 2010.

Survey respondents said they were enthusiastic about the future of the voluntary market.

“Suppliers are cautiously optimistic that this demand will remain strong as the economy recovers and the market continues to mature in its effort to synthesize buyer motivations and market scale,” the report’s summary said. “When we asked suppliers to estimate overall market performance in 2010 and beyond, they forecasted substantial growth for 2011, expecting that they and their peers will transact 213 MtCO2e [million metric tons of carbon dioxide-equivalent] over the next year.”

By Leora Falk

The report, Back to the Future: State of the Voluntary Carbon Markets 2011, is available at http://www.forest-trends.org/~foresttr/publication_details.php?publicationID=2828 .