Quality Enhancement in Voluntary Carbon Market

Bachelorarbeit von Kathleen Leonard

Introduction:

Climate change represents an ongoing threat, not only since it attracted growing media attention in recent years. Therefore, scientists urge to reduce the concentration of carbon dioxide in the atmosphere in order to prevent most disastrous consequences.

One method, chosen by the international community to achieve this reduction and therewith mitigate global warming, is via the establishment of so called carbon markets. Most famous example is probably the European Emissions Trade System (EU ETS), where pollution allowances can be exchanged among actors. The reduction then is achieved by the setting of a ceiling or cap by authorities. Besides, there are also voluntary carbon markets where actors aim at reducing emissions with self-imposed targets.

Objective of this paper will be to elucidate this unregulated market for carbon commodities and understand its functioning. Since voluntary carbon trading was largely criticised for a lack of quality and transparency, methods to overcome such weaknesses shall be presented and evaluated as well.

Beginning with an overview of different systems of carbon trading, the reader will subsequently learn about existing and emerging carbon markets, their characteristics and performance. Notably compliance and non-mandatory schemes will be distinguished. Juxtaposition will allow for evaluating strengths and weaknesses of both systems.

For gaining an understanding of the supply chain in the voluntary carbon market and comprehend underlying motivations, a presentation of market players will follow in the second chapter.

Based on market actors’ motives, a model for ‘high quality’ carbon commodities will be established in the third part, whereby criticism is also taken into account. An examination of instruments to enhance quality and to overcome shortcomings of non-mandatory markets will be examined in the following.

The fourth chapter will provide an evaluation of and an outlook on the beforehand discussed quality mechanisms. Additionally, different scenarios will be developed in order to predict the future of voluntary carbon trading.

Table of Contents:

Text Sample:

Chapter 2.4.1, Individuals – Underrepresented Target Group:

Voluntary offsetting provides individual consumers with the possibility to account for their personal carbon footprint. Compliance markets do not allow for such transactions due to structural restraints.

For reducing or neutralising individual emissions, consumers may:

- either purchase offsets directly from retailers; - or make environmentally conscious purchase decisions, as for instance with the ClimateSmart™ program from PG&E.

Retailers generally provide a so called carbon calculator on their websites. Therewith, consumers can determine the amount of carbon produced by their activities and purchase the corresponding amount of offsets. Mostly, this is done for air travel, but increasingly for domestic activities, too.

Second option is the participation in offset programs, increasingly offered by businesses, or the choice of offset products (as for instance financial services, see section 2.3.5 on Companies – Jumping on the Carbon Neutral Train). Though, a discrepancy between consumers’ commitments and actions has been observed by recent research. The GfK Rauper Green Gauge study concerning US consumer’s behaviour for instance found that 82% of Americans claim to be seriously concerned about environmental issues, whereas only 28% made corresponding purchases during the last two months (Makover 3).

With view on the country’s objective to become ‘carbon neutral’, Norway’s environmentalist Frederic Hauge sharply points on the mayor problem of most developed countries:

‘We are a nice little country of petroholics and that has made us lazy’, Frederic Hauge, head of Norway’s largest environmental monitoring organisation Bellona.

Therefore, incentives have to be created in order to further motivate individuals to change their high-carbon habits. The UK government for instance considers the introduction of a personal carbon trading scheme. But how can this target group be stimulated via market mechanisms?

Harris’ survey among retailers suggested that price and additional benefits are prevailing decision factors for consumers of this supplier group. Quality concerns seemed to be less important. Weakness of this study is that retailer’s customers are not solely individuals and the small size of the sample (26 answers). Nevertheless, one may deduce that for motivating individuals to become more active on the voluntary carbon market, businesses have to offer products with added environmental value at low prices. This can be achieved by means of already mentioned strategic partnerships.

Thus, a greater choice of offset products or commodities with the option to offset will stimulate individuals to increasingly participate in the voluntary carbon market. Another quality enhancing tool is education and transparency to gain credibility. The better informed consumers are, the more likely they will decide for offset products.

Business – Most Attractive Large-Scale Purchasers:

Besides the above discussed possibility to sell carbon credits, businesses may also purchase offsets. Dell or the often cited HSBC bank are just a small selection of examples for voluntary offsetters. Three forms of participation exist:

Firstly, entities aiming at neutralising emissions from corporate operations for corporate social responsibility reasons.

The second group comprises businesses purchasing carbon credits for resale, either in regard of future regulations or for profit reasons, see previous section.

Third possibility for corporations to act as purchasers is to neutralise product life cycle emissions for offering ‘carbon neutral’ commodities.

As evaluated before, major motives are corporate social responsibility and image concerns. Additionally, the discovered wish for valuable offsets will drive the development of projects with high quality features and co benefits, depending on the entity’s purposes.

Similarly to individuals, businesses are not yet ‘walking their talk’. A McKinsey survey found that 60% of global executives consider climate change as important issue. Almost the same amount (61%) even acknowledges that with the right management such issues may have ‘a positive effect on profits’. Though, solely 30% ‘frequently or always consider climate change in overall strategy’. The study also confirms observations that entities are influenced by factors such as ‘corporate reputation, media attention to climate change, and customer preferences’.

Despite the perceptible discrepancy between words and actions, corporate offset buyers will lead the drive towards quality in unregulated carbon markets, in order to maintain credibility face to their customers.

Events – Accounting for Carbon Footprints:

Not only corporations account for their carbon footprints, event organisers also discover this tool for attracting media attention or mitigating negative environmental effects. The role of events in the carbon market, if there is any; correspond to awareness raising and education.

As examples hereof may be named the Life Earth concerts, the UNFCCC conference in Bali 2007, the Olympic Games in Beijing 2008 or the FIFA Soccer World Cup two years earlier in Germany which are claiming to be ‘carbon neutral’.

Since event related offsetting intends to communicate and raise awareness, public and event participants need to understand projects easily. Therefore, carbon credits are chosen according to their public appeal. For instance forestation is a comprehensible and easily marketable action. Projects with additional benefits are also preferred for their communication possibilities. So, event organisers will rather support ‘charismatic’ offset projects.

Public Institutions and Governments – Combining Efforts towards a Low-Carbon Society:

What role do public actors play in an unregulated market? Since regulation potentially restricts the voluntary carbon market, governments are reluctant to act in this regard. However, in the UK research and dialogue is undertaken to design a profitable and market oriented framework, see Box 5 below for more information.

As purchasers of carbon credits, governments only play a minor role with 0.4% of transactions effected in 2007. Nevertheless, announcements of towns, communes and even entire countries to become ‘carbon neutral’ do not cease. In February 2008 for instance, the United Nations Environment Programme announced the launch of a Climate Neutral Network. New Zealand, Iceland, Costa Rica and the world’s third largest oil exporter Norway joined this initiative to reduce emissions to zero with together four towns and five corporations.