What is the value of the voluntary carbon market?

Written by tom


Pop Trivia: What $30 billion sophisticated financial market does the US not have a share of?
Answer: You guessed it, the carbon market!

What is in that $30 billion number? Well, the recent World Bank report (pdf) gives you a nice overview, but at a high level the $30 billion is divided into $5.4 billion in project-based revenues (CO2 offsets) and $24.6 billion in trading value of carbon allowances between companies and countries.

So where do TerraPass members, as well as companies like Yahoo! and more recently Google that have pledged carbon neutrality fit into this number? They are considered part of the voluntary carbon market, a tiny slice estimated between $50 and $100 million that represents voluntary demand from companies and individuals rather than forced demand from government regulation.

The numbers are pretty trivial so far. Should we care about the voluntary market at all? Why should we use it as a platform? What are the other valuable components of the voluntary carbon market?

1) The voluntary market precedes compliance and regulations

This sounds like a tautology, but I have a point, I swear. The reason the voluntary market matters is that is what we have now! If you want to do projects in the US (which we do) there is no compliance market to work with at all. Nor will there be in the near term, with most markets not coming to trading volume until 2012 or later, and then only in certain states and with small volumes.

The voluntary market is a laboratory for experimentation, policy development and establishment of the market infrastructures and participants. This has been true before. Consider this graph from World Bank:

Clearly, a huge run up in the voluntary carbon markets preceded Kyoto, with real reductions achieved and lots of learning about what it took to get those projects off the ground.

2) The voluntary market shows there are winners from climate change.

We were quite proud of our partner ECC’s nice spread in the Wall Street Journal last week. We’re also proud of the fact that together with ECC, we did the first cow-power transaction on the CCX. The voluntary market can build on itself like this where two dairies can inspire a large commitment from a utility. Or where one online firm can challenge its rivals to follow its lead. Cool stuff in the spirit of “yes and” solutions.

Why do we care about winners? Because we believe winners can help tip the political balance in favor of stronger regulation. Having just a few people come forward to show how they would benefit from cleaner energy makes a big difference. Case in point — when we started working with ECC, they had two dairies. They now have 160.

3) The voluntary market can generate huge reductions from a small numbers of companies and a consumer market. These reductions may be in fact bigger than the compliance markets in the near term

The idea that fighting climate change is going to be a universal bonanza of green making green is false. It’s going to cost us. Political will is necessary to implement meaningful change. The winds are shifting, but we’re still a long way a way from imposing a political solution to climate change.

The following graph from the team at New Carbon Finance shows the spectrum of proposals before Congress:

Note something special here — not even Senators Waxman or Sanders advocate going carbon neutral or anything close to it for another 43 years! Such bold moves are left to firms and individuals that want to do more than their fair share as a statement of their values. Again, these are reductions we are achieving way ahead of regulations. Since carbon is a cumulative problem, acting fast makes a big difference in the early days.

Cumulatively, those small numbers of firms and consumers aiming for 100% offset may make up the lion’s share of the early market. The New Carbon Finance folks suggest that unless we get a federal system off the ground, reductions from the voluntary market will far exceed those from the US compliance market as it currently stands. As an example, the system for the northeast states (RGGI) is not expected to have a positive demand for emissions reductions until 2015, and then only about 700,000 metric tons (only about 120,000 TerraPasses). The case for California is a little better, perhaps generating 35 million tons of CO2 reductions by 2015.

Compare these figures to some recent estimates for the voluntary carbon market. ICF last fall predicted 400 Million tons by 2012. New Carbon Finance suggests 100-400 million. Trexler predicts 250 million for the US by 2012. Clearly these are numbers that deserve attention equal to the efforts of our government.

Don’t get us wrong, we’re all for government regulation on carbon, as soon as possible and as strict as possible. But as you buy your TerraPass, recognize that you are joining a set of people, companies, environmental groups and the occasional dairy farmer riding the front of the wave. We’re all building on each other’s work, working without regulation, all doing the best we can to get on top of this problem as soon as possible.

Interested in more about this topic? Here are some additional resources:

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  1. meagen

    excuse my ignorance, but under point #1, what is CDM? i also don’t know most of the other acronyms, but i can at least figure them out from context.

  2. Adam Stein

    Good question. We usually try to be pretty good about translating these acronyms, but we missed the ones buried in the chart.
    CDM stands for Clean Development Mechanism, which is the part of the Kyoto Protocol that allows countries to offset their emissions with projects in the developing world. The thing that all of the categories in the graph — CDM, JI, etc. — have in common is that they are “project based.” Roughly speaking, this means that they are emissions reductions that come from specific projects, rather from large-scale trends such as increased energy efficiency.

  3. Rob

    “700K mT” should be either 700mT or 700KT I think. And the m should be capitalized. unless you’re saying 700 millitonnes, which is an interesting unit. 🙂
    [Ed. — You have sharp eyes, although the typo’s not quite as bad as you think. The “mT” stands for metric tons, and 700K is the correct figure. But this is totally confusing, so we’ve updated the post.]

  4. marco

    if we all want to see a healthy growth of this VER market we’d need a uniform and EU-like certification process to produce hi-quality credits. Based on who you read, VERs seem to be going for $1 – $8/Mt in the U.S., whereas on ECX the ERUs for Dec08 trade around 22Euroes. I worry about the fragmentation coming fm the states, though 31 states adopted the same registry they seem to be moving in different directions re the certifications and cap-and-trade…