What we can already say is that the voluntary carbon markets are rapidly becoming an interesting public relations and risk management option for companies, at the same time as they help involve and educate consumers about the importance of combating climate change. Already, these markets are providing the sort of innovation and flexibility that is simply not possible via the regulated markets. They are allowing more types of people to participate in carbon trading, and they are allowing more types of offsets to be sold.
On the issue of voluntary vs regulatory, we think that the voluntary carbon markets will find a way to coexist with regulated carbon markets. We think this coexistence can and should be beneficial to all concerned, with the voluntary markets helping to fill gaps in the regulated markets. And we think voluntary markets should not be seen as alternatives to regulated markets, but rather as supplements; supplements that can help educate and engage broad sectors of society in the fight against climate change, and that can help provide the sort of flexibility, inclusiveness and innovation that will become increasingly necessary if we are to address climate change. The question of voluntary vs regulatory is, therefore, nothing but a false dichotomy.
Where the issue of voluntary vs regulatory markets does get interesting, however, is in the interaction between voluntary carbon markets and regulatory (as well as voluntary) markets for renewable energy certificates, or RECs. We have devoted an entire chapter of this book to this issue because we see it as a potential source of pain and complication on both sides. Currently, the market for RECs and the fledgling markets for carbon (at least in the US) have been somewhat conflated. On the one side, both buyers and sellers of RECs advertise and justify their activities in terms of carbon emission reductions. On the other, sellers of voluntary carbon are often selling RECs as a substitute for carbon emission reductions. So what happens once there is a more robust market for carbon? Does a large part of the market for RECs get subsumed into the carbon market? Does this kill the REC market, or does it just force it to change shape?
Niels Bohr, the Nobel prize-winning physicist is said to have quipped: 'Prediction is very difficult, especially if it's about the future.' This caveat notwithstanding, our prediction is that parts of the REC market will be subsumed into the carbon markets, and parts will remain outside of it. The parts that will most likely remain impervious to the carbon markets will probably be the regulated REC markets, with much of the voluntary REC market using the carbon markets as a convenient outlet.
On the issue of demand, we believe that there will be two distinct (and somewhat different) sources of demand for voluntary carbon. One source will come from individuals and institutions interested in playing a role in addressing climate change. The size of this particular customer base is currently hard to gauge, since it will depend to a large extent on how the climate change problem continues to be perceived by the general public. It will also depend somewhat on whether or not people feel governments are doing enough to address the problem. The second source of demand is likely to be corporations and institutions that feel compelled - for a variety of reasons - to go beyond regulation to address climate change. Here again, the size of this market will depend on public opinion and the ultimate scope of government regulation. In other words, if companies feel that their consumers expect them to become climate neutral, if there appears to be a preference in the market (or some other business case) for climate neutrality, then companies will be in the market for offsets. The scope of regulation is important here, too, because if climate regulation is believed to be exceedingly strict, or if it is seen by all as being sufficient to address the perceived problem, then there will be little incentive to participate in a voluntary market.
Additionally, it is important to note that these two potential sources of demand will likely have two very different approaches towards buying carbon. Large buyers will want to minimize transaction costs and ensure adequate levels of risk management. For this reason they are likely to push for standardization and a further commoditization of voluntary carbon. This could lead to rapid growth (in terms of volume) of the voluntary markets, but it could, at the same time, mean more money being spent on certification and verification, and less money making it down to the original supplier of the emissions reduction credit. This is a trend we have seen with many other commodities: from coffee and sugar to corn and pork bellies.
Smaller individual buyers, on the other hand, will have a different approach towards buying carbon. They will be in the market for gourmet carbon - carbon that has various other beneficial qualities, whether they be environmental, social or otherwise. In the market for gourmet carbon, the price will depend on the qualities of the carbon being offered, and sellers will seek to 'brand', 'certify', or otherwise make the carbon they have to offer palatable to these consumers.
On the issue of standardization, we believe that large parts of the voluntary carbon market will become increasingly standardized, but we hope this standardization is done in such a way that it does not effectively prevent small producers in developing countries from entering the markets. We hope that the search for confidence, certainty and fungibility does not take away from the flexibility, innovation and inclusiveness that is such a hallmark of the voluntary carbon markets. To do this, we feel it is important for those developing standards for voluntary carbon not to be unnecessarily restrictive in the types of carbon offsets that can be considered, and that they come up with inexpensive and cost-effective ways of ensuring and verifying additionality; ways that don't impose too onerous a cost on offset project developers. In all likelihood, this will require the creation and use of in-country certifiers and verifiers.
In this, there is perhaps an interesting role for philanthropic donors to play -as funders of the training of in-country carbon certifiers, or perhaps in the creation of a 'certifier of certifiers' approach such as that which is undertaken via the Forest Stewardship Council. Either way, this is an issue that needs to be quickly resolved. For it would be a shame if the old chestnut of the agricultural community - that there is money to made in food, just not from growing it -were to one day apply to offset project providers in developing countries.
Finally, we believe the issue of quality will be an ongoing and never-ending battle for the voluntary carbon markets, and that the pendulum will forever swing from the desire for ever-greater assurances of the quality of offsets (and therefore rigour in certification) on the one side, to the desire for lower transaction costs, more innovation, and inclusiveness (and therefore simpler certification mechanisms) on the other. Currently the market is experiencing a strong push towards greater rigour and greater assurances of product quality. This is as it should be. For too long the market has operated with little or no emphasis on quality - a trend that could, if taken too far, seriously dampen (if not quell) the market's potential for growth.
Overall, however, we would argue that the future of voluntary carbon markets looks bright. As storms - literal, figurative and political - batter the concept of climate change into the public consciousness, companies, governments and concerned citizens will begin to look for simple and creative solutions to this global problem. In doing so, they will inevitably turn to markets, one of the most cost-effective and proven tools for reducing emissions of an atmospheric pollutant.
Even if the voluntary carbon markets do not mature into a truly robust marketplace, they will remain a source of innovation, inspiration, and education. They will also continue to serve as an interesting barometer of public opinion and businesses weighing options for branding and risk management. If the massive clouds that made up the numerous hurricanes that struck around the world in 2004 and 2005 had a silver lining, it was this: they helped breathe new life into a global market in voluntary carbon emissions reductions that, one way or another, will play an important role in our efforts to stem climate change for years to come.
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