The Future of Carbon Markets

As emissions reduction projects and carbon trading increase rapidly, financial analysts, environmental researchers, and human rights advocates will jostle to fine-tune the implementation. Perhaps the most crucial issue to improve is the ability to prove that GHG reductions are indeed happening as marketed. Several recent cases spotlighted by the media make this clear. In one case, Toby Nichol, communications director at EasyJet, a low-cost airline in Europe, warned carbon offset buyers to beware the "snake oil salesmen" that lure do-good customers into paying exorbitantly high fees for offset services. EasyJet had originally intended to offer its passengers credits from carbon offsetting brokers, but the company found that the quality of the credits offered was questionable and the markup was high, so it decided to purchase the credits from the CDM instead.47

Reliable emissions calculators and reputable certification and verification schemes will help ensure that carbon credit purchasers are getting what they paid for. These tools are crucial to the continued success of this nascent market. Several protocols help project managers ensure that they are correctly calculating the environmental benefits they market. Perhaps best known is the WBCSD/World Resources Institute GHG Protocol, which standardizes accounting methods. The Inter

SPECIAL SECTION: PAYING FOR NATURE'S SERVICES Improving Carbon Markets national Organization for Standardization has also released a useful methodology (ISO 14064) with four components: organization reporting, project reporting, validation and verification, and accreditation of validation or verification bodies. But there is concern that these tools do not sufficiently address the key issue of additionality.48

While lack of certification and oversight continues to be a problem in some sectors of the carbon market, a new problem is emerging: there may be too many competing certification and registration schemes. Ecosystem Marketplace counted at least 15 major certification programs and standards available for the U.S. voluntary carbon offset market alone.49

Several certification systems stand out in the crowd, however: The Gold Standard developed by WWF is one of the most focused certification schemes. Endorsed by more than 40 organizations, it certifies only renewable energy and energy efficiency projects, excluding any forestry or land use projects. It was originally developed to spotlight exceptional CDM projects when there was widespread skepticism regarding the CDM governing body's ability to screen projects adequately. The Gold Standard has created a registry for emissions reductions traded on the voluntary market to ensure that the same credits are not sold multiple times. At the same time, an increasing number of certification and standard programs are focusing not only on the quantifiable environmental aspects of offset projects but on larger social and biodiversity characteristics as well. The Climate, Community and Biodiversity Standards and Social Carbon are two examples of this approach.50

Other initiatives target one specific segment of the market, such as voluntary offsets. In 2007 a consortium of organizations— including the International Emissions Trad ing Association, the Climate Group, WBCSD, and the World Economic Forum—continued work on the Voluntary Carbon Standard Framework, a global standard for project-based emissions reductions. The goal of this standard is to ensure uniformity, additional-ity, and registration in an extremely varied voluntary offsets market.51

While the inner workings of the global carbon market are being refined, it is important not to lose sight of the larger picture: how to best integrate emissions trading into the architecture of future international climate governance. It is widely agreed that the current Kyoto target is not stringent enough to meet the overall goal of the 1992 climate change treaty—preventing dangerous levels of human interference with the climate system. Kyoto was always intended as simply a first step. The initial phase of Kyoto emissions targets comes to an end in 2012, and governments will soon begin formal negotiations over what should come next. A post-2012 target is needed, among other reasons, to provide a clear signal to the market. As British economist Nicholas Stern explains: "Creating an expectation that a policy is very likely to be sustained over a long period is critical to its effectiveness." Belief in the future viability of an effective global carbon market, underpinned by strong emissions reduction targets, is key to behavior change.52

Countries already bound by the Kyoto Protocol have recently recognized that global emissions must be reduced 25-40 percent below their 1990 levels to avoid catastrophic levels of climate change. But this goal has not been agreed to by countries that are not party to the Kyoto agreement—notably the United States, which is alone responsible for some 20 percent of global carbon dioxide emissions from fossil fuel burning. In upcoming negotiations, governments will consider strengthening the reduction targets included in the

Improving Carbon Markets SPECIAL SECTION: PAYING FOR NATURE'S SERVICES

protocol in the post-2012 period. They will also likely discuss the possibility of adding targets for developing countries, where emissions are growing rapidly but from a small per capita base.53

The future of the CDM is linked closely to these discussions of post-Kyoto targets. There is widespread agreement that the current design, while an interesting experiment, is not putting a meaningful dent in the rapid increase in greenhouse gas emissions in many developing countries. One way to restructure the CDM would be to allow developing countries to obtain credits for implementing broad-based policy reforms rather than piecemeal projects. As a move in this direction, the CDM Executive Board recently approved new procedures for a "programmatic CDM," in which countries can initiate a number of small projects under one larger program. It is hoped that this will result in greater emissions reductions and will make the investment more commercially attractive by reducing high transaction costs.54

Some critics ask whether limits should be placed on countries' ability to purchase CDM credits to meet domestic reduction targets, particularly while developing countries are not subject to binding emission limitations. Another remaining issue is whether a global emissions trading system will eventually be created, building on and linking today's ongoing experiments with instruments as diverse as the EU-ETS, the regional trading blocs developing in North America, the Clean Development Mechanism, and the many voluntary offset programs now available.55

Whatever the future may hold for international carbon markets, they are properly viewed as only one of many strategies that will be needed to help reverse the powerful forces fueling steadily rising greenhouse gas emissions. A range of other tools will also be important, including carbon taxes and policy reforms to reduce carbon emissions in key sectors such as buildings, transportation, and forestry. (See Chapter 6.) Individual actions to reduce carbon emissions are also essential— from shortening trips to using public transportation whenever possible, purchasing local goods, improving energy efficiency at home and in the office, and lobbying for more effective government emissions reduction policies.56

Although far from a magic bullet, carbon markets will be a significant feature of the global economic landscape in the years and decades ahead. One of their most important benefits is political: they are creating powerful economic constituencies that favor stricter international action to stabilize Earth's climate. This development stands poised to fundamentally alter the political calculus surrounding climate change negotiations in the years ahead—perhaps finally breaking the logjam that has so far stalled global efforts to reduce greenhouse gas emissions.57

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CHAPTER 8

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