Carbon Offsetting - The Role of the Voluntary Market

After giving a brief overview about how offset projects are developed, we now examine how the voluntary markets differ from CDM and how the standards that have been developed for the voluntary market approach carbon project management.

Key differences exist between the mandatory and voluntary markets. Unlike the former, voluntary markets do not implement any particular policy mandates. The mandatory and voluntary markets occupy different but overlapping niches. As chart 1 shows, the voluntary offset market is currently fed by two distinct offset streams: offsets that originate in the compliance market (e.g. CERs from CDM projects) and offsets that are created in the voluntary market (Verified Emissions Reductions – VERs). In other words, voluntary offset buyers can choose if they want to buy offsets that come from CDM or JI projects or offsets that come from projects implemented exclusively for the voluntary offset market.

In order to better understand the voluntary market, it is helpful to ask what role it should play in protecting the climate and contributing to sustainable development. Compared to the compliance market, trading volumes are minimal in the voluntary market (see chart 2). The voluntary market does currently not make significant contribution to reducing GHGs. Furthermore, effective future climate policy will necessarily involve a gradual transition from voluntary to mandatory action, and eventual regulation (through allowance markets or other policies) of many of the actors currently involved in the voluntary market. While there will likely always be a voluntary offset market to serve those individuals or companies who want to push the envelope beyond what is possible through internal reductions and evolving regulation, a key role of the voluntary market is to shape the rules and procedures for offsets in future compliance markets¹. In other words, the voluntary market can be used as a testing ground for procedures, methodologies and technologies. The voluntary market can help achieve emissions reductions with projects that are too small for CDM, projects set in countries without a Kyoto target, or reductions that are ineligible for CDM for formal reasons other than quality (e.g. China CDM requires major Chinese ownership in project).

The opinions on how the voluntary market can best do this, vary significantly. To clarify this ongoing discussion, we distinguish below between three main points of view. The distinction between these viewpoints is somewhat theoretical since most market participants have views that synthesize aspects of all three approaches. Yet juxtaposing these three views helps explaining the differences in how the voluntary market is perceived.

A. Voluntary Market Should Closely Follow, or Build Upon CDM

There are those, among them the governments of the UK and Norway (see chapter 8), who argue that under the current market situation voluntary buyers can minimize their risk by buying compliance credits because the legal and procedural requirements for CERs are already well established. The current voluntary offset market is seen as potentially undercutting the compliance market with cheaper offsets that are not clearly additional and sending the wrong price signals. Since the public and the media often do not distinguish between the compliance and the voluntary market, there is also a risk of damaging the reputation of compliance markets. To secure quality and transparency in the voluntary market, it is argued that voluntary offset standards should closely follow CDM procedures and apply them to VERs (e.g. the CDM approach to additionality, the documentation of reductions, and the monitoring and verification processes).

Standards that share this viewpoint include VER+ and the Voluntary Offset Standard (VOS).

B. Voluntary Market Should Be More Stringent than CDM

Some have taken this argument even further and have created standards with the explicit goal of enhancing the quality of offsets from both markets by requiring explicit social and environmental benefits as well as strict accounting standards (see chapter 5.5 on Co-Benefits.)

Standards that espouse this viewpoint include the Gold Standard and the Climate Community & Biodiversity (CCB) Standard.

C. Voluntary Market Should Complement and Be Different From CDM

On the other end of the spectrum are those who argue that voluntary offset standards should be less stringent and bureaucratic than the standards in the mandatory markets. They agree that the voluntary market can serve as a testing ground for future policy but they argue that in order to preserve the voluntary market’s creativity and innovation it must be protected from too many bureaucratic requirements. They distinguish between the compliance market, where regulatory obligations must met, and the voluntary market, were no such obligations exist and where the emphasis is on creating a market for innovative projects with as little administrative burden as possible.

Most carbon offset providers who do not use a third party standard but follow their own procedures fall under this category. The Voluntary Carbon Standard (VCS) also adheres more closely to this viewpoint. Although VCS incorporates many of the CDM procedures and guidelines, it is in principal a standard that looks to loosen the requirements for VER projects to allow for more flexibility and innovation.

The tension between these different viewpoints on the proper function of the voluntary market has shaped the market’s recent development. As with any complex issue, the devil lies in the details.

All sides have contributed to the discussion on the role the voluntary carbon market can play to further climate protection. Numerous new standards and registries have been introduced over the last couple of years and the competition among carbon offset standards has increased dramatically since large financial institutions, businesses, and industries have gotten involved in the carbon trade. In the next section we will discuss the elements that are necessary to create an effective carbon offset standard.