Price differential between voluntary offset markets points to fake projects and weak quality regimes
Offsets are in principle a sensible way to allocate funding for clean development in other parts of the world. The regimes that govern the generation of emissions credits for use in the voluntary market have come under a lot of criticism – including in a recent article in Nature – with good reason. It is a murky, immature market and there are plenty of people making dishonest profits. The clearest indicator of murkiness is the widely varying prices in different markets.
Offsets can by definition be generated anywhere in the world. Credits generated by a renewable energy project in India, for example, could equally be sold in Europe or North America. And you would expect prices to be broadly similar – which they are not.
Voluntary offsets that adhere to the Voluntary Carbon Standard cost around $15 per ton over the counter in the UK. Credits that have passed the Clean Development Mechanism (called CERs), which are valid in the ETS, currently cost $25.50 per ton on the Nordpool exchange. In the US, one ton of emissions on the Chicago Climate Exchange in the past few days dipped below $2.
As an offset generator, why would you sell credits in the North American market when the price is seven times higher in the UK voluntary market, and 13 times higher in the regulated European market? The answer cannot be in the administrative burden of the participating in more regulated markets – the disparity is just too big. The fact is that a proportion of voluntary offsets currently being traded would not pass three key tests: (i) the emissions reduction actually happened, (ii) the reduction would not have happened without the finance provided by selling offsets (additionality) and (iii) each offset has only been sold once.
The variability in prices is a good indicator of the quality of voluntary offset regimes. When regimes can reliably verify that offsets pass the above criteria, prices should converge.