Price differential between voluntary offset markets points to fake projects and weak quality regimes

carbon-price-graph.jpgOffsets 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.

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4 Responses to “Price differential between voluntary offset markets points to fake projects and weak quality regimes”

  1. Mike Temple Says:

    While there is validity in the view that the quality of some voluntary CO2 offsets is suspect, the author overlooks the key reason for the huge price discrepancy between voluntary credits and mandatory ones.

    In the EU scheme, there is a mandatory bid for these credits….CO2 polluters MUST, by law, purchase credits to offset their deficits.

    In the US, because there is no law forcing CO2 polluters to pay for the right to discharge CO2, there is a huge missing demand for the voluntary credits that are being generated…In other words, the US voluntary CO2 market is heavily skewed towards there being many more sellers than buyers.

    In a nutshell, that is why there is a huge discrepancy between US CO2 prices and European CO2 prices.

    To ignore this FUNDAMENTAL fact and lay the blame mostly on the lack of integrity of these credits is to ignore the proverbial 800 pound gorilla in the room.

  2. Thanks Mike. You’re right, the majority of demand for credits is in Europe – and it looks like most growth over the next few years will be there too (which is why investment funds are focusing on CDM / joint implementation projects).

    There are different regional markets for trading credits, but suppliers should broadly be free to choose which to sell to. If there is low demand in one region, suppliers would not rationally flood the market when there is higher demand elsewhere.

    To demonstrate, if we imagine a situation where CERs are fully tradable with EUAs and all offset projects meet the CDM / joint implementation, the price of CERs, EUAs and all offsets must be equal. And I would argue that this price would not collapse to the CCX price, or even the voluntary over-the-counter price, but would converge around the CER level – which probably reflects the costs of genuine offset projects. (Note that this scenario would lead to lower reductions by installations within the EU ETS and higher reductions via offsetting.)

    As an aside, companies taking part in the Chicago Climate Exchange’s programme do sign contracts that make their reduction targets binding.

  3. can you give me a websource that explains in more detail (for us lay people!) what offsets are and how they are meant to work? Thanks.

  4. Sure – the wikipedia entry is a good starting point – http://en.wikipedia.org/wiki/Carbon_offset, there was a critical article in the FT that’s worth a read – http://tinyurl.com/29xx6o, and finally take a look at McKinsey’s cost curve for greenhouse gas reduction – although not specifically about offsetting it should help explain the reasons why people do it – http://www.mckinseyquarterly.com/article_page.aspx?ar=1911#top.

    The point around additionality is that any project below the zero line in that McKinsey chart should have happened anyway – as it makes economic sense regardless of the environmental benefit – and therefore should not be given additional funding through offsets.

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