A question of quality

There is no shortage of standards aiming to impose consistency on the voluntary carbon market. But which are gaining traction? Christopher Cundy reports

At the heart of the voluntary carbon markets lies a contradiction. On the one hand, the market is, by definition, free of the often stifling straitjacket of regulatory oversight. Developers, entrepreneurs and carbon buyers can pursue novel types of emission reduction projects, in geographies or technologies not covered by mandatory carbon caps.

But, on the other hand, that very lack of oversight risks undermining the market’s credibility – with no minimum standards for sellers of offsets to adhere to. That risk was manifested last year, when the voluntary market came under intense scrutiny from the press in both Europe and the US, which exposed some of the tonnes of carbon savings being sold to environmentally-conscious consumers as nothing more than thin air.

Several offset providers have played safe – selling only offsets from regulated schemes, typically certified emission reductions (CERs), the credits generated through the Kyoto Protocol’s Clean Development Mechanism (CDM) and overseen by the UN, which has set a benchmark for rigour and transparency. Last January, the UK government made a provisional recommendation that only credits from Kyoto projects and allowances in the EU Emissions Trading Scheme be used for offsetting.

Proponents of voluntary carbon have sought a middle way – proposing standards that tread a fine line between ensuring sufficient credibility and rigour, but not imposing too many costs and restrictions that could stifle the market. The result has, however, led to a glut of standards and codes, which risks confusing buyers and sellers alike.

The first major effort came in May 2006 when environmental NGOs and charities launched the Gold Standard for offsets, for which only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The standard can be applied to both CERs and voluntary offsets, and the institutional set-up mirrors the CDM, with independent validation of projects, verification of emission reductions, and a board which holds the final say on approval of projects and issuance of credits. It should also, come the end of February, have a fully-functioning registry to track the issued credits, says the standard’s Basel-based director Michael Schlup.

Gia Schneider, Credit Suisse: VOS designed to help counter confusion

Thanks to its NGO backing and stringent rules, the Gold Standard is seen as the highest quality benchmark in the market. Gold Standard credits are reportedly sold at a premium of 5–25% compared with ‘standard’ CERs or voluntary offsets, says Schlup.

However, the rigour of the system is creating a bottleneck. Schlup says 600,000 tonnes of voluntary credits have been issued, 11 projects approved, there’s a pipeline of 39 projects that are already working to the standard, and the first voluntary methodology has been approved (the standard also uses CDM methodologies).

But brokers say Gold Standard credits are almost impossible to get hold of and Schlup admits that the organisation is “overwhelmed” with work. He expects staffing and expertise to grow and hence widen the pipeline but, in the meantime, there won’t be any shortcuts.“It’s important that we have the Gold Standard itself checking the projects – it’s what is unique about us,” he says.

In contrast, the Voluntary Carbon Standard (VCS) is planned for mass market appeal. It has been designed to provide the most basic level of quality that all greenhouse gas reduction projects should meet. Josh Harris, London-based acting programme manager, says: “Its main aim is to standardise and prove the credibility of the carbon market, to increase liquidity and buyer confidence, and to provide a streamlined process for project developers.”

The draft version of the VCS was released in March 2006 and was used as a pilot standard by offset project developers. A second version was released later that year, but not finalised until November 2007, after a lengthy stakeholder consultation. The delay was regrettable, say some, since an earlier launch might have helped deflect some of last year’s bad press around the lack of regulation of carbon offsets. But, by engaging so thoroughly with stakeholders, the VCS has ensured wide buy-in.

The VCS is a less bureaucratic standard that has no overarching board giving final project approval. It borrows methodologies from the CDM but Harris claims projects are approved at half the cost and in half the time of a typical CDM project.

Project validation and verification is carried out by independent companies approved by the VCS – at the moment, the roster of verifiers includes all the ‘designated operational entities’ (DOEs) approved by the CDM. Like the Gold Standard, specific VCS methodologies are permitted and the first are expected to appear “over the next three months”, Harris says. Registries to track the issuance and trade of credits are expected to be in place by mid-2008, he adds.

The first tonnes approved to the 2007 version of the VCS are expected imminently, but some project developers have encountered delays as verifiers ramp up capacity. Blue Source, a US project developer specialising in voluntary offsets, intends to accredit all its emission reductions to the VCS. Lauren Kimble, vice-president of offset marketing at the Utah-based firm, notes: “In the US we are expecting some growing pains in terms of infrastructure of the market.The main barrier to VCS approval has been the verifiers. When, in October,we asked verifiers to look at our projects, they said they couldn’t get to us until January or February.”

Without a registry or project database, it is difficult to estimate how many tonnes of emission reductions have been created to the first VCS standard – Harris gives a wide band between 1 million and 10 million tonnes. Anecdotal evidence suggests that VCS is already being widely used in the market. Grattan MacGiffin, a senior broker of carbon credits for MF Global in London, says: “80–90% of what I see is VCS, the rest is mainly VER+ and Gold Standard, although the latter has a limited supply of issued credits.”

VER+ is a standard developed by German verification company TÜV SÜD together with carbon project development and management firm 3C. Since its launch last April, it has gained some traction, particularly in the German market, and has benefited from having a registry – Blue Registry – in place since June. Werner Betzenbichler, head of the climate and energy department at Munich-based TÜV SÜD, says: “We developed it close to the UN rules.We have some lower criteria than the Gold Standard, but see more efforts required than for VCS.”

Climate Care’s cooking stoves in China – up to standard for additionality

The length of time to get a project approved is “dominated by our assessment work which is comparable to the CDM – around three to five months”, says Betzenbichler, who estimates a few million tonnes of offsets have been verified to the VER+ standard. A barrier to its wider acceptance could be that other verification companies may not be interested in using a standard developed by a rival, suggest market participants. Betzenbichler says he hasn’t heard of other verifiers explicitly using VER+, but notes that some project investors are pushing their verifiers to do so.

Meanwhile, the International Carbon Investors & Services (INCIS) group, made up of investment banks, project developers and intermediaries, launched its Voluntary Offset Standard (VOS) in June last year, in an attempt to set out a standard acceptable to some of the big names in the market. The VOS closely follows the CDM but notably excludes credits from projects that destroy HFC23 gas. Although they are eligible under the CDM,many NGOs and carbon buyers consider them to offer few sustainable development benefits.

Compared with other standards, the VOS is backed by little infrastructure – with no dedicated secretariat or registry – so it’s essentially up to INCIS members to regulate themselves. This has led to some in the market to consider the VOS more of a buying protocol than a standard.

Gia Schneider, vice president for energy trading and marketing at Credit Suisse in New York, says the VOS was initially intended to provide a counter to some of the confusion around offset quality at the time. “We are really focused on helping to further ongoing dialogue between some of the standards, to bring those standards to a robust level of additionality,” she says.The concept of additionality – whether an emission reduction project goes beyond business as usual and thus deserves to be rewarded with tradable carbon credits – is one of the most troublesome issues in the market.

A number of other niche and emerging standards exist.The Climate Community and Biodiversity Alliance (CCBA), a group of NGOs and companies, brought out a standard in 2005 focused on forestry and land-use projects. It aims to ensure such projects have a positive impact on local communities and biodiversity while reducing greenhouse gases. The first two projects were approved last year and a further five are in the pipeline.

On similar lines to the Gold Standard, Brazil’s Instituto Ecológica has developed its Social Carbon methodology, which emphasises sustainable development and transparency.

Other standards commonly cited by US market participants include the Green-e Climate Standard. San Francisco-based Green-e, an offshoot of the Center for Resource Solutions, is best known for its standard on renewable energy certificates. The Climate Standard is due to approve offsets from the VCS, Gold Standard, the CDM and Green-e’s renewable energy protocol.

The California Climate Action Registry also has protocols for three types of project: landfill gas capture, livestock manure management and forestry. Meanwhile, the US Environmental Protection Agency’s Climate Leaders programme has draft guidelines for developing or investing in offset projects, and draft screening criteria for purchasing greenhouse gas reductions.

The US is unique in having an exchange where voluntary offsets can be traded. The Chicago Climate Exchange (CCX) has pioneered the market, developing a complete infrastructure of methodologies, registries etc. But, outside the exchange, potential buyers of CCX offsets have been limited, partly because they cannot trace where the emission reductions came from.

Bill Sneyd, The CarbonNeutral Company: “We are putting our money on the VCS”

To some degree, the goal of the CCX is to create carbon offsets that are fungible and tradable – and consequently reap the rewards of accessing more market participants and ultimately winning greater investment in projects. But the vast majority of offset buyers are still concerned about the type and location of projects.

MacGiffin at MF Global says: “Having standards helps the credibility of the market, but there’s still some way to go before a verified emission reduction becomes a commodity. It’s still very much a bespoke market.” This is reflected in the pricing of offsets, he says, for which country of origin, methodology, standard, vintage and volume all play a part.

For Kristian Brüning, Helsinki-based director of consultancy Climate Wedge, the idea of fungibility in the voluntary carbon market is a myth. “You still need to know what the project is. To some extent, the Gold Standard allows that. For the VCS and VER+, given their broad approach to additionality, the buyer would still have to be familiar with the underlying project to be comfortable.”

Suenje Callsen, project manager in the climate neutral team at 3C, adds: “People are not just judging a standard against another standard – they are looking at the project itself.”

But are things beginning to change? Kimble at Blue Source told Environmental Finance in early January: “In this past week I got a call from a broker [seeking offsets]. Their one requirement was that they were VCS-compliant. I think that’s the first time we have heard that.”

Given how young the voluntary carbon market still is, it is difficult to predict which standard – if any – will become dominant. The VCS should find wide appeal, but there is room for others, particularly those such as the Gold Standard that address a particular niche, say brokers.

Lisa Ashford, Oxford-based head of commercialisation for project developer EcoSecurities, says the company is flexible about which standards it uses. “There’s definitely a use for having different standards [but] it has potential to confuse the client. I think with the few out there there’s enough assurance that they are getting quality credits.”

Shelagh Whitley, in charge of voluntary asset origination and placement at project developer Camco, says the company’s view is to align its voluntary offsets with the CDM, using its methodologies and approved verifiers.“ We will do Gold Standard wherever possible and VCS elsewhere, but get as close to CDM as possible.This is particularly the case in the US. We don’t know where the US will end up [with its mandatory market] so we want to have the highest quality possible,” says London-based Whitley.

Offset providers say retail customers are generally not well educated about standards, but awareness is higher among corporate buyers, and their choices will influence which standards gain ground.

Michael Buick at Climate Care, a leading UK-based offset provider, says: “Corporations want a very clear line that communicates the credibility of what they are doing.They have greater attraction towards something that’s clearly communicable – hence the move towards the CDM ‘UN’ badge and also the Gold Standard.”

Meanwhile, at the Carbon Neutral Company, one of the UK’s longest-established offset providers, director of advisory services Bill Sneyd is unequivocal about its direction.

“We are putting our money on the VCS.We have a couple of large clients that want to support the VCS and we believe the standard has gone through a very robust consultation. It deserves more attention than the others. VER+ and VOS don’t seem to do much more than just copy the CDM.”

The company has set a benchmark for transparency in the industry, publishing its full project portfolio and carbon accounting online. Sneyd says that around 65% of its carbon contracted in the last financial year was compliant with the VCS version one, 15% was CERs and the other 20% met the CarbonNeutral Company’s internal protocol. “The vast majority of voluntary emission reductions contracted from now on are likely to be certified to the VCS 2007 standard,” he adds.

While environmental group WWF may have derided the VCS as a “bottom of the barrel” standard, many in the market see it as a compromise solution that will bring together buyers and sellers.