Major corporations continue to support voluntary carbon offset projects – especially those with good stories behind them – and 2013 ended with the encouraging news that dozens of companies are establishing an internal carbon price for use in their business planning. But will that be enough to prevent the current projects from backsliding?
20 December 2013 | Perhaps it is fitting that 2013 was the Year of the Snake, as the carbon markets certainly endured plenty of twists and turns over the past 12 months. For carbon market advocates, the year got off to a troublesome start as the grandfather of compliance trading programs, the European Union Emissions Trading Scheme (EU ETS), dropped to a record low. But by the end of 2013, positive developments on the compliance front in certain jurisdictions, namely California and China, as well as the continuing commitment of voluntary buyers to invest in attractive projects, sustains hope for expansion in 2014 and beyond.
EU ETS prices slumped to $2.81 euros per tonne in January and set a new record low of $2.63 euros per tonne in April after the European Parliament rejected an emergency fix for the beleaguered compliance market. After months of intense negotiations, however, EU countries finally agreed to the so-called “backloading” proposal, in which the sale of up to 900 million allowances will be postponed, a move that participants hope will prop up the market until a more permanent solution is reached.
The Clean Development Mechanism (CDM), however, received no such life preserver as negotiators at the Conference of Parties (COP19) in Warsaw in November failed to lock in a concrete solution for the CDM market. Proposals to set a price floor and to have financial institutions such as the Green Climate Fund bail out the oversupplied market by buying up the very cheap credits both fell through. But key players such as United Nations Framework Convention on Climate Change Executive Secretary Christiana Figueres still see a role for market-based mechanisms such as the CDM in a future climate agreement, particularly since African countries strongly support keeping alive a program that they feel they haven’t yet had a chance to fully engage in.
Maneuvering the Mosaic
In June, Forests Trends’ Ecosystem Marketplace (EM) released its 2013 State of the Voluntary Carbon Markets report, which found that purchases of voluntary carbon offsets rose 4% in 2012 to 101 million tonnes of carbon offsets (MtCO2e), but market value decreased 11% to $523 million as offset prices fell slightly for several popular project types. Renewable energy projects were once again the most popular project type among voluntary buyers, not surprising given their relative affordability. Nipping closely at the sector’s heels, however, were forestry and land use projects, with afforestation/reforestation and avoided deforestation (REDD) projects the most highly sought after.
REDD in particular made great strides in 2013, despite lingering questions about where future demand for the credits will come from. The Brazilian state of Acre is preparing for possible participation in California’s cap-and-trade program by leveraging a Verified Carbon Standard (VCS) framework to account for REDD from statewide activities, with CarbonCo validating and selling carbon credits from its pilot project in the jurisdiction back in January. Carbon market history was made in September when the Paiter Suruí people of the Amazon sold the first indigenous REDD credits to Brazilian cosmetics giant Natura Cosméticos from a project using the VCS REDD methodology. In Warsaw, agreement on the so-called “REDD Rulebook” established guidelines for determining national deforestation baselines, a key step for allowing compliance-based REDD finance to flow.
Another project type that seemed to come of age in 2013 was clean cookstoves, with a surge of project activity in Africa and Latin America. Carbon offsets contributed funding to half of the eight million clean or efficient stoves distributed in 2012, as high offset prices and corporate demand for the projects drove $167.3 million into the sector, according to a new report by EM on behalf of the Global Alliance for Clean Cookstoves.
California, China March Ahead, Australia Retreats
Big news happened on the compliance front in 2013, with California officially launching its cap-and-trade program for greenhouse gas (GHG) emissions reductions in January, spurring project development and offset purchases state-side. California regulators finally started to issue ozone-depleting substances offsets in September and forestry offsets in November, paving the way for more development activity in 2014. California’s future trading partner Quebec finally held its first auction of carbon allowances last month, though it was deemed a bit of a snooze-fest as buyers only snapped up about a third of the available allowances.
The two jurisdictions plan to join forces for a linked trading system in the New Year, and other US states may be encouraged to partake in the trading fun as well, if the US Environmental Protection Agency’s upcoming rules to control carbon emissions from existing power plants offer the flexibility desired by the states. The Regional Greenhouse Gas Initiative is already making the federal case that its cap-and-trade program should be eligible for compliance, and many experts believe jumping on board the existing programs in California and the Northeast may be a much easier path for states than starting a new regulatory regime from scratch.
Meanwhile, across the world, China spent 2013 launching three of its seven planned subnational carbon markets. Trading in Shenzhen started in June, Shanghai and Beijing’s markets launched last month, and Guangdong commenced trading in mid-December. China could offer a lifeline to CDM project developers by allowing them to re-register their credits as China Certified Emission Reductions, which would fetch higher prices on the domestic markets.
While China took a major step forward, Australia took an equally major one back. Political opposition may have doomed Australia’s carbon pricing program, which was responsible for a flurry of pre-compliance activity – nearly 3 MtCO2e forest and land use carbon offsets transacted last year, according to Ecosystem Marketplace’s 2013 State of the Forest Carbon Markets report released in early November.
Carbon Pricing All the Rage
While the national and subnational-level developments were mostly welcome news for the carbon markets, the lack of progress toward an international climate agreement in Warsaw remains a source of frustration for many COP veterans. However, carbon pricing advocates can take comfort in the fact that establishing an internal carbon price is becoming standard operating practice for dozens of global corporations, despite the absence of a global regulatory regime for GHG emissions.
Some of the biggest names in the energy sector, including ExxonMobil, BP and Royal Dutch Shell, are using double-digit carbon price projections to guide their business planning decisions. Disney and Microsoft have gone a step farther by using the revenues generated from their internal carbon fee programs to invest in a wide range of offset projects, showing a particular affinity for REDD projects in Asia, Africa and Latin America.
So are the carbon markets in store for another roller coaster year in 2014? That could be the case, as major questions remain unanswered. How will efforts to establish jurisdictional REDD programs fare, and will California accept them as part of its compliance market? Will the anti-carbon pricing camp in Australia succeed in its mission to repeal the country’s carbon tax? Will enough progress be made at COP20 in Lima, Peru next year to allow negotiators to reach a new international climate agreement in Paris in 2015?