Carbon Offsets

The Compliance Market

We have seen that the opportunity to trade Carbon credits was created by the United Nations’ Kyoto Protocol, a legally binding Document committing countries to achieving Reductions in the emission of greenhouse gases
(GHGs). The treaty created a number of such targets that nations needed to meet in order to safeguard the environment. Collectively, industrial nations agreed to reduce their GHGs by an average of 5.2% from 1990 levels, the major impact of this to be borne by the most developed countries. The government of each Kyoto signatory country is now responsible for ensuring that it and companies operating there are reducing GHG emissions. To facilitate this, the Kyoto Protocol established a medium, known as a carbon credit. Each carbon credit permits missions of one tonne of CO2. If a company has emissions over its allowance, then this entails a cost. Conversely, companies able to stay under their allowance receive credits which can be traded on exchanges. Additionally, companies creating projects, say in developing countries, which actively reduce GHG emissions become eligible for these carbon credits and then can raise funds, by selling them, perhaps to a company exceeding its allowance,
on an exchange. Credits generated for the compliance market must come from a high standard project which is regularly checked and verified by independent review boards appointed for each country. Each such project goes through rigorous testing and analysis to determine the resultant reduction of carbon emission or the amount of carbon it is in fact to remove from the atmosphere. Once validated and registered, the credits generated by a project are known as Certified Emissions Reductions (CERs).

The Voluntary Market

In the Voluntary Market, governments, companies and individuals all purchase carbon offsets to mitigate their own greenhouse gas emissions be they from transport, power consumption or some other function. There are broadly two reasons why these organizations and individuals choose to buy voluntary credits. Firstly they may be doing to
demonstrate Corporate Social Responsibility and to establish their brand as being sympathetic to major global issues. Secondly they may consider that emissions regulations will become more generally applicable in future and it is only a matter of time before they will be involved in a compliance scheme anyway. Additionally they may consider the Voluntary market to be attractive financially and see good reason to hold a portfolio of credits.
Though Voluntary Emissions Reductions (VERs) are verified by a third party, they do not carry the costs associated with Certified Emissions Reductions (CERs), which are subject to much more stringent regulation, pushing up the price. This means that individuals and companies can reduce their emissions in a more efficient
and cost effective way. Despite there being less regulation, VERs are still subject to a standard and emissions reductions must be real, measurable, permanent, additional to what is already being done, and independently verified. The voluntary market may at present be smaller than the compliance market. However its growth
is led not by public policy but by the private sector which is evolving its own infrastructure of organisations such as the Carbon Trust to advise companies on achieving carbon neutrality. With major companies such as Tesco, The Co-op, and Marks and Spencer aiming for carbon neutrality, it is the opinion of many active in these markets
is that the wider scope and more competitive pricing of the voluntary market mean that it has a strong potential to outstrip the mature market size of the compliance regime. This is where our clients can come in. They can
choose to buy carbon credits emanating from projects which reduce CO2 emissions. In time they may wish to sell them on to a company aiming for carbon neutrality. Though MH-Carbon is active in both types of Market for these reasons it specializes in the voluntary market.