Voluntary Markets

1. Voluntary Markets • Mechanisms • Standards • Validation & Verification • Accreditation • Registries • Voluntary Standard • Basic module Requirements • AFOLU specific requirements • Registries & Project Database Agenda 25 March 2009

2. Voluntary Markets Its mechanisms 11 April 2008

3. Mechanims needed for the Voluntary market • In order to have a functioning market the market will have to have • A standards and/or claim against which a performance is being measured • Voluntary Carbon Standard • Company Policy • A mechanism of measuring performance • Project based methodologies outline the offset calculations • Direct emissions measurements • A mechanism of control • Third Party Validation & Verification • In house validation & Verification • Self Declaration • A mechanism to penalize non-performance and/or cheating. • Forced to leave the programme and make good on overissued credits • Name and Shame • Potential Buyers willing to accept the product produced under the programe

4. Voluntary Carbon Standards • Currently there is a multiple number of Voluntary Carbon Standards out in the market • Project Standards: • Voluntary Carbon Standard – VCSa • VER+ - TUV Sud • Gold Standard VERs – Gold Standard • Gold Standard CERs – Gold Standard • CCBA – Climate Community Biodiversity Alliance • CCAR Protocols – California Climate Action Registry • Etc. • Consumer Standards: • Green E – Center for Resource Solutions • DEFRA Code for Voluntary Market • Soil Association Climate Change principles • Participating in the Voluntary Market is selecting the standards that meet your needs and your objectives and that of your consumer!

5. Quantification The fundamentals of a Voluntary Standard Additionality The Standard should be: • Open and transparent • Relay where possible and uses exiting and proven expertise such as: • Accreditation system using IAF accreditation bodies • Use of existing ISO standards (ISO 14064 & ISO 14065) • Specialist Third Party Validators & Verifiers • Have a clear methodology on how credits are being calculated • Avoid double counting • Have a clear registries system in place to record issuance and transactions Leakage Verification Permanence Double-counting

6. Quantification The fundamentals of a Voluntary Standard Additionality The Standard should have: • A clear means of defining how emission reductions are being quantified. This can be done through • Methodologies • This is a description that defines how a project should obtain the necessary date to enable a calculation of the baseline and the with-project • CDM, Gold Standard, VCS etc • Protocols • This is a fixed process that requires the user to input actual measurements in order to allow the monitoring of actual emissions on installation • CCAR, EU ETS Leakage Verification Permanence Double-counting

7. Quantification The fundamentals of a Voluntary Standard Additionality Where the standard is operating on a offset principle there is a need to define the difference between what would normally happen and will happen with the project – which is described as “additionality” Additionality underpins the fact that the project has been undertaken with the specific purpose of reducing emission from what it otherwise would have done and goes beyond a natural decrease in emissions through normal innovation and technology development Additionality is the basis of the credibility of any scheme Where direction measurements are used in a protocol normally no additionality is required Leakage Verification Permanence Double-counting

8. Quantification The fundamentals of a Voluntary Standard Additionality Leakage defines the possible additional emission that may occur out side the project following the implementation of the project: • A farmer changes from cattle to forestry but his/her cattle is being relocated to an other area that is deforested for the purpose of raring this cattle More information will be provided later in the other modules under the CDM Leakage Verification Permanence Double-counting

9. Quantification The fundamentals of a Voluntary Standard Additionality Verification & Validation is the independent assessment that a project and its emission generated in line with the standard use. In order to become a verifiers & validators organisations have to become accredited by for example: • CDM Executive Board • National Accreditation Organization • Professional institutions Although not all programmes will use thirds party validators & verifiers programmes that are accepted by the market have this element in them. Although generally it is expected that Validators & verifiers companies in some programmes also personal qualifications can be accepted Leakage Verification Permanence Double-counting

10. Quantification The fundamentals of a Voluntary Standard Additionality In order to be able to trade the commodity it is essential that the emission reductions that have been achieved and are permanent as the will allow somebody else to claim its carbon neutrality. In particular were standards deal with forestry risks of reversals exists and need to be counter balanced within the system In the absence of these measure the potential buyers will risk that their action to offset will result in no emission reductions as the unit that it holds or has cancelled is no longer backed by an real emission reduction Leakage Verification Permanence Double-counting

11. Quantification The fundamentals of a Voluntary Standard Additionality There are two different ways of “Double Counting” • The fact that somebody sells the same credit twice to two different buyers • The fact that a voluntary unit is created within an existing cap-and-trade system such as Annex I countries under the Kyoto Protocol What is the negative of 2. Although the actual seller of the credits does not sell twice the emission reduction the regulator will through the action of the Voluntary project be able to sell an additional compliance unit to an other player in the cap-and-trade system and allowing this player to emit a ton more then it would have been able to do if the Voluntary units had not been created. Leakage Verification Permanence Double-counting

12. Quantification The fundamentals of a Voluntary Standard Additionality Example: • A project in England creates 1 million credits in the voluntary market and these are being used to offset the air travel of companies around the world • In the national inventory of England the government now finds that it has 1 million less emissions and based on its KP inventory is now able to sell these 1 million tonnes to say the Japanese government • Since the Japanese government has obtained these 1 million credits it can allow its industry to emit 1 million credits more then if England would not have had this project • The buyers of the 1 million credits to offset their air travel have now financed the Japanese industry to emit 1 million more credits and consequently their air travel was not carbon neutral Leakage Verification Permanence Double-counting

13. Quantification The fundamentals of a Voluntary Standard Additionality Example: • A project in England creates 1 million credits in the voluntary market and these are being used to offset the air travel of companies around the world • In the national inventory of England the government now finds that it has 1 million less emissions and based on its KP inventory is now able to sell these 1 million tonnes to say the Japanese government • Since the Japanese government has obtained these 1 million credits it can allow its industry to emit 1 million credits more then if England would not have had this project • The buyers of the 1 million credits to offset their air travel have now financed the Japanese industry to emit 1 million more credits and consequently their air travel was not carbon neutral. • In order to avoid this to happen England should cancel the 1 million credits from its overall allowance balance Leakage Verification Permanence Double-counting

14. Quantification The fundamentals of a Voluntary Standard Additionality What does this mean for standards? • Most standards will not allow voluntary projects to be registered in countries that have a compliance. • Some programme recognize the fact that it is important that voluntary action is also stimulate within these countries in order to make it easier to achieve the overall targets needed to act against Climate Change What are the possible solutions to deal with this issue without requiring action by a government • Create carbon units that represent not a emission reduction but an action to assist governments in achieving their targets Leakage Verification Permanence Double-counting

15. Quantification The fundamentals of a Voluntary Standard Additionality What does this mean for the market: • It will allow domestic action to take place in a more organized manner and often demanded by the market; • The user can still make a claim towards its actions towards mitigating climate change; • Will require the market to have not only a project standard but also a consumer standard that defines how emission reductions generated under the voluntary market can be used by the buyer and the claims that it can consequently make. Leakage Verification Permanence Double-counting

16. Quantification The fundamentals of a Voluntary Standard Additionality The role of Registries: • In the first example of the double counting the registries have a clear role to: • assure that owners of credits can only transfer the credits once. • assure that when credits are created this only occurs once against 1 specific vintage of 1 specific projects • In the second example of double counting the registries have the role to: • assure that credits are not transferred outside the jurisdictions in which they can be used Leakage Verification Permanence Double-counting

17. Voluntary Markets Voluntary Standard 11 April 2008

18. Background of the VCS. • 1st version for consultation launched by TCG, IETA and WEF, March 2006. • ~85 comments received from TCG, IETA, WBCSD and WEF members/partners • 2nd draft released October 2006, consultation through end November 2006: >60 comments received • Independent Steering Committee reviewed comments, agreed policy components. • Drafted by VCS team and LRQA into ISO 14064 compatible framework • Launch in November 2007, new independent body NOW THE MOST POPULAR VOLUNTARY OFFSET STANDARD FOR BUSINESS* * State of the Voluntary Carbon Markets 2007, Ecosystem Marketplace and New Carbon Finance

19. Basis the VCS and its MARKET POSITIONING Specific Buyer requirements Sustainability and other attributes State and other sub-national programmes Other Standards Carbon quality guarantee VOLUNTARY CARBON STANDARD

20. Validation, Verification under the VCS Validation • Validators approved by the VCS (CDM DOEs, ISO 14065 scope VCS) • Use of VCS approved Methodologies • Before the first Verification or at the time of first Verification • Crediting period 10 years renewable twice • Project start date after 1st of January 2002 except AFOLU projects Verification • Verifiers approved by the VCS (CDM DOEs, ISO 14065 scope VCS) • Verifier can be the same as the Validator • Frequency flexible but minimum of 5 years for AFOLU projects • Calculation of Buffer Size New Methodologies • Approval through double approval process by two Verifiers.

21. IFM IFM AR R ALM Agricultural & Grassland Management Foresty types under the VCS tC ha-1 Forest definition RED time Forest Degradation Afforestation Reforestation Forest Management Revegetation Devegetation Intact Forest Forest Land Non-Forest Land Forest Land

22. Addressing Non-Permanence – VCS Buffer Approach • Project risk assessment to determine buffer withholding percentage, placed in shared VCS buffer pool • Conservation easements are one risk mitigation strategy (could be assigned low risk depending on level of carbon security, e.g., conservation mgmt vs. clearcut) • Re-verification optional, but incentivized… • 10% of project’s buffer released every 5 yrs at re-verification (as project demonstrates longevity and risk mitigation) • Buffer (insurance) approach  • no buyer or seller liability • creates permanent, fungible credits (VCUs) • Efficient risk mitigation mechanism: • only 3%-10% reduction in Total Discounted Carbon Revenues for av. project (assuming 20% buffer, 30-70 yr lifetime) • 20-year minimum project life (max. 100-year crediting period) • Periodic “truing-up” ensures total portfolio carbon losses over time are covered by buffer pool • adjust buffer values and/or risk criteria as needed • Intentional/planned releases reflected in project plan and credits issued • The buffer approach is to address unplanned carbon releases

24. IFM Buffer Withholding

25. Risk Factors & Ratings for RED

26. Cancellation of VCS Buffer Credits • Baseline exceeds project carbon benefits • No future VCUs issued to project until deficit cleared • And equivalent number buffer credits cancelled • Project fails to submit verification report <5 yrs from latest verification • 50% of project’s buffer credits cancelled • 5 yrs later, all its remaining buffer credits are cancelled • 15 yrs later (and project crediting period not expired), buffer credits cancelled equal to all tradable credits issued to the project • Projects may claim cancelled credits by submitting new verification prior to the expiration of their crediting period • The remaining credit balance of a project’s buffer is automatically cancelled after the project ends

27. Registration under the VCS Step 1 Project proponents submit documentation to verifier. Step 2 Verifier assesses the claim against VCS 2007 and produces a validation and verification report and a certification statement. Registries • Only approved registries currently 3 registries are approved • TZ1 • Caisse des Depot • APX • Central Project Database • VCU freely transacted between the 3 registries Project Registration • Projects are not required to be registered before first issuance • Registries through one of the 3 registries Issuance • Issuance through one of the 3 registries Step 3 Project proponent submits a VCS project description, validation report, verification report and proof of title to a registry operator. Step 4 Registry operator checks documentation and submits it to the VCS project database. Step 6 Registry Operator issues VCUs into the account of the project proponent and places documents into a custodial service.

28. For more information Edwin Aalders Voluntary Carbon Standard Association 24 Rue Merle d’Aubigne 1207 Geneva Switzerland Tel: +41 22 7370501 Fax: +41 22 7370508 e-mail: eaalders@v-c-s.org April 1-3, 2009 | San Diego, California San Diego Marriott Hotel & Marina