The State and Trends in the Voluntary Carbon Market

The State and Trends in the Voluntary Carbon Market Dan Barry, Arreon Carbon November 19, 2007 dan.barry@arreon.com

Voluntary Market The voluntary market is the trading of carbon credits outside of compliance schemes (i.e. Kyoto’s CDM, EU ETS etc.) Desire to participate in the absence of a formal framework

Voluntary Market at A Glance • Demand generally fueled by; • CSR, • voluntarily reducing carbon footprints, or • preemption of a compliance market • Based almost exclusively on project-based credits • No umbrella regulator • Many standards • Higher quality standard = higher price • In comparison with compliance markets, voluntary markets are less mature and trade in lower volumes

Key Market Statistics • By end of Q3 2007, traded approx. 55 million tonnes of CO2e • More than double the volume traded in all of 2006 • U.S. markets represents approx. 60% of all traded volumes • Prices range from 2-16 USD per tonne of CO2

Historically Traded Volumes Source: New Energy Finance/Point Carbon

Methane3% Mixed/Other3% Energy Efficiency 5% Forestry 33% IndustrialGas 20% Renewables33% Voluntary Transactions by Project Type Source: New Carbon Finance

The Traded Commodity • More flexible than Kyoto-based markets • Demand for credits, not regulatory policy, creates the commodity • Most commonly traded voluntary credit is the “Verified Emission Reduction” or VER • Credit that has already been generated • Verified by a third party standards body • Similar to CER, but does not require UN certification • Other types • UN certified CERs • Prospective Emission Reductions (PERs) • Transaction settled before ERs are delivered (not in forward contracts) • Typically used for forestry projects • Emission Reductions (ERs) • Credits that have been generated but have not been verified

VER vs. CER • CER is CER, VER is not a VER • There is one type of CER, assessed and certified by the UN • There are many types of VERs, assessed and verified by different bodies • VER requires marketing and packaging • a CER is generally used for Kyoto compliance, VERs are used for other reasons

The Link Between Quality & Price • Wide price range: $2-16 USD • Credits that are assessed according to more stringent standards are sold for higher prices • Credits that are better marketed are sold for higher prices • What determines quality of projects? • Project Type • Project Location • Additionality • Transparency • Environmental co-benefits • Social co-benefits • Reputation of Seller

Prices By Project Type • The Chicago Climate Exchange, the largest voluntary climate exchange • Historical price range $1.50 - $ 4.00 • Nov 15 price: $2.05

Registries and Standards • Under CDM, UN acts as standard and registry • Role of a standard • Sets assessment guidelines/regulations • Role of a registry • Manages the movement of credits • Assures that one credit is not sold to two owners • For VERs, without UN regulation, different standards and registries have been created to fill this role • Each has different regulations

Creating the Commodity: Key Market Standards Source: Point Carbon

Gold Standard • Markets itself has most stringent VER standard • Similar to EB CDM guidance • Requires additional environmental and stakeholder assessment screens • Explicitly bans certain project types (i.e. forestry) • Most projects cannot meet these standards

VER+ • Sponsored by TÜV SÜD • Additionality/baseline requirements set according to CDM methodologies • Projects after 2000 qualify • Credits are recorded in TÜV SÜD’s Blue Registry

Voluntary Carbon Standard (VCS) • Sponsored by the Climate Group, IETA, World Economic Forum • Version 1+2 guidelines have been released (final version expected to be published this week) • Credits must be “real, quantifiable, additional and permanent project-based emission reductions” • Credits are placed into VCS registry

The Chicago Climate Exchange • Based in Chicago, Illinois, U.S.A. • Voluntary, legally binding cap and trade system • Members pledge to reduce emissions • Trades “CFI” • Allocated to members • Project based projects can become CFIs • Current Price around $2 USD • End of Q2 07, CCX traded 26.3 million tonnes of CO2e

Preferred Standards/ Certification Procedures Source: Ecosystem Marketplace and NCF Survey

Voluntary Market:Opportunities for Project Owners • Provides alternative revenue source for emissions reducing projects when… • CDM projects start generating electricity before they are registered • Projects do not have an approved CDM methodology • Projects are otherwise not eligible for CDM

Voluntary Market:Opportunities for Project Owners Source: Ecosystem Marketplace and NCF Survey

Voluntary Market:Opportunities for Project Owners • Increase awareness and understanding; • When VERs are relevant to their project • How to maximise the value of their VERs • Early stage development • Price expectations • Project packaging • How the voluntary market differs from the Kyoto market • What drives the voluntary market?

Voluntary Market:Interaction with the Aggregators • More so than CDM, need aggregators to access the tailored transaction market • Forward purchasing contracts • Brokerage agreements Source: Ecosystem Marketplace and NCF Survey

Benefits of Voluntary Markets? Source: Ecosystem Marketplace and NCF Survey Desire to participate in the absence of a formal framework

Benefits of Voluntary Markets • Sectors which practically can’t be capped • Services sectors, individuals etc. • Prior to an obligatory scheme • Experience / capacity building (Gov. and industry) • Early action credit • Hybrid markets (e.g. Japan)

Arreon Carbon • Specialises in the origination and delivery of Chinese VERs and CERs • Over one hundred emission reduction projects in a variety of technology areas • Financially backed by Credit Suisse International and Mandra Group

Thank You dan.barry@arreon.com

The State and Trends in the Voluntary Carbon Market