What is a voluntary carbon market (Part 2)?

May 26, 2010, by Michael Gillenwater

I promised in a recent blog post to return to the question of what is a voluntary carbon market.  Specifically, I laid out a framework for thinking about voluntary carbon programs and markets more broadly with the following list:

i) programs or initiatives that attempt to overcome problems of incomplete information by those making investment decisions (e.g., EPA’s Green Lights program),

ii) a related category, eco-labeling, provides information as well as other “warm glow” benefits of a credence good [1],

iii) voluntary emissions reporting and commitment programs (e.g., EPA Climate Leaders),

iv) opt-in provisions for uncapped entities to take on an obligation under a cap-and-trade emissions trading system [2],

v) markets where credit buyers face a scarcity due to an emissions cap but may offset their emissions by purchasing credits from emission reduction projects outside the cap’s boundaries, and

vi) voluntary emission offset markets that do not involve caps on the buying or selling entities and where trading only occurs via emission reduction credits that are calculated relative to an agreed baseline.

As I pointed out before, when we talk about voluntary carbon markets, most people are really referring to category “vi.” So then in my Part 1 post on this question I went on to talk about all the categories except “vi.”

Well, now I return to category “vi,” which is what you probably wanted to hear about in the first place.

This category is typically what people refer to when you or I (or more typically some company) purchases offsets for retirement so they can make claims regarding their own emissions. By purchasing and retiring offsets we intend to compensate for our own emissions.  Effectively, we are paying someone else to reduce in our stead.

Examples of this market include anyone participating in the retirement of credits certified under “voluntary standards” such as the Climate Action Reserve, the Voluntary Carbon Standard, or the Gold Standard.

The concept here is that both the buyers and sellers in the transaction enter the market entirely voluntarily.  There is no regulatory driver creating demand for voluntary market offsets.  Project developers voluntarily develop projects and sell offset credits (this characteristic is common to all offset markets, whether they are part of a “voluntary carbon market” or not) and offset buyers voluntarily purchase them.

The key question for differentiating different types of offset markets is what creates the demand for the credits?  In the case of category “vi,” it is simply a desire to provide a public good to society, which we typically refer to as charity [3].  What is truly interesting about category “vi” offset markets is that they have done something rather unique.  They have commoditized charitable giving in a way that attempts to directly measure a public good, meaning they measure a uniform unit improvement in the public welfare.

Other environmental commodities have been created and trade voluntarily, like Renewable Energy Certificates (RECs), but they typically do not actually represent a unit change in a public good.  Instead they represent a unit of activity occurring that we assume or hope produces a public good. Specifically, in the case of RECs, all we know is that a mega-watt hour of electricity was generated by someone.  We don’t know whether the commodity we bought and retired (i.e., the REC) produced a change for the better.  It could have had no effect on anything the renewable generator did [4] [5]. As many of you know, what I am getting at is the issue of additionality.

When you stop to think about it, there is a powerful lesson here.  What other areas of charity could we create commodities for?  Vaccinations?  Calories for the starving?  Education (e.g., in the form of improved test score results) for the disadvantaged?

A powerful idea, that goes beyond just environmental economics.

Endnotes:


[1] Baksi, S. and P. Bose (2007). “Credence Goods, Efficient Labeling Policies, and Regulatory Enforcement.” Environmental and Resource Economics 37(2): 411-430.

[2] The fraction of entities mandated to participate versus the fraction that voluntarily opt-in can vary from zero to one.  For example, under the U.S. Acid Rain program, the ratio is essentially one (mandatory), while for non-governmental systems, such as the Chicago Climate Exchange, the ratio is zero (entirely voluntary).

[3] See http://www.nature.com/climate/2007/0711/full/climate.2007.58.html#B4

[4] Gillenwater, M., Redefining RECs (Part 1): Untangling attributes and offsets, Energy Policy, Volume 36, Issue 6, June 2008, Pages 2109-2119.

[5]Gillenwater, M., Redefining RECs (Part 2): Untangling certificates and emission markets, Energy Policy, Volume 36, Issue 6, June 2008, Pages 2120-2129.


4 responses to “What is a voluntary carbon market (Part 2)?”

  1. Duncan says:

    The stance that voluntary carbon markets have “commoditized charitable giving in a way that attempts to directly measure a public good, meaning they measure a uniform unit improvement in the public welfare” seems rather utopian to make at this stage.

    There is some evidence to this end and also loads of evidence to the contrary.

    I would argue most voluntary offsets would be better defined as you have defined the REC market “they typically do not actually represent a unit change in a public good”. I think you have also defined the current slate of voluntary offsets very well in your attempt to define the REC market “they represent a unit of activity occurring that we assume or hope produces a public good” and further “We don’t know whether the commodity we bought and retired (i.e., the REC – OR OFFSET) produced a change for the better”.

    Just my thoughts – I may be getting jaded in my old age.

  2. Tim Kelly says:

    Dear Michael,

    Almost as important as additionality is the matter of allocation.

    Most offsets and voluntary renewable energy mechanisms should be treated in a scope 3 column as donation, like actions to help others reduce emissions elsewhere in the economy, with Scope 1 and 2 reductions being allocated to those other entities.

    Instead we see such voluntary actions used as wildcard greenhouse reductions on aggregated Scope 1 and 2 and aggregated Scope 1, 2 and 3 emissions footprint calculations and claims with absolute double counting of any benefits as a result.

    Kind regards
    Tim Kelly

  3. Duncan,

    Good points. Of course if a commodity does not actually represent the specific and quantified environmental public good it is defined to represent, then all bets are off. So it is both a question of defining the environmental commodity well (which is the problem with RECs, in that they are defined vaguely as “including attributes,” whatever that means), and it is a question of quality (i.e., that the commodity actually meets the definition). Offset quality is clearly a real issue, as we have talked about at length through the Offset Quality Initiative. http://www.offsetqualityinitiative.org

  4. Tim,

    I actually don’t think of offsets as really living in the same GHG accounting framework as entity level. An offset is an offset. Then if you use it to offset emissions (whether those be scope 1, 2 or 3) is a question of what you, as an entity, take responsibility for.

Leave a Reply

Your email address will not be published.