The carbon market is the most visible result of early regulatory efforts to mitigate climate change

Transaction Values on the Voluntary Carbon Market
Emissions trading are the most common form of environmental credit trading. These market based programs are designed to achieve established environmental goals by giving companies the flexibility to choose their own cost effective solutions.

First, overall emissions totals are set on a regional basis, then, for each facility regulated within regional boundaries. If your firm operates below its allocation or reduce emissions you can free up "emission credits" these credits can be sold to businesses that for economic or technical reasons are unable to stay under their assigned levels. The incentives are clear whether you're a compliance or financial manager, or entrepreneur developing a cost-effective emission reduction strategy makes sound economic sense.
The carbon market has grown enormously over the past three years. With the European Union Emissions Trading Scheme (the "EU ETS") at the forefront of this growth, CERPD have significant experience in the mandatory emissions trading schemes and markets currently being implemented at the federal, regional and state level which will be transferable to the mandatory greenhouse gas trading schemes and markets created by ongoing state and regional initiatives, as well as federal initiatives the US government may implement to address greenhouse gases.

Transaction Volumes and Values, 2007 and 2008 The carbon market is the most visible result of early regulatory efforts to mitigate climate change. Regulation constraining carbon emissions has spawned an emerging carbon market that was valued at US $64 billion (€ 47 billion) in 2007. Its biggest success so far has been to send market signals for the price of mitigating carbon emissions. This, in turn, has stimulated innovation and carbon abatement worldwide, ad motivated individuals, communities, companies and governments have cooperated to reduce emissions.

There are two types of carbon markets that exist:
Compliance markets which are created and regulated by mandatory national, regional or international carbon reduction regimes.
Voluntary carbon markets which function outside of the compliance market.


Emissions Trading Under the Kyoto Protocol
The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) established a cap-and-trade system that imposes national caps on the greenhouse gas emissions of developed countries that have ratified the Protocol (called Annex B countries). Each participating country is assigned an emissions target and the corresponding number of allowances - called Assigned Amount Units, or AAUs. On average, this cap requires participating countries to reduce their emissions 5.2% below their 1990 baseline between 2008 and 2012. Countries must meet their targets within a designated period of time by:
Reducing their own emissions; and/or
Trading emissions allowances with countries that have a surplus of allowances. This ensures that the overall costs of reducing emissions are kept as low as possible; and/or
Meeting their targets by purchasing carbon credits: to further increase cost-effectiveness of emissions reductions, the Kyoto Protocol also established so-called Flexible Mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI).


Emission Trading Outside the Compliance Market
VCM enables businesses, governments, NGOs, and individuals to offset their emissions by purchasing offsets that were created either through CDM or in the voluntary market. The latter are called VERs (Verified or Voluntary Emissions Reductions. It is about 17% of the offsets sold in the voluntary market in 2006 were sourced from CDM projects (Hamilton, 2007)

There are no established rules and regulations for the voluntary carbon market. Voluntary markets can serve as a testing field for new procedures, methodologies and technologies that may later be included in regulatory schemes. Voluntary markets allow for experimentation and innovation because projects can be implemented with fewer transaction costs than CDM or other compliance market projects. Voluntary markets also serve as a niche for micro projects that are too small to warrant the administrative burden of CDM or for projects currently not covered under compliance schemes. On the negative side, the lack of quality control has led to the production of some low quality VER, such as those generated from projects that appear likely to have happened anyway.



It is nearly impossible to give a precise overview of current offset market prices, as the market is considerably fragmented due to the variety of available standards, project types and locations, offset qualities, delivery guarantees, contract terms and conditions, etc. That said the main price drivers are an offset's standard and origin (i.e. project types).
In a competitive market, offset prices are a function of supply and demand like any other business. The attractiveness of project depends on the buyer's objectiveness. These are different for a compliance buyer than for a voluntary buyer:
Compliance buyers are interest in obtaining credits reliably and cheaply in order to fulfill their regulatory requirements.
Most institutions that voluntarily use offsets for their climate neutralization efforts want to communicate that effort to the public and choose projects that are well-received by the target group.
In Europe voluntary buyers are especially interested in biomass, renewable energy and end-user energy efficiency projects from less developed countries. Other emissions reduction projects such as industrial gas projects at chemical plants are less attractive to these buyers, because despite their emission reducing capability, such projects deliver very limited co-benefits such as job creation and protection of local ecosystems.
In the US, voluntary buyers prefer offsets generated by domestic projects, and are less focused on project type or sustainable development components.
Carbon markets are still in their infancy. As public opinion and understanding of the markets increase, different project attributes may become more attractive to buyers. The following market prices are only approximations, and do not reflect the full variety of the purchase and sale preferences of all market participants.

Pricing of Offsets for Each Standard at Year 2008


Risk management techniques can substantially reduce the risk of project under-performance and consequent delivery failure.
One key technique is the portfolio approach: by contracting/developing not just one or a few projects but a large number(e.g. with with differing technologies or locations), the provider can diffuse the risk of catastrophic project failure. Restricting sales to the expected delivered volume based on the probability of project failure can significantly reduce the risk of over-selling. Providers with a substantial portfolio of projects are thus able to guarantee the amount, quality, and parameters of the carbon offset delivery to the buyer at contract signature, prior to generation and delivery.
Active risk management can also be applied on a technical and operational level. By hiring technical experts to oversee the job site and perform quality control, and by consulting with local representatives, providers ensure that they will react in a timely manner to technical failure, shortfalls and errors in project documentation, changes in laws and regulations, etc. Although such measures raise project costs of the provider, they also ensure a lower project failure rate.
A third way for the provider to avoid delivery default is to compensate for generation shortfalls with emission reductions purchased from other providers.
Since all forms of risk management require an investment of resources, not all providers are able to offer an optimal delivery guarantee when contracting to generate offsets.

This is where CERPD comes and manages your investments.