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Carbon credits and the state of play of North American carbon markets – Part I


March 11, 2008
By Karen Haugen-Kozyra

Topics

Global trade in carbon is a
growing business. According to the World Bank, international carbon
sales quadrupled in 2006 to more than $25 billion.

Global trade in carbon is a growing business. According to the World Bank, international carbon sales quadrupled in 2006 to more than $25 billion. In North America, a patchwork quilt of voluntary and regulated carbon markets is emerging, causing a lot of confusion for buyers and sellers as to ‘what counts’ in these developing markets. Several companies in Alberta, called aggregators, are aggressively pursuing contracts with farmers and ranchers to secure carbon credits for sale into these markets. This primer is designed to clarify the state of markets in the U.S. and Canada.

The North American Situation
In Canada, there’s been a lot of signaling but limited concrete action towards establishing a country-wide compliance-based carbon market (also known as Carbon Offset market). Without clearly established rules that (a) set targets for companies to reduce their GHG emissions – establishing a demand for carbon; and (b) set standards for the supply side (i.e. what counts and how many tons of carbon can be reduced from an activity), most sales tend to be speculative and occur at the margins. With federal politics being what they are, we can’t be sure when a national offset system will be in place.

At the provincial level, at least five provinces have signaled their intentions to move forward with regulatory frameworks for greenhouse gases. In the lead is the province of Alberta, with Greenhouse Gas regulations were set to be in place by July 1, 2007. Alberta rules will allow regulated companies to purchase offsets created only in Alberta to meet their targets, enabling a compliance-based carbon offset market in this province. The intent is to keep investment in carbon offset projects within the province, creating more benefits for Albertans from improved stewardship of resources.

In the U.S., a similar situation is arising. There are a number of smaller, regional markets developing without any clear national system to knit them together. One of these markets is a voluntary-based market (Chicago Climate Exchange or CCX) that has a set of rules that are flexible to encourage participation by a wide variety of projects. Aggregators for the CCX are active in parts of Canada and, given the different set of rules required by this voluntary market, confusion reigns.

Just like in any other market, buyers and sellers need to have a bit of ‘market intelligence’ to understand what the market will support and whether it is worthwhile to engage in market activity at this time. And, since these markets tend to be created and defined around an intangible environmental commodity – something relatively recent in North America – confidence in the ‘currency or commodity’ along with transparency and price discovery are underdeveloped. Making business decisions as to which market, when and the extent of engagement can be exceedingly difficult. Producers must weigh the risk of participating in these initiatives now, where opportunities exist, versus waiting to see how opportunities unfold in the very near future.

Compliance vs. voluntary-based markets
Rules and requirements differ depending on whether a market is compliance-based (GHG regulated) or voluntary, (usually involving a group of firms who take on voluntary commitments to reduce GHGs). In a regulatory context, the government typically provides some structure to the market – setting the targets (demand) and providing standards to ensure offset credits meet compliance quality [(they’re real, measurable and quantifiable and incremental (supply)]. In this context, the regulated companies want to be sure what they are buying will meet their compliance obligations set out by governments. And, if a country has signed on to Kyoto, governments need to consider how these domestic compliance credits will mesh with our international obligations for Greenhouse Gas reduction.

At least five markets currently exist or are under development in North America, and the Chicago Climate Exchange is the only market at this stage that will accept outside credits. These markets are:

The California Climate Change Action Registry, which has very recently signed legislation that requires the reduction of GHG emissions by law. An offset market is being formed and supply standards are being developed. This registry now includes more than 10 western and Midwestern states and British Columbia and Manitoba have signaled their intent to join this market.

Performance-Based Electricity Standards based in Seattle (voluntary) and Oregon (compliance-based).

Regional Greenhouse Gas Initiative (RGGI), a compliance-based market involving a coalition of 10 northeast and mid-Atlantic U.S. states to tackle and reduce CO2 emissions created in the region. This market is still under development although Ontario and the Atlantic provinces have signaled their intent to join.

Chicago Climate Exchange, a voluntary emissions trading floor where companies who are seeking to learn about the market and/or reduce their long-term risk in a carbon constrained future, can get a head start on emissions reductions. More than six million tons of GHGs from Canadian prairie-based soil sequestration projects have flowed into this market.
Alberta Carbon Offset Market allows credits to be claimed back to 2002 for a real, demonstrative and quantifiable reduction.

In the September/October issue of Manure Manager, Haugen-Kozyra will provide a closer look at examples of both a compliance and voluntary market.

Karen Haugen-Kozyra is the acting director of policy development and offset solutions with Climate Change Central, a public-private partnership in Alberta that promotes the development of innovative responses to global climate change and its impacts. Climate Change Central builds links and relationships between businesses, governments and other stakeholders in Alberta interested in pursuing greenhouse gas reduction initiatives.


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