Photo:Juhanson, Creative Commons, Flickr
In a joint report issued last week by Ecosystem Marketplace and New Carbon Finance, an approximate total of 23.7 million tons, or US$91 million, of CO2 traded in the voluntary, non-Kyoto supported carbon markets in 2006. While this pales in comparison to the 1.1 billion tons of CO2, or US$24.4 billion, traded on the Kyoto-supported European Union Emissions Trading Scheme (EU ETS) last year, the voluntary markets are nonetheless carving out their own niche in the era of climate change. It is estimated that voluntary carbon trading so far this year has already almost matched that of all last year.
So this brings forth both good news and bad. The good news is quite simple: There are businesses and individuals who don't feel like waiting around until there are mandatory cap-and-trade systems implemented in the non-Kyoto markets (read: the United States) and are subsequently blazing new paths in fighting climate change. In previous notes, we have outlined how leading companies such as Citigroup (C) and Bank of America (BAC) have implemented sustainability programs in order to reduce their operating costs. These kinds of efforts, if they so chose, could also be monetized as a carbon offset project and thus further increase their bottom lines.
Elsewhere, the bulge-bracket investment bank community is also getting into the climate game. In the last year, Goldman Sachs (GS) has purchased a 19% stake in UK-based Climate Exchange plc (CLE.L), and Credit Suisse (CS) has purchased a 9% stake in UK-based EcoSecurities Group plc (ECO.L) as a way to capitalize on the burgeoning carbon finance industry. CLE.L is, incidentally, the parent company of the Chicago Climate Exchange, the largest carbon exchange in the U.S. and also responsible for more than half of the trading volume in the U.S. last year.
So while the voluntary markets are getting larger, this undoubtedly creates more room for error. There are less stringent rules in place for these transactions and thus more ways to cheat the system. In other words, enterprises have found ways to create carbon credits while not producing an equivalent amount of carbon reduction. While these kinds of instances have not been numerous, they have indeed been evident. These "carbon cowboys" are becoming more prevalent, and if not closely monitored, could threaten to undermine the system.
As such, one of the largest challenges currently facing the carbon finance industry is how to install standards in the voluntary markets so these kinds of inefficiencies can be avoided. The quality of credits created must be consistent throughout, no matter what method of offsetting carbon is used. The International Emissions Trading Association is in the process of issuing a Voluntary Carbon Standard that will increase the number of rule sets guiding this nascent industry.
It is great to see increased voluntary initiatives in the fight against climate change, but at the same time, the need for stronger control systems also increases. The Regional Greenhouse Gas Initiative (RGGI), set to begin trading in 2009, is hoping to use lessons learned elsewhere as guidelines for its trading program. And when the United States, by far the planet's largest per capita CO2 emitter, adopts a mandatory cap-and-trade system, there might be a set of regulations sound enough to make us the world's largest CO2 reducer, as well.
Disclosure: I don't own any of the above stocks but will consider owning ECO.L in the future.