Carbon trading: the market

The 1992 UN Framework Convention on Climate Change (UNFCCC) is the main international policy instrument dealing with the threat of global warming and most industrialised countries have committed themselves under it to reducing their emissions of greenhouse gasses by 95% of their 1990 levels.

These emissions reduction targets are legally binding for countries which have ratified the convention. In 1997, the Kyoto Protocol to the UNFCCC was negotiated, which created a series of flexible mechanisms to enable trade in verifiable greenhouse gas emissions reductions between parties to the convention.

This can take place on a country-to-country basis between what are referred to as Annex 1 (developed) countries and in terms of the Clean Development Mechanism (CDM) between developing countries and Annex 1 countries.

Afforestation and reforestation projects in which forests are planted are included in the Kyoto Protocol framework. Most Land Use, Land Use Change and Forestry (LULUCF) activities, however, were excluded from the mechanisms created by the Kyoto Protocol. For that reason, most forestry and land use projects, like Envirotrade’s, generate carbon credits for use in the voluntary, rather than the compliance, carbon markets.

Forest-based transactions in such a market offer a means of providing a cap on the cost of emissions reductions in a general range of between 1 to 15 US dollars per tonne of Carbon sequestered. These transactions are two-way and a continuous process.

Companies have also become interested in providing carbon neutral products and services on a voluntary basis and this sector of the market has embraced the forestry and land use sector of emissions reductions with some success. This sector of voluntary carbon offsets is the focus of Envirotrade’s activities.

The Participants

The World Bank Prototype Carbon Fund was the first emission-purchasing programme and comprised a mixture of governments and private corporations and successfully demonstrated that the carbon market can function in a meaningful way.

The largest carbon trading system currently in existence is the European Union Emissions Trading System (ETS). This is the market-based trading system established by the EU to manage its obligations under the UNFCCC Kyoto Protocol. The ETS is a compliance market mechanism, however, and therefore excludes project activities such as those of Envirotrade.

Private sector companies have moved beyond projects that are linked to the compliance regimes into what is referred to as a voluntary reductions regime. This market sector has seen the emergence of brokers and project developers who have produced and marketed carbon reductions packages that are sold on to corporate and individual consumers who are not required to reduce their carbon footprints, but desire to do so voluntarily.

The market in carbon emissions reductions is fluid and dynamic with prices being determined by supply and demand factors as well as subjective marketing criteria linked to the desirability of sprojects and their ‘co-benefits’. This has meant that projects that broadly comply with internationally recognised sustainability and biodiversity standards are generally more valuable and carbon offsets resulting from these projects command higher prices on the voluntary market.