Market Size and Scope
Table 2 compares the market size and the scope of various offset programs and providers, to the extent that information could be compiled (by spring 2009).
The landscape of domestic and international project-based emission reduction or ‘offset’ programs is evolving rapidly. While the global economic slump dampened activity in 2008, the global value of primary offset transactions has grown to US$7.2 billion in 2008, representing over 10 fold growth from 2004 levels. Primary transactions represent the flow of new project-based emission reductions to the market. The secondary market, which involves the resale of offset commodities, as well as options, futures, and spot transactions, grew by 350% in 2008 to over US$25 billion, indicative of the growing sophistication and maturity of this market (Capoor and Ambrosi, 2009).
This large growth has been due largely to the main offset mechanisms of the Kyoto Protocol: principally, the Clean Development Mechanism (CDM) and to a much lesser extent, Joint Implementation (JI). The CDM, which enables the financing of offset projects in developing countries, accounts for 90% of offset project transaction volumes and value. JI, the mechanism supporting offset projects within countries that are parties to the Kyoto Protocol, accounts for another 5%. The voluntary offset market accounted for the remaining 5%. In contrast to declines in primary transactions for both JI and CDM, the voluntary market continued to post double digit growth in 2008.
Figure 2.1 CDM: Annual Trade Volumes by Project Type 2002-2008
(Capoor and Ambrosi, 2009)
Despite the continued growth of the carbon market, the ultimate fate of the offset market is far from clear. If and when project types, sectors and countries become increasingly covered by emission caps or other regulations, the market for offsets could begin to decline as allowance allocation and trading or other policy instruments take on a greater role. It will depend on the role policymakers assign to offsets in an efficient, equitable and effective policy regime that comprehensively addresses the climate change challenge.
Figure 2.2 Annual Offset Trades by Type of Market
(Capoor and Ambrosi, 2009)
Table 2 compares the market size and the scope of various offset programs and providers, to the extent that information could be compiled. Compiling estimates of the size or volume of the offset market is challenging because metrics vary and information is often proprietary, especially within the voluntary market. Some figures for offset market activity represent total offset transactions in a given year, including both primary (by original offset providers) and secondary (resold offsets) transactions, some are for primary transactions alone, while others represent the total offsets registered or certified (which may include expected offsets generated in future years) or issued during a given year. The resulting estimates of the ‘size of the CDM market’ can thus vary by as much as an order of magnitude. For example, slightly over 100 million Certified Emission Reductions (CERs) have been issued to date, while other figures refer to the 1.2 to 2.6 billion CERs registered and in the ‘pipeline’, that is, that could be issued cumulatively by 2012 if projects registered, and those under development, yield credits as expected.
Readers should thus view market size estimates with caution, and with careful attention to precisely what is being counted. Those interested in more detailed and up-to-date assessments should consult market analyst publications such as those produced by Point Carbon, New Carbon Finance and Ecosystem Marketplace; as well as the annual State of the Carbon Market review published by the World Bank.
Compliance (Mandatory) Markets
Only offsets generated from the CDM and JI project-based mechanisms are eligible for compliance under the EU ETS and for compliance with the Kyoto Protocol, which makes such offsets by far the largest component of the compliance offset market. Demand from the EU ETS, as the largest mandatory cap-and-trade system, has dominated the purchasing of offsets in recent years. European buyers account for over 80% of CDM and JI purchases to date (Capoor and Ambrosi, 2009).
Voluntary Markets
Estimates of the size of the voluntary offset market vary widely and sales information from retail offset providers can be difficult to track. For example, according to Hamilton et al., the global voluntary market grew by 87% in 2008 to 123 MmtCO2e. The Chicago Climate Exchange accounted for 56% of these voluntary transactions and over-the-counter purchases made up the remaining 44%. The total value of the voluntary market in 2008 was over US$700 million (Hamilton et al, 2009). The World Bank on the other hand reported, that the voluntary market in in 2008 grew by only 26% to 54 MmtCO2e with a reported value of a little under US$400 million (Capoor and Ambrosi, 2009). It is unclear why the reported numbers differ so much.
Offset Prices
Offset prices tend to vary based on the project type, its location, the market demand and the stringency of the offset program requirements. Offset prices in the compliance market are driven primarily by the supply of and demand for offsets and allowances. Demand drives prices for offsets. It is therefore not surprising that offsets for the mandatory market fetch considerably higher prices than voluntary offsets. This is most apparent when comparing the price of CDM offset credits to those available on the voluntary offset market, as is shown in Table 2.
These price estimates should be viewed with caution, since they represent only a brief snapshot of an often volatile market. Nonetheless, they illustrate that prices vary by an order of magnitude depending on the program, its requirements and, perhaps most importantly, the markets in which the offsets are sold. For example, prices for CDM and JI offsets are linked to the broader markets for EU ETS and Kyoto allowances. Depending on the extent to which delivery of CERs and JI Emission Reduction Units (ERUs) is guaranteed, they can garner upwards of 100% of the trading price of EU allowances. Even though in principle CERs, ERUs, and EU allowances are fully fungible, countries have ‘supplementarity’ limits on the amount of CERs and ERUs they can purchase to meet their compliance obligation. To the extent that these limits are expected to be binding, and thus that the supply of CERs and ERUs is expected to exceed allowable demand under the supplementarity limits, CERs and ERUs are expected to trade for prices lower than allowances. It is not clear whether this will occur in the period to 2012.
Prices for voluntary offset credits vary significantly based on the standards used, project types, project locations, offset quality, delivery guarantees and contract terms. No readily available metrics currently exist for consumers to determine either how the price of offset credits sold in the voluntary market is determined, or the role the offset price has on the quality of the offset purchased.