How Carbon Credit Sales Can Benefit State Budgets // Carbon Investments

Business Day announced yesterday that South Africa would be putting on the market carbon credits, whose sale could bring in R250 million ($31 million) into the state budget. The Department of Environmental Affairs plans to use the revenue from these sales to fund the restoration of damaged agricultural and conservation areas.

The government is determined to take advantage of the carbon market in order to bridge the gap in its state budget needed to restore landscapes and rebuild the country's ecological resources. It is estimated that South Africa will need to spend R57 billion to achieve its goal. The current budget in place R1.8 billion.

To raise more money, DEA officials claim they are directing state investments into projects such as the Eastern Cape Parks and Tourism Agency initiative to replenish close to 1.4 million hectares of spekboom – a type of thicket with a high carbon sequestration capacity, which used to be seen in abundance in the Eastern Cape area.

In a paper by Anthony J. Mills and Richard M. Cowling, research professors at Nelson Mandela Metropolitan University, the scientists estimate that the "ecosystem carbon storage in intact thicket in the Eastern Cape, South Africa exceeds 20 kg/m2, which is an unusually large amount for a semiarid ecosystem." Therefore, the spekboom restoration project will also help South Africa reach its GHG reduction goals. The government had committed to reducing its toxic gas emissions by 34 per cent by 2020, upping that goal to 42 per cent by 2025.

According to Christo Marais, manager of the Department of Environmental Affairs' natural resource management programs, in the period between 2010 and 2011, the government spent R24 million on the spekboom project, with an additional R18 million already set aside for the upcoming fiscal year. Through its carbon sequestration capacity, the project is expected to generate carbon credits, which will then be put up for sale on the open market.

Two voluntary carbon standards have already evaluated and approved the initiative. The Verified Carbon Standard (VCS) and the Climate, Community and Biodiversity Alliance (CCBA) have added the project to their registries, which means the initiative has proven that it is effectively sequestering carbon dioxide.

VCS is perhaps the most widely used quality assurance third-party entity for offset projects on the voluntary carbon market. It also holds about one-third of all carbon credits transacted. CCBA, on the other hand, is a partnership, which includes research institutions and non-government organisations. As its name implies, the standard seeks to

"promote integrated solutions to land management around the world … and identify land management activities that simultaneously minimize climate change, support sustainable development and conserve biodiversity."

Both of the above standards have the goal to employ market mechanisms as a way of driving industrial and commercial processes in the direction of low emissions or less carbon intensive business processes.

They also evaluate projects on the basis of "additionality" and "leakage." Additionality means that the project cannot sustain itself financially without the revenue from carbon credits. Leakage refers to the probability that, as a result of the offset project, GHG emissions would occur in a different area. Offset projects have to prove that they have no leakage potential before they are awarded verified carbon credits.

South Africa's strategic investment can be an example of how governments can direct taxpayer money into investments, which not only help the environment, but also contribute to the state budget.

So far, governments have focused on green initiatives that only pull money away from the state budget and rarely bring in direct financial benefits to the government. Usually, state funds are placed in consumer hands in the form of incentives. The UK feed-in tariff system is a perfect example for that. Qualified households that install rooftop solar panels enter an agreement with the government that the excess electricity produced by the panels will be bought back and merged with the grid at a certain price. The agreement is for 25 years after the initial installation.

Another way that governments have invested in green projects is by using taxpayer money to subsidise corporations, which operate in the green sector. The latest case that comes to mind is the loan the U.S. government paid to Solyndra, a California-based solar panel company. The corporation recently filed for bankruptcy, drowning along the way over $500 million of taxpayer money.

Rarely do governments employ an entrepreneurial business mindset when it comes to achieving their emission reductions goals, be it voluntary or compliance, while also utilising the green potential of state-owned resources.

South Africa saw the opportunity to be its own venture capitalist and project manager at the same time, and it gladly took it. The government realised that restoring the country's ecosystem and landscapes can contribute to its GHG reduction goals, and it decided to cash in on it, too.

Forests, being dubbed "the lungs of the Earth," are the most obvious choice when it comes to engaging state money. According to estimates by the 2009 World Forestry Congress, about 86 per cent of the 3.9 billion hectares of the Earth's forests are publicly owned. Aggregate statistical analyses of forest data further indicates that private forests provide more market based goods such as timber for industrial purposes. Public forests, on the other hand, produce more fuel wood.

Governments worldwide should see their forests as more than just sources of timber and conservation areas, but also as potential reforestation projects, which can be carried out by money brought in from carbon credit sales. This innovative business model will benefit the public funds, create more jobs and, at the same time, spare taxpayer money, which can be allocated to other public services. Not to mention that now, with more governments facing serious challenges with managing state deficit, this new approach can be quite beneficial.

Another way governments can benefit from carbon credit sales is by providing state-owned land to privately operated offset projects. The U.S. Commonwealth of Massachusetts and Chile have already adopted a similar approach. They have lent public land to companies, which are developing renewable energy installations. If the offset projects happen to make and sell carbon credits, part of the proceeds can go straight into the state budget.

Green investments have long been viewed as burdens on national budgets. And understandably so. Tariffs, loans, tax breaks and other existing incentives simply deplete government funds. Perhaps the most commonly used practice for actually brining in money is employing the method of the stick rather than carrot by taxing polluting industries. As more and more companies turn to carbon-reducing technologies, however, this method would become less effective in bringing in revenue. Therefore, with all available natural resources, world governments should seek creative, yet eco-friendly, ways to enrich their state budgets.

Voluntary carbon market breathes sigh of re-leaf

Ecosystem Marketplace and Bloomberg New Energy Finance are pleased to bring you the latest annual report on the size and activities of the global voluntary carbon markets: Back to the Future: State of the Voluntary Carbon Markets 2011.

We invite you join us for the North American launch of the report, hosted by Baker & McKenzie at their Washington DC offices on June 22, 2011. The event will include a panel presentation of findings from 4:30-6:00 PM, followed by a reception. To attend, RSVP by Monday, June 20, 2011 via email to bakerevents@bakermckenzie.com or call +1 202 835 1661. Please provide full contact information including full name, company, title, address, and telephone number. If you would like to bring a guest please also include their details.
For the fifth year running, suppliers that responded to the State of survey provided an unprecedented amount of information on trading volumes, prices, projects and buyer motivations in this continually evolving marketplace. A resurgence of voluntary buyers, refinement of voluntary standards and the expansion of registries all served to make 2010 the biggest year ever for the voluntary carbon market. While key findings are described below, we encourage you to read the full report for a 360 degree view of market dynamics in 2010:

Volume: Suppliers reported a total volume of 131.2 MtCO2e transacted in the global voluntary carbon markets – the largest volume ever tracked in this report series, exceeding 2009 levels by 34%. The “over the counter” (OTC) market transacted 127.9 MtCO2e – 97% of global market share – following the collapse of the CCX. A single bilateral OTC transaction of CCX Carbon Finance Units (CFIs) totaling 59 MtCO2e substituted for collapsed exchange activity – but will not likely be repeated.

Price and Value: The average price on the voluntary OTC market fell slightly to $6/tCO2e from $6.5/tCO2e in 2009. Value was placed at $424 million. The 59 MtCO2e CCX trade, priced at $0.017/tCO2e, only contributed ~$1 million to 2010 market wide value, most of which was generated by the remaining 69 MtCO2e OTC transactions.

Project Types: Land-based credits surged in 2010 to sequester 46% of OTC market share (29.1 MtCO2e). Reducing emissions from deforestation and degradation (REDD) took center stage, alone generating 29% of credits transacted in the voluntary market. Landfill methane credits transacted the second largest volumes, bought up by pre-compliance buyers anticipating a US climate bill. When these hopes were dashed, focus shifted to the emerging Californian compliance market – a boon for project types accepted as “compliance-grade” by the California Air Resources Board (ARB).

Project Locations: North America once again took the top spot among origination locations, generating 37% of transacted OTC volume – 94% of which was made in the USA. Over half of credits transacted OTC that reported a project location were sourced from developing economies (58%) – 5% from least developed countries (LDCs) – where forestry dominated their expanding portfolios of project types.

Standards: The Verified Carbon Standard (VCS) retained its top billing among third-party standards in 2010 with 34% market share, largely attributable to its recent progress on REDD methodologies. Trailing the VCS were the Climate, Community and Biodiversity (CCB) Standards, which were stacked with carbon accounting standards to transact 15.5 MtCO2e. The market also saw several new forest carbon-specific standards in 2010.

Registries: More than ever before, suppliers and standards turned to registries for clarity of ownership and transparency – with 63% of transacted credits reported to be registry issued in 2010. Users reported transacting 21.6 MtCO2e issued by Markit Environmental Registry, the top-grossing registry in 2010.

Projections: Respondents were “cautiously optimistic” about the outlook for the voluntary carbon market. Suppliers predicted substantial growth for 2011, expecting to see 213 MtCO2e transacted over the next year – 82 MtCO2e more than in 2010.

—The Editors
For comments or questions, please email: vcarbonnews@ecosystemmarketplace.com

INTERVIEW - Asia seen as growth driver for voluntary CO2 market /// Reuters

By David Fogarty, Climate Change Correspondent, Asia

SINGAPORE (Reuters) - Fear of Western-imposed carbon tariffs on goods and services from Asia is likely to drive growth in offsetting emissions by large firms in the region, a voluntary carbon market executive said.

The market, worth $705 million in 2008 and likely much less in 2009, relies on businesses to voluntarily manage their carbon emissions, for example from the energy they use to produce and transport goods around the globe.

Western companies can buy carbon offsets from clean-energy projects in developing countries, which boast a high number of plants that capture methane from landfills or wind farms for example.

The offsets then allow these companies to cut their overall carbon footprint, or production of greenhouse gases, such as carbon dioxide.

While this concept is new to many Asian firms, there is a growing realisation that customers in the West will scrutinise the carbon content of goods and services, said Jonathan Shopley, managing director of The Carbon Neutral Company, a UK-based offset company.

"It's about requirements in Western markets," Shopley told Reuters in an interview in Singapore.
This was likely to prompt companies to make greater efforts to curb emissions arising from production, as well as a rise in offsetting, both to please their customers and differentiate themselves from the competition.

There are effectively two carbon offset markets. The compliance market, in which companies must buy offsets to keep their emissions below a certain cap, and the voluntary market.

Each offset set represents a tonne of avoided pollution from carbon dioxide, the main gas responsible for raising the temperature of the planet.

"I think the failure of Copenhagen to get to a binding target has fragmented the market into regional responses," he said of last December's U.N. climate talks.

"You're already hearing from the U.S. that (it's) thinking about a carbon tax on the border. This is going to drive demand for product assessments," Shopley said.

Indian firms, in particular, understand the cost of carbon, as the country is the second largest source of U.N.-backed carbon offsets from clean-energy projects.

"They're manufacturing and exporting goods into Europe and the U.S., where there is a clear message the carbon content of your product going to become important. It's coming from Walmart, Tesco, Macy's, Marks & Spencer," he said.


GROWTH FROM LOW BASE
In Europe, the voluntary carbon market is driven by corporate social responsibility, while in the United States, it is more of a pre-compliance market ahead of mandatory national or regional regulation on curbing greenhouse gas emissions.

Overall, the voluntary market struggled last year because of the financial crisis and is estimated to have shrunk by over 60 percent in 2009, according to Bloomberg New Energy Finance.
Hurdles to a U.S. federal emissions trading scheme, continued uncertainty about the future of the global carbon markets and pessimism about clinching a global climate deal this year in Mexico has disappointed investors.

"If we look at our business as an indicator, it was just above level over 2008 and 2009. We didn't see any massive growth at all," Shopley said.
He forecast a rise in the number of Asian companies that measure their greenhouse gas emissions, before offsetting, as businesses around the globe join the fight against climate change.

"We're working with between 20 and 30 companies in Asia," said Shopley. Of these, five were offsetting at an average of about 5,000 tonnes per year.

These five clients had chosen offsets backed by the Voluntary Carbon Standard and U.N. offsets, called Certified Emissions Reductions, he said.

"In terms of the number of clients that we expect to be measuring and reporting greenhouse gas emissions (in Asia), I think that will increase ten-fold at least over a year or so."

He said interest in offsetting was emerging from South Korea, Sri Lanka, Malaysia and Indonesia.

(Additional reporting by Nina Chestney in London; Editing by Amanda Cooper