CER suppliers considering a position in the voluntary offset market will face a host of challenges and important considerations – including the longer time required to identify a voluntary offset buyer; opaque supply information; additional registry fees; and voluntary offset suppliers’ historic effort to distance their products from the CER market, according to this year’s State of the Voluntary Carbon Markets report, released by Forest Trends’ Ecosystem Marketplace.
Historically, compliance-driven demand for carbon offsets from the UN Clean Development Mechanism (CDM) has far outpaced voluntary offset demand – thanks to a substantive carbon price and offset demand from the world’s largest regulatory carbon market, the European Emissions Trading Scheme (EU ETS).
In 2012, however, the EU ETS was a market in severe distress. Bloomberg New Energy Finance estimates that while traded volumes for CERs jumped 16% in 2012, market value for CERs (primary and secondary market) fell from an estimated $22 billion in 2011 to $6.5 billion this past year. Throughout 2012-2013, CDM offset (“CER”) prices fell precipitously, falling to a record low of $0.16/tCO2e.
Within this context, the voluntary market has begun and may continue to take some supply of offsets already developed for and targeted toward compliance buyers with obligations under the EU ETS or broader Kyoto Protocol targets, as well as other markets with prices linked to these.
Some developers may consider the voluntary markets’ historical average pricing to be comparable or favorable compared to current compliance market prices, which have been driven to record lows by policies that have not corrected for oversupply and provide insufficient price signals for compliance market-facing offsets. But while the relative stability of voluntary offset demand and pricing may be appealing to CDM project developers and CER suppliers, it’s important to recognize that the report’s findings capture a large volume of offset sales from project types that are not eligible under the CDM (like projects that reduce emissions from deforestation and forest degradation or “REDD” – or all offsets generated in developed countries). We see that 43% (42 MtCO2e) of all offsets sought by voluntary buyers in 2012 were from “CDM-relevant” projects – valued at $172 million or one third of overall voluntary market value. Prices for these offset types, at an average of $4.5/tCO2e, were 23% less than the overall voluntary markets’ average of $5.9/tCO2e. Excluding high-priced Gold Standard offsets from the mix (a total of 9.3 MtCO2e), this price falls to $3.3/ tCO2e.
Despite voluntary offset supplier concerns that traditional CDM market players will channel an oversupply of CERs into the voluntary markets, in 2012 the survey tracked less than 1 MtCO2e of CERs sold to voluntary buyers – mostly from unique projects and locations, at prices similar to those paid to traditional voluntary projects.
In contrast, 8.3 MtCO2e were sold from CCX projects to North American buyers at an average $0.1/tCO2e, representing a far larger source of inexpensive offsets that nevertheless did not collapse the US voluntary offset price. This highlights the fact that voluntary offset demand is highly stratified according to buyer tastes and offset supplier relationships, hence the demand for unique and atypical CERs, roughly half of which were also Gold Standard-certified.
CER suppliers considering a position in the voluntary offset market will face a host of challenges and important considerations – including the longer time required to identify a voluntary offset buyer; opaque supply information; additional registry fees; and voluntary offset suppliers’ historic effort to distance their products from the CER market.