The market for carbon as a traded commodity consists of two main sectors: Regulated, and Voluntary.
* Regulated, or ‘compliance’, carbon markets, which are governed by international rules defined in the Kyoto Protocol, and which include Clean Development Mechanism (CDM) projects. (Some uncertainty hangs over CDM’s future post-2012, with negotiations for a successor to Kyoto still very much in the balance.) A number of national schemes also fall into this category.
* Voluntary carbon markets, which are unregulated and include a range of different trading relationships and voluntary project standards. Many emphasise social benefits as well as carbon ones.
These markets differ radically in the way they operate and who they cater for. The compliance market is aimed mainly at large energy-intensive industries that need to purchase huge numbers of credits (usually at the cheapest possible price). Although open to all, this market is dominated by companies who have compulsory targets under the Kyoto Protocol or other national or regional ‘cap-and-trade’ systems. As such, the credits they buy tend to be generated by major industrial-scale projects – such as cleaning up emissions from Chinese factories – which have relatively few benefits for local communities, and are hardly inspiring stories to tell.
The CDM projects share, in theory, the ambitions of the Millennium Development Goals for alleviating poverty. However, unless they are certified to the Gold Standard (see below), this remains more theory than practice.
In contrast, the voluntary market, which is what any company considering offsetting out of choice will be dealing with, has a much wider range of customers, from individuals to large companies, with very different needs and aspirations, resulting in a much broader range of projects. For these buyers, voluntarily purchasing relatively lower volumes of credits, price is often not the overriding concern. They are for the most part buying because they see the ethical, strategic or reputational benefit of doing so, and so the provenance of the credits, and the story behind them, become more important factors in their purchasing decisions.
The voluntary market can also act as a kind of proving ground for technologies, which later go on to be recognised in the compliance market. This happened with efficient cookstoves, for example, and may well do so with water filters (which qualify for offset funding because they avoid the need to purify water by boiling it – usually using wood as fuel).
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Sceptre Group Limited is a specialist investment firm focused in low carbon financial investments such as sustainable biofuel plantations, agricultural farmland and green technologies.
Sceptre Group Limited opened its carbon trading desk in the third quarter of 2010. For more information, please visit our website: www.sceptreinternational.com