Yesterday’s panel on the voluntary carbon markets hosted by JPMorgan highlighted findings from the recent report by Ecosystem Marketplace and New Carbon Finance entitled “Forging a Frontier: State of the Voluntary Carbon Markets 2008,” including the size, players, prices and transaction volumes of the voluntary markets.

Collecting data from 150 organizations, including project developers, wholesalers, brokers, and retailers, the report confirmed that 65 million tonnes of carbon dioxide equivalents (MtCO2e) were traded on the voluntary markets in 2007 (a value of over $330 million), representing a tripling in value over 2006 levels. Of that number, 42.1 MtCO2e ($258.4 million) were traded on the over-the-counter (OTC) voluntary market and 22.9 MtCO2e ($72.4) on the Chicago Climate Exchange (CCX), the two components comprising the voluntary carbon markets.

Out of the 42.1 MtCO2e traded on the OTC market, survey participants confirmed that 10.7 MtCO2e (about 25%) were destined for retirement, and therefore not sold as a “resale investment.” The authors assert, and the panel agreed, that this number should be thought of as conservative, due to the fact that sales brokers and others could not attest to the final transaction of any credits. Based on an estimate of customers who bought credits with the expressed intent of reselling them, the authors suggest that as many as 71% of credits may have been retired in 2007.

Interestingly, the report stated that 80% of credits purchased on the OTC were bought by private businesses, whereas governments were responsible for a mere 0.4% of purchases. The report cited “corporate responsibility and public relations/branding efforts” as the most common motivations behind carbon offset purchases. An interesting shift in 2007 was in the location of voluntary buyers. Survey participants noted that 34% of credits were sold to buyers in North America in 2007, down substantially from 71% in 2006. The demand instead came from Europe (47%, up from 28% in 2006) and Australia/New Zealand (8%, up from 1% in 2006). Prices increased in the OTC market on average by about 50% from 2006 due in part to the contraction in the share of low value industrial gas projects, but there remains a huge range of prices for credits with one transaction priced at $300/tCO2e.

The report notes that the “rise of third party standards is considered by many market players to be THE major trend of 2007.” Third party standards such as Voluntary Carbon Standard (VCS) and the Gold Standard for verified emissions reductions (VERs) were among the most popular, providing a way for suppliers to demonstrate the legitimacy of the credits sold, in part arising as a result of various quality issues reported in the mainstream press. The panel appeared to confirm that standards will continue to evolve with buyer preferences such that only 3 or 4 will likely thrive in the long run. Predictions from the panel indicate an increased focus on third party standards in 2008.

The findings discussed yesterday raised the question of whether the entry of new financial players into the voluntary market has been a positive development. Some panelists felt that the market participants in the past were focused on “doing good things” and, until 2006, they were seen as environment heroes. Now there has been a shift to a more conventional market without the same objective on underlying environmental effects. They argued that this has called the legitimacy of the voluntary market into question. Others noted, however, the maturing of the voluntary market was also seen as a very positive development because it means that the number of projects and resulting offsets would continue to increase, ultimately resulting in a larger reduction of carbon dioxide in the environment and ensuring the long-term sustainability of the voluntary market.

A few further observations noted by the panel yesterday were that (1) despite the fact that the voluntary market remains only a small fraction of the size of the compliance markets, the rate of growth far outstripped that of the compliance market, which grew by only 71% (volume) in 2007; (2) the rising prices of offsets on the voluntary market was an important signal of its future strength and growth; and (3) the growth of both the voluntary and compliance markets internationally indicates that implementation of a U.S. compliance market would not disrupt or trump the voluntary market.

Initial findings in the first quarter of 2008 have shown a continued growth of the trends established in the past year. The report observed that the CCX has already confirmed a 180% growth in the first quarter of 2008 compared with that of 2007 and may reach 80 MtCO2e traded this year if the pace continues. The OTC has also grown in 2008, potentially surpassing 150 MtCO2e traded by the end of the year. As more and more companies plan their offset strategies and gear up for what the report calls “inevitable carbon legislation,” 2008 is well on its way to being the biggest year yet for voluntary carbon markets.

For further information about this topic, please contact Akin Gump.