Keep faith in the carbon market

The ongoing lack of momentum in the voluntary U.S. carbon market, Congressional delay on passing climate legislation, and the potential likelihood that U.S. officials will not let companies count existing emissions credits toward compliance in a federal program are all contributing to a skepticism about when—or even if—a meaningful carbon trading program will get off the ground. 

The skepticism and uncertainty is reflected directly in the price of the carbon credits trading right now. One need only look to the price of the Climate Reserve Tonnes (CRT) issued by the Climate Action Reserve (CAR). Much of the CRT demand comes from companies interested in hedging against future U.S. carbon regulations.

Since the start of 2010, the price of CRTs has gone into a tailspin. Price disclosure is somewhat limited due to the fact that the majority of CRTs trade over the counter in bilateral transactions. Being the only North American exchange currently dealing in CRTs, the Chicago Climate Futures Exchange (CCFE) provides some insight into CRT prices.

The December 2010 Futures contract for vintage 2009 CRTs is down 50 percent from the start of the year. One could argue that the ongoing uncertainty around the passage of climate legislation has created an environment of inaction and diminished the demand for carbon-offset instruments.

However, not all have lost faith that the market can be used as a tool for achieving real environmental results. Despite the uncertainty around the prospects for cap-and-trade or other carbon-trading mechanisms, there is no doubt programs can be scaled and profitably run in a well-regulated system. Markets have demonstrated their ability to achieve emission reductions that work for both business and the environment. 

Although the price of CRTs has plunged, projects continue to be registered on the CAR, with nearly 6 million tonnes issued to date from numerous different technologies. CAR continues to develop and adopt new quantification protocols adding to the list of technologies eligible for CRT creation. Furthermore, CAR continues to add to the geographic scope of coverage, reflecting the fact that carbon reductions can be achieved anywhere. 

The reduced CRT prices mean that some emission reduction projects will no longer be economical to implement. But, even now, at these reduced prices, projects continue to come forward, and it is through these market signals that financial capital will be efficiently allocated to carbon reduction projects.

To be successful, a voluntary carbon-offset program can draw on the key lessons being learned from the mandatory greenhouse gas (GHG) framework currently operating in the Canadian province of Alberta. The Alberta Specified Gas Emitters Regulation (SGER) is a regulation requiring GHG reductions from large point source emitters, with flexibility allowing for the use of carbon offsets as a compliance tool.  

The CAR has issued eleven different protocols to date, while Alberta currently has 29 government approved quantification protocols. The Alberta protocols have resulted in the retirement of 6.5 million tonnes of real, verified emission offsets since the program’s inception in July 2007. Similar to CAR, the Alberta program continues to add new protocols and technologies with time and every year the volume of carbon offsets created continues to increase.

The starting point for this foundation is identifying a diverse portfolio of projects from which carbon offsets are purchased on a long-term basis. A successful portfolio should feature a strategic mix of offset technologies, so that these projects can be credibly evaluated based on their carbon value. 

At Capital Power, we have demonstrated how a diverse portfolio can create unique relationships that drive value for both parties. In partnership with an agri-services company, we created a project called the Carbon Reduction Offset Project (CROP).  It is through CROP that we are now paying hundreds of Alberta farmers for the carbon offsets they create through changes in their tillage practices. 

But the critical element of success is around early identification and establishment of strict investment criteria with a focus on carbon offsets that are real and verified.

These criteria are what make a program worth watching and participating in, regardless of the uncertainty as to whether or not CRTs will ultimately be eligible compliance tools under future greenhouse gas regulations. The work of the CAR should be applauded. Through the issuance of CRTs, the CAR has laid the groundwork for the creation of high integrity carbon offsets that will allow intelligent investment to take place.

Hope for the carbon market should remain strong as there is proof that these programs can work, creating a model that can be applied across North America.  That is something that gives us great confidence about continued growth in the future.