Voluntary Emissions Reduction (VER) Introduction
VER stands for Voluntary Emissions Reductions or Verified Emissions Reductions. Both refer to the emerging market for carbon credits outside the Kyoto Protocol compliance regime. The voluntary market may at present be smaller and less liquid than the compliance market, however, general market opinion is that the wider scope of the voluntary market, and growth led by the private sector, not public policy, means that it has a strong potential to outstrip the mature market size of the compliance regime.
Demand for VERs has been gradual and intermittent, but since the beginning of this year there appears to have been a shift in this market to more structured growth, facilitated greatly by the development of credible intermediaries such as the Bank of New York, which created a registry for VERs in June 2006, as well as the widespread acceptance of the minimum quality standard embodied by the Voluntary Carbon Standard (VCS), designed by the International Emissions Trading Association (IETA), and non-profit organizations The Climate Group and WWF.
There are three main drivers for demand in the voluntary market. Firstly, as a key component of a company's marketing strategy, linked to corporate social responsibility. Secondly, as a profit-making enterprise where financial participants build portfolios of VERs in order to speculate in this market. Thirdly, as a valuable learning exercise for forward-looking companies in business sectors which anticipate being included in a future compliance regime, and which wish to develop a competitive advantage through familiarity with carbon credit market mechanisms.
VERs are derived from project-based emissions reductions, from a wide range of technologies and project types. There are generally three sources of VERs at the moment; pre-registration CDM, "special situations", and small-scale projects.
The first refers to CDM projects which have already been operational for a period of time, but due to e.g. political uncertainty, changes in CDM-level or host country regulations, have not yet been registered with the CDM Executive Board. As the crediting period for CERs may only commence after successful registration, projects which have been operational prior to this do not have the opportunity to commercialise their emissions reductions, despite real and verifiable reductions. These may, however, be sold in the voluntary market.
The second type, "special situations", refer to technologies or methodologies for emissions reductions which have not yet been approved in the compliance regime, typically in the sectors of land use change and forestry, carbon capture storage, transport including biofuels.
Lastly, there is a variety of small-scale, community-driven projects which simply have insufficient resources to satisfy the strict requirements and specialised consultancy services required for the CDM project cycle. These projects thus opt for the lower cost option of VERs.
The voluntary market has evolved a simplified process based on the CDM project cycle, but to lower-cost, less rigorous standards, applied to a wide variety of project types. Evolving buyer preference has driven the adoption of several core principles to ensure value retention in VER assets:
VERs must represent real emissions reductions in addition to the business-as-usual scenario. While tests are generally not as strict as for CERs, the principle remains the same.
The compliance regime mandates that projects have a twin mandate – to reduce emissions, and contribute to local sustainability. However, the strict project cycle of the CDM, designed to maintain environmental integrity, has also resulted in projects which are more focused on emissions reductions than sustainability, such as large-scale industrial technologies which yield strong profits to their private owners, but do not improve local conditions. The voluntary market, driven by buyer preferences, is far more sensitive to sustainability concerns due to the impact on pricing and relative value. In fact, there are currently two broad types of VERs – those with high community and environmental sustainability such as renewable energy, and those from large-scale, industrial, typically pre-CDM registration projects. The former typically commands twice the price or more than the latter. This issue is also addressed through the use of quality labels, which is explained in detail below.
An independent third party is required to verify the emissions reductions; this may be carried out by entities accredited by the UNFCCC to conduct similar activities for CER projects, or by professional environmental consultancies.
Linked to the issue of verification, Buyers are wary of purchasing VERs which may already have been sold to another party. Without a central registry, as maintained by the UNFCCC for compliance CERs, there is always the danger of double-selling. To counter this, in June 2006 the Bank of New York opened a VER registry where Buyers may set up accounts to track VER purchases. TUV SUD, accredited by the UNFCCC to assess compliance projects, has also set up the Blue Registry, which is due to be launched in July 2007.
The range of technologies used in the compliance regime are eligible in the voluntary market, as well as others not currently accepted, such as certain forestry, land use and transport methodologies. VER projects also have no geographical limitation, and can be generated form projects globally, although there this is dictated by buyer preference for local (e.g. Buyers from
As with the compliance regime, there are two main types of transactions, "spot" and "forward". Spot transactions are carried out for VERs which have already been generated, and have completed or are in the process of verification by an independent third-party. A spot transaction can be arranged based on current prices, as long as VER delivery is expected within approximately three months. Forward transactions are carried out for VERs with a generation schedule over several years, typically up until 2012.
All VERs at a minimum should be verified by an independent third-party.
The general market requirement as a minimum standard is the Voluntary Carbon Standard (VCS) which ensures additionality, and uses as a basis several of the additionality tests required in the compliance regime. This is typically supplemented by internal criteria designed by Buyers, which will vary based on their individual focus on community involvement, technology transfer, host country impact, etc.
The Voluntary Gold Standard is a premium quality label which ensures the successful integration of stakeholder feedback, and integrity of environmental impact assessments. Similar to its compliance counterpart, the Gold Standard represents the highest in sustainability attributes, for projects which it may be applied to.
This does not include forestry, which is often evaluated using the Climate Change and Biodiversity Standards (CCBS) developed by non-profit organisations. The CCBS is a stringent standard customised for forestry projects, and focuses on the contribution to local economies and integration with local communities.
A new quality label, the VER+, is not yet widely accepted by the market, but has been recently launched by TUV SUD, an entity accredited by the UNFCCC to assess compliance projects.