A fifth installment on carbon trading finds the law coming to town.
Carbon trading: What it is and how it works
Carbon trading: Notes from the European Union
Carbon trading: U.S. offset projects and aggregators
Carbon trading: The REDDs are coming
April 22 is Earth Day, and Canada’s The Globe and Mail ran a special section called “Report on Green Solutions.” In it, Craig Saunders took on the task of reporting on the latest word on regulation in the carbon offset retail market in an article called “Who’s tracking the trackers?” Saunders says, “… the burgeoning offset market still looks a little like the Wild west of yesteryear, and consumers are faced by a confusing mass of offset options vying for their money.”
Saunders told the story of Lee Hunter, who purchased a carbon offset in order to, well, offset the carbon footprint he’d leave behind by flying from Ottawa to Edmonton. Hunter learned that his seat on the plane would produce 1.25 metric tons of GHGs (greenhouse gasses), and he wanted to find a way to reduce his emissions. PlanetAir, Saunders reports, was Hunter’s solution. Hunter purchased offsets from the not-for-profit company which was set up to facilitate exactly that: The selling of carbon offsets to individuals. The cost to Hunter? $45.
Based on previous research on various websites, we know that on the Chicago Climate Exchange (CCX), a metric ton of CO2 equivalents goes for about $6. $39 is a pretty hefty premium to pay to offset some carbon! For retail buyers, however, that may be the only way to do it – for now. Besides, on the CCX you can’t trade a single metric ton, you’d have to trade a full contract’s worth of offsets.
What Saunders goes on to cover in his article is the developing regulatory processes now coming into play in the carbon offset world. The tricky question is, when you buy a carbon offset, what are you actually buying? In Saunders’ words, “you’re effectively paying someone to not produce a certain amount of greenhouse gas.” And how might one track that?
It is possible to purchase (as Hunter did) carbon offsets that are officially certified and verified. The verification process is conducted by a third party, such as the Clean Development Mechanism (CDM), created under the Kyoto Protocol, or Gold Standard, similar to CDM but with even more stringent requirements and disclosures. These standards organizations provide the assurance offset buyers need to see in order to feel comfortable that their money is going to purchase something that does in fact exist: a reduction in carbon emissions.
Both the International Organization for Standardization and the Canadian Standards Association have set up verification processes as well. Their intention is to ensure proper accounting; accounting in this case means accounting, on paper, for carbon offsets, by showing how much carbon was produced prior to the offset project and how much was produced after. The intention, obviously, is for the amount of carbon produced to go down, and for the reduction to be converted into an offset and then sold.
Personally, I’m curious about whether or not there’s an arbitrage opportunity here. If I can purchase carbon offsets on the CCX for roughly $6 per metric ton and then sell them to PlanetAir for three or more times that, then there is money to be made. It appears that all of these organizations are operating on their own terms right now, and that crossover opportunities (at least from a retail investor’s perspective) are not available.
Look for more on that subject in a future installment.
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