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In 2012, the market for REDD carbon credits shrank and the price fell

Ecosystem Marketplace recently released its State of the Voluntary Carbon Markets 2013. During 2012, the market for voluntary carbon credits grew by 4% in volume, reaching 101 million tonnes of carbon offsets. But the market value decreased by 11% as the average price of voluntary carbon credits fell from US$6.2 in 2011, to US$5.9 in 2012.

The report provides a fascinating insight into the unregulated voluntary carbon market. The total value of the voluntary carbon credit market in 2012 was US$523 million. According to the report, “Suppliers predict market value could reach $1.6 – $2.3 billion in 2020”. These numbers are based on “survey respondents’ back-of-the-envelope predictions”, the report notes. Last year, respondents to the survey estimated that the size of the market in 2020 would be larger – by 200 million tonnes of carbon offsets (or double the currrent size of the market).

From 2006 to 2008, the voluntary carbon market grew steadily. Since 2008, it’s not really grown at all, as the graph below shows. Exactly why suppliers of carbon offsets expect the market to grow steadily until 2020 is far from clear. It would be fascinating to see the “back-of-the-envelope” scribbles on which these predictions are based.

The State of the Voluntary Carbon Markets 2013 report offers the following explanation for the assumptions behind these predictions:

In order to incentivize voluntary offsetting activities of this magnitude, suppliers say the market must more effectively communicate the value of its underlying infrastructure and pilot project activities to private sector actors, the international donor community, and governments seeking tools to incentivize, verify, and finance emissions reductions. They also anticipate that in coming years, the private sector may increasingly leverage offset payments to incentivize sustainable resource management in their supply chains and spheres of influence.

A cynic might point out that the first sentence translates as a request to companies and governments to pour money into carbon offsetting, in order to bail out a struggling market. The second sentence hinges on the word “may”.

The report offers the following caveat:

Because of the market’s lack of liquidity and predictability, historical trends presented in this report should be viewed only as a starting point for understanding demand in the current year – which continues to evolve as both offset buyers and suppliers innovate new ways to mitigate GHGs, influence policy, and communicate their purchases and successes.

While grew offsets from tree plantations grew in 2012, the number of carbon credits from REDD projects fell by 8% to a total of 6.8 million. REDD offsets from projects certified to VCS and CCB standards increased. The report notes that,

suppliers still recount their ongoing struggle to compete for buyer attention with less expensive renewable energy offsets. As the pipeline of VCS REDD projects and offsets (Verified Carbon Units – or “VCUs”) continues to grow, they also express concern for the future price of the asset class.

Four projects accounted for 96% of REDD VCUs issued in 2012: Kasigau Corridor project phases I and II (Kenya); Mai Ndombe project (Democratic Republic of the Congo) and Alto Mayo project (Peru).

The report quotes Michael Sahm of the Forest Carbon Group saying that,

“It will be very challenging for voluntary private sector buyers to purchase enough credits from already verified vintages to sufficiently satisfy project needs, even if they buy really substantial offset volumes. This is why we’ve begun exploring how to engage institutional or country-level buyers that want to engage in REDD purchase programs or bilateral agreements that can achieve a greater scale of demand.”

And the report raises a series of questions, based on the large number of REDD credits that could be issued under Jurisdictional Nested REDD programmes:

  • Will voluntary offset end use buyers engage in transactions with a domestic government?
  • Will governments allow project developers to issue and monetize their own offsets – or what does the private sector need to demonstrate to governments in order to gain their confidence in this approach?
  • How can progress be demonstrated to the private sector?
  • Will offsets from these large programs affect the market’s perception of supply and influence prices, or will they be sufficiently differentiated from project-level activities?

The report provides no answers to these questions, but Ecosystem Marketplace “invites experts to share their insights and expertise via a new insight series to be published monthly through our news service beginning in July 2012”.

The price of REDD credits fell, from over US$12 in 2011 down to US$7.40 in 2012. While prices are going down, costs of implementing REDD projects are not. The report notes costs such as “local community engagement, and regularly adjusting project specifications to ‘fit’ with several VCS forestry and land-use program updates”. The report quotes a Latin American forest carbon project developer saying that,

“all of this unexpected additional time to implement the project begins to add up, and so do the costs. And so, so does the eventual offset price to compensate for those costs.”

This graph illustrates how both the volume and price of REDD credits fell in 2012:

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  1. The value of our world and the preservation of world wide rain forest. BTC has brokered 200 million REDD’s this year with another 500 million REDD’s coming from South America, South Africa, Indonesia and Europe. BTC has struggled to find any US support in buyers and sellers unless the buyers had international requirements. The US top 100 are making a statement and are spending over $2 Billion dollars in 2013 recognizing the world wide support in both the compliance and voluntary markets that someone needs to lead in. With all the auditing and verification that BTC is proving to their buyers, I expect BTC to be the first distributor of REDD’s world wide to $10 Billion. The race is on, Good luck to BTC credits