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REDD and voluntary carbon markets: Prices falling as supply exceeds demand

Ecosystem Marketplace’s “State of the Voluntary Carbon Markets 2015” report tells us that a total 87 million carbon offsets were transacted in 2014, an increase of 13.6% compared to 2013. A total of 25 million avoided deforestation offsets were transacted.

But these statistics need a little explaining. Ten million of those avoided deforestation “offsets” are the result of REDD Early Movers Programmes funded by the governments of Germany and Norway.

And, as the report acknowledges, the average price of voluntary carbon offsets in 2014 reached an all time low of US$3.8.

The reality is that prices are falling as supply vastly exceeds demand. Perhaps not surprisingly, supply is also falling.

Let’s start with a look at how Ecosystem Marketplace explains the voluntary carbon offset markets.

Carbon markets 101

Ecosystem Marketplace’s explanation of carbon markets can be summarised as a series of bullet points (with my comments in brackets):

  • The vast majority of carbon projects use verified standards to ensure that emissions are real (this isn’t a legal requirement, but without some sort of certification system, there would be nothing to prove that the carbon offsets exist anywhere outside the project developer’s imagination).
  • Project developers produce a Project Idea Note to assess the feasibility and the risks involved (and large sums of money are transferred to consulting firms).
  • Later they produce a Project Design Document to outline project activities and establish a baseline level of emissions (consultants earn more money by making up a counterfactual story about what would happen in the absence of the project – the baseline).
  • Then the project developers hire an auditor to “validate” the assumptions in the Project Design Document (more money leaks away from communities and is handed over to consultants).
  • Once the project is underway, another audit “verifies” that emissions have been reduced (yet more money flows to consultants, this time to write a story about how the project compares to the previously made-up story about the baseline).
  • The carbon offsets are then registered on registries, where each carbon offset is given a unique serial number. They can be bought and sold until an owner “retires” the offset on a registry (and in the process still more money flows without any going to local communities).
  • Carbon offsets can be sold by brokers (who don’t own the credits) or resellers (who buy the credits in order to resell them) (both brokers and resellers take their cut).

Transactions… not new carbon offsets

Ecosystem Marketplace’s report looks at statistics based on “transactions”, which it defines as,

the point of contract between the buyer and the seller and may occur at any stage of the project development process, from before its carbon reduction impacts are verified (i.e., “investment” stage) to after it generates verified offsets.

Also, carbon offsets can be traded more than once:

Transactions are a measure of the health of the market (indicating new demand for offsets year-on-year), but a single offset may be traded more than once.

So the figures in Ecosystem Marketplace’s report do not represent the number of new carbon offsets generated in 2014. They represent transactions, which can include carbon offsets that do not yet exist (i.e. have not yet been verified), and can include carbon offsets that have been sold more than once.

Fudging the numbers

Not all the carbon offsets included in Ecosystem Marketplace’s report were paid for by the private sector. In 2013, the German government started its REDD Early Movers Programme. As Ecosystem Marketplace acknowledges this is not a “market-based” payment. The first REM agreement was between the German bank KfW and the state of Acre, Brazil.

These are not carbon offsets, and it is a government to government transaction. There is currently no possible way of the private sector buying or selling REDD credits from REM projects. Nevertheless, Ecosystem Marketplace argues that,

the program falls under the purview of this report series methodology in that the financial flow is contingent upon emissions reductions being achieved, issued, and retired on a registry. REM payments are voluntary in that they are occurring outside of regulation and ahead of an international climate agreement that may or may not include a REDD market mechanism.

This form of carbon finance accounts for “about one tenth of market value over the past two years”, Ecosystem Marketplace notes.

Ecosystem Marketplace also includes a US$50 million agreement between Norway and Ecuador because the contract was signed in December 2014, even though no money had changed hands and the programme was far from operational.

The REDD Early Movers Programme accounts for 10 million of the 87 million “offsets” transacted in 2014.

Falling demand, falling prices

The REDD Early Movers Programme uses a price of forest carbon of US$5/tonne, significantly more than the average price of US$3.8/tonne for voluntary carbon offsets in 2014. Ecosystem Marketplace puts the falling price down to “a lack of new buyer demand”.

Meanwhile large projects are selling credits at high volume, but low prices. More than 10.9 million voluntary carbon credits were sold for less than US$1 in 2014.

Ecosystem Marketplace argues that,

The 87 MtCO2e transacted by voluntary buyers in 2014 is both a large and small number, depending on the context.

It’s small because it only 0.25% of global greenhouse gas emissions in 2014. It’s large, Ecosystem Marketplace argues, because voluntary actors have a “sizeable impact” on compliance carbon price policies.

Excluding the Norwegian and German transactions, REDD prices increased slightly in 2014 to US$4.3/tonne. REDD offsets from avoided planned deforestation (such as from forests threatened by industrial logging or oil palm plantations) sold for US$3.1/tonne on average. REDD offsets from avoided unplanned deforestation (such as from forests threatened by smallholder agriculture, informal mining) sold for US$5.2/tonne on average.

Supply exceeds demand

While 31 million forestry and land use offsets were transacted, a further 44 million offsets remained unsold. Suppliers told Ecosystem Marketplace that they either couldn’t find a buyer, or deliberately held on to their carbon credits hoping for better prices. Another 32 million credits are in the pipeline. These figures are only from suppliers that answered Ecosystem Marketplace’s survey, so it’s an underestimate.

The report states that,

Respondents to Ecosystem Marketplace’s 2015 voluntary carbon survey described a buyers’ market in which supply exceeds demand and prices are dropping across nearly all project types.

The report notes that the market for offsets from cookstoves and water filtration systems shrank by 44% in volume in 2014. The price also fell. Ecosystem Marketplace comments that,

As even more supply is expected to enter this development-oriented offset marketplace, suppliers are hoping for governments to spur demand.

The same comment, more or less, appears a few lines later, relating to REDD credits:

Project developers continue to look to the public sector as a potential and critical source of demand as the sheer volume of supply available far outpaces private buyers’ appetites.

And supply is falling

On page 18 of the report is a graph showing offset supply issued by the four most commonly used standards: VCS, The Gold Standard, ACR, and CAR.

Ecosystem Marketplace acknowledges that “the total supply of newly issued offsets that enter the market … each year also offers important insights”. In 2014, the figure was about 43 MtCO2e, down from over 50 MtCO2e in 2013.

Ecosystem Marketplace acknowledges that the voluntary markets rely on government regulation:

Interestingly for a voluntary market, regulatory development is the single most impactful determinant of market performance, driving or diminishing both supply and demand.

In other words, without meaningful targets for emissions reductions, no one needs to buy carbon offsets. Since the UNFCCC is now operating under a system where each country produces its own Intended Nationally Determined Contribution to emissions reductions, the chances of meaningful targets emerging from COP21 in Paris are less then zero.

Oddly enough, for a report looking at voluntary carbon markets, Ecosystem Marketplace’s report makes no mention of the word “fraud”. Given the scale of the fraudulent selling of carbon credits to retail investors over the past few years, that’s perhaps surprising.

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  1. “Oddly enough, for a report looking at voluntary carbon markets, Ecosystem Marketplace’s report makes no mention of the word “fraud”. Given the scale of the fraudulent selling of carbon credits to retail investors over the past few years, that’s perhaps surprising.”

    Why surprising?

    The only people who care are those ripped off by fraudsters, better known as thieves.

    Little action appears to have and to be taking place.

    Or am I just being cynical?

    Comments invited.

  2. What if we do nothing Chris! You need to pick a side: The side of lets continue to cut the forest, use fossil fuels, and destroy the planet. Or a side of “all of the above” solutions of renewable energy, tree plantations, and any mechanism of the many mechanisms that are present; with the attempt to save the planet.

    Maybe carbon credits are not the best solution, but they are a solution, they put a price on the polluters and if that price is high enough those polluters will be put out of business. This is a market friendly approach, that will not break the back of these companies overnight but it will break them and put them out of business, as long as blogs like this don’t destroy this opportunity to put them out of business.

    Parliament, Democracies and Communist are not going to wake up one day and do what you want. They will not pass a law that is as black and white as you want. They will on the other hand pass laws that are in the gray. That will give a transition to a clean economy.

    Right now you are doing more harm than good. You have some supporters but those supporters also take an extreme approach. As long as you impede the mechanisms that help protect forests, you are helping the polluters and the very industry that is truly responsible for the climate change.

  3. @Peter Zimmerman – Thanks for this comment. Let’s put aside (for a moment) the arguments about the necessities of reducing carbon emissions (rather than just shuffling them around the planet) and look at your argument in favour of carbon credits. You say that carbon credits are a “solution”, because “they put a price on the polluters and if that price is high enough those polluters will be put out of business”.

    The current price of CERs (Futures Dec15) is €0.66. Here’s how the price has fluctuated over the past 12 months (from

    And here’s another graph, this one showing how atmospheric CO2 has gone up since 1960 (from

    Carbon trading is doing more harm than good. It has failed to reduce emissions. It allows continued pollution. It helps the polluters continue polluting by offering a cheap way out of changing their operations. It does nothing to keep fossil fuel underground.

  4. Chris, you assign blame incorrectly. In your reply, you use one year’s data for price and compare it to 50 years of atmospheric concentration. Moreover, the one graph is focused on instantaneous data points, and the other is on cumulative, so comparing the two is doubly misleading. All of that said, the first graph is the most important for illustrating one thing – the ridiculously low price of CERs. Here is the fault – the poor construction of the Euro ETS allowing for a gross oversupply of allowances. The fault should be focused on the inherent weakness that a confederate form of government (the EU, in this case) has in dealing with a large scale problem – the only way to achieve consensus amongst all of the member states is to make it practically painless.

  5. @Mike Smith – Thanks for your comment. In my previous comment, I wasn’t comparing the two graphs. I was using each graph to illustrate a separate point. Sorry about the confusion – here’s an attempt to clarify.

    My comment was a response to Peter Zimmerman, who said that carbon credits “put a price on the polluters and if that price is high enough those polluters will be put out of business”.

    The point of the first graph (showing prices of CER Futures Dec15) is to show the “ridiculously low price of CERs”, as you put it. Since then, the price has fallen further:

    The second graph shows how atmospheric CO2 has gone up since 1960. My point here was to show that carbon trading has not had the slightest impact on the amount of CO2 in the atmosphere. The reality, as Steffen Böhm wrote in 2013, is that “carbon markets have lost us more than 15 years in the battle against climate change”.