The regulated market is slow moving, and the democratic process of building a global consensus to cap and reduce greenhouse gas emissions is time consuming. At the same time, mechanisms such as the EU Emissions Trading Scheme only impose emission caps on specific sectors of the economy. Meanwhile, the current scientific consensus is that we need an absolute reduction in greenhouse gas emissions up to 60-80% by 2050, and we need to start delivering those reductions immediately. The regulated market shows little sign of being able to move at that speed.

The voluntary carbon market made up of those programmes and projects that deliver carbon reductions ahead of, or beyond regulatory requirementsm has and can continue to help build that mandate. An increasing number of companies have taken action on climate change, including BSkyB, HSBC and others, reducing their emissions to net zero by going carbon neutral without any compulsion to do so. This is in response to the fact that companies around the world are increasingly being held accountable for their ‘carbon footprint’ by investors, staff and customers. In fact, the extent to which a company tackles its contribution to climate change is becoming a key measure of business performance and a critical factor in competitive tenders and consumer buying decisions.

Going carbon neutral means reducing emissions internally, and funding external emission reductions in projects to compensate for those emissions which cannot be avoided. These external reductions may come from Verified Emission Reduction (VER) projects, Clean Development Mechanism (CDM) projects or Joint Implementation (JI) projects. CDM projects are hosted in developing countries, while JI projects are hosted in industrialized countries. Both are developed within the Kyoto framework and are overseen by the United Nations Framework Convention on Climate Change. VER projects operate outside the Kyoto Framework and, historically, have met the bulk of demand in the voluntary carbon market.

The Carbon Neutral Company provides carbon funding to a large number of projects throughout the world. In India, among other projects, the company supports SELCO in a programme that supplies solar electric lighting systems to under-served households and businesses in rural Karnataka. Replacing kerosene lamps with solar systems consisting of a solar panel, a battery and two or four compact fluorescent light bulbs saves emissions. Central to SELCO’s approach is the partnership with micro-finance organizations, which allows customers to pay for the systems on affordable terms. The result is lower emissions, alongside improved health, reduced fire risk and better lighting for income-generating activities and academic pursuits for school children. This is just one of the projects supported by the CarbonNeutral Company in the fields of solar power, wind power, small-scale hydro power, energy efficiency and methane capture.

Clearly, the voluntary carbon market is growing rapidly. A recent report by consultancy ICF International suggests the market could grow from 10–25 million tonnes carbon dioxide equivalent (MtCO2e) in 2005 to approximately 400 MtCO2e in 2010. This compares with 450 MtCO2e of CDM project transactions in 2006; so the voluntary carbon market is certainly about to come of age.

This rapid growth brings with it a number of challenges. Key amongst these are the questions of project integrity, emission reduction supply and delivery of sustainable development benefits by projects being brought to the voluntary carbon market.

The question of project quality in the voluntary market has received a lot of attention recently. Indeed, even the regulated market is taking notice, concerned that examples of bad practice in the voluntary market will negatively impact on perception of the regulated market. Recent research by Ecosystem Marketplace and New Carbon Finance has also shown that buyers view the quality of emission reductions as more important to them than the price. In response to such concerns, a number of strong standards have emerged, chief among these being the Gold Standard and the Voluntary Carbon Standard. The Gold Standard has the backing of 44 non-governmental organizations and is applicable to renewable energy and energy efficiency projects with clear sustainable development benefits. The Voluntary Carbon Standard can be applied to a wider range of project types and has been developed by the Climate Group, the International Emissions Trading Association, the World Business Council for Sustainable Development, and the World Economic Forum. Both standards strive to apply stringent quality assurance to projects and to underpin consumer confidence.

The challenge to the voluntary market is to comprehensively adopt these standards to ensure the delivery of a quality product to both its clients and the global environment. In the UK, the government has launched a consultation on a ‘code of conduct’ for the voluntary market, with the suggestion that only CDM projects can provide suitable emission reductions. The voluntary market must demonstrate that it can keep its own house in order, and standards such as the Gold Standard and Voluntary Carbon Standard now provide a set of tools to enable it to do so.

Supply of emission reductions is a further challenge for the voluntary market. While the market has been small, identifying projects has not been difficult. But as the market grows, the supply of VER projects may not meet the mounting demand. There will be a consistent and growing supply from countries such as Turkey and the US that have not ratified the Kyoto Protocol (and are, therefore, not eligible to host either CDM or JI projects). In countries that have ratified the Kyoto Protocol, the preference will be to process projects within the Kyoto framework, since emission reductions from CDM and JI projects fetch higher prices than those from VER projects. There may be some cases where projects cannot be processed under the Kyoto framework for technical reasons and the VER route becomes the obvious alternative for quality projects. However, the CDM is maturing (and the JI will follow suit) and putting eligible projects through the system is becoming an increasingly streamlined process. This means fewer and fewer VER projects, implying that the voluntary market will need to get used to purchasing more expensive emission reductions from CDM and JI projects.

A cornerstone of the CDM is the provision by projects of sustainable development alongside the delivery of emission reductions. Its success in this area is debatable, with early CDM projects concentrating on a small number of early mover countries and with the majority of emission reductions coming from a small number of ‘low-hanging fruit’ project types. Sub-Saharan Africa has been left behind and more challenging community based project initiatives are not being tackled. The voluntary carbon market, where the project story is a key asset to buyers, is well placed to assist projects with clear social, economic and environmental benefits to local communities. However, it has not yet delivered to this on any scale, in part because it faces many of the same challenges as the CDM. Limited local infrastructure and capacity hinder the development of projects. It is also more difficult to quantify, then monitor and verify the emission reductions associated with community based project activities such as cook-stove or light bulb replacement projects. These projects work along with communities to introduce efficient cook-stoves or to replace incandescent with compact fluorescent light bulbs. Quantification, monitoring and verification is much more difficult and expensive than, for example, a wind power project where the emissions factor of the electricity grid is published by the government and it is a simple matter to read the meter on each wind turbine.

There are some tentative signs of progress on this front. Programmatic CDM has recently received the go-ahead and will hopefully encourage a wider range of community based project schemes under the CDM. Not missing a beat, the Indian government announced its intention to develop an ambitious countrywide light bulb replacement scheme and numerous other countries are likely to develop projects under CDM. Methodologies for quantifying and measuring the emission reductions associated with cook-stove projects have been the subject of extensive debate by the CDM, but here too, there has been recent progress. The approval of two new methodologies is expected in mid-2008 and the voluntary carbon market will be keen to push forward new projects using the same. There is now considerable local expertise in developing emission reduction projects in countries such China and India. Growing awareness of the global carbon market elsewhere in the world will surely mean that projects in other countries will soon benefit from such local expertise.

In conclusion, it is clear that the voluntary carbon market is set for take-off and will provide considerable opportunities for all the players in the market. But rapid growth will bring with it great challenges. Standards will need to be maintained, a supply of high-quality projects is needed and the voluntary market will need to consider its role in sustainable development. As the voluntary carbon market grows to fill the vacuum left alongside regulation, it must rise to these challenges and demonstrate that it has a valid and important role to play in the reduction of global greenhouse gas emissions.