Markets for Emission Reductions

Corporate leaders now recognise that shareholder value is damaged by greenhouse gas emissions. Indeed, with corporations increasingly being judged on their reputation for "corporate social responsibility" as well as their profit-making potential, the 2006 McKinsey Global Survey of Business Executives found that environmental issues are expected to be the third most important driver of shareholder value in the next five years. As the tremendous importance of environmental issues has become increasingly clear, new markets for reducing emissions have rapidly emerged. These markets are either "compliance" markets, or "voluntary" markets. ClimateBridge focusses on the voluntary market.

Compliance Markets

The largest compliance market is the European Union emissions trading scheme, where 320 million tCO2 was traded in 2005, worth US$8 billion. Connected to this market, 370 million tCO2 certified emission reductions (CERs) were traded forward in 2005, worth US$3 billion. China is the dominant country in this market, and managed to reduce emissions by 280 million tCO2 in 2005. Other markets are insignificant by comparison, totalling just 8 million tCO2.

Prices in the EU ETS have been unstable since the market opened in January 2005. The carbon price rose dramatically in the first few months — more than had been expected — and then showed relatively high volatility within a trading range of €20-30/tCO2. Real data on verified emissions for 2005 released in Spring 2006 revealed that most countries were long. The price subsequently crashed. These experiences have alerted players to the inherently high levels of uncertainty and policy risk in the market. EU ETS allowances in Phase I are based upon projections that incorporated enormous uncertainty, and the implicit emission reductions are well within the range of uncertainty. This implies a non-trivial probability of a near-zero price. Longer term price movements are more complicated, and an understanding of policy movements is crucial in understanding this government-constructed market.

Voluntary Markets

Unfortunately, government efforts currently appear unlikely to prevent greenhouse gas concentrations from reaching dangerous levels. This is a challenge that requires not just regulation, but also the effective use of human self-interest and human altruism (or enlightened self-interest). The latter is a powerful force — increasingly, individuals and companies are offsetting their emissions to become "carbon neutral", even though they are under no legal obligation to do so.

Voluntary offsets can be divided into four categories. First, an increasing number of ethical and environmentally-conscious individuals are buying carbon offsets directly from retailers, to offset their emissions and to become "carbon neutral". For instance, the directors of ClimateBridge offset their personal emissions each year, as do government departments (e.g. UK Defra) and numerous public and political figures such as Al Gore and David Attenborough.

Second, individuals are also buying offsets bundled in "low-carbon" products and services. This includes, for instance, carbon neutral flights (eg. those offered by SAS and Lufthansa), low-carbon petrol (e.g. BP Global Choice), and carbon neutral insurance (e.g. ClimateSure).

Third, environmentally-conscious businesses are also directly offsetting their emissions. This may be motivated by ethical considerations, as a way to improve public relations, retain and acquire customers increase staff morale, and as a point of differentiation from competitors. HSBC recently committed to purchasing 350K-450K tCO2 of offsets per year to eliminate its "carbon footprint"; other leading corporations have begun to follow suit. Again, the corporate activities of ClimateBridge are fully offset each year.

Fourth, events — from small conferences all the way to major events such as the World Cup and the Olympic Games — are increasingly run in a carbon-neutral fashion, by offsetting their direct and indirect emissions.

All the businesses in these four market segments have a shared interest in sourcing genuine and robust emission reductions, often along with sustainable development benefits, at low prices. ClimateBridge is committed to developing the industry and to helping those companies purchase offsets to ensure that they are sourcing "the real thing", and that their money is directed to achieving real emissions reductions. ClimateBridge is also committed to providing transparency to its customers. The quality of emission reduction is important. ClimateBridge works to ensure that superior emission reductions, with sustainable development benefits, receive a higher price.