Why use carbon markets?
Carbon markets aim to do several things. They aim to reduce greenhouse gas (GHG, or “carbon”) emissions cost-effectively by setting limits on emissions and enabling the trading of emission units.
They aim to achieve an environmental objective at the lowest cost possible for participants.
They also provide revenue for suppliers of the GHG reduction. They lastly provide suppliers a profit center for their business.
Canada has four offset markets:
1.
Regulated Market
2.
Voluntary Market
3.
Carbon Insetting Market
4.
Direct Investment Market
Regulated Market
What is it?
A regulated market is a trading of government certificates used for compliance purposes. A regulated emitter purchases the serialized certificate from a non-regulated supplier in lieu of paying the government the levy.
The serialized certificate is based on an approved protocol.
How is price achieved?
The trading is bilateral. A supplier puts up for sale the serialized certificate and a regulated emitter purchases it. The certificate usually trades at a discount under the regulated levy to account for supply, due diligence costs and risk of rejection.
Once a supplier is paid, a commission is applied before the funds are released to the aggregated emission reduction creators.
What is a good example?
The Alberta system has been in operation since 2005 and has generated over 15 million tonnes from the agricultural sector.
Voluntary Market
What is it?
A voluntary market is the trading of GHG reduction serialized certificates between non-regulated emitters and non-regulated suppliers.
The serialized certificate is based on an approved voluntary protocol.
How is price achieved?
The trading is bilateral. A supplier puts up for sale the serialized certificate and a buyer purchases it. The certificate usually trades at a price representing the supply and demand of the certificates.
Once a supplier is paid, a commission may be applied before the funds are released to the aggregated emission reduction creators.
What is a good example?
The Climate Action Reserve operates a voluntary registry.
Carbon Insetting Market
What is it?
Carbon insetting is the practice of a company measuring the total GHG footprint of their output, based on the emissions generated by suppliers, the manufacturing of the output and the emissions getting the output to the consumer.
The company then announces a reduction in that footprint for corporate reasons.
The GHG measurement and anticipated reduction is not protocol based nor serialized.
How is price achieved?
Any price negotiations are not over carbon reductions but over the data that accompanies the supply of raw commodities and transportation services. Reduction requirements may be embedded in supply purchase contracts or data and raw product is required to access sale contracts.
What is a good example?
General Mills has announced to their suppliers they would like to have 1 million acres meeting their sustainability requirements.
The New Zealand wine industry now has label requirements.
Direct Investment Market
What is it?
Companies are making direct investments to lower their GHG emissions or purchasing access to GHG emission reduction projects.
How is price achieved?
The trading is bilateral. This is corporate based.
What is a good example?
Shell making direct investments in wetlands, forests and other nature-based solutions.
How Using Carbon Markets Can Create Value
This is the first profit center for farm businesses coming from the ideas of environmental goods and services. The diagram below directly connects soil health to owner value. Farms that pay a levy on fuel used now have business decisions on their GHG outputs.
Lastly, markets change the nature of the discussion about what is measurable, sustainable production.
