Understanding the voluntary carbon market

Abstract

Ever since United Nations Framework Convention on Climate Change (UNFCC) has started working on its goal of reducing greenhouse gas concentrations, there was significant development in the approach of many nations towards environment. Kyoto protocol which has been adopted in 1997 came into force in 2005 . Under the Protocol, the industrialized countries had committed to reduce green house gases (carbon dioxide, methane, nitrous oxide, Sulphur Hexafluoride), hydroflurocarbons and perflurocarbons. The global carbon market has tripled in the volume of transactions in 2006 as nations started realized the importance of reduction of emissions. It was estimated the global carbon market of $30 billion in 2006 in which Europe Union accounts for $ 24.4 billion. Project based market accounts for $ 4.8 billion of which 88 % belongs to Clean Development Mechanism projects. . CDM is one of the flexible mechanisms designed to allow Annex B countries to meet their emission reduction commitments by promoting CDM projects which has high potential in reducing emissions; without the implementation cause normal projects to produce more emissions. Thus CDM mechanism is very much beneficial to developing countries and industrialized countries would be paying for these reductions. But the CDM had to face setback from the environmentalists for not delivering on sustainable development. It is argued that the market is favourable to low-cost and high volume projects which are considered to be less beneficial to host countries. As the transaction cost in developing countries is high and this increased the cost of carbon offset. Hence to counteract CDM, voluntary market for carbon offsets is emerged where companies, governments, individuals are the voluntary participants. The carbon offsets are bought from the retailers who had taken long position from the offset projects. Though the market is nascent in 2006 ($ 0.1 billion) but it shows great potential for development. There is huge cost reduction compared to CDM process and our study concentrates on the efficiency of voluntary carbon credit market in terms of price discovery and efficiency.