The Carbon Credit Market

carbon market

What is the Carbon Market?

The new low-carbon economy provides an emerging market opportunity for American Indian foresters, ranchers and farmers to develop and sell carbon credits, also called greenhouse gas offsets and reduction credits. Carbon credits are developed from land conservation and renewable energy projects which reduce the amount of carbon dioxide (CO2) – or “greenhouse gas” – released into the air or remove existing CO2 from the air. Projects often include the use of terrestrial sequestration. Greenhouse gas (GHG) management and carbon credit projects are good for the environment but they also provide an economic opportunity for those who develop them. Investors, often large companies or industries, purchase carbon credits to offset their own CO2 emissions.

 

 


Benefits to Indian Country

Many Indian reservations contain large land holdings, much of which are currently used for farming, ranching, or forestry. This situation puts Indian nations and landowners in a unique position to derive income from the sale of carbon credits which are based on carbon storage value and require large areas of land in order to be profitable for the project developer. Benefits to carbon market enrollment include:

    • Additional profit from land
    • Preservation of Indian land ownership
    • Promotion of land stewardship
    • Greenhouse gas emissions reductions
    • Promotion of soil health, ecological diversity, and water and air quality

Click here for some examples of tribes who have already created projects.

Carbon Credit Trading and Market Infrastructure

Carbon credits in North America are currently traded on voluntary offset markets and through regional GHG compliance programs. Prices for carbon credits are higher in compliance programs because there is greater demand for credits from regulated entities.

What is Being Traded?

Carbon Offsets
The term “carbon offset” is used generically to refer to a ton of carbon dioxide equivalent (CO2e). An offset negates the effects of carbon emitted in one place by avoiding the release of a ton of carbon elsewhere or absorbing/sequestering a ton of CO2e that would have otherwise remained in the atmosphere.

Allowances
Under regulatory compliance programs, emitters are allocated a specified number of allowances, representing tons of CO2e they may legally emit. An entity that can reduce its annual emissions below the number of allowances received may bank the credits for future compliance or sell the credits/allowances to other entities whose emissions exceed annual allowances. Allowances may include emission reductions or offsets and are generally defined as acceptable emission units recognized by a registry.

Emission Reductions
Emission reductions are the quantifiable reduction in emissions attributable to an activity or technology.

Market Participants

Carbon Chart

Carbon market participants include project sponsors, project developers, aggregators, brokers, verifiers, and buyers.

Project sponsors: The owners of land or a business that undertake an activity or adopt a practice that sequesters carbon or reduces emissions.

Project developer: Responsible for all aspects of the delivery of the carbon offset, including the development of project methodologies, baseline determinations, additionality analysis, and monitoring plans.

Aggregators: May share similar functions as the project developer while also bringing together smaller projects in marketable volumes to buyers, brokers, or exchanges.

Brokers: Project developers (also known as offset providers) may decide to enlist the services of a broker to market offsets and to act as an intermediary with potential buyers. Brokers sort through potential investment opportunities for buyers and create portfolios scalable for large investor demand.

Verifiers: An integral process in the establishment of carbon offset quality and project integrity is independent verification of project offsets by a third-party agent. Verifiers may conduct field based carbon measurements or perform remote audits of entity reports, verifying that registry or standard measurement protocols have been followed during the development of the project and implementation of monitoring, mitigation, and verification.

Buyers: Buyers in the voluntary market fall into three primary categories: retail, industrial, and investment. Ultimately, the majority of transacted offsets are reported to a GHG registry or exchange, where they are retired to mitigate an entity’s GHG emissions.

Voluntary Markets

A voluntary offset market refers to the voluntary sales and purchases of carbon credits where transactions are not part of a GHG compliance “cap-and-trade” program. Voluntary markets are also referred to as the “over-the-counter” market where buyers and sellers engage directly, through a broker. Credits in this market are voluntary emissions reductions, VERs or carbon offsets. Buyer motivations include wanting to manage their climate change impacts, an interest in innovative philanthropy, public relations benefits, the need to prepare for (or deter) federal regulations, and plans to re-sell credits for a profit.

Certification Programs and Standards

Carbon credits developed from carbon storage projects and emission reduction activities must meet voluntary market standards in order to provide quality assurance for purchasers. Landowners and developers enroll their projects into certification programs which provide GHG accounting protocols for the quantification, monitoring, and reporting of the amount of stored carbon or reduced emissions. Various protocols have been developed and differ across organizations depending on the type of project.

Compliance Programs

GHG compliance “cap-and-trade” programs place an overall limit on emissions allowed from a specified set entities, and issue tradable emission allowances (or rights to emit) that these entities can use for compliance. Allowances, which typically authorize an entity to emit a ton of CO2e, can be auctioned or freely distributed to covered entities or other parties. At the end of a program’s compliance period, covered entities must submit an allowance for every ton of CO2e they emitted during that period. Every greenhouse cap-and -trade program established to date has also allowed covered entities to submit offsets in lieu of allowances for compliance purposes. A covered entity in a cap-and-trade program, therefore, has several options for achieving compliance: using emission allowances it has received or purchased, acquiring offsets, and/or reducing its own emissions. The following table lays out the cap-and-trade systems currently used throughout the United States.

Cap-and-Trade Systems States
Regional Greenhouse Gas Initiative Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, Vermont
California Cap-and-Trade California and Province of Quebec


Beginning in 2013, the state of California will also regulate GHGs through a cap-and-trade compliance program. This program will allow regulated emitters to purchase offsets that meet California Air Resources Board standards and protocols. The currently approved protocols, posted at http://www.arb.ca.gov/cc/capandtrade/offsets/offsets.htm, are for livestock manure biodigesters, ozone depleting substances, urban forest projects, and U.S. forest projects (reforestation, improved forest management, and avoided forest conversion). The Air Resources Board is also evaluating additional protocols for adoption. Projects developed under ARB protocols may be listed on any offset project registry. The American Carbon Registry and the Climate Action Reserve are under consideration by ARB as offset project registries. If the program is determined to be successful it will most likely serve as a model for future market developments.

Greenhouse Gas Registry

A greenhouse gas registry is an official repository to which an entity reports emissions of one or more GHGs or changes in emission levels, typically annually. Participants can include companies reporting entity–wide or on a project–by–project basis; all or parts of state government operations; individuals; or other parties responsible for emissions or emission reductions. A GHG registry is subject to reporting and verification requirements to ensure data consistency and quality, and registries can support voluntary or mandatory reporting requirements. Aggregators track and report contracted offsets for the purposes of verification.


Some information on the carbon credit market comes from the following sources:

Stockholm Institute. Handbook of Carbon Offset Programs. Earthscan 2010. Print.

United States. Deptartment of Energy. National Energy Technology Laboratory. “Market Development for Terrestrial Sequestration on Private Lands.” October 2008.

Carbon Credits 

“The market value for greenhouse
gas commodities could be worth
$2-3 trillion per year by 2020.”

Green Divider The Nicholas Institute for
        Environmental Policy Solutions

 

FAST FACT

Green Divider

Terrestrial sequestration focuses on carbon dioxide (CO2) storage in vegetation and soils within a few feet of the Earth’s surface.

Methods that enhance carbon buildup in biomass and soils include:

  • Adopting conservation tillage
  • Reducing soil erosion
  • Minimizing soil disturbance
  • Using buffer strips along waterways
  • Enrolling land in conservation programs
  • Restoring and better managing wetlands
  • Eliminating summer fallow
  • Using perennial grasses and winter cover crops
  • Fostering an increase in forests