* First carbon offset futures contracts to launch within
weeks
* Over-the-counter market is unregulated, small, opaque
* Critics fear race to bottom
* For factbox on carbon offsets, please click on
(Updates with additional comment from ICAO)
By Susanna Twidale and Shadia Nasralla
LONDON, Feb 25 (Reuters) - An expected dash by big
corporations for offsets to meet their climate targets has
prompted financial exchanges to launch carbon futures contracts
to capitalise on what could be a multi-billion dollar market.
It's a step change. Carbon offsets, generated by emissions
reduction projects, such as tree planting or shifts to less
polluting fuels, have struggled for years to gain credibility,
but as climate action has become urgent, their market is
expected to grow to as much as $50 billion by 2030.
Among the major corporations that say they expect to use
them to compensate for any emissions they cannot cut from their
operations and products are Unilever, EasyJet,
Royal Dutch Shell and BP, which all have climate
targets.
Singapore-based digital exchange AirCarbon told Reuters it
planned to launch an offset futures contract by the second
quarter.
"The entire concept behind carbon trading and offsets is to
employ the profit motive in order to push decisions towards
climate change mitigating activities. (We ensure) that you find
the most efficiently priced offsets," William Pazos, co-founder
of AirCarbon, said.
The futures market would allow companies to buy a simple
credit, effectively a promise to reduce a tonne of emissions but
not specifying where that would take place, in contrast to the
existing market that offers direct access to particular offset
projects.
Advocates, such as AirCarbon, say the resulting liquidity
and transparency are positive.
Critics, including some environmental groups and some
project developers, say making the market bigger may just make
it cheaper for emitters without providing any guarantee it will
support the projects most effective in reducing emissions.
"There is a risk in a ... switch from something which has a
large proportion of over-the-counter buyers at least taking some
interest in what they are buying and its quality to large
wholesale transactions that aren’t so easily unpacked," said
Owen Hewlett, chief technical officer at Gold Standard, one of
the biggest carbon offset registries.
SMALL AND OPAQUE
Carbon offset credits are currently traded in small,
bilateral and typically project-specific deals.
An emitter can buy a credit awarded to a forestry or clean
cooking stove project for a tonne of carbon dioxide emissions
the project has prevented.
The buyer uses these credits to offset past or future
emissions and the credit is "retired", or removed from the
system.
The retail price of an offset can vary from 50 cents for a
renewable energy project in Asia to $15 for a clean cook stoves
project in Africa to $50 for a plastic recycling project in
eastern Europe.
These voluntary deals are distinct from compliance
cap-and-trade markets, such as the European Union's Emissions
Trading System, based on lawmakers setting a carbon budget and
allocating a finite number of allowances, which can be traded by
emitters or market players.
The underlying principle echoes the carbon offset market in
that those that have emitted too much carbon can buy pollution
permits from those with allowances to spare.
As demand to limit carbon emissions grows, carbon prices in
the EU ETS have soared to a record high of over 40 euros a tonne
this year.
In the off-exchange, bilateral market for carbon offsets,
some say they are struggling to navigate the proliferation of
standard setters, registries, verifiers and criteria.
"The market today is very small. It’s difficult to be
confident that the product you are investing in is credible,"
said Bill Winters, CEO of Standard Chartered bank and Chair of a
private sector task force seeking to create a multi-billion
dollar offset market in the coming months.
DECISIVE YEAR?
This year in theory should mark the coming of age of carbon
markets as decades of U.N. talks on tackling climate change
reach a decisive stage.
Delegates at the United Nations climate conference in
November in Glasgow, Scotland, are expected to work on designing
a market to channel money into offset and emissions removal
projects to prevent global temperatures from rising more than
1.5 degrees Celsius (2.7 degrees Fahrenheit) above the
preindustrial average.
Some players, such as AirCarbon, are eager to launch their
financial products sooner.
Global exchange CME, home of the main U.S. crude oil
benchmark contract, will launch an offset futures
contract in March.
"It is a brand new market for many players," Peter Keavey,
Global Head of Energy at CME Group, told Reuters. "We can help
provide standardised pricing benchmarks and improve price
discovery in the voluntary offset market. That's our goal."
Ahead of the talks later this year on market design, both
CME and AirCarbon plan to use standards set under the aviation
CORSIA offset scheme, which many environmental campaigners have
said are not rigorous enough as they allow the aviation sector
to use most types of project to reach its emissions targets.
They say they fear a repeat of problems that beset the
offset market of the Kyoto Protocol, the Clean Development
Mechanism (CDM).
The market under Kyoto, a precursor of the Paris climate
deal, was flooded with cheap credits from industrial gas
projects, mainly from Asia. That led to price crashes and made
it harder for other projects to attract funding.
"CORSIA allows a lot of project types and does not have
particularly stringent criteria, such as forestry projects with
permanence issues and old CDM (Kyoto) credits with little
environmental benefit," Gilles Dufrasne, policy officer at the
non-governmental organisation Carbon Market Watch, said.
The International Civil Aviation Organization (ICAO), which
developed the scheme, said in an email CORSIA only allows CDM
units issued from 2016, meaning the majority of CDM credits are
not eligible.
The email also said the permanence of emissions reductions
for forestry credits was guaranteed by an insurance mechanism.
Some project developers, brokers and environmental groups
also question the wisdom of decoupling carbon units from their
underlying project.
They say combining emissions-focused projects with those
that might prioritise other issues, such as community
engagement, education or biodiversity, could lead to a race to
the bottom in terms of price.
This might make it harder for more capital intensive
projects to attract buyers.
More broadly, green groups are concerned companies may place
too much emphasis on offsets which, if priced too cheaply, could
lead them to focus less on cutting their own emissions.
There are no rules on how many tonnes of carbon a company is
allowed to offset a year.
Emitters, such as Royal Dutch Shell, BP and Unilever and
project developers, say the first priority must be to reduce
emissions.
"We have always acknowledged that offsetting can only be an
interim solution while zero-emissions technology is developed,"
EasyJet said in an email.
The private sector task force, chaired by Winters and
promoted by former central banker Mark Carney, wants to
encourage a range of participants, such as bankers and trading
houses, as well as emitters to join the market to boost
liquidity.
"Markets work best when they are efficient, and that
efficiency comes from greater rather than smaller liquidity. So
it’s important to have as many participants as possible, from
all different types of background," said Abyd Karmali, Managing
Director, Climate Finance at Bank of America, who is also a
member of the private sector task force.
Others question the role of speculative trading in a climate
context.
"There might be a place for a bunch of traders flipping
margins on some futures contracts, but at the end of the day I
don’t see how the volume of trading going through (exchanges)
has any positive impact on climate change," said Wayne Sharpe,
CEO and founder of ecommerce site Carbon TradeXchange.
(Reporting By Susanna Twidale and Shadia Nasralla; Editing by
Katy Daigle, Veronica Brown and Barbara Lewis)
