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the markit magazine – Autumn 2009
Environmental markets are the new gold of the 21st
century. Now robust and secure infrastructure has
been set up for those participating in the gold rush.
Helen Robinson, managing director, Markit writes
The overuse of these services has
impacted everyone everywhere with
drastic outcomes, not just at the human
level but at the economic and environ-
mental levels too. Rising sea levels,
oceanic dead zones, the loss of endan-
gered species, interruption of food chain
supply, degradation of recreational
areas, loss of cultural values – the list
goes on.
The identified solution is the creation
and implementation of fungible, liquid
markets to ensure appropriate payment
combined with massive financial trading
But what is this opportunity? Who
is really getting involved? Where is the
demand being generated and how is the
demand being met?
very so often in commercial
and financial sectors a new
opportunity arises – whether
due to revolution, evolution or
Such an opportunity has arisen now
with the “coming of age” of environ-
mental markets.
What had started with just carbon
trading has evolved over the past few
decades to encompass other atmos-
pheric gases, forest preservation and
wetlands and conservation banking. The
market is also moving rapidly to include
water and other types of environmental
goods and services.
Governments and business have an
increasing awareness of the urgent need
to pay for environmental services.
Climate control
Autumn 2009 – the markit magazine
Demystifying carbon markets
While carbon has been the fastest-
growing “commodity” of this century, it is
also the most misunderstood.
There are two primary markets for
carbon – the Kyoto market and the
non-Kyoto market. Only a handful of
countries (largely in Europe and Asia-
Pacific) participate actively in the Kyoto
compliance markets. These Kyoto
markets form the majority of trading
volume today, and have created traction
and knowledge about carbon trading
together with the all-important forward
price curve, being the key to behavioural
In parallel with the Kyoto market,
there are many national domestic
schemes, for example in Australia and
Ireland, as well as state-based schemes,
such as the Regional Greenhouse Gas
Initiative (RGGI) in the US, and voluntary
carbon markets operating globally.
The voluntary carbon markets have
been growing most quickly in regions
where Kyoto resides, proving that
compliance and voluntary markets can
function, and indeed blossom, side by
However, in 2009 the fastest-growing
voluntary carbon market has been in
the US, according to the Markit Environ-
mental Registry, with more than 300 per
cent growth in issuances to 50m credits.
President Barack Obama has publicly
declared that the path to economic
restoration must be undertaken in
parallel with resolving the world’s
environmental challenges. This has
created huge and rapid investment in
demand and supply for new technolo-
gies (including green jobs), investments
in carbon, and an increase in volumes
of voluntary carbon credits around the
world. Environmental markets are now
identified as not just fashionable or
trendy but critical to continued survival
and dependence on limited natural
Following on from Obama’s statement
of intent, and regardless of the existing
Kyoto Protocol, US Carbon Cap and
Trade regulation is expected to be imple-
mented in the next five years.
The US Waxman Markey Bill has been
passed by the House of Representatives
and is now with the Senate. Early adop-
tion credits have been identified with
more expected before law is passed.
The path will be much faster than in
Europe. Forward price curves, regulatory
and market engagement, and corporate
awareness all exist in the US while these
are being learned over time in the Euro-
pean carbon market.
Types, standards and regions in
For markets to function and grow, robust
and secure infrastructure is essential.
Environmental markets are no different.
In June 2009, Markit invested in
such infrastructure by acquiring the
TZ1 Registry, now known as the Markit
Environmental Registry, which lists
Carbon and Ecosystem Credit Lifecycle and Market Players
Project Funders
e.g. Banks,
Equity Firms,
Private Investors
Process (Standards) used to create credits
Project Owner
of Emission
Final Buyers
Offset Providers
Allocated Credits
Traders/Brokers/Investment Banks
Financial Market Environment
Source: Markit
As with the securities market, an environmental
markets registry plays the critical role of tracking
ownership providing authenticity of credit listings.
Markit Environmental Registry:
• is integral to the carbon and ecosystem markets;
• provides truth to sellers and buyers of credits by
providing a record of the credit – from issuance,
to transfer, to retirement; and
• records the life cycle of a credit
Buyer Types:
Non-Kyoto (Regulated)
Non-Kyoto (Supply Chain)
Non-Kyoto (CSR)
Long-term Investors
Speculative Buyers
Credit Types:
Conservation Banking
Other Biodiversity
Stacking Credit
Helen Robinson, managing director, Markit

the markit magazine – Autumn 2009
the majority of the world’s carbon and
ecosystem standards.
The registry helps the environ-
mental markets to move from “norm” to
“perform” and operate more like finan-
cial markets. No prudent investor would
trade shares or commodities without
ownership being ascertainable at settle-
ment, and confidence that the assets
were centrally recorded and transfer-
able. The growth seen in the voluntary
markets is reflected in volumes on the
registry, identifying which types, stand-
ards and regions are in demand.
Credits approved to internationally
recognised standards are now in great
demand, including the Voluntary Carbon
Standard (VCUs), American Carbon
Registry’s Emission Reduction Tons
(ERTs), Climate Action Reserve (CRTs),
Climate Community And Biodiver-
sity Alliance (CCB) and Social Carbon
Credits (SCC).
The VCU remains the world’s most
recognised voluntary carbon credit with
expected market share of almost half,
as reflected in the Ecosystem Market-
place/New Carbon Finance “State of the
Voluntary Carbon Markets 2009” report
released in May this year. Some 6m
VCUs have been registered since the
introduction of the registry system.
The American Carbon Registry has
the largest market share in credits to
date with some 28m registered, and
is selected as the standard of choice
by many of the largest and most well-
known corporations in the US.
Some very prestigious certifica-
tions are being added to these stand-
ards. These additional certifications
(or “icing standards”) are helping drive
increased demand in areas other than
carbon emission reduction and in turn
have a positive impact on the price of
the credits. These certifications assess
other factors such as social, cultural and
biodiversity impacts, and are changing
the way the market views environmental
markets. However, two factors have
created scepticism in the past years
about these markets. One is the lack
of robust infrastructure to support the
industry, and the other is that carbon
emission reduction is only one element
of the detrimental environmental picture.
To make a difference, we need to assess
and address other factors also.
While under the Kyoto Protocol, all
gases are measured, in the emerging
compliance markets (e.g. the EU Emis-
sions Trading Scheme and the Australian
Carbon Pollution Reduction Scheme),
only a few industry sectors have been
regulated to manage their carbon
emission volumes. These are prima-
rily the energy and industrial sectors.
Such sectors as waste, agriculture and
forestry have not been included to date,
although this may change pending
the outcome of the Emission Trading
Schemes of Australia and New Zealand,
and the stated inclusion of these sectors
in the US.
In past years, the Clean Development
Mechanism established under the Kyoto
Protocol has resulted in the greatest
proportion of carbon credit types. Due
to the requirements of this mechanism,
all project-based credits have derived
from developing countries and forestry,
in spite of its huge potential for seques-
tration, has been completely overlooked.
However, with the imminent cap and
trade scheme in the US, credit demand
and project origin is changing. This is
reflected in market traded and listed
The largest volume share is methane
capture and gas conversion with some
18m tonnes listed on the Markit Environ-
mental Registry, followed closely by huge
investment in forestry. This is driven both
by an anticipated global acceptance of
forestry credits in the “post-Kyoto” policy
phase after 2012 and the US scheme,
and a greater awareness by consumers
of the important role that forestry plays in
climate change mitigation and preserving
biodiversity and cultural values. Other
types of large volumes include waste,
methane capture and fuel switching.
Since January 2009 and the emer-
gence and growth of the North American
carbon markets, demand has increased
100 per cent, with credit generation
largely focused on the forestry and
agricultural sectors. According to the
Ecosecurities’ “Forest Carbon Offset-
ting Survey, 2009”, avoided deforesta-
tion and reforestation remain the type of
forestry credits in largest demand, with
“The American Carbon Registry has the
largest market share in credits to date with
some 28m registered, and is selected
as the standard of choice by many of the
largest and most well-known corporations
in the US. ”
Autumn 2009 – the markit magazine
Africa, South America and south-east
Asia the areas of greatest demand for
credit generation.
According to this Ecosecurities
report, Europe and North America are
willing to pay upfront for credits being
generated more than five years from
Redd: A lifeline?
One important role of the voluntary
market is innovation and as a testing
ground for pre-compliance frameworks.
The voluntary market has played a
key part in helping to establish greater
acceptance of the concept of avoided
deforestation (also known as Reducing
Emissions from Deforestation and forest
Degradation, or Redd).
Redd is the prevention of activities
that reduce carbon density of a forested
area such as logging, forest burning or
selected cutting. Since deforestation
contributes 15-20 per cent of global
carbon emissions, Redd is critical to
the global climate change effort. The
Climate Change Conference in Bali in
December 2007 opened the possibility
of developing an incentive mechanism
for Redd and these are in early stages of
being tested in the voluntary market, in
anticipation of greater demand by global
compliance market buyers.
Held on registry are credits generated
from all over the world with the greatest
share today coming from within the US.
There is some 65 per cent of volume
held by US organisations of some 30m
credits, followed by Europe with 20 per
cent, Canada with 5 per cent and the
balance primarily in Asia Pacific.
Some of the most interesting areas
of increased investment by large
banks, and other large government and
commercial entities include Africa, South
America and pockets in such countries
as Turkey, Indonesia and Australia.
This is expected to continue to grow
rapidly in the coming 12-24-month
period because of increased demand in
forestry, and the emerging cap and trade
scheme in the US which is nowhere near
the levels of the regulated European
carbon markets.
Beyond carbon: The growing scope
of ecosystem markets
Biodiversity markets have existed in
some countries for more than 20 years.
Increasing awareness and engagement
in global carbon markets is creating
greater participation in these and other
ecosystem markets such as water.
These are not just green or consumer
preference markets or tools to engage in
simply to receive a Corporate and Social
Responsibility (CSR) tick. More than 30
countries regulate biodiversity impacts
with the local law requiring the developer
to offset residual impacts on biodiver-
sity. And for development companies
(often extractive companies) operating
in countries with no such regulatory
frameworks, there are often compelling
business reasons to participate. This
can include gaining a licence to operate,
accessing credit to finance the project
(e.g. the International Finance Corporate
has a Performance Standard regarding
biodiversity impact), easing the path
of engagement with local regulators
and communities, and even growing
customer loyalty with major interna-
tional customers. Equally, particularly
in emerging water quality markets, the
cost of implementing the action that
generates the credit is often substan-
tially (sometimes more than 10 times)
cheaper than the mitigation cost of the
polluter. Together with the environmental
co-benefits, these markets make good
business sense.
They also make good survival sense.
They are about using a market mecha-
nism to manage limited environmental
assets such as water filtering, pollina-
tion, food (agricultural and fisheries)
and climate stability. At present (infinite)
demand on the planet for ecosystem
services is outstripping (finite) supply,
which is not sustainable. A market-
based price on properly quantified
environmental goods and services helps
lessen the challenges to the supply of
basic ecosystem services we need.
A number of mechanisms for giving
value to ecosystems goods and services
have been applied, ranging from govern-
ment payment systems to regulatory
tools that set the price, right through to
voluntary transactions between private
entities. However, the optimal combina-
tion is a hybrid of the latter two. Here, as
in carbon, regulation establishes a scar-
city of goods or services, forcing buyers
and sellers to negotiate in order to set
the price. This method will most likely
generate most environmental impact
with the US leading the way in terms
of regulated environmental markets,
followed closely by Brazil and Australia.
Federal and state-based conserva-
tion banking and wetlands schemes
have been in operation in the US for
well over a decade. To date, they have
“Some of the most interesting areas of
increased investment by large banks,
and other large government and
commercial entities include Africa, South
America and pockets in such countries
as Turkey, Indonesia and Australia.”

the markit magazine – Autumn 2009
remained opaque to market commenta-
tors, investors and even regulators. This
is rapidly changing with the introduction
of tracking tools, standardisation across
the regulator offices and reporting
facilities creating confidence and market
To add complexity, these markets do
not operate in isolation of each other. A
water quality (temperature) benefit may
also enable the creation of a species
habitat. The market players have many
differing views on “bundling” and
“stacking” of credits, and regulators and
regional co-ordinators will resolve these
issues over the coming months.
The current focus is on managing
biodiversity impacts via market-based
tools, with an emergence of voluntary
and regulatory focus on water quality
and, recently, water quantity. In addition,
there is some talk of an environmental
(and possibly corporate) need to estab-
lish a marine waste market.
Learning about and engaging with
these markets is a huge opportunity for
early movers. Given that 80-90 per cent
of all project finance around the world
is provided by the International Finance
Corporation and the 60 or so interna-
tional banks that have endorsed the
Equator Principles, the financial sector
and large international corporations are
already key players, whether they know
this or not.
Buyer Demand:
So who is buying voluntary carbon
credits? This is where the biggest
misunderstanding exists.
Certainly, in the past, the buyers
were corporations buying carbon
credits voluntarily for corporate social
responsibility (CSR) reasons. With
a focus on image and reputation,
and numerous reports from credible
consultants (that proved that compa-
nies with environmental sustainability
strategies grew faster and were more
profitable than their counterparts), these
qualified assessments and recommen-
dations were at the forefront of corpo-
rate investments in voluntary carbon
The reasons to buy have changed,
thanks to three primary factors –
speculative investments, supply chain
purchasing and “pre-compliance” in
anticipation of regulation.
In 2008, speculative investment in
the voluntary carbon market grew by
some 35 per cent according to the
above mentioned “State of the Volun-
tary Carbon Market 2009” report. This is
expected to rise drastically again in 2009
with increased volume demand from
the US as it adopts President Obama’s
policy to rectify economic and environ-
mental challenges. As the banking and
finance sectors emerge from the crisis
of the past year, carbon is becoming
increasingly recognised as the sensible,
lower-risk investment choice of the
Supply chains are the other big
factor in increased demand for
voluntary carbon credits. Compa-
nies such as Tesco and WalMart have
implemented supplier requirements
that have had an enormous impact on
voluntary carbon credit purchasing.
Supply chain policies vary but largely
enforce suppliers to large organisa-
tions to be “carbon neutral” or, at a
minimum, to have an effective sustain-
ability strategy. In short, if you want to
sell your products to one of these large
companies, you have to have some
significant investment in managing your
carbon footprint.
Today, nearly 50 per cent of buyers
and owners of voluntary carbon credits
are corporates, followed by 35 per cent
still held by project developers, and
NGOs, traders and other financial insti-
tutions making up the balance.
Volumes in markets around the world,
but most importantly in the Europe and
the US, are increasing rapidly because
of this increased market demand.
Be it carbon, biodiversity or water,
environmental markets are the new gold
of the 21st century and with demand
directly linked to survival and quality of
life on this planet, it does not look like
going away any time soon.
Autumn 2009 – the markit magazine