September/October 2008 / Cover Story
Understanding Carbon Markets
Carbon markets are driven by government-imposed caps on greenhouse gas emissions. A facility must hold allowances to cover the annual tonnage of greenhouse gases it emits. If its emissions exceed the allowances, it must purchase additional allowances to meet its compliance target. If its emissions are less than that amount, it may sell its excess allowances on the market.
There is a voluntary carbon market in which about $330 million worth of credits was traded in 2007, and projections are for rapid expansion. Along with transactions that take place at the Chicago Climate Exchange, many U.S. voluntary carbon credits are traded over the counter through brokers. Often buyers and sellers find each other at conferences. A May 2008 report finds that the value of global voluntary markets more htan tripled from $96.7 million in 2006 to $330.8 million in 2007. Virtually all buyers demand that Verified Emission Reductions (the unit of trade, typically referred to as VERs be verified by a reputable third-party.
Buyers have various rationales for entering the carbon market now instead of waiting unitl they have to. Some are doing it to gain expertise. Others seek to meet social responsibility goals.
Some companies have adopted a carbon reduction target or a carbon neutrality goal, while others are respond to or preempting shareholder resolutions.
