State of Voluntary Environmental Markets

Environmental commodity markets are commonly viewed as a leading means by which to promote environmental objectives. The most famous example can be seen in the U.S. sulfur dioxide trading market or the European Union’s greenhouse gas emissions trading scheme. The backdrop for these green trading programs is to achieve environmental objectives with cost efficiencies.

Voluntary trading markets are also commonly used to promote environmentally related objectives. These include efforts to reduce greenhouse gas (GHG) emissions (through credit trading), promote renewable energy (through renewable energy credit or REC trading), and even preserve biodiversity (through biodiversity credits).

Through these early steps, entities taking voluntary action have often had to formulate their own trading rules, sometimes with the objective of shaping the national markets that will emerge. While this presents an exciting opportunity for innovation, there also exist obstacles typical of new markets.

A common feature of these early transactions is the lack of generally accepted standards regarding the definition of what is being traded. A variety of approaches for validating and certifying the credits may be in use. This can lead to uncertainty regarding the quality of what is being traded.

Consequently, in these nascent markets, trading is impaired by:

• Relatively high transaction costs,
• Risk of being charged with “green-washing,” and
• Much smaller market sizes than might otherwise exist.

Such hurdles impede the usefulness of these new markets in their primary purpose of accomplishing environmental benefit. Further, these obstacles make it difficult for companies to use such markets in their corporate environmental branding efforts.

greenT Forum Objectives

The purpose of this conference is to promote:

• Discussion of quality in voluntary environmental commodities;
• Development of quality standards for such commodities traded in the voluntary markets; and
• Understanding of the impact of quality on commodity valuation, price and liquidity.

The premises of the conference discussions are:

• Creation of “quality standards” in voluntary environmental markets is important to public and corporate acceptance of these markets;
• Environmental benefits (such as reducing greenhouse gas emissions) can be linked to quality standards in technically defensible ways; and
• Uncertainties can be understood and incorporated into the labeling of environmental credits in ways that conserve the environmental integrity of the voluntary markets.

Ultimately, transparent voluntary markets can provide consumers with confidence in environmental commodities and allow efficient comparison of widely varying commodities. Such transparency will encourage wider market participation and reduce the chances of popular misconception and inaccurate media coverage.

Establishing and protecting the quality of environmental commodities traded in voluntary markets can:

• Lower transaction costs,
• Facilitate deal flow,
• Provide greater returns for producers’ positive environmental practices,
• Inform management strategies for maximizing revenue and minimizing liabilities,
• Increase confidence among buyers, aggregators, registries, and intermediaries,
• Encourage market development (e.g., fungibility, forward price curves, and additional related financial products), and
• Make it easier to transition from voluntary into mandatory markets, should that occur.