VERs: the Preferred Carbon Offset Instrument for Communicating Voluntary Action

Posted December 16, 2011

Even with the recent fall in CER prices, our Strategic Development Manager Oliver Crouch doesn’t expect voluntary buyers to switch from VERs. He explains how their high standards, innovative use of technologies, and societal benefits make them the instrument of choice for many buyers.
Over the years, a number of our clients that first used compliance-grade offsets, namely Certified Emission Reductions (CERs), as part of their carbon management strategies have switched to voluntary offsets, or Verified Emission Reductions (VERs). VERs have become the instrument of choice for achieving voluntary emission reduction goals. This preference is reflected in the wider market as evidenced by the reducing share of CERs within the over the counter voluntary market.

Despite the recent fall in CER prices and what that might suggest for the competitiveness of VERs, we don’t expect the trend of voluntary buyers sourcing VERs to reverse. As corporate carbon management programmes evolve they increasingly look to their offset portfolio to deliver social, environmental and economic benefits beyond the core GHG reduction requirement of carbon finance. VER standards offer a level of variety and responsiveness that is best placed to meet these evolving needs. More specifically, VERs continue to be our clients’ offset instrument of choice for the following reasons:

VER standards generate high quality instruments that are real, measurable and additional

VER standards like the Verified Carbon Standard (VCS) and Gold Standard often use well established Clean Development Mechanism (CDM) methodologies as the basis for quantifying project baselines and emission reductions. They follow similar quality assurance processes for verification and validation as the CDM and use the same independent third party verifying organisations, or DOEs. Indeed a significant proportion of projects generating VERs are aspiring CDM projects, and once registered with the CDM Executive Board will generate CERs.

To inspire consumer confidence in the quality of VERs as financial instruments, infrastructure providers have developed robust credit-accounting registries that bring clarity of ownership and transparency to the VER market. Registries utilise serial numbers as an accounting tool to track credit issuance through to proof of retirement.

VER standards are a driver of methodology and technology innovation

The governance structure of VER standards allows them to be more responsive to market needs, meaning they typically lead innovation in terms of project types and project tools. For example, the Verified Carbon Standard (VCS) introduced the buffer mechanism for forestry and land use projects to account for non-permanence risk. In 2010 the VCS approved the first reduced emissions from deforestation and forest degradation (REDD) methodology.

VER standards also have pioneered methodologies for innovative project types, including community bicycle sharing programs, water purification programs, and the destruction of Ozone Depleting Substances (ODS). VER standards have been the first to adopt more innovative and streamlined procedures, particularly in relation to additionality. The Climate Action Registry (CAR), for example, only credits projects that meet a particular technology requirement or benchmark instead of evaluating projects on a case-by-case basis. Such an approach is seen as key to rapidly scaling carbon finance.

VER standards are a driver of social and ecosystem benefit quantification

The demand for projects that go over and above emission reductions comes from voluntary buyers of offsets. Different VER standards have evolved specialist focuses, and have found ways of collaborating to meet the evolving needs of the marketplace.

For example, the Climate, Community and Biodiversity (CCB) Standard does not quantify carbon reductions, but is often combined with VCS projects to certify a forest project’s additional social and environmental contributions. The Gold Standard was designed by NGOs to raise the bar with regard to local stakeholder engagement.

Similarly the Social Carbon Standard has been developed specifically to certify emission reduction projects for their contributions to sustainable development. This is achieved by continuous assessment of the changes in key social indicators such as employment and health and safety conditions, with a focus on improvements over time.

VER standards promote the inclusion of small-scale projects.

Demand for offsets varies, not only by type and location, but also by project size. Corporate buyers often favour smaller scale projects as they have the potential to source all of the projects credits and feel a greater level of ownership.

Project development costs for VER standards tend to be lower than the CDM, due to more streamlined processes, making carbon finance accessible to smaller scale projects. The Gold Standard’s Community-focused Micro-scale Scheme (CFMS) has streamlined its procedures, resulting in lower costs which help project developers to overcome cost barriers.

Project grouping tools like the VCS ‘Grouped Project’ guidelines allow aggregation of similar projects under a single registered programme. The aim is to reduce costs for household-level activities like efficient cook stoves, solar water heaters and biogas to overcome the small-scale threshold and become economically viable

VERs offer greater price stability and range

CER prices are determined by the market price within the EU-ETS, meaning they are subject to its supply and demand dynamics, and directly linked to political forces in play. In contrast, VER prices have remained more stable over recent years. VER prices are influenced by the attributes of the underlying project technology, location and contribution to social benefits. Accordingly, VER prices span a wide range, allowing buyers to identify projects appropriate for their budgets. More stable prices and a wider range of prices means greater price certainty and flexibility for offset inclusive carbon management programmes built around VERs.

As members of ICROA (International Carbon Reduction and Offset Alliance), The CarbonNeutral Company works with standards that meet the highest quality requirements. These quality standards, combined with the track record of innovation and breadth of project types with access to VER finance, provides the voluntary buyer with choice.

VERs offer the flexibility to design a carbon portfolio that meets specific requirements for price, charisma and communication value. VERs have consequently become the instrument of choice for action ahead of and beyond compliance. While some early buyers favoured CERs for the quality of a compliance grade instrument, they now place confidence in the quality VER standards. In 2012, CERs will continue as an instrument of compliance under Kyoto and the EU-ETS. It is unlikely, however, that CERs will regain a meaningful share of the voluntary carbon market.