Why the Recession is Good for the Carbon Offsets Market, but Bad for Sustainability

Governments, corporations, and individuals have increasingly turned to the voluntary carbon market in recent years in an effort to offset their carbon footprint. The market grew to approximately $330 million in 2007 (Reuters). Much of this growth can be attributed to the increased popularity of Corporate Social Responsibility (CSR) and an increased appreciation for social responsibility.
There are two discrete markets for carbon offsets — the compliance market, and the voluntary market. Compliance market demand is driven in large part by regulations that set carbon emissions caps for different entities from companies to governments. Carbon emissions over this cap must be offset by purchasing carbon offsets or face steep fines. But unlike the much larger compliance market, where regulation drives demand, the voluntary market has a larger risk exposure to economic downturns, as the name suggests, it is voluntary.

This is not to say that the compliance market is not affected by the recession — industrial output has fallen significantly resulting in decreased carbon emissions. This translates directly to a decreased demand for offsets, a sell-off of unneeded credits, and thus, depressed prices.

Voluntary carbon credits
, otherwise known as verified emissions reductions, or VERs, represent real carbon emissions-reducing projects from renewable energy such as solar arrays and wind farms to energy efficiency such as co-generation plants and energy-efficient buildings. Many of these projects are implemented in developing countries while their credits are sold in the developed world to take advantage of supply and demand price differentials.
Recessionary Implications
The implications of our current economic slowdown are mixed in the carbon offset markets. While it’s no news that prices and transactions have fallen significantly, there are signs that point to a following boom after the storm. A shakedown in the market resulting from falling prices and decreased demand has buyers demanding higher quality and standards. Far from being an ominous cloud hovering over the carbon offset markets, this recession spells good news in the long run. As the perceived value of offsets rise, expect the voluntary market to boom as the economy stabilizes and begins to recover.
But is a boom in offsets necessarily a “good” thing? Recessionary implications go beyond an increase in perceived value and project quality.
The Larger Picture
Sustainable CSR strategies employ a mix of tactics that begin with decreased carbon emissions through efficiency programs that clean up business processes and end with carbon offset purchases. A dangerous secondary effect of a steep rise in perceived value of carbon offsets is a strategic shift away from efficiency programs in favor of purchasing carbon offsets to deal with the burgeoning global problem of carbon emissions.
Your Judgement Call
Therein lies the problem, offsets should be used only as a last resort after all other options have been exhausted. In my view, it is more sustainable to not create CO2 in the first place than have to go back and clean up your mess. It’s your judgement call, what do you think?
image credit: The New Republic

2 responses

  1. Well, I think that most voluntary carbon markets only exist in the absence of government regulation – and typically as a precursor to it. The reason is partly as a strategy to get ready for the inevitable regulation and also as a way to comply with foreign markets who might already have tighter regulations.
    So, I’m not sure the decline of voluntary markets is necessarily such a big deal, provided regulation does its job!

  2. Dale, Sorry for the late reply. There were some technical issues! Hoping for regulation to do its job is a tall order in my opinion.
    The regulatory system is a powerful, but slow machine and has yet to catch up with the private system (voluntary market). It’s very possible that the low price of oil coupled with attractive value of voluntary market will hinder organic sustainability initiatives in the short to mid-term.
    In the long run, you’re right, it’s no big deal :)

Leave a Reply