Cleaning the trade in carbon credits

By Fiona Harvey
Financial Times

July 9, 2007

LONDON — Banks involved in carbon-credit trading have moved toward self-regulation of the market.

A group of more than 10 banks — including ABN Amro, Barclays Capital, Citigroup Inc., Credit Suisse Group, and Morgan Stanley — agreed on a standard for "carbon offsets" bought by companies and individuals to cancel out their contribution to climate change.

The banks said they were reacting to a perceived risk to their reputations after reports of widespread problems in the market for carbon offsets. In April, the Financial Times found multiple examples of companies trading carbon offsets that carried no environmental benefits.

The main problems lie in the voluntary market for carbon credits, which is not regulated by governments, unlike the market for credits set up under the United Nations-brokered Kyoto Protocol and the European Union's greenhouse gas emissions trading scheme.

The banks agreed to base their so-called voluntary offset standard on a system of checks set up by the U.N. under Kyoto. Companies selling offsets based on the standard will have their operations checked by independent parties to deter fraud.

To conform, offsets must be based on projects that use one of a small number of methods for cutting carbon. In addition, companies cannot claim offsets from nuclear power or large hydroelectric dams.

An individual or company can become carbon-neutral by buying offsets equal to its carbon emissions.

Most credits are issued under Kyoto, with most developed countries agreeing to cut their emissions about 5% by 2012. The U.N. issues credits to projects that cut emissions in developing countries, and the credits can be bought by governments to count toward their emission reduction targets.

The market for carbon credits under Kyoto was worth about $5 billion last year, compared with $25 billion under the EU's trading scheme. The voluntary market for credits was worth less than $1 billion but is forecast to grow rapidly.

Environmental groups say buying offsets salves consciences in the developed world but does not result in lower emissions.