How to shop VERs; Issues related to legitimacy and good and marketable title

By Yves Legault

The Voluntary Emission Reductions (VER) market, also known as the voluntary offsets market, is currently booming world wide. From a marginal market five years ago, VERs became today an important market stream inside the carbon offsets market. In its report entitled: State and Trends of the Carbon Market 2007, the World Bank was estimating the size of the voluntary market to be 100 millions USD with the highest potential growth among all carbon segments.

The rapid growth of the VER market has created several issues for the carbon market participants. Because VERs are not issued and traded inside a regulatory framework, many questions are raised related to the quality and legitimacy of the VERs that are currently on the market.

Buyers should be aware that not all VERs are born equal. When shopping for VERs buyers should;
- Verify the plausibility and the quality of the GHG reductions;
- Check the right of the seller to claim property on the VERs he is intending to sell.
When quality and good and marketable title have been proven a large part of the VER’s due diligence has been made.

To verify the plausibility and quality of VERs, buyers can read the Project Design Document (PDD) and challenge scientific approach and methodology used to determine the amount of GHG reductions claimed per vintage. PDDs referring to generally accepted methodologies like CDM Executive Board approved mothodologies, IPCC reports or the United States EPA official documents should be reliable. Look carefully the way additionally and sustainability have been addressed in the PDD. Some projects claim VERs on the basis of intensity when others are stricter and claim only net reductions.

Buyers who do not have enough knowledge to assess the quality of a PDD should only buy VERs from projects which have been verified. A verification report provides an assessment by an experienced party on the quality of the project and the realistic volumes per vintage.

The quality of a project is also very much related to the type of verification standards used by the third party verifier who has audited the project and its reputation. Many standards have been published to qualify voluntary carbon offsets. Among all of them, five standards seem to be more accepted. Those are: ISO 14,065; the Voluntary Carbon Standard (VCS) version 2007, the GHG Protocol, VER+ and the Gold Standard. VCS has incorporated the best practices of ISO and the GHG Protocol and seems to be the widest known standard. The Gold Standard is undisputedly the best standard, because it has very high requirements related to additionally, sustainability and impact on the local environment. However, the Gold Standard is scarce, because it only applies for renewable energy projects and it is therefore the most expensive VER to buy.

Being in presence of a good carbon offsets project does not prove that the seller owns property rights on the VERs neither that those units have not been sold twice. Avoiding so called double counting and tracking the chain of title is another point of attention for buyers in the VERs market. The easiest way to protect yourselves against a fraudulent transaction is to request that the project has been registered with a reliable GHG registry and that a certificate of ownership will be provided to you. A reliable registry is a registry that runs and operates by an independent organisation who’s sole business model is to provide GHG offsets project registration; serialisation, transfer and retirement services. Your registry should be able to assign a unique serial number to each tonne registered and its system traces its entire journey into the carbon market from origination to retirement. Registries like the California Action Registry in California, the Blue Registry and the GHG Cleanproject registry in Canada are reliable registries. Both VCS and Gold Standard are currently setting up registries, which are also expected to be reliable once they become available.

In the current state of the Voluntary market shopping VERs requires knowledge and careful preparation. When you want to make a transaction we recommend that you request a full disclosure of the project document like PDD, verification report, registration statement and chain of titles and involve professionals like attorneys and GHG specialists to support you where necessary.

Do you want to gain further insight in the knowledge required to buy VERs? Attend the Climex Master Class on 14 February 2008 in Amsterdam, where the afternoon will be filled with workshops on all the above issues. You can register for the Master Class at www.newvalues.net

The next VER Auction on the Climex Platform is scheduled for 25 January 2008.