13.3.5.0 Introductie

The private sector is becoming increasingly involved in payments for voluntary carbon sequestration. The global demand for carbon sequestration is motivated by the Kyoto Protocol, regional and national legislation implementing policies and trading schemes.1 The market for carbon sequestration services has two bases: legislation2 and voluntary initiatives.

As to the first dimension: legislation requires companies to reduce their carbon emissions to the level of the permits annually allocated to them (credits). Companies are required to hold a number of permits equivalent to their emissions. If they exceed such levels, they have to buy additional carbon credits on the carbon credit market. The total amount of permits cannot exceed the cap, limiting total emissions to that level (also called cap and trade' programmes). The cap is an enforceable limit on emissions that is usually lowered over time - aiming towards a national emissions reduction target. Economists have urged the use of "market-based" instruments such as emissions trading to address environmental problems instead of prescriptive "command and control" regulation. Command and control regulation is often criticised for being excessively rigid, insensitive to geographical and technological differences, and for being inefficient. However, emissions trading requires a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. Companies will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce.3

Carbon credits can be obtained for completing projects that cause a reduction of carbon emissions. Such projects can entail programmes enhancing industrial efficiency programmes that result in lower emission levels. They can also constitute sequestration programmes, e.g. vegetation that absorbs carbon (planting trees). A company or even an individual can initiate a project that sequesters carbon in order to generate tradable carbon credits. Industrial companies buy carbon offsets in the framework of regulatory obligations. In addition, any company can voluntarily decide to offset its carbon emissions.

Regarding the second dimension of the market for carbon sequestration, the voluntary market, it should be noted that this market develops completely between private parties on a voluntary basis. This market is particularly well developed in the US. For instance, the reductions can be achieved through buying credits at the Chicago Climate Exchange (CCX). The CCX represents a legally binding compliance regime, providing independent, third-party verification by the Financial Industry Regulatory Authority (FINRA).4 This system is based on voluntary membership; CCX emitting Members make a voluntary but legally binding commitment to meet annual carbon emission reduction targets (usually a one per cent reduction per year). Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing so-called 'CCX Carbon Financial Instrument® (CFI®) contracts'.

The Voluntary Carbon Standard (VCS) Programme provides a global standard and programme for the approval of credible voluntary offsets. Originally, the VCS Programme was initiated in 2005 by the Climate Group, the International Emissions Trading Association and the World Economic Forum. As forests and agriculture play an important role in carbon storage by storing carbon in plant matter and the soil, they can produce carbon credits. In 2008, VCS introduced a standardised approach for forestry and agriculture. REDD, i.e. Reducing Emissions through Deforestation and Forest Degradation', then became accessible to all market players. Starting from 18 November 2008, land use projects including forestry and agriculture can be validated and verified against VCS. New VCS rules allow agriculture, forestry and other land-use (AFOLU) activities to generate permanent voluntary carbon units (VCUs) that can be easily substituted with other carbon credits generated by non -AFOLU activities, such as industrial and energy projects.5

Both the regulated and the voluntary dimension of the market for carbon sequestration services can entail either a bilateral project-based transaction between the company-buyer and the carbon credit-producer, or the offset can take place through trading credits in a carbon sequestration market. This is how a new market for payments for agricultural and forestry sequestration services has come into existence over the last decade. The next sections will explain this.