Essential strategies for effective

emissions trading and offsetting

Practical information from leading companies

Executive Summary
The full report is available at www.ethicalcorp.com/emissionstrading

Ethical Corporation

2008
ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING

Contents

Introduction ........................................................................................................................................................6
Terminology ......................................................................................................................................................8
Glossary ..............................................................................................................................................................9
Section 1: The emissions trading and offsetting process, step-by-step
Chapter One: Introduction to the regulated markets and their implications for voluntary trading
1.1 Introduction............................................................................................................................................10
1.2 Introduction to the compliance markets ..............................................................................................10
1.3 Introduction to the Clean Development Mechanism (CDM) and
Joint Implementation (JI) ............................................................................................................................12
1.4 The Clean Development Mechanism (CDM) ..........................................................................................12
1.5 The Joint Implementation (JI) ................................................................................................................15
1.6 Common perceptions of the CDM and JI ..............................................................................................16
1.7 The EU Emissions Trading Scheme (EU ETS) ........................................................................................17
1.8 The UK Carbon Reduction Commitment (CRC) ......................................................................................21
1.9 The New Zealand Emissions Trading Scheme (NZ ETS) ........................................................................23
1.10 The Australia National Emissions Trading Scheme (AETS) ..................................................................25
1.11 The emerging North American cap and trade schemes ......................................................................27
Chapter Two: Things to consider before getting started on trading or offsetting emissions
2.1 Introduction ........................................................................................................................................30
2.2 Typical reasons for buying or selling carbon credits ............................................................................31
2.3 Reducing your carbon footprint in a cost effective way ......................................................................32
2.4 What is the difference between the various carbon credits available?................................................32
2.5 Where are emissions reductions or carbon credits generated? ..........................................................36
2.6 How to make sure that the credits you buy are additional ................................................................37
2.7 Understanding vintages in the context of the carbon markets............................................................38
2.8 Controversy associated with some projects that generate carbon credits ..........................................39
2.9 Getting to grips with voluntary offset standards ................................................................................42
2.10 Things to consider when deciding which type of carbon credits to buy ..........................................44
Chapter Three: Where to buy and sell carbon credits
3.1 Introduction ........................................................................................................................................47
3.2 An overview of carbon exchanges ......................................................................................................47
3.3 Who trades emissions reductions on these exchanges? ....................................................................51
3.4 How to make the most of trading on an exchange ............................................................................52
3.5 Buying offsets over-the-counter ..........................................................................................................53
3.6 Buying credits from non-regulated offset providers ............................................................................56
Chapter Four: Reporting emissions-reduction transactions
4.1 Introduction ........................................................................................................................................ 60
4.2 Reporting emissions reductions under the Kyoto Protocol ................................................................ 60
4.3 Reporting emissions transactions voluntarily .................................................................................... 60
4.4 How do the companies responding to the Ethical Corporation questionnaire report their
emissions transactions? .............................................................................................................................. 61
 ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING

Section 2: Case studies – How companies are managing emissions trading and offsetting
Introduction ......................................................................................................................................................64
Aggregate Industries ........................................................................................................................................64
Alliance Boots ..................................................................................................................................................66
The Co-operative Bank ......................................................................................................................................67
Deutsche Post World Net ..................................................................................................................................68
EDF Energy ........................................................................................................................................................70
Ford Motor Company ........................................................................................................................................72
HSBC..................................................................................................................................................................73
Kuoni Travel Holding ........................................................................................................................................74
Land Securities ..................................................................................................................................................76
Man Group ........................................................................................................................................................77
Simmons & Simmons ........................................................................................................................................79
Unilever ............................................................................................................................................................80
Westpac Banking Corporation ..........................................................................................................................82
Summary and conclusion ..................................................................................................................................84
References ........................................................................................................................................................87
Tables, figures and boxes
Table 1: Annex I and Annex II countries as defined by the UNFCCC ................................................................10
Table 2: CDM projects grouped by type ............................................................................................................14
Table 3: Emissions caps of the EU nations ......................................................................................................18
Table 4: Credits and their Features ..................................................................................................................35
Table 5: Summary of the major exchanges covered in chapter three ..............................................................54
Table 6: Summary of transaction reporting practice of companies responding to the Ethical
Corporation questionnaire ................................................................................................................................62
Table 7: Case Study Comparison ......................................................................................................................84

Figure 1: Structure of the international carbon market ....................................................................................12

Figure 2: CERs from registered projects by host ..............................................................................................13
Figure 3: CDM project type by sector, April 2008..............................................................................................15
Figure 4: JI project locations, April 2008 ..........................................................................................................16
Figure 5: JI project type by sector, April 2008 ..................................................................................................16
Figure 6: Example of credit strategy decision making ......................................................................................30

Box 1: An NGO’s perspective on the CDM ........................................................................................................17

Box 2: An NGO's perspective on the EU ETS ....................................................................................................20
Box 3: An NGO’s perspective on the CRC..........................................................................................................23
Box 4: An NGO’s perspective on additionality ..................................................................................................38
Box 5: An NGO’s perspective on controversial carbon credit sources ..............................................................41
Box 6: An NGO’s perspective on voluntary offset standards ............................................................................44
Box 7: What are the transaction fees relating to hundreds of thousands of tonnes of CO2e ........................47
Box 8: An NGO perspective on reporting emissions transactions ....................................................................63
ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING

Foreword

thical Corporation readers have indicated a strong
E need for a comprehensive but accessible report
that guides executives and sustainability ocers
through the complexities of the carbon markets.
Despite the wealth of information about the
carbon markets currently in circulation, there is no
simple overview that describes the practicalities of
the various aspects of the carbon markets as they
relate to companies trading or considering trading
emissions reductions (carbon credits). This need is
reinforced by an increasing number of regional and
national emissions trading schemes. The emergence
of new regulations means that more companies will
be required to trade emissions in the near future and
will need to start strategising now. Finally, this report
is driven by the increasing complexity of the carbon
markets. Corporations call for guidance on the
various credit types available, the number of different
exchanges on which it is possible to trade, and the
means by which the different schemes and credit
types interlink.
The document is therefore intended as a compre-
hensive guide for those considering trading emissions
reductions or wishing to expand or amend their
current emissions trading or offsetting strategy. It is
also intended for those who anticipate that they will
soon face mandatory involvement in the carbon
markets and need to plan accordingly.
It is important to note that although Section 1
attempts walk the reader through the carbon markets
in a step-by-step fashion, Section 2 highlights the
considerable flexibility that the markets offer. The
case studies in this second section highlight the
different motives that companies have for their
current approach to the carbon markets. They also
demonstrate that companies buying or selling carbon
credits can have as much or as little involvement as
they wish in the generation of those credits.
We hope that the guidelines presented in this
report will provide readers with some solid footholds
for navigating the carbon markets. It will also
highlight the huge array of options available to those
wishing to buy or sell carbon, provide inspiration,
and suggest the best approach for your company.
Ethical Corporation is grateful to all those who
have offered guidance on the production of this
report and to those who were kind enough to provide
us with the facts and opinions included in the body
of the report and for the case studies in Section 2.

Ethical Corporation

Acknowledgements
We would like to thank Magpie Links Ltd for leading this research and the companies that collaborated with us on the
case studies. These include Aggregate Industries, Alliance Boots, The CarbonNeutral Company, Climate Exchange Ltd,
Combined Heat and Power Association, The Co-operative Bank, Deutsche Post World Net, EDF Energy, Ford Motor
Company, HSBC, Kuoni Travel Holding, Land Securities, Man Group, Simmons & Simmons, Unilever and Westpac Banking
Corporation.

In addition, we wish to thank Anglo American plc, Aviva plc, BT Group plc, Enel SpA, GlaxoSmithKline plc, Hennes &
Mauritz AB, HBOS plc, HSBC plc, Iberdrola, KBC Group NV, Munich Re and WWF for providing valuable insight and
assisting us with our research.

Introduction
his report is intended to help companies make
T informed and effective decisions about their
company’s greenhouse gases (GHG) emissions trading
and offsetting strategy. It is designed primarily for
companies wishing to get involved in the voluntary
emissions trading market. It is also designed for
companies not currently covered by the compliance
carbon trading market but that may be affected within
the next three years by emerging regulations. This
guide also meets the needs of companies that quali
for the compliance markets but that wish to expand
their trading and offsetting strategy voluntarily.
It might be considered unusual to discuss carbon
trading in its classic sense alongside non-regulated
offsets in the same report. But we feel that any
distinction drawn between them will be arbitrary and
that by considering both together we can more effec-
tively outline the options available to companies. We
can thereby enable them to make more informed
decisions about reducing their own emissions beyond
what can be achieved operationally.
Setting the scene
The principle underlying the market for carbon
credits is as follows: under the Kyoto Protocol,
governments establish annual targets, or caps, for the
reduction of GHG emissions in their respective
countries. These targets set a limit on emissions,
measured in millions of tonnes of carbon dioxide
(CO2).
This national target is divided among all the major
emitters in the economy so that each industry sector
has an allocation of the number of tonnes it can emit.
Emission allowances are issued to cover all or part of
these amounts. Each allowance confers the right to
emit one tonne of carbon dioxide, or the combined
global warming equivalent of other greenhouse gases,
into the atmosphere. Trading schemes establish a
market for these permits, allowing emitters and other
organisations to buy and sell them. The system is
known as cap-and-trade.
An expanding market
The market is growing exponentially. The World
Business Council for Sustainable Development
highlights research by analysts Point Carbon that
indicates growing enthusiasm for the carbon trading
industry among companies and investors worldwide.
Point Carbon found the value of the global carbon
market went up by 80% in 2007, with some 2.7
billion tonnes of carbon credits, worth €40.4bn,
changing hands. Around 60% of this trading took
ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
place through the European Union's Emissions
Trading Scheme (EU-ETS), with 1.6 billion tonnes of
carbon emissions, worth €28bn, changing hands in
the bloc.
The UN-administered Clean Development Mecha-
nism (CDM), which allows companies to meet part of
their emission reduction targets by financing carbon-
cutting projects in the developing world, accounted
for a further 947m tonnes of carbon dioxide, worth
€12bn.
Voluntary markets, where companies or individ-
uals concerned about their carbon footprint can
choose to buy emission credits, are also starting to
grow; the largest being the US-based Chicago Climate
Exchange, where trading volume doubled in 2007 to
22.9m tonnes.
Report structure and methodology
The information included in the report has been
sourced om a variety of public sources and om
discussions with individuals active in the industry.
We explain the origin and current structure of the
compliance market at the beginning of this report.
Although this report is primarily aimed at companies
that are not currently obliged to participate in carbon
trading, the mechanisms developed by this market
are fundamental to an understanding of the volun-
tary market, and it is impossible to take advantage of
voluntary trading opportunities without an under-
standing of the regulatory field. In addition, as we
describe later, developments in the compliance
market mean that an increasing number of compa-
nies will be affected in the near future.
The report has two sections. In Section 1 we
provide guidelines, over the course of four chapters,
on everything om whether trading or offsetting will
work for you, to how and where to report the trans-
actions you are making. Section 2 features 14 case
studies involving companies currently involved in
emissions trading schemes or which are buying
offsets. These case studies outline how they make
their most important decisions and why their partic-
ular strategy has worked for them. Information on
the companies interviewed is included in Section 2.
As well as the companies in Section 2, we wish to
acknowledge the input into Section 1 provided by the
following based on our discussions with them:
• Lisa Ashford, Associate Director, Head of Commer-
cialisation Europe, Ecosecurities;
• Kirsty Clough, Climate Change Policy Ocer,
WWF-UK;
ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING

• Robert Rabinowitz, Director, Climate Exchange

(Europe) Ltd;
• Bill Sneyd, Director Advisory Services, The
CarbonNeutral Company and
• Peter Smith, Research and Communications
Manager, Combined Heat and Power Association
(CHPA).

WWF
We have included WWF’s comments on many of the
topics raised in this report as they provide insight
into the perspective of a leading NGO that is focused
on sustainability issues and on the scientific
addressing of climate change. WWF is actively
engaged with the business community in this regard.
WWF is the world's largest and most experienced
independent conservation organisation and oversees
a global network working in more than 90 countries.
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