Defining the Markets
Cap & Trade – The Compliance Markets
The compliance market is the place where emitters subject to legal carbon emissions requirements go to purchase emission reductions to meet their legal emissions “cap”. They “trade” cash for offsets/credits/allowances.
The Voluntary Markets
The voluntary market is where the carbon reductions from carbon reduction projects are sold to companies and individuals that are not required to comply by law. They reduce their emissions voluntarily.
Speculation in the Voluntary Market
Historically, speculation existed in the voluntary market primarily based on the supply of offsets to meet ONLY the demand of the voluntary participants.
More recently, speculators have been purchasing voluntary offsets in anticipation of a cap-and-trade law in the USA. They refer to this as “pre-compliance” purchasing. They are speculating that offsets will increase in value as compliance legislation is passed. Over the past few years, with National Cap & Trade seemingly on the horizon this market was extremely active and billions of dollars entered the voluntary market for pre-compliance purposes.
Liquidity of Voluntary Offsets
During the past few years the market has been highly active and liquid. When it became obvious that there would be no immediate National Cap & Trade law in the USA, the market slowed significantly among speculators. The new California and Regional initiatives are changing the landscape once again.
It will take time as the new programs define the use of offsets in their programs. With the exception of California’s CAR registry, the market is extremely quiet.
Summary
The current voluntary market is illiquid as the markets ‘re-tool’ for 2012. Owners of existing pre-compliance offsets should hold in anticipation of their inclusion in the new California, WCI, EPA and regional programs, as well as a potential re-emergence of National Legislation.