How to find a good offset provider; a sensible guide in plain English.
How to Judge the good tree from the bad tree: How to avoid scams in the carbon markets.
Carbon trading is the sale and purchase of carbon credits to offset Greenhouse Gas (GHG) emissions. As awareness about global warming and the environment grows, carbon trading has become an important financial tool to address it. The industry is further boosted by pressure from customers and investors on corporations to reduce their emissions and implement environment friendly activities. The volume of overall carbon traded has continued to grow, in 2012 volumes increased by as much as 13% and it is forecasted to grow further, making carbon one of the top tradable commodities in the world. Most of the carbon credits are traded over the counter (OTC) by large organisations looking to offset emissions or meet regulatory requirements from their activities; for example, Microsoft recently announced plans to ensure each of its divisions is carbon neutral, through the purchase of carbon credits, beginning 2013.
Like any large market, the carbon markets too have seen their share of scams and individuals who try and cheat their way into making the quick buck. Fraudsters and scammers have been attracted to this burgeoning market and have tried to dupe and trick investors. Financial services regulatory bodies such as the Financial Services Authority (FSA) in the UK have been trying to help new investors avert the risks associated. Even though the risks exist, if one is savvy and informed one can prevent themselves from falling prey to the unscrupulous elements in the carbon markets.
Here are some tips to keep in mind before investing in carbon:
Ethical & candid market information
- Seek advice from independent financial advisors before making any investments. It is also always good to read up on the market to get an understanding of how the sector works and the various risks involved.
- The carbon markets are a thinly traded market and thus one should expect frequent and large fluctuations in price as a norm and not be bothered too much. According to a recent study at Yale, thinly traded commodities have outperformed higher volume ones by as much as 12% between 1970 and 2010.
- One should always buy in spot carbon offsets rather than in futures.
- There are strong indications that carbon markets will continue to grow exponentially, however there are no guarantees, which is similar to any other market commodity.
- Carbon credits should be viewed as a medium to long-term hold. One should realize that since the market is growing, it might be difficult to sell credits quickly until the market matures further.
- Ask for reports and pictures of the projects highlighted in marketing documents.
Check the company
- Most of the firms sell carbon credits that are held in an account in a registry. One can check a registry to verify that the company and credits exist.
- One should always check whether the company, one is looking to use has the appropriate authorization and should ideally be based in the local country. The payments for the credits should also go directly to the provider or seller of the credits and not to a third party escrow account or agent.
- Always utilize companies that are more publicly visible.
- It is important to assess the quality of company employees before making any selection. For example, do they have the appropriate education and qualifications /
- Companies that publish scientific reports, provide technical studies, have scientists or a research team are ideal to use. A good website too says a lot about an organisation. For example, check to see the quality of followers on twitter. Are they fellow professionals, industry leaders and household names.Are they invited by their peers to domestic and international seminars i.e, Do they hobnob with the best in their field?
- Does the company advise corporations on environmental and corporate social responsibility policies? Do they have quality testimonials both Government and corporate.
- The FSA in the UK does not regulate the sale or trading of spot carbon credits, a firm promoting or selling them does not necessarily have to be authorised by the FSA, although it is always good business sense to invest in an organisation that is authorized by the FSA or other local regulatory bodies eg. London stock exchange. However, international registries NYSE Blue, CDC, Markit insist all clearing houses should be regulated entities. It is advisable that you only clear carbon credits through a regulated entity.
- It should be checked if the company selected explains how to assess the integrity of credits and has qualified specialist to carry out due diligence to ensure the credits are fit and proper.
- It is advisable to invest in small-scale projects such as biomass rather than HFC or large hydro as such projects have a more positive impact on the sustainable development of the region they are located in. For purpose of ethical/environmental integrity certain offsets are best avoided namely Industrial gases: N20, HFC, CF4, C2F6, SF6 .Large hydro dams which cause significant environmental and human risks. Carbon offsets from coal plants because they are based on flawed methodology.
- Projects that meet “additionality” requirements of validation companies have maximum positive impact on the environment and it is best to purchase carbon credits from such projects.
- It is advisable to invest in carbon credits that have been validated and verified by renowned standards such as the Verified Carbon Standard or the Gold Standard.
Education of paramount importance
Finally, the prime objective for any good offset provider ought to be educating the public about climate change. It is important to ensure that the company is part of the solution to climate change and not the problem. Some questions to consider.
- Is the company passionate about promoting sustainable growth?
- Does it offer advice on how to avoid, reduce and offset emissions?
- Do they offer energy saving tips
- Have they created youtube presentations offering guidance and education?
- What impact “Klout” (Klout measures influence online) do they have on social media sites. Do they release informative blogs and publish newsletters on a regular basis.
- Do they make available their own carbon calculator complying with government standards e.g., DEFRA
- Do they offer internships to students?
The above combination of sound market advice and reliable information on company, projects and standards should go a long way in clearing doubts in any buyers mind.
Good luck with your selection.