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Focus: Climate Change – September 2008

Voluntary Carbon Standard 2007: an alternative carbon credits option

In brief: The Voluntary Carbon Standard 2007 is one of the most internationally recognised voluntary standards for earning carbon credits. Partner Campbell Davidson (view CV) and Lawyer Mark Harding examine the Voluntary Carbon Standard as an alternative, or complement, to Clean Development Mechanism approval for greenhouse gas-reducing projects in the PRC.

How does it affect you?

  • Voluntary Carbon Standard 2007 potentially provides another pathway to earn carbon credit revenue for projects that are able to make real, measurable reductions in greenhouse gas emissions.
  • It is wider and more flexible than the Clean Development Mechanism in terms of the projects that can qualify and opens up the possibility for certain projects that may not be able to obtain Clean Development Mechanism approval to earn carbon credits.

What is Voluntary Carbon Standard 2007?

Developed by the Climate Group, the International Emissions Trading Association and the World Business Council for Sustainable Development, the Voluntary Carbon Standard 2007 (VCS 2007) has been established to provide a robust global standard, program framework and institutional structure for validation and verification of voluntary greenhouse gas (GHG) reductions or removals1. The main objectives of the VCS 2007 are to provide credibility and transparency to the voluntary carbon market, and to encourage more innovative projects that reduce GHGs.

To date, it is not possible to determine how many projects have been certified under VCS 2007 because the Voluntary Carbon Standard's registries and central project database are still under development. However, the Voluntary Carbon Standard Association (the VCS Association) expects that between 50 to 150 projects, creating between 10 million and 20 million tons of CO2 equivalent, will have been approved under VCS 2007 by the end of 20082.

Under the VCS 2007, an entity may establish and operate a project that reduces or removes GHGs and earn Voluntary Carbon Units (VCUs) for those GHG reductions or removals. There are no restrictions on where a VCS project may be undertaken, therefore projects in both developed and developing nations are eligible for VCS registration. Each VCU issued has a unique serial number, is equivalent to one metric ton of CO2 equivalent and may be used or sold to offset emissions on a voluntary basis. A VCU is not able to be used to satisfy a legal compliance obligation.

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Requirements to qualify under VCS 2007

In order to be able to obtain VCS 2007 approval and to earn VCUs, a project proponent must demonstrate that 'the GHG reductions from the project are real, measurable and permanent and are additional to what would have happened under a business-as-usual scenario if the project had not been carried out'. All GHG emission reductions are also required to be verified to a reasonable level of assurance by an accredited validator or verifier that has signed a VCS validation agreement with the VCS Association (an independent, non-profit association that legally represents the VCS Secretariat and Board).

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Approval process

The approval process follows a similar path to the Clean Development Mechanism (CDM) approval process3, involving submission of project documentation by a project proponent to an independent validator, who will undertake an assessment of the project to ensure it meets all the requirements of VCS 2007. This validator will produce a validation report, which contains its assessment of the project, and, if the project is already operational and has reduced GHGs, a verification report outlining the GHG reductions that have taken place, and a certification statement verifying those GHG reductions. These documents are then submitted to the VCS Registry, which will check to make sure the proper documents have been submitted. However, unlike the CDM Executive Board, the VCS Registry will not review the merits or substance of the documents submitted.

Once the VCS Registry is satisfied that the documents are in order, the VCS Association will check that the project has not been previously registered under the VCS Program, receive the registration fee and register the project. Unique VCUs with individual serial numbers will be issued for all verified emission reductions that have already taken place. If the project has yet to be established, the project proponent can elect to be registered in the VCS database, and, upon it implementing the project and making emission reductions, have those emission reductions verified by a validator and then submit the validator's verification report and certificate to the VCS Registry. Once this has been done, the project proponent may have VCUs issued for those emission reductions that have taken place.

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Difference between a voluntary carbon credit and compliance credit

The VCS 2007 is a voluntary standard, which issues voluntary credits as opposed to compliance credits, such as the certified emission reduction units (CERs) issued by the CDM. While each of the credits produced under CDM and VCS share similarities, such as one credit being equal to one ton of CO2 equivalent, there is an important and fundamental difference between them. That is, a voluntary credit such as a VCU issued under the VCS 2007 cannot be used by an entity to meet its legal compliance obligations under the Kyoto Protocol, while CERs issued under the CDM and Emission Reduction Units (ERUs) issued under the Joint Implementation Programme (JI) can. That is because both the CDM and JI programs were set up and established as part of the Kyoto Protocol framework and are expressly recognised as such as methods by which developed Annexure 1 countries can meet their Kyoto obligations. Voluntary standards, such as VCS 2007, are not.

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Consequences of difference in nature

The main implications for this difference in nature between voluntary and compliance credits are:

  • Price: generally, voluntary credits will trade at a lower price than that of compliance credits, such as CERs and ERUs. Also, as buyers purchase voluntary credits for other than compliance purposes, the price of the credits will often vary greatly depending on 'other' features of the project, such as any sustainability or environmental and social benefits.
  • Buyers: buyers of voluntary credits are buying for non-compliance reasons, such as corporate social responsibility, marketing and image reasons. The buyers of voluntary credits are often high-profile, highly visible companies to whom corporate image is extremely important. In contrast, compliance credit buyers are often from the primary industry sector, such as large power producers and industrial companies.

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Benefits of undertaking a voluntary VCS project

Despite the pricing spread that exists between voluntary VCUs and compliance CERs, there are a number of reasons to consider undertaking a project under the VCS 2007 and earning VCUs. Some of these are:

  • More project types are eligible: in particular, more agriculture, forestry and other land-use type projects are able to come under the VCS 2007 including avoided deforestation projects, which are expressly excluded from the CDM and JI.
  • More flexible: the flexible nature of VCS 2007 (ie the ability for more project types to be able to qualify for VCS approval) is a deliberate design feature as one of its main aims is to encourage innovative projects and provide a showcase for pilot projects, which, if successful, can feed into other compliance schemes like the CDM. As a consequence, obtaining approval for a new methodology, or obtaining approval to deviate from an existing methodology, is quicker and simpler than under the CDM, which can be extremely rigid and where obtaining approval for a new methodology is notoriously time consuming, costly and difficult.
  • Projects not limited to developing nations: unlike the CDM and JI, there are no restrictions on where a project may be carried out, therefore projects located in developing and developed countries are eligible to obtain VCS 2007 approval.
  • Simpler, faster approval: the VCS 2007 approval process is more streamlined than that of the CDM, as the VCS Registry, unlike the CDM Executive Board, will not itself initiate a review of a project. This removes a large step in the approval process, and makes the approval process much faster than the CDM, which is currently facing significant delays at the project registration stage because of a backlog of projects at the CDM Executive Board level.
  • Retrospective crediting: unlike the CDM, it is possible under VCS 2007 to obtain retrospective crediting for reductions of GHG emissions that took place before registration. The earliest credit start date under VCS 2007 is 28 March 2006.
  • Does not affect later approval under CDM: while a project may only be registered with one voluntary or compliance scheme at one time, there is nothing that prohibits a project from first obtaining VCS approval and earning VCUs for the period from when the project began reducing GHG emissions, up until it ultimately receives CDM approval and then switching to the CDM. Many project owners are now electing to obtain VCS approval for their project first to bring in a source of carbon credit revenue, and then obtain CDM approval, ultimately dropping out of the VCS once their project receives CDM registration. This has been the case recently where many projects have faced delay in obtaining CDM registration because of a backlog at the CDM Executive Board level.
  • No ownership restrictions: a particular consideration for projects in the PRC is, unlike the CDM, VCS 2007 has no rules requiring majority Chinese ownership for the project vehicle. Therefore, a project undertaken by a wholly foreign owned entity in the PRC is eligible to be approved as a VCS project.

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Conclusion

The VCS 2007 provides another mechanism for companies to earn carbon credits for projects that make real, measurable reductions of GHGs. VCS may be particularly suitable for project types that are not eligible for approval under the CDM, where a project does not fit neatly into an existing CDM methodology, or where the costs and time of CDM registration may be prohibitive. VCS approval may also be considered as a complement to CDM project approval where a project is likely to commence before CDM registration, to allow carbon credits to be earned for the period up until CDM registration.

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Footnotes
  1. Voluntary Carbon Standard Program Guidelines, 19 November 2007.
  2. Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, A Kollmuss et al, WWF Germany, March 2008, page 59.
  3. See our Focus: Climate Change – January 2008, 'The Clean Development Mechanism in China', for an overview of the CDM approval process.

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