Will the voluntary market live to plant another tree?

Freddy Sharpe is excited about Australia's voluntary carbon market. All it needs, says the CEO of carbon management advisor group Climate Friendly, are some “very large and very ballsy investors,” because once the value of this market is demonstrated, Sharpe says, “it'll be off to the races”.

But is the future for the voluntary carbon market – a market that currently makes up less than 1 per cent of the global carbon market – really this bright? Is there really money to be made? And how will the introduction of the government's mandatory carbon scheme affect it?

These are all questions that were addressed by a panel of six experts, including Sharpe, during a workshop at the Carbon Expo on Monday, aptly called “The future of the voluntary market.” And while not all panel members were as openly enthusiastic as Sharpe, there was a definite sense of optimism among them.

Australia has had a voluntary carbon market for some years now, which was, until recently, dominated by trading in Greenhouse Friendly carbon offsets, as well as GreenPower RECs (which comprised about 65 per cent of market value as of August 2010), and international carbon offsets. The Greenhouse Friendly scheme, which was introduced by the federal government in 2001 to test the domestic appetite for a voluntary market, was phased out in July last year and replaced with the NCOS – the National Carbon Offset standard.

NCOS now guides Australia's voluntary market – which was valued by by Ecofund in 2010 at $150 million per annum, with approximately 5-6 million units traded annually – providing a framework to claim 'carbon neutrality' using the calculation of carbon footprints, emissions reductions, offsetting residual emissions using NCOS eligible carbon offsets, and third party verification. Some corporate examples of NCOS participants are Qantas, Virgin Blue, Fosters, NAB and Australian Paper. And the supply side has grown too, with 91 carbon offset providers in Australia in 2010, up from 13 in 2007.

So what's the appeal of the voluntary market, and will it endure when the mandatory market comes into play? Getting down to basics, voluntary markets are used by businesses, organisations, and individuals who voluntarily purchase carbon credits (often referred to as carbon offsets in this context) to mitigate their greenhouse gas emissions. And as another of the panellists, Low Carbon Australia COO Cath Bremner, explained it, there are several different reasons why companies engage in the voluntary carbon market, such as: strategic positioning, reputational reasons, learning about carbon markets, engaging staff on corporate social responsibility obligations, influencing policy makers, and cementing strategic interest in specific offset projects.

For Qantas – whose offset program has been running since 2007, accounting for more than one million tonnes of carbon – NCOS has been very important, according to Andrew Sellick, the airline's Group Manager for Environment and Carbon, and another of the session's panellists. Sellick told the conference that Qantas considers part of its role in the voluntary market as building awareness in society. And, he added, it also stimulates the broader market.

This is an interesting point for Qantas because, as it turns out, it will be opting in to the mandatory carbon market next year. The federal government announced last month that, as a result of lobbying from Qantas and other domestic airlines and rail operators, heavy users of fuel would be allowed to opt in to the impending carbon pricing scheme. Qantas, et al, argued that paying a carbon levy would give their operations more certainty and, at the time, a Qantas spokesman said it would allow the airline to buy carbon credits on the market, giving it the same flexibility as other companies.

Which brings us back to the question of how the voluntary market will fare when the mandatory market comes into play. According to most on the panel, it will balance out just fine. “They will coexist and expand,” said panellist Peter Stark, who is the CEO of Ecofund Queensland. And he cited the example of the European market, where the voluntary market tripled in size during the trial period of the EU ETS, between 2005 and 2007.

And Freddy Sharpe agreed. "Voluntary market and mandatory markets are very different, but very complementary,” he told the conference. “The voluntary space has room for innovation. It allows companies to show leadership. …[They] can go beyond the very modest government-set targets.”

Shayleen Thompson – the federal government's First Assistant Secretary for Land Division in the Department of Climate Change and Energy Efficiency – told delegates that NCOS helped provide offset opportunities, or sources of domestic offsets – such as the Carbon Farming Initiative, a part of the government's Clean Energy Future package which has passed through Parliament unscathed – that set a biodiversity standard, allowing market participants to go beyond the reduction of carbon footprints and buy offsets that tell a “positive story.”

The first example of this came in July this year, when RM Williams Agricultural Holdings bought the degraded Henbury cattle station in the Northern Territory for $13 million, with the help of the federal government. The plan is to remove cattle from the property and implement a conservation program that is expected to generate up to 1.5 million carbon credits a year, while also protecting several endangered species. At the time of the deal, Martijn Wilder, a Baker & McKenzie lawyer who represented RMWilliams and will chair an independent committee to oversee the project, said it was significant because it was the first time private capital had been attracted to such a conservation scheme.

And while the Henbury deal might sound like the kind of "large and ballsy" investment Sharpe believes will set the voluntary market on fire, the Climate Friendly chief told the conference it was “in some ways …unfortunate” that it was the first example of the CFI at work – “because it made it seem like the program was about planting and not farming.” The key strengths of the CFI, Sharpe told the conference, are that it is about planting and food farming. “[The] CFI's aim is to hit three of the great strategic needs of our time,” Sharpe said: food security; cutting carbon; and closing the gap between Indigenous and non-Indigenous Australians.

And to really take off as a local offset opportunity, the CFI needs “million-hectare, multi-billion dollar projects,” Sharpe said. “The potential is enormous.” But to realise this potential, he said, projects needed to see the big picture. “Agricultural assets get improved returns from improved land management, and then the carbon and the water come on top of that,” he said. Sharpe also noted that to meet demand for locally sourced offsets, companies and other market participants might have to be prepared to fork out the big bucks. While it might be cheaper to buy international offsets through programs in developing nations, he said, “to protect a native forest in Tasmania, you have to pay a decent amount.”

But if its potential is enormous, what is the current status of the voluntary market? In answer to this question, Shayleen Thompson admitted that, for a while there, the government's Greenhouse Friendly scheme “was on life support.” But since the introduction of NCOS, she said, the market has improved greatly and is getting lots of interest from local councils and lots of demand for locally made offset opportunities to support farmers and indigenous communities. And Sharpe agreed. “Government policies now aim to create demand and supply, and this will create an exciting market over the next five years,” he said. “There is huge demand coming down the pipeline, the trick is holding on to the supply end of the bargain.”