The over-the-counter market for forest carbon offsets: an insight into pricing in a market without common price signals

Abstract

Summary Carbon markets have been recognised as being one of the few financing mechanisms with the ability to quickly raise the capital required to finance an international mechanism to ‘reduce emissions from deforestation and forest degradation’ (REDD) in developing countries, as well as to support conservation and sustainable management of forests and to enhance forest carbon stocks (REDD+) under an international framework to mitigate climate change. Historically, however, climate change negotiations and outcomes have not supported the inclusion of forest carbon offsets or credits in a cap-and-trade carbon market. Consequently, the voluntary market has become an important market for the trading of forest carbon offsets. The ‘over-the-counter’ (OTC) market is the predominant market for forest carbon offsets, but pricing transparency is limited as transactions are done on a deal-to-deal basis. Large variations in the price of forest carbon offsets are evident in Australia and other countries. Common pricing strategies identified include pricing transactions based on the volume of offsets, and setting fixed or minimum prices for transactions. Data were collected from the Australian Carbon Offset Guide and Carbon Catalogue which provide regularly updated information on project developers, retailers and brokers selling carbon offsets from a variety of projects on the voluntary market. Most brokers in the sample also required a minimum volume for the transaction. It was concluded that current pricing on cap-and-trade schemes selling carbon commodities does not offer common pricing signals for the OTC market, and that prices for forest carbon offsets on the OTC market were much higher than prices in cap-and-trade schemes.