San Francisco a Good Place for a Timely Conference.
Many implications of the post Bali, Kyoto 2 world were covered at the recent CFA Forum in San Francisco. One of the initial discussions was moderated by Henry Derwent current Director of the IETA, and former director of climate, energy and environmental risk at the UK's Department of the Environment. Who made some of the opening statements concerning the current state of world carbon offset markets as both an overview and in detail. There are several pieces of pending legislation including the Lieberman Warner Bill and the Bingman Spector Bill, either of which will provide the impetus for government mandates to institute a nationwide cap & trade system. Right now carbon offsets are grossly undervalued in the United States even though there has been a recent price spike on the Chicago Climate Exchange largely because the system is largely based on voluntary compliance.

Carbon Forums Worlwide.All three of the presidential candidates support some kind of cap and trade scheme. Barack Obama, for example, was one of the founding board members of the Chicago Climate Exchange. The full scale entry of the US into the carbon markets will increase the demand for offset credits by at least 810 million tonnes under current market conditions. That number merely sums up the numbers already being traded in California, the Northeast's RGGI and the Chicago Climate Exchange's closed system according to NASD verified accounting. The demand is likely to be substantially higher as the Lieberman Warner Bill (S2191) or another piece of legislation gets out of committee and heads for the floor. The Lieberman Warner Bill started life as the Lieberman McCain Bill but underwent some changes in both name and substance during this last year when the presidential race went into full swing. The various proposed bills mandate between 3.25 and 4.65 billion tonnes of CO2 offsets to be sold at market rates. The price of US carbon offsets will likely climb initially to at least parity with the European market rate of at least $30/tonne when these bills become pending legislation.
ADF the 500kg Gorilla for Legitimate Verifiable CreditsThe entry of the US into the international market will at least double the demand for carbon offsets on the international market. Expect further mandates and legislation with an economy wide GHG cap and concommittant trade legislation. There is currently a shortfall of deliverable and verifiable carbon offsets on the the world market. Existing contracts are often unable to deliver the full promised amount currently the system sees a shortfall in 15-25% of cases. Price projections also do not take account of full scale Chinese participation. Something which is likely to happen after 2010 as China seeks to turn itself from a greenhouse gas pariah into a CleanTechnology powerhouse and as the PRC begins to administratively implement already pending cap & trade regulations. These factors will increase the vastly increase the demand for legitimate offsets beginning in the US as voluntary customers make the shift to mandated caps and continuing on an upward trend as China begins to establish and implement its own government mandates. There is already movement to quality projects, and a focus on counter party risk which addresses delivery problems. Delivery of promised or contracted offsets being a major issue since at the present time between 15% & 25% of promised offsets are non-deliverable almost a quarter of the market. At the end of the day this is what matters. Can you actually deliver the promised tonnage in the contract and right now the answer is no in many cases. The supporting infrastructure to allow the rapid creation of large projects with auditable and verifiable offset potential does not currently exist nor is there sufficient personnel to support them. A tidal wave of involvement would overwhelm CDM as project surges slow down the CDM mechanism according to a Nature Conservancy report. Planning assistance for these kind of projects currently works best outside of highly regulated areas. A projected shortfall of credits caused by a lack of suitable carbon finance instruments which will extend into the foreseeable future could create the potential for unwarranted speculation and potentially spurious instruments in a burgeoning market. Something already seen in various european markets most notably London over the past decade.
Post Bali the Sun Shines on ADF Projects.ADF credits can take up some of the shortfall, they have been hard to package and monetize as they were really not addressed coherently in Kyoto One. Post Bali, or Kyoto Two, has leveled the playing field for Avoided Deforestation Offsets. They can now be securitized as a viable Carbon Finance Instrument (CFI) albeit in one-offs through specifically designed project aggregators. They are both visible and verifiable and now can be securitized and monetized through several different but international standards including VCS. At the current time Avoided Deforestation (ADF Offsets) are grossly undervalued and just beginning to make it to market as projects are created and audited then securitized and monetized. Much of the science is in place and the VCS (voluntary carbon standard) provides a framework that can be used and conforms to recognized international standards. VCS may help plug the gap in providing the framework for accelerated development of ADF projects. But to help ADF offsets to gain wider acceptance some questions first have to be addressed.

Questions:
-How do we get full value for non CDM projects?
-How to use REDD as a CDM type mechanism instead of the policy mechanism as it is now.
-how far out to lo create a viable credit (30,50,100) years?
-how long is the expected lifespan of a vintage. 2010 is the expiration of many.
-How to create a standard criteria for valuing assets

Also important given the potential for an impending demand there is a need to create a suitable standard CFI that has unequivocal international acceptance. Open source frameworks which allows for more standard guidelines in the creation of programs would speed up the process.ADF programs, especially tropical ones are a major untapped source of deliverable carbon credits. There is now the likelihood of getting specific programs off the ground that have languished through the CDM process.
More Work is Needed but the Future Looks Good. New programs that come on line will acquire accumulated vintages. Standing forests are also verifiable, securitizable and deliverable in almost all cases short of a major environmental disaster. Most projects will have 'buffers' built in to allow for shortfalls, unlike a lot of more conventionally generated carbon offset credits which should cover even unforeseen eventualities. Programs will hopefully incorporate financial underpinnings designed to support & maintain longterm sustainable forestry programs as well as providing the carbon offset credits to accommodate the surge in demand needed to fill the hole in carbon finance instruments likely to accompany the surge in demand caused by government mandates. With a big new mandated markets opening up internationally. its possible many carbons offset programs of dubious provenance might crop up, especially in the US given that countries tendency for derivative mischief making. Avoided Deforestation offsets can fill the gap with a real & verifiable credit that can actually be delivered.