1. Essential strategies for effective
emissions trading and offsetting
Practical information from leading companies
Executive Summary
The full report is available at www.ethicalcorp.com/emissionstrading
Ethical Corporation
2008

2. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
Contents
Introduction ........................................................................................................................................................6
Terminology ......................................................................................................................................................8
Glossary ..............................................................................................................................................................9
Section 1: The emissions trading and offsetting process, step-by-step
Chapter One: Introduction to the regulated markets and their implications for voluntary trading
1.1 Introduction............................................................................................................................................10
1.2 Introduction to the compliance markets ..............................................................................................10
1.3 Introduction to the Clean Development Mechanism (CDM) and
Joint Implementation (JI) ............................................................................................................................12
1.4 The Clean Development Mechanism (CDM) ..........................................................................................12
1.5 The Joint Implementation (JI) ................................................................................................................15
1.6 Common perceptions of the CDM and JI ..............................................................................................16
1.7 The EU Emissions Trading Scheme (EU ETS) ........................................................................................17
1.8 The UK Carbon Reduction Commitment (CRC) ......................................................................................21
1.9 The New Zealand Emissions Trading Scheme (NZ ETS) ........................................................................23
1.10 The Australia National Emissions Trading Scheme (AETS) ..................................................................25
1.11 The emerging North American cap and trade schemes ......................................................................27
Chapter Two: Things to consider before getting started on trading or offsetting emissions
2.1 Introduction ........................................................................................................................................30
2.2 Typical reasons for buying or selling carbon credits ............................................................................31
2.3 Reducing your carbon footprint in a cost effective way ......................................................................32
2.4 What is the difference between the various carbon credits available?................................................32
2.5 Where are emissions reductions or carbon credits generated? ..........................................................36
2.6 How to make sure that the credits you buy are additional ................................................................37
2.7 Understanding vintages in the context of the carbon markets............................................................38
2.8 Controversy associated with some projects that generate carbon credits ..........................................39
2.9 Getting to grips with voluntary offset standards ................................................................................42
2.10 Things to consider when deciding which type of carbon credits to buy ..........................................44
Chapter Three: Where to buy and sell carbon credits
3.1 Introduction ........................................................................................................................................47
3.2 An overview of carbon exchanges ......................................................................................................47
3.3 Who trades emissions reductions on these exchanges? ....................................................................51
3.4 How to make the most of trading on an exchange ............................................................................52
3.5 Buying offsets over-the-counter ..........................................................................................................53
3.6 Buying credits from non-regulated offset providers ............................................................................56
Chapter Four: Reporting emissions-reduction transactions
4.1 Introduction ........................................................................................................................................ 60
4.2 Reporting emissions reductions under the Kyoto Protocol ................................................................ 60
4.3 Reporting emissions transactions voluntarily .................................................................................... 60
4.4 How do the companies responding to the Ethical Corporation questionnaire report their
emissions transactions? .............................................................................................................................. 61

3. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
Section 2: Case studies – How companies are managing emissions trading and offsetting
Introduction ......................................................................................................................................................64
Aggregate Industries ........................................................................................................................................64
Alliance Boots ..................................................................................................................................................66
The Co-operative Bank ......................................................................................................................................67
Deutsche Post World Net ..................................................................................................................................68
EDF Energy ........................................................................................................................................................70
Ford Motor Company ........................................................................................................................................72
HSBC..................................................................................................................................................................73
Kuoni Travel Holding ........................................................................................................................................74
Land Securities ..................................................................................................................................................76
Man Group ........................................................................................................................................................77
Simmons & Simmons ........................................................................................................................................79
Unilever ............................................................................................................................................................80
Westpac Banking Corporation ..........................................................................................................................82
Summary and conclusion ..................................................................................................................................84
References ........................................................................................................................................................87
Tables, figures and boxes
Table 1: Annex I and Annex II countries as defined by the UNFCCC ................................................................10
Table 2: CDM projects grouped by type ............................................................................................................14
Table 3: Emissions caps of the EU nations ......................................................................................................18
Table 4: Credits and their Features ..................................................................................................................35
Table 5: Summary of the major exchanges covered in chapter three ..............................................................54
Table 6: Summary of transaction reporting practice of companies responding to the Ethical
Corporation questionnaire ................................................................................................................................62
Table 7: Case Study Comparison ......................................................................................................................84
Figure 1: Structure of the international carbon market ....................................................................................12
Figure 2: CERs from registered projects by host ..............................................................................................13
Figure 3: CDM project type by sector, April 2008..............................................................................................15
Figure 4: JI project locations, April 2008 ..........................................................................................................16
Figure 5: JI project type by sector, April 2008 ..................................................................................................16
Figure 6: Example of credit strategy decision making ......................................................................................30
Box 1: An NGO’s perspective on the CDM ........................................................................................................17
Box 2: An NGO's perspective on the EU ETS ....................................................................................................20
Box 3: An NGO’s perspective on the CRC..........................................................................................................23
Box 4: An NGO’s perspective on additionality ..................................................................................................38
Box 5: An NGO’s perspective on controversial carbon credit sources ..............................................................41
Box 6: An NGO’s perspective on voluntary offset standards ............................................................................44
Box 7: What are the transaction fees relating to hundreds of thousands of tonnes of CO2e ........................47
Box 8: An NGO perspective on reporting emissions transactions ....................................................................63

4. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
Foreword
thical Corporation readers have indicated a strong also intended for those who anticipate that they will
E need for a comprehensive but accessible report
that guides executives and sustainability ocers
soon face mandatory involvement in the carbon
markets and need to plan accordingly.
through the complexities of the carbon markets. It is important to note that although Section 1
Despite the wealth of information about the attempts walk the reader through the carbon markets
carbon markets currently in circulation, there is no in a step-by-step fashion, Section 2 highlights the
simple overview that describes the practicalities of considerable flexibility that the markets offer. The
the various aspects of the carbon markets as they case studies in this second section highlight the
relate to companies trading or considering trading different motives that companies have for their
emissions reductions (carbon credits). This need is current approach to the carbon markets. They also
reinforced by an increasing number of regional and demonstrate that companies buying or selling carbon
national emissions trading schemes. The emergence credits can have as much or as little involvement as
of new regulations means that more companies will they wish in the generation of those credits.
be required to trade emissions in the near future and We hope that the guidelines presented in this
will need to start strategising now. Finally, this report report will provide readers with some solid footholds
is driven by the increasing complexity of the carbon for navigating the carbon markets. It will also
markets. Corporations call for guidance on the highlight the huge array of options available to those
various credit types available, the number of different wishing to buy or sell carbon, provide inspiration,
exchanges on which it is possible to trade, and the and suggest the best approach for your company.
means by which the different schemes and credit Ethical Corporation is grateful to all those who
types interlink. have offered guidance on the production of this
The document is therefore intended as a compre- report and to those who were kind enough to provide
hensive guide for those considering trading emissions us with the facts and opinions included in the body
reductions or wishing to expand or amend their of the report and for the case studies in Section 2.
current emissions trading or offsetting strategy. It is
Ethical Corporation
Acknowledgements
We would like to thank Magpie Links Ltd for leading this research and the companies that collaborated with us on the
case studies. These include Aggregate Industries, Alliance Boots, The CarbonNeutral Company, Climate Exchange Ltd,
Combined Heat and Power Association, The Co-operative Bank, Deutsche Post World Net, EDF Energy, Ford Motor
Company, HSBC, Kuoni Travel Holding, Land Securities, Man Group, Simmons & Simmons, Unilever and Westpac Banking
Corporation.
In addition, we wish to thank Anglo American plc, Aviva plc, BT Group plc, Enel SpA, GlaxoSmithKline plc, Hennes &
Mauritz AB, HBOS plc, HSBC plc, Iberdrola, KBC Group NV, Munich Re and WWF for providing valuable insight and
assisting us with our research.

5. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
Introduction
his report is intended to help companies make place through the European Union's Emissions
T informed and effective decisions about their
company’s greenhouse gases (GHG) emissions trading
Trading Scheme (EU-ETS), with 1.6 billion tonnes of
carbon emissions, worth €28bn, changing hands in
and offsetting strategy. It is designed primarily for the bloc.
companies wishing to get involved in the voluntary The UN-administered Clean Development Mecha-
emissions trading market. It is also designed for nism (CDM), which allows companies to meet part of
companies not currently covered by the compliance their emission reduction targets by financing carbon-
carbon trading market but that may be affected within cutting projects in the developing world, accounted
the next three years by emerging regulations. This for a further 947m tonnes of carbon dioxide, worth
guide also meets the needs of companies that quali €12bn.
for the compliance markets but that wish to expand Voluntary markets, where companies or individ-
their trading and offsetting strategy voluntarily. uals concerned about their carbon footprint can
It might be considered unusual to discuss carbon choose to buy emission credits, are also starting to
trading in its classic sense alongside non-regulated grow; the largest being the US-based Chicago Climate
offsets in the same report. But we feel that any Exchange, where trading volume doubled in 2007 to
distinction drawn between them will be arbitrary and 22.9m tonnes.
that by considering both together we can more effec-
tively outline the options available to companies. We Report structure and methodology
can thereby enable them to make more informed The information included in the report has been
decisions about reducing their own emissions beyond sourced om a variety of public sources and om
what can be achieved operationally. discussions with individuals active in the industry.
We explain the origin and current structure of the
Setting the scene compliance market at the beginning of this report.
The principle underlying the market for carbon Although this report is primarily aimed at companies
credits is as follows: under the Kyoto Protocol, that are not currently obliged to participate in carbon
governments establish annual targets, or caps, for the trading, the mechanisms developed by this market
reduction of GHG emissions in their respective are fundamental to an understanding of the volun-
countries. These targets set a limit on emissions, tary market, and it is impossible to take advantage of
measured in millions of tonnes of carbon dioxide voluntary trading opportunities without an under-
(CO2). standing of the regulatory field. In addition, as we
This national target is divided among all the major describe later, developments in the compliance
emitters in the economy so that each industry sector market mean that an increasing number of compa-
has an allocation of the number of tonnes it can emit. nies will be affected in the near future.
Emission allowances are issued to cover all or part of The report has two sections. In Section 1 we
these amounts. Each allowance confers the right to provide guidelines, over the course of four chapters,
emit one tonne of carbon dioxide, or the combined on everything om whether trading or offsetting will
global warming equivalent of other greenhouse gases, work for you, to how and where to report the trans-
into the atmosphere. Trading schemes establish a actions you are making. Section 2 features 14 case
market for these permits, allowing emitters and other studies involving companies currently involved in
organisations to buy and sell them. The system is emissions trading schemes or which are buying
known as cap-and-trade. offsets. These case studies outline how they make
their most important decisions and why their partic-
An expanding market ular strategy has worked for them. Information on
The market is growing exponentially. The World the companies interviewed is included in Section 2.
Business Council for Sustainable Development As well as the companies in Section 2, we wish to
highlights research by analysts Point Carbon that acknowledge the input into Section 1 provided by the
indicates growing enthusiasm for the carbon trading following based on our discussions with them:
industry among companies and investors worldwide.
Point Carbon found the value of the global carbon • Lisa Ashford, Associate Director, Head of Commer-
market went up by 80% in 2007, with some 2.7 cialisation Europe, Ecosecurities;
billion tonnes of carbon credits, worth €40.4bn, • Kirsty Clough, Climate Change Policy Ocer,
changing hands. Around 60% of this trading took WWF-UK;

6. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING
• Robert Rabinowitz, Director, Climate Exchange
(Europe) Ltd;
• Bill Sneyd, Director Advisory Services, The
CarbonNeutral Company and
• Peter Smith, Research and Communications
Manager, Combined Heat and Power Association
(CHPA).
WWF
We have included WWF’s comments on many of the
topics raised in this report as they provide insight
into the perspective of a leading NGO that is focused
on sustainability issues and on the scientific
addressing of climate change. WWF is actively
engaged with the business community in this regard.
WWF is the world's largest and most experienced
independent conservation organisation and oversees
a global network working in more than 90 countries.

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