I had the chance to catch up with Robert Dornau, an economist who is Vice President of SGS Climate Change Programme, one of the leading verifiers of carbon credits, just as SGS verified the first carbon credits under the Voluntary Carbon Standard.
Robert, I saw the press release on the first verified VCUs by SGS. Can you tell me a little bit about what VCS is and how it’s different?
I am happy to tell you that SGS also validated the first projects registered under the Voluntary Carbon Standard (VCS). The VCS provides a rigorous, trustworthy and innovative global standard and validation and verification program for voluntary emission reduction projects. It ensures that carbon credits generated from those projects can be trusted by business and consumers and have real environmental benefits. The VCS was initiated by the Climate Group, the World Business Council for Sustainable Development (WBCSD) and the International Emissions Trading Association (IETA). What sets the VCS apart from other voluntary standards is not only this prestigious group of founding fathers, but the fact that it has undergone two rounds of global stakeholder consultation and was developed under guidance of an international steering committee from the business, industry and non profit sector (including SGS).
The VCS provides innovative approaches to a credible and diligent approval of new methodologies especially for the forest sector. Another element that sets the VCS apart is the recently launched registry system.
We’ve heard the VCS discussed for some time now – are these really the first carbon credits from VCS? Why did it take so long? Are we going to see more of these?
The first version of the VCS was released on 28 March, 2006. Soon after, first projects were validated and verified against this standard. Until the recent launch of the registry system, the credits generated were only traded on the back of certificates issued by verification companies like SGS. Having a registry system that lives up to the high standards of financial registries was a number one goal of the VCS from the start. Unfortunately it took a bit longer than expected to develop this system. It now consists of three independent registries and the VCS database. I am absolutely certain this was the final launch pad for the VCS to establish itself as the standard of choice for any credible market participant.
What can you tell us about the differences between validation and verification of projects under VCS as compared to CDM and the Kyoto carbon project markets?
In principle there are not many different ways to conduct a proper validation or verification of a GHG project. The VCS relies on the principles for validation and verification of GHG projects established by the International Organization for Standardization (ISO). The new set of standards for the Carbon Market (ISO 14064 family) was develop taking into account best practice and experience from a number of global programs while being in itself program neutral.Two of the main differences are, that 1) the aim of the VCS is to assure that the emissions reduced by a project are measured, reported and verified correctly. If a buyer is interested in additional sustainability criteria, he/she can add those by applying a different add on standards like the Gold Standard for energy efficiency projects or Forest Stewardship Council (FSC) for forest projects. 2) Project developers can rely on methodologies approved in other accepted GHG Programs (like the CDM) to establish baselines, additionality and monitoring procedures. However, if the project developer wants to use a new approach towards additionality or a new methodology for baseline and monitoring of project emissions, this has to be approved by two verifiers (Double approval process). We expect this process to be a lot quicker than the current CDM process while delivering results of similar environmental integrity.
You’ve mentioned 3rd party verification. Is this similar to getting a CPA’s financial audit of a company? What role do you think 3rd party verification will play in the voluntary and US carbon markets going forward?
Market credibility requires that data used for emission trading is reliable, true and fair as well as credible. The third-party verification model has played an integral role in providing this credibility, and it has been accepted in major established markets. Third-party verification has been important in relation to both emission offsets, such as CDM and JI projects, and organization GHG emissions such as EU ETS, JVETS,.UK ETS, The Climate Registry, Western Climate Initiative. As emission allowances, related to the verified emissions, have the status of a financial commodity, it is a requirement that its verification and assurance meet financial market needs. In this regard, the third party verification model involves assessment of an organization’s internal control system including calibrations and QA/QC checks as well as actually data checks. It is also common in existing GHG programs for the verifier to assure the market risk of misstatements or omissions in any GHG emissions report and hence allowances or credits traded. We sincerely hope that a similar approach will finally be taken in the US for inventory and project emissions to assure that this market can be linked with other markets on the basis that “a ton is a ton” and the allowances traded have the same environmental and financial integrity.
I know that your main competitor in the global carbon markets, DNV, has also been growing it’s US presence.
Are we seeing a new wave of European carbon expertise moving into the US?
SGS is in the very fortunate position to be able use extensive global expertise in the development of our internal procedures. We of course always adapt those to local GHG program requirements. We bring in expertise from Europe in key technical quality management positions in the beginning of any new market. But the aim is and will be to run a local program with local capacity. I encourage everybody interested in the interesting job of a GHG auditor to apply with SGS an join our international team of experts.
You’ve told me that SGS has been hiring in the US for climate change, where is your office and what plans can you share?
SGS has offices in most US states and employs a staff of more than 3000 in the US working in all kinds of industry sectors. Our climate change program is headquartered in Ontario, California, but we are already in the process of training auditors across the country. SGS has been a first mover in all GHG programs globally and we understand that we have to develop expertise and manpower before the market is actually there. As such, SGS has been an active verifier under CCAR for years and is one of only six entities that achieved ANSI accreditation for ISO 14064 verification of TCR and CCAR. DNV by the way is not ANSI accredited.
And finally, you’re an economist by original training, so can you share a personal opinion on the causes of recent carbon price collapse and the recent article by Point Carbon suggesting that prices should rise by 2012?
The recent price collapse is a result of the international credit crunch and economic crisis. Decreasing industrial production resulted in lower emissions, which had an immediate effect on the demand for allowances in the EU. In addition companies were cash strapped and were selling EU allowances. 2012 is the final true up for phase II emissions in the EU ETS, until then companies will be able to borrow from next years allocation of allowances to meet last year compliance requirements, so that we should see the true demand and supply balance only towards the end of the period. Another result of the credit crisis is that less energy efficiency measures are being undertaken at industry and household level now, so that while the crisis caused relatively less emissions in the short run, it might cause relatively higher emissions in the medium and long run.
As EU companies can meet their compliance targets also with CDM credits, CDM supply also has an influence on the equation. The credits crisis results in less CDM project being started, meaning less supply of CDM credits. New GHG Markets in Australia, New Zealand and the US will compete for this reduced amount of credits. This will result in a decoupling of the CDM price from the EU ETS price, which has basically been the benchmark to date. So when you talk about the price of carbon, I don’t think that there will be a uniform price by 2012 yet.
So, depending on how deep and lasting the cuts in industrial production are, you will see an upward trend in prices towards the end of the Kyoto phase. So much for the different economic developments that will influence carbon prices, but as you know, the econometrician in me will simply say: the best forecast for tomorrow’s price is the price of today…
Thanks Robert, always good to catch up.
Neal Dikeman is Chairman and CEO of Carbonflow, providing software services to carbon developers and funds cut the cost of carbon abatement, including managing the validation and verification processes. Carbonflow is partnered with both SGS and DNV.