In a recession, CO2 offset buyers want quality

Wind turbines that produce electricity spin at a wind farm in Daban, in northwest China's Xinjiang Uygur Autonomous Region, March 1, 2005.

LONDON (Reuters) - Prices are falling in a voluntary market in carbon offsets which allows companies to show they are cutting their contribution to climate change but in a recession buyers are concentrating on what they buy and not how many.

With companies struggling to raise cash, buying carbon offsets -- often used for brand management -- may be seen as an unnecessary luxury, but market participants and analysts say the market is surviving, although at lower prices.

"Buyers are definitely more price sensitive," said Martin Berg, carbon emissions originator at U.S. bank Merrill Lynch.

The market for voluntary emissions reductions (VERs) has boomed over the past couple of years as companies have bought credits to try to reduce their carbon footprint or improve their reputation as "green" businesses.

But the voluntary nature of the market means it could be vulnerable to economic slowdown as companies choose to offset their carbon dioxide emissions and are not forced to do so, unlike under a regulated carbon market.

Most offsetting companies say they still have a healthy rate of contract renewals from large businesses, but are finding it more difficult to entice new entrants to the market.

"The market has slowed down but that doesn't necessarily mean companies are backing out of offsetting strategy as most are committed to a carbon management strategy for a few years," said Johannes Ebeling, senior consultant at offset sellers EcoSecurities.

"It means they might reconsider the types of projects to support."

The most popular projects are in the renewable energy sector, particularly wind or hydro power in India and China. The prices for these offset credits has fallen to around $5-6 from $7-8 late last year.

Buyers are looking for higher quality, and sellers -- who develop projects to avoid greenhouse gas emissions in developing countries -- have diversified their portfolios to meet their clients' demands.

"I would say our clients are more discerning. So we have to have enough diversity in our project portfolio to have a robust enough offering," said Neil Braun, chief executive of The CarbonNeutral Company.

GOLD STANDARD

The unregulated market includes several standards. Voluntary Carbon Standard (VCS) credits are popular as they are of a high enough quality and low enough price to attract buyers.

Buyers are waiting for the price of the perceived highest quality offset, Gold Standard, to fall, traders said. There could then be a rush to buy at a bargain.

"There is increasing due diligence as to the quality of the credit and the ability of a project to deliver. Prices in the market are generally falling, so I would assume that the Gold Standard absolute price would fall as well," said Jasmine Hyman, director at the Gold Standard Foundation.

The voluntary carbon market was worth some $330 million in 2007. Interest in carbon offsets is rising in the United States as a new U.S. climate legislation including carbon emissions capping is debated by the Senate. Demand for offsets is also seen in developing countries in Latin America and south east Asia.

"More and more companies are interested in this market now, even though they might be entering at a slightly slower rate," said Ebeling.

(Editing by Gerard Wynn and James Jukwey)