Effectiveness and legitimacy of forest carbon standards in the OTC voluntary carbon market

BACKGROUND: In recent years, the voluntary over-the-counter (OTC) carbon market has reached a significant market volume. It is particularly interesting for forest mitigation projects which are either ineligible in compliance markets or confronted with a plethora of technical and financial hurdles and lacking market demand. As the OTC market is not regulated, voluntary standards have been created to secure the social and environmental integrity of the traded mitigation projects and thus to ensure the quality of the resulting carbon credits. Building on a theoretical efficiency-legitimacy framework, this study aims to identify and analyse the characteristics and indicators that determine the efficiency and organisational legitimacy of standards for afforestation/reforestation carbon projects. RESULTS: All interviewed market actors consider third-party certification and standards as a crucial component of market functionality, which provide quality assurance mechanisms that reduce information asymmetries and moral hazard between the actors regarding the quality of carbon credits, and thus reduce transaction costs. Despite this development, the recent evolution of many new and differing standards is seen as a major obstacle that renders it difficult for project developers and buyers to select an appropriate standard. According to the interviewed experts the most important legitimating factors of standards are assurance of a sufficient level of quality of carbon credits, scientifically substantiated methodological accounting and independent third-party verification, independence of standard bodies, transparency, wide market acceptance, back-up of the wider community including experts and NGOs, rigorous procedures, and the resemblance to the Afforestation/Reforestation (A/R) CDM due to its international policy endorsements. In addition, standards must provide evidence that projects contribute to a positive social and environmental development, do no harm as a minimum requirement and build a strong track record of successful projects. Project developers require clear, easily and practically applicable standards at lowest possible costs with a high potential in order to achieve good carbon prices, while buyers require that standards are legitimate, credible and that no public criticism arises when carbon credits are purchased from projects certified by a certain standard. CONCLUSIONS: Despite the fragmented and immature state of the OTC market, standards act as 'market-making' intermediaries and contribute to the quality and transparency of the OTC market. However, the variety of different standards imposes new hurdles for their efficiency and often creates confusion instead of confidence among potential buyers. Despite the lacking legitimacy of the standards, pressures from the institutional environment on standards ensure a minimum quality of carbon credits (including positive social and environmental impacts of carbon credits) that serves as an insurance mechanism for the integrity of standards. Its unregulated nature and the pressure from an increasingly competitive environment provides innovative space to deliver efficient certification procedures without imposing unreasonably high transaction costs on market actors. Furthermore, voluntary standards imply a more innovative certification approach, as one legal authority could do, because standards have to compete for adopters backed by civil society organisations. Thereby, the forest sector in OTC voluntary market bears great opportunities to provide the forest sector with crucial lessons for international climate policy and governmental institutions when designing regulation for forest regulation such as international and national REDDplus schemes.