Carbon markets swell to $10 billion
Following tenfold growth from 2004 to 2005, the market may double again in 2006, as transactions in the first quarter have already reached US$7.5 billion. Some predict a market value of between US$25-30 billion by the end of the year.
The growth was driven by rising prices for Phase I European Union Allowances in the European Union’s Emissions Trading Scheme. Allowances worth $8.2 billion were swapped last year, amounting to 322 million tons of carbon dioxide equivalent, almost a forty-fold increase over 2004.
Prices soared as the first phase came to its reporting stage, but values dropped precipitously as several countries reported lower-than forecasted emissions. Many countries undershot their targets for the first phase of the scheme, and limits are expected to be tightened for Phase 2, which runs from 2008-2012.
See article: EU Carbon market falls- April 28, 2006. Click Here.
Developing countries are increasingly important in the global carbon market, as almost half of overall trading volume was contributed by developing countries using the Kyoto Protocol’s Clean Development Mechanism (CDM). The CDM allows countries to earn emissions credits by investing in emissions reduction projects in developing nations. A corresponding scheme, called Joint Implementation, is used for projects between two industrialized countries, but made up less than 5 percent of trading.
European and Japanese private organizations led the demand for credits, buying nearly 90 percent of all project emissions reductions in 2005 and 2005, while China and Brazil were the primary suppliers. Other large buyers were Britain, Italy and the Netherlands.
An analysis of CDM and other carbon credit projects shows that the market is driving technology innovation and deployment, particularly in low-cost areas where credits can be very easily earned with minimal investment.
According to Halldor Thorgeirseen, Deputy Executive Secretary of the United Nations Framework Convention on Climate Change, “limits on emissions contributed to the deployment of new climate friendly technologies,” citing carbon capture and sequestration as a prime example. Forest conservation is also one area that may experience growth due to a proposed financial incentive provided for preserving carbon ‘sinks’.
Financial markets also adapted to the carbon incentive, raising capital for clean technology projects, and creating unique carbon-based securities and hedge instruments to capitalize on the growing market. Specialized brokers and investment managers also emerged to source our credit-earning projects and finance them.
According to the report’s authors, private capital markets will play the most important role in raising the estimated $40 billion annually that will be required for climate change mitigation and adaptation efforts, and for the billions more that will be needed to make the transition to less carbon-intensive energy systems.
In the future, clear signals from policy makers are needed to ensure that carbon can retain its value as a commodity. Transparency and improvement in regulatory procedures can also help carbon trading develop into a more robust, efficient market.
Developments such as the Regional Greenhouse Gas Initiative (RGGI) in the North-Eastern United States, the growth of the Chicago Climate Exchange, and the New South Wales carbon market in Australia are hopeful signs that the European model is extending to the rest of the world.
The next step will be setting targets for Phase II of the EU trading scheme – stricter limits will be needed to meet Kyoto targets and ensure that emissions are not undershot again. Following that, a long-term commitment to reduction targets from the UN Framework Convention on Climate Change will provide companies and markets with the proper economic incentives to drive clean technology innovation and deployment.
Canada currently holds the presidency of the Framework, but Environment Minister Rona Ambrose has repeatedly acknowledged that it is “impossible” for Canada to meet its targets, and favours a ‘Made in Canada’ plan with more “realistic” goals. Environmental groups have called for Ms. Ambrose to resign the presidency given the administration’s lack of support for Kyoto.
The Canadian government is expected to announce a new climate change plan soon, which could provide a strong signal in either direction on the role of Canada in international climate change negotiations. The inclusion of some form of market incentive for carbon reduction seems likely, and it is possible that the proposed emissions trading plan launched by the previous government will be included
See article: Canada to establish emissions trading market
Based on emissions data released this week, Canada’s own emissions have increased by more than 35% since 1990, putting Kyoto Protocol goals totally out of reach according to Minister Ambrose. Click Here.
Read the World Bank report, State and Trends of the Carbon Market 2006 (PDF).