Carbon market doubles in size to $22 billion

Washington, D.C. – The worldwide market for carbon credits grew to an estimated US $21.5 billion during the first three quarters of 2006, doubling its value in 2005, says a new report from the World Bank and the International Emissions Trading Association. The market was once again dominated by the European Union’s Emissions Trading Scheme (ETS), which rebounded from a decline in prices following the release of emissions data in May.

The State and Trends of the Carbon Market report shows the strength of emissions trading, which has become one of the hottest commodity markets and a preferred market-based instrument for reducing greenhouse gas emissions. The $21.5 billion in credits trade represents 1 trillion tonnes of carbon dioxide equivalent, or 130% of Canada’s total annual emissions.

$18.8 billion of trade this year was in the EU ETS, up from $8.2 billion in 2005. Other schemes based on allocated emissions allowances, including the Climate Exchange (CCX), the New South Wales Greenhouse Gas Abatement Scheme (NSW) and the United Kingdom Emissions Trading Scheme (UK ETS) all grew sharply as well.

There remains significant price risk in allowance-based schemes, as they are affected by changes in conventional energy prices such as a drop in natural gas costs, and weather volatility.

Plans for emissions cap and trade programs in California, seven Northeast states through the Regional Greenhouse Gas Initiative (RGGI), and a proposed national energy trading plan in Australia are likely to be formalized in the next few months, and could lend some stability to the market if they are integrated with existing schemes.

Trade under ‘project-based’ transactions, which includes the earning of credits through investment in emissions reducing projects, was relatively stable since last year, reaching $2.4 billion to date compared to $2.7 billion for all of 2005.

This includes the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI) schemes, which did not experience growth this year. The CDM allows rich countries to earn emissions credits by investing in projects in developing countries, while JI incorporates projects located in other industrialized countries.

Prices for these credits is relatively more stable than those under the allocation schemes, and not as sensitive to fluctuations in weather and energy prices. Prices rose to an average of US $10.50 per tonne, up from $7.10 in 2005.

The United Kingdom and Italy surpassed Japan as the leading buyers of project-based credits. Private sector buyers, in particular banks and carbon funds, led the way in purchasing CDM assets, while the public sector led in JI purchases.

The governments of the EU and Japan have bought only around 20 percent of the credits that have been earmarked for purchase, so the next two years are likely to see growth in public sector acquisitions of project-based allowances, the report authors conclude.

Canadian purchases of project-allowances are virtually non-existent, as “Canadian buyers are still conspicuous by their absence”, they note.

The Kyoto mechanisms are suffering from uncertainty about what will happen when the first phase of the agreement expires in 2012, and some form of continuity, either through a Kyoto extension or link with other trading schemes, is needed to continue growth.

Asian countries dominated the CDM market: China contributed 60 percent of the overall project-based market, while India drew a 15 percent share. Most of the projects in China were aimed at reducing industrial gases such as HFC-23, a byproduct of refrigerants that is a potent contributor to the greenhouse effect. China has indicated that it wants to pursue more energy efficiency and renewable energy projects to help reduce poverty, so the opportunities to earn credits through easy investments in industrial processes may be limited.

Overall, energy efficiency projects grew from virtually zero to account for 14 percent of total CDM volumes. Renewable energy accounted for 12 percent of the CDM market, with wind energy tripling to 6 percent.

While gases like HFC and nitrous oxide have been the target of most emissions reducing projects so far, the opportunity for such projects is in decline. Many investors cited coal mine methane as an area of interest, though this wasn’t borne out by any investment data.

The next “big thing” could be carbon capture and sequestration, say the report authors. The topic will be discussed at the upcoming United Nations Climate Change Conference in Nairobi this November 6-17, and there exists substantial opportunity for this in many developing and developed countries.

The full carbon market report can be read here pdf.

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