World Carbon Markets at a Turning Point According to Survey

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GLOBE-Net, April 4, 2013 – The world’s carbon markets are at a turning point according to the latest Thomson Reuters Point Carbon annual survey of carbon trading.

While the volume of carbon credits traded globally will grow by an estimated 14 percent this year, reaching roughly 12 gigatons of carbon dioxide equivalents, concerns remain about depressed market prices in certain markets and uncertainties abound over the future direction of carbon trading generally.

The report – Carbon 2013 – reveals that the European Union’s Emissions Trading Scheme (EU-ETS), the world’s largest carbon market, is deeply challenged by an oversupply of credits that have been causing prices to fall. While EU policy makers have considered various measures to reduce the huge oversupply of allowances in that market which contributed to record low carbon prices, a community-wide consensus has yet to emerge.

[stextbox id=”custom” float=”true” width=”200″ bcolor=”add3d5″ bgcolor=”add3d5″ image=”null”]The Point Carbon eighth annual survey covers the European Union’s Emissions Trading System (EU-ETS); the Clean Development Mechanism (CDM) under the Kyoto Protocol; the Joint Implementation (JI) mechanism, also under the Kyoto Protocol;  the Western Climate Initiative (WCI), and emerging carbon markets in Asia and Australia.[/stextbox]

Progress is being made on measures to fix the EU-ETS, notes the report, which also reports a strong positive conviction among survey respondents that structural reforms in this market will lead to higher prices and a resurgence of greenhouse gas (GHG) emissions reducing investments.

The uncertainties that do remain focus mainly on what remedial measures will be adopted (i.e., delaying allowance auctions or outright cancellations) and how quickly other structural reforms will be implemented.

Other World Markets

Outside the EU, the outlook for nascent carbon markets is optimistic, suggesting that carbon trading has become a tale of two markets.  While the oversupply of allowances and low prices became more acute throughout 2012 in the EU-ETS, the North American Western Climate Initiative (WCI) is stimulating positive action. The WCI is a multi-jurisdictional Canada-U.S. emissions trading group with California and Quebec currently the two active participants.

California’s carbon market successfully came into force in 2012 and, unlike the exodus of traders from the EU-ETS, California regulated companies were busy preparing for trading or planning real GHG emissions reductions that could earn credits.

Over 60 percent of respondents to the Point Carbon survey who have compliance obligations under the WCI market said they have set up trading operations, and 53 percent said they have implemented internal emissions reductions strategies.

Over half of the participants consider the price of carbon to be a decisive factor in investment decisions, with the majority of respondents expecting California Carbon Allowances to be priced between $10-15 per tonne in 2013.

Of the other WCI partners, Quebec has announced it will be moving ahead with taking the necessary steps to formally link its emissions-trading program with California.

British Columbia’s Greenhouse Gas Reduction (Cap and Trade) Act, provides the statutory basis for setting up a market-based cap-and-trade framework to reduce GHG emissions from large emitters operating in the province. British Columbia has been in discussions for several years with the WCI after being the first Canadian province to authorize hard caps on GHG emissions in 2008.

The Province is currently monitoring the performance of the WCI cap-and-trade program and depending on progress, has reserved the right to join the program in future.

The other U.S. carbon market showing signs of vitality is the Regional Greenhouse Gas Initiative (RGGI), involving seven northeastern states. This program covers large electricity generators only, and nearly 100 percent of allowances are auctioned. Revenues from allowance auctions go to state governments, which are required to invest at least 25 percent of those funds toward energy efficiency or renewable energy programs.

Other World Carbon Markets

Australia’s cap-and-trade program also has been recently launched and will come into effect fully in July 2015. Surveyed companies in Australia are busy preparing for the scheme by establishing operations for buying allowances and offsets or by engaging in internal GHG emission abatement measures.

Similar optimism prevails as South Korea prepares to launch its emissions trading scheme in 2015. Most participants surveyed believe the Korean scheme will effectively drive domestic GHG emission reductions, though some fear it will hurt South Korean industry competitiveness in international markets.

A lower share of participants believe that some of China’s regional programs will start this year, falling to a third from 52 percent last year. Yet, most respondents (78 percent) believe that the world’s largest emitter will have a nation-wide GHG emissions trading system eventually, most likely by the end of 2020.

Survey participants state that South Korea and Japan have the highest probability of enacting national carbon markets by 2017. The third most likely host of a national cap-and-trade measure in their view is China. Some 33 percent of respondents believe the world’s largest emitter will put in place a national GHG emissions trading scheme by 2017. Canada comes next (29 percent), followed by Brazil (27 percent), and the US (23 percent).

Regarding a U.S. carbon market, expectations have remained largely flat despite the implementation of California’s ETS and President Obama’s climate change pledge in his inaugural speech. Survey respondents still anticipate difficulties in passing cap-and-trade legislation through the currently divided U.S. Congress.

A host of other market-based mechanisms for meeting Kyoto commitments are emerging, including reducing GHG emissions from deforestation and degradation (REDD), from so-called “nationally appropriate mitigation measures” in developing countries and from bilateral projects in one country financed by an investor in another country without need for UN approval.

The Future of Carbon Trading

Overall, carbon trading markets are maturing and are becoming more effective in terms of stimulating investments in GHG emissions reduction technologies. Realistic market prices clearly are a key factor in stimulating GHG emission abatement measures, though by how much remains unclear.

So too, the availability of allowances has been proven to have a profound impact in determining which economic sectors within any market area will benefit most from carbon trading. Excessive allowances have been shown to be potentially destructive to the effectiveness of carbon trading in actually reducing GHG emissions.

Another key factor likely to influence future developments in carbon markets is the need to re-establish transparency with respect to the valuation of supposed carbon offsets arising from the project proposals.

Public confidence in the valuation process has been shaken in recent years by various revelations of wrongdoing for some EU-ETS projects, as well as undertakings funded through the Clean Development Mechanism.

A UN audit published in 2010 found that at least 59 percent and possibly as much as 77 percent of the carbon offset credits that the UN had issued to date had no underlying value in terms of GHG emissions reductions. The UN audit also found that bogus UN credits accounted for roughly 85 percent of the offsets used in the EU carbon market.

The emergence of a diverse range of national and regional GHG emissions trading regimes signals another important transition in the nature of carbon trading, namely fading reliance on multi-lateral mechanisms to give legitimacy to how carbon markets will function and how or whether these programs will be linked together.

As noted in a recent study on Carbon Markets: Past, Present, and Future published by the National Bureau of Economic Research, the emerging international architecture of carbon trading features separate emissions trading systems serving distinct jurisdictions.  This is in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol.

The absence of an overarching global emissions reduction target and growing disillusionment with the multi-lateral climate negotiations process is contributing to this trend. The Point Carbon survey noted the share of participants who believe there will be a global agreement with internationally binding targets for major GHG emitters is falling and that many respondents expect the current pledge-and-review climate regime to continue well after 2020.

What role international negotiations regarding carbon markets might play in this emerging, bottom-up world has yet to become clear. One role could be to address issues of comparability among different trading systems not only to diffuse potential competition between regimes, but also to ensure fundamental comparability in the accounting of emission reductions.

Rather than trying to command how carbon markets must operate from the top-down, major international institutions in the climate space could profitably be more directly supportive of carbon markets in a more decentralized world.


Some content for this article was adapted from “Carbon markets at a tipping point” from PICS CLIMATE NEWS SCAN, April 3, 2013 Editors:  Neil Thomson, James Tansey,  Tom Pedersen, Robyn Meyer.

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