MARKETS:

World carbon trading booms in volume as emissions grow, too

Worldwide carbon emissions trading volume rose 17 percent last year to 10.3 billion metric tons of carbon dioxide equivalent, with permits in the E.U. Emissions Trading System (ETS) accounting for more than three-quarters of the total, the World Bank said in a new report.

Carbon trading grew 11 percent by value to a record $176 billion, with a record number of emissions products traded, the bank said in its annual report presented at the Carbon Expo conference in Cologne, Germany.

The ETS grew to a value of $148 billion in 2011 from a revised $134 billion in 2010, despite lower CO2 prices caused by the oversupply of permits, the bank said.

There was also a substantial increase in the volume of secondary Kyoto Protocol offsets, which grew by 43 percent to 1.8 billion tons, valued at $23 billion. This growth was fueled by increased liquidity in the Certified Emission Reduction market and in the nascent secondary Emission Reduction Unit market, the bank said.

"It is heartening to see that while leading economies continue to experience difficulties and the carbon market faces major challenges, we see increasing interest in new market-based mechanisms to mitigate climate change in the long term," said Joëlle Chassard, manager of the bank's Carbon Finance Unit.

Global CO2 emissions rose 3.2 percent to 31.6 billion metric tons last year, the highest ever recorded, as an increase in China outweighed drops in emissions in the United States and Europe, the International Energy Agency said last week.

Meanwhile, carbon prices have fallen to as low as €5.99 ($7.44) per ton in Europe, where there is an oversupply of as many as 900 million permits, according to the European Commission.

The carbon market will not live up to its potential as a tool to combat climate change until a large number of countries agree to more ambitious targets, the World Bank said in its report.

"The pace of U.N. climate talks is frustrating, painful and unacceptable," Christiana Figueres, executive secretary of the U.N. Framework Convention on Climate Change, told the conference.

Most experts want E.U. to prop up prices

While countries continue negotiating through the U.N. framework, the World Bank looked to regional carbon markets for potential growth and saw mixed results. New Zealand's carbon market value grew threefold to $351 million last year, while the Regional Greenhouse Gas Initiative in North America was cut in half to $249 million, it said.

As European carbon prices remain under pressure from a supply glut, the European Union should intervene on the market to prop up prices, the annual survey by the International Emissions Trading Association showed.

"Four out of five carbon markets experts have called for the E.U. to intervene to support the price of carbon allowances, but respondents warned that periodic tinkering with the market risks turning it into a casino," the IETA said in its survey.

"The three best options were thought to be a move to the 30 percent emissions reduction target for 2020, a permanent set-aside of allowances or an auction reserve price," it added. "Intervention is broadly expected, boosting demand. Respondents assumed the Commission would act to either set aside a substantial volume of allowances or else increase the E.U.-wide target."

Such proposals have been under discussion among E.U. members but have been met with strong opposition from Poland, which has the biggest coal power plant in Europe at Belchatow and is the third-biggest CO2 emitter in Europe, after Germany and the United Kingdom.

The survey also found that respondents expected U.N. negotiations to lead by 2015 only to voluntary emissions reduction targets that aim to contain global warming at 2 degrees Celsius.

More than half the respondents expected the United States to take federal action on greenhouse gas emissions trading before 2020.

Long-term market view 'robust'

"In the minds of industry, the idea of emissions trading is very much alive," said Dirk Forrister, president and CEO of IETA. "It offers businesses flexibility to apply the low-carbon investment strategies and technologies that make the most sense in their unique situations."

Still, Forrister said, President Obama probably won't try to establish a U.S. cap-and-trade system if he wins a second term because of opposition from Congress.

"U.S. carbon markets will likely be state-driven," he said at the conference.

While fraud on the E.U. carbon market may have undermined the credibility of emissions trading as a policy outside the European Union, viable carbon trading markets will emerge in Australia, China and South Korea by 2020, the survey predicted. Some of these markets will link up and will become a significant source of demand for offsets, respondents predicted.

Average offset prices, which trade at a discount to E.U. carbon prices, fell 21 percent last year, as a record number of credits were issued, the World Bank said in its report.

The U.N.-administered Clean Development Mechanism (CDM) accounted for more than 95 percent of total spot and secondary emissions offset trading, but the value of the primary CDM market declined to under $1 billion in 2011 from $1.5 billion in the previous year as the 2008-2012 commitment period draws to an end.

Primary investment in post-2012 CDM offsets rose to nearly $2 billion in 2011 from $1.2 billion the year before, despite depressed prices and uncertainty about the future of the Kyoto Protocol and its market mechanisms.

"The long-term view remains robust, because we know that if our carbon-constrained world is going to take steps to seriously address climate change, there is simply no more cost-effective way than market mechanisms that create business incentives to reduce carbon emissions," Forrister said. "This survey reflects those views."

Even so, expectations of future permit prices are now 36 percent lower than three years ago, to €19 from €30 in 2009, the survey showed. Seven out of 10 respondents said carbon markets and taxation will not be able to raise the expected $30 billion annually for the Green Climate Fund.

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