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Carbon market volume grows, value shrinks amid recession

The global carbon market volume will grow 20 percent this year but will drop sharply in value as the United States and other major economies labor under the weight of a recession, according to a new report by the Norway-based consulting and analytics firm Point Carbon.

Traders are on pace this year to buy and sell the equivalent of 5.9 billion tons of carbon dioxide, the main heat-trapping gas, up from 4.9 billion tons in 2008. The market value, however, will drop to about $79.7 billion from nearly $118 billion in 2008 -- the first annual contraction since trading began, noted Endre Tvinnereim, a Point Carbon senior analyst and author of the report.

The global carbon market value grew more than 80 percent last year, even as investment banks collapsed and credit markets froze in the final months. As major economies continue to slow in the months ahead, Point Carbon's Tvinnereim forecasts a considerable drop in the Clean Development Mechanism and Joint Implementation projects that stem from the United Nations' Kyoto Protocol.

The volume of certified emission reductions, which are generated by Clean Development Mechanism projects, will drop 45 percent this year to 300 million tons, according to Tvinnereim's analysis. Meanwhile, the volume of primary emission reduction units, which are generated by joint implementation projects, will drop 44 percent to 40 million tons.

But the weak economy could spur growth in the Kyoto-bound European Union's Emission Trading Scheme, or ETS, which owns the majority of the global trading market, Tvinnereim said in an interview.

The ETS market volume will grow 24 percent this year to 3.8 billion tons, primarily because of increased spot trading, according to the report. More than 11,000 installations, from steel mills to power plants, are regulated under the E.U. scheme.

"Companies will be selling off surplus E.U. allowances because they will have lower production volumes than last year," Tvinnereim explained. "They are really in a squeeze financially, so they may use them as collateral to get loans from banks."

The Regional Greenhouse Gas Initiative (RGGI), which includes 10 states, from Maryland to Maine, will also see its market share grow.

RGGI, which saw its first auctions and forward trades last year, will trade the equivalent of 339 million tons of CO2 in 2009, according to Tvinnereim's analysis. Greater auctioning volume and secondary market activity will push RGGI's share of the global market to about 6 percent from 1.4 percent, he estimated.

In a separate research brief last year, the London-based market analytics firm New Energy Finance estimated that the global carbon trading market could reach $3 trillion annually by 2020 if the United States -- the world's largest per capita CO2 emitter -- adopts an emissions cap-and-trade scheme. House Democratic leaders have pledged to hold a floor debate on a climate bill this year (E&E Daily, Feb. 23).

Click here to read the Point Carbon report.