WORLD CARBON MARKET SUCCEEDING

On December 5, Senator Barbara Boxer (D-CA) chaired a marathon session of the Senate Environment and Public Works Committee, driving the committee to develop guidelines for a US cap-and-trade system. Whatever success a US trading scheme may have will owe much to the pioneering work down by the European Union (EU)’s Emissions Trading Scheme (ETS).

The EU realized, for instance, that an early CER values drop to below €10 was due to inadequate stringency about cap allocations. December 2008 values are now holding in the mid-€20s. Debate remains over whether all allotted CERs can be assigned for free. Many think some must be withheld and auctioned to kick-start the market and maintain credit values.

Carbon trading shakes off early troubles
November 30, 2007 (Financial Times of London)

WHO
European Union (EU), global carbon markets, Point Carbon analysts, carbon credit project developer EcoSecurities, United Nations (UN) Clean Development Mechanism (CDM)

Trading in the EU ETS has smoothed out. (click to enlarge)

WHAT
Global carbon markets and especially the EU Emissions Trading Scheme (ETS) have generated a new market and new asset class. Volume has grown yearly. The project is not without failures, most dramatic of which is the continued growth of worldwide emissions. The project is, however, newly created, making making adjustments and showing signs of maturity.

WHEN
- The first Phase of the Kyoto Protocol process ends in 2008. Phase 2 will run through 2012.
- 2006 global carbon market transactions: €22.5 billion (EU ETS = 62% of the volume, 80% of the value) Point Carbon says 2007 will be bigger yet.
- More industries will brought into the markets going forward. Aviation, a major source of emissions, will be included in 2011.

WHERE
- EU nations are bound by the Kyoto Protocol to a cap-and-trade system, a key to the EU’s overall strategy for global emissions reduction.
- Because of the EU ETS, London has become the world’s carbon trading center.

WHY
- The EU ETS is most established Certified Emissions Reduction credits (CERs) trading scheme in the world.
- Projects certified as emissions-reducing earn a CER for each ton of emissions cut. Owners can sell the credits in the trading market. Businesses and industries that need to exceed their allotted emissions can buy the CERs in the market.
- CERs are overseen by the UN CDM. It is working to prevent fraudulent projects or abuse of credits but is encountering greater complexities requiring more time. The result is a backlog of projects in the application process and a slowing of emissions reductions.
EcoSecurities recently highlighted the slowdown at the UN CDM in certifications which threatens to affect the market.
- All major investment banks now have carbon trading desks among their other commodities desks.

The objective of the trading scheme is to cap emissions and incentivize emissions-cutting projects. (click to enlarge)

QUOTES
Financial Times: “…Last year the price of carbon slumped when it emerged that the EU member states had been too lenient in their allocation plans and several actually enjoyed a surplus of carbon, sending the price of carbon credits tumbling below €10. But, national allocation plans have been tightened up for the 2008-2012 period, making a repeat unlikely, and forward carbon prices are healthier than for a long time.”