EMISSIONS TRADING ON THE BRINK – OF WHAT?

Carbon trade on brink of boom - or backwater
Nina Chestney (W/William Hardy), November 18, 2009 (Reuters)

"Emissions trading stands at a crossroads -- a future as a $2 trillion market if the United States bolsters it, or as a modest sideline to energy and commodities trade if a new climate treaty is not agreed.

"Some players have bet on the growth of the $126 billion global carbon market after 2012 but regulatory uncertainty will be drawn out for another year as a deadline for a binding treaty on greenhouse gas emissions was pushed back to 2010…[U]ncertainty about the future form of emissions trading after the Kyoto Protocol expires in 2012 could put off new entrants and discourage banks, brokers, funds and commodity traders…"

click to enlarge

"The global market is touted to reach $2 trillion by 2020 if nations agree to a new climate pact curbing greenhouse gas emissions and the United States introduces its own federal cap-and-trade scheme…[but] negotiators will not meet a December deadline for agreeing on a binding climate pact in Copenhagen…[and] Democrats [in the U.S.] are trying to pass climate legislation in the early spring of 2010…[though] some senators do not back the bill…

"Some banks have already closed their carbon trading desks or reduced staff due to financial difficulties and tumbling carbon prices resulting from the global economic slowdown…Prices for carbon permits, called EU Allowances (EUAs), under the EU's Emissions Trading Scheme (EU ETS) have fallen by half since last summer. Once famously volatile, they have barely moved out of a 12-15.50 euro range in the past six months."

The Big Board of world emissions trading. (click to enlarge)

"Without a climate deal, prices are not expected to move significantly in 2010 and analysts forecast average EUA prices anywhere between 12 and 35 euros in 2012…With uncertainty over carbon offset regulation set to last at least another year, investors in the U.N.'s Clean Development Mechanism are also increasingly nervous…[S]ome players are also seeking business in forestry credits or expanding into other commodities, or both…

"Many players have bet on the emergence of a U.S. emissions trading scheme. Oil trading companies like Gunvor and Mercuria have beefed up their desks in anticipation of a multi-million dollar market…Compliance players in the EU ETS, such as utilites, have more certainty than most. They have been actively hedging, preparing for the scheme's third phase (2013-2020), when they start paying for carbon permits currently received for free…"