Global carbon market set to explode in next decade
2008-02-22 by renewenergy
Analysts foresee a boom in carbon emissions trading by 2020 as the EU prepares to include new sectors in its Emissions Trading Scheme (EU-ETS) and the United States’ accession to a similar system appears increasingly inevitable.
Background:
Yet, the biggest challenge of the Commission’s proposed climate strategy is to bring all major world emitters of global-warming gases - including the US and emerging economies such as China and India - into similar binding pollution-cutting schemes.
LinksDossier: EU Emissions Trading SchemeOther related news:
Issues:
The value of the global carbon market shot up by 80% in 2007, with some 2.7 billion tonnes of CO2 credits, worth €40.4 billion, changing hands, in a sign of growing enthusiasm for the carbon trading industry among companies and investors worldwide, according to research by independent analysis and consulting firm Point Carbon
.
Around 60% of this trading took place through the European Union’s Emissions Trading Scheme (EU-ETS), with 1.6 billion tonnes of carbon emissions, worth €28 billion, changing hands in the bloc.
The UN-administered Clean Development Mechanism (CDM), which allows companies to meet part of their emission reduction targets by financing carbon-cutting projects in the developing world, accounted for a further 947 million tonnes of carbon dioxide, worth €12 billion.
“The 2007 numbers show that greenhouse gas emission trading has become a commodity market in its own right,” said Endre Tvinnereim, a senior analyst at Point Carbon. “The remarkable growth in the secondary CDM market shows companies are ready to invent new, creative tools for managing carbon constraints.”
Analysts further believe the global carbon market could see a veritable boom in the next 12 years, especially if the US steps in.
State and regional initiatives in the United States and Canada are already gaining momentum, with at least 10 north-eastern American states committing to develop a multi-state cap-and-trade programme in a bid to reduce greenhouse gas by 10% compared to 1990 levels by 2018, under the Regional Greenhouse Gas Initiative (RGGI ).
Voluntary markets, where companies or individuals concerned about their carbon footprint can choose to buy emission credits, are also starting to grow; the largest being the US-based Chicago Climate Exchange , where trading volume doubled in 2007 to 22.9 million tonnes.
What’s more, with 13 climate change bills currently under discussion in the Democrat-led Congress – most of which contain plans for some sort of market-based mechanism – analysts believe it is unlikely the US will escape entering into an emission reduction scheme in the future.
“Even if the current Bush administration rejects all of these bills, the next President will be less inclined to use a veto. All leading 2008 presidential candidates have endorsed the need for action and some have already supported significant emissions reductions,” said Michael Liebreich, CEO of New Energy Finance (NEF ), the leading provider of information and analysis in the renewable energy and low-carbon sectors.
The “Climate Security Act” (CSA ), a bi-partisan compromise drafted by Senators Joe Lieberman and John Warner, is one of the proposals currently before Congress. According to Point Carbon, the passage of this bill, which foresees the introduction of a carbon cap-and-trade system, could result in the creation of a $150 billion market, with 5.7 billion allowances traded, as early as 2012.
Cutting out the ‘free riders’
The US is unlikely to agree to any scheme that does not require its major trading partners from the developing world, such as China, Brazil and India, to abide by emissions regulations as well. As US Senate committee chair Max Baucus explained: “In the context of a competitive economy, they cannot enjoy a free ride while we bear the cost.”
The EU is also more than eager to create a level global playing field for its businesses in order to avoid the so-called “carbon leakage” phenomenon, where companies relocate to third countries with less stringent climate protection laws in order to remain competitive. In its new plans
for the EU-ETS, the Commission is notably threatening to subject industrialised nations refusing to enter into an international climate pact to some kind of ‘border adjustment scheme’, whereby imported goods would fall under the EU-ETS (EurActiv 28/01/08).
What’s more, India and China could also see their participation in the carbon market limited if they fail to ratify a global deal. Indeed, while currently, around 10% of carbon credits purchased by EU companies are Clean Development Mechanism or Joint Implementation credits, the Commission is suggesting limiting this to 5-6%.
Analysts say the move could be the result of growing frustration that India and China are reaping the benefits of the carbon market – with EU investors flocking to pay Chinese and Indian energy companies to cut their emissions instead of spending far more to reduce pollution at home – without taking up any of the burden of mandatory carbon reduction targets themselves. There is also concern that they are preventing less well-off developing countries in Africa from entering the market.
NEF’s Liebreich commented: “Developing countries should bear in mind that even if they are successful in negotiating away the need to control greenhouse gas emissions, they will likely face the impacts of climate change legislation through an indirect route, via their export trade balance, and potentially sooner than they think.”
However, the European Federation of Energy Traders (Efet) has warned that the Commission’s proposal would “frustrate the development of a deep market for emission reduction projects and thereby significantly increase the cost of reducing emissions for Europe, as low-cost abatement potential in developing countries would not be fully tapped.” Moreover, it added that the proposals risked creating a longstanding “situation of uncertainty for private entities involved in emission reduction projects,” as an international agreement on climate change is not likely to be concluded before late 2009.
A sectoral approach?
Even if other nations level the playing field by applying a carbon trading mechanism similar to the EU ETS, many fear that Europe’s global competitiveness would still suffer as the carbon-intensity of EU exports is higher than those of China, the US and other exporters.
A key tool in addressing this issue could be the conclusion of international sectoral agreements, under which energy-intensive industries would be allowed to operate under a separate carbon regime, based on targets agreed among themselves, effectively sheltering the sector from a severe increase in operating costs related to clean technology upgrades or the purchasing of emissions credits from projects in developing countries.
Under such a scheme, major developing countries such as China would pledge to achieve a voluntary sector GHG intensity target (e.g. GHG/ton of steel) and would receive technology incentives from developed countries in exchange.
The idea has been backed by EU Industry Commissioner Günter Verheugen and the EU’s High Level Group (HLG) on Competitiveness, Energy and Environment as a means of delivering fair competition while continuing to ensure clean technology improvements in developing countries. Such a scheme could also receive backing from the US and Japan, which are both against strict binding goals.
Next steps:
- Early 2009: New US Presidential administration assumes power following elections in November 2008;
- Dec. 2009: Copenhagen climate conference (COP 15) - projected completion of UN climate negotiations on post-2012 framework;
- End 2012: Deadline for ratification of any new climate deal.
Links
- EUR-Lex: Proposal for a Review of the greenhouse gas emission allowance trading system of the Community [FR] [DE]
- Commission: EU ETS post 2012
- New Carbon Finance: Press Release: US Carbon Market valued at 1 trillion dollars by 2020 (February 2008)
- Point Carbon: Press Release: Global carbon market grows 80% in 2007 (18 January 2008)
