Carbon market shrinks 36% but signs for a prosperous 2013 remain

By John Parnell

The value of the global carbon market fell 36% in 2012 to €61bn, according to analysts Bloomberg New Energy Finance (BNEF).

The group’s report also found that a combination of more frequent auctions and the drop in price saw the volume of transactions in the carbon markets grow by 26%.

Permits to emit a tonne of carbon, traded on domestic, international and EU platforms, averaged €5.7 in 2012 compared to €11.2 the year before.

There are reasons for optimism, with BNEF predicting an increase in the value of the global market to €80bn by the end of 2013.

Carbon trading usually requires high emitting industries to purchase credits if they exceed their greenhouse gas cap. Cheap allowances remove the incentive to reduce their emissions. (Source: Flickr/Mad House Photography)

“Even in the face of policy paralysis and depressed prices, trading activity in carbon markets has continued to grow in 2012. This shows how efficiently these markets work,” said Guy Turner, director of commodity research at Bloomberg New Energy Finance.

“Policy-makers now need to harness the energy of this market and create policies that will drive innovation, spur further reductions in emissions and reduce costs.”

One chink of light is that the EU Emissions Trading Scheme (ETS) is set for a restructuring that will see a scheduled release of allowances put on hold in order to create scarcity and increase the price of the permits.

A more ambitious EU emissions reduction target is expected in 2014 and demand for permits could increase as that begins to crystallise.

Further legislation on energy efficiency and the removal of “perverse” opportunities to earn credits, such as through the destruction of industrial gases with a large greenhouse gas effect, will further improve the European market.

Kyoto continues

The UN climate change talks in Doha at the turn of the year also provided some additional stability.

The continuation of the Kyoto Protocol ensures the future of the UN’s carbon trading mechanism till 2020 and increases the likelihood of its continuation after then. This could potentially happen under the new Durban Platform talks, which would mean participation from every country in the world.

“In 1997 at the time of the agreement, the Kyoto Protocol’s first commitment period was intended to cover 55% of global emissions yet in 2012 the number is only 15%,” said Miles Austin, director of the Carbon Markets and Investment Association (CMIA).

“Scientific consensus tells us far more clearly in 2012 than it did in 1997 that we need to take urgent action at scale today and we look to the actions of Governments to reflect this with far greater clarity.”

The next climate science report from the Intergovernmental Panel on Climate Change (IPCC) will be released in 2013 which could provide some of the necessary impetus to drive climate action and create demand for permits.

Carbon markets are already developing around the world without an international agreement from the UN however.

California opened its carbon markets at the turn of the year with prices reaching a high of $16 per tonne during early trading compared to the current price on the EU ETS of €6.43 (around $8.4) when trading closed on Friday 4th January.

Schemes are under way or in development as far afield as Quebec, Tokyo, New Zealand, Mexico and China.

“2013 should see the ushering in of functioning carbon markets in China, and this should increase the range of players interested in the carbon markets. We expect it to be an exciting time,” said Alyssa Gilbert, unit manager for carbon trading at climate and clean energy consultancy Ecofys.

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