Carbon market still powering ahead

In what has now become a regular event, analyst Point Carbon has used its annual carbon markets conference to unveil a comprehensive market survey detailing not only the latest trends but also its forecasts of what lies ahead.
At this year’s event, which took place in March in Copenhagen, three main themes dominated the conference:
Growth: the global carbon market showed phenomenal growth again in 2007.
CDM: is Europe putting “unhelpful” restrictions on the clean development mechanism (CDM) even as the secondary market is booming?
Energy-intensive industries: is Europe losing them to regions without a price on emissions?
Strong growth in 2007
The global carbon market continued its strong growth last year, mainly driven by the EU emission trading scheme (EU ETS), according to Point Carbon.
In 2007, the market grew by 80 per cent to €40bn relative to 2006. Total traded volume grew by nearly two thirds to 2.7bn tonnes. These figures far surpass Point Carbon’s prediction of a 50 per cent growth made a year ago. The EU ETS traded 1.6bn tonnes last year, equivalent to the size of the entire global carbon market only a year earlier. Trades were worth €28bn, representing an increase of 55 per cent on 2006.
Europe continues to drive global carbon market growth, in particular by participating in a booming secondary market for CDM-derived credits. Primary CDM credits are delivered directly from emission-reduction projects in developing countries while secondary CDM credits are bought from a middleman. Point Carbon had forecast a decline in the CDM market for 2007, but instead it grew by 68 per cent in volume to 947m tonnes and 200 per cent in value to €12bn. The joint implementation (JI) market tripled.
The market survey reflects a positive outlook for the future. Respondents expect the carbon price to average €24 per tonne in 2010 and €35 in 2020, significantly higher than their expectations last year. Point Carbon expects prices to average €30 per tonne until 2012 and €35 thereafter.
The analyst believes 4.2bn tonnes will be traded during 2008, up over 50 per cent from 2007, worth €63bn. It expects greater volatility. The primary CDM market will slump, it forecasts, but growth in the secondary market will continue. US companies will make their mark on the global carbon market for the first time.
‘Unhelpful’ CDM limits
In Copenhagen, UN climate chief Yvo de Boer criticised European commission plans to limit the use of CDM carbon credits to 3 per cent of countries’ 2005 emission levels. Several EU environment ministers called for greater use of CDM at a council meeting in early March (see front page).
CDM projects have been a “great success so far”, Mr de Boer told delegates, and restricting their use “will not motivate developing countries to get more involved” in discussions on a global climate agreement.
The CDM market should be shaped to “spur bigger financial flows”. This would “lay the basis” for an agreement in 2009, he said.
“We understand there must be regulations on how much CDM you can buy, but we are afraid of anything that can destroy them,” agreed Norway’s prime minister Jens Stoltenberg.
“If we are serious about tackling climate change we need to rethink the role of CDM,” said commission representative Yvon Slingenberg. She believes that in the long term a transition to a cap-and-trade system for developing countries “seems inevitable”. EU limits on CDM are necessary to force Europe to develop a low-carbon economy, she added.
Concern for Europe’s Industries
The concern dominating the airwaves in Brussels also emerged as a key priority in Copenhagen: will energy-intensive industries in the EU relocate to areas without a
price on carbon?
There could be 5-8 per cent carbon leakage in the steel and cement sectors, said Michael Grubb of the UK’s Carbon Trust. This estimate assumes a carbon price of €30 per tonne. Mr Grubb stressed the steel industry was particularly at risk.
Point Carbon’s market survey put the risk of relocation much higher, finding that 17 per cent of companies surveyed have, plan or are considering relocating outside the EU because of the cost of carbon.
Mr Grubb told delegates in Copenhagen that free allocation of carbon allowances would not necessarily be a solution as it would compensate for profit loss but not prevent firms from relocating.
Robert Fig of steelmaker Arcelor Mittal said his firm was used to treating carbon like just another commodity, but carbon markets have not been kind to heavy industry. “There’s a long way to go for us to trust the market to deliver what we need it to deliver,” he said.
Traders said too many uncertainties surround the current situation and present a significant risk for Europe’s industry. Uncertain timescales and lack of clarity about the international scenarios are frustrating markets and damaging “faith in the regulators’ ability to deliver”, said Olivia Hartridge of Morgan Stanley.
EU leaders have agreed to hold off measures to counter relocations until the outcome of international climate talks becomes clear (see front page). The implications of this will be a lot clearer by this time next year.

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