A challenging year

Miles Austin picks out the lows and highs of what could turn out to be the carbon market’s most difficult year to date

This year has been a challenging one for the carbon markets, but it has resolved a number of key issues. It’s also seen an unusual num­ber of shocks to the system.

Spring 2010 began with the recycling scandal, the phishing scam (which put in doubt the security of some EU allowances registries) and carousel fraud. Yet none of these were intrinsic to the commodity of carbon, as the Carbon Market and Investors Association (CMIA) stressed. They are a result instead of govern­ments respecting the letter of carbon market rules rather than the spirit, and differing security regulations and VAT regimes across Europe.

Carousel fraud in particular prompted some unlikely assessments of the scale of the problem, which were then used by US opp­­onents of cap and trade. Unfor­tunately, the highest assessments assumed that the drop-off in trade after the fraud came to light was entirely fraudulent. In fact, much of it was because various institutions (wisely) suspen­ded trading while they reviewed ‘know your customer’ procedures and traced past trades they had been involved in, to assess what, if anything, their exposure amounted to.

With the recycling scandal, the gap in the rules already existed but came to light so drastically that the UK decided to clarify it would under no circumstances eng­age in recycling certi­fied emiss­ions reductions (CERs). Other states foll­owed suit and the European Commission responded as stron­gly as it felt possible, ruling out use of recycled CERs for EU emissions trading scheme (ETS) compliance. It is hoped that the ensuing negative publicity around Hungary’s actions, not least in Hungary itself, will deter other member states from recycling CERs.

Spring also brought the first of the UNFCCC intersessionals in Bonn, from which emerged the refreshingly engaging approach to stakeholders on the part of the Mexican hosts for COP16. A number of senior figures have taken the time to meet stakeholders and ask us what business and industry need and expect from Cancun.

The so-called Mexican dia­logues have also begun, with representat­ive stakeholders meeting negotiators to discuss investors’ and industry’s needs, desires and expectations of the UNFCCC process. The first such meeting, on finance, was held in Geneva and facilitated by the International Chamber of Commerce and the World Business Coun­cil on Sustainable Development, with the CMIA attending. A second on carbon finance was due in late Septem­ber.

Whatever the result, the Mexicans must be applauded for taking a very serious step towards better stakeholder engagement at the UNFCCC. Future hosts look likely to build on their initiative.

The UN’s Collaborative Programme on Red­ucing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD+) has emerged strongly this year as well. The Paris–Oslo fast-track REDD+ partnership process has continued beyond the meetings chaired by Papua New Guinea and Japan. The Paris end of the process was largely closed to stakeholders but Oslo was far more open, in no small part due to CMIA efforts; Abyd Karmali represented the association at the meeting and it also led a coalition that took stakeholder views to the Norwegian hosts. Subsequent meetings have been less open, but indications are that they will open up again in future.

Needless to say, the failure of cap-and-trade legislation to pass again in the US is a major disappointment. Equally, the moves to stall AB32 in California are worrying. Most resistance in the US seems to take two forms. First is the idea that cap and trade is a tax, which it is not. It offers flexibility and alternative courses of action to covered installations that taxes cannot hope to match. The second is the idea that the US cannot afford to take action on the environment. When countries as diverse as Norway, Poland, Portugal and Romania, to name a few, have managed to act without any apparent difficulty, this is hard to reconcile.

On the plus side, AB32 is still alive (for now), the Western Climate Initiative is gaining momentum, the Regional Greenhouse Gas Initiative is very much in place and, crucially, the EPA aims to regulate CO2 emiss­ions ­– which, it is hoped, will bring home to opponents of federal action the benefits of a more flexible cap and trade-based system.

Moving on, the call from NGO Climate Watch in mid 2010 for revisions to the UN Clean Development Mechanism (CDM) meth­­odology for hydrofluorocarbon (HFC) projects has, along with the forthcoming introduction of qualitative restrictions on offsets in the EU ETS and the unhelpful muddying of the waters on the CDM’s status after 2012, combined to ensure that there are clear areas of action for the remainder of the year, in addition to the build-up to Cancun.

With regard to proposed HFC revisions, no-one from the investment commun­ity will have a problem with action against installa­tions proved to have been gaming. But app­ropriate action can only be taken after a transparent process in which each installa­tion can pre­s­ent its case. Evidence given by Climate Watch is highly ambi­guous and the CDM Executive Board is right to ask the meth­odologies panel to look further into this. Any change to the methodology would have to be based on what is technically and environ­mentally achievable, not on a politically motivated desire to make HFC less profitable. This would simply deter investment at a time when it is vital to ramp it up.

The carbon markets, like all commodities markets, are used to uncertainty, and most participants have weathered the year’s ongoing storms with their usual stoicism. But bear in mind that the vast majority of those involved in the market actually believe in what they are doing and that they are contributing to the fight against climate change. This frequently gets lost but is important to remember as it signals something deeper.

Fundamentally, the carbon markets are not about trading, exchanges, spreads and spots. They enable reduction of industrial emissions where it wouldn’t otherwise happen – and also investment in wind, solar, and hydro power. These contribute to sustainable development and in many cases have benefits for the host communities. Finally, all of the above helps combat climate change. The markets are our best tool for doing so at the least cost. Long may they continue.

Biography: Miles Austin is director of CMIA. He was formerly head of European regulatory affairs at project developer EcoSecurities and a Point Carbon analyst. He also sits on the UK Treasury’s Carbon Market Expert Panel. He holds a masters in environmental science and technology from Imperial College London.

The Carbon Yearbook

A special report, sponsored by RPS(energy and environmental consultants)