Global carbon market alive and well, says World Bank

Countries outside the EU that are considering carbon trading schemes can be reassured that the EU emissions trading scheme is behaving like a ‘rational market’, says the World Bank.1 But it adds its voice to concerns that the lack of standards threatens the credibility of voluntary offsets.

The value of the global carbon market trebled in 2006 according to a report from the bank. Once again, the market was dominated by the EU emissions trading scheme (EUETS) which accounted for nearly $25 billion (¤19 billion), or 80%, of the market in 2006 - up from $8 billion the previous year.

When the extent of over-allocation in the EUETS became apparent 12 months ago and the market crashed (ENDS Report 376, pp 12-13 ), there was a switch towards allowances for phase 2 of the scheme, which runs from 2008 to 2012, says the report. By March 2007, more than 75% of traded allowances were for phase 2.

Thanks to action by the European Commission to tighten national caps, the World Bank expects a significantly higher carbon price in phase 2 and predicts a shortfall in allowances of between 0.9 billion and 1.5 billion tCO2e.

Allowances for delivery in 2008 are currently trading at €20.7, way above the €0.3 that phase 1 allowances fetch.

The EUETS is functioning well, says the bank, and behaving like a "rational market" - good news for other countries and regions that are considering similar schemes.

"These numbers for the regulated carbon market should give comfort to other countries considering new climate change policies," said Philippe Amroisel, one of the report’s authors.

Trading of project-based credits through the Kyoto Protocol’s joint implementation (JI) programme and clean development mechanism (CDM) also saw strong growth in 2006 to nearly $5.4 billion (see table).

Yvo de Boer, head of the UN Framework Convention on Climate Change (UNFCCC), predicted that by 2050, this could grow twenty-fold. "If rich countries commit to reduce emissions by 60% by 2050 compared to 1990 levels, and if they buy half of the reductions in developing countries, that would generate $100 billion in financial flows for clean development options," he told delegates at the international Carbon Expo in Cologne in May.

In spite of the collapse in EUETS prices, CDM credits were marginally up in 2006. Most certified emissions reductions were traded at $8-$14.

Projects for the destruction of the potent greenhouse gas HFC-23 continued to dominate, with 34% of the CDM market, but were down on 2005 when such projects accounted for 67%. Nitrous oxide (N2O) abatement and renewable energy projects saw their market shares increase significantly.

Most CDM projects (61%) continue to be located in China. India had 12% of projects, while Africa only had 3%.

London has consolidated its position as the dominant hub for the international carbon market, with more than 50% of CDM transactions occurring in the UK. Even so, says the report, few companies in this field have managed to turn a profit yet.

The voluntary offset market reached $80 million in 2006 and could reach $1 billion in 2012, says the bank. But it warns that the lack of standards threatens its future, baldly stating that "rarely does ‘a tonne, is a tonne, is a tonne’ hold less true than it does in this segment".

A "credible voluntary standard," it says, "will do more to attract value to this segment than any other action." The lack of a standard "…remains a significant reputation risk, not only to its own prospects, but also to the rest of the market, including the segments of regulated emissions trading and project offsets."

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