While prices slump, carbon trading soars

ClimateWire, 8 July 2009 - The global carbon market continues to expand, and trading volumes are way up, a direct result of the global economic slump, argues a leading market research firm in its latest mid-year review.

Research posted yesterday by Oslo-based Point Carbon indicates that, while prices for greenhouse gas emission allowances and offset credits are still off from what they were trading at last year, trading for the first half of 2009 rose by 124 percent over the same period in 2008. The value of the global carbon market has also risen as a result, although carbon prices have been hit hard by the financial crisis.

All told, some 4.1 gigatonnes of CO2-equivalent instruments have traded so far this year, helping boost the overall value of the world's carbon market to about $65 billion, or 22 percent higher than in the first half of 2008. Analysts behind the new report, titled "Carbon Market Monitor Mid-Year Review," say the expansion is actually thanks to the worldwide recession, which has pushed energy demand down.

"Prices are lower due to the economic slowdown, but volumes are much higher as many depressed industry sectors in Europe have decided to trade their surplus carbon allowances," said global head of carbon analysis Henrik Hasselknippe in a summary.

While presumably terrible for carbon prices, the dumping of allowances by industries as they scramble to raise cash in any way they can actually illustrates "how the economic slowdown is, in effect, increasing market activity in the carbon sector," said Hasselknippe.

Trading in the European Union's Emission Trading Scheme (ETS), by far the world's largest carbon market, is up by a remarkable 140 percent so far this year over the same period in 2008, Point Carbon reports. Though prices for E.U. allowances (EUAs), the most liquid carbon instrument, are still modest, the boost in volume means the overall value of the ETS has risen by some 29 percent, to about €39 billion ($54 billion).

Analysts also say that the United States' first venture into cap and trade, the Northeastern states' Regional Greenhouse Gas Initiative, has also enjoyed strong growth.

Russian 'hot air' sales explode

But much of the increase in trading volume globally seems to be driven by the sharply increased reliance by governments on Assigned Amount Units (AAUs), carbon instruments generated under Kyoto Protocol rules by nations that were part of the former Soviet Union.

The first trades in AAUs only started last fall, but already that segment has grown to represent about 2 percent of the total market, Point Carbon reports. AAU trading volume has exploded by about 75 percent, with 75 million tonnes' worth changing hands so far this year, compared to just 43 million tonnes last year.

Growth in AAU trades is coming at the expense of the Clean Development Mechanism (CDM), a U.N. program for international emissions offsets that issues the popular Certified Emission Reduction (CER) credits. Carbon market insiders report that governments facing budget constraints are turning to cheaper AAUs in lieu of CERs to meet their Kyoto Protocol commitments.

Many in the emissions trading industry view the rise of AAUs in the market as troubling. AAUs are reductions attributed to former Soviet states, whose outdated industries collapsed in the early 1990s. As AAUs don't really represent actual emission reduction efforts, critics routinely deride the instruments as "hot air".

Last month, the International Emissions Trading Association (IETA) issued a letter to negotiators expressing concern over a surplus of AAUs in the market and warned against moves in Europe to transfer a large volume of them into a post-2012 commitment period.

Creating a serious 'structural imbalance'

"Until this surplus is dealt with, there is a structural imbalance that could seriously impact the ability of the market to function effectively, and could impact on the environmental integrity of the future international agreement," IETA President Henry Derwent said in the letter. "This damage could occur at a very sensitive time for the adoption of a market approach in the U.S. and for the future of the CDM."

While CDM trading volume is up slightly over last year, the total value of that market has slid by about 28 percent so far in 2009 as a consequence of slumping carbon prices and the rising popularity of AAUs, Point Carbon reports. And growth in CDM trading volume is actually being driven by the secondary market, or speculative trading on spot exchanges. Primary trades in CERs, usually from offset project developers directly to initial buyers, are down by roughly 36 percent.

"These reductions in volume and value reflect the fact that the economic downturn has seen future demand for (and supply of) these types of credits declining in favor of allowances which have already been issued," said Hasselknippe.

The U.N. Environment Programme's Risø Centre reports that the CDM issued 2.6 million new CERs to offset projects last week, contracting from where issuances stood in prior months. The United Nations' Joint Implementation program, which allows for offsetting in the former Soviet bloc, has also shrunk.

Author Nathanial Gronewold Publication Date 8 Jul 2009 Document Type News articles Issue/Topic Electricity Utilities Energy & Climate Source ClimateWire Include In RSS Energy & Climate News