The value of the world’s carbon market fell by 36% last year, according to Bloomberg New Energy Finance, the first annual contraction to hit the CO2 reduction mechanism since 2008.
The worth of traded EU carbon allowances and UN emissions credits fell from €95 billion in 2011 to a reported €61 billion. Analysts blame a near halving of the average price of carbon allowances from €11.2 a tonne in 2011 to €6.4 a tonne by the end of 2012.
“This analysis doesn't come as a surprise, as we all know the reality of the market,” Sarah Deblock, the EU policy director of the International Emissions Trading Association (IETA) told EurActiv in an email.
“It reaffirms the importance of the proposal by the European Commission to backload 900 million allowances during phase III of the EU ETS,” she said.
The EU executive has proposed staggering the release of these allowances to create a temporary scarcity to slightly raise carbon allowance prices, which have been depressed by economic recession and a lack of robust political signals.
However, the measure’s success may depend on Brussels’ ability to maintain ambiguity about the possibility of the credits being permanently removed, although the far-sightedness of market traders is considered a moot point.
One silver lining in the Bloomberg numbers for market traders may be a 26% leap in the total trading volume of carbon allowances to 10.7 billion metric tonnes, equivalent to a third of the world’s total CO2 emissions.
Much of this may be down to speculation which surrounded the EU’s plans for intervention in its Emissions Trading System (ETS). The final backloading proposal from the European Commission is still awaiting approval from the EU's Parliament and member states representatives in the Council of Ministers.
Guy Turner, Bloomberg New Energy Finance’s director of carbon markets said that the drop in the carbon market’s value was significant primarily as a temporary response to the recession.
“Any market will go through ups and downs,” he told EurActiv over the phone from London. “Given that the market has only been in existence since 2008 and hasn’t suffered a down year in terms of market size, I think it rode the global financial crisis pretty well.”
Bloomberg New Energy Finance predicts that in 2013, market value will increase to around €80 billion because of the EU’s backloading measures, and that in 2014 it will be worth a record €94 billion.
“What matters is how much demand there is [for allowances] today,” Turner said. “That’s what determines short term prices, so we think that the backloading will support prices in the short term, unequivocally.”
New market entrants
The cap and trade idea, which began in the US, will soon be buoyed by the entrance of a pack of countries and regions to the global trading floor.
In 2015, Australia and South Korea are due to open carbon markets, while China is beginning its own project this year and California, a US state one eighth the size of Europe, launched its first carbon allowances auction on November 14, 2012.
Australia’s carbon price has been fixed at €18 a tonne until 2018, when it will merge with the EU’s ETS.
“California will be interesting,” Turner said. “I think you’re going to see the highest prices in the world in California, and although the schemes in Australia, South Korea and China aren’t actually trading yet, they are positive developments.”
China is expected to launch several regional pilot carbon trading schemes this year, initially using a nominal price for CO2, and these could also have a knock-on effect on world markets.
“We are eagerly anticipating the World Bank's State and Trends report for 2013, which will be released at Carbon Expo in Barcelona at the end of May this year,” Deblock said.
With a turnover that reached around €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.
The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.
The scheme has proved influential. Australia’s is due to begin carbon trading in 2015, Thailand and Vietnam have both unveiled plans to launch ETS’s, China is due to launch pilot schemes across several provinces this year, and India will ring the bell for trading on an energy efficiency market in 2014. Mexico and Taiwan are also planning to introduce carbon markets.
- 19 Feb. 2013: European Parliament environment committee scheduled to vote on a crucial one line amendment authorising carbon market action by the European Commission
- March 2013: Potential plenary vote in European Parliament on European Commission proposal for ETS reform
- 2014: India due to begin energy efficiency trading
- October 2014: Thailand due to launch a voluntary emissions market
- 2015: South Korea sue to begin emissions trading
- 2018: EU and Australia due to link emissions trading schemes
- DG Climate: Structural Reform of the ETS
- DG Climate: Carbon market reform press release
- DG Climate: Q&A - Emissions Trading
- DG Climate: EU ETS
- DG Climate Action: ETS Legislation
- Bloomberg New Energy Finance: BNEF
- Thomson Reuters: Point Carbon
- International Emissions Trading Association: IETA
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