The growing scarcity of CO2 emissions permits expected to result from tighter EU regulation is sending favourable signals to the carbon market, according to Per-Otto Wold, CEO of Point Carbon.
Per-Otto Wold is chief executive officer (CEO) of Point Carbon, a market analysis and consulting firm.
Despite the uncertainties over an international agreement to replace the Kyoto Protocol, how do you see carbon markets developing in the coming years?
It depends which markets you are talking about. On the CDM [Clean Development Mechanism, which is part of the Kyoto Protocol], I think there will be continued uncertainty which might hamper volumes a little bit.
For EUAs [European Union Allowances], they will continue to grow rapidly and the draft EU-ETS (Emissions Trading Scheme) review is actually a bullish factor for the EUA price, where potentially more reductions will have to take place within Europe.
Also in the US, with the presidential candidates all supporting further commitment on climate change, it is also a bullish factor and we see a lot of activity from market players there.
Why the uncertainty on CDM markets?
There is uncertainty for CDM demand based on the European Commission’s requirement to have an acceptable international agreement [on climate change to replace the Kyoto Protocol] for the current limits on CDMs to be increased. So, if such an agreement doesn’t happen, the current limit on CDMs will have to be spread out over 13 years instead of five. And because CDM supply is already bigger than the demand will be, it is a factor that potentially hampers further investments in CDMs.
Do you see an appetite outside the EU to continue with CDMs? Has it been convincing enough in your view?
The CDM is to a large extent a well-functioning mechanism. Some criticism has focused on the rigidity of the system or that the executive board did not have enough funds. These problems have been solved to a large extent, a lot of [CO2 emissions] reductions have taken place thanks to the system and I think there is a fair degree of confidence in the CDM mechanism. Based on that, you see investment in 130 countries around the world and also from investors outside the EU like Japan and the US.
There is a lot of interest these days in so-called sectoral approaches to emissions trading that would focus on certain energy-intensive sectors such as chemicals, steel or aluminium. What is your view on this? How could sectoral approaches be combined with the EU-ETS, which is an economy-wide system? Can the two systems co-exist or does it create a system which is too complex to manage?
It does and it will create a less efficient system as there might be leakages from sectors that are not covered. But I guess that might be a pragmatic approach to cover some of the developing countries, where some sectors are easier to monitor, rather than to go nationwide – for example the power and heat sectors, which are large emitters. So this may be a pragmatic and intermediate approach to globalise the market but it will create challenges.
Sectoral approaches are precisely aimed at preventing ‘carbon leakages’ whereby companies relocate to countries where there are less CO2 emissions constraints. So how can they continue to happen under a sectoral approach?
It’s leakages internationally. For example, if you have an agreement in the cement sector, let’s say between China and Europe, there is no leakage there. But obviously between sectors, you have to be clear about the definition of the sector that is covered and where the guidelines are.
What is your assessment of the Commission’s ETS review? Is it going to send the right signals to the market?
It depends on who you ask. CDM developers, for example, would have liked more certainty. But if you ask industry, I think the issue of competitiveness has to a certain degree been solved, or at least tried to be solved, through the amount of free allocation, which is different in the power and heat sector than in the industrial sector.
The EU is currently talking about trading renewable energy certificates. Is Point Carbon going to get involved in such trading?
Currently we’re not involved in trading renewable certificates. From what I understand, it is not a big market at this stage. However, it does relate to the carbon market and the 20% by 2020 proposal [to reduce greenhouse gas emissions by 20% in 2020]. It is linked because investments in renewables will create less emissions and hence less demand in the EU-ETS. But whether there is going to be a vibrant trade in renewable certificates, I am not certain.