State and Trends of the Carbon Market 2008
by Karan Capoor, Sustainable Development Operations, World Bank and Philippe Ambrosi, Climate Change Team, World Bank
The following article is the Executive Summary of the full ‘State and Trends of the Carbon Market 2008’ Report by Mr Karan Capoor and Dr Philippe Ambrosi of the World Bank. The full Report, which we would encourage readers to consult, can be accessed from the World Bank’s Carbon Finance Unit at http://www.carbonfinance.org. We are grateful to Mr Capoor and Dr Ambrosi and the World Bank for their permission to publish part of this Report in TMI.
Climate change captured the public’s imagination in 2007, as a major report prepared by the Intergovernmental Panel on Climate Change (IPCC), a Nobel Peace Prize and the launch in Bali of the negotiation process for a post-2012 climate change regime, contributed to making climate change a key part of the global economic and environmental debate. January 1, 2008 also marked the formal start of the compliance period of the Kyoto Protocol and of Phase II of the European Union Emission Trading Scheme (EU ETS).
Regulation constraining carbon emissions has spawned an emerging carbon market that was valued at US$64 billion (€47 billion) in 2007.
The growth of the carbon market
The carbon market is the most visible result of early regulatory efforts to mitigate climate change. Regulation constraining carbon emissions has spawned an emerging carbon market that was valued at US$64 billion (€47 billion) in 2007 (see Table 1). Its biggest success so far has been to send market signals for the price of mitigating carbon emissions. This, in turn, has stimulated innovation and carbon abatement worldwide, as motivated individuals, communities, companies and governments have cooperated to reduce emissions.
The EU ETS market has been successful in its mission of reducing emissions through internal abatement at home, and of stimulating emission reductions abroad. The European Commission, learning from the experience of Phase I, has strengthened several important design elements for EU ETS Phase II. Along with recent EU proposals for Phase III (‘Climate Action and Renewable Energy Package’, EU Commission, Jan 23, 2008) these improvements include tighter emission targets, stronger flexibility provisions for compliance (at least for EU Allowances, or EUA, although not for project-based credits, see below), more attention to internal EU harmonization and, most importantly, longer-term visibility for action to reduce emissions until 2020. These proposed reforms create confidence in emissions trading as a credible and cost-effective tool of carbon mitigation. Australia, Japan and authors announced that they too would develop their own emissions trading schemes (ETS).
In 2007, US$50 billion (€37 billion), almost entirely in Phase II allowances and derivative contracts were traded over-the counter, bilaterally, and, increasingly on exchange platforms that publish transparent data about price formation in the markets. (The major European carbon marketplaces are the European Climate Exchange (ECX) and the London Energy Brokers Association (LEBA). Markets and exchanges also emerged around the world, including New York, New Delhi & Mumbai, India and elsewhere.) Energy utilities and industrial companies hedged their carbon exposure by buying the EUA and financial companies bought and sold the EUA for their clients (“flow trading”) and for their own account (“proprietary trading”).
In 2007, buyers also continued to show a strong appetite for primary project-based emission reductions, reflected by continued growth in the project pipeline showing that 68 countries had identified and offered to reduce 2,500 million tonnes of carbon dioxide equivalent (MtCO2e) through over 3,000 projects. This potential supply received strong interest, mainly from private sector buyers and investors, who in 2007 transacted 634 MtCO2e from primary project-based transactions (up 8% from 2006) for a corresponding value of US$8.2 billion (6.0 billion), up 34% from 2006.
CDM accounted for the vast majority of project-based transactions (at 87% of volumes and 91% of values) and JI saw transacted volumes doubling and values tripling in 2007 over the previous year. The CDM alone saw primary transactions worth US$7.4 billion (€5.4 billion), with demand coming mainly from private sector entities in the EU, but also from EU governments and Japan. The voluntary markets, supporting activities to reduce emissions not mandated by policymakers, also saw transacted volumes doubling to 42 MtCO2e and value tripling to US$265 million in 2007. There were reports of growing demand for voluntary “pre-compliance” credits for U.S.-based forestry projects under the California Climate Action Registry (CCAR).