Climate Action 2011-2012

carbon Trading
climate Policy, Governance & Finance
Carbon trading:
achievements, key lessons
and future forecasts
By Henry Derwent, President and CEO and
Monique Motty, Policy Director Assistant for the
International Emissions Trading Association (IETA)
The carbon market is one of the most effective policies for
tackling climate change. It inspires operational excellence
and incentivises business investments in low-carbon
technologies. Not only is the market expected to save over
two billion tonnes of CO 2
emissions by the end of 2012,
but the development of the current global carbon market,
now worth over US$140 billion, has catapulted climate
change to the forefront of business decisions. But while
it exhibits real environmental and economic impact, and
helps achieve climate change goals, it remains vulnerable
to external factors.
In a period of downturn in economic growth, it is widely
perceived to be positive that the carbon market has adjusted
by a decrease in price. More problematic is a significant
downturn in investment. The State and Trends of the Carbon
Market 2011 (World Bank) shows a 60 per cent decline
in Clean Development Mechanism (CDM) investments
because of the lack of a sufficiently ambitious emissions
reduction agenda anywhere in the world.
After five years of rapid growth driven by European
demand, the market has stagnated in volume and value terms.
Over the past year or so, the European Union’s Emissions
Trading Scheme (EU ETS) – accounting for over 80 per
cent of global carbon market transactions – has experienced
embarrassing security breaches.
The international community’s
inability to agree on a post-2012
Kyoto framework has seriously
damaged the confidence of
the private sector.
Many other factors have impacted on carbon trading and
carbon prices. The Fukushima nuclear accident in Japan
in March 2011 increased the country’s fossil fuel use, and
with it CO 2
emissions and prices in the EU ETS. It has also
led to some high profile reversals of government positions
around the world, and to a further increase of political risk
perceptions in this market.
The development of the current global carbon market,
now worth over US$140 billion, has catapulted climate
change to the forefront of business decisions.
On the political front there have been disappointments,
the greatest of which was the United States failing to pass
federal cap-and-trade legislation last year. Korea and Australia
have delayed their domestic cap-and-trade schemes. There is
great uncertainty over future investments in some developing
countries as CDM investors do not know where demand
will come from after 2012; and finally, the international
community’s inability to agree on a post-2012 Kyoto
framework in Copenhagen (COP15) and Cancun (COP16)
has seriously damaged the confidence of the private sector in
the long-term viability of existing carbon markets.
The comeback
Nevertheless, a more optimistic reading of the resolutions
from Cancun justifies confidence that carbon trading can
have a future with or without global binding agreements:
• Parties at COP16 agreed to contribute annually US$100
billion into a Green Climate Fund as of 2020 to assist
developing countries’ climate change mitigation activities,
support adaptation, technology deployment and capacity
building initiatives. Much of this is expected to come from
scaled-up carbon markets.
• The continued reforms of the project-based instruments,
the Clean Development Mechanism (CDM) and Joint
Implementation (JI), hold the promise of a real reduction
in delays and a simplification of procedures.
• Outside the COP negotiations, numerous plans for the
establishment of regional and national market mechanisms
have emerged or are clearly continuing despite delays
and setbacks: from Australia, New Zealand, South Korea
and emerging economies like India, Brazil and China,
to Japan’s preparation of a new bilateral offset credit
mechanism, and Western Climate Initiative States and
© Emily Schreck
73 climateactionprogramme.org