The state of the carbon markets is Messy - not Messi

SUBMITTED BY ANDREW STEER 

Last week Barcelona brilliantly beat Manchester United to become the soccer Champions of Europe.  This week Barcelona hosted delegates at Carbon Expo, the annual jamboree for carbon marketers organized by the World Bank and others.  But sadly, the style, strength, efficiency and confidence shown by Messi, Villa, and Pedro are not much in evidence in global carbon markets today. More like my old fourth division club, Bexley United, which I believe has now ceased to exist.

• There’s certainly a lot to be gloomy about in the world of carbon trading over the past year:
• The overall size of the market worldwide shrank for the first time ever in 2010
• The primary CDM market (Clean Development Mechanism) – the principal window of carbon markets to the developing world – fell another 46% to $1.5 billion, down from $7.4 billion in 2005, and the lowest since trading began in 2005.
• Legislative disappointments in the USA, Australia and Japan, and the market have now become even more concentrated, with well over 90% of trades originating in Europe.
• Serious irregularities and fraud in the European Trading System (ETS), and suspicions of monkey business in some CDM HFC (Hydrofluorocarbon) transactions.  

Above all, confidence in the post 2012 market, when the first Kyoto Protocol Commitment period comes to an end, is on the floor, and thus demand for post-2012 deliveries is close to zero.

These points are all documented in the Bank’s new State of Carbon Markets Report, 2011launched this week. And yet 3,000 people turned up at the Carbon Expo this week, and seemed to doing deals and having a good time. Is there anything positive out there? Yes, actually.

First, the overall size of the market was still $142 billion, no small change, although overwhelmingly concentrated within the European Trading System.

Second, negotiators in Cancun last December made some good decisions that over time could breathe life into the CDM. Delegates agreed to standardized baselines, inclusion of forests in the system with measurement at the national level, city-wide carbon trading, and a move towards new trading platforms allowing significantly scaled up activity, such as through sectoral crediting etc.

Third, new players are warming up on the bench, albeit not within any globally binding legal system. California and some western states and Canadian provinces are scheduled to launch a trading system next year. Australia is exploring carbon trading legislation again this year, and everybody is watching Tokyo’s cap and trade system, which is the first city-level system to allow international trading.

Fourth – and most exciting of all – a number of non Annex 1 countries are designing their own internal schemes. In Barcelona we listened to the plans of countries like China, Chile, Colombia, Costa Rica, Indonesia, Mexico, Thailand and Turkey. Some will adopt cap and trade systems, not because they must, but because they feel it will boost technology and competitiveness, and because they want to be part of the solution. These countries and others will be supported in these plans by the World Bank’s new Partnership for Market Readiness.  

Bottom Line: With flows to developing countries from carbon markets of only $1.5 billion per year it is not worth the large effort of the World Bank Group and others on this market. We’re staying in this business because we don’t believe it will stay this way. Carbon markets have been shown to dramatically reduce the costs of reducing GHG emissions, and to transfer technology to developing countries. As in the case of all markets the future will depend on demand, supply and the regulatory system that brings the two together. We’ve a lot of work to be done on all three areas. While it’s demand that’s the binding constraint right now, we need to work on all three, so that the market is ready when scale up is inevitably required. I laid out these thoughts in my opening speech to the Expo.

We don’t know when or if there will be a legally binding global deal. Carbon markets would benefit hugely from such a deal, and can grow without it. As long as individual countries and groups of countries are committed to reducing their carbon footprint, and understand that this will be cheaper if part of their obligations can be bought from others, this market is set to grow.

The global carbon market is 11 years old this year, and like its human counterparts, entering that awkward stage. The good news is that even teenagers grow up.