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The State of Play in Global Carbon Markets

Posted by: Mark Scott on April 27, 2009

Here’s one for both the optimists and pessimists among us. Despite the recession, the global carbon markets grew 37% — when measured by the volume of transactions — in the first quarter of this year, compared to the last three months of 2008, according to consultants New Carbon Finance (NCF). But (and here’s the bad news), the total value of the CO2 market actually fell 16% in dollar terms to $28 billion over the same period due to the falling price to offset carbon emissions.

So what does this all mean? On the one side, the 37% quarterly growth in carbon transactions shows trading is going from strength to strength. That’s mostly down to Europe’s mandatory CO2-offsetting scheme, which currently constitutes 84% of the global market in dollar terms (and 78% when measured by volume). In contrast, the U.S. markets, constituting the Northeast’s Regional Greenhouse Gas Initiative and the voluntary Chicago Climate Exchange, represent 1% of worldwide CO2 trading value, and 3.7% of total volume.

On the flip side, the 16% drop in dollar terms — despite the expansion of CO2-offsetting activity — shows the global recession is taking its toll. Europe’s carbon price, for instance, currently stands around €13.5 ($17.7) per metric ton of carbon — or less than half what it was when energy prices peaked in July, 2008. The cheaper the carbon price, the less economic incentive there is to invest in green energy and other efficient technologies to lower companies’ carbon footprints.

All is not lost, though. As in previous reports, NCF reckons global CO2 markets will post steady growth between now and 2020, but could really start cooking if/when a U.S. federal offsetting scheme takes shape. That's expected by around 2012, and NCF's projections show just how much impact the U.S. could have. By 2012, according to the analysis, activity in the world's carbon markets could top $408 billion -- in itself, not a shabby figure. But by 2020 -- ie: when the U.S. scheme could be well underway -- that figure could reach $2.1 trillion, or a five-fold increase in just eight years.

A lot of detail is needed before a U.S. system takes shape. And critics of carbon trading still believe the buying-and-selling of CO2 credits benefits companies' bottom-lines, and does little to reduce overall carbon output. Yet for those wondering how a federal offsetting scheme could jumpstart the U.S.' green economy, you just have to look at NCF's '$2.1 trillion by 2020' figure. Even if the U.S. only represents 40% of total CO2 trading by the end of the next decade (and that's a conservative projection), that would represent an $840 billion economic incentive for companies to reduce their carbon footprint. When faced with such a price tag, it won't take long for industry to get on board.



BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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