Carbon: Integration of local and global carbon markets

Global and regional emissions trading markets are emerging and drive strategic energy policy. The EU-ETS is a leading player and dominated carbon trading in 2006, it is pivotal to achieving a truly 'global' carbon trading scheme and meeting the wider environmental challenge. The Clean Development Mechanism is key to engaging non-EU participants such as China who dominate the CDM market.



Report Highlights
Standardized exchange trade accounted for almost a quarter of the European carbon market. The European Carbon Exchange (ECX) accounted for around three quarters of all formalized emissions trading last year. Europe's leading power exchanges have used synergies with the carbon market to capture significant ETS volume 171 states signed the Kyoto Protocol by June 2007. Under the Kyoto Protocol, all Annex II countries have established emission quotas, in ratifying the protocol, essentially agreeing to bear the costs of emission reductions. With the EU viewed collectively as a single economy, it accounts for 27 of the 33 Annex II countries to ratify Kyoto China dominates selling into the CDM - China's rapidly growing, increasingly carbon-intensive economy offers the greatest scope for cost-effective Certified Emissions Reductions. Governments often invest in CERs to help meet their overall Kyoto targets, while private investors may look to hedge their exposure in regional markets like the EU ETS


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Figure 1: The EU is pivotal to establishing a truly 'global' carbon market 3
Figure 2: Europe's ETS dominated global carbon trading in 2006 4
Figure 3: Non-brokered bilateral trading accounts for just a fifth of European carbon market activity 5
Figure 4: The Anglo-Dutch ECX dominates formalized EU emissions trading 6
Figure 5: Key EU economies will ultimately determine the success of the ETS 9
Figure 6: The undesirable surplus of EU allowances remained in 2006 10
Figure 7: Both the UK and Slovakia secured European Commission (EC) approval for a larger emissions quota in their Phase II NAPs 11
Figure 8: Poland and its smaller central and eastern European neighbors have been disproportionately targeted by Brussels in Phase II 12
Figure 9: The EU is collectively off-target to meet its ETS commitments 13
Figure 10: The transition from Phase I to Phase II allocations will see the current surplus of credits replaced with an EUA shortfall from 2008 14
Figure 11: Trader focus is shifting from an increasingly meaningless ETS Phase I towards increasingly stringent Phase II allocations 15
Figure 12: While Europe's carbon market now dwarfs the CDM as Kyoto's most traded and valuable mechanism, project-based trade remains pivotal 16
Figure 13: China generated 70% of all CDM CERs in 2006 17
Figure 14: The UK was the largest purchaser of CERs in 2006, reflecting its large ETS Phase I deficit 18
Figure 15: Central and eastern European states are cashing in on a 'greener' economic recovery 19
Figure 16: Copenhagen and Vienna are buying ERUs to bolster their 2012 Kyoto compliance efforts 20
Figure 17: Private investors have greater interest in CDM credits, which can be used in Phase I 21
Figure 18: Governments take a longer-term view, dominating trade in JI credits post-2008 22
Figure 19: While nominal and relative growth of the EU ETS is impressive, voluntary Kyoto schemes are growing at over 300% per annum 23


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