The development of pan-regional and national allowance-based carbon marketplaces

Markets are bearish about the future of carbon and carbon policy. Fears of declining legislative and capital commitments have set in, as governments shift their attention away from climate change issues to deal with the contingencies of the current economic turmoil. Long-term, investors will only crystallize the carbon opportunity if governments foster the right global regulatory environment.

Report Highlights
Recent movement in crude oil prices together with a continuing flow of surplus EUAs into the market suggests a short- to medium-term price floor of EUR15.00 for the year ahead EUA contract. For now, companies are unsure of their likely industrial output in years to come, and are showing little interest in looking beyond immediate compliance needs.

With so many uncertainties prevailing in the carbon and other financial marketplaces, carbon is increasingly irrational. Yet electricity demand in mature economies is relatively resilient and is likely to remain so. A minimum element of price and demand stability can therefore be expected in the short to medium term.

Many quantitative and/or qualitative restrictions currently stand in the way of a truly global carbon market. Carbon markets are plagued by burgeoning policies, frameworks and currencies, poor linking and limited convertibility. The biggest risk today to the carbon market is caused by the lack of regulatory continuity and uniformity beyond 2012.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
There have recently been significant and meaningful developments in carbon markets worldwide 2
In the last year, the carbon landscape has become broader, deeper and more complex 2
Developments in US and European carbon regulation have taken center stage 2
Confidence in Europe's flagship cap-and-trade mechanism, the EU ETS, was recently undermined 3
Phase II EU ETS EUA price forecasts are likely to remain deflated in response to recession fears and industrial output cuts 4
With so many uncertainties prevailing in the carbon and other financial marketplaces, carbon is increasingly irrational 5
A minimum element of price and demand stability can be expected in the short to medium term 5
A regulatory regime that reflectively prices-in the true market-driven cost of carbon is more important than ever 6
The US and Canada are assessing the demand for economy-wide carbon offset schemes 7
Current RGGI emission, volume and price trends poorly reflect likely future demand for state and regional GHG trading programs 8
It is unclear to what extent emissions trading schemes in Canada would be open to the global carbon market 9
In 2007 and 2008, Australasia received the carbon wake up call 10
In 2007, Australia introduced the notion of a national emissions trading scheme, leading to issues of credit substitutability 10
In Australia, the carbon pollution reduction scheme (CPRS) will not trigger economic decline; upward pressure on carbon is expected 11
CCS in Australia and elsewhere must address the fundamental concerns of market power imbalance and risk exposure 12
Linking carbon markets to achieve the required mitigation effort presents a significant challenge 13
Many quantitative and/or qualitative restrictions currently stand in the way of a truly global carbon market 13
Five key issues need to be considered, acknowledged and resolved before effectively linking carbon markets worldwide 14
Fragmented carbon markets are plagued by burgeoning policies, frameworks and currencies, poor linking and limited convertibility 15
APPENDIX 16
Ask the analyst 16
Datamonitor consulting 16
Disclaimer 16
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Figure 1: Widespread policy uncertainty is unsettling the carbon markets 3
Figure 2: A short- to medium-term price floor of approximately €15 for the front-year EUA contract is now expected 4
Figure 3: The relationship between gas, oil, coal and carbon is increasingly irrational 5
Figure 4: Government policy must send the 'right' signals to market to encourage capital growth 6
Figure 5: Investors are fleeing CCX contracts on mounting concerns about the future value and substitutability of the product 7
Figure 6: Holders of fraught CCX Carbon Financial Instruments (CFIs) are opting for the relative safe haven of the RGGI contact 8
Figure 7: While Canada is a party to the Kyoto Protocol, it will follow an alternative reductions schedule 9
Figure 8: The NSW GHG abatement scheme has suffered following uncertainty about the transition to the national ETS 11
Figure 9: CCS must gain the market support required for widespread deployment in Australia and globally 12
Figure 10: Markets operate a patchwork of carbon currencies which, more often than not, lack substitutability 13
Figure 11: Five key regulatory policy issues stand in the way of a unified global carbon marketplace 14
Figure 12: The global carbon market is fragmented: several carbon markets encompassing both allowances and project-based assets coexist with different degrees of interconnection 15
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