Global carbon market update

Introduction

Following a dismal year for global carbon markets resulting from economic gloom and unsuccessful international climate negotiations at Copenhagen, attention has now turned to promotion of national and regional emissions trading schemes.

Scope

*An overview of carbon policy initiatives in the EU, the US, Australia and other developed and industrialising countries

*A review of international climate change negotiations, and the progress expected in the near future

*Insight into which regions will dominate the future global carbon market

*Forecasts of future carbon price movements in all major emission trading schemes

Highlights

Political setbacks have delayed the implementation of cap-and-trade schemes in the US and Australia, whilst the lack of international agreement at Copenhagen has hindered national progress in several other developed countries

Carbon prices will begin to recover as developed countries slowly pull out of recession in the coming year, with growth in global carbon markets expected post-2012

Voluntary carbon markets are set to benefit greatly from pre-compliance buyers and increased corporate social responsibility concerns

Reasons to Purchase

*Establish the current level of trading in carbon allowances and assess the drivers for growth in global carbon markets

*Navigate the various political debates currently surrounding the implementation of carbon markets, at both the national and international level

*Identify the threats and opportunities that emissions trading presents to business strategy


Report Highlights
Political setbacks have delayed the implementation of cap-and-trade schemes in the US and Australia, whilst the lack of international agreement at Copenhagen has hindered national progress in several other developed countries

Carbon prices will begin to recover as developed countries slowly pull out of recession in the coming year, with growth in global carbon markets expected post-2012

Voluntary carbon markets are set to benefit greatly from pre-compliance buyers and increased corporate social responsibility concerns
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Datamonitor View 1
CATALYST 1
SUMMARY 1
Table of Contents 2
Table of figures 3
Analysis 4
2009 saw the growth of global carbon markets hampered by the economic slowdown and stalled international politics 4
The Kyoto Protocol binds most developed nations to a cap-and-trade system 4
Emissions trading is an administrative approach used to control pollution by way of economic incentives 4
The past year has seen a number of setbacks that have cast doubt on the future of a global carbon market 5
The global carbon market continues to be dominated by the EU ETS 6
A number of regional cap-and-trade schemes are emerging in both developed and developing countries 7
Progress towards a global carbon market has been slow, but several nations have taken independent action 7
Following a poor 2009, growth is expected to return to the global carbon market in 2010 8
Regional and national carbon trading schemes will make up the majority of the global carbon market for the foreseeable future 8
Several quantitative and/or qualitative restrictions will hinder the progress towards a truly global carbon market 9
Five key issues need to be considered, acknowledged and resolved before carbon markets worldwide can be linked effectively 11
The Climate Change Conference in Copenhagen failed to deliver the meaningful negotiated outcome the world was hoping for 11
The Copenhagen Accord left many key structural challenges unresolved 12
COP16 is likely to deliver little more than an operational architecture, with a binding treaty remaining out of reach for 2010 13
Carbon prices will begin to recover as developed countries slowly pull out of recession in the coming year, with growth in global carbon markets expected post-2012 14
Carbon prices are determined by a range of region-specific demand and supply factors 14
In the long run, energy prices and carbon prices will rise in tandem due to increased energy demand from industrializing countries 15
Following economic recovery, Datamonitor expects upward pressure on carbon prices due to increased industrial production 16
Although desirable, the success of global negotiations is not vital to the construction of carbon markets 17
Considerably higher European carbon prices are expected post-2012 as the EU ETS experiences tighter caps and increased coverage in its third phase 19
The EU ETS is the leading emissions trading system 19
The planned expansion of Phase III brings an estimated additional 100MtCo2e within the scope of the EU ETS 20
GHG emissions under the EU ETS fell by 11.2% in 2009, reflecting the severity of the global economic downturn 20
In 2009, the biggest drops in emissions were seen in the iron and steel industry, and the brick and ceramic industry 21
Emissions and industrial production in the EU are expected to recover steadily over the next five years, raising carbon prices 22
Sentiment bounce: failed Copenhagen talks have affected EU carbon prices, but fundamentals will quickly regain the upper hand 23
No changes on the exchanges: the ECX continues to lead the standardized market for EU emissions trading 24
Upside risks could be introduced into current abatement targets, causing more upward pressure on demand and pricing 25
The UK's CRC has brought in a new ETS to capture those organizations that fall outside the realm of the EU ETS 25
Growth in the EU ETS will remain sluggish as the region pulls out of recession, while the lack of a global agreement weighs on the market 26
Offset markets continue to be plagued by post-2012 policy uncertainty 28
Failed Copenhagen talks coupled with the pre-existing limitations of the CDM are causing jitters in the market for carbon offsets 28
The lack of regulatory certainty post-2012 will constrain CDM financing to the severe detriment of new offset projects post-2010 29
Uncertainty regarding international climate change policy post-2012 plagues the CDM market 29
Without a successor to Kyoto, CER could become a two tier commodity market made up of pre- and post-2013 CDM projects 30
The JI market remains small and risk-prone compared to the more mature CDM market 31
Political setbacks have delayed the implementation of cap-and-trade schemes in the US and Australia, while the lack of international agreement at Copenhagen has hindered national progress in several other developed countries 32
Bottom-up approaches are taking shape in the US given the failure of federal climate change legislation to emerge so far 32
US carbon markets are not solely reliant on federal cap-and-trade legislation being passed 33
'Lesser of two evils': the EPA endangerment finding makes a strong case for the prompt passing of a US climate bill 33
US cap-and-trade is not 'dead' 34
The passing of an all-encompassing Senate climate bill in 2010 remains unlikely 35
KGL presents significant opportunities for utilities operating across the energy value chain in the US 36
US carbon markets will remain deflated until the economy or the odds of a federal cap-and-trade program being passed pick up 37
Much like their RGA counterpart, 2010 CFI contracts will remain deflated and are unlikely to drive utility innovation in clean energy 38
Canada is unlikely to implement any form of federal cap-and-trade scheme before the US government takes the lead 38
Australia is mindful of the impact that incoming carbon cap-and-trade mechanisms would have on its national competitiveness 39
The CPRS includes a number of mechanisms designed to minimize economic disruption from the scheme 40
Overall increases in prices due to the introduction of the CPRS will be modest 41
It is expected that the introduction of the CPRS would result in the demise of the GGAS in New South Wales 41
The NSW government has committed to extending targets as far as 2020. However, it is expected that the GGAS would cease operations if the Australian government introduces the Carbon Pollution Reduction Scheme. 42
It is a question of when, not if, there will be an emissions trading scheme in Australia 42
Several amendments have been introduced to the New Zealand Emissions Trading Scheme to reduce the costs of participation 43
The JVETS has allowed Japan to accumulate knowledge and experience of emissions trading 44
The Japanese government is committed to implementing a national ETS, but details are yet to emerge 45
The emissions trading scheme recently launched in Tokyo could provide a blueprint for a future national scheme 45
Voluntary carbon markets are set to benefit greatly from pre-compliance buyers and increased CSR concerns 47
Voluntary carbon markets nearly doubled in volume in 2008, reaching 123.4MtCO2e 47
The reasons behind companies engaging in voluntary carbon markets are diverse 47
The verification standard used is a major determinant of VER prices for projects 48
Voluntary markets are well insulated from the failures of the climate change talks in Copenhagen 49
Incoming climate legislation presents companies with both risks and opportunities 50
There are a number of risks regarding incoming climate legislation that companies should consider 50
APPENDIX 51
Glossary 51
Additionality 51
Australian Emissions Unit (AEU) 51
Assigned amount units (AAU) 51
Biomass 51
California Assembly Bill 32 51
Cap-and-trade 51
Carbon capture and storage (CCS) 52
Carbon dioxide (CO2) 52
Carbon dioxide equivalent (CO2e) 52
Carbon offset 52
Carbon Pollution Reduction Scheme (CPRS) 52
Carbon Reduction Commitment (CRC) 52
Carbon trading 52
Certified Emission Reduction (CER) 53
Chicago Climate Exchange Carbon Financial Instrument (CCX CFI) 53
Clean Development Mechanism (CDM) 53
Cleantech 53
Climate change 53
15th Conference of the Parties (COP15) 53
Copenhagen Accord 54
Emissions trading 54
Emission Reduction Unit (ERU) 54
European Climate Exchange (ECX) 54
European Union Emission Trading System (EU ETS) 54
Greenhouse gases (GHGs) 54
Intergovernmental Panel on Climate Change (IPCC) 55
Joint implementation (JI) 55
Kerry-Graham-Lieberman bill 55
Kyoto Protocol 55
National Allocation Plan (NAPS) 55
New South Wales Greenhouse Gas Reduction Scheme (GGAS) 55
New Zealand Emissions Trading Scheme (NZ ETS) 55
Regional Greenhouse Allowance (RGA) 55
Regional Greenhouse Gas Initiative (RGGI) 56
Further reading 56
Ask the analyst 56
Datamonitor consulting 56
Disclaimer 56
List of Figures
Figure 1: The first mandatory emissions trading scheme in the world, the EU ETS, represents approximately 80% of the global carbon market at present, in both value and volume terms 6
Figure 2: Bottom-up approaches to combating climate change are becoming more frequent as agreement on a global scale falters 7
Figure 3: Emergence of regional carbon markets around the world 7
Figure 4: In 2009, despite the recession, global carbon market volume grew by 68%, although value stagnated due to the low carbon prices witnessed throughout the year 8
Figure 5: Although the creation of a US emissions trading system would drive global carbon market growth, passage of such legislation remains unlikely this year 9
Figure 6: Current carbon markets operate a patchwork of carbon currencies, which lack substitutability. As a result, we will witness different carbon prices in different regions, with no global carbon price. 10
Figure 7: Global carbon market issues 11
Figure 8: Successes of COP15 12
Figure 9: Both regulatory factors and market fundamentals directly concerning the GHG emission level will impact the price of carbon 14
Figure 10: Projected energy prices 15
Figure 11: Energy price trends affecting carbon price 16
Figure 12: As the global economy pulls out of recession Datamonitor expects the demand for carbon allowances to rise, matched with a corresponding upward movement in carbon prices 16
Figure 13: Development of the EU ETS architecture 20
Figure 14: The EU over-allocated some 60.6 million free carbon permits last year, resulting in depressed carbon prices being witnessed throughout the year 20
Figure 15: 2009 European carbon emissions by sector 21
Figure 16: Change in 2009 carbon emissions by sector 21
Figure 17: European emissions and industrial production values projected to 2015 22
Figure 18: The market will enjoy a modest recovery in 2010, with prices likely to rebound towards the end of the year as companies hedge their positions in anticipation of tighter Phase III emission caps in 2013 23
Figure 19: The Anglo-Dutch ECX continues to dominate formalized EU emissions trading 24
Figure 20: UK Carbon Reduction Commitment Scheme development 25
Figure 21: Risks associated with UN offset markets 28
Figure 22: A lack of clarity over emission liabilities and international abatement mechanisms post-2012 will perpetuate carbon market uncertainty and cause a drop in the number of new CDM projects in 2010 29
Figure 23: Beyond 2012, policy will dictate the future direction of this market. Future demand will be determined by regulation in upcoming national/regional schemes. 29
Figure 24: In the absence of an international agreement post-2012, the EU's stance on CER and ERU markets might well result in a two tier market 30
Figure 25: Most JI projects are undertaken in Central and Eastern Europe, with Russia and the Ukraine as the main recipients 31
Figure 26: Together, the Western Climate Initiative (WCI), Midwestern Greenhouse Gas Accord (MGGA) and Regional Greenhouse Gas Initiative (RGGI) represent a third of US and Canadian emissions 32
Figure 27: Regional North American emissions trading schemes 32
Figure 28: The EPA will target heavy polluters: companies emitting more than 0.25mtCO2e a year will be affected, including many multinationals 34
Figure 29: With nuclear, more oil and gas drilling, and a secure future for coal (through CCS) celebrated alongside renewables, the Senate bill provides a strong basis for the IEA's 450 scenario. 36
Figure 30: 2010 RGA prices and volumes will remain deflated until there is more certainty regarding the form that federal climate legislation will take 37
Figure 31: The Chicago Climate Exchange Carbon Financial Instrument (CCX CFI) is suffering a tremendous lack of price tension 38
Figure 32: The CPRS would challenge the Australian economy, which is currently heavily dependent on fossil fuel power generation 39
Figure 33: If passed, the CPRS will introduce an emissions trading scheme covering sectors that emit some 400 million tonnes of GHG emissions 40
Figure 34: While only approximately 1,000 businesses will be required to participate in the CPRS, other sectors will be affected as prices are passed down the supply chain 41
Figure 35: The New South Wales Greenhouse Gas Reduction Scheme (GGAS) has imposed enforceable annual reduction targets on its participants since 2003 42
Figure 36: Development of New Zealand Emissions Trading Scheme 43
Figure 37: It is estimated that power and petrol price rises as a result of the New Zealand Emissions Trading Scheme (NZ ETS) will be halved due to amendments made to the scheme last year 44
Figure 38: Japan's Voluntary Emissions Trading Scheme (JVETS) supports voluntary GHG emission reductions by subsidizing CO2 reduction activities and emissions trading 44
Figure 39: Although small compared to the compliance market, the voluntary carbon market has been growing quickly, nearly doubling in volume in 2008, reaching 123.4MtCO2e 47
Figure 40: The most utilized standard in 2008 was the Voluntary Carbon Standard (VCS) (48%), followed by the Gold Standard (12%) and the Climate Action Reserve (10%) 48
Figure 41: The carbon market's biggest risk today is caused by the lack of market continuity beyond 2012; a risk which has not been alleviated by the talks at Copenhagen, as was previously hoped 50
Figure 42: Companies should be guided by the clear direction of policy that Copenhagen signaled, despite its failure to produce a binding treaty. The talks provided enough of a message for energy companies to see they must invest in improving efficiency, renewable energy sources and other low-carbon forms of energy, and in technologies such as CCS. 50

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