The Global Carbon Trading Market: Concepts, Regulations and Industry Trends to 2020

Introduction

GBI Research’s report, “The Global Carbon Trading Market - Concepts, Regulations and Industry Trends to 2020” provides an in-depth analysis on the global carbon trading market. The report provides the latest information on the value, volume and price of the emissions traded in primary project-based mechanisms such as Clean Development Mechanism (CDM), Joint Implementation (JI) and secondary CDM, and allowance markets such as the EU Emission Trading System (ETS), New South Wales Exchange, Chicago Climate Exchange, the Regional Greenhouse Gas Initiative (RGGI) and Assigned Amount Units (AAUs). The report provides a scenario-based forecast of the carbon market up to 2020. The report provides an overview on various carbon registries, carbon exchanges and the major companies participating in the carbon trade. The research work provides indispensable assessment of risk and opportunities for the corporate in the carbon constraint environment. Regulatory efforts to mitigate climate change have spawned an emerging carbon market that grew at compound annual growth rate (CAGR) of 89% to reach $138.3 billion in 2009. The EU’s initiatives to build a broad, globally linked carbon market, the prospective US Federal cap-and-trade program and the strong emergence of other regional market trading mechanisms will drive the carbon market significantly beyond 2012.

Report Highlights
The Global Carbon Trading Market: Concepts, Regulations and Industry Trends to 2020

Global Carbon Market is Poised for a Dramatic Growth Post 2012 under Proposed Regulations

Global Carbon Trading Market, Value ($ bn), 2005–2020

Source: GBI Research

Regulatory efforts to mitigate climate change have spawned an emerging carbon market that was valued at $10.9 billion in 2005 and grew at compound annual growth rate (CAGR) of 89% to reach $138.3 billion in 2009. The global carbon market doubled for two consecutive years form $31.2 billion in 2006 to $63 billion in 2007 and $126.3 billion in 2008 due to the expansion of allowance markets. The European Union (EU) Emission Trading System (ETS) experienced a robust growth during this period. However, the recession in the global economy contained the impressive growth of the global carbon market. The global carbon market registered a less than 1% increase in value in 2009. The primary reason for such market behavior was the sharp decline in carbon prices, on the back of lower oil and energy prices and a deteriorating economic outlook. The demand for carbon allowances fell sharply in late 2008 and early 2009 as the recession reduced economic output, resulting in much lower emissions than had been expected.

GBI Research predicts that the global carbon trading market will experience a dramatic growth after 2012 and reach $1.2 trillion by 2020. The EU’s initiatives to build a broad, globally linked carbon market, the prospective US Federal cap-and-trade program and the strong emergence of other regional market trading mechanisms will drive the carbon market significantly beyond 2012.

Primary Project Based Market is Losing Impetus Due to Uncertainty in Carbon Mitigation Mechanisms Post-2012

Global Primary CDM Market, Annual Volume Transactions (MtCO2e), 2005–2009

Source: GBI Research

The primary market for project-based emission reductions declined considerably in the year 2009 under the weight of the economic downturn. The primary CDM transactions that accounted for the largest share of activity in the primary market, at 84% of volumes and 91% of value transacted, declined in both volume and value terms.

The primary market for project-based emission reductions weakened considerably in the second half of 2008 and 2009. The buyers became more cautious due to persisting uncertainty about the role of and the demand for CDM and JI in the post-2012 climate regime, procedural delays, delivery and issuance challenges, and credit risks amid the worsening economic climate.

Secondary Project-based Market: Instrument to Hedge Price Risk in the Primary Project Based Market

Global Secondary Project-based Market Volume Transaction (MtCO2e) and Carbon Price ($/tCO2e) Shift. 2005–2009

Source: GBI Research

European traders, particularly financial and energy marketers dominated the secondary CER market. Traders hedge their exposure to price or volume risks in the primary markets through the secondary market. European Climate Exchange (ECX) data analysis indicates that traders predominantly opt for put options on guaranteed CERs, therefore hedging their price risk in the market.

The rise in trading in various exchanges and platforms by European financial and energy companies has led to a rise in the volume and value of the secondary CDM market. Hence, the trade value of secondary CDM has grown despite declining interests in project-based mechanisms. The volume transaction in the secondary market for CERs grew in 2009 to reach 1.2 billion CERs transacted for a value of $22.4 billion. Contrary to the exponential market growth in 2008, the growth of the secondary market for CERs was dampened in 2009. The marginal increase of 19% in volume transaction of CERs could not boost the market in value terms due to the decline of CER prices, which fell from $24.51 in 2008 to $17.53 in 2009. A market for options on CERs started to emerge in the second half of 2008, with hedging, profit-taking, raising cash and arbitrage as the main drivers of this market segment.

The US: Revitalized Interests in Carbon Commodity Market

Over the past years, the US has instituted a number of regional initiatives with the goals of implementing emissions trading programs. The size of the total allowance market in the US — the combined allowance volumes of the Regional Greenhouse Gas Initiative (RGGI) and the Chicago Climate Exchange – was 805 MtCO2e, valued at $2.5 billion in 2009. The US federal cap-and-trade mechanism has been expected for a long time and the implementation of the scheme will boost the North American and world carbon trading markets.

Rising investments and efforts in energy efficiency programs and renewable energy programs driving carbon trading volumes in regional markets. The RGGI states in the US - Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont - have been participating in numerous clean energy projects and initiatives. RGGI states have invested in renewable energy sources and energy efficiency projects to decrease their carbon footprints. These states have created employment opportunities and generated lower electricity bill values due to their low-carbon investments. These states are investing in green building programs and are conducting workshops and training programs to improve awareness on energy efficiency measures. The clean energy initiatives have therefore boosted carbon trade in the region and the trading of carbon permits.

Hurdles in Implementation of the US Cap-and-Trade Would Affect the Dynamics of the Global Carbon Market

Global Carbon Trading Market Potential Scenario Based Assessment of the Market, Value ($bn), 2010–2020

Source: GBI Research

The US government faces hurdles in the enforcement of cap-and-trade program for GHG emissions. One of the major setbacks for the US cap-and-trade was the failure of the Copenhagen Accord to impose mandatory emission reduction targets. China, one of the largest GHG emitters, is not legally bound by the emission reduction targets and hence the existing government faces a tough challenge in the implementation of initiatives for low-carbon economy. Worldwide potential investors and eco-friendly firms are awaiting the implementation of the US cap-and-trade program as it has immense potential, and further delays in the launch of the cap-and-trade program will hinder the investments in clean energy. Prolonged delays can decelerate investments in energy efficiency and alternate energy projects. Additionally, it could lead to the postponement of the emission trading market in Canada and other carbon policy frameworks worldwide.

Sale of Recycled Carbon Credits Will Hinder Growth of the EU ETS

The EU countries are considering the sale of surrendered credits and these surrendered credits would influence the credibility of the EU ETS market. In March 2010, Hungary announced that it will sell 2 million metric tons of United Nations (UN) credits for $21m. These credits reenter the market and might be mistaken for compliance grade credits. The entry of these credits into the market would lead to lack of transparency and increase the risk of transactions. UN Certified Emission Reduction credits are on the ones generated by emission reduction projects in emerging nations and these credits can be used for compliance with GHG emission reduction targets or they can be used by power generation companies as an alternative to EU permits by governments. Hence, the Eastern European countries are using the surrendered credits in the trading markets. The International Emission Trading Association (IETA) has brought in certain initiatives to counter the resale of surrendered credits. The IETA mandates that credits surrendered to the EU registry Scannot be deployed for compliance or for carbon trading systems. The European Commission (EC) and the IETA are working together to reduce the risk of surrendered transactions and therefore improve the transparency in those transactions. There are other challenges pertaining to surrendered allowances, such as that the credits can also be sold to markets outside the EU and there is no international authority to monitor these transactions beyond the EU ETS currently.

Success in Carbon-Constrained Economy: Capture Opportunity rather than just Avoiding the Risks

Carbon substantiality is no longer compliance or a branding issue; it is now a core business issue. Global business houses and corporate across all verticals are of the view that there is a need to make carbon sustainability truly viable by practicing it in economically sustainable manner. Over the past few years, the carbon management landscape for companies has witnessed a dramatic change. The efforts to reduce carbon emissions have risen multifold and strategies to mitigate impact of climate change have reached new dimensions. Today, companies are striving to transform their compliance challenges to competitive advantage. Companies are generating business value by managing the risks and opportunities associated with climate change.
Carbon management is increasingly becoming main-stream business function due to higher awareness of the business value associated with a broader approach to carbon management. Companies are focused on generating revenue from their in-house climate change solutions and initiatives; moreover firms are identifying carbon reduction opportunities across the supply chain. Large businesses have started sharing information on their carbon performance and climate risks and opportunities with investors and other stakeholders.

Corporate Carbon Exposure, Risks and Opportunities

Source: GBI Research

GBI Research predicts that the currently climate policy and corporate carbon exposure are likely to decrease profits for corporate. Eventually, in the long run, major cost of compliance will be passed on to the consumers. Hence, early movers on climate change are likely to gain and likely to stay ahead of regulatory compliance curve. The negative carbon exposure will be in the form of compliance obligations, and this would increase the energy costs and raw material costs. Additionally, an excess cost would be incurred on implementing new technologies. Carbon trading and development of new markets may provide a silver-lining to the situation.

The success of any business in the carbon constrained economy hinges upon the ability to not only manage these risks but to also transform them into opportunities for future growth.