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Carbon markets, still in the game

Pablo Benitez's picture

I’m writing to you from what is probably the most exciting place to be in the carbon world this week―Carbon Expo in Cologne Germany―the global trade fair and knowledge-sharing platform on current and future carbon investments. There are thousands of people here from all over the world and the story in the corridors is...well...carbon. It is a meeting place for large and small companies operating in the CO2 market, as well as government representatives and climate experts interested in the latest CO2 projects and climate developments. Carbon Expo is proving to be a showcase for introducing projects to investors and carbon buyers, with sessions on everything from the ‘How-to” of Low Carbon Growth to matchmaking and deal facilitation.

The Carbon Market Outlook

On Wednesday, the World Bank released its annual State and Trends of the Carbon Market report here at Carbon Expo. It had a very interesting story to tell.

We have seen the price of certified emission reductions drop, but the price change was not as dramatic as what seen in other markets. In the aftermath of a recession, carbon markets are back at their 2008 levels, which is a positive signal.

As discussed in the 2010 State and Trends of the Carbon Market report, carbon prices have fallen just under € 10 per certified emission reduction (CER). The short-term outlook shows a downward projection for the demand for emission reductions that comply with the Kyoto Protocol.. This is accompanied by a lack of long-term signals from governments, regulators and policy-makers, who could reverse this situation by taking some decisions on a post-2012 regulatory framework.

The International Emissions Trading Association’s ( IETA) 2010 GHG Market Sentiment Survey, was also released at Carbon Expo this week, and provides a similar “reality check” blended with mild optimism. The survey shows that while expectations for future trading volumes remain positive, there is a lack of confidence with regard to carbon prices. Carbon market participants similarly show important concerns regarding the uncertainty of future regulation which continues to discourage carbon investment. At this point, market participants seem to be losing their patience.

Does the market outlook suggest that the game is over? Not really. Hopefully it is only a temporary dip until a new regulatory regime is announced. Furthermore, we should keep in mind that a key achievement at Copenhagen was broad endorsement of the goal to limit the global temperature increase to 2 °C reflected in the Copenhagen Accord. If all countries associated with the Accord take this goal seriously, emission reductions are expected to take place worldwide and carbon prices could exceed € 40 per ton of CO2e (according to IETA and McKinsey studies). What remains unclear, however, is how long we will have to wait to see the fruits of this commitment.