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On carbon markets: ‘the valley of creation’

Ari Huhtala's picture

The climate conference in Durban in December 2011 agreed to start a process for a post-Kyoto agreement on emissions reductions. The negotiations in Bonn in the last two weeks did make some progress on the issue, at a snail’s pace, but strong signals for a solid, future carbon market are not in the air.

Carbon prices are at an all-time low and do not currently stimulate trade that would make a difference. Hundreds of carbon traders are flocking to look for new employment opportunities, hopefully not for good if the business picks up again in the coming years.

In spite all of this uncertainty, almost 2,000 people from over 100 countries, have gathered in Cologne this year for the 9th Carbon Expo. This is my second visit to this event and I was surprised to find the booths busy and plenaries full. Admittedly there are clear messages of supply surpassing the demand and the long awaited price signal still missing, but there were also some signs of relative optimism.

The annual World Bank report on the State and Trends of the Carbon Market 2012 was launched with a message that the volume of US$ 176 billion in 2011 was the highest ever (an 11% increase over 2010), but that this market is increasingly dominated by Europe. Pre-2013 credits from the Clean Development Mechanism (CDM), known as ‘Certified Emissions Reductions’ (CERs) went down by 32%, Joint Implementation activity was down by 36%. Post-2012 CERs grew by 63% resulting in a total volume of US$2 billion. Africa is emerging as a seller of post-2012 CERs, which is a welcome diversification from the earlier trade dominated by a few emerging economies.

There were strong calls for more ambitious targets to encourage low-carbon investments. Good examples of action on the ground are the numerous initiatives in countries such as Australia, Brazil, Chile, China, Colombia, Mexico and South Korea to establish their own carbon trading systems and cap-and-trade schemes based on national legislation. The bottom line is that carbon markets are based on simple economics: a price that is conducive to market entry requires some restrictions – you need scarcity of credits or a cap on emissions to create a market.

Christiana Figueres, the Executive Secretary of the UNFCCC, in her passionate and frank opening keynote address admitted the frustration of the international community with the slow pace of the negotiations process. She  emphasised the obvious willingness of all parties to work seriously towards an inclusive, long-term solution – a high-pace marathon rather than a sprint. She feels that the intergovernmental process has recognised the need for the world to choose low-carbon and climate-resilient development options in the long run. In her words, we should not think that we have reached the “valley of death” in the negotiations, but rather the “valley of creation” – a time to develop a new market system in which CDM will be an important element but marked by innovation, diversification and segmentation, and more in sync with the broader climate finance world.

Ms Figueres called for participants in the carbon market to share experiences on what has worked (not only what hasn’t), suggest design considerations and demand more government policy action which is essential in ensuring a healthy development of the market-based system. While many of the more technical sessions dwelled on a rather gloomy outlook, Christiana Figueres concluded her intervention by reminding us that “Impossible is only an attitude”.

(This blog was first posted on the Climate and Development Knowedge Network)