Global carbon markets traded a total €38.4 billion worth of allowances and credits during 2013, down 38% from €62 billion in 2012. This drop falls in line with the decline that began after the market peaked at €96 billion in 2011. Since then, the key European reference price of emissions has fallen from €18/t to €5/t of carbon dioxide.
Last year also saw a decrease in terms of volumes – from 10.7 billion to 9.2 billion emission units – the first drop in traded volumes since 2010, according to analysis from Thomson Reuters Point Carbon.
The decline will have a considerable impact on the UN-led ‘flexible mechanisms’ that were created to incentivise emission abatement investments such as renewable energy in developing countries. Until recently, these markets – known as CDM and JI – accounted for approximately 20% of the volume and 10% of the value of the world’s carbon markets. After prices collapsed between 2012 and 2013, they now represent only 7% of volume and 1% of value.
Falling carbon prices
“The main explanation for the falling prices in carbon markets around the world is the very modest emission reduction targets adopted for the period up to 2020. Without ambitious climate targets there is no need for deep emission reductions and carbon prices will remain at low levels. However, if the goal to limit global warming to two degrees shall be met, more dramatic cuts are needed over the next decades. The international negotiations towards a new climate agreement scheduled to be adopted in Paris in 2015 will be a litmus test on the political willingness among large emitters to make the required emission reductions”, explained Anders Nordeng, senior carbon analyst at Thomson Reuters Point Carbon.
With a share of 88% of volume and 94% of value, the European Emission Trading System (EU ETS) continues to dominate the global emission trading market. In this market, 2013 was marked by the political debate on whether or not to intervene in the market in order to address the massive oversupply of allowances.
Much of the debate in 2013 revolved around the reorganisation of auction volumes from the years 2014-16 to 2019/2020. As this proposal, known as ‘backloading’, made its way through the European institutions, the price of carbon reacted sharply to the different votes as well as to the statements of key decision makers.
Ultimately, after Germany decided to support the idea, the European Parliament and the Council approved backloading at the end of 2013. “Market participants seem to have anticipated this outcome, as the European carbon price stabilised fairly much over the autumn, after a downwards trend in the first months of the year”, explained Nordeng.
“If policy makers now follow up with the actual implementation of backloading, as well as with structural reform of the carbon market, we expect European carbon prices to remain stable around €5, or possibly pick up this year”, Nordeng continued.
North American growth
However, emerging carbon markets witnessed more positive developments during 2013. The only segment to have seen a growth in volume and value last year was the North American market, driven by trade in California, and by the resurrection of emission trading in states in the North East.
“2013 was the year the North American carbon markets blossomed”, explained Olga Chistyakova, senior analyst of the North American market, adding that in the Western Climate Initiative (WCI) that encompasses California and Québec, carbon allowance and offset prices are now the highest in the world, with the allowance price floor of US$ 10.71/t (approximately €7.8) in 2013.
Chinese emission trading schemes
Another source of growth is the new pilot emission trading schemes in China, which launched the first of seven regional trading schemes in June, five of which are now in full operation. Although the traded volumes are still modest, the overwhelming size of some of the covered provinces and cities, which include Guangdong, Beijing, Shanghai, points to a great potential. The latest of the regional schemes, Tianjin, was launched on 26th December.
Shenzhen has witnessed the most active secondary trading (excluding the initial auctions) among the five pilots. “Shenzhen allows private investors to trade, a feature that distinguishes the city’s scheme from most of the other pilot markets”, explained Hongliang Chai, analyst of China’s emission market.
Adapted from press release by Katie Woodward
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