Local Carbon Markets Set to Become More Attractive to Investors

Posted on May 25, 2011 by

As the Kyoto protocol nears its term end, there has been a lot of speculation over where the global carbon market will stand. International meetings like the Cancum(Mexico) summit in December 2010 and the April 2011 talks in Bangkok (Thailand), demonstrated that the global consensus on  the Kyoto carbon mechanism is breaking down. The failure of Copenhagen summit to come up with a globally binding accord casts further shadows on the bleak future of the international carbon market. Developing countries insisted on a new legally binding accord while the non-European developed nations reject a binding international agreement unless the U.S. and other major emitters commit to emission reduction targets as well. With such erratic developments, investors and carbon intermediaries are beginning to shy away from global carbon markets and are moving towards local initiatives.

The recent financial crisis also played a role in stalling the International Carbon market which was once hailed to be the next trillion dollar market. Financial institutions and private investors are redirecting their positions away from risky investments and towards safer assets and markets. According to data published by the New Energy Finance, emission credits traded in 2010 reached $120 billion, which is a 5% increase over 2009 levels. However, trades fell by 10% over the same period. The number of carbon traders and brokers has decline since and other players have exited the market or significantly reduced their activity. Major exchange hubs like the Intercontinental Exchange, housed by the Chicago Climate Exchange, have had to close some of their trading platforms while the International Trading Association’s membership has decline about 16% since its inception at the 2009 Copenhagen Climate summit.

However, all is not lost. In the midst of uncertainties and reserved speculation, Climate investors can still look forward to opportunities to engage the problem of climate change while securing returns on investment. The lack of a common consensus amongst international policy makers has pushed individual entities to evolve and adopt regional or national level initiatives. Europe has been at the forefront with the EU-ETS (Emission Trading Scheme) that was independent of the Kyoto Protocol and other international accords. China, the world’s largest emitter and the vocal opponent to the international GHG reduction targets for developing countries, has revealed in its 12th Five-Year Plan (2011-2015), a range of market mechanisms aimed at boosting its internal carbon trade.

Kyoto Protocol absconder, U.S., has interestingly adopted several emission trading strategies aimed at reducing GHG emission. The trading volume of the Regional Greenhouse Gas Initiative (RGGI), a coalition of 10 states in the north-eastern U.S. aiming to reduce GHG emissions from power plants, grew almost ten-fold in 2009 to US$2.2 billion in expectation of federal emissions regulation. Now that regulation appears unlikely, several member states have indicated their inclination to withdrawal from RGGI but in spite of this, more states have shown interest to join the initiative. California’s Western Climate Initiative (WCI) has also seen significant improvement with Canadian provinces, including Ontario, Quebec, Manitoba and British Columbia making implementations to join WCI. However, there is a slight setback for this cap and trade program as a recent ruling from the California superior court could stall the state’s cap and trade program. The result of this ruling may ultimately determine the fate of the country’s trading regime as Congress will look to California to assess the viability of a cap and trade program in the U.S.

While EU ETS is still the major market in emission trading, several others are also taking shape. Emission trading schemes like New South Wales GHG Abatement Scheme, The Chicago Climate Exchange, the UK ETS, REC markets of Australia, Japan, India and Italy, RGGI, Midwestern GHG Accord, NZ-ETS and the that of Japan, opens up internalized and focused markets that posses less risk to investors and hence such markets will eventually become more attractive to investors than the global counterpart.

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