Carbon Credits

23 February 2009 (Last Updated February 23rd, 2009 18:30)

The commoditised carbon credits trading markets experienced its best year to date in 2008. In spite of the global economic crisis, analysts believe 2009 will be another prosperous year for trading. Ozge Ibrahim finds out why.

Carbon Credits

Trading in carbon credits has become a key part of efforts to curb greenhouse gas emissions and ultimately fight global warming. Europe’s most successful carbon trading platform, the European Climate Exchange (ECX), became the most liquid carbon place in Europe not long after launching its futures contract on carbon dioxide emissions in April 2005. (ECX futures and options contracts have both EU allowances (EUA’s) and Certified Emission Reductions (CERs) as their underlying units of trade). More than 90 global businesses have signed up for membership on ICE Futures Europe to trade ECX emissions products. In addition, several thousand ICE clients around the world have trading access to the emissions market daily via banks and brokers.

The voluntary carbons market, which relies on company investment, is experiencing mixed fortunes, due to lack of credit as the global economy weakens. Even though prices on the main voluntary exchange remain strong, the Chicago Climate Exchange (CCX) has fallen sharply in recent months. While this market is likely to experience a tough year ahead, the commodities market goes from strength to strength.

"In the New Energy for America plan, $150bn will be pumped into alternative, renewable technology."

Speaking at a press conference last month, ECX CEO Patrick Birley said that despite falling credit rates, 2008 was a "phenomenal" year and that 2009 will represent "huge opportunities" in the sector. Louis Redshaw who heads Barclays Capital’s Emissions Trading business says he believes there will be growth in 2009, which will increase spot activity. As a result of confidence in the market, ECX plans to launch spot contracts later in the year.

What lies behind such optimism as expressed by Patrick Birley and other industry names is a new political era in the US. The new climate friendly US President Barack Obama is expected to take a leading role in global climate change policy, leading to a growing interest from a wide range of countries and organisations to follow the US example. According to Birley Barack Obama’s appointment will increase the chance of commitment to climate change policy from high polluters India and China.

President Obama’s domestic targets have been laid out as such. In the New Energy for America plan, $150bn will be pumped into alternative, renewable technology and production over ten years. As part of this plan, by 2012, 10% of America's energy will come from renewables and 25% by 2025. The target for reducing greenhouse gases is 80% by 2050.

The Road ahead

"Australia, Canada, New Zealand and Japan are moving forward rapidly, collectively demonstrating 84% growth across their markets."

According to the ECX, Australia, Canada, New Zealand and Japan are moving forward rapidly, collectively demonstrating 84% growth across their markets in 2008. But the start of 2008 has seen Australia’s Government, led by Kevin Rudd, come under intense pressure to delay or soften its emissions trading scheme in light of the economic crisis and mounting job losses. Any change in the Australian policy could affect the cap at which emissions allowances and credits are set, which in turn would impact carbon trading in the country and beyond.

While prospects for traders on the commodities market look good in 2009, there has been criticism of the effectiveness of some trading schemes, particularly the clean development mechanism (CDM).

According to the United Nations Framework on Climate Change (UNFCC), the CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one ton of CO². The CER’s can be traded and sold, and used by industrialised countries to meet a part of their targets under the Kyoto Protocol. The CDM assists countries in achieving sustainable development and emission reductions, while giving industrialised countries some flexibility in how they meet their emission targets.

Speaking this month at the World Future Energy Summit in Abu Dhabi, vice chairman of Deutsche Bank group and former German minister Caio Koch Weser said: "Financing abatement in the developing world is key and the CDM is well established to do that but it is very expensive and inefficient. One of the key issues at Copenhagen this year will be reforming the CDM into a scaled-up programmatic approach."

"Financing abatement in the developing world is key and the CDM is well established to do that but it is very expensive and inefficient."

Executives on the CDM board also agree improvements can be made. Chair of Executive Board Rajesh Kumar Sethi says the board must "with renewed urgency" address the task of improving the CDM in 2009.

"Simply, the CDM must run better; delays must gradually disappear. The material impact of procedural requirements may be revisited, while maintaining the environmental integrity of the CDM", says Sethi.

Changes to the CDM and other parts of the Kyoto pact will be debated and decided upon at Copenhagen where leaders from 170 countries are expected to gather in December. With the US expected to take a more significant role in global climate change policy, decision makers at the Copenhagen conference will be under huge pressure to come up with a workable package, which can build on the current success of the carbon credits trading market, impose realistic caps on carbon emissions across the board while tackling the obstacles of global recession.