US gives carbon markets new lease of life

The EU has long maintained that emission trading must form a central part of global efforts to combat climate change. This week it received fresh support from a hitherto unexpected quarter: America.
In his first speech to congress on Tuesday, new US president Barack Obama called on US lawmakers to propose a greenhouse gas emission trading scheme (ETS) for America. "I ask this congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America," Mr Obama said. The president's first budget, presented on Thursday, projects 2012-19 revenues from auctioning carbon allowances to industry would amount to US$646bn (€510bn). Some of this would go to clean energy projects and some to tax credits to help Americans transition to a low-carbon economy.
Meanwhile, Australia will publish draft legislation on a domestic ETS on 10 March, climate change minister Penny Wong announced on Friday (Source: Ends Europe)

Global endorsement amid the gloom

This international endorsement of emission trading comes at a time of new lows in the carbon price, dire predictions for the rest of the year, and more questions than ever over whether the mechanism can deliver emission reductions.

EU carbon prices plummeted to fresh depths of just over €8 per tonne in February and have recovered little since. Overall, global carbon markets will lose about a third of their value this year compared with 2008, carbon market analyst Point Carbon forecasts.

In its first contraction since the start of carbon trading (EE 11/03/08), the global market will be worth €62.6bn (and the EU market €42.5bn) in 2009, the analyst predicts. It expects lower emissions from reduced economic activity will keep the carbon price at an average €12 per tonne. The carbon market is a recent victim of the credit crunch (EE 21/01/09).

Point Carbon foresees a halving of carbon credits from clean development mechanism and joint implementation projects. The economic crisis and continued uncertainty over the fate of these mechanisms after 2012 are to blame.

Fresh hope across the Atlantic

Good news for the carbon market lies across the Atlantic, Point Carbon says. The Regional Greenhouse Gas Initiative, a carbon market for America's north-eastern states, is expected to grow to represent six per cent of the global carbon market in 2009.

"The economic downturn will hit the value of global carbon markets as a whole but the US looks set to buck this trend and shows healthy growth," report author Endre Tvinnereim says. Emission trading between countries under the Kyoto protocol is also expected to pick up "steeply" in 2009.

The boost for US carbon markets has not taken away European concerns over low carbon prices. In a report released on 23 February, Deutsche Bank analysts remarkably said EU policymakers may have to intervene to preserve the credibility of the EU ETS in the run-up to talks on a new global climate treaty in Copenhagen in December.

They urged the European commission to consider setting a minimum price for auctioning EU allowances in 2013. They also suggested the EU ETS directive should allow for periodic and ad hoc reviews of the post-2020 emissions cap. Because installations can transfer allowances between years, tightening the long-term allowance supply could boost the current carbon price.

Pressure mounts for EU ETS

Commission officials are adamant they will not intervene. "From an environmental perspective what matters is the [emissions] cap. Whether the price is high or low has no impact," deputy director-general of the commission's environment department, Jos Delbeke, said on 26 February.

An energy company source told ENDS: "If the market shows a lower price, it is a clear sign that environmental goals will be reached more cheaply than expected. What’s wrong with that? To fix a price floor just means giving cheap abatement technologies a massive windfall profit. This makes no sense to me at all."

Most green investments are independent of the carbon price because of other promotion mechanisms like green certificates and feed-in systems, the source added.

The big question is whether the EU ETS – and carbon markets more generally – can reduce greenhouse gas emissions. Evidence for this has been highly controversial (EE 24/04/08). But more of it is emerging.

On 16 February analyst New Carbon Finance reported that the EU ETS drove a three per cent fall in EU industrial carbon emissions to 2.1 gigatonnes in 2008. It attributed 40 per cent of this fall to the ETS and 30 per cent to the economic recession.

Official EU industrial emission data for 2008 are due at the end of April. If they support this picture, it would be a bigger boost to emission trading as a key plank of a new global climate treaty than any attempt at price fixing.