Carbon Trading: Fast Growth But Key Vulnerabilities

| About: Climate Exchange (CXCHF)

The carbon trading market is growing rapidly, but not fast enough to meet the commitments of the Kyoto protocol, especially among developing countries, according to a World Bank report, “The State and Trends of the Carbon Market 2008.”

The global carbon market doubled or tripled in value for all segments, except for projects in developing countries which saw a leveling off of market volumes transacted under the Clean Development Mechanisms.

The global carbon market more than doubled to $64 billion in 2007, the report shows. The European Union Emission Trading Scheme [EU ETS] also saw a doubling of both value and number of allowances transacted to the tune of $50 billion.

There are significant problems with the market, however:

The overall data in the report masks some key vulnerabilities — especially for developing countries. All developing countries face a demand gap sometime in 2008 when buyers realize that there is not enough time to fulfill Kyoto commitments with new projects, and demand will have not yet kicked in from emerging markets in the US and Australia that are expected to be players in a future market after 2012.

Another problem is that market growth is limited by the uncertainty of what will happen after the Kyoto protocol expires in 2012.

An interesting observation of the report is the degree to which business and environmentalists are working together:

The world has truly changed today when power company executives and investment bankers talk about climate risk and environmentalists talk about leveraging the power of markets. Climate policy has mobilized the world of private capital to work in favor of protecting the environment. In so doing, it has brought together two widely different worlds with very little experience and knowledge of each other.

Considering how widely different these two cultures are, it is quite extraordinary to recognize how successfully they have worked together so far to produce concrete action to reduce carbon emissions.

In 2007, some prominent investment banks tried to further bridge the gap between the two worlds, as they hired specialist carbon staff, bought small and boutique carbon originators and made investments in the “infrastructure” of the carbon market, including exchanges and registries.

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