Stocking Up on Carbon Credits

Stocking Up on Carbon Credits

November 20, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

Business has slowed. And so too has the demand for carbon emission allowances -- those credits that are traded among European nations and some American utilities as a way to motivate a transition to a carbon-free global economy.

If commerce were humming along, manufacturing and utility plants would be increasing production and thereby raising their emission levels. Because they are cutting back their operations, however, they are in essence keeping a lid on that pollution. In a world that is moving steadily toward pricing each ton of carbon released into the atmosphere, that dynamic has dampened the trading of carbon allowances.

The recession, however, is ending and activity will once again pick up. Carbon trading will then follow suit. While Europe has led the global effort, it is expected to be joined by the United States, Japan and Australia.

According to New Energy Finance, the value of world carbon markets fell by 27 percent from the second quarter of 2009 to the third quarter of 2009. That is the result of the reduced demand for credits, which has thus put downward pressure on carbon prices -- once estimated to rise to $30 a ton but which hovered around $10 a ton earlier this year.

The firm still expects that the total value of global carbon markets will reach $122 billion by year-end. That is 3 percent greater than that of 2008 and about double that of 2007. It estimates that the value of world carbon markets will reach $1.9 trillion by 2020.

The European Union Emissions Trading Scheme remains the cornerstone of carbon markets but other nations are also making inroads. As for the EU, it accounts for about 71 percent of emissions credits that have been traded as well as 83 percent of the value that has been exchanged, the group says. Volume in other countries such as the United States is picking up, although not enough to compensate for that decline.

In this country, volume actually increased by 8 percent over the second quarter of 2009. However, New Energy Finance says that this may not last, noting that the while the U.S. Regional Greenhouse Gas Initiative has conducted five auctions that have raised a total of $360 million, the price of credits fell to a record low of $2.56 a ton in September. That's compared $3.39 a ton in June. The firm says that it expects prices to drop further, perhaps to as low as $1.86 a ton.

"These figures show that the carbon markets have not been immune from the recession," says Guy Turner, head of carbon market research at New Energy Finance. "However, pending the passage of legislation in the U.S., Japan and Australia -- all of which are within reach -- the global carbon market should see continued growth post 2012 driven by increasing volumes and prices."

The Possibilities

Europe is now leading a charge to cut emissions by 25-40 percent by 2020 when the international community meets in Copenhagen in December. The United States, meanwhile, has not made any firm commitments. But the U.S. House has passed legislation requiring 17 percent cuts in carbon emissions by 2020 while the U.S. Senate is considering a bill to cut them by 20 percent.

Clearly, the establishment of an emissions trading plan is critical to achieving greater cuts. As governments around the globe continue to restrict overall pollution levels, cap-and-trade systems involving carbon will expand. The thinking is that by trading credits, a "price" for emission levels is established that will send the proper investment signals to those who have to decide how they will reduce harmful pollutants.

Installing environmental controls may or may not be cheaper than purchasing emissions credits. Obviously, in today's economic climate in which the price of credits has fallen precipitously, buying allowances would be a better bargain for companies.

As things turn around, carbon markets will become more liquid and transparent, setting forth a possible expansion of $150 billion per year of traded certified emission reductions, says the World Bank. "As one response to the climate crisis, a deep and global carbon market continues to hold the promise to deliver significant benefits to both developed and developing countries alike," says Kathy Sierra, vice president for sustainable development.

U.S. lawmakers are debating the merits of a cap-and-trade system, with conservatives saying it would raise the cost of energy during recessionary periods while progressives are maintaining that it is a free-market approach to solving a complex problem. Even more perplexing, though, is whether to give away most of the allowances until a trading mechanism is established or to sell most of them from the start.

Neither the House nor the Senate bills tackles that subject, although the general belief is that most credits would initially be allocated for free. The premise behind giving them away is to give companies time to adjust to carbon limitations -- something that critics say will delay progress at a time when the world can't wait. The good news, according to EcoSecurities that trades carbon credits, is that three-fourths of the more than 300 industrial facilities that it surveyed have already started a carbon reduction strategy.

"Although there's still plenty of room for improvement, these survey results show that companies are keeping green issues high on their agendas," says Lisa Ashford, global head of voluntary and new markets for EcoSecurities. "It is great to see from these survey results that the voluntary carbon market is continuing to gain more credibility."

Recession has hurt carbon markets. But the exchanges are emphasizing that the financial value of those markets has doubled in a few short years and that it can continue to grow exponentially once the private sector joins the cause en masse.