Recent developments in international carbon finance have seen investors and carbon intermediaries moving away from the global carbon market and towards local initiatives, such asregional carbon trading regimes, as a means of participating in carbon reduction financing or achieving climate change objectives. This short piece identifies and begins to examine this trend away from global carbon market development and towards regional initiatives and some of the reasons for this movement.
At the 1997 climate change conference in Kyoto, Japan, 193 nations, including the European Union (EU), arrived at a global consensus on using financial measures to combat climate change. The Kyoto plan introduced restrictions on greenhouse gas (GHG) emissions by industrialized countries and the creation of credits to emit GHGs that would be tradeable in a global carbon market. Developing countries, including China and India, were not given GHG emissions limits and could sell credits based on their own GHG emission reductions to industrialized nations. When the Kyoto commitments entered into force in 2005 and, as a result, became a binding international commitment, they were taken up in earnest by the EU and were made mandatory under the EU Emissions Trading Scheme (ETS). An emissions trading system has the advantage of allowing companies to choose the most cost-effective means to achieve GHG emission reduction targets by either purchasing allowances or decreasing emissions.
Thirteen years after these international commitments were made, the December 2010 climate change summit in Cancun, Mexico and the April 2011 talks in Bangkok, Thailand demonstrate that the global consensus on the Kyoto carbon finance mechanism is breaking down. Developing countries are rejecting the agreements from the Copenhagen summit in December 2009 by insisting that any new international agreement must be legally binding, and non-European developed nations reject a binding international agreement unless the U.S. and other major emitters commit to emissions reduction targets as well. All the while the U.S., the world's second largest GHG emitter and absconder from the Kyoto plan, continues to grapple over "how, when and to what extent they can reduce GHG emissions"1 and carbon markets are struggling internationally.2
Due to this and, as some suggest, the hangover from the financial crisis, the global carbon market is showing signs of stalling. Although carbon trading was once hailed as the next trillion dollar market, data published by New Energy Finance shows that the value of carbon emissions credits traded in 2010 reached $120 billion, which represents a 5% increase over 2009 levels3. However, the volume of trades fell by 10% over the same period. This data on the size of the global carbon market should be considered in relation to other global commodities markets. Measured carbon market activity is easily dwarfed by the $21 trillion market in crude oil.
According to the World Bank, the financial crisis spurred financial institutions and private investors to "deleverage and redirect their positions away from risky investments and toward safer assets and markets."4 Perhaps in part as a result of such redirected focus and in part because of the slow movement on the climate change and carbon markets regulatory front, the number of carbon traders and brokers has declined.2009 saw an increase in market consolidation, where financial players that survived the financial crisis chose to acquire undervalued portfolios rather than engage in origination themselves. Other players have exited the market or significantly reduced their activity. IntercontinentalExchange, operator of the voluntary carbon trading platform housed by the Chicago Climate Exchange, closed its U.S. carbon platform in January and Bloomberg News reports that the International Emissions Trading Association's membership has declined about 16% since it emerged at the 2009 Copenhagen climate summit5
All the while, global temperatures are still rising and droughts and flooding continue to wreak havoc across the world, from Pakistan and Russia to Brazil and Australia. Without investor demand spurred by global GHG emissions limits, the global price of carbon will be difficult to buoy. Clear policy and regulatory signals must be provided if a stronger global market is to emerge.
In the face of a deepening sense of uncertainty over the future of the global emissions reduction effort and the likelihood that international policymakers will be able to reach a legally binding agreement, regional and national emissions mitigation efforts offer financial players some opportunities to engage the problem of climate change while securing returns on investment. For example, even with the binding international commitments made in Kyoto set to expire in 2012, the EU is adhering to its plans to extend carbon trading under the EU ETS and intends to increase the scope of the program by including airlines to the range of regulated companies next year. Other jurisdictions, including New Zealand, Taiwan, Brazil and South Korea have either committed or are considering national emissions trading programs.
In its 12th Five-Year Plan for the period 2011-2015, China, the world's largest GHG emitter and vocal opponent to binding international GHG reduction targets for developing countries, is planning to apply a range of market mechanisms to complement existing regulations and standards directed at its carbon emissions. In April 2011, the Chinese government announced that it will launch pilot cap and trade schemes in six provinces before 2013 and set up a national cap and trade platform by 2015. This announcement is intended to implement the country's commitment to reduce its carbon intensity, the amount of carbon dioxide produced per unit of GDP, by 40-45 percent by the end of 2020 from 2005 levels. Reuters reports that Guandong, one of the selected provinces, has already submitted plans to cap the energy use of its cities in the Pearl River Delta region and incentivize them to trade consumption permits with one another.6
National and regional carbon trading strategies are underway even in one of the most unlikely of places, the U.S., which has shown opposition to binding international GHG reduction targets. 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, according to the World Bank.7 However, it now appears unlikely that such regulation will emerge any time soon and since December 2010, when RGGI permits slumped to a record low, several states have indicated their inclination to withdraw from the RGGI. In March 2011, New Hampshire's Senate has approved legislation to amend its participation in the RGGI. Other member states have announced that they are examining taking similar action.
Despite setbacks in the north-east, regional initiatives are still alive, if just barely, in the western U.S. Living up to the state's reputation as a first mover on environmental issues, in December 2009, the California Air Resource Board (CARB), the state agency tasked with reducing the state's GHG emissions, approved a state-wide cap and trade program to begin in January 2012. The program seeks to build a regional carbon market known as the Western Climate Initiative (WCI). Although five states have failed to enact implementing legislation, leaving California the sole WCI participant in the U.S., a number of Canadian provinces, including Ontario, Quebec, Manitoba and British Columbia, have begun implementing the regulations necessary to join the WCI. Despite having survived a multi-million dollar campaign to halt its implementation, a recent ruling from the California superior court could stall the state's cap and trade program while CARB is required to consider alternative GHG mitigation strategies. As a result of the ruling, there is uncertainty around timing of the launch of the program. The results of California's foray into carbon trading will likely determine the eventual fate of a national carbon trading regime as Congress will look to California to assess the viability of a cap and trade program in the U.S.
It is widely believed that a global agreement is a pre-requisite to a global carbon market, which is in turn the pre-requisite to setting a price on carbon, which is what spurs investor demand. Given this, it may be surprising that, in the face of the failure of the international community to renew the consensus on global climate change action, some carbon market participants remain optimistic about the future of the global carbon market. In fact, Bloomberg New Energy Finance predicts that the global carbon market will grow by 15 percent in 2011, the most in three years.8 The reality is that a global agreement is not necessarily the only answer. If key elements are established to make it possible to progressively link regional and national emissions trading systems, desired emissions reductions could be achieved. This proposal has recently been espoused by Henry Dewent, head of the International Emissions Trading Association who addressed hundreds of corporate executives and financiers at the Navigating the American Carbon World Conference in April 2011. The Los Angeles Times quotes Dewant as saying: "[t]he way forward lies in individual regional, national and state systems over the world reaching out to each other over time."9
1 Ben Sills, March 22, 2011, "Global Carbon Credits
Die as Smart Money Backs Indian RECs".
2 Ben Sills, March 26, 2011 "Carbon Traders go back to the drawing board', the Washington Post".
3 Press Release, January 6, 2011, "Value of the Global Carbon Market Increases by 5% in 2010 but Volume Declined".
4 2010 State and Trends of the Carbon Market Report.
5 Supra note 1.
6 David Stanway, April 11, 2011, "China planning emissions trading in 6 regions – Point Carbon".
7 Supra note 3.
8 Catherine Airlie, January 6, 2011, "Carbon Market to Grow 15% This Year, Bloomberg New Energy Finance Predicts".
9 Margot Roosevelt, April 18, 2011, "California's carbon market: Will cap-and-trade work?"
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