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Kyoto Protocol

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Carbon as a Commodity
The Kyoto Protocol’s efforts to mitigate climate change have resulted in an international carbon market that has grown tremendously since the entry into force of the Protocol in 2005. While previously, the relatively small market consisted mostly of pilot programmes either operated by the private sector or by international financial institutions such as the World Bank, the market experienced strong growth since 2006. The total traded volume of emissions increased from 1.6 billion tons of CO2 in 2006 to 4.9 billion tons in 2008, reaching a value of €92 billion in 2008, with the average world carbon price at around €19 per ton of CO22).

While the international carbon market has expanded to include a wide variety of project types and market partici¬pants, it has to date been dominated by the EU Emissions Trading System (ETS) and the CDM.

The EU emissions trading scheme continues to account for around two thirds of the global carbon market volume (3.1 bn tCO2) and around three quarters of the value (€67bn). One ton of CO2 traded at between €13.5 and €29.43). In December 2008, European institutions reached an agree¬ment on the EU’s new energy and climate package, which includes a revision of the EUETS. Key elements include the cap, the credit limit, the level of auctioning and new sectors and gases included. With the agreement on the package, the EUETS took a significant step towards better long-term stability.

The CDM market increased dramatically to 1.6 bn tCO2 worth €24bn in 2008, making up a third of the physical and 26% of the financial market. The UN international transaction log was, on 16 October 2008, linked with the EU emissions trading registry, which allowed for CER credits to be transferred to the EU market. This represented an important step for the CDM market as it reduced the delivery risk into the EUETS. In addition, the new EU climate package has provided certainty about the overall use of CER’s in the EUETS until 20204). The JI market, while still small, also finally started to take off in 2007, nearly doubling in volume to 38 MtCO2 and more than tripling in value to €326 million. In 2008, according to World Bank statistics, the JI global market reached about 30 Mt CO2 in volume, with a face value of €200 million.

Three key elements are shaping global carbon markets in 2009: the economic downturn, the UN climate negotiations and developments in the US. Experts predict that the economic crisis will result in a leveling off of the carbon trading activity in 20095). While the EUETS will remain the dominant market, both CDM and JI markets are likely to be affected by a lack of investments, as well as uncertainty over the structure of the post-2012 carbon markets and declining emissions in many countries6). However, many experts believe that this downturn will be temporary and that investment in CDM will pick up again later in the year.

Providing that the price for carbon is high enough, the carbon market is a powerful tool for attracting investment, fostering cooperation between countries, companies and individuals and stimulating innovation and carbon abatement world¬wide. In theory, at least, the price of carbon should more or less directly reflect the rigorousness of the economy-wide caps of the Annex B countries. The reality is, however, more complicated, since there is only one real ‘compliance market’ at present, which is the EUETS, while the CDM and JI markets are just getting started. It is also not clear what role Canada, Japan and Australia will play in the carbon market during the first commitment period; and of course, the original conception and design of the carbon market was predicated on the fact that the United States would be a large buyer, which has not turned out to be the case, at least not for the first commitment period.

Governments negotiating the post-2012 climate agreement seem committed to ‘building carbon markets’ and ‘keeping the CDM’, but it appears certain that the CDM will undergo changes in the post-2012 framework. Figure 2 shows a survey of carbon market practitioners conducted by Point Carbon at the end of 2008 about the price of carbon in 2020.

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