Gloomy prospects for carbon markets in the region

Factories releasing a lot of smoke
Photo credit: UNFPA

BRATISLAVA, Slovakia — 29 April 2013 — In 2012, the value of the global carbon market rose to $176 billion and it was not long earlier that analysts had been predicting a trillion dollar market within the next decade. The carbon market was supposed to turn into the world’s largest commodity market and a high price on carbon was supposed to stimulate large-scale new investment in greenhouse gas emission reduction projects.


Unfulfilled expectations

A global carbon market driven by a price on carbon was expected to develop with the clean development mechanism (CDM) and joint implementation (JI) (‘cap and trade’) schemes leading the way. As of February 2013, over 6,500 CDM projects have been registered and 1.20 billion CERs (certified emissions reductions) have been issued. By 2020, this number is expected to rise to at least 3.22 billion CERs.


Currently, the carbon market is oversupplied – more Kyoto carbon credits are in the market than can be absorbed by major emitters – and the situation is getting worse. Large emitters such as Japan and Canada have pulled out of the Kyoto Protocol and the United States, the world’s largest emitter, never ratified the agreement in the first place.


As of 2013, the Kyoto Protocol only places legally binding caps on 14 percent of the world’s greenhouse gas emissions. Most of these emissions come from the European Union - which has announced that EU member states from 2013 will only purchase CERs generated by emissions reductions projects in least developed countries (LDCs).


As of 29 April 2013, the secondary price on a CER is down to less than 0.30 euro cents and European Union allowances currently trade at around 3 euros per allowance. At these very low prices, and with a lack of demand in the foreseeable future, it is inconceivable that a project developer would initiative a new project solely on the basis of a return from carbon credits.


The low-hanging fruit and gold rush which characterized the early years of the carbon market from 2003 – 2008 is long gone.


The future of carbon trading in this region

In December 2011, Russia pulled out of the second commitment period of the Kyoto Protocol. Ukraine was temporarily suspended from participating in the carbon market in 2011 due to very negative publicity surrounding missing funds from a 380 million euro large-scale purchase of Green Investment Scheme (GIS) Assigned Amount Units (AAUs).


Much of these funds from AAU sales are still not properly accounted for. Ukraine re-entered the carbon market in 2012 and is more proactive than Russia but some have expressed a lack of confidence in the integrity of its carbon market systems.


New market mechanisms that focus on sectors as opposed to individual projects currently under negotiation remain underdeveloped and are uncertain and do not currently provide incentives for large countries such as Russia and Ukraine to remain actively engaged in the carbon market. Ukraine is more likely to develop its own domestic emissions trading scheme than find a way to participate in international carbon markets.


Russia has pulled out of the second commitment period of the Kyoto Protocol and therefore will not be able to sell its large surplus of AAUs. Among other countries from this region, only Kazakhstan has a functioning domestic emissions trading scheme which started in January 2013 and which focuses on the oil and gas sector. There is currently no linkage between this scheme and international carbon markets; it is too early to assess its effectiveness.


Minding the gap years

In Durban in 2011, a successor agreement to the Kyoto Protocol was agreed in principle by the Conference of Parties (COP) by 2015 (the Kyoto Protocol’s expiration date) to be in force by 2020. This means that we now face some serious gap years with an underperforming carbon market. Even once the new agreement is in place it is quite possible that the emphasis is more on domestic measures to reduce greenhouse gas emissions rather than international carbon markets.


Progress has been made around the argument that a successor agreement (to Kyoto) should include caps for both developing as well as developed countries—something which has never been agreed previously. However, Parties are still a long way from reaching a globally legally binding agreement which is acceptable to all large emitters and in particular the United States and China who account for almost 50 percent of the world’s GHG emissions.


In the meantime, the carbon market in the region is likely to continue to decline. A few existing CDM and JI projects will continue to sell emission reduction units on international carbon markets at very low prices, but no new projects will be developed on the basis of a return from carbon credits.


Kazakhstan will implement its domestic emissions trading scheme and a few other countries in the region may follow suit. The day when this region will include a series of national emissions trading schemes linked through some successor agreement to the Kyoto Protocol, is still a long way off.


It remains very uncertain as to whether the Parties will indeed be able to reach a new global agreement to succeed the Kyoto Protocol by 2015, given the myriad of obstacles that need to be overcome. However, the increasing scientific evidence that anthropogenic climate change is accelerating raises the chances that such an agreement will be reached. There might be some light at the end of the tunnel.


* This post reflects the opinion of the author and does not necessary reflect UNDP’s official position.


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