Carbon Trading & The Carbon Economy
Mandatory Carbon Markets
Governments around the world, including Australia, are developing Emission Trading Schemes to encourage the reduction of Greenhouse Gas Emissions and the development of renewable energy industries. These are generally “mandatory” for businesses in identified sectors, that is, businesses must purchase or sell Carbon Credits or Offsets to comply with regulatory requirements in particular jurisdictions. This will be particularly apparent in Australia as the economy is underpinned by large mineral exporters and a power generation industry that uses large amount of brown coal.
The most recognised scheme globally is the European Union Emissions Trading Scheme (EU ETS) which became active in January 2005. During 2006, approximately 992Mt of C0²-e were traded on the EU ETS, representing about 62% of the global Carbon Emissions trading market.
Buyers of Carbon Credits in the mandatory market largely engage in Carbon transactions because of Carbon constraints (current or anticipated) at international, national or regional levels. The Kyoto Protocol is the largest potential market and the associated EU ETS has set the scene for a market in the trade of certificate based allowances and for the import of project-based reductions, commonly called carbon offsets. The proposed Australian ETS will form another complimentary scheme to the Kyoto Protocol that is expected to enable the trade of allowances and credits generated under the Kyoto flexible mechanisms within Australia.
Voluntary Carbon Markets
Participants trade in the voluntary markets for different reasons, including their desire to take responsibility for their Carbon Emissions, reputation and competitive market reasons and because they see it as the first step in the process for an inevitable Carbon constrained economy.
Reports of increased interest of banks, credit card issuers, private equity funds and others in this segment suggest that this market could grow exponentially once credible voluntary standards for such assets are introduced and widely adopted in 2010.
To provide some regulatory framework in this regard a voluntary standard was released by The Climate Group in conjunction with the International Emissions Trading Association (IETA) and the World Business Council for Sustainable Development (WBCSD) in 2007.
Quality of Carbon Offsets
For Offsetting to help tackle Climate Change, the Offsets need to be generated from projects that are reliably verified and are additional to business as usual activity.
There are a number of factors that differentiate high-quality Carbon Offsets. Such factors include:
- Baseline Determination:
A credible approach is taken to determine the Emissions that would have occurred in absence
of the project. [
i.e. there must be a differential created by the offsetting activity compared to normal business operations].
- Quantification:
The quantification of Emissions reductions resulting from a project does not overstate benefits and reflect uncertainties. [ i.e. quantification is realistic, almost conservative].
- Longevity:
Potential future reversal is not an option for
the resulting Offsets, e.g. offsetting using tree
as carbon sinks requires a 100 year commitment not to cut down the trees.
- Ownership and Registration:
Ownership of the Offsets is clear and formally registered, providing a paper trail and reducing the possibility of Offsets being sold many times.
[
i.e. once a carbon credit offset is sold it s taken off the market].
- Monitoring and Verification:
The Offset project will be monitored and verified over time, by an independent auditing body.
- Additionality:
The Carbon Offsets produced make the
project viable, that is, the project would not have occurred otherwise. This is especially true for the Land holders working with Carbonculcha!
Carbon Price Forecasts
JP Morgan European Equity Research has released a report in which they have raised their 2008-2012 CO2 price forecast from €20/t to €25/t, and introduced a post-2012 forecast of €30/t. The over-allocation of permits during phase 1 has already reached 160mt at the start of 2007.
JP Morgan sees 2007 being long as well, and in the absence of banking they therefore see no intrinsic value to phase one CO² permits. The only risk on pricing would come in the event that any of the big compliance buyers ends 2007 short and faces a cornered market. JP Morgan sees a near-zero probability of this given the magnitudes of permits involved to create this cornering.
LONDON (Reuters) - Deutsche raised its European Union 2008 carbon price forecast to 40 Euros ($62.37), from 35 Euros previously and well above the current price of about 26 Euros.
The EU's cap and trade scheme forces energy-intensive companies to buy permits to emit the planet-warming gas carbon dioxide. The scheme covers nearly half the EU's carbon emissions and is its main weapon against climate change. Power generators which burn fossil fuels add the extra cost to power prices, which means a carbon price hike impacts electricity bills for everyone inside the 27-nation bloc.
Deutsche raised its price forecast for emissions permits called EUAllowances (EUAs) because of higher than expected carbon emissions in 2007, plus rising oil prices and the inclusion of aviation carbon emissions in the scheme in 2011 or 2012.
"This is going to be tougher than we thought," said Deutsche carbon analyst Mark Lewis.
Assuming interest rates of 4.5 percent, fundamentals pointed to a long-run carbon price rising from 40 Euros this year to 67 Euros in 2020, estimated Lewis.
LONDON, Jan 25 2008 (Reuters) - Belgian-Dutch financial group Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz) raised its price forecast for European carbon emissions to more than double the current price, Energy Analyst Kris Voorspools told Reuters on Friday.
If there is no international agreement to succeed the U.N.'s Kyoto Protocol after 2012, Voorspools expects prices of EU emission permits, called EUAs, from 2008-2012 at 48 Euros ($70.33) a tonne. This scenario would see 830 million tonnes of carbon offsets, called CERs, carried over to phase 3 of the scheme, starting in 2013.
Carbon emissions trading has been steadily increasing in recent years. With the creation of a market for mandatory trading of carbon dioxide emissions within the Kyoto Protocol, the London financial marketplace has established itself as the centre of the carbon finance market.
According to the World Bank's Carbon Finance Unit the size of the carbon market was $A66 billion in 2007. The voluntary offset market, by comparison, is projected to grow to about $A4bn by 2010.
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