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The future of carbon trading

Carbon prices are rising slowly after a recent fall in the markets. But questions remain about the role of carbon trading in rich countries – and in developing countries like China, writes Yu Jie.

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The price of carbon seems to be rising slowly, closing on May 27 at 15.24 Euros a tonne. For the past several months, the price on the European Climate Exchange fluctuated around the nine-Euro mark. Current prices are slightly better than predicted last year, but still far off 31 Euros – the price in August 2008.

Climate change and the economic crisis share one crucial feature: the importance of financing mechanisms. In every climate-change proposal, emissions reduction and climate-change adaptation require funding that runs into the tens of billions of dollars. Finding and allocating that money will be the core of any climate deal reached at the United Nations conference in Copenhagen in December. But the ongoing crisis has highlighted the problems of carbon markets, and forced a re-examination of their role in any future deal.

In 1997, the Kyoto Protocol established a system of rights over environment resources that created a market mechanism known as a cap-and-trade system. People hoped that carbon trading would solve a global “tragedy of the commons”. Certainly, it is hard to imagine the energy industry making changes without the right economic incentives in place. But with the financial crisis darkening an already bleak outlook, will carbon trading come to a premature end?

In April, the European Union published emissions figures for its 27 member states. Overall emissions for the EU were down 6% on the previous year, at 2.11 billion tonnes. Emissions from the concrete, chemical, glass and paper industries had fallen significantly – a drop of 9% – while emissions from power-generation fell by 6%. Industry analysts believe that this was not only caused by the implementation of the Kyoto Protocol, but also the fall in production triggered by the financial crisis.

Carbon markets may be non-traditional, but the laws of supply and demand still hold true and the price of carbon reflects overall economic trends. Lower emissions reduced businesses’ need for emissions quotas and some dumped those that they held. Meanwhile developing nations sold off their emissions quotas, which were of no more use to them than hot air, exacerbating the problem of oversupply. The market plummeted.

In 2005, a crash in the carbon market saw prices drop close to zero. This was due to the EU miscalculating national emission levels and issuing too many quotas, thus killing demand. This year however, the economy was to blame.

In discussions about post-Kyoto mechanisms, there is a tension between truly equitable, and more competitive, price-setting mechanisms. Long-term considerations about carbon pricing are thus a major factor in discussions about the impacts of emissions reduction. A carbon price that fluctuates within a reasonable range is of interest to developed governments and investors. But for developing countries participating in Clean Development Mechanism, a low carbon price is unfair and unhelpful in reducing emissions.

Prices for traditional products are set by supply and demand. But what worries investors about carbon is the important role of political priorities in price-setting. Policy will determine the outlook for long-term investment in infrastructure, manufacturing and technology. Investors have been calling for a “Three-L” policy signal: long, loud and legally binding. This is also the case for venture capital and private equity. But the carbon market is even more risky, since it is heavily reliant on multilateral political agreements.

Specialist carbon investment funds that emerged in recent years have struggled; some have pulled out or switched funds to other markets. The first phase of the Kyoto Protocol ends in 2012, and there is not yet a plan for moving from the current carbon market framework to a new global deal. Negotiations that take place over a five-year basis do not fit with normal investment cycles. Investors look at carbon markets, but do not act.

China is the country with the most emissions reduction quotas under the CDM – and a battlefield for investors. In the last two years, with the market expected to rocket, most quota purchase agreements were priced at 10 Euros or more. Average project development costs are around one Euro per tonne of carbon, while the cost of carbon hovers around the 11 to 12-Euro mark. Therefore there is no guarantee of a reasonable return. This year the slow pace of negotiations and the low price of carbon have slowed down progress on projects. Add in the other failings of the CDM, and there is a pressing need for change.

Low carbon prices do not only present an obstacle to investment in the low-carbon economy, they also exacerbate differences between political groupings.

At recent UN-led climate talks in Poznan, Poland, the British and German environment ministers emphasised the role of carbon markets as a funding stream in the future. For the EU, the current 2% tax on income from the CDM remains the main source of funds. As long as there is still a market, these funds will flow. Politically, this is an easier option than increasing carbon taxes, and the system is already in place – it only needs to be expanded. Meanwhile, financial institutions and large businesses will welcome the investment opportunities.

However, some of the major developing nations oppose the expansion of carbon markets in their countries. Current proposals would see the EU cut emissions by 30% from 1990 levels by 2020, with half of that reduction coming from the purchase of quotas from the developing world: a form of offsetting. But this raises worries among industrialising nations. Developing countries will lose the opportunity to make cheaper reductions in emissions, as requirements increasingly target energy-intensive industries.

Moreover, fluctuations in the carbon price mean the funding for emissions reduction and adaptation provided from developed nations to the developing world is unpredictable. This tends to make carbon trading politically unsaleable. Negotiations are deadlocked on these issues, and there is not a clear road ahead.

But despite these disagreements, carbon markets are expanding. In the United States, some regional markets are in operation; Australia and Japan are working on similar plans. Meanwhile the emissions reduction projects in developing nations as part of the CDM system have provided an important reference for a future agreement. But technical problems are easily resolved; it is political agreement that is elusive.

There is also a complex relationship between the cost of carbon and the cost of oil. When the oil price is high, the price of carbon rises as more people seek out alternative energy sources. Lower oil consumption during the economic crisis has reduced emissions, but the low price of carbon has weakened investment in emissions-reducing technologies. The way to restore investor confidence is the addition of public funds to put the market back in order – and help push forward the low-carbon economy during the economic crisis.


Yu Jie is head of policy and research at Climate Group China.

Homepage photo by freefotouk

 

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评论通过管理员审核后翻译成中文或英文。 最大字符 1200。

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评论 comments

Default avatar
匿名 | Anonymous

碳的自由贸易

和所有能够进行国际贸易的商品一样,碳也有其商品的属性。正如在国际贸易中,相对优势决定国际贸易的可能,但绝对优势绝对国际贸易的价格。碳也一样,碳的价格还是受到了强势贸易主体的控制。当然了,就中国而言,碳贸易的前途我看来是在于国内的市场,这也是应对减排压力的途径之一。yfy

Free carbon trading

Carbon has the same attributes of those goods that can be exchanged in international trades. Just like in international trades, comparative superiority determines international trade, however, absolute superiority determines international trade prices. It can also be applied to carbon, carbon price is controlled by strong trend trade system. Regarding China, I believe that carbon trade's future lies in the domestic market, this is a way of reducing pressure of emission. yfy
Translated by Jennifer Yip

Default avatar
匿名 | Anonymous

“外包”式排放导致目标毫无意义

所有国家都得减少不管是直接的,还是间接的碳排放。欧盟的碳减排很可能被其进口国碳排放的增加所抵消,——即,欧盟(或其它国家)把污染“外包”出去了。碳交易是那些政客们想出的权宜之计,他们其实并不想在应对气候变化上有所作为——当然,这也少不了那些名誉扫地的金融寡头们的参与。
(田亮翻译)

Outsourcing one's emissions make targets a nonsense

All countries must reduce their direct and indirect carbon emissions. The reductions in EU emissions are probably more than offset by increased emissions by the countries which supply the EU's imports - i.e. the EU (and others) are outsourcing their pollution.

Carbon trading is a red herring, promoted by weak politicians who do not wish to deal with climate change - and of course by the (discredited) finance industry.

Default avatar
匿名 | Anonymous

回应2号

2号的想法过于简单,碳交易就是在减排中引入市场的力量,一方面发达国家通过在发展中国家投资低碳项目,以较低的成本完成减排目标,另一方面发展中国家得到所需的技术、资金,有利于实现真正的可持续发展。的确,目前碳价整体上波动较大,交易机制还不成熟。但是,如果没有资本的参与,仅仅靠政治意愿,所谓的“减排”将会变为一场“猴子捞月”的闹剧——愿望固然美好,实践起来却难于登天!

response to comment #2

The thinking in comment 2 is overly simplified. Carbon trading introduces market force into the emission reduction. On one hand, developed nations reach their reduction targets by low-carbon investment in developing countries while on the other, developing countries benefit from the technologies and funds they need to achieve a real sustainable development. It is indeed that the present carbon prices are in a wavy change and the trading mechanism is not that ready. However, the so-called "reduction" will turn to be a farce like "fishing in the air" if no capital but political will is involved. So the will is no doubt a good one but hard to put into place like finding a ladder to go heaven.

translated by Ming Li

Default avatar
匿名 | Anonymous

福兮祸之所依

面对经济的不景气,碳价一路走高的局面也是“风光不再”,着实令人叹息。换个角度想想,这次危机会加速碳交易市场的整合,整个交易机制的不足也被暴露出来,有利于今后的更加完善。

blessing comes in a form of misfortune

The soaring carbon price is "over the hill" in the recession. Seeing it in different light, this crisis might speed up the integration of carbon trading market and reveal the defects of the trading mechanism, which might benefit its future improvement.

Translated by Ming li