EU drives boom in carbon trading in first half of ‘09

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The European Union Allowance market represented 75 percent of the total carbon market trading volume in the first half of 2009, according to a new report from Point Carbon.

And the EU is likely to continue to dominate the sector because initiatives such as the U.S.’s Regional Greenhouse Gas Initiative, or RGGI, lack the necessary stringency when allocating credits, said Veronique Bugnion, managing director of trading analytics and research for Point Carbon, a consulting group that focuses on the energy and environmental markets.

“Europe is driving the global market, and until the U.S. comes to the table with either a sizable regional program or federal program that will be the case,” she told the Cleantech Group. “RGGI has two issues against it: It’s less than 10 percent of the size of the EU market in terms of the footprint of emissions covered; also it’s overallocated.”

The first half of 2009 saw an increase in trading of 124 percent when compared to the same period last year, resulting in 4.1 gigatons of carbon traded across all the global markets. But the higher volumes were offset by lower prices on carbon, resulting in an increase of just 22 percent in the first half of 2009 to €46 billion ($65 billion), the report said.

But Bugnion said the lower prices were actually good news.

“In short, it points out that the market is working,” she said. “Prices are lower because of the recession. You’re emitting less this year than you were two years ago, and you want a healthy market to be driven by healthy demand and supply.”

Bugnion pointed out that the high volume of trading suggests that many industrial players are selling off their excess credits. What effect that could have on the remainder of the year remains to be seen, she said.

“The question is: Have they sold their excess for 2009, or will we continue to see that for the rest of the year?” she said, indicating that the highest-volume trading quarters are the first and fourth each year.

The EUA accounted for €39 billion of the transactions, a 29 percent increase over the first half of 2008. RGGI accounted for €840 million ($1.2 billion) and 321 Mt of carbon traded, up from almost zero in the first half of 2008.

The carbon markets seem to be faring slightly better than venture capital. The total venture capital invested in cleantech in the second quarter of 2009 was down 44 percent from the same period a year ago (see Cleantech may have seen the worst, rebounding to $1.2B in 2Q09).

But there are some types of carbon units that are being seen in the market as safer to hold, the Point Carbon report said. Investors are shying away from the Kyoto Protocol’s Clean Development Mechanism (CDM), which allows industrialized countries to invest in projects in developing countries in place of more expensive emission reductions in their own country. The companies that finance the deals receive carbon emission reduction (CER) credits (see Europe gains carbon credits with India projects).

Bugnion said Point Carbon is seeing fewer CERs come out of projects directly, but the volume of CERs being traded on a secondary basis is still healthy. Bugnion said part of the reason is that investors are spooked because of policy uncertainty surrounding CERs past 2012, which means projects not already on the ground could have little time to generate CERs before the changes.

The declining interest in CERs has already prompted some major Indian companies to spend money on renewable energy projects instead of preventing pollution (see Indian firms drop carbon trading plans in favor of renewable projects).

In the next six months, the world is watching to see what happens with U.S. House of Representative’s Waxman-Markey bill as it goes through the Senate, Bugnion said (see Obama administration could fast track cap-and-trade, RPS in ‘09). She said that, while it’s good that RGGI has familiarized businesses with how a cap-and-trade system works, it has serious flaws.

“The market is very overallocated, and might even be increasingly so in the current recession,” she said.

In recent weeks, some notable figures have criticized cap-and-trade systems because of the price uncertainty, instead pushing for a carbon tax. Among them are Elaine Kamarck, former domestic policy advisor to Vice President Al Gore and the co-founder of the U.S. Climate Task Force (see New paper advocates U.S. carbon tax shift), and former U.S. Secretary of State Condoleezza Rice (see Rice calls carbon cap-and-trade ‘ridiculous’).