Cloudy outlook for carbon markets

Not surprisingly, there's a gloomy outlook for any expansion in new carbon markets this year, thanks to policy uncertainty, according to respondents to a recent carbon market survey. However, confidence in existing market segments remains solid.

Between January 20 and February 4, Point Carbon, which is a provider of analysis and consulting services for global power, gas and carbon markets, conducted its fifth annual carbon market survey. Yesterday, the organisation released the results of the survey, which garnered 4,767 responses from 118 countries -- the highest number of respondents to date, making it arguably the most comprehensive overview of the international carbon market to date.

The ABCs of carbon trading start with the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which came into force in February 2005, and defined targets for developed-country emissions during the 2008 to 2012 period. Hopes had run high that this past December global leaders would agree at a meeting in Copenhagen to continue this agreement in some shape or form. But no solution was reached.

The Kyoto Protocol also prompted the launch of the EU's Emissions Trading Scheme (ETS). The EU ETS is the world's first international greenhouse gas emissions trading scheme. It works on a cap-and-trade basis, where the total volume of permitted emissions -- the cap -- is set at the start of a trading period. EU Allowances (EUAs) are the tradable units under the EU ETS, each representing a permit to emit one metric tonne of carbon dioxide equivalent (CO2e). Up to a certain limit, companies regulated by the EU ETS are also allowed to use carbon credits from third countries -- and this is where Asia typically comes into play -- instead of EUAs.

Some 70% of respondents to the recent poll expressed dissatisfaction with the lack of a decision from the Copenhagen meeting. This dissatisfaction was evident in all countries polled, and only just a bit more than a third of respondents (37%) said they expect a deal in Cancun (where the next UN Climate Change Conference will be held at the end of this year), down from 59% who had expected Copenhagen to yield binding agreements when asked this time last year.