Global carbon market to grow by 33% in 2010

Despite the failure to reach a global consensus on extending the Kyoto Protocol, 2010 is likely to be a year of growth and stability in the world's established carbon markets, a new report suggests.

The global carbon market will be worth $170 billion in 2010, up 33% on last year, according to a recent report by Point Carbon, the leading independent provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environment markets.

The report, titled Outlook for 2010 and Beyond, also predicts that trading volumes will increase by only 5% versus 2009, to a total of 8.4 billion metric tonnes of carbon dioxide equivalent (CO2e). One billion metric tonnes is commonly referred to as 1 gigaton or 1 Gt.

The Kyoto Protocol on climate change, which came into force in February 2005, resulted in the launch of the European Union's Emissions Trading Scheme (EU ETS), which is the world's first international emissions trading scheme. It works on a cap-and-trade basis, where the total allocation is set at the start of a trading period.

Although the world failed to commit in Copenhagen in December to succeed or extend the existing Kyoto Protocol from 2013, this year is likely to be a year of growth and stability in the world's established carbon markets.

The volume in the EU ETS is expected to be virtually flat compared to 2009, with Point Carbon anticipating that 5.4 Gt of CO2e will be traded. The EU ETS will still remain the world's largest carbon market, comprising 64% of the total transaction volume. Its value is expected to increase to €95 billion ($134 billion) in 2010 from €69 billion last year.

The largest growth in the major market segments is expected to come from the United States' Regional Greenhouse Gas Initiative (RGGI), a mandatory cap-and-trade system covering the power sector for 10 Northeastern and Middle Atlantic states. RGGI will make up 12% of the global carbon market this year.

The market for Certified Emissions Reductions (CERs) from the Clean Development Mechanism(CDM) will see an increase in volume despite having the greatest policy uncertainty. The CDM market is expected to reach 1.8 Gt in 2010, up 11% on 2009, at a forecasted value of $31 billion. However, the lack of post-Kyoto policy certainty will diminish trading in primary CERs.

Primary CER volume is projected to amount to only $3 billion this year, while the secondary CER market will benefit from continued portfolio optimisation (a trend that began last year) and reach a volume of 1.5 Gt, worth $267 billion.

Beyond 2010, a driver for global carbon markets will be the creation of a US emissions trading system. If the US were to pass federal cap-and-trade legislation, American trading activity will likely eclipse that seen in the EU ETS within a few years. However, Point Carbon believes there is only a 20% likelihood of getting such legislation through the US Congress in 2010.

"The overall picture is that cap-and-trade systems such as the EU ETS and RGGI will see stable or growing volumes," said Endre Tvinnereim, a senior analyst and one of the authors of the Point Carbon report. "By contrast, the market in projects that generate offsets under the CDM is suffering from post-2012 uncertainty. However, the great unknown is the volume that could be generated by trading under a US ETS towards the end of the [existing Kyoto protocol] ."

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