Carbon traders pessimistic about future market expansion

Peta Hodge

3rd March 2010

Carbon traders’ confidence in future carbon market expansion has been dented by the failure of governments to secure a binding global climate deal in Copenhagen last December.

This is the central conclusion of Point Carbon’s fifth annual ‘Carbon Market Survey’, based on 4,767 responses from 118 countries, which found 70 per cent dissatisfied with what was achieved at Copenhagen and only 37 per cent expecting a binding deal to be delivered in Mexico this year.

This disillusionment is feeding into respondents’ expectations of what carbon prices will be achieved in future. They are now anticipating a global carbon price of €31 in 2020, compared with the €35 they were predicting last year.

The carbon price is key to determining the extent to which carbon markets expand in the future. “To what extent this anticipated reduction in carbon prices may impact investment in the longer term is not yet clear,” said Endre Tvinnereim, senior analyst and one of the authors of the report.

“But 47 per cent of respondents representing companies covered by the EU Emissions Trading Scheme (EU ETS) cited the long-term carbon price as a decisive factor for new investment. In Germany, this was even higher, at 72 per cent.”

Confidence in EU ETS

Although apparently pessimistic about future expansion of carbon markets, the carbon traders questioned indicated increasing confidence in the efficiency of the existing EU ETS.

For the first time, an outright majority (54 per cent) says the EU ETS has caused visible emission reductions in the companies they represent, while 43 per cent see it as the most cost-effective instrument for reducing emissions in the EU.

Such optimism flies in the face of the findings of the UK’s own Environmental Audit Committee, whose report last month concluded that the EU ETS is failing to deliver. A fundamental problem, it found, is that the caps set by the EU ETS have not been tight enough to sufficiently challenge the emitting behaviour of businesses.

A spokesperson for Point Carbon said the two reports were not necessarily contradictory – its own research showed only that emission cuts were being made, not whether these cuts were meaningful.

Japanese ETS by 2015

Although Point Carbon’s report is generally pessimistic about the expansion of carbon markets in the short term, optimism is growing in Japan where 80 per cent of respondents expect there to be a Japanese ETS by 2015 (compared with 61 per cent last year).

Expectations lower for US cap-and-trade

This contrasts with the falling expectations for a US cap-and-trade scheme being in place by 2015. As it proves to be one of the major sticking-points of the US’ troubled climate bill, 61 per cent of respondents to this year’s survey say they expect it now, compared with 81 per cent last year.

The research for the report was conducted between January 20 to February 4 2010 and expectations for a US cap-and-trade scheme may have fallen even lower since then.

Yesterday it was reported that Republican senator Lindsey Graham, who has been working with Democrat senator John Kerry and independent Joe Lieberman on a compromise version of the US climate bill, had describes the emissions trading element of the legislation as "dead".

Commenting on this development, a spokesperson for Point Carbon said: “The concept of cap-and-trade is likely to be replaced by a variant called ‘cap-and-dividend’, which involves a greater focus on auctioning and the redistribution of allowance proceeds.

“The scope of the programme is also likely to be re-worked, with a cap on the power sector only, industry being phased in later and transportation fuels addressed through a fee.

“The new bill may include some restrictions on trading but we don’t have any details on this point yet.”