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More government intervention in carbon markets

London, 28 March 2012

Carbon Market Survey: For the first time since it was carried out in 2005, the results of Thomson Reuters Point Carbon?s annual carbon market survey provides a convincing argument for those inclined towards market intervention in the EU ETS. Unlike in previous years, respondents to the survey – Carbon 2012 - said that emitters within the EU?s Emissions Trading Scheme (ETS) view the cost of carbon as less decisive in investment decisions, and fewer report that the EU ETS has caused emission reductions. Fewer respondents saw the EU ETS as a cost-effective way to reduce emissions this year than last and the share of respondents who think the EU ETS is mature was flat, putting an end to an upward trend seen since 2007.

According to Carina Heimdal, Editor, Crediting Mechanisms and Emerging Carbon Markets, Thomson Reuters Point Carbon and author of the report into the survey?s findings; “This is largely a consequence of the current low carbon prices and gloomy price outlook, and reflects what many believe is the need for market intervention, to prop up prices, either through a deepening of the EU-wide emissions reduction target or by setting aside a number of allowances in phase 3 of the EU ETS which runs from 2013-2020”. She continues; “The general public may think that the current low prices mean that the EU ETS is not working. In fact, it is not really the market as such that has failed, but the low carbon prices reflect the fact that no additional reduction is needed to meet the EU reduction target for 2020, prompting the question, should reduction targets be more ambitious?

Heimdal points out that the European Parliament has already indicated support for market intervention in terms of a set-aside, while the member states are currently in fierce internal discussions over the issue. “We definitely spot a trend here, in favour of more legislation to support carbon prices, along the lines of the new markets in California, Australia, Quebec, where we see high levels of intervention. The experience of the EU ETS is one of the reasons behind this trend”, she said.

Despite the downbeat responses regarding the EU ETS, assessments of the Clean Development Mechanism (CDM) are more positive than was previously the case. Some 36% of respondents think the CDM is the most cost-effective way of reducing emissions in non-Annex I countries, up from 31% last year and 28% think the CDM market is mature, up from 19%. Despite growing perceptions of maturity, which Heimdal attributes, at least in part, to faster and more efficient UN procedures and the greater use of standardized baselines, involvement in the CDM market is decreasing, according to respondents.

“We think that the main reasons for the lower willingness to invest are, again, the low carbon prices in Europe, and the low demand for CERs. Thomson Reuters Point Carbon currently forecasts 4,313m CERs and ERUs to be issued over the 2008- 2020 period, while we think demand for these credits amounts to 3,250m, leaving a surplus of roughly a billion credits, which could be reduced considerably if set-aside proposals were introduced”. In terms of new mechanisms, more than 70% of respondents think credits from reducing emissions from deforestation and degradation (REDD) and from bilateral agreements will be generated by 2020.

In North America, more respondents thought that regulators will tighten the Regional Greenhouse Gas Initiative?s cap in the coming years than did not. However, even more respondents didn?t know or had no opinion on whether the cap will tighten, reflecting the state of uncertainty around the future of RGGI?s current over-allocation. In California, emitters say that they are preparing for the cap-and-trade scheme starting in 2013 mainly through allowance and credit purchases. As for the price of carbon next year, 40% of respondents think California Carbon Allowances (CCAs) will cost in the range of $10-15, which implies enough offsets would be available for compliance – a far cry from today?s supply outlook.

The expectation of a carbon price has put emission reductions on respondents' radar screens, with 31% saying they are planning to cut their greenhouse gas output in light of the programme?s upcoming entry into force – up from only 24% last year.

Most respondents think Australia?s carbon pricing scheme will start as planned in 2015 although a quarter of the respondents think it won't. “This may reflect concern over the threats from the opposition to the Gillard government in the run-up to elections next year. We think that the most likely outcome is that the scheme goes forward as planned, but that there could be changes to the price floor/ceiling”, Heimdal said.

Respondents to questions regarding China's ETSs, reflect the view that the main question is not whether there will be emissions trading in China, but how functional it will be. Several respondents express doubt that the Chinese ETSs will be effective and transparent and respondents did not expect all of the seven planned regional carbon schemes in China to go ahead in 2013. “In our view, there are a number of barriers to the successful functioning of emissions trading schemes in China, including a heavily regulated power sector, the rapid growth of coal-fired power plants, the steel and cement sectors? role in employment, and the difficulty of gathering emissions data from the numerous facilities in the steel and cement sectors”, said Hongliang Chai, Analyst, Emerging Carbon Markets, Thomson Reuters Point Carbon, adding “because of these difficulties there is the risk that these schemes become more symbolic than effective”.

The survey threw up one final intriguing insight into the views of the carbon professional. Of several countries suggested, the one considered most likely to introduce a mandatory cap-and-trade scheme at national level by 2017, is Japan, with 44% of respondents expecting such a scheme in the next ten years. “Given the bill which was to introduce mandatory cap-and-trade in Japan was abandoned, and Japan has been dealing with reconstruction and power supply in the aftermath of the tsunami, this is a surprising result”, said Heimdal.

China came second, South Korea third and Brazil came in fourth, ahead of Canada, and the US; “so clearly respondents believe that the focus of emissions trading over the next decade will be the Asia Pacific Rim”, she concluded.

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