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Global carbon market contracts 38% as prices and volumes drop

Oslo, 2 January 2013

Global carbon markets traded a total €38.4 billion worth of allowances and credits during 2013, a 38% decrease from the €62bn the previous year, in a continuation of the decline that started after the market peaked at €96bn in 2011. Since then, the key European reference price of emissions has fallen from €18 to €5 per tonne of carbon dioxide.

Last year also saw a decrease in terms of volumes – from 10.7 billion to 9.2 billion emission units – the first drop in traded volumes since 2010, according to analysis published today by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis and forecasting for the energy and environmental markets.

The decline is most dramatic for the UN-led ‘flexible mechanisms’ that were created to incentivize emission abatement investments such as renewable energy in developing countries. Until recently, these markets – known as CDM and JI – accounted for roughly 20% of the volume and 10% of the value of the world’s carbon markets. After prices collapsed from 2012 to 2013, they now represent only 7% of volume and 1% of value.

  • Strong growth in the North American emission markets
  • Chinese pilot trading schemes show substantial progress
  • Europe continues decline  but still dominates global market

“The main explanation for the falling prices in carbon markets around the world is the very modest emission reduction targets adopted for the period up to 2020. Without ambitious climate targets there is no need for deep emission reductions and carbon prices will remain at low levels. However, if the goal to limit global warming to two degrees shall be met, more dramatic cuts are needed over the next decades. The international negotiations towards a new climate agreement scheduled to be adopted in Paris in 2015 will be a litmus test on the political willingness among large emitters to make the required emission reductions”, says Anders Nordeng, Senior Carbon Analyst at Thomson Reuters Point Carbon and co-editor of the report.

With a share of 88% of volume and 94% of value, the European Emission Trading System (EU ETS) continues to completely dominate the world of emission trading. In this market the whole of 2013 was marked by the political debate on whether or not to intervene in the market in order to address the massive oversupply of allowances.

Much of the debate last year revolved around the reshuffling of auction volumes from the years 2014-16 to 2019/2020. As this proposal – known as ‘backloading’ – wriggled its way through the European institutions, the price of carbon reacted sharply to the different votes as well as to the statements of key decision makers.

In the end, after Germany decided to support the idea, ‘backloading’ was approved by the European Parliament and the Council in the last months of 2013. “Market participants seem to have anticipated this outcome, as the European carbon price stabilised fairly much over the autumn, after a downwards trend in the first months of the year”, explained Nordeng.

“If policy makers now follow up with the actual implementation of backloading, as well as with structural reform of the carbon market, we expect European carbon prices to remain stable around €5, or possibly pick up this year”, said Nordeng.

Emerging carbon markets witnessed more positive developments during 2013 however. The only segment to have seen a growth in volume and value last year was the North American market, driven by trade in California, and by the resurrection of emission trading in the North-Eastern states. “2013 was the year the North American carbon markets blossomed”, said Olga Chistyakova, senior analyst of the North American market, adding that in the Western Climate Initiative (WCI) that encompasses California and Québec, carbon allowance and offset prices are now the highest in the world, with the allowance price floor of $10.71/t (approximately €7.8) in 2013.

Another source of growth is the new pilot emission trading schemes in China, which launched the first of seven regional trading schemes in June, five of which are now operational. Although the traded volumes are still modest, the sheer size of some of the covered provinces and cities (Guangdong, Beijing, Shanghai), points to a great potential. The latest of the regional schemes, Tianjin, was launched on 26 December.

Shenzhen – albeit the smallest in terms of cap – has witnessed the most active secondary trading (not counting the initial auctions) among the five pilots.  “Shenzhen allows private investors to trade, a feature that distinguishes the city’s scheme from most of the other pilot markets”, explained Hongliang Chai, analyst of China’s emission market.

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