London, 29 October 2009 

The outcome of the December 2009 Copenhagen Climate Conference will largely dictate the success of the emerging but potentially lucrative global carbon market.  Governments worldwide are actively pursuing initiatives to reduce greenhouse gas (GHG) emissions.  The EU, for instance, wants to lower GHG emissions by 20 percent over 1990 levels by 2020, and by up to 30 percent if agreement is reached in Copenhagen later this year. 

New analysis from Frost & Sullivan, Asset Management - European Emissions Trading Market, reveals that the emissions reduction market earned revenues of $94.28 billion in 2008 and estimates it to reach $344.64 billion in 2015.

“International agreements on climate change after 2012 will propel the global carbon market to the next stage of development,” says Frost & Sullivan Research Analyst Kavitha Chakravarthy. “The emissions trading market in the United States will likely be three times larger than the EU market, thereby encouraging greater participation from financial institutions and increasing its depth and breadth.”

Growth in the emissions trading market is largely contingent upon global regulatory support for carbon emissions reduction initiatives and on the expected increase in energy prices. Even under current economic conditions, the European emissions trading market will grow, albeit at a slower rate, because trade volumes are looking up regardless of the fact that carbon European Union allowance (EUA) prices have shrunk.

The economic slowdown raises the risk of oversupply of carbon credits because private sector emissions may be lower than estimated due to reduced operations.

Nevertheless, the surplus or deficit varies every year. The European Union's Emissions Trading Scheme (EU-ETS) Phase II is short, as the cap gets more stringent every year.

“A move toward a low carbon economy creates various investment opportunities in various sectors while boosting the liquidity of the emissions trading market,” notes Chakravarthy. “In these conditions, spot trading volumes are expected to increase, as participants focus on avoiding counterparty risk and on cashing in surplus EUAs.”

Despite plentiful market opportunities, participants will likely worry about the use of project credits like certified emissions reduction (CER) and emissions reduction units (ERUs) after 2012. This is true because project credits arising out of clean development mechanism ( CDM) and joint implementation (JI) often lead to procedural delays.  Moreover, the role of these credits after 2012 is uncertain and hinges on whether a deal is reached in Copenhagen. 

Various industrialized countries including Australia, Norway, New Zealand, and Japan have launched or are expected to launch their respective cap and trade systems. Once linked, the various regional cap and trade systems will likely result in better carbon prices.

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