Global Carbon Market Set for Momentous Changes

Alessandro Vitelli, Platts Managing Editor for Global Emissions Markets

2007 has seen momentous developments in the global carbon market, adding to the weight of support for the concept of market-based mechanisms as a key player in the fight against climate change. In the wake of these developments, the focus of debate and attention is likely to move to Asia.

PREEMINENT AMONG THE DEVELOPMENTS have been the start of widespread efforts at regional and federal level in the United States to build support for emissions trading legislation. The mid-term elections in 2006 brought a Democrat majority in both Houses of Congress, keen to overcome the long-term resistance to mandatory caps on carbon emissions.

Headed by Senator Barbara Boxer from California, chair of the influential Environment and Public Works Committee, Democrats have tabled a number of proposed bills establishing a nationwide cap-and-trade scheme for greenhouse gas emissions.

While it is not certain whether any of these bills, if passed, would be signed into law by Republican President George W Bush, there is a growing sense of inevitability among observers and commentators that the United States will launch some form of carbon market by 2012, when the first compliance period of the Kyoto Protocol ends.

Even without the work being done at federal level, individual US states are gearing up for emissions trading. The most advanced trading scheme, the Regional Greenhouse Gas Initiative, groups nine states in the northeast of the country, and is scheduled to begin in 2009.

Meanwhile, on the west coast, California governor Arnold Schwarzenegger has launched an effort to build an emissions trading scheme in three states. In addition, 31 US states representing over 70% of the US population have joined an initiative to track and report emissions from major industry.

The expectation is that the pace of change will pick up after 2008 when the next Presidential election is due to take place. Currently, Presidential candidates on both sides are promising to launch federal emissions trading schemes, underlining that the next Administration will take a radically different approach than the current one.

Meanwhile, Australia, the other developed country to reject the Kyoto Protocol, has undergone a complete change of heart on the issue.

Prime Minister John Howard in June 2007 announced that the country will launch a nationwide emissions trading scheme in 2011. Australia's scheme will cover around 70% to 75% of total emission sources, including transport and other fuels. A reporting system for emissions data is expected to be in place in 2008.

The upshot of these developments in the two main Kyoto holdouts is likely to be an increase in pressure on Asian economies to take on meaningful emissions reduction targets.

Pressure has already been brought to bear on major emitters such as China and India. While the two Asian giants continue to resolutely argue that they will not do anything to impede economic development and prosperity, it is possible that they may eventually cede some ground.

Both the US and Australian administrations had repeatedly said that the prerequisite for their own participation in emissions cap-and-trading was that major developing nations take on their own targets as well. The fact that they are now advancing their own plans without any corresponding undertaking from Asian countries suggests that the weight of scientific evidence has persuaded decision-makers that action is required as soon as possible.

There is in any case movement among developing countries. India recently announced that it would develop its own climate change policy, while China already has numerous initiatives in place to boost renewable energy and low-carbon technologies.

Equally influential may be the decision by Brazil that it will need to develop policies and strategies to combat climate change and its effects. All three major developing countries are experiencing the climatic effects of rising greenhouse gas emissions.

In general, Asian participation in the global carbon market has been limited to hosting Kyoto Protocol-approved emissions reduction projects that generate offset credits for investors in developed countries.

So far, these Clean Development Mechanism projects have generated some 63 million metric tons of CO₂ equivalent reductions, with a total pipeline of some 1.2 billion mt expected in the period 2008-2012 from projects approved to date.

Some forecasts estimate the eventual total volume of CDM reductions to top 2 billion mt by 2012 as more projects receive approval.

While there is a small degree of certainty that this carbon market will continue past 2012, at least in Europe, UN-sponsored discussions on a successor to Kyoto are taking on greater importance. This December's meeting in Bali is seen as a key step on the way to building consensus on what the carbon market will look like, and who will participate, after 2012.

1. Expected Annual Average Certified Emission Reductions from CDM Registered Projects by Host Party. Source: UN Framework Convention on Climate Change (August 2007)

2. Registered CDM Projects by Country in August 2007 (760). Source: UN Framework Convention on Climate Change (August 2007)