76842 state and trends of the Washington DC, May 2012 2012 State and Trends of the Carbon Market 2012 9 Executive summary With memories of the 2008-2009 financial crisis still vivid, 2011 emerged as yet another turbulent year for capital markets. Volatility increased for energy-related commodities, including carbon, with the onset of the Arab Spring, the shutdown of nuclear power stations in Japan and Germany in the wake of the Fukushima disaster,1 and the downgrade of the United States’ AAA credit rating. Equally relevant was the crisis of confidence that ensued as the Greek debt crisis intensified, spurred by fears that it would spread to other European Union (EU) economies and lead to a double-dip recession. Carbon markets were not immune to the eco- activity, trading volumes for secondary Kyoto off- nomic volatility. Compounded by increas- sets also soared in 2011, increasing by 43% yoy ing signs of long-term oversupply in the EU to 1.8 billion tons of CO2e, valued at US$23 bil- Emissions Trading Scheme (EU ETS), the back- lion (€17 billion). Largely driven by hedging and bone of the EU’s climate policy and the engine arbitrage, trading volumes for all assets increased of the global carbon market, carbon prices plum- as annual greenhouse gas (GHG) emissions in meted toward the end of the year.2 Yet even as Europe declined for the second time in three years prices declined, the value of the global carbon (primarily driven by weak industrial activity in the market climbed in 2011, driven predominant- EU) and forecasts of compliance demand were ly by a robust increase in transaction volumes. dwarfed by the oversupply of allowances. As com- The total value of the market grew by 11 per- pliance demand and prices deteriorated, the issue cent (%) year on year (yoy) to US$176 billion of whether current carbon prices can sufficiently (€126 billion), and transaction volumes reached spur long-term low-carbon investments emerged a new high of 10.3 billion tons of carbon dioxide in the debate, surfacing a key challenge in this equivalent (CO2e) (see Table 1).3 market: an oversupply created as a consequence of demand responding to the current macroeco- Central to the rise in global transaction vol- nomic scenario versus a pre-established supply de- umes, EU Allowance (EUA) trading volumes termined under very different market conditions. increased, reaching 7.9 billion tons of CO2e, val- ued at US$148 billion (€106 billion). Supported The value of the pre-2013 primary CER market by increased liquidity in the Certified Emission declined once again in 2011 as a consequence of Reduction (CER) market and in nascent secondary the imminent end of the first commitment period Emission Reduction Unit (ERU) exchange-based of the Kyoto Protocol. Market value fell by 32% 1. The Fukushima disaster was a consequence of the earthquake and tsunami in Japan in March 2011. 2. Prices for December 2012 delivery of EU Allowances (Dec 12 EUA) and December 2012 delivery of Certified Emission Reductions (December 12 CERs) fell by 50% year on year (yoy) and 62% yoy respectively, from January 3, 2011, to December 30, 2011. Source: IntercontinentalExchange (ICE) Futures Europe. 3. Differences in 2010 figures reflect changes in the methodology to calculate the value and volume of trades. For detailed information regarding the methodology used to measure asset volumes and values, see the Methodology section at the end of this Report. 10 State and Trends of the Carbon Market 2012 Table 1: 2010 2011 Carbon market at Volume (MtCO2e) Value (US$ million) Volume (MtCO2e) Value (US$ million) a glance, volumes Allowances market and values, calendar EUA 6,789 133,598 7,853 147,848 2010-2011 AAU 62 626 47 318 RMU - - 4 12 NZU 7 101 27 351 RGGI 210 458 120 249 CCA - - 4 63 Others 94 151 26 40 Subtotal 7,162 134,935 8,081 148,881 Spot & Secondary offset market sCER 1,260 20,453 1,734 22,333 sERU 6 94 76 780 Others 10 90 12 137 Subtotal 1,275 20,637 1,822 23,250 Forward (primary) project-based transactions pCER pre-2013 124 1,458 91 990 pCER post-2012 100 1,217 173 1,990 pERU 41 530 28 339 Voluntary market 69 414 87 569 Subtotal 334 3,620 378 3,889 TOTAL 8,772 159,191 10,281 176,020 Sources: World Bank, Forest Trends-Ecosystem Marketplace for data on the voluntary market and Thomson Reuters Point Carbon for data on the California offsets Subtotals and totals may not add up due to rounding yoy to US$1.0 billion (€0.7 billion). The size of The year ended with the 17th Conference of the the ERU and Assigned Amount Unit (AAU) mar- Parties (COP) in Durban, South Africa. While kets also decreased, by 36% and 49% respectively. COP 17 did not adopt the incremental emission In stark contrast to this, the post-2012 primary reduction commitments necessary to close the gap market increased by a robust 63% yoy to US$2 as per the ambitious level set by the UNFCCC billion (€1.4 billion) despite depressed prices. Parties, it signaled a political commitment to re- Although China remained the largest source of solve critical issues that were far from certain prior contracted CERs, African countries – largely by- to the meeting. In particular, three key results passed in the pre-2013 market – emerged stron- formed the backbone of the Durban Platform for ger in 2011 and accounted for 21% of post-2012 Enhanced Action: (i) the formal provision for a sec- CERs contracted during the year. Despite the in- ond commitment period of the Kyoto Protocol;4 crease in post-2012 volumes, purchase agreements (ii) the launch of the Green Climate Fund to scale became less binding due to lingering uncertain- up long-term climate finance to developing coun- ties regarding residual compliance demand and tries; and (iii) the formal provision for a roadmap the eligibility of international credits in existing toward a global legal agreement on climate change frameworks and schemes under development. (the “Durban Platform�) to be agreed in 2015 and 4. To become a reality, the necessary decision to that effect will need to be adopted at COP 18. State and Trends of the Carbon Market 2012 11 take effect in 2020. The decision on a new market for 2015, the plan is expected to cover 85% of mechanism further strengthens the international California’s annual emissions. Québec, which trust in the UNFCCC process. Still, the restricted emits 12% of Canada’s annual GHG emissions, geographic scope of the Kyoto Protocol’s second adopted its own cap-and-trade plan, and the commitment period and prospects for a global province is now working toward linking it with deal to take effect in 10 years did not satisfy the California’s (within the context of the Western immediate needs of the existing carbon market in- Climate Initiative) starting in 2013. In addition, frastructure, and the Durban Platform could not both Mexico and the Republic of Korea got their reverse the downward spiraling of the carbon price comprehensive climate bills passed a few days that produced record lows through early 2012. apart in April 2012. These initiatives combined mean five new jurisdictions are adopting econo- At a time when uncertainties surround the exist- my-wide cap-and-trade schemes. These events are ing carbon markets, it becomes more important particularly noteworthy in contrast to 2010, when than ever to take stock of the cumulative impact no such initiatives were launched. Now the world of carbon market mechanisms. To date, US$28 looks with particular attention to China, which billion worth of pre-2013 CERs have been con- is also among the frontrunners in the race to be- tracted forward (US$30 billion, combined with come a low-carbon economy. Its advanced plan to ERUs); if all underlying projects are imple- pilot several regional cap-and-trade schemes is ex- mented, these contracts will have supported ad- pected to provide the foundation for a nationwide ditional investments of more than US$130 bil- scheme in the coming years. lion in developing countries5,6 and confirm that project-based mechanisms have the capacity to Initiatives that attract competitive private sec- mobilize capital efficiently toward cost-effective tor participation are essential to identifying and low-carbon investments. More broadly, low-car- implementing least-cost solutions for climate bon initiatives, including market mechanisms, change mitigation and adaptation, and market- have broken the inertia and significantly raised based mechanisms can catalyze such participa- awareness of the climate challenge. tion. However, the allocation of private capital toward the deployment of new low-carbon tech- In this context, several domestic and regional low- nologies at scale has been constrained by the low carbon initiatives, including market mechanisms, price prevailing in the short term and the ab- gained increasing traction in both developed and sence of a price signal in the long term, and com- developing economies in 2011 and early 2012. pounded by nervous financial markets that favor The global carbon market welcomed the news exposure to less risky assets and markets. More in late 2011 that the Australian Parliament had ambitious targets are needed from a larger num- passed the ambitious Clean Energy Act, which ber of countries to foster demand that can set the will bring a nationwide cap-and-trade scheme to groundwork for a truly transformational carbon Australia by 2015. The scheme is expected to cov- market – one that can emerge from fragmented er roughly 60% of the country’s 600 million tons but workable market initiatives. The challenge of CO2e per year. In 2011, California’s cap-and- then will be to chart a course to further evolve trade regulation was adopted by the California Air these initiatives through linking and potentially Resources Board. California’s plan is set to go into reshaping the global carbon map. effect in 2013; with a coverage expansion planned 5. World Bank estimates from 2011 and based on CDM projects in its own pipeline led to an average 1º:5 ratio between CER purchase values and the additional investments required for the underlying project to be implemented. 6. This value refers to the cumulative 2.4 billion CERs contracted in the primary market from 2002-2011. The value does not ensure the actual transfer of funds from the buyer to the seller as payments for emission reductions purchased in the primary market are commonly made upon delivery.