Carbon credit market reaching plateau

By Fiona Harvey, Environment Correspondent
Published: September 12 2008 03:14

Investors have twin concerns regarding the fledgling market in carbon credits – its complexity and the fact that much of today’s trading could peter out in three years’ time.
The market was launched in 2005 thanks to 1997’s Kyoto protocol. However, the provisions of the treaty are set to expire in 2012 and in spite of years of fraught negotiations, there is nothing to replace them.

Carbon traders such as EcoSecurities and Camco make their money by generating and selling carbon credits issued by the UN under a provision of the Kyoto protocol called the clean development mechanism.
The idea is that rich countries, which are obliged under the treaty to cut their emissions, can do so, in part, by funding projects that reduce emissions in poor countries. These projects, such as wind turbines or solar panels, are awarded carbon credits and these can be bought by wealthier governments to count towards their emissions-cutting targets.
In this way, emissions should come down and developing countries gain access to technology they could not otherwise afford.
Governments are not the only buyers. Europe has a separate carbon trading scheme under which certain heavy industries are handed a quota of carbon dioxide emissions each year. They receive permits for each tonne they are allowed to emit. If they want to emit more, they can buy permits from one another, or buy UN carbon credits.
However, the market has been hit by a series of mishaps. The EU trading market suffered a serious blow in 2006 when it was discovered that more permits had been issued than companies needed. As the market only has a meaning if there is a scarcity of permits, trading collapsed.
This problem appears to have been solved and the market in EU permits is “getting stronger and stronger”, says Paul Newman, managing director at Icap Energy, which is trading 2.5m EU permits a day, up a third on last year.
But the market for UN credits is a different story. Having carbon credits issued by the UN is a lengthy process, often taking more than a year. As there may be no UN market after 2012, developers are coming under increasing pressure as they can only count on making money from their credits for another three years – a limited window of opportunity.
As a result, traders and analysts are reporting the number of projects is drying up.
Bruce Usher, chief executive of EcoSecurities, says: “It’s slowing down because of what happens in 2012. There isn’t a lot of runway left for projects.”
Alexander Ivanovitch, analyst at Kaupthing, agrees: “The pace at which new projects are coming forward is being reduced as we’re getting closer to 2012.”
“We’re hitting a plateau,” says Lucy Mortimer, a carbon trading manager at TFS, formerly Tradition. She is hopeful that the market will continue but investors will need reassurance.
Negotiators from around the world are at work on crafting a new treaty by the end of 2009, in time for national governments to ratify it before 2012. But the work is progressing slowly and there is much disagreement.
However, there are hopeful signs: the EU has pledged to keep its carbon trading system going at least till 2020, which will give carbon credit sellers a market for their wares.
However, the key will be the US. Both US presidential candidates have plans for a federal carbon trading system. If they fulfil their pledges, that will breathe new life into the market.
Copyright The Financial Times Limited 2008