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Carbon market in "rude health," awaits U.S.: BarCap
July 13, 2009 / 12:52 PM / 8 years ago

Carbon market in "rude health," awaits U.S.: BarCap

LONDON (Reuters) - The global carbon emissions market is thriving in the wake of the economic meltdown, but its future rests on a landmark climate change bill currently incubating in the U.S. Senate, Barclays Capital’s head of environmental markets said.

“The carbon market is in rude health, despite the financial crisis and dramatic price drops across the board,” Louis Redshaw said. Trading volumes in greenhouse gas emissions grew by 124 percent in the first half of 2009 over the same period last year while the market value increased by only 22 percent, analysts Point Carbon said last week, reflecting an increase in speculators and a drop in carbon emission prices.

Benchmark European Union permit prices, trading at 14.15 euros ($19.68) on Monday morning, are down 12 percent in 2009 and still more than 50 percent below record highs of around 30 euros hit last July.

“More and more compliance counterparties are getting involved in the market which suggests that companies are thinking about carbon costs much more than in (the scheme‘s) phase 1 (2005-2007),” said Redshaw.

“There has also been an increase in the number of intermediaries and speculators, leading to greater liquidity ... and ultimately an efficiently priced market results.”

Redshaw, acknowledging that clean energy project financing has slowed as a result of the slowdown, was cautious when asked if the market was picking up again.

“It’s difficult to say things are heating up again right now as everyone is waiting with baited breath for the U.S. to pull the trigger for the next spurt of investment to take the market to the next level.”

The U.S. House of Representatives narrowly passed a landmark climate change bill late last month that would introduce carbon trading as a tool to help cut U.S. emissions by 17 percent by 2020 and by 83 percent by 2050, below 2005 levels.

But the leading Senate committee responsible for developing climate legislation last week delayed its crafting of the bill by at least a month, leaving less time for Congress to meet President Obama’s goal to enact a law this year.

OFFSETS

While the U.S. bill allows carbon offsets to be used to meet abatement targets, Redshaw said demand for international offsets issued under the Kyoto Protocol climate pact, called Certified Emissions Reductions (CERs), is likely to be low.

“The headline is that 50 percent of U.S. emissions abatement can come from offsets (but) the headline forgotten is that demand is likely to be low,” Redshaw said.

Under Kyoto, companies can invest in clean energy projects in countries like China and India, and in return receive CERs which can be used toward emissions targets or sold for profit.

“50 percent doesn’t necessarily translate into another gold rush for CERs, in particular if the huge agricultural sector, with potentially low additionality criteria, gets to supply the same market.”

Agriculture offsets, a potentially multi-billion dollar business, involves measures like sequestering carbon dioxide under the soil through less intensive farming practices.

Critics say farmers have been using this technique for years and therefore it’s unlikely to drive additional emissions cuts.

To get the bill through the House, its architects cut a deal with House Agriculture Committee Chairman Collin Peterson to let the U.S. Department of Agriculture regulate such offsets, a role originally intended for the Environmental Protection Agency.

Despite observers likening the move to “putting the fox in charge of the henhouse,” Agriculture Secretary Tom Vilsack said last Tuesday the bill is unlikely to succeed unless it gives farmers a prominent role in offsetting.

To read an interactive interview with BarCap's Louis Redshaw, go to here

Editing by Michael Kahn

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