March 2, 2011 / 4:59 PM / 7 years ago

Slim pickings in "dead" carbon market

AMSTERDAM (Reuters) - Carbon trading was once hailed the next trillion-dollar market, but risks of another criminal scandal, plus falling demand following recession and new watchdog limits threaten the once darling industry.

Carbon markets are intended to cut the cost of fighting climate change by giving companies the flexibility either to reduce their own greenhouse gases or buy emissions permits.

The theft in January of permits called EU allowances (EUAs) from national electronic accounts in the EU emissions trading scheme (ETS), launched in 2005 and the hub of global carbon markets, has darkened moods.

“One more shock to the system and there won’t be any more cap and trade, it will be a carbon tax,” said Louis Redshaw, head of environmental markets at Barclays Capital, referring to a raft of other scandals which have befallen EU emissions trading including a 5 billion euro ($6.94 billion) tax fraud.

“It’s the easiest, cheapest way to launder money. Anybody globally can open an account and start moving this stuff around,” he added, of the EU market.

So far the thefts, worth about 50 million euros, have only affected the spot market, which accounts for about a tenth of emissions trading in Europe.

But the nearer a December delivery date approaches for the main futures contract, without a resolution, the more fears grow for wider contagion where traders and polluters are worried about liability if they inadvertently buy stolen credits.

CALIFORNIA DREAMING

Notes of optimism for the carbon market include a prospective Californian cap and trade scheme, to launch next year, but that will be small at first, and comes as the United States and Japan postpone national schemes.

The threat of climate change itself may provide most support, by driving carbon reduction policies which will include emissions caps which motivate carbon trade.

While the shape of a global response to climate change is unsure, as countries struggle to agree an extension to the present Kyoto Protocol after 2012, it will include carbon reduction measures, if not binding emissions caps.

“Climate change is not going away and carbon markets are a way of dealing with it more cheaply,” said Martin Hession, chair of the U.N. panel which oversees trade in carbon offsets under Kyoto, called the clean development mechanism (CDM).

CRISIS

One short-term worry in the EU market is a lack of demand from the biggest buyers of EU emissions permits, German power plants.

Recession in Europe has left over-capacity of power supply, which coupled with robust commodity prices has squeezed margins and reduced selling.

Optimists hope margins build in the second half of this year, motivating power plants to sell more power.

When they sell power they buy permits called EU allowances (EUAs) to hedge against their carbon emissions from generating electricity, for example when they burn natural gas or coal.

“The market is effectively dead until German generators start hedging,” said Mark Lewis, carbon analyst at Deutsche Bank, speaking on the sidelines of a carbon market conference in Amsterdam.

A longer term concern is that tough new EU limits on the import of carbon offsets will curb trade.

The EU has banned European polluters from offsetting their emissions by paying for carbon cuts in developing countries after 2012, unless these low-carbon projects are already established by then, or based in least developed countries which have only accounted for a fraction of such trade to date.

Offsets were responsible for a large part of emissions trading in Europe last year, as bankers traded the difference between the two commodities: EUAs, and offsets called certified emissions reductions (CERs). Global CER trade was worth about 18 billion euros in 2010.

The value of trade in EUAs was 72 billion euros last year, up 4 percent on 2009, compared with a global traded market of 92 billion euros, according to the information company Point Carbon, owned by Thomson Reuters.

Additional reporting by Nina Chestney in London; editing by Keiron Henderson

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