Carbon Market Shrinks for First Time in Record Hot Year

The global carbon market shrank for the first time in 2010, snapping five years of growth as a lack of clarity about the future climate framework hurt investment in the hottest year on record, a World Bank report showed.

The value of the market for greenhouse-gas permits and credits for cutting pollution fell to $141.9 billion last year from $143.7 billion in 2009, also because of fading prospects for the introduction of emissions-trading programs in countries including the U.S., according to the report published today during the Carbon Expo conference in Barcelona, Spain.

“The global carbon market is at a crossroads,” said Andrew Steer, World Bank special envoy for climate change. “If we take the wrong turn we risk losing billions of lower-cost private investment and new-technology solutions in developing countries. This report sends a message of the need to ensure a stronger, more robust carbon market with clear signals.”

United Nations talks to iron out climate-protection architecture for when the Kyoto Protocol expires in 2012 have stalled amid differences between industrialized and developing nations. Countries including Japan and Russia have signaled they don’t want to extend the protocol, under which 37 industrialized nations adopted binding targets to cut greenhouse gases that scientists blame for heat waves, floods and storms.

Extreme Weather

The year 2010 ranked as the warmest on record, together with 2005 and 1998, according to the World Meteorological Organization. The more extreme weather may disrupt harvests, possibly cutting production of grains, livestock and cooking oils and boosting prices, it said last month. Global food costs reached a record in February, stoking inflation and pushing millions into poverty.

At the next UN climate summit due to start toward the end of November in Durban, South Africa, envoys are unlikely to reach an agreement on legally binding post-2012 emission-reduction targets, according to a survey conducted by PwC for the International Emissions Trading Association.

Nearly three quarters of emitters, consultants, government bodies and traders surveyed expect carbon goals for larger developing countries to be agreed only after 2016, IETA said in a report today.

The UN carbon market, the Clean Development Mechanism, shrank to the lowest level since the Kyoto agreement entered into force in 2005, with new project-based transactions falling 46 percent to $1.5 billion, according to World Bank estimates. The CDM generates Certified Emission Reduction credits, also known as offsets, for investment in projects that cut greenhouse gases in developing nations.

Pollution Quotas

The UN offsets can also be used by emitters in the European Union emissions trading system, the world’s largest, as a cheaper way to comply with their pollution quotas. The EU market accounted for 84 percent of the total carbon market last year, or for 97 percent including secondary transactions in offsets, the World Bank said.

UN CERs for delivery in December dropped as much as 0.5 percent to 12.85 euros a metric ton today and traded at 12.90 euros as of 2:22 p.m. on London’s ICE Futures Europe exchange. EU permits for December gained 0.1 percent to 17 euros.

The value of the EU market increased to $119.8 billion in 2010 from $118.5 billion the previous year, according to the report. The EU emissions program, started in 2005 and known as the ETS, is the cornerstone of Europe’s plan to cut greenhouse gases. It imposes pollution limits on companies including Germany’s utility RWE AG and France’s Electricite de France SA, leading to a cap in 2020 that will be 21 percent below 2005 discharges.

Carbon Dioxide

EU emitters that produce less carbon dioxide than their quota can sell surplus allowances and those exceeding their limits must either buy additional permits or pay a fine of 100 euros per metric ton of carbon dioxide.

Respondents in the IETA survey expect an average price of EU permits of 30.67 euros in the next phase of the program from 2013 to 2020, up from 25.97 euros in last year’s poll.

“Looking at volumes, market sentiment is surprisingly bullish,” IETA said. A third of respondents expect EU allowances trading to increase between 2012 and 2020 by up to 50 percent and nearly a quarter sees a growth rate of between 51 and 100 percent, according to the survey.

While the halt in emissions-market growth coincided with a rise in temperatures and increase in pollution, a pick-up in national and local low-carbon initiatives offered a positive sign, according to Alexandre Kossoy, World Bank senior financial specialist.

“Collectively, they offer the possibility overcome regulatory uncertainty and signal that, one way or another, solutions that address the climate challenge will emerge,” he said in a statement.

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