Kyoto2 and the carbon market
In October 2006 the World Bank revealed that the global carbon market was worth $21.5 billion, having doubled in value in the preceding 9 months form the 1995 turnover of $11 billion. For details see the press release: ('State of the Carbon Market Report Update' Shows Strong Impact of Asia in the Market; or the full paper: State and Trends of the Carbon Market 2006 - Update: (January 1 - September 30, 2006).
Volumes traded were (in million tonnes of CO2 equivalent, MtCO2e):
- 2005: 716
- 2006 (until September 30): 1,022 equivalent to 1,360 over the full year (a year on year increase of about 90 percent).
The securities traded include:
- Certified Emissions Reductions (CERs) under the Kyoto Protocol arising from projects under the Clean Development Mechanism (CDM)
- Emission Reduction Units (ERUs) under the Kyoto Protocol arising from projects under Joint Implementation (JI) in countries with economies in transition
- those arising from cap-and-trade systems, including EU Allowances (EUAs) under the European Union Emissions Trading Scheme (EU-ETS), and Assigned Amount Units (AAUs) under the Kyoto Protocol
- Voluntary carbon offsets (as offered by, for example, Climate Care.
In terms of value, the market is dominated by the EU-ETS market, which turned over $19 billion. CER / ERU trades were estimated to account for $3 billion over 2006 ($2.41 billion in the first 9 months).
The City of London has emerged rapidly as a dominant player in global carbon markets. Its share of transaction volumes rose from 14% in 2005, to 46% in 2006 (first 9 months).
However the future of the global carbon market is highly uncertain, in that the Kyoto Protocol which underlies most carbon securities expires after the first Commitment Period, 2008-2012. No replacement is yet in place.
Kyoto2 implications
If the carbon market is to continue, a second Climate Protocol will be needed to replace the existing Kyoto Protocol. It has been proposed that the EU-ETS could continue independently.
If implemented, the Kyoto2 proposals would have the effect of greatly magnifying the scale of global carbon markets. In 2004 (IEA) the burning of fossil fuels produced 26,583Mt of CO2. This is approximately 20 times more than the volume of carbon traded in 2006 (estimate based on first 9 months).
Account also needs to be made for the additional Rights associated with aviation, cement production, HFCs and other potent industrial greenhouse gases (PIGGs) and allocations to member states of the UNFCCC for land based emissions. We assume an order of magnitude estimate of an additional 30% to the fossil fuel figure alone, to reach a figure of 34,558 MtCO2e, 25 times the 2006 volume of carbon traded.
Under Kyoto2, all greenhouse gas production would need to be covered by Rights. These Rights would become valuable traded securities and it can be expected that a significant after-market would develop. While many of the Rights would be purchased at auction directly by the GHG producers, and would thus not need to be traded on the secondary market, Rights would also be purchased by a broad range of investors and speculators and many of these would be traded many times over.
On average we suggest that each Right would be traded once on the secondary market during its lifetime. We further assume that this volume would be doubled through the trading of derivative instruments based on Rights. This leads to the conclusion that Kyoto2 would bring about a global carbon market approximately 50 times larger than that of 2006.
Given that the 2006 carbon market turned over $21.5 billion, this yields an order-of-magnitude estimate that the global carbon market under Kyoto2 could turn over in excess of $1 trillion.
This fact should be of interest to those involved in the carbon market. The potential of a significant expansion in the carbon market's size and scope presents a major growth opportunity to them.
Oliver Tickell, 4 April 2007.
For Kyoto2 - www.kyoto2.org
