Outlook for carbon markets uncertain, by Chris Tobias

Pending international regulation and turbulent financial markets, carbon market development is likely to remain uncertain in the near future. According to industry expert Lukas Heer of First Climate, the ongoing financial crisis has jeopardized investor interest in many projects, and increased the volatility of carbon prices.

Big issues on the table include outcomes of the forthcoming Congress of Parties (COP) 16 held later this year in Mexico, and the next steps that will be taken there following Copenhagen late last year. The fundamental question it boils down to is which nation will take the lead?

At the centre of the attention is the United States. In the U.S., President Obama proposed a 17 percent emissions reduction by 2020, but it is subject to legislation that is currently still pending.

National climate legislation in the U.S. has been sidelined due to numerous setbacks including healthcare reforms that have been highly contentious. Some question if any serious solution will be politically feasible given sharply divided camps, as well as extensive lobbying by vested fossil fuel interests.

Worth noting however is at state and local levels, a variety of climate focused initiatives, such as the Western Climate Initiative, are underway.

China has pledge a reduction of carbon intensity of 40 to 50 percent, but relative to GDP by 2020. The good news on the ground is that China is rolling out substantial amounts of non-fossil fuel energy projects, as well as making progress on reforesting many depleted areas. There is also potential for a Chinese market emissions trading scheme (ETS).

The European Union has taken a leadership role in emissions reductions and is likely to meet its 2012 Kyoto target of eight percent, in part due to slowed economic growth alongside concerted emissions reduction efforts. In terms of an international agreement, the EU has pledged 20 percent target by 2020 if no agreement is reached, and 30 percent reduction if there is an international consensus reached at Cancun and beyond.

The localised EU ETS has also been in operation and garnishing some interest, though prices remain deflated due to only localised, rather than international demand.

Surprising developments in recent months have been from South Korea. While South Korea is a non-Annex 1 country (one that is not considered historically responsible for the bulk of greenhouse gas emissions, and off the hook for Kyoto responsibilities), President Lee Myung-Bak has shaking the boat.

He pledges that Korea will have a 30 percent reduction by 2020, and is working emphatically to make his country a cleantech capital through both legislation and industry incentives. It is the first time a “developing” country has taken a leadership position in such a manner.

Countries like Brazil and Indonesia are facing steep liability from emissions due to deforestation. The good news is that at Copenhagen, there was some progress made on clean development mechanisms (CDM), including some clarifications on Reductions in Emissions from Deforestation and Forest Degradation (or REDD for short).

Tackling deforestation with a variety of incentives for leaving forests intact will be critical for Brazil and Indonesia both going forward to protect their remaining forested land area. It is anticipated further clarification and agreement on REDD will take place in Cancun later this year.

Mr. Heer of First Climate sees the price for carbon credits hovering at €10-15 at least through 2012. Under such conditions, he anticipates that EU demand will be the key price driver. Prices would be more robust if there was one unified market for global trading, he said.

Currently, are 1.2 billion certified emission reductions (CERs) to be issued through 2012 by the United Nations Framework Convention on Climate Change (UNFCCC). Of these credits, the majority of emissions reductions projects certified are in developing countries. China, India, and Brazil comprise some 72 percent of the projects, and primarily consist of renewable energy projects.

Given the internationally complex issues surrounding climate change and greenhouse gas emissions, it is easy see why progress has been so slow to date. When it comes to carbon markets and trading emissions credits, the financial uncertainty, as well as competing markets have put the pressure on the price of credits. If it is to succeed, the carbon market requires clear direction and signals from global policymakers - and they need it soon.

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