Market News

 August 17, 2005
Growth of the worldwide carbon trading market

 Vancouver, Canada (GLOBE-Net) - With the announcement of the creation of a carbon credit offset system, Canada joins a number of countries and private organizations that participate in the growing worldwide market for emissions credits. The development of these credits as a tradable commodity is relatively new, but the market is now moving quickly as more regions and companies adopt the system.

The European Union in particular is driving the market, with the introduction of an emissions trading scheme similar to Canada's on January 1st of this year. As a way of controlling total emissions, polluters in a number of industries -- including oil refining, power generation and steel manufacturing -- are granted the right to emit a certain amount of carbon dioxide. If they are unable to reduce their emissions to that level, they must buy excess credits on the international market. The market can be supplied by companies that have found a way to reduce their emissions, and is intended to provide a way for the free market to combat global warming.

Carbon reduction and sequestration that occurs when companies adopt sustainable practices can also earn credits. So far though, energy conservation oriented results have not been as strong as expected, with renewable-energy projects producing only about a third of the credits sold on the international market, sequestration projects accounting for the balance.

One recent example of a mulitnational reduction effort was found when Brazilian workers and the Dutch government arranged to build a modern landfill Nova Iguacu, Brazil, one of only a few such facilities in the developing world. The goal is to capture methane from decomposing waste before it is released into the air, to reduce production of the potent greenhouse gas. This allows the landfill to build up an excess of greenhouse gas credits, which the Netherlands can then buy to help it reach its reduced emissions levels under Kyoto.

Developed countries like the Netherlands face a high cost for emissions reductions at home, so it makes sense for them to seek less expensive options abroad. Costs are estimated to range from $15 to $100 for each ton of emissions saved in developing countries, while developing countries are able to sell equivalent credits for as low as $3.

In another move by the European Union, plans are being discussed to include airlines in the emissions credit market. Airlines, operating at high altitude and burning large quantities of jet-fuel, have an effect on global warming that has yet to be addressed. The EU is considering is a levy on airline flights, which could be transferred to consumers and raise prices up to $100 for an intercontinental flight from Europe. Other methods are also being discussed, with the goal being to offset or reduce airline CO2 emissions by 2008.

One way of ensuring that a reduced emissions project will lead to a real reduction in overall greenhouse gas emission is for the unused credits to be cancelled, so that they cannot be used by another company to cover their own pollution. However, because the unused credits have a monetary value, they tendency is for the credits to be sold on international markets. An example of a private enterprise solution to this is Carbonfund, a new organization that is buying credits through donations and retiring them. They offer a chance for businesses and individuals to offset their own activities by purchasing emissions credits that could otherwise be used to allow emission of greenhouse gases. This provides an easy and tangible way to make an impact on global pollution.

As Carbonfund president Lesley Marcus Carlson says, "For just a $55 tax deductible donation, the average person can offset their climate footprint with Carbonfund.org. And you'll know your supporting a nonprofit group that is committed to solving our climate change problems." This is one example of a number of unique companies that have emerged in the carbon credit market.

Even companies that do not have imposed reductions are joining the carbon trading market, through private organizations, such as the Chicago Climate Exchange (CCX), the world's first and North America's only private carbon market. Firms from all over North America have entered a legally binding agreement to lower emissions according to their 1998-2001 levels, and carbon allowances and offsets are being traded actively. Member firms such as IBM, Ford Motor Co., and American Electric Power are all supporters of a market based carbon exchange system as a way to combat global warming. The carbon market in North America is expected to expand, as the government sought a cap on emissions and established the guidelines for a trading market in 2003.

The market for emissions credits is growing, with over $3 Billion USD worth of credits traded at CARBON EXPO 2005, an event organized by the World Bank. A major supporter of the carbon market, the World Bank has recently announced the expansion of its carbon fund, which raises funds from governments and investors to purchase credits on their behalf. The results of such efforts have been effective: the cumulative market for GHG offsets has been estimated at 320 million tons of C02 since trading began in 1996. Asia represents half of those project-based reductions, and Latin America a further 25%.

Governments and businesses alike are buying inexpensive credits from developing countries, as Western governments are requiring domestic companies to absorb their share of Kyoto reductions; the largest buyers so far are Canada and Japan. Analysts have forecasted the size of the future global greenhouse gas market to range from US$10 billion to US$1 trillion by 2010.

Investment brokers have also entered the market acting as clearing houses for the credits; financial organizations have shown a fondness for the secure credits that are often backed by the World Bank, and are highly affordable when purchased from emerging economies. The resulting drop in emissions from developing countries is considered crucial to the fight against greenhouse gases, as fast growing developing countries are becoming major emitters of industrial pollution.

However, some have raised the concern that nations can essentially continue to pollute at current levels without truly changing current practices, provided there is always a supply of cheap credits from developing areas. Investing in technology and taking measures reduce emissions may be more expensive and less desirable for some companies than just simply purchasing 'hot air' on the open market. After all, for every company that successfully reduces emissions, the carbon market allows another company to buy that excess pollution to release equivalent GHGs as they please. The question is whether the cost of buying credits outweighs the incentive to innovate and earn credits to sell.

The real results of the carbon offset credit system remain to be seen, but it is clear that the credits themselves are becoming a popular international commodity. As more countries adopt the practice of offset trading, Canada included, the market is expected to continue growing.

Further information on the carbon finance market can be found at the following sites: