Value of Worldwide Carbon Market Expected to Plunge by a Third: Point Carbon

WASHINGTON, D.C. — Point Carbon predicted this week that activity in worldwide carbon markets will grow 20 percent to 5.9 billion tons of carbon dioxide equivalent (CO2e) traded this year over 2008, but early signs indicate trade volume is hitting a plateau relative to the impressive growth enjoyed by the market until now.

The value of the market, however, reflects the larger economic picture. Total market value will likely experience its first contraction in 2009, the environmental market research company said, plummeting about 32 percent to 62.2 billion euros (US$79.7 billion).

"With subdued economic activity, and subsequent lower emissions, carbon prices will remain at low levels in almost all markets," Point Carbon said in Carbon Market Analyst: Outlook for 2009. "This does not, however, imply that we will see similar reductions in all market activity, although some market segments look likely to be hit harder than others."

In the U.S. market, the Regional Greenhouse Gas Initiative shows potential for growth because of higher auctioning volume in the coming months and secondary market growth. The regional greenhouse gas cap-and-trade consisting of 10 states began its compliance period in January. Point Carbon predicts volume to hit 339 million tons (Mt) of CO2e, up from 71 Mt in 2008.

Australia is also expected to see transaction volumes of 24 Mt this year due to its federal Carbon Pollution Reduction Scheme.

The European Union Emissions Trading Scheme (EU ETS), the workhorse of the overall global carbon market, will see its trade volume increase by 24 percent. But the market won't escape the realities of the global economic recession, which will spur continuing activity on spot trading as, in some cases, industry sells off permits to reduce "counterparty risk."

"First, the credit crunch has led to an increased awareness of counterparty risk, and settlement within the next few days appears more reliable than settlement that could be a year or more into the future," Point Carbon wrote.

The credit crunch and lower industrial production, resulting in lower emissions, complicates the matter and has already led to a sell-off of unneeded permits in a trend Point Carbon expects to continue until the economy improves or the industry has released most or all of its surplus.

"Survival is the focus in 2009, and spot selling of EUAs (European Unions Allowances) constitutes a reliable source of income for companies that might otherwise face liquidity crises and even bankruptcy in the face of dried-up credit lines," the report said.

The economic downturn, coupled with post-Kyoto uncertainty, will also negatively impact investments in Clean Development Mechanism (CDM) and Joint Implementation (JI) investments, Point Carbon said.