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Countdown to Copenhagen: targets announced, coalitions formed and sabres rattled

Only a week remains before the opening of the much anticipated climate change negotiations in Copenhagen. While hope for a binding agreement has waned in recent weeks, a series of announcements in the past week suggest that countries are positioning themselves for an intense round of negotiations in the coming weeks.

Top emitters announce targets

Last week, the world's two largest emitters announced the emissions reductions targets they will adopt. The U.S. intends to propose absolute reductions of 17% from 2005 levels by 2020. For reference, Canada's target is 20% from 2006 levels by 2020. Prime Minister Harper describes Canada's target as "virtually identical" to the U.S. target, but may be subject to "some minor adjustments." The Prime Minister is adamant that Canada will not adopt "blue sky" targets (an unfortunate analogy), but will instead focus on "modest, achievable targets - particularly in the short term."

China, on the other hand, has committed to reduce the intensity of carbon dioxide emissions per unit of gross domestic product in 2020 by 40 to 45 per cent from 2005 levels. While the announcement was a major step forward for China, which had previously refused to commit to targets, it comes as somewhat of a disappointment for many environmentalists. China's target is based not on absolute emissions, but on emissions intensity. Under such targets, if a country's economy grows, its total emissions may also grow, even if the intensity target is achieved. Canada's Turning the Corner plan has long been criticized for relying on intenisty based targets, particularly in light of the projected grow in the oil sands.

The setting of final targets will obviously remain a very contentious issue in Copenhagen. However, that the Chinese and Americans are willing to entertain any type of binding target is encouraging.

Emerging economies form negotiating coalition

China, India, Brazil and South Africa have reportedly negotiated a collective negotiating strategy for Copenhagen. Leaders from the emerging economies met for two days in Beijing last week to discuss their shared interests. According to a prepared statement, "the purpose of the meeting was to prepare for and contribute to a positive, ambitious and equitable outcome in Copenhagen."

The countries have allegedly agreed on several key issues, including the need for developed countries to provide financing and technology to help developing countries combat climate change. It is also expected that they will take the position that the post-Kyoto regime should either be an extension of the Kyoto Protocol, or something substantially similar. Many developed nations, including Canada, want to scrap the Kyoto Protocol and start from scratch.

China's participation in the strategy session was perhaps most significant. Observers hoped that China and the U.S. would have reached a common position when President Obama visited Beijing the other week. While the two countries released a joint statement, it fell short of a clear and common vision for the post-Kyoto regime. As Copenhagen is shaping up to be a clash of interests between developed and developing nations, Chinese Premier Wen Jiabao's participation in the strategy session suggests that the U.S. may still face some hard bargaining with China in Copenhagen.

France pushes for E.U. carbon tariff

The French government has recently advocated for a carbon tax on imports from countries that have "low environmental standards." The tax, more properly called a carbon tariff, would be intended to level the playing field between industry in the E.U., wish incurs significant costs in complying with the E.U.'s cap and trade system, and industry in nations that do not face similar regulatory burdens. There are some reports of an emerging consensus in the E.U. for France's proposal.

India, France's largest trading partner, reacted particularly harshly to the suggestion, calling it a protectionist measure. That carbon tariffs may be on the negotiating table highlights again how Copenhagen is a much a trade negotiation as it is an environmental one.

Global carbon market to soften according to Point Carbon

As reported by Carbon Finance, Point Carbon, a leading provider of news and analysis about the carbon market, predicts that the value of the global market will shrink by a third in 2009. They expect the aggregate value of carbon credits to drop to EUR62.6 billion, compared with EUR92 billion in 2008. This is despite a 20% increase in the volume of transactions, an increase which is not nearly as pronounced as the 80% and 200% growth levels seen in the two previous years.

Point Carbon summarizes their findings as follows: "2009 will see a levelling off from the massive growth seen in the carbon market so far. How long this 'breather' will last is, for the most part, a question of how long, and how deep, the recession will play out."

The EU ETS will continue to be the dominant market, with an expected 3.8 billion tonnes to be traded.

2009 will be a leaner year for CDM and JI projects. Primary market transactions are expected to plummet 45% to 300 million tonnes. Combined with a weak CER price, uncertainty about the post-Kyoto framework, and the dry credit markets, this decline may put many projects at risk. Secondary market CER trades are, however, expected to climb 12% to 1.4 billion tonnes.

The Regional Greenhouse Gas Initiative in the northeastern United States will expand to occupy just under 6% of the global market, with an expected trading volume of 339 million tonnes in 2009.

Carbon markets boom

Posted by Andrew Lord

The voluntary market for carbon credits more than tripled in 2007 to USD $331 million, while the much larger regulated market more than doubled to USD $64 billion. Those are the conclusions of two significant carbon reports released last week.

Ecosystem Marketplace and New Carbon Finance released State of the Voluntary Carbon Markets 2008 last week. The report notes that the volume of credits traded increased from 25 million tonnes CO2 equivalent (tCO2e) in 2006 to 65 million tCO2e in 2007. The average price of a tonne of CO2 jumped by $2 to $6.10. However the price remained very volatile in 2007, ranging from $1.62 per tCO2e to about $300 per tCO2e. That volatility is a reflection of the perceived problems with the quality of some credits, a perception that the market tried to address by introducing a number of voluntary credit standards during the year.

Also released last week was the World Bank's State and Trends of the Carbon Market 2008. This report focuses on the regulated carbon market, particularly the allowance market under the EU Emissions Trading Scheme and the project market under the Kyoto flexibility mechansms (Clean Development Mechanism and Joint Implementation). The value EU ETS trades, which comprised 78% of the overall regulated market, more than doubled to $50.4 billion, with the average price creeping up from just over $22 per tCO2e in 2006 to around $24.30 in 2007. In the project market, the big story in 2007 was the emergence of a strong secondary market for CERs. The value of trades in the secondary market increased by a factor of over 10 to $7.4 billion. The secondary market was largely occupied by aggregators who purchased a portfolio of CERs and sold guaranteed CERs backed by the portfolio and, in some case, credit-enhanced through the aggregators' banks. At about 28%, growth in the value of trades in the primary CDM market was strong, but not as vibrant as that in the secondary market.

EU learns from cap-and-trade mistakes

Submitted by Andrew Lord.

The EU has been extensively criticized for doling out too many greenhouse gas emissions allowances during the first phase of the European Trading System (EU ETS). The EU Commission recently responded by announcing that it has adjusted the EU-wide cap for Phase II (2008-2012) to give Members an average of 10% fewer emissions allowances.

The 10% reduction was confirmed by Environment Commissioner Stavros Dimas on October 26, 2007. The remarks were included in the announcement that the EU Commission had finalized the Phase II allowances for Bulgaria, the last of the countries to have their national allocation plans approved.

Several countries received significantly fewer allowances than they had requested. Bulgaria's allowances, for example, fell 37% of expectations. According to one source, Hungary, Latvia, Malta and Lithuania, Poland and the Czech Republic all plan to challenge the decisions of the EU in court on the basis that their meager allotments will unduly harm their industries.

However, overall reaction to the tougher targets has been positive in the EU . Many members were eager to prevent a collapse in the price of carbon similar to that which occurred during the first phase. Assuming the new scarcity drives up the price of carbon in the EU, trading under the EU ETS may provide a more reliable source of funds and financing leverage in the next 5 years.