Global Carbon Market Declines, Voluntary Market Surges

Global carbon markets declined for the first time in five years in 2010, but voluntary markets surged to new heights.

Participants in global carbon markets tend to be compliance-oriented, while voluntary markets are driven by corporate responsibility leaders, who have motivations beyond compliance.

The total value of the global carbon market was an estimated $142 billion last year, down 1.4% from 2009, according to the World Bank’s annual review, State and Trends of the Carbon Market 2011

There are several reasons for this, say the report’s authors, primarily related to government policy.  The loss of political momentum on setting up cap-and-trade programs in several developed economies has resulted in confusion about where the market will go. 

Carbon credit purchasers in industrialized countries, which in previous years reached or surpassed targets, made fewer purchases in 2010.

Lingering effects of the recession in a number of industrialized countries led to lower greenhouse gas emissions, easing emissions reduction compliance obligations.

The primary Certified Emission Reductions (CERs) market, which accounts for the bulk of project-based transactions, fell by double digits because of lower demand for credits and competition from more predictable assets (Assigned Amount Units and secondary CERs).

The Clean Development Mechanism (CDM) market is at its lowest level since the Kyoto Protocol entered into force in 2005, having dropped by 46% to an estimated $1.5 billion in new project-based transactions. Similarly, other carbon markets also declined or plateaued. 

Cumulatively, however, primary offset transactions have reached almost $30 billion since 2005, catalyzing much larger resources, mostly from the private sector.

"The global carbon market is at a crossroads. If we take the wrong turn we risk losing billions of lower cost private investment and new technology solutions in developing countries," says Andrew Steer, World Bank Special Envoy for Climate Change. "This report sends a message of the need to ensure a stronger, more robust carbon market with clear signals."

"State and Trends of the Carbon Market 2011" shows that the EU cap-and-trade market is the largest market by far, with 84% of the total value of the carbon market. When secondary CDM transactions are taken into account, the market’s value jumps to 97% of the world’s total value.

The authors predict that in the next two years, the difference between demand and supply of carbon credits under Kyoto will be slightly less than US$140 million. Virtually all demand will be from European governments.

Beyond 2012, although the potential demand for emission reductions could reach 3 billion tons or more, the only substantial and unconditional demand to date comes from Europe, estimated at 1.7 billion tons. The supply available between 2013-2020, through existing projects, is seen as sufficient to fill that demand, leaving little incentive for project developers to invest further and create a future supply of emission reductions.

"Carbon market growth halted at a particularly inopportune time: 2010 proved to be the hottest year on record, while global emission levels continued to rise relentlessly," says Alexandre Kossoy, World Bank Senior Financial Specialist. "At the same time, other national and local low-carbon initiatives have picked up noticeably in both developed and developing economies. Collectively, they offer the possibility to overcome regulatory uncertainty and signal that, one way or another, solutions that address the climate challenge will emerge."

But Voluntary Carbon Market Flourishes

The voluntary carbon market is another story – it posted record trades in 2010 because of growing attention to climate change by corporate leaders.
In 2010, the voluntary market was worth at least $424 million, up 34% in volume, from trades representing a record 131 million tons of carbon dioxide equivalent (MtCO2e), according to "Back to the Future: State and Trends of the Voluntary Carbon Markets 2010," by Ecosystem Marketplace and Bloomberg New Energy Finance.

"The healthy volumes reflect the growing emphasis of corporate social responsibility spending on climate change," says Katherine Hamilton, Managing Director of Ecosystem Marketplace.  "This is a return of sorts to the voluntary market’s roots and away from the pre-compliance buying that had been dominant of late as companies prepared for legislation that never came."

Latin America benefited the most as carbon trades paid for projects to preserve rainforests under REDD (Reduced Emissions from Deforestation and Degradation). 29% of credits went to REDD projects. 

The surge in credits doubled the number of project developers and buyers in Asia, Latin America and Africa, which will contribute significantly to their sustainable growth.

"As in previous years, the US remained the epicenter of the voluntary carbon market, providing over one-third of carbon credits and purchasing almost half of them," says Milo Sjardin, Head of US Analysis for Bloomberg New Energy Finance. "The evaporation of chances for federal climate change legislation, however, reduced its market share with growth coming from other areas such as Latin America."

In terms of specific projects supported by the credits, renewable energy and methane each received 20%. Wind projects got 53% of that.


Read the report on the Voluntary market.

Read the World Bank report:

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