The Global Carbon Market is Taking Shape

By Alina Koch Lawrence

As California prepares to form a strategic partnership with Quebec to link its cap and trade program, it is fascinating to examine developments in the global carbon market.

The “leader” took a hit

The European Union made news this week experiencing a major setback on its proposal for back-loading, a measure to shift carbon allowances to the back end of the compliance period in order to stabilize the EU ETS carbon price. The European Parliament blocked the back-loading proposal, brought forward by the Parliament’s Environment Committee in an effort to tighten the cap. As a result, the carbon price plummeted to EUR 2.46. Analysts warn that the price could fall even lower to nearly zero in the coming weeks. Over the past few years, the world has been scrutinizing the EU as the first mover in deploying a sizable cap and trade mechanism. While many applauded the efforts, just as many criticized its numerous flaws. The EU ETS serves as a “guinea pig” for other regions to explore what and what not to do. Over-allocation of allowances arguably falls into the category of “don’t do’s.”

UNFCCC Executive Secretary Christiana Figueres, stated in her keynote speech at this week’s Navigating the American Carbon World conference, that the vote was “disappointing […] and a blow to the market, though not a death blow.” In her motivating oratory, she encouraged market participants to remain optimistic as the EU ETS is a “powerful instrument, but not the only one as there are many other policies” supporting emissions trading markets.

What’s happening down under?

While other regions have been fine-tuning their cap and trade systems, Australia has implemented a “Carbon Pricing Mechanism” to achieve its climate targets (unconditional 5 percent reduction of 2000 level by 2020 and up to 15 percent within the context of a global agreement). In July 2012, the country introduced a carbon tax priced at $23/metric ton with a 2.5 percent annual increase until 2015.

In contrast to the United States, Australia gained bipartisan support for a tax on carbon. Australian businesses argued that a carbon tax would have a stifling effect on the economy. However, Karen Lanyon, Australian Consul-General stated in a panel this week that Australia’s economy has not suffered at all. In fact, Australia is now the world’s 12^th largest economy (moving up from place 15 in 2007). A substantial amount of the carbon tax revenues is allocated toward industry assistance to ease the transition (AUS $9.2 billion) and investments in renewable energy and clean tech to stimulate job growth in low-carbon sectors (AUS $14.2 billion).

Australia aims to transition from the carbon tax to a cap and trade system in 2015. As part of the new cap and trade system, the country plans to link with the EU ETS starting in 2015. The Australian legislature approved the linkage in December 2012 and a bilateral treaty is expected to be signed in the coming months. However, this will only happen if politics play along. In recent conversations with Australian offset developers, it was brought to attention that Australia’s upcoming election this Fall could fundamentally change the carbon market landscape. If the opposition wins and gains sufficient seats in the Senate, the current plans of a carbon-tax-turns-cap-and-trade may not happen after all. The opposition makes it clear that it is determined to repeal the carbon tax as soon as elected. Their plan is to implement “direct action”, which allocates companies emissions abatement credits, measured against a business-as-usual baseline. However, political commentators deem it very unlikely that the opposition will take control over the senate. As a result, this year is challenging for investors as they balance political uncertainty.

Developing countries following suit

While the Western world was ahead a decade ago, in 2012, impressively, developing nations have passed twice as many green laws as industrialized countries.

Mexico was the first developing country to announce a long-term climate target of a 50 percent reduction below 2002 levels by 2050. Mexico passed its first climate change law in 2012 and committed to developing the world’s first national GHG reporting system for industry. A recent regime change caused analysts to question the feasibility of the plan. However, the current sentiment among climate experts at this week’s Navigating the American Carbon World conference was rather optimistic.

China, the world largest emitter of CO₂, has set its climate targets to 40-45 percent reduction by 2020 in comparison to 2005 levels. China is also in the process of establishing an emissions trading system in seven pilot areas (five cities and 2 provinces). Additionally, the Chinese Ministry of Finance recently announced its inaugural carbon tax. Detail regarding the timing and pricing have remained vague but sources quote a price range of US$1.50/ metric ton increasing to US$7.90/ton in 2020.

South Korea, the fastest-growing emitters among OECD nations, has passed legislation for a national cap and trade system to be launched in 2015. The bill received an overwhelming vote in the National Assembly, 148-0. EU Climate Commissioner Connie Hedegaard stated that South Korea is a “natural” partner for the EU ETS.

Despite the EU’s continued growing pains with its emissions trading system, proponents of market-based mechanisms to manage emissions can remain hopeful considering the global trends. Countries in both the industrialized and emerging world are implementing policies to curb emissions. Setbacks such as the back-loading pushback in Europe are cause for concern, yet, not reason to resign. While the top-down global approach had limited success, regional efforts are growing and have potential to interlink in the near future. A market for carbon clearly exists, and it is manifesting itself through increasing political commitment.