04 May 2007

Global Climate Change: Carbon Trading Global Market Exceeded $30bn in 2006

The Guardian (UK) reported yesterday that the global market in carbon trading tripled last year to $30bn (£15bn), but quoted the World Bank, which cautioned that the market's "role in the battle against climate change could be hit by worries about the effectiveness of unregulated carbon offset projects."

The bulk of carbon trading, some $25bn, was carried out through the sale of allowances under the European Union's emissions trading scheme, according to the World Bank's seventh annual carbon market intelligence report, which was published this week.

“These numbers are relevant because they demonstrate that the carbon market has become a valuable catalyst for leveraging substantial financial flows for clean energy in developing countries,” said Warren Evans, World Bank Director of Environment, in a press release.

The EU scheme has been criticized for being weak on allowances under the initial phase, which created little incentive to cut emissions and, subsequently, precipitated a fall in the price of carbon.

Sources familiar with the situation indicate that allowances have been toughened up for the second phase, which will begin in 2008 and be in force until 2012. The tougher standards may address the fact that polluters have been less obliged to trade. The weaker standards have also given detractors of cap-and-trade schemes fodder for arguing that carbon trading "doesn't work."

According to the Guardian article, officially-backed carbon offset projects, subject to the Kyoto agreement, wherein companies and countries invest in emissions reduction schemes in developing countries and emerging markets, doubled to $5bn over the same period and, the bank estimates, "carbon purchases have raised $14bn in 'associated investments' supporting clean energy in developing countries since 2002."

We've argued before on this blog that an overarching set of standards is needed to reduce reputational risk and so that both regulated and voluntary schemes can be judged comparatively. The World Bank study seems to corroborate this view.

Yvo de Boer, the head of the UN Climate Change secretariat, told The Guardian (UK) that "the official clean development programme (CDM) was working well but some analysis of the scheme was failing to differentiate between the highly regulated CDM and a growing number of unregulated or self regulated enterprises. 'Some confusion can be expected, but some analysis of the CDM has dangerously missed the mark,'" De Boer said.

To access the World Bank report, see the bank's Carbon Finance Unit's website.

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