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US stalemate hits carbon markets

Globally, carbon trading is in the doldrums, driven down by the collapse of a US initiative, writes Ian Lewis

THE FAILURE of US climate-change measures to pass through Congress this year leaves the near-term prospects for creation of a global carbon market in doubt, despite efforts elsewhere in the world.

The EU already has a functioning emissions-trading system (ETS), but until the US moves towards establishing its own cap-and-trade mechanism, there seems little hope of a global market materialising. That is partly because as the world's largest economy the US is a trendsetter, but also because an active US ETS would provide an incentive for countries whose firms do business in or with the country to sign up for cap-and-trade if they want access to its market.

"A patchwork of smaller economies are looking at emissions schemes, but it is the US that would be the game changer," says Andreas Arvanitakis, senior analyst at Point Carbon, an energy consultancy.

The US climate bill that could have introduced cap-and-trade was stymied by Congressional opposition earlier this year and is unlikely to be resurrected swiftly. Senate Energy and National Resources Committee chairman Jeff Bingaman, a Democrat, said in late September he thought it unlikely the bill would return until at least 2013, after the next presidential elections. This month's mid-term elections are likely to strengthen opposition Republicans, many of whom are unsympathetic to potentially costly climate-change measures (see p12).

At a time of economic hardship it is the high costs of proposed climate-abating measures, rather than the concept of cap-and-trade itself, that is the stumbling block. The US pioneered trade in sulphur emissions and has CO2-emissions trading at a regional level, among more green-minded states, so US industry is not necessarily averse to an ETS.

But there is little succour for cap-and-trade supporters from the plight of the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade scheme for the power sector established by 10 northeastern and mid-Atlantic states. Cited by some politicians as a possible template for a national cap-and-trade scheme, it has all but stalled. The in-built surplus of allowances generated by the scheme – together with the effect of the industrial slowdown on emissions – is suppressing the carbon price and hope is waning for progress with a federal scheme that could have soaked up undervalued RGGI allowances.

As with the EU ETS (see p26), the RGGI was designed to ease companies into the scheme in the early years, before introducing more challenging conditions by tightening the supply of carbon allowances later. It could take until 2015 before the RGGI's allowance surplus disappears.

But the result of the oversupply is a collapse in trading. RGGI's turnover of 36m tonnes in third-quarter 2010 was down by 90% from 327m tonnes in Q3 2009, accounting for just 3% of world trading volumes in the first nine months of 2010, compared with 11% in the year-earlier period, says Bloomberg New Energy Finance (BNEF), a consultancy.

RGGI's woes are the single biggest factor behind a weakening in global carbon trading, BNEF says. The quantity of carbon traded globally fell by 14% in Q3 2010 compared with Q3 2009, against a background of continued uncertainty over the outcome of global climate talks.

That contrasts with relatively robust trading in the EU ETS, where the volume of carbon allowances traded in Q3 2010 rose by 8% from Q3 2009 and remained virtually unchanged in the first nine months of 2010 compared with 2009, at 4.2bn tonnes of CO2.

Countries such as Australia, Japan, South Korea, Brazil, Chile and South Africa have all considered introducing carbon-trading schemes, but none has done so yet. Of the world's larger economies, Australia and South Korea have the most advanced plans.

Australia had planned to launch its ETS by now, but it has been repeatedly delayed by political disputes and resistance from some quarters of industry, which say the financial cost would be too high. Prime minister Julia Gillard has said the government would not decide on a carbon price until 2012 at the earliest, but following August's general election, her Labour party now leads a fragile coalition in which a Green MP plays a key role, so that may create greater impetus to push ahead.

South Korea wants to start carbon trading in 2012, but it is still working on the blueprint for the system. The Japanese government, meanwhile, plans to revive a stalled climate bill that calls for the introduction of an ETS and an environmental tax. But with opposition parties able to block legislation in the country's upper house and industry claiming cap-and-trade would hit Japanese exports, passing the bill could be an uphill task.

CDM under pressure

Another element of carbon trading, the UN-backed Clean Development Mechanism (CDM) has helped companies operating in developing countries, such as China and India, to secure billions of dollars of finance for CO2-curbing measures. The CDM enables projects deemed to save emissions to generate allowances known as certified emission reductions (CERs), which can be sold to companies in the developed world to offset their emissions.

But the future of the CDM is far from assured. It was established under the 1997 Kyoto Protocol, which expires in 2012, and efforts to negotiate a fresh treaty have failed. Meanwhile, both the UN and the EU ETS, the main market for CERs, are tightening up eligibility criteria.

To be eligible for CDM carbon credits, projects must show that they employ measures to reduce emissions and that they would not be built without CDM backing. This contentious area is leading to a growing number of disputes. In recent months, several Chinese hydropower and wind projects have been rejected by the UN's CDM panel, amid concerns that they either did little to reduce CO2 emissions, or that the firms involved were claiming that feed-in tariffs received for electricity were lower than they really were.

Meanwhile, Connie Hedegaard, EU commissioner for climate action, has suggested new ETS regulations could limit the use of CERs issued by controversial projects purporting to cut hydro-fluoro-carbon (HFC) greenhouse gases – around half of all CERs issued by the UN so far relate to HFC projects. Some of these projects in China and India are being reassessed by the UN after accusations that the firms involved deliberately increased emissions before cutting them to win carbon credits.

More significantly, the EU plans to ban trade on its ETS of most CERs from projects developed after 2012, in the absence of a new agreement. It has also yet to clarify how CERs from projects in operation before that time will be treated in the ETS. The net result has been a collapse of confidence among potential investors in CDM projects. They will be hoping that the forthcoming UN-backed climate talks in Cancun will help bring clarification to a murky situation.

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