The dog that didn’t bark in carbon markets

Are the carbon markets showing unexpected signs of maturity?

Last week, the European Union released preliminary data on carbon emissions for 2009 under the EU emissions trading scheme (EUETS).

The information showed a huge slump in emissions compared with the previous year. Verified emissions from industry were down just over 11 per cent in 2009, at about 1.89bn tonnes of carbon compared with 2.12bn tonnes.

This left European industry with a surplus of permits, calculated by Point Carbon, the analyst company – more than 80m tonnes, excluding the permits that were auctioned.

Yet the market barely wobbled. Prices for permits held up and even increased slightly, as traders had already factored in the effects of the recession.

The “steady as she goes” reaction will bode well for supporters of the market, which has looked rather fragile in recent months after a series of shocks. These shocks include revelations of hacking and VAT fraud, the outcome of the Copenhagen summit – which was particuarly bad news for the carbon markets, as the Accord failed even to nod in their direction – and a climate of political uncertainty, driven by the recession and exacerbated by the Climategate scandals.

The latest shock came with the news that the Hungarian government had been helpfully recycling job lots of permits – taking advantage of a legal loophole that allowed it to re-sell on to the market millions of UN carbon credits that had been submitted to cover EUETS positions.

The more the carbon market can withstand setbacks such as these, the greater confidence that companies can have in it – and the better it looks as a potential model for other countries looking for business-friendly ways to cut greenhouse gas emissions.

But there is a downside. The recession and surplus of permits are keeping carbon prices firmly depressed, and that is unlikely to change any time soon. So although the carbon markets are holding steady, and giving other countries cause for faith in “market-based mechanisms”, they are still not fulfilling their primary purpose – to raise the price of emitting carbon to the sorts of levels that will encourage companies to take stronger measures to cut their greenhouse gas output.

Related links:

Carbon trading survives key test -FT
Just when you thought it was safe to talk carbon markets… -FT Energy Source
Hungary’s used carbon offsets sale accelerates market fragmentation – FT Energy Source

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