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Global Carbon Market is Poised for Dramatic Growth Post 2012 under Proposed Regulations

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Global Carbon Market is Poised for Dramatic Growth Post 2012 under Proposed Regulations

Regulatory efforts to mitigate climate change have spawned an emerging carbon market that was valued at $10.9 billion in 2005 and grew at compound annual growth rate (CAGR) of 89% to reach $138.3 billion in 2009. The global carbon market doubled for two consecutive years form $31.2 billion in 2006 to $63 billion in 2007 and $126.3 billion in 2008 due to the expansion of allowance markets. The European Union (EU) Emission Trading System (ETS) experienced a robust growth during this period. However, the recession in the global economy contained the impressive growth of the global carbon market. The global carbon market registered a less than 1% increase in value in 2009. The primary reason for such market behavior was the sharp decline in carbon prices, on the back of lower oil and energy prices and a deteriorating economic outlook. The demand for carbon allowances fell sharply in late 2008 and early 2009 as the recession reduced economic output, resulting in much lower emissions than had been expected.

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GBI Research predicts that the global carbon trading market will experience a dramatic growth after 2012 and reach $1.2 trillion by 2020. The EU’s initiatives to build a broad, globally linked carbon market, the prospective US Federal cap-and-trade program and the strong emergence of other regional market trading mechanisms will drive the carbon market significantly beyond 2012.

Primary Project Based Market is Losing Impetus Due to Uncertainty in Carbon Mitigation Mechanisms Post-2012

The primary market for project-based emission reductions declined considerably in the year 2009 under the weight of the economic downturn. The primary CDM transactions that accounted for the largest share of activity in the primary market, at 84% of volumes and 91% of value transacted, declined in both volume and value terms.


The primary market for project-based emission reductions weakened considerably in the second half of 2008 and 2009. The buyers became more cautious due to persisting uncertainty about the role of and the demand for CDM and JI in the post-2012 climate regime, procedural delays, delivery and issuance challenges, and credit risks amid the worsening economic climate.

The US: Revitalized Interests in Carbon Commodity Market

Over the past years, the US has instituted a number of regional initiatives with the goals of implementing emissions trading programs. The size of the total allowance market in the US — the combined allowance volumes of the Regional Greenhouse Gas Initiative (RGGI) and the Chicago Climate Exchange – was 805 MtCO2e, valued at $2.5 billion in 2009. The US federal cap-and-trade mechanism has been expected for a long time and the implementation of the scheme will boost the North American and world carbon trading markets.

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Rising investments and efforts in energy efficiency programs and renewable energy programs driving carbon trading volumes in regional markets. The RGGI states in the US - Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont - have been participating in numerous clean energy projects and initiatives. RGGI states have invested in renewable energy sources and energy efficiency projects to decrease their carbon footprints. These states have created employment opportunities and generated lower electricity bill values due to their low-carbon investments. These states are investing in green building programs and are conducting workshops and training programs to improve awareness on energy efficiency measures. The clean energy initiatives have therefore boosted carbon trade in the region and the trading of carbon permits.


Secondary Project-based Market: Instrument to Hedge Price Risk in the Primary Project Based Market

European traders, particularly financial and energy marketers dominated the secondary CER market. Traders hedge their exposure to price or volume risks in the primary markets through the secondary market. European Climate Exchange (ECX) data analysis indicates that traders predominantly opt for put options on guaranteed CERs, therefore hedging their price risk in the market.

GBI Research’s new report “Global Carbon Trading Market: Concepts, Regulations and Industry Trends to 2020” provides an in-depth analysis on the development of Carbon Trading Market in the European Union, United States, Canada, Australia and other developed and developing economies. The report provides an overview of the policy initiatives by the major carbon markets. The report will suggest investment decisions in carbon projects by providing trends and information on global carbon trading policies. The report discusses in detail about key drivers of interest in carbon trading - climate change and the Kyoto Protocol.

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Rajesh Gunnam