Carbon market to grow 50% in 2007

Copenhagen, 15 March: Volumes in the global carbon market are set to grow 50% this year, according to analyst company Point Carbon. It expects some 2.4 billion tonnes of carbon dioxide equivalent (CO2e) to be traded in 2007, up from 1.6 billion tonnes in 2006, according to the company's Carbon 2007 report, released in Copenhagen on Tuesday.

The value of transactions in the carbon markets is forecast to grow much less dramatically between 2006 and 2007, despite higher volumes. Contracts traded to the tune of €22.5 billion ($29.8 billion) changed hands in 2006 but, given lower average carbon prices likely for 2007 compared to 2006, that figure is forecast to rise to €23.6 billion.

The results were derived from a web-based survey, for which the company received 2,250 responses, of which 60% represented emitting companies. Of those that were active in the EU Emissions Trading Scheme (ETS), 65% claimed that the scheme had led them to "initiate internal abatement" measures to reduce emissions – up from just 15% in 2005.

It also found that moving production outside Europe in response to the EU ETS was mentioned by 2-3% of respondents as their primary means of complying with emissions targets.

The EU ETS represented 62% of the market in terms of volume, and 80% of its value in 2006. Brokers accounted for 71% of trading, with the remainder traded on exchanges, the majority (above 75%) on the European Climate Exchange.

On average, survey respondents expect the price of allowances in 2010 – in the middle of Phase II of the EU ETS – to be about €17.5 a tonne, compared to €15.55 currently.

However, the other major section of the carbon market – the Kyoto Protocol's Clean Development Mechanism (CDM) – is forecast to stay more or less flat, at 552 million tonnes (Mt) of CO2e, from 562 Mt in 2006.

The CDM allows projects in developing countries to claim carbon credits, which can be used to meet emissions targets in industrialized countries. Point Carbon expects the volume of primary transactions – where credits are bought directly from projects – to shrink to 456 Mt, from 522 Mt CO2e. This is because most of the large-scale industrial CDM projects have been identified and contracted.

On the other hand, the secondary market for certified emission reductions (CERs) from such projects is set to grow, to 96 MtCO2e, from 40 Mt in 2006.

Within the CDM, China accounted for 70% of volumes, and a third of total volumes were from HFC-23 destruction projects, with a further 21% from N20 projects. On the buy side, the UK and Italy accounted for 36% and 24% of volumes respectively, the former because a large number of financial players active in the market are located in London, and the latter because of large purchases by utility Enel and the Italian government.

Joint Implementation (JI) only accounted for 4% of Kyoto project transactions, at just 21Mt, valued at €95 million. This was less than in 2005, although Point Carbon analysts expect the JI market to double in 2007.