Kyoto & Post Kyoto Market

The EU emissions trading scheme saw transactions totalling 817 million tonnes of CO2 in 2006 through brokers or exchanges, for a total of €14.6 billion worth of carbon allowances changing hands.  In addition to the brokers and exchanges there is a considerable direct bilateral market (that is next to impossible to estimate), bringing the financial value even higher.

This is almost a 400% increase from 2005, and an astounding 200 times the value from the 2004 trading totals.   The brokered market is still the largest, with 71% of the volume through over-the-counter transactions. The balance traded through exchanges, where The European Climate Exchange (ECX) still dominates with over three quarters of all exchanged carbon.

As outlined by the EBRD the demand for carbon credits is expected to grow for the following reasons:

• Because of projected shortfalls and higher relative carbon abatement costs, it is anticipated that the Organization for Economic Cooperation and Development (OECD) countries will fail to meet their Kyoto target by 2012.  The higher the relative emissions abatement costs in these countries mean that they will find it attractive to buy carbon credits generated elsewhere.

• Private companies in industrialised countries will increasingly be subject to “cap and trade” mechanisms, such as the EU Emission Trading Scheme which started on January 1st 2005 (although this will initially cover only 50 percent of emissions).  The EU scheme is separate from the Kyoto Protocol but the “Linking Directive” of 2004 allows a European company to buy Kyoto Protocol carbon credits to comply with their obligations under the EU Emission Trading Scheme.

• Governments will also have to buy carbon credits because the “cap and trade” mechanisms will initially only apply to a fraction of each state’s economy and Governments are responsible under the Kyoto Protocol for meeting their country’s targets.  OECD Governments and European companies subject to the EU Emission Trading Scheme will therefore be the main buyers of carbon credits. 

Voluntary Market

Although carbon offset providers have been operating since the early 1990’s, the market for voluntary carbon offsets has experienced its most rapid growth in the past couple of years.  Several factors have contributed to this increase in interest.   First, there has been a rise in environmental reporting, which has raised awareness among the general public and business community of global impact, issues and the offenders responsible.  The increasing prominence of the Corporate Social Responsibility (CSR) agenda has led to more firms becoming concerned about sustainability and the projection of a responsible image to the public.

Many large firms will include an analysis of their climate impact and mitigation strategies in their annual sustainability reports or in the CSR section of their websites. National and International policy developments, such as Kyoto coming into force and the launching of the EU ETS, the Regional Greenhouse Gas Initiative (RGGI)  and the potential West Coast Regional Carbon Trading Registry, have received significant publicity and also been important for raising awareness of climate change issues. 

Overall heightened public awareness of the importance of climate change issues and impacts, as well as awareness of offsets as a viable mitigation strategy, appear to be key factors driving the market.