The Development of Pan-Regional and National Allowance-Based Carbon Marketplaces

This publication has been discontinued on July 19, 2011.

Introduction

Abstract

Overview

Introduction

Markets are bearish about the future of carbon and carbon policy. Fears of declining legislative and capital commitments have set in, as governments shift their attention away from climate change issues to deal with the contingencies of the current economic turmoil. Long-term, investors will only crystallize the carbon opportunity if governments foster the right global regulatory environment.

Scope

• Insight into the importance of clear and comprehensive regulatory frameworks that incentivize industry and create long term capital formation.
• Historic volume and price trends for key US and Canadian carbon markets and the likely respective demand for economy-wide carbon offset schemes.
• Analysis of key emissions trading schemes worldwide and the fundamental market imbalances obstructing the development of carbon capture and storage.
• A compatibility benchmark of all major carbon schemes worldwide and their relative degree of interconnection.

Report Highlights

Recent movement in crude oil prices together with a continuing flow of surplus EUAs into the market suggests a short- to medium-term price floor of EUR15.00 for the year ahead EUA contract. For now, companies are unsure of their likely industrial output in years to come, and are showing little interest in looking beyond immediate compliance needs.

With so many uncertainties prevailing in the carbon and other financial marketplaces, carbon is increasingly irrational. Yet electricity demand in mature economies is relatively resilient and is likely to remain so. A minimum element of price and demand stability can therefore be expected in the short to medium term.

Many quantitative and/or qualitative restrictions currently stand in the way of a truly global carbon market. Carbon markets are plagued by burgeoning policies, frameworks and currencies, poor linking and limited convertibility. The biggest risk today to the carbon market is caused by the lack of regulatory continuity and uniformity beyond 2012.

Reasons to Purchase

• Assess which currencies, schemes and countries are driving worldwide carbon market development as you weigh up the most recent vital developments.
• Gauge how confidence in Europe' s flagship carbon mechanism was undermined and how the economic slowdown is likely to affect carbon fundamentals.
• Get to grips with the five key issues that need to be considered, acknowledged and resolved before carbon markets worldwide can be effectively linked.

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • There have recently been significant and meaningful developments in carbon markets worldwide
    • In the last year, the carbon landscape has become broader, deeper and more complex
    • Developments in US and European carbon regulation have taken center stage
    • Confidence in Europe' s flagship cap-and-trade mechanism, the EU ETS, was recently undermined
    • Phase II EU ETS EUA price forecasts are likely to remain deflated in response to recession fears and industrial output cuts
    • With so many uncertainties prevailing in the carbon and other financial marketplaces, carbon is increasingly irrational
    • A minimum element of price and demand stability can be expected in the short to medium term
    • A regulatory regime that reflectively prices-in the true market-driven cost of carbon is more important than ever
  • The US and Canada are assessing the demand for economy-wide carbon offset schemes
    • Current RGGI emission, volume and price trends poorly reflect likely future demand for state and regional GHG trading programs
    • It is unclear to what extent emissions trading schemes in Canada would be open to the global carbon market
  • In 2007 and 2008, Australasia received the carbon wake up call
    • In 2007, Australia introduced the notion of a national emissions trading scheme, leading to issues of credit substitutability
    • In Australia, the carbon pollution reduction scheme (CPRS) will not trigger economic decline; upward pressure on carbon is expected
    • CCS in Australia and elsewhere must address the fundamental concerns of market power imbalance and risk exposure
  • Linking carbon markets to achieve the required mitigation effort presents a significant challenge
    • Many quantitative and/or qualitative restrictions currently stand in the way of a truly global carbon market
    • Five key issues need to be considered, acknowledged and resolved before effectively linking carbon markets worldwide
    • Fragmented carbon markets are plagued by burgeoning policies, frameworks and currencies, poor linking and limited convertibility
• APPENDIX
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Figures
    • Figure 1: Widespread policy uncertainty is unsettling the carbon marketsFigure 2: A short- to medium-term price floor of approximately EUR15 for the front-year EUA contract is now expected
    • Figure 3: The relationship between gas, oil, coal and carbon is increasingly irrational
    • Figure 4: Government policy must send the ' right' signals to market to encourage capital growth
    • Figure 5: Investors are fleeing CCX contracts on mounting concerns about the future value and substitutability of the product
    • Figure 6: Holders of fraught CCX Carbon Financial Instruments (CFIs) are opting for the relative safe haven of the RGGI contact
    • Figure 7: While Canada is a party to the Kyoto Protocol, it will follow an alternative reductions schedule
    • Figure 8: The NSW GHG abatement scheme has suffered following uncertainty about the transition to the national ETS
    • Figure 9: CCS must gain the market support required for widespread deployment in Australia and globally
    • Figure 10: Markets operate a patchwork of carbon currencies which, more often than not, lack substitutability
    • Figure 11: Five key regulatory policy issues stand in the way of a unified global carbon marketplace
    • Figure 12: The global carbon market is fragmented: several carbon markets encompassing both allowances and project-based assets coexist with different degrees of interconnection

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