10 May 2006 - Carbon Trading house Natsource has released details of its global survey of Greenhouse Gas market activity covering 2005 and the first quarter of 2006, which shows extensive growth in trading with transactions totaling $10.6bn in 2005.
Natsource carried out the annual survey on behalf of the World Bank's Carbon Finance Unit. The report points to growth in traded volumes for European Union Allowances (EUAs) and Certified Emission Reductions (CERs) created by Clean Development Mechanism (CDM) projects located in developing countries that have ratified the Kyoto Protocol (KP).
"The initiation of the European Union Trading System and entry into force of the Kyoto Protocol increased firms' and governments' demand for compliance instruments to meet greenhouse gas emission reduction requirements. The issuance of allowances by European governments and increased clarity regarding the rules governing the project-based mechanisms provide buyers with more options for meeting compliance requirements," said Jack Cogen, president of Natsource. "This is good for the marketplace. We believe the market will continue to mature as the Kyoto deadline approaches and as European governments announce and allocate their targets for installations in Phase 2 of the EU ETS."
Growth of Trade in European Union Allowances (EUA)
The European Union Emissions Trading Scheme (EU ETS) establishes emission reduction requirements for approximately 10,000 large industrial and electricity generating sources accounting for nearly half of Europe's emissions of carbon dioxide (CO2). Phase 1 of the EU ETS started in January 2005 and runs through 2007. Phase 2 corresponds to the 2008-2012 first commitment period of the KP. European Union allowances are EU ETS compliance instruments, which are allocated by EU governments to regulated installations. They can be purchased by entities with short positions to comply with their reduction targets.
The market for EUAs experienced explosive growth in 2005, increasing from approximately 9m tonnes (Mt) in 2004 to over 322 Mt in 2005 -- a nearly 35-fold increase. Prices also increased dramatically during 2005, moving from euro 7 ($9) to a high of approximately euro 30 ($37). This increase was driven by factors such as: rising natural gas prices which increased the need for coal-fired generation, the relative absence in the market of some sellers from Eastern Europe due to delays in bringing their emissions registries on line, delays in creating project-based supply, and other regulatory delays. In 2005, the value of EUA trades in 2005 totaled $8.2bn. The EU market saw continued expansion in the first quarter of 2006, with approximately 203 Mt traded at a value of approximately $6.6bn.
On April 28, 2006 the EU market experienced its largest price drop to date, with prices falling to euro 13 ($16) following reports of lower-than- expected emissions for 2005 from six EU countries. All EU ETS countries' 2005 verified emission reports will be made public by May 15, 2006.
Growth in Trade of Project-based Emission Reductions
Traded volumes of carbon dioxide equivalent (CO2e) emission reductions created by projects grew by 240 per cent, from 110m tonnes (Mt) in 2004 to 374 Mt in 2005. Approximately 346 Mt (or 93 per cent) of this volume was created from CDM projects hosted by developing countries that ratified the Kyoto Protocol. The value of trade in project-based transactions in 2005 totaled US$2.7bn. In the first quarter of 2006, approximately 79 Mt were traded, with a value of approximately $0.9bn. Figure 1* illustrates the explosive growth in these transactions since 2001 (over 4,000 per cent). This growth was driven by at least three factors:
The launch of the EU Emissions Trading Scheme in January 2005 and
rising prices for EUAs. CERs created by projects located in developing
countries can be used to comply with EU emissions targets.
The entry into force of the Kyoto Protocol, which establishes GHG
emission reduction targets for industrialized country signatories, and
the approach of the KP's first commitment period (2008-2012).
An increase in the clarity of the rules that govern CDM project
approvals and the creation of CERs that will be usable for compliance.
Although prices in GHG markets will continue to fluctuate over time as in similar markets, emission reduction requirements at the national level under the KP, and at the firm level under the EU ETS, will likely continue to drive demand and activity in greenhouse gas markets. Natsource estimates that the countries that comprise the European Union, Japan and Canada will be approximately 3-4bn tonnes short of achieving their emission reduction targets in 2008-2012, based upon business-as-usual emissions trends.
Natsource has been a major participant in the GHG market since the late 1990s. In October 2005, Natsource announced the final close of the Greenhouse Gas-Credit Aggregation Pool (GG-CAP). A total of euro 510m (approximately US$640m) was committed to GG-CAP by 26 participants located in Europe, Japan and Canada. This capital will be used to purchase and manage delivery of a large pool of CERs and ERUs which participants can use to comply with GHG emission targets from 2005-2012.