Carbon Markets Struggle to Maintain Momentum

Between 2008 and 2009, the volume of global carbon transactions increased 80 percent, reaching 8.7 billion tons of carbon dioxide–equivalent (CO2e).1 (See Table 1.) Over the same period, declines in industrial output reduced demand for carbon assets, resulting in falling prices and an increase in the total value of global carbon transactions of only 6 percent.2 The average global carbon price fell from $27.93 to $16.52 per ton of CO2e. 3 (See Figures 1 and 2.)

Carbon markets (sometimes called emissions trading systems, or ETS) internalize the environmental costs of emitting carbon dioxide (CO2) and other greenhouse gases (GHGs) by facilitating trade in allowances or permits for such emissions. This can be a mandatory or a voluntary system. In mandatory carbon markets, legislation or a binding international agreement establishes overall caps on the amount that countries, sectors, or specific segments of an industry may emit. Allowances to emit the established amount are allocated or auctioned to emitters, who surrender them when emissions occur. Excess allowances may be sold to other emitters or, in some cases, banked for future use; some trading systems also permit emitters to purchase “offsets” or carbon reduction credits from projects outside the ETS. Voluntary carbon markets, in contrast, do not cap carbon emissions but they do allow carbon instruments, often offsets, to be traded among participants that may not be covered under a mandatory ETS. Carbon markets are now in use in over 30 countries across the world.4

The European Union’s Emissions Trading System (EU-ETS) remains the world’s largest and most mature example of this, driving market trends and influencing market design and behavior around the globe. The EU-ETS completed its Phase I in 2007, which was intended as a trial period for market structure and operations. The Phase I cap was set to reduce emissions 4.3 percent below a business-as-usual scenario, and preliminary research estimates that the EU-ETS did reduce emissions 3–5 percent during Phase I.5 In Phase II, which covers 2008–12, the overall EU-wide market cap has been reduced to 6.5 percent below 2005 emissions levels and, as of 2010, covered about 11,000 medium-size and large emitters in industrial and energy sectors responsible for about 45 percent of the EU’s CO2 emissions.6 In 2009, just over 6.3 billion tons of CO2e were traded in the EU-ETS, which accounted for 73 percent of the global total of traded allowances, at a value of 88.7 billion euros ($118.5 billion).7

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