WORLDWIDE trading in emissions added up to less than $400 million last year. But it is early days yet. Turnover is growing rapidly, as is the price at which emissions are being traded.
About 107 million tonnes of carbon dioxide equivalent (tCO2e) was exchanged in 2004 through `Kyoto Protocol' projects, mostly purchased by rich countries in developing countries and in countries with economies in transition; up 38 per cent compared to the 78 million tCO2e traded in 2003. It is estimated that 43 million tCO2e have been exchanged so far this year.
Prices for project-based emissions increased by 20-25 per cent over the last year. Verified Emissions Reductions now trade at a weighted average price of $4.22. Certified Emissions Reductions command a premium of one dollar per tCO2e.
To get at the total size of the emissions market, one must add trading in `allowance' markets to the figure for project-based emissions. In this fast growing market, a company can sell whatever it saves from the total emissions quota allotted or auctioned to it by a public regulator.
For example, under the EU's Emissions Trading System (ETS), European Governments have allotted greenhouse gas emission allowances to individual companies and industries. If a company does not emit its total allowance, it can trade the balance. Volumes exchanged on allowance markets have increased dramatically this year as compared to 2004, and are now reported to be comparable to volumes exchanged through project-based transactions.
Apart from the EU ETS, three other active markets for greenhouse gas allowances have so far been established. The UK Emissions Trading System, the New South Wales trading system and the Chicago Climate Exchange. The total amount exchanged on all allowance markets taken together from January 2004 to March 2005 was about 56 million tCO2e.
Thanks mainly to the coming into force of the EU's ETS from January 2005, volumes traded in the EU from January through March this year were 3.5 times higher than the allowances exchanged in the 12 months of 2004.
There is an increasing disconnect between the prices of carbon reductions from Joint Implementation and Clean Development Mechanism projects under the Kyoto Protocol on the one hand, and on the other the prices at which allowances are being traded under the EU's ETS.
Trades in the latter market were priced between 7 and 9 euros in 2004, but increased to 17 euros per tCO2e in March and April 2005.
According to the joint World Bank-International Emissions Trading Association (IETA) report released two weeks ago `these two commodities are so different that they cannot be compared'. The price differential, the report says, "could be explained by a number of factors including thin volumes traded in allowances - resulting in high price volatility". The price differential could also reflect the `risk inherent in project-based transactions'.
The report, which is titled `State and Trends of the Carbon Market: 2005' (available online at http://carbonfinance.org/docs/CarbonMarket Study2005.pdf) was released during the CARBON EXPO at Cologne, Germany, recently. It is the largest carbon market fair and conference held so far. There were over 1,000 participants.
Projects abating non-carbon dioxide emissions account for more than half of the total volume of emissions put up for sale. These include HFC23 destruction (which is the dominant type of emissions reduction project in terms of volumes supplied), projects capturing methane and N2O from animal waste, and hydro, biomass energy and landfill gas capture projects.
HFC23 comes into being as a byproduct in the production of the hydrofluorocarbon HFC22, which is used as a refrigerant and as a raw material for the production of fluorinated resins.
It is a very potent greenhouse gas: the release of one tonne of it in the atmosphere has the same long-term effect on climate change as the release of 11,700 tonnes of carbon dioxide.
HFC23 destruction projects, all of which are located in Asia according to the State of the Carbon Market Report, are few in number but account for very large volumes. It is mainly because of these projects that Asia in general and India in particular have such a large weight in total emission reductions in volume terms.
In the period from January 2003 to December 2004, the share of India in total emission reduction projects of different sorts worldwide was 26 per cent, with the rest of Asia having a share of 17 per cent.
India's share has since gone up a few percentage points. The share of the rest of Asia has fallen slightly, but this has been offset by the growth in total volume.
In addition there are a large number of unilateral CDM projects that are under various stages of implementation in India. Since credits relating to the 60-70 projects in this category have yet to be sold they have not been included in the figures mentioned in the Carbon Report.
The US, which backed away from its commitment to the Kyoto Protocol, predictably accounts for only a very small share of total project emissions purchased, around 3 to 4 per cent.
The largest buyers are Japan and the Netherlands in that order, which account for 29 and 22 per cent of total purchases, respectively.
The share of UK in total purchases has doubled recently and now stands at around 12 per cent. Other EU countries account for 30-32 per cent of total purchases.