Navigating the Carbon Economy
Global Financial Outlook and its Impact on the Carbon Economy
We are witnessing one of the worst financial crises in the history of financial markets.
Globally stocks are down more than 50% on average from their 2007 peaks and no single industry or country has been immune to this meltdown.
The biggest drop in values has been in the commodity sector with values of the majority of commodities declining by 70% from their peak. Carbon spot prices have reflected that trend in their values.
Independent of the financial markets, carbon values are expected to improve with the improvement in commodity prices, United States' carbon emission trading scheme, framework on Copenhagen discussions late this year and with the potential inclusion of India and China in global initiatives to reduce their (GHG) greenhouse gas emissions.
The growth in this fastest growing industry globally is nonetheless on an upward trajectory. Considering that global research firms and financial institutions like World Bank and the IMF project the size of the carbon economy to reach over $2,000 billion per annum by 2020, the quantity of carbon credits produced is going to increase at a massive rate, compounding each year. Supply on the other hand is expected to be relatively subdued and new sectors are expected to be included to match the demand. Such sectors include generating compliant carbon credits from preservation of existing tropical rainforests and soil carbon sequestration, currently under the voluntary market.
The onus therefore is on organisations to build and consolidate their capabilities in order to leverage from the increase in value and quantity of carbon credits over the coming years and subsequent increase in the valuation and cash flow involved in the carbon economy.
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Industry Growth Forecast
"The carbon economy is the fastest growing industry globally with US$84 billion of carbon trading conducted in 2007, doubling to $116 billion in 2008, and expected to reach over $200 billion by 2012 and over $2,000 billion by 2020"
World Bank Carbon Finance Report for 2007
Forecasts are for the compliance market to continue to grow. The recent World Bank Report forecasts that underlying demand for Europe between 2008-2012 would be a total of 1,650 MtCO2e for the next five years. This has the potential to increase considerably over the period, with an estimated 400 MtCO2e of underlying demand for 2012 and a likely trading volume of eight times this at 3,200 MtCO2e (worth at leastUS$128 billion).
A recent report by New Carbon Finance has suggested that the US market alone will be worth US$1 trillion by 2020 (more than twice the size of the European market) on suggested trading volumes of 25,000 MtCO2e at a price of US$40. With the US market predicted to be more than twice the size of the European market, it is not unreasonable to expect that the European and Japanese markets (currently the most active markets) combine to be as large as the US market.
The voluntary market is expected to grow from an estimated US$100 million in 2006 to reach between US$9.9 billion and US$17.1 billion per year by 2012.
Commentary regarding the size of the voluntary carbon offsets market is consistent, forecasting that the industry is on the cusp of enormous growth over the next three-five years.
According to the World Bank in its 'State and Trends of the Carbon Market 2007' report, the CCX accounted for US$38 million in sales of voluntary carbon offsets in 2006.
Some Background
The Kyoto Protocol was created by United Nations Framework Convention on Climate Change (UNFCCC), and adopted for use in 1997. The international treaty is intended to form a global effort to reduce the levels of man made greenhouse gas emissions that are leading to global warming.
The Kyoto Protocol establishes legally binding commitments for the reduction of greenhouse gas (GHG) emissions in industrialised nations, as well as general commitments for all member countries.
Under The Kyoto Protocol, industrialised countries agreed to reduce their collective GHG emissions by 5.2% compared to the year 1990.
Kyoto includes "flexible mechanisms" such as Emissions Trading, the Clean Development Mechanism and Joint Implementation to allow industrialised countries to meet their greenhouse gas (GHG) emission limitations by purchasing carbon credits, and to encourage investment in and transfer of clean technologies into developing countries.
Thus the carbon economy was created, underpinned by the dual facts that:
- Federal governments in industrialised countries are requiring organisations to report and cap their emissions in order to meet targets
- Kyoto provided an opportunity for other parties to create and sell carbon credits to assist these organisations in meeting their targets