Carbon Trading Faces A Make-Or-Break Year

The global carbon trading market grew 68 percent in 2009 compared with the previous year, despite a global economic downturn. But the value of the market remained virtually unchanged after carbon prices fell, averaging $16.40 in 2009.

In 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands world-wide, up 68% from 2008, said carbon market research firm Point Carbon, of Washington and Oslo. But at 94 billion euros, or about $135 billion, the market's value was nearly unchanged compared with 2008, amid world carbon prices that averaged EUR11.40 per ton of carbon, about 40% lower than 2008, according to the study.

The failed Copenhagen climate summit however has put paid to immediately creating a global trading market. It is hoped that national and even regional schemes will bridge this gap, but some large political decisions in the first half of this year will be crucial.

Currently, FinSoul research shows that compared to conventional energy markets, carbon trading is still tiny, with permits with a value of about $150 billion changing hands in 2009, generating revenues of $850 million for investment banks according to a Societe Generale analyst. The majority of these revenues came from hedging prices and volume risks associated with projects to offset carbon emissions.

Investment banks had hoped to take advantage of climate change by originating, financing and hedging carbon reduction schemes as well as trading permits and credits.

However, to date it remains a niche business. Barcap(NYSE:BWX), the biggest player, employs just four people on its trading desk. Some banks, including Credit Suisse (NYSE:CS) and UBS AG, have withdrawn from the market.

Even with the failure of the COP15 to find a replacement treaty for the Kyoto Protocol which is due to expire at the end of 2012 it is hoped that local markets could make up the shortfall. Barack Obama is soon set to address Congress on the State of the Union and it is hoped that some clarity will come for the American market which analysts believe could be worth as much as $1.3 billion by 2020.

The U.S. Senate is currently working through a proposed climate bill which was narrowly passed by the House in mid 2009.With mid-term elections due in November the original deadline for a federal market of 2014 may still prove too ambitious.

The European Union’s Emissions Trading Scheme accounted for the largest share of carbon trading, equal to 68 percent of the global market. The second-largest segment was the international Clean Development Mechanism market, followed by the Regional Greenhouse Gas Initiative, the first mandatory cap-and-trade system in the United States.