Isramart :Carbon Trading May Have Hit Brick Wall

Isramart news:
Touted by its supporters as the best and cheapest way to fight global warming, carbon trading is losing momentum amid the uncertainty created by the failure of the Copenhagen summit meeting and President Barack Obama’s political troubles in the United States.

Investors are steering clear of energy-saving projects meant to generate carbon credits, and traders in Europe are hunkering down through a period of consolidation that is disappointing to those who had hoped carbon markets would grow quickly into a $2 trillion-a-year business.

While the European Union’s Emission Trading System is ticking along, it is looking increasingly likely to be the only big game in town for years to come. Those who see carbon trading as the best way to cut worldwide emissions quickly are wondering if their vision of a global network of markets, encompassing the United States, Australia, Japan and other countries, will ever be realized.
“That bold vision, clearly, that hit a brick wall at Copenhagen,” said Dieter Helm, a professor of energy policy at the University of Oxford who argues that taxing carbon is a more effective way of ensuring emissions cuts. People will go on trading carbon, he said, “but it’s not where the future lies.”

Negotiators at the December summit meeting failed to deliver an agreement on binding carbon caps for countries around the world, a move that would have positioned carbon trading as a main mechanism for meeting them. And in the United States, Mr. Obama’s political difficulties — highlighted by the Democrats’ loss of the Massachusetts Senate seat long held by the late Edward M. Kennedy — is a setback for his contentious cap-and-trade plan, making it unlikely it will become law this year.

That may mean that carbon trading loses the primacy its advocates had hoped it would have in the fight against global warming. It is instead being sidelined by other approaches, like the E.U. goal of renewable energy accounting for 20 percent of energy production by 2020, Dr. Helm said.

“Clearly, there is a question mark over the role of the carbon markets at an international level,” said Guy Turner, the director of carbon market research at Bloomberg New Energy Finance.

Carbon trading, the centerpiece of the idea known as cap and trade, took off in 2005 when the E.U. launched its market and has grown rapidly since then. Companies in heavy industries like power generation that are part of the system receive credits for the amount of carbon dioxide they are allowed to produce, which is determined by a systemwide limit, or cap.

If a plant emits too much carbon, its owners must buy more credits. Those come either from firms that have excess credits or from projects certified as having reduced emissions in the developing world, for example an energy-efficiency overhaul that cuts the amount of pollution created by a cement plant in China.

Investors in those projects, often environmental finance companies that raise money through public offerings or from big entities like pension funds, make decisions with an eye on the profits to be gained by selling carbon credits, mainly in Europe. The credits can then be traded on exchanges like the European Climate Exchange, based in London, and are ultimately purchased by utilities that need them to offset excess pollution.

The system of creating credits through green projects, called the clean development mechanism, was set up by the 1997 Kyoto Protocol, and its future is in doubt if negotiators fail to create a framework to succeed Kyoto before it expires in 2012.

That uncertainty has made potential investors nervous. “It has become very difficult to raise new money,” Mr. Turner said. “That’s the killer from Copenhagen.”

While green financiers and others are still starting projects in the developing world, those firms cannot count on returns from carbon credits and must find other, more reliable funding streams.
Abyd Karmali, the global head of carbon markets at Bank of America Merrill Lynch and president of the Carbon Markets & Investors Association trade group in London, estimated that new investments in such projects fell 30 percent to 40 percent in 2009 and will probably slide another 40 percent to 50 percent this year.
The failure at Copenhagen also makes it less likely that Europe will adopt a more stringent target for cutting carbon emissions by 2020 than the 20 percent reduction that it has already pledged.

As the Copenhagen conference floundered, E.U. leaders backed away from a deeper 30 percent cut they had considered offering as a carrot to tempt negotiators into a tougher international deal. Deeper emission cuts would increase demand, and therefore prices, for internationally generated carbon credits, and make investment in new projects more appealing, as well as boost the value of credits in Europe.

Worldwide, carbon trading markets were worth $125 billion in 2009, Mr. Turner said. In Europe, which accounts for 70 percent to 80 percent of the total, the market is likely to contract this year, he added.

With the European carbon credit prices down sharply from 2008 to 2009 and likely to remain flat in 2010, in part because the economic slowdown has resulted in lower energy use, many once-bustling London trading desks have quieted, analysts say.

“A number of trading houses might be saying, ‘We had three traders, we might scale back to two,”’ Mr. Turner said.

Richard Gledhill, head of climate change and carbon markets at PricewaterhouseCoopers, said he had been contacted by European traders and others working on international projects who were looking for jobs.

While the European trading system is well established and will remain in place at least until 2020, the market is mature and lacks the growth potential it will have if the United States or other international players decide to start carbon trading, said Sam Fankhauser, a principal fellow at the Grantham Research Institute on Climate and the Environment at the London School of Economics.

That may be just as well, Dr. Helm said. While carbon trading makes sense in theory, implementation in Europe was riddled with special-interest deals and giveaways to industry that made it far less effective than taxing carbon directly, he said. The same would almost certainly apply to any future U.S. system.

In Europe, Dr. Helm said, policy makers should set a floor for the carbon price, to keep it stable and high enough to push big emitters to make cuts.

“Taxes are better than permits,” he said. “But we’re stuck with the permits, so we end up in a world where we have to say: ‘Given we’ve got that system, how can we make it work better?”’