Carbon Markets on the Move?

28/05/2018

Two reports were issued this week on the state of the carbon market. One was the latest edition of the World Bank’s State and Trends of Carbon Pricing, the other IETA’s 2018 report on the results of its annual GHG Market Sentiments survey.

With Europe’s carbon price continuing to firm up following reforms last year, both reports give cause for optimism that carbon markets – which many see as vital to funding a substantial part of the finance needed for the Paris NDCs – are beginning to find their feet outside the EU/North America axis where they have been concentrated to date.

The Worldbank report notes that “70 jurisdictions (45 national and 25 sub-national) have implemented, or are scheduled to implement, carbon pricing initiatives. These mechanisms helped governments raise about $33 billion in 2017 in carbon pricing revenues from allowance auctions, direct payments to meet compliance obligations, and carbon tax receipts. This represents a 50% increase compared to the US$22 billion raised in 2016.”

An interesting side-snippet of news during the week was a claimed “first” for REDD+ finance directly linked to a country’s NDCs, with the Peruvian government officially recognising offsets from two forestry conservation projects.

Among the positives in the PWC-conducted IETA survey, there were findings that:

  • Expected prices for the EU ETS in Phases 3 and 4 have increased for the first time in three years – to €15 and €22 respectively
  • 90% of respondents believe a cap-and-trade system will emerge within five years in Latin America. There are also high expectations for broader Pacific Rim carbon market cooperation in within the same timeframe
  • States are once more at the forefront of climate change action in the US: 97% of respondents believe state regulation will be important or very important in driving private sector climate action in the US (vs 54% for federal regulation).

Two key risks, however, emerged from the reports:

  • Reading between the lines (or rather, interpreting the graphics) in the World Bank’s report, the Bank now doesn’t seem to think that China’s national ETS scheme, officially announced to have commenced late in 2017, will actually be properly up and running until 2020.  Looking at the pricing in some of the regional markets – which are as low as $1 / tonne – it’s clear that these are indeed very much still pilots.  In IETA’s survey, the danger of China’s market not coming onstream and working well was the biggest risk seen by respondents. 71% of these said that “if China’s ETS is not considered a success by the global community, the reputation of emissions trading worldwide will be affected.” A similar percentage, however, believed the launch of China’s scheme will encourage other countries to implement a carbon price.  So much rides on success here.
  • There is concern over the Paris process and ambition. The linkage between carbon markets and finance for the NDCs resides Article 6 of the Paris agreement, which was caught up in something of a stalemate in recent ‘rulebook’ negotiations in Bonn.  This will have to be agreed this year if Paris is to be kept on track. IETA respondents were said to be “uncertain whether this year’s UN talks will successfully agree the rulebook for the Paris Agreement or the status of the CDM after 2020.”  What’s more, only 19% of respondents believe that developed countries will mobilise the promised $100 billion per annum of climate finance by 2020, which many see as vital to developing countries agreeing the rulebook. They also warn that “governments worldwide need to ‘get real’ if they are to raise global climate ambition. Respondents believe that a carbon price of €50/tCO2 by 2030 is needed to achieve the 2°C goal, which far outstrips their current price expectations.

If you want to keep up to speed on developments in carbon pricing, the World Bank’s Carbon Pricing Dashboard website, launched in 2017, provides a complement to the annual State and Trends report, with an up-to-date overview of carbon pricing initiatives and allowing users to navigate interactively through the visuals and data of the yearly report.

 

 

 

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