Carbon market activity highest on record

Analysis from Bloomberg New Energy Finance shows that trading across the world’s carbon markets reached record levels of activity in 2012 – up 26% on the previous year – equivalent to a third of the world’s CO2 emissions

London, 3 January 2013 – According to analysis by Bloomberg New Energy Finance, transaction volumes across the world’s carbon markets grew by 26% in 2012 to reach 10.7bn tonnes – equivalent to a third of the world’s total emissions of CO2. Since 2010, trading activity in the world’s carbon markets has increased steadily by around 25% each year.

Much of the activity in 2012 occurred towards the end of the year, with trading in the last quarter jumping by 70% compared to average of the previous three quarters. The last quarter of 2012 alone accounted for 36% of the total annual volume. Trading activity in the EU Emissions Trading System (ETS) grew by around 40% in Q4 compared to the average of Q1 to Q3 2012, while liquidity in the market for UN offsets – carbon credits from developing countries and former Eastern bloc countries (notably Russia and Ukraine) – soared by over 150% on the same basis.

The increase in trading activity in the EU ETS was driven by two key factors:
• Increased use of auctioning to distribute allowances – this has both an immediate and secondary impact on trading activity as intermediaries become more active in trading contracts over different time periods to match supply with demand.
• Heightened volatility, and speculation, associated with the European Commission’s attempts to support prices in the EU ETS by withholding allowances from the market.

The dramatic rise in trading in UN offsets was due to the rush to issue and acquire these credits before the end of the year and to take advantage of record low prices. Eligibility concerns following the threat of a potential ban of offsets from Eastern bloc countries issued after 2012 in Europe incentivised developers to issue as many credits as possible before year-end. In the final quarter of 2012, secondary trading of these offsets grew by 80% to 890Mt, up from 500Mt in Q3. Volumes were further boosted by 480Mt of primary issuance, more than three times higher than the previous quarterly record in Q3 2012.

The flip side to the increase in trading activity however has been the decline in value of the world’s carbon market. This fell to €61bn in 2012 – a drop of 36% compared to 2011 and just below the value of the market in 2008. This is the first-ever annual decline of its value and the result of severely depressed price levels caused by oversupply in main market of the EU ETS. The average tonne of carbon changed hands for only €5.7/t over 2012, down from €11.2/t the year before – a drop of close to 50%. Much of this price fall was due to the collapse in UN offset prices – credits from developing and Eastern bloc countries lost 85% and 92% of their value respectively between October and the end of December as primary issuance reached record levels.

Looking forward, Bloomberg New Energy Finance expects the value of the market to bounce back to around €80bn in 2013 – a similar level to 2009 and 2010. This will be driven by a further increase in the volume of carbon transactions of 17% to around 12.5bn tonnes on the back of even greater use of auctioning in the EU ETS, and a recovery in average prices of around 15% to some €6.6/t following intervention by the European Commission in the EU ETS.

Assuming the European Commission is successful with its backloading proposal in the EU ETS, Bloomberg New Energy Finance expects the world carbon markets to return to growth and reach a new record of €96bn in 2014. Carbon markets will receive a further boost over 2013-15, as the EU ETS will be joined by compliance markets in California and later Australia. By 2015, we project that these new markets will represent 35% of the value of the world’s carbon markets.

Guy Turner, director of commodity research at Bloomberg New Energy Finance, commented:

“Even in the face of policy paralysis and depressed prices, trading activity in carbon markets has continued to grow in 2012. This shows how efficiently these markets work. Policy-makers now need to harness the energy of this market and create policies that will drive innovation, spur further reductions in emissions and reduce costs.

“This is already starting to happen in California, Australia and South Korea, and the intention to link these markets with the EU ETS is a significant move in the right direction. More countries now need to follow suit and join a global trading system that includes both developed and the larger developing economies.”

For further information:
Guy Turner
Bloomberg New Energy Finance
+44 20 3216 4086
gturner10@bloomberg.net

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