Carbon Prices Follow Global Economic Downturn

The global carbon market has not remained unshaken after the world financial crisis and gloomy economic outlook. Over the past two months, prices of emissions permits have fallen, with risks of a negative downward effect on investment in carbon reducing projects.

Driven by weak energy prices, increased selling of credits by cash-strapped firms and an anticipated drop in emissions from lower industrial production, the fall in carbon prices is hitting the UN mandatory market for Certified Emissions Reductions (CERs) harder than the voluntary offsets market for Verified Emission Reductions (VERs).

In the US, buyers anticipating a carbon cap-and-trade under the Obama administration contributed to the fall in price of VERs – tradable carbon offset credits for emission reductions – at levels still higher than mid-2008. The voluntary Carbon Index of market analyst New Carbon Finance for November-December 2008 has the average VER price at US$7.50 - down 15 percent from US$8.70 in the previous two months, but still up nearly 20 percent from July-August prices.

In contrast, the prices for CER – carbon credit generated under Kyoto Ptotocol’s Clean Development Mechanism (CDM) for industrialized countries to reduce their emissions of greenhouse gases through a primary market of projects undertaken in developing countries – have continued to fall away, with falling prices of European carbon permits amid lower energy prices and looming recession. Benchmark CERs in December 2008 closed at €11.75 (US$15.50) on the European Climate Exchange on January 15 - down 42 percent over the last three months.

Low Prices Could Limit CDM Effectiveness

There is now fear that the low prices for issued credits in secondary markets leads to downward pressure on the primary market and discourages project developers from generating new credits. This may significantly hamper prospects from the UN CDM’s to contribute to emissions reduction and clean technology transfer in the developing world over the next year or two.

Carbon offsets traded under the Kyoto Protocol represented a $32 billion market in 2008, of the US$120 billion global carbon market. At the UN climate change conference in December 2008 in Poznan, Poland, delegates adopted decisions aimed at streamlining and speeding up the CDM .

In China, the largest recipient of CDM projects, one project developer noted that the number of developers looking to secure forward credit sales in the primary market has halved from a year ago. The Chinese government imposed a primary market CERs price floor to above €8 in 2008. Some developers are hoping the government will consider the depressed market and bring minimum prices back down to €6, but others are skeptical that the government will act unless there is a sustained period of depression in prices.

Nonetheless, Reuters reports that many established project developers with projects underway have already locked in prices at levels above €10. According to equity analysts, the three largest publicly-traded developers, Camco, EcoSecurities and Trading Emissions, are well positioned to weather a prolonged downturn in CER prices. So developers not pressed by debts or urgent cash flow are holding off selling their credits, and waiting for prices to return to truer values, knowing that CERs are expected to range from €18-21 in the period to 2012.

ICTSD reporting; “Depressed Carbon Prices To Have Ripple Effects,” REUTERS, 16 January 2009; “Global downturn hits carbon credits,” CARBONPOSITIVE, 16 January 2009.