Before Copenhagen, the markets in trading green-house gas emissions were buoyant. For the first time, nearly all of the world’s big economies, including the US and China, had set carbon reduction targets that vastly boosted prospects of the trade. As another fillip, the US was considering a federal system of carbon trading capable of sending the value of the market rocketing.
Traders were looking forwards to an accord at Copenhagen that would lead to the forging of a new world-wide legal pact on reducing emissions. They would be among the main beneficiaries of such a treaty, as trading in emissions is one of the key ways of encouraging countries and businesses to cut emissions. But the outcome from Copenhagen was nowhere near as definitive as the markets would have liked.
The “Copenhagen accord”—a last-ditch compromise cobbled together by 40 of the world’s big economies—agreed to reduce their emissions substantially by 2020 but failed to set a firm timetable for signing a legally binding global treaty. Although the UN is hoping that a treaty could be signed by the end of this year, for carbon traders, this was not enough.
Reflecting that sentiment, carbon prices fell by more than 8% on the first day of trading after the Copenhagen conference. In addition, many traders are facing a potential disaster: the deadline for the end of a large slice of their market is fast approaching. Carbon trading was set up under the 1997 Kyoto protocol, the world’s only existing legal treaty on climate change but one that failed to bind developing countries to take action on emissions and that was never ratified by the US.
The problems facing the carbon markets spell bad news for low-carbon businesses and technologies. The existence of a carbon price is supposed to generate investment in low-carbon goods and services but analysts estimate that prices of at least €30 a tone are needed for significant investments, and higher levels, above €50 a tone, would be needed to encourage investments in the newest and most expensive technologies, such as carbon capture and storage.
Eyes are now on the US. If President Barack Obama succeeds in pushing a cap-and-trade bill through the Senate, then a massive expansion of the global carbon market will be likely, whether or not there is a global treaty on the climate.