Towards a low-carbon economy - Carbon markets, compliance and investments

Abstract

The growth of the carbon market has been fast; the growth in the euro value of trades became more than 10-fold in 4 years, from 9 billion € in 2005 to some 100 billion € in 2009. The carbon markets have two major parts, the compliance and the voluntary markets. The compliance markets include allowance based Assigned Amount Units (AAU) between states, emission allowances within the various regional trading schemes such as the European Emissions Trading Scheme (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) covering about ten states in the United States as well as project-based emission reductions from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects. The voluntary markets consist of instruments based on the mentioned carbon units and on the market for neutralizing carbon emissions. Key issues for the future of the carbon markets are the outcome of the COP 16 negotiations in Mexico in December 2010 aiming at reaching a global climate agreement for the post-2012 period, the outcome of the legislative processes for establishing cap-and-trade emissions trading schemes in the US, Australia and Japan and the compliance strategies of European companies within the EU ETS in addition to a possible higher EU ambition in reducing emissions by 30% by 2020 compared with 1990 which would replace the currently set target of a 20% reduction. While abating climate change is a real challenge, the markets created by efforts to do that create exciting new investment opportunities. And money is needed for bringing down emissions. By the end of 2009, more than 10 billion € had been invested in funds and other carbon investment vehicles. No business goes unaffected by the carbon markets and a long-term climate strategy is an essential part of every company's risk management. The carbon markets have implications on the competitiveness of products and services, on business strategies and investments and ultimately financial result.