Carbon Trading As A Financial Commodity

The global market for carbon dioxide (CO2) emissions -- an innovative offshoot of the Kyoto pact on global warming -- has shown explosive growth, the World Bank said May 10. But in a new report, the World Bank also noted that recent events in the European Union's Emissions Trading System (ETS) had underscored how deeply volatile the market remains.

The study said the worldwide market in CO2 trading was worth more than $10 billion in 2005, 10 times the value of 2004. "To put that figure in perspective, the entire U.S. wheat crop in 2005 was valued at about $7.1 billion," said Karan Capoor, senior financial specialist at the World Bank.

"The data makes it clear that carbon is now a financial commodity. Carbon is now priced and business managers take the carbon price into consideration along with other factors in making business decisions," he said.

The market is the brainchild of the Kyoto Protocol for controlling greenhouse-gas emissions -- the carbon gases emitted mainly by burning oil, gas and coal that are driving perilous climate change. Its backbone is the 25-nation EU's ETS marketplace. Under this, 11,500 firms that are big users of fossil fuels have to meet a target of CO2 emissions or else pay a penalty of 40 euros (US$50) a ton for 2006 and 2007, a punishment that, from 2008, will rise to 100 euros a ton. Those that are below their quota can sell their surplus on the ETS to companies that are over, thus providing a financial carrot to everyone to clean up.

But when it was discovered in late April that several EU countries were polluting far less than they had thought, prices plunged by more than half to a 12-month low, from a high of 30 euros for a ton of CO2. Analysts warn that a white-knuckle price ride could undermine confidence in what Kyoto's supporters claim is the smartest and most flexible way to tackle carbon pollution.

Nonetheless, the World Bank report said the fledgling market was already achieving its aim of lending a financial incentive to countries to change their ways. The EU system accounted for 75% of the total market in 2005, but almost half of the total volume of gas emission reductions came from the developing world.

The report said the power of the market is being seen even in the U.S. and Australia, which have both refused to support the Kyoto agreement. In the U.S., the Chicago Climate Exchange saw some 1.25 million tons of CO2 equivalent traded in the first three months of 2006, compared with 1.45 million over the whole of 2005.

In total over the World Bank's period of study, 453.5 million tons of CO2 were bought in the marketplace. The leading buyers were Japan (38%), Britain (15%) and Italy (11%). The U.S., Australia, Canada and New Zealand each bought 1% from the market. On the seller's side, China placed 66% of the total for trading, ahead of Brazil with 10% and the rest of Latin America with 7%. India sold 3% percent of emissions.

Copyright Agence France-Presse, 2006

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