Shifting Landscape of Carbon Market

The scenario of carbon market is rapidly changing. Prices in the major existing carbon markets are at a historic low. Market encountered another dramatic downfall immediately following the European Parliament’s vote to reject the backloading proposal of European Commission, carbon prices sink heavily by over 45%.

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Even many enthusiastic anti-carbon market activists, who believe that climate change is a hoax, have stated that carbon market is dead! Optimistic project developers are shifting from compliance carbon finance pathway to voluntary and gold standard credit mechanism. Traders and brokers are diversifying their portfolios into other environment product trading like renewable energy certificates, carbon footprint and energy efficiency credits. But, does this shift/adjustment could help us to sustain and grow the carbon market? What would be the future of carbon market; is it going to vanish in a year time?

Carbon gurus and researchers have different versions on these two fundamental questions. A few of these so called market gurus and stereotypic researchers stated that the inception process of carbon market itself was erroneous; without a strong regulatory system, poorly drafted legislations, weak taxation mechanism (resulting billions of euro of lost VAT in fraud), theft, security breaches and badly designed infrastructure. Hence, they believe that the current market ‘failure’ is an issue of technicality of the carbon market and its mechanism.

Whereas in reality, this is a political issue and cannot be solved with technical quick-fix. It will be desirable to address the underlying political issues such as jobs and environment, in country industrialization in EU and environmental concern in foreign policies. It is now increasingly visible in the EU politics that many politicians believe, by protecting environment one would increase unemployment and promote deindustrialization. There is fear that strong emission reduction policies would put trillions of euro investment in rubbish bin, made in big industries and factories. It is also believed that relocation of industrial and manufacturing activities from Europe to developing countries had also contributed to fall of EU emission scheme.

Hence, to restore the normal function of EUETS and build confidence of market players, EU needs to lead climate policy with politics. This is also a leadership challenge, which should be demonstrated by the European Commission by creating an appropriate political debate. The commission needs to be equipped with very competent leaders with extraordinary statesmanship and character to stimulate discussion on climate policy and political questions/issues across Europe. There will be a second chance to manifest this political will on June 19. However, experts do not expect a long term changes to the EUETS in this year until the next European Commission is appointed in 2015.

The good news that while EUETS markets face structural and political issues, it is remarkable that new regional, national, and sub-national initiatives are moving faster than ever, in both developed and developing economies. The World Bank’s Partnership for Market Readiness (PMR) is also helping to design next generation carbon markets, which could definitely provide a boost to the UN climate negotiations. Indeed, this is the flip side of carbon market, which fulfills the need of the world by providing flexible carbon mechanisms to successfully develop into a low carbon economy!

Keshav C Das, June 9, 2013

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