GLOBAL CARBON MARKET TRENDS--PROS AND CONS
As emissions trading is making its way into greenhouse gas emissions policies throughout the world, project-based mechanisms are playing a significant role in how governments and the private sector are planning to reduce emissions. And in the process, major financial institutions, energy companies, and technology developers are committing billions of dollars to enter the growing carbon market. While looking increasingly attractive as an emissions compliance tool and an investment vehicle, the market also poses unique risks. CERA analyzes the current trends in the market for flexibility mechanisms and finds that
*The private sector is the primary driver for demand for project-based credits, i.e., the Clean Development Mechanism (CDM) and Joint Implementation (JI). European and Japanese companies are leading a dynamic private demand to offset their domestic emissions to comply with domestic programs in the 2008-12 period. In a high case scenario, demand from the private sector could reach 300 million tons per year as the rollout of the carbon program fuels interest from major financial institutions and energy companies.
*Over 1,500 projects are under development, with significant success in Asia and Latin America. CDM and JI processes are moving up the learning curve, and price signals have stimulated interest from developing countries and project developers. As of April 1, 1,783 CDM and 156 JI projects were at various stages of development in 68 countries. The number of projects is rising by the day, with the potential to generate over 2.1 billion certified emission reductions and emission reduction units by 2012. It is worth noting, however, that a large proportion of this emission offset potential is held in a small number of CDM projects (44 out of the 1,783 projects above represent around 40 percent of the emissions reductions potential). Therefore it is too early to make assumptions regarding the longer-term (post-2012) potential of CDM and JI in their current form.
*Key risks remain in this emerging market. Although the focus to date has been on risks in the supply side of the market, as time passes the time horizon for investors to make a return before 2012 shortens. The timing and the nature of domestic and international carbon programs may jeopardize profitability of carbon investments if governments fail to implement well-functioning emissions reduction programs in the post-2012 period. Based on CERA's estimates, overall the outlook for project developers remains positive as projected demand for project-based credits currently exceeds projected supply. However, given the volume of projects now registered and the lack of concrete legislation for the post-Kyoto period, CERA expects a greater focus on the demand side of the market over the coming year.
