Structural work underpins carbon market optimism

The past 12 months in the carbon markets have been high in drama – from litigation in the US to regulatory changes and fallout from contentious elections on both sides of the Atlantic, as well as enduring uncertainty as to when China's long-awaited national market will be launched.

However, the winners of this year's Annual Market Rankings broadly agree that, following a period of turbulence for the markets that has its origins in the 2008 financial crisis, there are signs that recent structural changes could create the basis for a period of relative stability.

Martijn Wilder, partner at Baker McKenzie, which picked up the title of Best Law Firm across four categories, agrees this "rebuilding period" is defined by a lot more talk about how carbon markets can become effective and stable, which is partly inspired by Article 6 of the Paris Agreement on climate change, he says.

In the EU Emissions Trading System (ETS), the price of allowances (EUAs) has been climbing, reaching €7.68 per tonne of carbon dioxide (CO2) at the time of going to press – up from a low in May of less than €4.50 – which is a sign of confidence brought about by the EU agreeing to long-term reforms, according to Jeff Swartz, director of climate policy and carbon markets at South Pole Group. The Switzerland-based company was voted Best Trading Company on the secondary market and Best Project Developer for Kyoto project credits (JI and CDM).

EU Member States backed the ETS Phase IV (2021-2030) reform package in a November vote. The reforms include a commitment to reduce the overall cap on the total volume of emissions, annually, by 2.2%, to reduce oversupply – which has been a key weakness of the system in past years.

The reforms must be approved by the EU's environment committee, with final approval not expected until February 2018. Prices rose as much as 3.3% to €7.98 following announcement of the deal.
This increasing market confidence is likely to be important for the future development of carbon markets, Wilder says.

"This year, for the first time in a long time at the COP climate negotiations in Bonn we saw a lot more focus on how carbon markets should be linked. In that way, a strong EU ETS market is very important," he says.

However, the discussions are "only just starting to play out", he says, and the subject of linking is fraught with difficulties that require further work on regulation.

South Pole's Swartz echoes Wilder's call for more structural work around the ETS, and says that although the reforms have been successful in that they have increased investor confidence and pushed up allowance prices, EU law-makers have shown a lack of ambition that could undermine progress.

"The EU has a target to reduce emissions by 40% by 2030, and 20% by 2020, from a 1990 baseline – the 2020 target has already been met: it was achieved in 2014. We've now had six years where we're not working towards the 2020 target."

"The EU should increase its target, and one way to do it cost-effectively is by meeting it with international credits, by showing the rest of the world that the EU is interested in supporting other countries to reduce their emissions. This would allow European firms to purchase credits that are low cost, and also support action in developing countries, which are those hardest hit by climate change."

"It's a political decision Europe has declined to make and, taking that as an example, other governments have also decided not to take increased action on reducing emissions between now and 2020," Swartz says.

This article has been shortened for length. Read the original article on Environmental Finance.