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A Global Carbon Market? We’re Not Confident

If you had asked me yesterday, I would have said we are on the verge of a global carbon market that was shaping up to look quite attractive. Ask me today, after the EU voted down a backloading proposal, and I’m not so sure. There are other big carbon markets forming and they are starting to cross borders, but the EU’s is the largest and now it will lose its impetus, which could set back the whole thing.

Before yesterday’s vote in the EU parliament, predictions were that the global trade in carbon would grow by 13-14% this year, to reach a volume of 12 gigatons of carbon dioxide equivalent. Most of this growth would have come from the some 10 billion EU carbon permits out there. This would have represented a 40% increase in the volume of EU carbon permits. Last year, there were some 7 billion permits out there for trading. It’s an extremely speculative business with high price volatility.

The EU has been toying with a proposal to backload some 900 million permits in order to stabilize prices, which could raise the carbon permit price to just over $7.70 per ton. Last year, the price was about $9.40 per ton. The trick is to keep the volumes down enough to maintain a stable price. For this year, the EU carbon market should have been worth close to $80 billion, up about $9 billion from last year. But only with the backloading proposal in place. For 2014 and 2015, when volumes would have been reduced enough to smooth out the price volatility,…

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