The new commodity in town

The United Nations defined them, the Kyoto climate protocol is trying to give them a legal policy base, and businesses and governments around the world are already buying and trading with them. As a string of international conferences and seminars testify: carbon credits are the new commodity in town.

Despite a lack of any international trading system, their growth in popularity has shot up exponentially in the last year as businesses strive to clean up their image and governments set bold climate targets. The carbon market this year will be worth $489 million with trade in some 100 million tonnes of CO2 equivalent (CO2e), according to Kristian Tangen of industry analyst Point Carbon. If these levels are indeed reached, traded volumes in 2002 will be four times those of 2001 and almost equal to the total traded volume in the five years since 1996 when the first deals were struck.

According to the Netherlands' National Energy Research Centre, trade in emissions credits can become the biggest environmental market in the world. Recent activity alone seems to show that companies and governments on both sides of the Atlantic are starting to wake up to this possibility. In Canada, British Columbia utility BC Hydro is seeking to offset 5.5 million tonnes of its own CO2 emissions by buying credits from projects elsewhere in the world (Windpower Monthly, March 2002). In the UK, a scheme for trading CO2 emissions among British companies will come into operation this month, while in the EU, plans for a community-wide trading system are currently being hammered out for implementation in 2005. The Dutch government reports a huge interest from developers around the world for its procurement tenders based on Joint Implementation or Clean Development Mechanism projects in the developing world and Eastern Europe (next story).

As yet, however, the market for carbon credits is patchy, provisional and lacking cohesion. Governments, utilities, and companies with high CO2 risk exposure, such as Shell and BP, are setting up their own schemes in order to learn by going ahead of the anticipated mandatory emissions reduction targets that will follow ratification of the Kyoto Protocol.

Historically, most trading has taken place in Canada. Last year, the Dutch got in on the act, and this year Point Carbon estimates most of the action will shift across the Atlantic. This shift reflects the EU's determination to ratify Kyoto and the political uncertainty surrounding climate change policies in North America. Consequently, the EU is beginning to offer the clearest picture of the eventual form of an international carbon trade market.

The scope of carbon trading is limited by the Kyoto protocol specifying, however vaguely, that parties will have to achieve a "significant" part of their emissions cuts from domestic measures such as renewables development and energy efficiency.

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