Carbon Expo 2006: In spite of EU volatility, experts conclude that CO2 market is maturing

May 23, 2006—In spite of the downward trend in prices of carbon commodities in the European market in recent weeks, government officials, private sector brokers, traders, and market specialists concluded at the end of Carbon EXPO 2006, held May 10 – 12 in Cologne, that the global market is maturing and is here to stay and grow.

According to Warren Evans, World Bank Environment Director, “We now have a global market of US $10 billion dollars,” and added, “the strong price signals in the European Union market in 2005 raised expectations in the project-based markets as well. The carbon market has created an important flow of private and public capital to climate-friendly technologies in developing countries, which contributes to sustainable development.”

The sixth annual World Bank carbon market intelligence study, (State of the Carbon Market 2006) released at Carbon EXPO 2006, shows a dramatic growth in the global carbon market, led by strong activity in the European Union’s pilot Emissions Trading Scheme (EU ETS). The report, which covers the period from January 1, 2005 to March 31, 2006, records a booming global market worth over US $10 billion in 2005 – ten times the value of the previous year.

The sixth annual World Bank carbon market intelligence study -- the State of the Carbon Market 2006 -- launched at Carbon EXPO 2006, records a booming global carbon market worth over US $10 billion in 2005 – ten times the value of the previous year, led by strong activity in the European Union’s pilot Emissions Trading Scheme (EU ETS)

“To put that figure in perspective, the entire U.S wheat crop in 2005 was valued at about US$7.1 billion,” says Karan Capoor, Senior Financial Specialist, World Bank and main author of the State of the Carbon Market 2006 report. He added, “The data makes it clear that carbon is now a financial commodity. Carbon is now priced and business managers take the carbon price into consideration along with other factors in making business decisions. But like other financial commodities, the events of the last two weeks in the EU ETS shows that markets can be volatile.”

Capoor was referring to the fact that the price of carbon credits in the European Union recently dropped to a 12-month low, after several European countries reported that their 2005 emissions were below quota, dampening demand for carbon credits.

The 2006 Report shows explosive growth in allowance markets, making them, for the second year in a row, the main driver of growth of the market. European Union trades dominated the carbon market in terms of value – 75 percent in 2005. But almost half of the total volume of greenhouse gas (GHG) emission reductions came from the developing world, making developing countries meaningful participants in the drive to reduce climate altering greenhouse gases on the earth.

Looking at future trends, the report emphasizes that, “the prospects for the project-based market are quite solid, provided the EU does not erect any barriers limiting entry for CDM and JI imports for phase II (2008-2012).”

The view from developing countries

With regards to the Clean Development Mechanism (CDM) of the Kyoto Protocol, which allows industrial nations to buy carbon emissions reductions in developing countries to comply with their targets at home, Roberto Urquiza, Deputy Minister of Environment from Ecuador, said “It is necessary to remove barriers for a more equitable distribution of CDM resources.” He stressed the need for broader participation of small developing countries in CDM projects, “by integrating carbon finance in new sectors, including energy efficiency and the forest sector.”

According to the South American official, the trend in the allocation of resources is following the same trend of Foreign Direct Investments (FDI), which has emerging markets such as China, India, and Brazil as its preferred destination.

Warren Evans, World Bank Director of Environment, presents Jorge Mario Rodriguez, Executive Director of FONAFIFO (Fondo Nacional de Financiamiento Forestal), with a plaque commemorating the signature of the Emission Reductions Purchase Agreement (ERPA) between the Bank and FONAFIFO for a Payment for Environmental Services program to farmers and rural communities in Costa Rica.

That is leaving countries, many of them on the African continent, fighting for a toehold in the carbon market. A number of them showed their carbon wares at Carbon EXPO, including Uganda. Godfrey Ssemakula is Assistant Director Uganda Investment Authority. “As far as Uganda is concerned, Carbon EXPO is a huge success. We brought 18 projects that cut across sectors – energy, landfill, co-generation – and got a lot of interest from buyers,” said Ssemakula. “If we could turn all these 18 projects into deals, it would be meaningful to Uganda. But the real challenge is the underlying finance for the projects.”

Andrei Marcu, President & CEO, International Emissions Trading Association (IETA), is confident about market prospects. “We will see the market mature, including the European market. The CDM is maturing; it is beginning to deliver results.” However he warned that, “soon we will be seeing the uncertainty of not having a clear direction after 2012 [the date the Kyoto Protocol is set to expire].”

Looking at the reality of Africa, Kivutha Kibwama, Head of the UN Climate Change Conference that is to take place in Nairobi in November, said, “With only two percent of the market, we are at a very early stage. For Africa to be engaged, we need assistance in awareness raising on available opportunities this market is bringing. We need to find backers to provide finance in order to make the initial preparation of projects a reality.”

Carbon EXPO goes to China

More than 2000 participants from 94 countries took part in the 2006 version of Carbon EXPO, organized by The World Bank, the International Emissions Trading Association (IETA), and Koelnmesse. The exhibition space increased by 50 percent over last year, with 187 exhibitors from 50 countries – once again proving its value as a multilateral knowledge and learning experience. High level government representatives from 25 developing countries, invited by the World Bank, attended the Conference

More than 2000 participants from 94 countries took part in Carbon EXPO 2006, organized by The World Bank, the International Emissions Trading Association (IETA), and Koelnmesse. The exhibition space increased by 50 percent over last year, with 187 exhibitors from 50 countries.

The success of Carbon EXPO is now expanding regionally. Following three years of success in Cologne, the partners of CARBON EXPO – The World Bank, IETA, and Koelnmesse – have announced Carbon EXPO ASIA, which will take place in Beijing in China, October 26 – 27, 2006.

China, which participated in Carbon EXPO 2006, sees the fair as a valuable tool for showcasing the CDM and emission reductions. “Carbon EXPO is a bridge between developing countries and developed countries in terms of participating in CDM activities,” said Gao Guangsheng, Director General for China’s Office of National Coordination Committee for Climate Change, National Development and Reform Commission. He added, “It contributes greatly to CDM development in China.”

According to reports from participants in Carbon EXPO, more than 200 greenhouse gas emission reductions projects from developing countries were presented and a series of contracts for the purchase of emissions rights were concluded or initiated.