Carbon Trading Market Undergoes Growing Pains

by | Sep 5, 2009

carbontradingAs carbon trading grows in the U.S. — estimated at a $60 billion market in 2012 — new products and business opportunities are expected to emerge including more forestry mitigation projects as carbon offsets, reports the Delta Farm Press. At the same time, the global carbon trading industry is faced with growing pains that have resulted in trading fraud and retention issues as companies hire employees from rival trading firms.

Jeffrey O’Hara, senior economist, Chicago Climate Exchange (CCX), told Delta Farm Press that as the carbon offset market grows beyond $60 billion, it will make forestry mitigation opportunities more important. CCX is currently North America’s only carbon and environmental derivatives exchange.

Forest offset participation recently gained credibility with the adoption of Version 3.0 of the Climate Action Reserve’s Forest Project Protocol and the release of the latest version of Germany’s CarbonFix Standard for afforestation and reforestation activities.

O’Hara also noted in the article that CCX is now trading 3,000 to 5,000 contracts per day, with 20 percent of the largest carbon dioxide-emitting utilities in the U.S. participating.

Although CCX volumes remained constrained in August due to uncertainty over the prospects of U.S. climate change legislation, the Chicago Climate Futures Exchange (CCFE) posted its second highest volume month with 154,150 contracts traded, for a 600 percent year-on-year increase, according to the London Stock Exchange’s monthly update.

The European Climate Exchange (ECX) also remained strong with 283,400 contracts in August, which translates into a 36 percent year-on-year increase, according to the monthly update.

However, several issues need to be resolved before forest offsets take a foothold in the carbon trading market. Christopher Galik, research coordinator, Climate Change Policy Partnership, Duke University, said in the article that forest offset participation in climate policy will be impacted by the resolution of several accounting issues, including additionality, baseline, leakage, and permanence.

David Miller, chief science officer, AgraGate Climate Credits Corporation, also noted in the article that a minimum of $4 per metric ton will be needed to get any value out of carbon credits. AgraGate is operating 14 different forest pools, each with specific characteristics.

Robert Grala, assistant professor of forest economics, Forestry Department, Mississippi State University, told Delta Farm Press that carbon markets are getting increased attention because of new income opportunities for landowners in addition to the income they can derive from timber.

In an example, cited by Grala, using a $4.25 carbon price, by managing loblolly pine for both timber and carbon sequestration, the landowner could derive an additional $300 per acre at 35 years, without having to make significant changes in management. If carbon prices were at $10 per ton, it could be as much as $500 more per acre at 35 years, he said.

In Europe, trading companies are faced with employee retention issues and potential fraud in the offset market.

Several trading companies including Gunvor and Mercuria are hiring personnel from rival firms to expand their carbon emissions desks, reports Reuters. As an example, Russian oil trading firm Gunvor International has hired Nyame de Groot, formerly vice president of emissions at Essent Trading, to work on its new emissions trading desk as part of a new global energy division, according to Reuters. Other former Essent Trading employees were also hired.

The recent announcement of “carousel” fraud in the European Union’s $90 billion emissions trading scheme has prompted the European Commission to propose a temporary solution later this month to stop tax fraud in the European carbon emissions market, reports Reuters.

However, experts are warning that a patchwork of unilateral actions by member states like the UK and France to prevent carousel fraud in spot trading of EU carbon permits could push the suspected activity into neighboring states, according to Reuters.

Stay Informed

Get E+E Leader Articles delivered via Newsletter right to your inbox!

Share This