The international market in carbon credits has suffered an almost total collapse, with only $1.5bn (£916m) of credits traded last year - the lowest since the market opened in 2005, according to a report from the World Bank.
A fledgling market in greenhouse gas emissions in the US also declined, and only the European Union's internal market in carbon remained healthy, worth $120bn. However, leaked documents seen by the Guardian appear to show that even the EU's emissions trading system is in danger.
The international market in carbon credits was brought about under the Kyoto protocol, as a way of injecting much-needed investment into low-carbon technology in the developing world. Under the system, known as the clean development mechanism, projects such as windfarms or solar panels in developing countries are awarded carbon credits for every tonne of carbon avoided. These credits are bought by rich countries to count towards their emissions reduction targets.
From its start in 2005, when the Kyoto protocol finally came into force, to 2009 the system generated a total of $25bn for developing countries. But last year's $1.5bn was less even than the amount paid for credits in the first year of operation.
"This bodes very badly for the countries we are trying to help," said Andrew Steer, envoy for climate change at the World Bank. "The [carbon] market is failing us. It has done very good things in the past but it is not delivering what we feel is necessary."
If the poor performance continued, it would mean increasing greenhouse gas emissions, he predicted. "We are heading for a 3C or 4C world [temperature rise]."
Part of the problem is uncertainty over the future of the Kyoto protocol. The current provisions of the 1997 treaty, which took years to come into force because of wrangling among governments, are due to expire in 2012 and there is no agreement yet on a continuation.
The US refuses to take part in the treaty, and Russia, Japan and Canada said at the recent G8 meeting they would not continue under Kyoto.
The UN is now trying to ensure that the trade in credits continues even if the protocol is not renewed. Christiana Figueres, the UN's climate chief, said there was broad agreement among countries that carbon trading should continue, but said investors also needed to look beyond the carbon markets to ways of financing emissions reductions independently of the protocol – for instance through "green bonds" issued by governments or the World Bank.
Henry Derwent, chief executive of the International Emissions Trading Association, said the relative health of the EU's emissions trading system showed that carbon trading was still going strong. He pointed out that the total value of the carbon market was $142bn in 2010, of which 97% came from the EU. "That is 1.5% smaller than [the previous year] during a period of turmoil. That is no big deal," he said. "The carbon market is working – it is still quite a big thing."
The UN carbon market is deeply dependent on the European system, because European heavy industries are the biggest buyers of UN carbon credits, which they can use to top up their own carbon quotas.
But the future of the EU's emissions trading system (ETS) is also in doubt, according to leaked documents. If the EU meets its target of improving energy efficiency by 20% by 2020, then the price of carbon permits under its trading system is likely to fall dramatically. This will in turn make it less financially attractive for companies to invest in low-carbon technologies.
Under the EU system, energy-intensive companies are awarded a quota of carbon permits, each representing a tonne of CO2, and cleaner companies can sell their spares to big emitters. The current price of about €17 a tonne is regarded as too low to stimulate the investment in low-carbon technology envisaged under the system, however, and any further falls would remove even more of the incentive to clean up.
The UN carbon market is deeply dependent on the European system, because European heavy industries are the biggest buyers of UN carbon credits, which they can use to top up their own carbon quotas.
The European commission said: "Energy efficiency is key to reduce emissions. All energy efficiency measures are welcome. This said, we have to make sure that the energy measures are compatible with the ETS. This is why the commission proposed in the 2050 roadmap to recalibrate the ETS cap and set aside a number - to be determined - of [carbon] allowances for the next phase of the ETS from 2013 to 2020."
Ruth Davis, chief policy adviser at Greenpeace UK, said: "A small group of dirty companies have spent years trying to undermine the European emissions trading scheme - in the process netting billions of euros of free polllution permits. Now these same companies are arguing that Europe should 'rescue' the ETS by abandoning its energy-saving plans. With global climate pollution going through the roof, and the Arctic ice cap melting, only a lunatic would argue that now is the time to waste more energy. The only 'rescue package' the scheme needs is a new 30% emissions reduction target for the EU – a target supported by a a growing movement of Europe's biggest businesses and employers, including Unilever, Google, Ikea and Vodaphone."
