The Stakes of Carbon Trading Are Losing Their Sizzle

NEW YORK -- Global carbon dioxide emissions offsetting markets are fast losing their luster in the minds of investors, both in the United States and abroad.

As governments around the world delay climate change legislation, offset project developers and traders on Wall Street and beyond say that they are rethinking their earlier enthusiasm for carbon markets. Money on hand is now being diverted, instead, to traditional clean energy plays as market players are taking a pause, waiting for signs that greenhouse gas offset credit trading will either rebound or slowly fade into nothing.

The steep recession of 2009 started the trend. Data show that prices for nearly every variety of offsetting credit plummeted sharply in value last year, including those generated by California's Climate Action Reserve, a system that most analysts believe will be folded into any U.S. federal carbon control regime.

Failure by governments to achieve a new, solid agreement on climate change at negotiations in Copenhagen last year added to the downward spiral. But far more damaging to the long-term viability of the market is a growing perception by the investment community that the U.S., Japanese, Australian and other governments are pulling away from adopting European-style cap-and-trade markets entirely. They appear to be switching instead to carbon tax schemes or other methods to bring greenhouse gas emissions under control.

Kristel Dorion, a developer with 10 years of experience putting together offset projects under the United Nations' Clean Development Mechanism (CDM), confirms that many in her industry are quickly shifting focus elsewhere. The pullback is especially noticeable in the CDM, the world's largest offset credit generation scheme, which produces Certified Emission Reductions (CERs). The CDM was created by the Kyoto Protocol treaty and allows investors to sell CERs to companies or governments in Europe, Japan and elsewhere.

American companies are pulling out

"The ones that are pulling out are all the American-based companies," she said. "The difference is that the European Union companies still believe in the CDM. The U.S. companies still don't know what to believe in."

Dorion herself is still optimistic. Last year, she established her own CDM active consulting company, EnergetixClimate, and she has three of her own projects waiting for CERs to be issued. She believes international emissions offsets trading is here to stay, but admits that many in the industry don't share that view.

The market is especially weak in the United States, where offset credit trading first began under voluntary schemes. The nation's first carbon credit, the Chicago Climate Exchange's Carbon Financial Instrument (CFI), is trading at just 10 cents per ton of CO2 equivalent today. Prices of other popularly traded U.S.-based carbon offsets, including credits certified under the Voluntary Carbon Standard and American Carbon Registry, have slid by more than 60 percent overall.

Analysts at World Energy Solutions, the Massachusetts-based energy trading firm behind the auctions of allowances in the Northeast's Regional Greenhouse Gas Initiative, confirm that activity is slowing. World Energy hosts auctions and over-the-counter trades in every popular offset credit instrument. Companies are still committed to lightening their environmental impact, they say, but seem to be pursuing other ways of doing it.

Overseas traders struggle with skepticism

Tuesday, for instance, World Energy announced that it had helped Adventist Health Care power seven of its facilities in Maryland and New Jersey with 10 percent renewable energy through an auction for power supply contracts. The company estimates that the procurement of this clean power equates to a carbon footprint reduction of 4,100 metric tons of emissions each year.

"For a lot of companies, this is really the easiest way to go green if you're looking to step into the market for the first time," said Kenneth Ivanic, vice president of environmental markets at World Energy.

Suppliers of offset credits are putting less up for sale as demand from corporate America has dwindled. "They don't really know what's happening," said Ivanic. "Whenever there is uncertainty, it tends to cause people to be slower to react or slower to do something while they're in that unknown part of the time period."

Overseas, experts say the European Union's Emission Trading System (ETS) will keep offsets trading from the CDM alive for some time. Even though skepticism is growing that international negotiators will ever come up with a replacement to the Kyoto Protocol to cover markets for 2013 and beyond, E.U. regulators have already written into law a place for CERs up to 2020, and no one expects Brussels to revise that legislation.

However, many agree that new CDM activity could effectively come to a halt in the coming months.

Wanted: traders with a long-term view

Analysts who have crunched the numbers say that there is currently enough supply in the CDM pipeline to meet demand for the next 10 years, given that the European Union is highly unlikely to boost its emissions reduction target of 20 percent below a 1990 baseline by 2020. To date, the CDM office in Bonn, Germany, says it has registered 2,080 separate projects, issuing more than 390 million CERs from about 700 of them. More than 2,000 projects sit in the pipeline awaiting approval.

As a result, new CDM projects that manage to earn CERs will find it very difficult to get their credits sold in the years ahead. The coming supply is more than enough to meet Europe's future needs, experts say.

"All the developers that are out there with their current portfolios in place, they're likely to be able to sell their credits because there's enough demand going forward," said Milo Sjardin, an analyst at Bloomberg New Energy Finance. "But anyone making new investments would be relatively non-sensible, because demand isn't going to be there."

EnergetixClimate's Dorion agrees that the CDM offset market is in a precarious state, but she is still confident that offsetting in one form or another will exist after 2020. Whether the system in place will be the CDM or not is an open question.

"The way I see it is you have to take a long-term view," said Dorian. "If you are in the CDM for the next three to four years, this may not be the market for you."