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Carbon Market

Carbon offset markets exist both under compliance schemes and as voluntary programs. Compliance markets are created and regulated by mandatory regional, national, and international carbon reduction regimes, such as the Kyoto Protocol and the European Union’s Emissions Trading Scheme. A voluntary carbon market functions outside of the compliance markets, enabling companies and individuals to purchase carbon offsets on a voluntary basis.


In January 2005 the European Union GHG Emission Trading Scheme (EU ETS) started operation as the largest multi-country, multi-sector GHG trading system worldwide. Until now, it is the world‘s most advanced emissions trading system. The EU ETS is implemented as a cap-and-trade system. An aggregate limit (cap) on the amount of a pollutant that can be emitted is established. After a first phase of the EU ETS, which ran from 2005 to 2007 and which was aimed at gaining experience with this new instrument, the second phase (2008 to 2012) is ongoing. Currently, European regulators, notably the European Commission, are focusing on designing the rules for the third trading phase, which runs from 2013 to 2020.


The Carbon Market has been steadily increasing in recent years via the Carbon Trading. Yet even as global GDP declined by 0.6% in 2009, and at a more perilous rate of 3.2% in industrialized economies, the carbon market demonstrated resilience. The total value of the market grew 6% to US$144 billion (€103 billion) by end 2009 with 8.7 billion tCO2e traded. According to the World Bank's Carbon Finance Unit, 374 million metric tones of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e).


In terms of US dollars, Felipe de Jesus Garduño Vazquez using the World Bank has estimated that the size of the carbon market was $11 billion  in 2005, 30 $billion in 2006, and $64  billion in 2007.


EU ETS remained the engine of the carbon market. A total of $119 billion (€89 billion) worth of allowances and derivatives changed hands. Futures trades continued to account for the bulk of transactions with a 73% share, while spot market volume swelled to 1.4 billion tons as cash-strapped EU companies monetized allowances to raise funds in a tight credit environment. Sophistication also increased in the options market, which grew 70% to 420 million tons. However, trading volume in the secondary market for Kyoto offsets leveled off at one billion tons and value fell by one third to $18 billion (€13 billion) as prices declined. Taking into account what was contracted through 2009, the estimated residual (net) demand for Kyoto assets over the next three years is 230 MtCO2e, virtually all of which is attributable to European governments.


In the United States, the Regional Greenhouse Gas Initiative (RGGI) grew almost 10-fold to $2.2 billion (€1.6 billion) in expectation of federal carbon regulation; it now appears unlikely that such regulation will emerge anytime soon. To make matters worse, Australia’s effort to develop a national scheme has stalled. These challenges, combined with more limiting import rules under Phase III of the EU ETS, threaten to erode the long-term interest of major actors in carbon finance despite the strong support of developing countries for the Kyoto mechanisms.