The international market for carbon emission reductions is growing at a fast pace. The total market was estimated at US$ 11 billions in 2005, growing to US$25 billions in 2006. The size of the primary market (i.e., that based on the origination of carbon credits) is expected to reach US$37 to US$50 billion per year during the 2008-2012 period. Estimates for the secondary market (i.e. subsequent transactions involving the same credits) are orders of magnitude higher. It can be expected that many emission reduction projects will now be financed using a combination of debt, equity and carbon finance. It can be expected, therefore, that the total investment leveraged by the sales of carbon credits should be much larger than the estimated size of the primary market for credits and that the amount of capital invested in developing countries because of carbon finance will be significant.
Source: Point Carbon, EcoSecurities
Background on Market Based Solutions
The first major environmental success of the emissions trading concept was demonstrated in the 1980's U.S. program to phase out lead from motor fuel. This was followed by the highly successful U.S. Environmental Protection Agency sulfur dioxide (SO2) emissions trading program, which continues to prove the concept on a large scale. To reduce acid rain, an overall cap on SO2 emissions was imposed on electric power plants. Power generators that find it expensive to cut sulfur emissions can buy allowances from those that make extraordinary cuts at low cost. While the first compliance year was 1995, trading started several years earlier. The first EPA auction was administered by the Chicago Board of Trade in 1993. Through private transactions and annual auctions, electric power generators trade emission allowances to arrive at an efficient use of mitigation resources.
The SO2 program has been extremely successful: emissions were reduced faster than required and costs are far below most forecasts. There has also been steady growth in the trading of allowances, from 700,000 tons of registered trades in 1995 to approximately 12 million tons in 2001. The market has now reached a value of approximately $2 billion each year for registered trades. Estimates suggest there are annually $2 billion a year in SO2 allowance derivatives such as options, forwards and other unregistered trades.
Application of flexible, market-based mechanisms for reducing greenhouse gas emissions has achieved widespread intellectual and political support. This broad acceptance of emissions trading was reflected in the Kyoto Protocol, which established several emissions trading mechanisms. Signatory countries to this treaty adopt legally binding commitments to reduce emissions to levels below those experienced in 1990.
Source: Chicago Climate Exchange