UK Leading Centre for Trading and Investment In Carbon Markets

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Carbon market is expected to be progressed through the pledge and review system based on individual country targets.

  • Global carbon markets declined in 2010 following five years of sustained growth
  • Key countries moving towards pledge and review system as prospect of multilateral agreement is decreasing
  • London-based ECX has accounted for over 96% of futures and options trading on
    EU ETS since 2009
  • ECX set to reach new high if emissions trading volumes in first half of 2011 are sustained in second half
  • UK is the leading investor in Clean Development Mechanism (CDM), purchasing a quarter of CDM projects, and is a key centre for raising equity finance

Trading in global carbon markets in fell by 2% to $141.1bn in 2010 from the 2009 high of $143.7bn. Volume of transactions also fell back to 7.3 billion tonnes (bnt) of CO2. Cap-and-trade allowance markets account for the bulk of activity, particularly the EU’s Emissions Trading Scheme (EU ETS), according to TheCityUK’s new Carbon Markets report. While the likelihood of a global agreement in the next few years has decreased, development of the carbon market is expected to be progressed through the pledge and review system based on individual country targets.

Allowance markets EU ETS dominates international activity in allowance-based markets and is the only scheme with binding commitments beyond 2012. Trading rose to 5.7bntCO2 in 2010. London-based European Climate Exchange (ECX) has accounted for over 96% of EU ETS exchange traded futures and options since 2009. Despite problems with fraud and phishing, market perceptions of EU ETS have been improving. EU ETS phase III starting in 2013 will see expansion of auctioning and extension into new sectors including aviation.

Trading in other markets, such as the Regional Greenhouse Gas Initiative (RGGI) and the Chicago Climate Exchange in the US, was affected by over-allocation of credits as well as receding prospects of federal legislation in the US.

Project market: Primary transactions in the Clean Development Mechanism (CDM) fell for the third successive year to 149 million tonnes (mt) of CO2 in 2010 from 245mt in 2009 and the peak of 552mt in 2007. Recession in advanced economies has reduced demand for offsets while supply continues to be constrained by delays in the CDM process. Restrictions on purchases of offsets in EU ETS Phase III will continue to constrain demand for offsets. China and India are the main location for CDM projects.

ECX trading in EU ETS and project markets reached 3.34bntCO2 contracts in the first half of 2011. If sustained at this level for the remainder of the year, trading in 2011 would exceed the 2010 high of 6.16bnt. Emissions trading by UK energy brokers was 2.94bnt in the year ending June 2010, only marginally less than 2.96bnt in the previous year.

Duncan McKenzie, Head of Research at TheCityUK, said, “Alongside the dominant position of ECX in the EU ETS and prominent role of energy brokers, the UK remains the leading investor in project-based transactions with 26% of CDM purchases. It is also a key centre for raising finance, with 115 LSE-listed cleantech companies having raised £10bn in equity issues.”

This press release, the Carbon Markets report and other publications from TheCityUK can all be downloaded from its website

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