New statistics have revealed that the global carbon market contracted 38% in 2013 as prices and volumes dropped. There is, however, strong growth in the North American emission markets.

The Chinese pilot trading schemes show substantial progress with Europe continuing to decline – but still dominates the global market. 

Global carbon markets traded a total €38.4 bn worth of allowances and credits during 2013, a 38% decrease from the €62bn the previous year, in a continuation of the decline that started after the market peaked at €96bn in 2011. Since then, the key European reference price of emissions has fallen from €18 to €5 per tonne of carbon dioxide.

Last year also saw a decrease in terms of volumes – from 10.7 billion to 9.2 billion emission units – the first drop in traded volumes since 2010, according to analysis published today by Thomson Reuters Point Carbon.

The decline is most dramatic for the UN-led ‘flexible mechanisms’ that were created to incentivise emission abatement investments such as renewable energy in developing countries. Until recently, these markets – known as CDM and JI – accounted for roughly 20% of the volume and 10% of the value of the world’s carbon markets. After prices collapsed from 2012 to 2013, they now represent only 7% of volume and 1% of value.

“The main explanation for the falling prices in carbon markets around the world is the very modest emission reduction targets adopted for the period up to 2020. Without ambitious climate targets there is no need for deep emission reductions and carbon prices will remain at low levels. However, if the goal to limit global warming to two degrees shall be met, more dramatic cuts are needed over the next decades. The international negotiations towards a new climate agreement scheduled to be adopted in Paris in 2015 will be a litmus test on the political willingness among large emitters to make the required emission reductions”, says Anders Nordeng, Senior Carbon Analyst at Thomson Reuters Point Carbon and co-editor of the report.

With a share of 88% of volume and 94% of value, the European Emission Trading System (EU ETS) continues to completely dominate the world of emission trading. In this market the whole of 2013 was marked by the political debate on whether or not to intervene in the market in order to address the massive oversupply of allowances. 

Emerging carbon markets witnessed more positive developments during 2013 however. The only segment to have seen a growth in volume and value last year was the North American market, driven by trade in California, and by the resurrection of emission trading in the North-Eastern states. “2013 was the year the North American carbon markets blossomed”, said Olga Chistyakova, senior analyst of the North American market, adding that in the Western Climate Initiative (WCI) that encompasses California and Québec, carbon allowance and offset prices are now the highest in the world, with the allowance price floor of $10.71/t (approximately €7.8) in 2013.

Another source of growth is the new pilot emission trading schemes in China, which launched the first of seven regional trading schemes in June, five of which are now operational. Although the traded volumes are still modest, the sheer size of some of the covered provinces and cities (Guangdong, Beijing, Shanghai), points to a great potential. The latest of the regional schemes, Tianjin, was launched on 26 December.

Shenzhen – albeit the smallest in terms of cap – has witnessed the most active secondary trading (not counting the initial auctions) among the five pilots.  “Shenzhen allows private investors to trade, a feature that distinguishes the city’s scheme from most of the other pilot markets”, explained Hongliang Chai, analyst of China’s emission market.