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Global carbon trading market triples to $30b

Mark Milner

Carbon trading is seen as a market-based alternative to either direct taxation or a "command and control" approach.

THE GLOBAL market in carbon trading tripled last year to $30 billion but its role in the battle against climate change could be hit by worries about the effectiveness of unregulated carbon offset projects, the World Bank warned on Wednesday.

The bulk of carbon trading, some $25 billion, was carried out through the sale of allowances under the European Union's emissions trading scheme — which covers industries pumping out large amounts of carbon dioxide — according to the bank's seventh annual carbon market intelligence study which was published on Wednesday.

Officially-backed carbon offset projects, where, under the Kyoto agreement, companies and countries can invest in emission reduction schemes in developing countries and economies in transition, doubled to $5 billion, the report said.

The World Bank also estimated that carbon purchases have raised $14 billion in "associated investments" supporting clean energy in developing countries since 2002.

"These numbers are relevant because they demonstrate that the carbon market has become a valuable catalyst for leveraging substantial financial flows for clean energy in developing countries," Warren Evans, the World Bank's director of environment said.

"The greenhouse gas markets continued to grow and mature in 2006," Jack Cogen, president of Natsource LLC, an emissions and renewable energy asset management firm, said. "In 2006 we saw growing activity in this asset class not only from industrial companies, but also from newer participants, like commercial firms, banks and financial institutions that recognise the attractiveness of this market for managing risks and earning returns on capital."

Carbon trading is seen as a market-based alternative to either direct taxation or a "command and control" approach that would directly impose emission limits.

However the EU's emission trading scheme, has come in for criticism because allowances under the initial phase proved too generous, causing a fall in the carbon price, offering little incentive to cut emissions. Allocations have been toughened for the second phase, which runs from 2008 to 2012. Supporters believe the new levels will make the system more effective and that the European model could provide the hub of a global carbon trading mechanism in coming years.

As well as reducing emissions in developed economies, policymakers are hopeful that carbon trading will help provide the finance to clean up heavy industry in poor countries where economic expansion is set to increase emission levels.

The World Bank cautioned that moves in carbon offsets outside the regulated "cap and trade" systems could pose a threat to the development of the overall market.

There has been growing criticism that schemes where companies or individuals seek to offset their emissions by investing in projects to cut emissions elsewhere, are either not delivering or funding developments that would have been financed anyway. Critics say that the system needs a greater degree of standardisation.

The World Bank said that on some estimates voluntary carbon offset schemes could rise to 400 million tonnes by 2010. It added: "This high potential voluntary sector, however, lacks a generally acceptable standard, which remains a significant reputation risk not only to its own prospects, but also to the rest of the market, including segments of regulated emissions trading and project offsets."

The concern was underlined by Yvo de Boer, head of the U.N. Climate Change secretariat. He said the official clean development programme (CDM) was working well but some analysis of the scheme was failing to differentiate between the highly regulated CDM and a growing number of unregulated or self regulated enterprises. "Some confusion can be expected, but some analysis of the CDM has dangerously missed the mark."

— © Guardian Newspapers Limited 2007

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