31 May 2012

World Bank State and Trends of the Carbon Market 2012: market growth is more spin than substance

The World Bank's annual State and Trends of the Carbon Market report is out, and can be found here:

It's a very useful source of data which, like all WB stuff, needs to be treated with caution. The spin is all about a growing carbon market, rising to $176 billion, an 11% increase on the previous year's figures for 2010. (see, for example, how Reuters picked it up) However, it is worth noting that :
  • The largest proportion of the "carbon market growth" is accounted for by a change in how the World Bank counts the figures, the explanation for which is buried in an annex: “Instead of using external data, however, in 2012 the authors calculated the volumes and values for 2010... . The calculation resulted in higher volumes and values, particularly for EUA and secondary CER transactions. Instead of the global carbon market of US$142 billion reported in 2010, the revised calculations resulted in a global carbon market that is greater by about US$17 billion year on year (yoy). A higher value in the EUA market accounted for about US$14 billion, 80% of the difference. This year’s calculation also resulted in a secondary CER market greater by US$2 billion in 2010 yoy. The remaining differ- ence is explained by the value of the post-2012 CER transactions, not reported last year, which reached over US$1 billion in 2010. ” (p.124) 
  • That said, the market still grew a bit, and the reason given for that is a rise in hedging and speculative trades: “Trading volumes soared in 2011, coinciding with the second decline in verified emissions in three years. A considerable portion of the trades is primarily motivated by hedging, portfolio adjustments, profit taking, and arbitrage." (there's quite a useful box explaining this around p.39) 
  • It's also worth noticing that the Bank has massaged the figures to overcome the embarrassment of a shrinking CDM Last year's "primary" CDM market (ie. the value of the credits generated by projects; rather than the cumulative value of further trading in these credits) was $900 million, the lowest ever (comparisons below - figures in US$billions) 
  • The Bank then boosts this figure by adding another $1.9 billion for forward pCER post-2012" value - "call options" on credits that are not yet issued. Put simply, it's counting an option to buy a credit that does not yet exist as part of the value of the CDM. A lot of carbon is actually traded this way, although the press doesn't exactly get very far in explaining this. But the real massaging of the figures is revealed here (p.49) : “without a brighter market outlook, it is unlikely that a substantial proportion of these post-2012 ERPAs will be exercised at the indicative prices and volumes established in these documents. ” (ie. the figures written to Emissions Reduction Purchase Agreements, which are the basis for this $1.9 billion, would generally - I'd wager almost exclusively - mean that options would not be taken up with CDM credits going for less than €3.50 per ton, as at present). 
  • With the CDM, too, the story is one of greater financialisation. The biggest trade in CDM credits passes through the UK and Switzerland (where a lot of the financial intermediaries are based "Entities in the UK transacted the largest share, accounting for 47Mt or 39% of pre-2013 pCERs and 44Mt or 26% of post-2012 pCERs. The primary catalyst for this was the high concentration of buyers in the UK. However, a large portion of these vol-umes are known to be redistributed upon deliv-ery. Switzerland had a robust increase in 2010 and in 2011 in both pre-2013 and post-2012 markets compared to previous years. The Swiss market share came right after the UK, for the same reasons as the latter." (p.55)

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