“The total value of the carbon market grew by 11 percent in 2011, to $176 billion”, the World Bank announced this week. The occasion was the launch of the Bank’s “State and Trends of the Carbon Market 2012”. But as Oscar Reyes notes, the carbon market growth is “more spin than substance”.
The World Bank has a great deal invested in carbon markets. At a time when companies are laying off carbon traders, the World Bank has 200 full-time staff working on carbon markets. It has 15 carbon funds, worth a total of almost US$2.4 billion. The Bank claims that these funds, “have demonstrated the role market instruments can play in supporting cost-effective emission reductions and channeling mitigation finance to developing countries.”
So when the World Bank announces that carbon markets have reached an all time high of US$176 billion, it’s worth taking a closer look at the figures. Oscar Reyes points out that “The largest proportion of the ‘carbon market growth’ is accounted for by a change in how the World Bank counts the figures”. In a footnote, the Bank’s glossy new report tells us that it has changed the methodology used to calculate the value and volume of carbon trades. The explanation of the new methodology is tucked away on page 124 of the report (between the Annexes and the Acknowledgements):
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.
The carbon market did grow slightly between 2010 and 2011 with most of the increase coming from the EU Emissions Trading Scheme. But a large part of this is the result of an increase in hedging and speculative trades. “Trading volumes soared in 2011… A considerable portion of the trades is primarily motivated by hedging, portfolio adjustments, profit taking, and arbitrage,” the Bank’s report notes.
The Bank’s spin about a growing carbon market is part of an attempt to deflect attention from the shrinking primary Clean Development Mechanism market. This is the market for carbon credits bought from CDM projects, excluding the speculative further trading of these credits. In 2011, this market fell to US$990 million, the lowest since 2004:
The primary market for pre-2013 Kyoto offsets continued to decline in 2011. The volume of primary CERs (pCERs) [Certified Emission Reductions] contracted fell 27% year on year (yoy) to approximately 91 million tons of carbon dioxide equivalent (tCO2e). As a result, the total value of the primary CDM market fell by 32% yoy to US$ 990 million (€711 million).
As a graphic, things don’t look too good for the CDM:
So, the Bank massages these numbers by adding in nearly US$2 billion for forward pCERs. The Bank’s press release explains that,
“With the end of the first commitment period of the Kyoto Protocol in 2012, the value of the pre-2013 primary CER [Certified Emission Reduction], ERU [Emission Reduction Unit] and AAU [Assigned Amount Unit] markets declined once again in 2011. Not surprisingly, however, the market is starting to look beyond 2012 and consequently the post-2012 primary CDM market increased by a robust 63 percent, to US$2 billion, despite depressed prices and limited long-term-visibility.”
These are “call options on credits that are not yet issued,” Reyes explains. “Put simply, it’s counting an option to buy a credit that does not yet exist as part of the value of the CDM.” These are called ERPAs (Emission Reductions Purchase Agreements) and the Bank admits that at current price levels it’s unlikely that these options will be taken up:
“[W]ithout 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.”
There’s a great deal of useful information in the World Bank’s report. The problem is the spin. The World Bank is not an honest broker. It has invested way too much in carbon markets to be able to pretend that this is anything like a neutral analysis. It is a Bank attempting to boost a sector that it stands to benefit from.
But the signs are clear to read – not only in the report’s text. The report’s cover is a staircase spiralling down and down to a small blue circle. By the time we’ve reached the bottom, it’s a long climb back. The first photograph in the report is a road going straight through a desert into the setting sun. It could, of course, be a sunrise and the image is full of the symbolism of a new dawn, but to me it looks like the Bank is inadvertently confirming that this is a report about the sunset of the carbon markets.