Carbon Expo: Waiting for the great leap forward?

Day 1 of Carbon Expo in Cologne and delegates were told – as reported by the World Bank in its now annual State and Trends of the Carbon Market report – that the market is long – and likely to be long for some time. In other words, all the talk about new market mechanisms is just a sideshow to the reality that – as it currently stands – the global carbon market just doesn't have enough demand to match global supply. 

And yet supply keeps coming. Every second person one talks to here in Cologne is developing a ‘POA' (Program of Activities*) – cook stoves, lightbulbs, large-scale wind, biomass, biogas and many other so-called programmatic CDM projects that are seen as a key way to scaling-up climate mitigation activities in developing countries – hoping to make the December 31 deadline in order to be able to sell unrestricted into the EU Emissions Trading Scheme. 

But it's not a case of information asymmetry in face of declining demand in the market.

Rather it's clear that market participants still firmly believe in the long-term fundamentals around carbon markets: that climate change is a global problem; that countries will continue to implement policies and targets to reduce greenhouse gas emissions; and that market-based approaches such as emissions trading will continue to be a key part of these policy responses. The belief is strong even though the markets may require some fixing and correcting from time to time – as an IETA survey announced here in Cologne revealed: four out of six market experts are in favour of market intervention to manage the demand/supply imbalance. 

And there are real signs to back this leap of faith by the market. Not just an 11 per cent growth in carbon market value over the last 12 months – as reported by the World Bank's State and Trends report – but also a growing list of regions beyond the EU, Australia and New Zealand aiming to put in place emissions trading: California and China with its 7 pilot schemes ahead of a national scheme in 2015; but also now Quebec, South Korea and Mexico. While the market might have run further ahead of the policymakers, there is a strong sense here in Cologne that with these various announcements they are quickly catching up.

One interesting perspective for Australia is that while China has supplied most of the carbon market to date, it seems pretty clear that this supply will all be internalised under its planned domestic trading scheme and so supply is shifting to new markets that have been under-represented so far. 

Here we see that Africa is emerging as a new carbon frontier, particularly around programmatic CDM.  Rather than CERs coming into Australia bearing a ‘Made in China' stamp, we're more likely to see CERs supplied from many middle to low-income countries across Africa – typically with a very strong social development dividend. How Australian companies position themselves to access these changing supply markets remains to be seen, but things will certainly look quite different in 2015 than they do now.

So while no one is prepared to give up entirely on the international process to see the market through the next few years, it's clear here in Cologne that the carbon market is increasingly focused on various bottom-up approaches. 

Anecdotally, there seemed to be a general consensus among conference attendees that it is better to have a fragmented market, than no market at all – and that the only way forward is to continue navigating through a matrix of sectoral, national, plurilateral and regional efforts rather than waiting for the great leap forward.

Let's see if people still feel the same way after Day 2….

* A POA is a way of earning CDM credits through implementing lots of small abatement projects involving the same type of equipment such as rolling out energy efficient light bulbs in large numbers of houses or small biogas stoves in villages.

Paul Curnow, Partner at Baker & McKenzie. Megan Flynn and Lachlan Tait are both associates at Baker & McKenzie.