World’s carbon markets grow 34% in value to $215 billion in 2019 -report
Global carbon markets grew by 34% in 2019 to hit €194 billion ($215.1 bln) in value, according to analysts at Refinitiv, marking a third straight year of growth and a nearly fivefold increase in two years.
In a report published Wednesday, the company said the value of almost every major carbon market worldwide had increased markedly year-on-year, in spite of overall trading volumes dipping by some 370 million tonnes or 4% to 8.73 billion tonnes.
A surge in allowance prices in the EU ETS was the primary driver for the rise in global carbon markets’ value, with the average jumping by some €9 to near €25 between 2018 and 2019.
The European carbon market – the world’s largest by volume and value – rose in worth by 30% to €169 billion to make up by far the largest share of the global total, despite a 12% drop in traded EUA and EU Aviation Allowance (EUAA) volumes to 6.78 billion.
“The main driver for this increase was the Market Stability Reserve that came into effect in Jan. 2019, withholding a significant amount of allowances and tightening the supply side,” the analysts wrote.
“The Green Deal proposals of the new European Commission, and talk of reopening the 2030 emission target, also lent support,” they added, referring to the EU executive’s plans for a wide-ranging decarbonisation programme for the bloc and the proposal to increase the EU’s greenhouse gas cutting goal to 50% or 55% below 1990 levels by the end of this decade.
The analysts noted that the rise in EUAs came despite a drop in natural gas prices, which is expected to lead to lower emissions due to the fuel’s lesser CO2 output compared to coal.
Coal prices also fell last year, but less compared to gas, which translated into lower fuel-switching costs for European utilities. Additionally, renewable capacity increased significantly across the EU, while coal-fired output plummeted also because of domestic measures such as the UK’s carbon tax.
The EU ETS has grown by nearly 450% in value from €30.9 billion in 2017, with the surge also fuelled by new investors entering the market.
Breaking down last year’s numbers:
589 mln EUAs were auctioned (down 36% from 2018) for a total €14.5 bln (up 3% YoY)
82 bln EUAs were exchange-traded (down 3%) at a total value of €145.2 bln (up 43%)
360 mln EUAs were traded OTC (down 57%) at a total value of €9.1 bln (down 33%)
6 mln EUAAs were traded (unchanged) at a total value of €137 mln (up 32%)
Meanwhile, North America’s main two carbon markets – the Northeast US’ RGGI scheme and the California-Quebec linkage under WCI – when combined ranked second globally in volume and value at 1.67 billion metric tonnes and €22.37 billion ($24.79 billion) respectively, the report said.
Traded volumes in the sibling systems gained 49% YoY, while their value soared by 74% to make up a 12% share of the global total.
“Both the WCI and RGGI are operating under expectations of a significantly tighter market next year, as they enter a new trading period with more ambitious caps from 2021,” the analysts wrote.
Examining the figures, WCI saw over 1.3 bln tonnes change hands with a total market value of $23 billion, while RGGI recorded volume of 323 mln short tons (293 metric tonnes) for a total value of $1.8 bln.
Allowance prices in WCI rose over the first half of the year, spurred by speculative buying following an oversubscribed February auction to peak at nearly $19 in early May, just before the year’s second primary market sale.
They then receded in the second half on numerous bearish factors, the analysts said, including falling power sector emissions in California and lower-than-expected fuel consumption.
A lawsuit filed by the US Department of Justice in October against the state’s market link with Quebec under WCI also didn’t help sentiment, the report added.
In the power sector-only RGGI market, prices mirrored those of WCI to peak in May and fall after that, also on signs of weakened demand.
However, sentiment picked up ahead of New Jersey rejoining the scheme this month, with prices also influenced by the upcoming 2021 launch and $6 starting trigger level of the price-supporting Emissions Containment Reserve (ECR).
RGGI and WCI’s combined value has jumped from €9.2 billion in 2017, while traded volumes have almost doubled from 923 mln metric tonnes over that time.
The North American figures did not include the existing, smaller emissions trading schemes such as those in Massachusetts, Alberta, or Nova Scotia.
Breaking down last year’s numbers:
In WCI, 1.38 bln tonnes were traded (up 56%) at a total value of €20.7 bln (up 76%)
In RGGI, 293 mln metric tonnes were traded (up 23%) at a total value of €1.63 bln (up 47%)
Across the Pacific, most companies in China are focussed on the anticipated launch of country’s long-awaited national ETS later this year – a market poised to become the world’s biggest.
“Intense preparations have been taking place in 2019 to get the market’s rules in place and the participants ready so that trading can start in 2020,” the analysts wrote.
“After the release of several draft policy documents last year, the authorities are set to publish the final legislation early this year. We expect a detailed regulatory framework for the national ETS to be released in Q1 2020 and actual trading to start in Q3 2020.”
The national ETS will cover 1,700 entities in the power sector that collectively emitted roughly 4.5 billion tonnes of CO2 in 2019, the analysts said, adding that they expect allowances in the Chinese market to be initially priced around €10/tonne.
The government intends to expand the scheme to cover eight industrial sectors by 2025.
In the short term, China’s nine existing regional pilot schemes – all of which cover some non-power sectors – will continue to operate in parallel to the national market, as the power sector emissions will be covered by the national scheme.
Eight of the regional markets collectively saw trading of 136 Mt worth a total €272 mln. Those figures were up respectively by 35% and 40%, with the carbon markets combining to account for around 1.6% of global GHG trading volumes and just 0.1% of the total value.
Refinitiv did not report numbers for Sichuan’s ETS.
Guandong was by far the largest in traded volume at 45.4 Mt allowances (up 60% YoY), with Shenzhen a distant second at 14.6 Mt (up 14%).
Guandong’s market was also worth the most of the eight at €111.1 mln (up 142% YoY) based on an average allowance price of €2.45 (up 51%).
“We attribute this sharp climb in trading and prices to policies released in 2019,” the analysts said, pointing to a futures exchange in provincial capital Guangzhou that was initiated by a regional development plan for the Guangdong-Hong Kong-Macau Greater Bay Area released last February.
“The favourable investing environment attracted liquidity providers, which in turn led to an increase in the number of transactions involving financial products such as carbon repo deals and futures – those accounted for 18% of the total traded volume in Guangdong in 2019.”
Beijing’s ETS ranked second in value at €55.3 mln, but that was based on just 7 Mt trading at an average price of €7.81/tonne – the highest cost across the eight schemes.
In terms of market growth, Chongqing’s tiny market saw the largest YoY rise in both volume and value. Traded tonnes grew by 370% to 1.27 Mt, while the value climbed by 1654% to €2.68 mln and the price by 273% to a mean €2.12.
Overall, the eight markets experienced a 28% increase in allowance trading to 92.9 Mt, a 40% rise in value to €271.9 mln, and a 9.9% increase in average price to €2.93/tonne.
“With increased certainty that allowances of the pilots will not be valid under the national ETS, regional authorities sought to reduce surplus allowances in their programmes with more tightening, and this was typically done by adopting tougher benchmarks and/or tougher emission reduction factors,” the report said.
This contributed to YoY price rises across nearly all most the schemes, though that in turn led to fewer participants in some markets, causing a drop in volumes.
And in the background, trade in Chinese CER offsets (CCERs) continued, with volumes rising 40% YoY to 43 mln – an increase partially linked to the May 2018 resumption of the country’s CCER market, ending a 14-month suspension, despite the ongoing halt in project registrations and credit issuances.
Shanghai continued to have the most active offset market, transacting nearly 15 mln CCERs last year to account for 35% of total volume across all the pilots.
Sichuan saw almost 12 Mt, and Guangdong around 9 mln. Chongqing and Tianjin did not see any CCER trading in 2019.
Only the Shanghai, Beijing, and Sichuan exchanges disclose CCER prices, with last year seeing a range from €0.80 to €3.50.
By the end of 2019, some 2,871 Chinese offset projects have been made public for review and 1,104 have been registered, and CCERs have been issued to 358 projects.
“Since the regulator started issuing CCERs in 2014, around 73 million have been issued. Certification reports are available for 291 of those, showing that they collectively represent 59 million tonnes CO2 equivalent,” the analysts wrote.
“The reports indicate that wind, small-scale hydro, solar PV, and household biogas projects are most popular – this is due in part to the offset rules for CCERs in the pilot carbon markets.”
The South Korean ETS was the only major carbon market to diminish in value last year, falling 4% to €373 mln as a drop in volumes outweighed the effect of rising prices.
Permits in the scheme rose in value due to a tightening in supply linked to emitters’ unwillingness to sell their spare units.
“The Korean carbon market is over-allocated, but only very few allowances were in circulation as Korea’s industrial entities are banking KAUs ahead of next year’s compliance deadline,” Refinitiv said.
The benchmark KAU-19 contract increased by 70% to nearly KRW 41,000 (€31.70) in late 2019, making the allowances the most expensive of any major carbon market worldwide.
Almost 17 mln allowances and offsets changed hands in Korean ETS throughout 2019 – a 23% drop on the previous year.
The government is attempting to address the price hike by forcing emitters holding a significant surplus to sell rather than continuing to bank them, though the effects of these policies have been minimal so far.
South Korea also plans to tighten the market’s rules in the third phase of the KETS from 2021-25 by reducing annual allocation by 4% compared to the current 2018-20 phase, and increasing the share of KAUs it auctions to 10% from 3%.
“These prospects send a bullish signal to the market, which is already seeing record-high prices due to a lack of permits in circulation,” the analysts said.
“We expect prices for KETS allowances and offsets to stay high in 2020, due to the existing shortage of available units and expectations of a tighter market,” they added.
“But decreasing energy-related emissions (as a result of lower power demand and increased nuclear power generation) forecast for 2019 and 2020 could dampen the price growth by the end of this year.”
To the south, New Zealand saw ETS trading of 119 Mt in 2019, worth a total €1.75 bln, Refintiv said. However, those numbers are likely reflecting transfers of NZUs rather than actual trades.
Prices stayed above the programme’s fixed price option of NZ$25 (€14.90) for most of the year because participants expected the government to announce major reforms to the ETS that would tighten the market – an announcement that eventually came last month and caused NZU prices to immediately surge by 15%.
“We expect the prospect of a tighter market to keep sending bullish signals to the market in 2020,” Refinitiv said.
Elsewhere, trade in offsets under the Kyoto Protocol’s Clean Development Mechanism (CDM) remained muted in 2019, with just 8 mln CERs changing hands on the primary market at a total value of €39 mln. That compares to 8 Mt worth €30 mln done in 2018.
On the secondary market, CER volumes were softer at 3.4 Mt worth €700,000 – marking respective falls of 4 Mt and €1.3 mln from 2018.
“Roughly half of the CERs cancelled in 2019 were applied toward compliance to the Korean ETS as offsets and to Colombia’s carbon tax in lieu of that country’s $5/t payment requirement. The rest satisfied corporate social responsibility (CSR) goals of voluntary buyers in various other countries,” the report said.
And at around €0.20-0.25, prices for CERs in the EU ETS also remain depressed and near their record lows due to non-existent demand from emitters.
Source: Cabron Pulse
Author: Mike Szabo
Date: January 22, 2020