The Worldwatch Institute released a report today singing the praises of carbon trading and carbon markets. The report puts the global carbon trading business up 80 percent from 2006 to $59.2 billion in traded credits. While this growth is extremely encouraging, these numbers need to be put in context.
The report cites the European Union’s Emission Trading Scheme (EU-ETS) as the poster child of carbon trading systems, which for most intents and purposes it is. Worldwatch puts the importance of the EU-ETS this way:
With the EU-ETS, the European Union expects to meet its Kyoto targets for $4.3 billion–5.4 billion annually, an amount equivalent to less than 0.1 percent of the region’s gross domestic product. Without the EU-ETS, compliance costs would be about twice as high.
However, just last week, the EU proposed a new climate plan that is estimated to cost the region $80 billion a year, or about 0.5 percent of their GDP. The plan calls for the EU-ETS to enter its second phase and will include the auction of permits as well as the inclusion of new business sectors in the ETS but that is an ambitious jump for the nascent carbon trading market.
While the European numbers might seem daunting, they throw America’s own carbon trading endeavors into sharp relief. Where the European Climate Exchange (ECX) traded over 1.1 billion tons of carbon credits in 2006, back home the Chicago Climate Exchange (CCX) did a meager 10.3 million tons of business. Now, it is crucial to note that the ECX is facilitated by transnational legislation while the CCX is an entirely voluntary market, but that is still an amazingly large gap.
The report notes other potential problems through carbon trading differentials. The Kyoto Protocol allows industrialized nations to generate carbon credits through “flexibility mechanisms.” These include the Clean Development Mechanisms (CDM), where developed nations earn credits by investing in clean development projects in the developing world, and the Joint Implementation (JI) program, which is primarily aimed at getting Europe to help reverse the polluting ways of the ex-Soviet bloc countries.
These two programs generated nearly half a billion tons of carbon credits in 2006 but the actual carbon-reducing value of the credits has been called into question. With little regulation watching these far flung CDM projects, it is difficult to verify that the projects are indeed reducing carbon emissions in the way they claim.
The Worldwatch report provides some good baseline information but raises more questions than it answers. What is the scope of existing carbon trading markets? How big will the market grow as all the world’s carbon is accounted for? And, most importantly, how quickly can these markets grow to internalize the cost of carbon emissions?

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