A new research report says that the carbon is market is set to grow, particularly in North America, for 2009 but the value of the market will fall off a cliff.
PointCarbon is forecasting that 5.9 billion tons of carbon credits will be traded in 2009 a 20% bump over the 4.9 billion traded in 2008. The price of all those carbon trades will only amount to $80 billion, which is down 32% from $118 billion a year ago. This is probably old news to anyone following the carbon market or the economy at large. With a slumping economy, production is down, and the price of emissions is falling all over the place. (As an aside: How low can carbon prices go? Around $10 a ton as China has established a pseudo floor by imposing a $10 floor for the U.N.’s certified emissions.)
The report projects that the Regional Greenhouse Gas Initiative (RGGI) started this year (see graphic on right) will contribute to the US having 6% of the carbon trade in the world for 2009. Still not enough to touch the European market which will continue to dominate carbon trading, but not a bad start.
Here’s what PointCarbon sees for RGGI this year:
Based on the level of interest witnessed in the previous two RGGI auctions, we expect the four auctions held this year to continue to be oversubscribed. Though RGGI is clearly over-allocated in the short term, buyers seem keen to get hold of allowances at the auctions, possibly to bank them into later years in expectation of a future federal cap-and-trade system into which RGGI allowances might be transferred, or in which they might be accepted at a certain exchange or conversion rate.
Are companies loading up on cheap credits for the future? Probably not, as they don’t have any money to waste right now. But the report states:
As with RGGI’s auctions in 2008, we expect that most of the allowances will be purchased by compliance buyers financials participating in the auctions – to the extent that they are active in the down economy – tend mostly to do so as part of their clients’ risk-management strategy and not in order to take a position in the market. Depending on the speed of US economic recovery this may change as well, with more banks and hedge funds getting into the auctions toward the end of 2009.
Maybe that will change in light of Obama saying he wants cap and trade legislation in his address to Congress last night. His request ties into the bottom line of the report: The market is slowing for 2009 and the biggest change for the year will come about from government policy.