Carbon experts forecast global trading agreement by mid-2011

The outlook for the COP-15 in Copenhagen this year has been buoyed by reduction target pledges by the US and China, despite almost unanimous agreement from experts that a legally binding treaty is unlikely to be concretised. Katie Holliday and Pauline McCallion report

At the end of last month, US President Barack Obama announced he would be attending the Copenhagen meeting and would be going armed with a reduction target of 17% below 2005 levels by 2020 (see page 6). The news was immediately followed by China’s announcement that it would commit to a voluntary 40–45% cut in carbon intensity by 2020.

Experts say the dual pledge has boosted sentiment for progress at the conference, but without legislative backing, Obama will be powerless to sign up to anything legally binding. The American Clean Energy and Security Act of 2009, known at the Waxman-Markey Bill, was passed by the US House of Representatives in June this year, but is yet to be passed by the Senate.

Simon Glossop, Partner at UK-based carbon trading and advisory firm CF Partners, says that without US input, a globally binding agreement will not be possible. “President Obama needs internal US commitment first to able to commit to targets in Copenhagen and this is not presently in place,” he says. “I expect there to be a reasonably good conference where a lot of these things are discussed but there will be no firm agreement for the post-2012 Phase Three world,” adds Glossop.

Glossop expects the lack of a legally binding agreement will not drastically impact the price of carbon. “I expect there to be no real change in price for the next year because of this,” he adds. “Currently the market is confused about post 2012 and this has been reflected by little movement in price in recent months.”

But Kristian Tangen, a senior analyst at market analyst Point Carbon, says the recent statements from the US and China has led to a slight rise in the price of carbon. This is because the pledges have led market participants to believe that the European Union is more likely to take on more ambitious targets and the EU target is a key driver of price, he says. The price of carbon has risen by €0.30 ($0.45) on the news, according to Point Carbon’s Tangen. Carbon was priced at €12.58 on November 24 and €12.88 on November 25, according to Point Carbon data.

“The impact of the combined pledges makes it very difficult for the EU not to set the 30% target as promised – we have seen a direct impact of news of the pledges on price,” adds Tangen.

According to Miles Austin, head of European regulatory affairs at EcoSecurities, the lack of an international legally binding agreement does not mean Copenhagen will not be productive. “There’s a lot of work to be done: the architecture of the Clean Development Mechanism (CDM) urgently needs reforming, new mechanisms, such as sectoral ones, must be defined and we need clarification on what Nationally Appropriate Mitigation Action means,” he says.

Clarification on these details will provide a boost to the global markets, especially in terms of investment on the supply side, says Austin. “There’s plenty of work to be done at Copenhagen, without the need for US commitment in a globally binding treaty, which is a lot of where the focus has been,” he adds.

Market sentiment that a new form of the Kyoto Protocol will be finalised in time for 2012 is still strong, say experts. “By the summer we’re likely to know whether the US will have a domestic cap-and-trade system in place,” says Point Carbon’s Tangen. “This will act as a pre-condition for whatever legally binding commitment they might take. I expect to see a global agreement in 2010,” he adds.

CF Partners’ Glossop is confident that the US will have an internal system established by 2012 and there will be strong demand for international credits ( mainly CDM). “The best case scenario will see a global agreement finalised next summer, worst case will be it’s delayed to 2011,” he says.

Glossop highlights that any negative political statements to come out of Copenhagen could be counterproductive. “If any negative comments about the level of the US’s reductions come out from the conference or its commitment, there’s a possibility this could be badly received by the carbon markets and will lead to reduction in the price of carbon in the short-term,” he adds.