Baker & McKenzie`s Global Environment Practice

On the up

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Courtesy of Courtesy of Baker & McKenzie`s Global Environment Practice

The global carbon markets traded an estimated € 92 billion worth of carbon credits in 2008. 4.9 billion t of CO2 equivalent (CO2e) of greenhouse gas (GHG) reductions changed hands under the various international, regional, national and sub-national carbon trading schemes that together make up the global carbon marketplace. These figures demonstrate the phenomenal expansion and maturation of the global carbon market since its inception, with 2008 seeing close to 100% growth in volume (2.7 billion t of CO2e of GHG reductions were traded during 2007) and greater than 100% growth in value (in 2007 the global carbon market was worth € 40 billion). This rapid growth is expected to continue, with the global carbon market forecast to be worth US$ 1 trillion by 2020 (it was worth US$ 8 billion in 2005).

These figures are impressive by any standard. They are particularly striking, however, in light of the relative youth of the global carbon market.

Environmental products related to air pollution were first traded in the US in the late 1960s, and the UN Framework Convention (UNFCCC) and its Kyoto Protocol date from the 1990s. Domestic carbon trading schemes had been operating in Denmark, the UK and the Australian state of New South Wales as early as 2001, while bodies such as the World Bank and the Netherlands Government had contemporaneously entered into groundbreaking forward purchase transactions for Certified Emission Reductions (CERs) to be generated from Kyoto Protocol Clean Development Mechanism (CDM) projects.

But it was not until 2005, when the Kyoto Protocol came into force (following ratification by Russia) and the EU Emissions Trading Scheme (EU ETS) commenced operation, that global carbon trading began in earnest. It was only when legally binding emission reduction obligations (imposed on both public and private entities) came into effect under these two mechanisms that international carbon trading became the favoured means of capturing least-cost large-scale abatement opportunities in order to reduce GHG emissions as cost effectively as possible.

Today, carbon trading schemes operate in a number of jurisdictions around the world, with demand for carbon credits driven by both domestic and international compliance regimes, as well as voluntary initiatives.

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