'The limits being set by the European Commission are increasingly tight,' explained Douglas Higgins, an NEF analyst in London. 'There's more demand for these credits, so we're also seeing higher prices.'
A World Bank carbon finance analyst in Washington, D.C., concurred that the carbon market is likely to surpass the $100 billion mark by year's end.
Higgins and his NEF colleagues project that the volume of carbon emissions transacted will grow 31 percent this year to 3.9 gigatons. European Union allowances, which constitute about 68 percent of trading by volume, have averaged about $34 a ton through September. Meanwhile, collective trades in secondary 'certified emission reductions' -- the main currency of the European Union's Clean Development Mechanism market -- more than doubled to $10 billion through September.
The trading volume of secondary CERs increased by 100 percent. However, the volume of the primary CDM market -- which reflects trades from CERs from new projects -- fell 26 percent. NEF analysts underscored that there has been a drop in the size but not the number of carbon mitigation projects, such as industrial heat recovery and afforestation investments.
'The average size of [CDM] projects has declined after the initial large industrial gas projects seen in 2007, and primary CDM deals are strongly linked to the creation of new projects,' NEF analysts noted. 'The average size of new CDM projects entering the United Nations approval process fell from 122 kilotons per year to 104 kt/yr in 2008.'
While the World Bank does not make formal carbon market projections, NEF analysts project that the carbon market will hit the $550 billion mark in 2012. And should the United States -- the world's top per-capita CO2 emitter -- adopt an emissions cap-and-trade scheme, the global carbon trading market would turn over $3 trillion annually by 2020, NEF analysts noted.
The value of the U.S. and E.U. markets would be roughly equal -- about $1 trillion apiece, Higgins noted.
But the deepening global economic slump is a wild card, Higgins conceded. A long recession in the United States, for example, could delay implementation of a national cap on emissions or reduce demand for carbon credits in states beholden to regional carbon caps.
'If the U.S. suffers a long and deep recession, industrial output would go down, and there would be less demand for carbon credits,' he said.