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REVIEW

Annus horribilis?

11 December, 2009

Fraud, recession, fund closures, firesales – 2009 has not been the greatest year for the carbon market. But it’s not all been doom and gloom. Katie Kouchakji reports

No one expected 2009 to be a sterling year for the carbon market: the world was still reeling from the aftershocks of last year’s economic earthquakes, which helped slash 25% off carbon prices in January alone (see graph). It was no surprise that job losses followed and some carbon funds were liquidated, such as Deutsche Bank’s DWS CO2 Opportunities Fund. One trader, when asked to describe 2009, could only muster: “What a horrible year.”

But was it really all that bad? Among all the tragedy, there was some triumph. The US House of Representatives passed the first bill in Congress’s history that would cap and reduce greenhouse gas emissions across the entire country. Japan’s election in late August catapulted the Democratic Party of Japan to power, led by Yukio Hatoyama who wasted no time in upping the previous administration’s paltry target of an 8% emissions cut by 2020 – a mere two percentage points lower than the country’s Kyoto Protocol target – to 25%. To achieve this, he is expected to introduce a mandatory emissions trading scheme (ETS). New Zealand has finally got its ETS on track, and Australia is planning to reintroduce its bills early next year.

Yes, some of these fights have been fraught – Australia’s opposition leader Malcolm Turnbull had staked his political career on delivering a compromise on the country’s Carbon Pollution Reduction Scheme, while the Waxman-Markey bill only passed the US House after much horse trading and President Barack Obama’s involvement. But they show how embedded the concept of emissions trading is becoming.

And while recession did depress carbon prices – to a record low of €8 ($12) for Phase II EU allowances (EUAs) in February – the subsequent recovery, to €16 by the summer, as economic pressure started to ease, showed that the carbon market is functioning as designed. “This is the response to those folks that think emissions markets are exceptional,” says one market veteran. “This is the reality – this is a market that responds to fundamentals.”

Without doubt, plummeting prices at the start of the year prompted some “existential navel-gazing” about the carbon market, as another trader puts it, adding that he now has a “renewed faith and optimism”.

However, in May rumours of ‘carousel fraud’ hit the market, prompting some to suggest that perhaps not all of the trading volumes at the start of the year were recession-related. UK authorities arrested nine individuals in August as part of an investigation into the value added tax (VAT) fraud – whereby a product is imported from another EU state VAT-free, sold on domestically including the tax, before the fraudster absconds without declaring the tax collected to the government. Admitting that its investigation began at the start of the year, the UK added weight to the argument that volumes at the start of 2009 were inflated by fraudulent trading.

And more knocks were to come. In September, the European Court of First Instance ruled that the European Commission had overstepped its remit in drastically cutting the EUA allocations of Poland and Estonia for 2008–12, sending prices into freefall as participants took the news as a sign that more allowances were set to come to a finely balanced market. With the Commission poised to appeal, this battle will rage on in 2010.

Also spilling into next year – and no later, carbon traders hope – is the negotiation of a legally binding international climate deal for 2013 onwards. Key players have moved to manage down expectations for December’s Copenhagen talks, particularly in recent months, and many observers now expect this decision to be postponed for six months – but warn that any later could be catastrophic, both for business and the environment.

So to 2010 – the year of clarity. Perhaps.

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