Reuters, 12 March 2008 - The risks of investing in global carbon markets are soaring as the trade in emissions rights between rich and poor countries becomes a pawn in talks to agree a new global climate change deal by 2009.
Carbon offsetting works by allowing countries, companies and individuals to pay others to cut greenhouse gas emissions on their behalf, whether to meet binding emissions targets or simply for voluntary reasons.
In particular, under the Kyoto Protocol rich countries can meet binding emissions targets by funding clean energy and other projects in the developing world.
The European Union has been the biggest buyer so far, but this week in Copenhagen its executive Commission signalled that it would use offsets as a political tool to encourage developing countries to do more to fight global warming.
"Developing countries will need to contribute, we are handing them a carrot," the Commission's head of emissions trading Yvon Slingenberg told Reuters on the sidelines of a carbon market conference in Copenhagen on Wednesday.
The Commission also wants to curb offset imports as it tries to spur more action to cut emissions at home.
It proposed in January an ambitious reform programme to get one fifth of its energy by 2020 from renewable sources like wood, wind and solar, and unexpectedly proposed a freeze on offset imports from 2012-20.
"If we want to change our economy we need to encourage people to invest in the EU," said Slingenberg. "If you can do it cheaper by offsetting then we will not move to a low carbon economy."
The Commission's distancing from the Kyoto Protocol's clean development mechanism (CDM) offset scheme, worth around 12 billion euros ($18.44 billion) last year, has underscored the importance of political support for carbon trading.
Some carbon market participants fear the EC approach is too heavy-handed.
"Unless the European Commission changes direction the existing CDM...market will weaken with potential collapse of some (carbon) funds and developers," said Odin Knudsen, managing director of environmental products at JPMorgan Chase.
"It's a tremendous injection of uncertainty, instability into the market," he told the Copenhagen conference.
Limbo
Nearly 200 countries agreed in Bali in December to try and clinch by the end of 2009 a new global climate deal to extend or replace the Kyoto Protocol after 2012.
The Commission said in January it would cap the use of offsets by Europe's energy-intensive industry from 2008-2020 at 1.4 billion tonnes if there were no new climate deal, and at 2.2 billion tonnes if there were.
That move is designed to encourage developing countries, the main beneficiaries of trade in offsets, to engage in the talks.
This week the Commission went further, saying that under a new deal offsetting would have to set a higher bar than at present, only rewarding developing countries for efforts above a certain baseline, for example.
"It seems to me the CDM is in limbo," said EDF Trading's Mark Meyrick.
But offsetting has a future because it's too expensive to achieve meaningful emissions reduction targets without it, analysts and policymakers say.
"This isn't going to keep us from being engaged," said JPMorgan's Knudsen. "Other players (besides the EU) are coming forward, the United States, voluntary... This isn't going away."
Norway has said carbon offsets would play a key role in its move towards being climate neutral by 2030 -- meaning the country would make no net contribution to global warming.
"The best thing would be a cap on developing country emissions, in the meantime I believe the CDM is important," Norway's Prime Minister Jens Stoltenberg told the conference.
Sourced from the Reuters InterActive Carbon Markets Community - a free, gated online network for carbon market and climate policy professionals.
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