The development of a successful global carbon trading market that delivers real and cost-efficient greenhouse gas emission reductions will require an improved market infrastructure, according to a report issued today by The Bank of New York Mellon entitled, "Towards a Common Carbon Currency: Exploring the Prospects for Integrated Global Carbon Markets."
The report - prepared in conjunction with Point Carbon, a world-leading provider of market intelligence, forecasting and advisory services for the energy and environmental markets - finds that for a global carbon trading market to allocate capital to the lowest cost carbon reduction projects worldwide it must be based on standardization, liquidity, transparency and predictability.
Other key findings of the report include:
- Reliable information on market prices, volumes and transactional behavior will add greater transparency, which will provide companies, investors and regulators with critical benchmarks to assess carbon exposure.
- A high level of risk surrounding the future value of carbon prices, due to political uncertainty, would impede the functioning of the market as a way of reducing emissions at the lowest cost.
- A plethora of mandatory and voluntary programs has created a fragmented approach to addressing the global environmental challenge. Consolidation is needed for the market to be more effective at reducing greenhouse gas emissions.
- Linking existing and planned programs and creating a framework for efficient global trading would allow the global carbon market to grow from $63 billion (year-end 2007) to $3 trillion by 2020.
"While short-term impediments exist, the development of a truly global, market-based approach represents the most promising, standardized and transparent way to curb greenhouse emissions," said Scott Posner, chief executive officer of Global Corporate Trust at The Bank of New York Mellon. "The financial industry must do its part by providing a reliable infrastructure that improves the performance of the market and builds the confidence of investors and politicians alike."
The paper recognizes the political and practical challenges of reconciling differing worldviews of what constitutes real, permanent and verifiable emissions reductions.
"Creating a more efficient global carbon market by linking global cap and trade programs and continuing the use of international offsets will reduce more greenhouse gas emissions at a faster rate and at a lower cost than would be possible through national or regional programs alone. This recognition originally embedded in the Kyoto Protocol needs to remain at the core of a new international framework on climate change," said Kjell Olav Kristiansen, director of Advisory Services at Point Carbon.
The paper advocates the development of a linked "cap and trade" market model, in which emitters are offered the widest set of options to reach their emission reduction targets, including the use of imported allowances or offsets.