Investment in projects that generate carbon credits fell sharply in 2010 amid the political uncertainty regarding the future of the global carbon market, according to a report today by the World Bank.
The “Clean Development Mechanism” (CDM) market is now at its lowest level since 2005 when it was created by the enactment of the Kyoto Protocol.
There was an estimated $1.5 billion invested in new projects in 2010, down 46% on the previous year. These projects in developing countries generate Certified Emissions Reduction (CER) credits, which are awarded by the United Nations and can be used by companies and governments to offset carbon emissions.
This helped the global market shrink to $142 billion in 2010, some $2 billion less than in 2009, estimates the World Bank.
Europe’s emission trading scheme accounts for the bulk of the global carbon market, with trade in EU allowances, the tradable carbon unit within the cap-and-trade market, worth around $121 billion.
Airlines, which are due to join the ETS in 2012, will be allowed to use around 32 million CERs to offset their carbon emissions in 2012, but the limit will be sharply reduced between 2013 and 2020.
Analysts expect airlines will be able to use between 20 million and 40 million CERs throughout the whole 2013-2020 period in meeting their carbon cap.
Investment in CDM projects is unlikely to increase because there is little demand for credits outside of the European Union, the World Bank notes.
“The only substantial and unconditional demand to date comes from Europe, estimated at 1.7 billion tons,” according to a statement form the World Bank, before adding: “The supply available between 2013 and 2020, through existing projects, is seen as sufficient to fill that demand, leaving little incentive for project developers to invest further and create a future supply of emission reductions.”
All airlines that fly in and out of EU airspace will be subject to regulation by the region’s cap-and-trade market from 1 January, 2012.
Unlike most other sectors, airlines will be short of carbon allowances from the outset, and will be required to buy either EU allowances or CERs to fill the shortfall.
Airlines will receive around 175 million EUAs for free in 2012, but the sector is estimated will emit around 265 million tonnes of carbon with EU territory.
OPIS has launched a clean jet carbon price, which calculates the price of buying jet fuel and the required volume of EU allowances to offset carbon emissions.