Until 2012,Europe was central to the global carbon market; heck, it was the only “real” market. Carbon offset project developers invested billions to earn Certified Emission Reductions (CERs) under the Clean Development Mechanism (CDM) and sold them to European companies and traders participating in the EU Emissions Trading Scheme (EU ETS).

Projects had sprung up in almost all parts of the developing world. Countries otherwise isolated in the weird geopolitical arena, like North Korea and Iran, were also hosting CDM projects. With too much supply, the quality had to be affected.

This fairy tale, however, came to end when the EU started implementing restrictions on the offsets it considering lacking environmental integrity. Billions of dollars were at stake, and still are, as developers stopped investing in new low-carbon infrastructure and started contemplating pulling investment from old projects.

The Slow Down

The great economic slowdown of 2008 took its toll on the European carbon market. Industrial activity collapsed, demand dwindled, and emissions fell to unprecedented levels. The European industries today have millions of surplus emission permits. So the price fell, from a peak of about €30 per tonne to just over €4 per tonne within few years. The CERs now cost less than €0.3 per tonne. The fall in demand from European industries and the added restrictions on use of CERs within EU dealt a double blow to the project developers in the developing countries.

EU member states have been preoccupied with their financial issues and emission reduction targets have taken a backseat. It’s been months since the regulators started discussing possible ways to boost the EU ETS. There have been no results yet.

New Markets Sprout Up

Some developed countries, which had been minor league players in the whole “action against climate change” game and, surprisingly, many developing countries announced several measures to develop national carbon markets.

Australia and California have already implemented carbon tax and cap-and-trade regimes, respectively. Australia will have a cap-and-trade scheme in July 2015, if all goes well with the Liberal-Greens government in the upcoming election. California is leading efforts to develop a U.S.-Canadian emissions trading scheme. The Western Climate Initiative (WCI) is the cornerstone of these efforts.

The progress made by China in setting up pilot emissions trading schemes (ETS) in its provinces and cities has been a major surprise. The U.S., which has long been the largest GHG emitter before being overtaken by China, has failed to do so. China plans to expand these pilot ETS in other regions of the country before launching a national ETS sometime after 2015.

South Korea will have an operational ETS by 2015, and South Africa will have a carbon tax in place in the same year. Several developing countries like Thailand, Vietnam, and Chile are working with the World Bank to develop some form of ETS. The World Bank’s initiative to help countries develop a carbon market mechanism now supports about 30 governments in Asia, Africa, and South America.

Linkages, Linkages, and … more Linkages

China linking with Australia; Australia linking with New Zealand, California,Europe, and South Korea; California linking with Canadian provinces; Japan linking with Asian and African countries: This is a highly intricate web of carbon market linkages currently under development. Some of them have already been finalized and await implementation.

The development of carbon markets around the world, especially in the developing countries, has brought hope of renewal of the “global” carbon market, a market less dependent on the pace of economic recovery and renewal of will to act on climate change in the EU.

These new carbon markets will help each other develop the basic infrastructure so that, once operational, they can easily trade the carbon offsets generated in one market with the other.

But these markets will mostly be guided by local conditions and would allow a small portion of external offsets; as a result, the price of carbon offsets would be different in all these markets. Such restrictions on external offsets could help promote competition among the project developers who may look to develop projects which provide offsets with greater environmental integrity.

These linkages are a great buildup to the proposed global climate change treaty expected to come into effect in 2020. Apart from the developed countries, most of which already reduce emissions under the Kyoto Protocol, the advanced developing countries will also be required to reduce their emissions. These distributed carbon markets, which enhance the proliferation of knowledge regarding implementation and operation of carbon markets, will prove helpful in the implementation of a wider carbon market likely to originate out of the next climate change treaty.