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Carbon Needs Ratings
carbon, solar, recycle, climate, renewable

Without the certainty to be achieved through a strong international climate change agreement at Copenhagen, committed to the short, medium and long term reduction of carbon in the atmosphere, we’re going to have to find another way to make it work. That means carbon markets, and that means market tools.


Despite the enormous growth the carbon market has experienced in the last couple of years, it continues to come under fire due to a combination of volatility and market uncertainty.  The impact of the collapse of the global credit markets has also understandably led to mistrust of the traditional tools of the market. Yet its difficult to know what other tools to use.


There is little question the carbon market has continued to grow strongly despite the credit crunch. According to figures from Point Carbon, the carbon market`s total value for 2008 was estimated at €92bn (US$125bn), more than double the €40bn it was worth in 2007, and that growth is set to continue. And, while the price of carbon has fallen significantly with the drop in industry and manufacturing, about 25% of the overall drop in emissions within the EU is said to be down to the carbon market.


Yet, if negotiators fail to achieve a successful international climate change treat in Copenhagen, we could end up with a wide range of unconnected carbon markets across the globe. In fact, according to Trevor Sikorski of Barclays Capital, it could be at least seven different markets.


We’ll have the EU ETS, at least three US programmes (RGGI, WCI, MRGGRA), Australia’s CPRS, a planned Japanese programme, as well as the ongoing contribution of the CDM and JI under Kyoto. The difficulty will lie in understanding how these schemes can work together.


In a globalised economy, there is going to have to be cross-border analyses of the carbon footprint of goods and services. And we’re going to need some standardised way of comparing the quality of one offset to another if the carbon levels of those goods and services are going to be agreed.


Buyers, sellers and investors need confidence in what they are buying or, at the very least, they need ways to differentiate between the risks attached to the different credits that are going to be use. Just because the markets operate on a regional basis, doesn’t mean that there isn’t a global implication.


A global carbon market requires a set of tools to predict risk, as historical data alone cannot predict the likelihood of future events. Just like financial investors in the debt market (although hopefully with more common sense and a more robust set of tools), they want a clear, transparent and unbiased declaration of those risks, enabling the necessary price differentials to develop. One of the most well-established instruments for enhancing the transparency and efficiency of financial markets is the use of independent credit ratings.  


Ratings tells investors/buyers what they should rationally expect to be delivered from a project, given its fundamentals. Therefore, ratings will be a key element in driving the efficiency of the market.  


With an increasing number of project developers looking to sell carbon credits into the emerging compliance and voluntary markets around the world, the widespread use of effective carbon ratings might be the only thing standing between separate regional carbon markets, and the introduction of economic protectionism. And that’s something that none of us can afford.

Posted via email from Conquering Carbon


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