Carbon Markets Slow Down

HFC23 plantGlobal investments in carbon offset projects are on the decline this year and are likely to dwindle further until countries reach agreement on a new treaty to address climate change.

Negotiators are set to decide on the next international climate agreement this December in Copenhagen, Denmark. Until then, uncertainty surrounding how the United Nations will regulate carbon offsets in developing countries, an approach known as the Clean Development Mechanism (CDM), has deterred investment, carbon traders said at a Washington, D.C., conference last week.

"Carbon investment has dropped significantly," said Milo Sjardin, who leads the North American office of the research service New Carbon Finance. "No one wants to take the risk."

Although investments in greenhouse gas offset projects such as methane capture, soil sequestration, and reforestation are difficult to measure, market analyst Point Carbon predicted in February that the volume of high-value Certified Emission Reductions (CERs) - carbon credits from United Nations-approved projects - would fall 45 percent in 2009.

Hundreds of projects with financial support will likely continue, but investors appear hesitant to engage in new projects, Point Carbon said.

JP Morgan Vice President Gravnille Martin said that ongoing adjustments to the CDM, such as recent changes in the methodology for evaluating energy-efficient cement plants, may prevent investments in Kenya and other developing countries from receiving expected carbon credits.

"A plant in Kenya invested [in carbon-reducing technologies] thinking that they could get credit from the CDM. One executive order changed all that," Martin said. "Becoming an investor has become a much more challenging task."

Regulatory uncertainty, coupled with the economic downturn, has curtailed investment in the U.S. carbon offset market as well. Investment would likely increase if the United States develops a domestic cap-and-trade carbon market, which would allow pollutors and non-pollutors to exchange carbon "credits." Congress has begun drafting legislation to this end, but carbon investors are not likely to increase their spending without knowing key details such as how pollution auctions would allocate the permits or spend the auction profits, market participants said.

"To get people who are waiting on the sidelines involved, the details need to be hammered out," said Josh Green, CEO of Verdeo Group, an investment firm focused on carbon markets. "For that trickle to turn into a torrent you need clarity."

Despite the slowdown, many carbon investors are preparing themselves for a more robust market. For instance, the carbon credit registry TZ1 has expanded to 182 customers, including investment banks, carbon traders, and project managers, since its launch in April 2008.

In the United States, TZ1 customers are buying carbon credits mostly to demonstrate a commitment to tackling climate change or to appease buyers who demand carbon neutrality throughout their supply chains. Since U.S. President Barack Obama's election, however, a new category of participants has joined the registry in preparation for a U.S. carbon market. Chief Executive Helen Robinson refers to these latest market players, who are not yet bound by regulations, as "non-compliance" customers.

"We've seen an incredible growth in our markets," Robinson said. "The market does need certainty, but there are plenty of investments taking place."

The investment group EcoSecurities is among the companies that are developing carbon offsets throughout the Americas and Asia. Jonathan Mancini, who is in charge of finding projects in the United States, said his company is investing in local government projects to capture methane emissions from landfills. Mancicini would not divulge how much money his company is currently investing.

Randy Lack, managing director of the U.S.-focused carbon investor Element Markets, estimates that EcoSecurities is one of only six companies, at most, that are currently investing in the U.S. carbon offset market, despite the launch of a regional emissions trading market in the country's northeast earlier this year.

"There are people trying to get cheap, affordable options more than [there are] people willing to put down a lot of money," Lack said. "Developers say they have lots of U.S. projects under way, but once you ask what their actual investments are, they can't tell you or they dodge.... Most of them have more offices than they have projects."

In order for emission levels to peak by 2015, as the Intergovernmental Panel on Climate Change, a group of leading international climate experts, recommends, carbon offset investments would need to increase significantly worldwide. Clean energy investments alone would need to reach $500 billion per year by 2020, according to New Energy Finance.

To reach these spending levels, Matthew Kiernan, founding director of the World Business Council on Sustainable Development, said the pool of investors dedicating money to low-carbon technologies must expand considerably. He estimates that only 2 percent of investment capital is being targeted to low-carbon projects.

"My appeal to the gods is let's get the other 98 percent of the capital stream involved," said Kiernan, who now runs the consultancy group Innovest Strategic Value. "The leading instinct on Wall Street is extremely powerful. If you get some lead lemmings to come into your direction, I think the rest of the lemmings will join."

Ben Block is a staff writer with the Worldwatch Institute. He can be reached at bblock@worldwatch.org.

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