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China, EU Carbon Markets Big Winners at Durban

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CARBON TRADING

"We have saved planet Earth for the future of our children and our great-grandchildren," South African Foreign Minister Maite Nkoana-Mashabane declared at the close of the UN Durban climate conference, which negotiated a Green Climate Fund of up to $100-billion a year that keeps the Kyoto spirit alive. More likely, all that she saved is face for China's renewable-energy industry and the EU carbon market, both in danger of freefall. These two corporate groups will land the lion's share of the spoils coming out of Durban. As for Kyoto, it can be presumed dead.

The group of taker-nations under the Kyoto Protocol remain united: China, India, and all the other developing nations that have been receiving climate cash are as eager as ever to see Kyoto continue. But the giver-nations have mostly gone. Canada, Japan, and Russia will formally leave Kyoto when it expires at the end of 2012 and the U.S. never joined. That leaves virtually the entire burden of supporting Kyoto to the European Union. And all that's left of Kyoto, in any tangible sense, is the EU carbon market.

Just a few years ago, investors were banking on a $2-trillion global carbon market by 2020. Instead economic gloom and growing doubt about global warming science has made it a pariah. In the last six months, the price of carbon has plummeted by 50 per cent to a record low. UBS, JP Morgan and other banks have already retreated from the market and cut their climate-related businesses this year.

The industry, in fact, has fallen into such disrepute that "carbon" has become a dirty word. The Carbon Markets and Investors' Association, representing more than 50 firms that finance and invest in emissions reduction, renamed itself the Climate Markets and Investors' Association and the Voluntary Carbon Standard Association renamed itself the VCS Association. "Carbon trading in particular does not have the best reputation, so if you want to stay in this space but draw less ire from some quarters, it would make sense to use climate instead of carbon," VCS Chief Executive David Antonioli told Reuters.

The EU, which last year saw the European cap and trade program valued at $160-billion, is not prepared to give up on the industry it had so proudly created, particularly with so many viewing the EU itself as dysfunctional and incapable of getting its member states to agree on concerted action for the common benefit. To protect its trademark industry, and its own reputation, the EU has unilaterally, in effect, decided to continue Kyoto.

As for the giver-nations abandoning Kyoto, they are promising to fund a Green Climate Fund to the tune of $100-billion per year as a farewell gift to the taker-nations, and to appease their own citizens. As with so many other Western promises of foreign aid -- witness the West's now-forgotten $10-billion pledge to rebuild Haiti -- much of this money will never materialize.

There's also another reason the money will not materialize -- that $100-billion would largely go to purchase products stamped "Made in China." The Green Climate Fund is designed to help poor countries adapt to climate change and to purchase renewable-energy technologies. The seller of those technologies will generally be Chinese, thanks to aggressive state subsidies that squeezed out foreign competitors, to the ire of U.S. lawmakers.

China's domination in renewables, which made its industry a national champion when countries around the world were tripping over themselves to buy wind and solar technologies, now looks like a national chump: Much of that capacity sits idle because orders from major markets such as Spain, Italy, Germany, and the U.K are drying up, withered by European austerity programs and a recognition that green power is unaffordable. Four of China's solar energy firms announced last month that their shipments would be lower than expected and, according to the Financial Times, "their shares have all more than halved."

Because China wants to rescue this industry on which it has placed its prestige, it lobbied hard at Durban for a healthy Green Climate Fund, promising in return to consider subjecting itself to Kyoto II after 2020. In exchange for this promise, China received the promise of a Green Climate Fund.

These future promises, like the past promise of Kyoto, will likely collapse long before the parties will be called upon to deliver on them. In the meantime, backs can be patted all around.

This article appeared in the Financial Post.

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