The EU 'green' market has taken a battering recently after consistently performing well over the previous five years to become a $142bn entity. It has been accessed by Gulf industries seeking funds to invest in projects designed to cut greenhouse gas emissions, writes Farah Halime
EU carbon prices have fallen to their lowest point in more than two years amid speculation the world's largest market for green credits faces an existential threat.
The EU has developed a US$142 billion (Dh521.58bn) market for carbon credits in the past five years that has also been accessed by Gulf industries seeking funds to invest in projects designed to cut emissions of carbon dioxide, which causes global warming.
But there are growing signs the EU programme is facing a major challenge.
The price of carbon credits has fallen by a third in just three weeks to €11.85 a tonne.
"There is so much post-2012 uncertainty that we've seen institutional investors not prepared to take on the risk of investing," said Matthew Gray, a senior carbon trading analyst at carbon consultancy IDEAcarbon in London.
"Why would [an investor] take that unnecessary risk?"
The EU emission trading scheme was set up to cap the emissions of about 11,000 factories and power plants. It is a major pillar of EU climate policy, which is committed to reduce carbon dioxide emissions by 21 per cent from 2005 levels by 2020. These ambitious targets drive demand for carbon credits, although the target could rise to 30 per cent if the EU approves it. Europe dwarfs the rest of the world in trading activity, accounting for the majority of the global market value.
Industries such as power plants and steel mills buy credits to offset the emissions they generate, but they can just as easily sell them if they generate fewer emissions than the quota set by the European Commission (EC).
However, plans by the EC, which is body behind the trading scheme, to sell an extra 300 million carbon credits on the market to raise funds for green energy projects threatens to further saturate the market and push prices down.
This uncertainty on the future price of carbon credits, coupled with euro-zone debt woes, has led to a sell-off. Having grown tenfold from about $15bn in 2005, the market began to contract last year when trading activity fell by about $2bn.
There have been attempts by Middle East players to break into the European market.
The UAE's Masdar last month became the first country in the GCC to earn financial credits from the UN for a project to reduce carbon emissions.
Masdar worked with Emirates Power Company, a subsidiary of the Abu Dhabi Water and Electricity Authority, to develop a project at its power generation plant at Taweelah, a water and power project.
Teh Dubai Carbon Centre of Excellence recently unveiled plans to offset 5 million tonnes of carbon annually. Major carbon-producing companies, including the Dubai Electricity and Water Authority, the aluminium company Dubal and the energy company Enoc, have also announced they are considering carbon-emission reduction quotas as part of a voluntary joint initiative.
At the moment, the EU accepts credits from anywhere in the world. And although there is no a specific deal between the GCC and the EU, Gulf countries are considered to fall under the right category for generating carbon credits.
"Given the limited number of projects in the region and the expectations of registered projects being grandfathered into future schemes, credits from existing projects in the GCC have a good chance of continued eligibility post-2012," said Philip Moss, the former carbon markets manager at Masdar.
The evolution of bilateral carbon trading agreements is partly the result of the failure of global powers to extend the Kyoto protocol beyond next year, which could have formed the basis for a global market in carbon credits. The agreement is aimed at fighting global warming and binds 37 industrialised nations to targets for cutting environmentally harmful emissions. But countries including Japan and Russia do not want to extend the treaty.
One London carbon trading outfit has even set up a credit trading floor in Dubai.
Advanced Global Trading, a carbon credit-trading company, opened up an informal trading floor in Dubai last month.
Mr Moss said while he did not see the benefit of setting up a carbon trading floor in the Middle East, he recognised the region could become a big player in an increasingly fragmented market.
"I expect to see an increase in the number of bilateral agreements … as the carbon market slows. You will still have trading, but it will take on a different trade and form," he said.
"The EU will continue to buy a lot of carbon credits [for trade] but, in addition, it will likely import credits from overseas emerging markets like the UAE."
He said countries would also be likely to enter into agreements with one another to buy and sell carbon credits. The UAE is one of the largest polluters in the world per capita, according to UK risk analysts Maplecroft, signalling strong potential for the country to raise its carbon-generating projects.