Carbon trading can fetch Gulf $5bn annually

The global carbon market is currently growing rapidly. Trading volume in the first half of 2008 at $59 billion (Dh217bn) reached the levels for all of 2007 at $63bn.

This growth is predominantly attributable to the European Union Emissions Trading Scheme (EUETS) and to increasing interest in global Kyoto credits from the Clean Development Mechanism (CDM) and Joint Implementation (JI).

In the region, however, there is not a single project on carbon trading, said a senior official of EcoVentures.

According to Armen Vartanian, Director at EcoVentures, the Middle East and North African (Mena), the region has a potential to generate $5bn a year from the carbon trading market.

But unlocking the potential, however, would take time. "There are too many factors involved, and regulation is one. It depends entirely on the carbon market. We, as market participants, rely entirely on the market," he told Emirates Business.

"As long-term participants we are taking a bet that some sort of regulation will happen," Vartanian said. "There is a lot of interest. DMCC [Dubai Multi Commodities Centre] and Doha Bank, for example have made public announcement of consideration to go into the carbon market."

Dubai has in 2007 launched a bid to become a centre for trading greenhouse gas emissions permits, diving into a fast-growing market and the potential to turn the region's sizeable carbon footprint into cash.

EcoSecurities have signed a deal to try and make Dubai the regional centre for trading carbon offsets. The two are eyeing several projects in the UAE that could cut greenhouse gas emissions and generate carbon emissions reduction certificates (CER) under a United Nations scheme. Later, they will look at similar projects across the booming Middle East economies.

Doha Bank, also in 2007, announced that it aims to sell a $1bn sukuk to finance investment in renewable energy by the mid of 2008, using the money for projects such as setting up an exchange for trading greenhouse gas emissions permits.

Doha Bank, Qatar's largest private commercial bank, plans to start the Arabian Gulf's first carbon-credits exchange in 2009 to tap an emerging market for emissions trading. However, those announcements were made when the markets where riding on the region's upward boom. Come 2008 and the industry have not heard again from DMCC.

Doha Bank, meanwhile, delayed its fundraising for the Middle East's first carbon trading scheme due to the financial crisis.

The bank is working with the San Francisco, California-based RainTrust Foundation on the Qatar exchange project and has then secured expressions of interest from Citigroup and Credit Suisse Group.

In an earlier interview, Doha Bank group Chief Executive Officer Raghavan Seetharaman said the bank would invest $27 million in its electronic Qatari exchange, and has so far spent $7m on a plot of land in the $2.6bn Energy City business park that Qatar is building to lure international oil and gas companies to the state.

The plot adjoins that of International Mercantile Exchange Holdings, an energy derivatives bourse under formation by investors, including Bahrain-based Gulf Finance House, Kuwait Investment and Abu Dhabi Investment House. "The time [of fundraising] depends on what happen across the globe," Seetharaman said. "Why should I be taking a price that is not cost effective? I have to make money out of it?"

While the mechanisms for the trading are still not in place, a number of projects complementing the trade have already been launched in the UAE. For one, Masdar launched in February 2008 a project to develop a national CO2 capture network capable of creating a significant reduction in Abu Dhabi's carbon footprint. The first phase of the network will capture around 6.5 million tonnes of CO2 from power plants and industrial facilities in Abu Dhabi by 2013. The captured CO2 will be transported and injected in oil reservoirs for enhanced oil recovery.

However, voluntary initiatives would not work for long-term, said a senior official of Det Norske Veritas (DNV). Oslo-based DNV has classified and rated about 80 per cent of the renewable and clean energy in the West.

"Voluntary markets can create demand like in Japan. In Japan, it is all voluntary but I don't think that could be very sustainable," said Henrik O Madsen, President and Chief Executive of DNV.

"It can create a market but not a very big one," he added. "The market can only be created if you can define caps. If each government accepts that there is a cap for carbon emission and if that country exceeds that cap, then they have to buy credits from somewhere. The more country that accepts caps – either forced or voluntary – the more that you will grow the demand side."

Although the UAE is not obliged to cut emissions, Madsen said the country is now well-placed to do the same.

"The UAE was not part of the Kyoto where you have the Annex 1 and Annex 2. In 1997, this region was a non Annex 1. But the economy has developed so much since 1997 so I think this region could take on an obligation. All countries – like here, India and China should take on an obligation," he said.

According to a study by the Bank of New York Mellon, the voluntary market remains a small but growing portion of the overall global carbon market.

Volumes and values tripled from 2006 to 2007, which witnessed the trade of 65 million VERs worth $337m if Carbon Financial Instruments (CFIs) traded on the Chicago Climate Exchange (CCX) are included.

The strong growth and variety of products offered in the voluntary space have spurred the development of numerous standards and registries designed to give consumers confidence that the credits they purchase are real and verifiable. In 2007, 87 per cent of credits transacted in the over-the-counter (OTC) market were verified by a third party, with the most widely used standard being the Voluntary Carbon Standard (VCS), followed by VER+ and the Gold Standard. In addition, the CCX is using its own set of standards for voluntary offsets.

"In the mid-term we see the potential of direct or indirect linking of regional cap and trade programmes comprising emitters in Europe, North America and Asia Pacific, potentially reaching a combined cap of more than nine billion tonnes. Point Carbon estimates that a linked global cap and trade market could reach a turnover of $3 trillion by 2020," said the report sent to Emirates Business.

It said the reductions necessary to mitigate global warming need mechanisms that allocate capital to the lowest-cost abatement opportunities. This enables emissions to be reduced faster and in greater scale than would occur under regional or national programmes.


Carbon trading facts

Carbon trading is a financial market not to be confused with trading physical quantities of greenhouse gases. The financial representation of greenhouse gases is either a permit to emit greenhouse gases or a proof that a certain amount of greenhouse gas emissions is being avoided.

Carbon markets comprise two distinctly different markets: 1) the regulated markets where demand is created by legislative mandates, and 2) the voluntary markets where emitters or individuals causing emissions can offset these emissions by purchasing verified emissions reductions (offsets).

Voluntary demand originates in a combination of private and corporate social responsibility and commercial advantages derived from accommodating preferences in retail, labour and financial markets.

Mandatory carbon trading programmes essentially comprise two alternative approaches. Regulation may address individual emitters' level of emissions by mandating specific emissions reductions or carbon intensity levels.

To comply under this type of programme (also referred to as baseline and credit programmes), emitters face the choice of reducing emissions or surrendering verified emissions reductions (credits/offsets) for any shortfall between their actual emissions and their target level emissions.

Alternatively, regulation may address emissions of a group of emitters by placing a total cap on their permissible emissions known as "cap and trade". In cap and trade programmes, emitters need to surrender rights to emit (allowances or credits) equal to their measured emissions.

As most cap and trade programmes cover a limited geographic area or selected emission sectors, they can be combined with verified reductions from outside the programme to offset emissions increases above the cap.

Provided certain conditions are met, this creates fungibility between offsets and allowances. Both instruments carry the same environmental value and can be used for compliance interchangeably. While the concept of trading verified emissions reductions may carry environmental attractiveness, offsets have met challenges because it has proved very difficult to establish appropriate "business as usual" benchmarks against which reductions should be measured.

In principle, regulators face the choice of adopting either of these two main market models as their fundamental approach to regulate emissions. Cap and trade-based emissions trading programmes seem to be the most favoured approach despite the existence of baseline and credit programmes in Australia and Canada.

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