The carbon markets can be split into two categories: the compliance markets and the Voluntary Carbon Markets (VCM). Compliance markets were initially started under the UNFCCC Kyoto Protocol (2005-2020) which introduced three market-based mechanisms: Emission Trading (ET), Clean Development Mechanism (CDM), and Joint Implementation (JI). The 2015 Paris agreement, ratified in 2016 brought more tools to the markets such as green financing and trading in green bonds. In addition to these systems, a significant number of countries have implemented a carbon tax.
The World Bank, which serves as the main source for the data presented in this article, bundles carbon taxes and emission trading systems under the compliance markets and call the remaining markets “Carbon Crediting Mechanisms”. These mechanisms are further split into international (CDM and JI), independent (e.g. Verified Carbon Standard (VCS) and Gold Standard), and domestic (e.g. Australia Emission Reduction Fund, ERF). This article will mainly focus on the Emission Trading Scheme (ETS) markets and the current linkages to forestry. The ETS concept is also known as the cap and trade (CAT) system.
According to World Bank data, the world has currently 29 up and running ETS programmes. These are either subnational (19, e.g. California CAT), national (9, e.g. New Zealand ETS), or regional (1, EU ETS). On top of the existing markets, there are further three ETS programmess that are scheduled and 18 that are under consideration. In addition, there are three programmes (Austria, Brazil, Brunei) that have not yet decided which option (e.g. ETS, carbon tax) they will look into. A carbon tax is currently implemented in 35 markets, out of which 27 are national.
Out of the current ETS markets, only the NZ ETS has forestry as a compliant sector. However, the pulp and paper industry is more often covered under these schemes (e.g. EU ETS, California CAT, and some of the subnational Canadian markets). Currently, it is common that forestry plays a role in the carbon markets through forestry carbon offsets (e.g. California, China ETS, Korea ETS). These offset projects often relate to afforestation or improved forest management and can generate additional revenue for the forest companies. According to World Bank, forestry offsets covered 42% of the credits issued over the five years from 2015-2019.
The ETS field is developing at a pace and new ETS markets could have forestry (including pulp and paper sector) included more often either as a compliant or offset market or both. For example, the world’s largest ETS, the China ETS, which came into effect in February 2021, is speculated to include the pulp and paper sector later on. Currently, it only encompasses the power sector. It has also been discussed that the EU ETS could at some point include forestry carbon offsets, therefore changes to the already existing ETS markets could be possible. In July 2021 the European Commission proposed to revise EU ETS amongst other pieces of EU climate legislation.
Several major forestry countries are also looking into the ETS markets and only the future will show how forestry will be treated. Such countries include Indonesia, Vietnam, Chile, Colombia, and Ukraine. In addition, Brazil and Austria are considering carbon markets, but have not yet indicated which one they are focusing on. These countries are likely looking into the current carbon markets and examples of how these markets have been developed. Another interesting development in the ETS market is that Germany has started their national ETS which covers heat and road transport sectors that are currently not included in the EU ETS. This indicates that some countries might further develop their own national or regional carbon markets to achieve their climate goals under the Paris Agreement.
Carbon market prices
Figures 1 and 2 show the nominal carbon price development for selected markets in USD for one ton of carbon dioxide equivalent (tCO₂e). The YTD2021 price data in Figure 1 is until the end of April. This data demonstrates how most of the market prices have increased over recent years after seeing the lows in prices (mostly between 2012-2017). New markets in the western countries appear to reach prices from USD 20/tCO₂e to USD +30/tCO₂e from their initiation, however, the recently launched China ETS achieved prices lower than USD 10/ tCO₂e when it opened in July 2021. The High-Level Commission on Carbon Prices has identified that carbon prices should range from USD 40-80/tCO₂e in 2020 and USD 50-100/tCO₂e by 2030 to achieve the temperature goal of the Paris Agreement. This suggests that most of the markets are still below the effective carbon prices.
For comparison, Figure 1 also shows the most recent market price data for the forestry and land-use sector in voluntary carbon markets. For forestry and land use, the prices have been ranging between USD 3-5/tCO₂e over the years 2015 to 2019. Therefore, one can note that the development in this sector has fallen behind the ETS market carbon prices. This is interesting as the voluntary markets can also have linkages with the ETS. This is the case for example with the recently launched China ETS. The compliant companies in the China ETS can offset 5% of their emissions by domestic voluntary credits called China Certified Emission Reductions or CCERs. On a global scale, it will be interesting to see how the ETS markets develop and if these will start including more sectors, as this could decrease voluntary carbon market demand from companies. This would make these markets more reliant on individuals rather than companies voluntarily compensating for their carbon emissions.
Figure 1: Global Carbon Prices, Selected Markets 2010-4/2021
Source: World Bank, Forest Trends, Margules Groome
Note: OBPS= Output-Based Pricing System, BC GGIRCA= British Columbia Greenhouse Gas Industrial Reporting and Control Act
Figure 2 demonstrates the market sales over the last 2.5 years and is updated to the most recent available data. It shows that prices have on average stayed reasonably stable in USD terms before starting to increase in late 2020 (especially EU ETS, Swiss ETS, NZ ETS, and temporarily Korea ETS). In China, various regional pilot ETS systems have been in place for years before the implementation of national ETS. Margules Groome included these markets (Shenzhen, Shanghai, Beijing) as possible lead indicators of China ETS prices in the short-term.
Figure 2: Global Carbon Prices, Selected Markets 1/2019-6/2021
Source: World Bank, ICAP, Margules Groome
At the time of publishing this article, in mid-September, the EU ETS and NZ ETS prices continue to increase. The EU ETS prices have been above EUR 60-63/ tCO₂e and NZ ETS skyrocketed to ~NZD60-65/tCO₂e. These prices translate to USD71-74/tCO₂e and USD43-47/tCO₂e respectively. The prices in China ETS appear to have slightly decreased from the opening prices. It will be interesting to see how the prices develop in the near term and what kind of implications this will have to different sectors. The UN Climate Change Conference (COP26) will be held in late November in Glasgow, UK, and this could be one further event to impact the carbon sector development.
Margules Groome will continue to monitor carbon market developments and the role that forestry plays. We are planning on providing another article later this year more specifically discussing the impacts seen in New Zealand. For further information and analysis in the meanwhile, please contact Margules Groome Consulting.