The Kyoto Protocol’s emissions offset market is oversupplied by 13 billion metric tons of carbon dioxide, more than 1,000 times greater than the anticipated demand of 11.5 million mt, according to analysis by Thomson Reuters Point Carbon.
The surplus in the first Kyoto commitment period (2008-2012) could compound in the second phase, which kicks off next year, leading to a glut as large as 16.2 gigatons and threatening the global carbon market over the long term. If Australia and New Zealand do not join the second commitment period, the surplus could be as high 17.2 Gt CO2, which includes the carryover from the first commitment period, Point Carbon said.
Demand will remain weak—and sustain the glut—as long as governments continue to set emissions caps higher than the expected business-as-usual emissions for the period, Point Carbon said.
Countries that agreed to emissions targets as part of the Kyoto Protocol between 2008 and 2012 were issued a set number of tradable emissions allowances known as Assigned Amount Units, or AAUs. One AAU allows a country to emit one mt of CO2 equivalent.
The effect of the surplus AAUs on the carbon market is minimal over the short term, said Olga Gassan-zade, associate director of advisory services at Thomson Reuters Point Carbon and co-author of the analysis. However, if the surplus extends beyond 2020 then the oversupplied market is likely to continue indefinitely, said Gassan-zade. This would essentially kill the market.
The balance of emissions offset in the second commitment period could shift to a net shortfall of 2 Gt CO2 if countries set caps at the high end of the range of pledges made at the Copenhagen summit. This means a 30 percent reduction of emissions on 1990 levels by 2020 for the EU, a 25 percent reduction for Australia and a 20 percent cut for New Zealand.
The issue of surplus AAUs and the second commitment period will be discussed at UNFCCC’s Climate Change Conference scheduled for November in Doha, Qatar.
The value of the world’s carbon markets has declined despite above average trading volumes due to the oversupply of carbon allowances. Bloomberg New Energy Finance predicted in April that volumes will grow by 39 percent over the year, on increasing auctioning volumes in the EU ETS. However, the oversupply will continue to weigh on market values, which Bloomberg forecast will fall by 7.5 percent on an annual basis to €85bn.