Price volatility will become a key characteristic of carbon, as its price becomes ever more difficult to forecast accurately, says energy expert GlobalData.
Its report on the topic says that the current European sovereign debt crisis has drastically reduced carbon demand, and hence its price in the trading market has also seen a steep decline.
The failure of the international community to agree on a common goal in a post-2012 Kyoto framework has damaged the confidence of the private sector, and played a role in lowering the price of carbon.
Carbon is traded at national and regional levels in various markets, and future prices and stability have always been a concern for private players and policy makers. Several models have been developed to forecast the market price of carbon, although outcomes differ significantly.
This is due to the nature of the carbon market, which is affected and driven by a complex set of subjective factors.
Geo-climatic policies and energy policies, geo-politics, global economic growth, crude oil price, coal prices and the demand and supply scenario all help to drive and shape the carbon market.
The European Union Allowances (EUAs) under the European Union Emission Trading Scheme (EU ETS) is the largest cap and trade carbon trading mechanism, followed by Certified Emission Reduction (CER) under the Clean Development Mechanism (CDM).
Both of these programmes come under the Kyoto Protocol. EUAs and CERs are used to offset the same amount of CO2 emissions, but are not equal in price due to regulatory differences for the use of CERs in the EU ETS.
The Carbon Pollution Reduction Scheme (CPRS) in Australia and the New Zealand Emission Trading Scheme (NZ ETS) in New Zealand are also important, and more regional and national markets will be operational in the future. Such developments are expected to boost the carbon market.
The short-term view of the carbon market is pessimistic, as the prolonged European sovereign debt crisis, over-supply of carbon units, and uncertainties under the Kyoto Protocol are expected to keep prices low.
The EU recession means that emissions will grow less than expected, in correlation to overall economic growth.
As the EU shows signs of recovery from the recession, carbon prices will follow the same path, although this seems unlikely in the next few years.
The economic conditions in the Euro zone and outcomes of the Kyoto Protocol will determine the global price of carbon in the long-term, with government commitments to tackling climate change dictating the scenario.
The oversupply of allowances will keep pulling the price down over the long-term, although global macro economic conditions will also play a role, and prices will increase if India, China and Brazil also promise to meet certain targets by 2020.
Apart from negotiations under Kyoto, various regional and national market mechanisms have emerged or developed to offset emissions, despite delays and setbacks.
Australia, Japan, New Zealand, South Korea and emerging economies such as India, Brazil and China are developing their carbon markets.
The current state of the market and its future success remains dependent on post-2012 international agreements and their fulfilment.
For the general Understanding of the Kyoto Protocol and Carbon trade Read here