The growing global patchwork of carbon markets is likely to remain fragmented for many years as governments focus on driving abatement within their own territories, a conference heard on Wednesday.

Over 60 national and sub-national jurisdictions have or plan to set up carbon pricing instruments, covering almost a quarter of global greenhouse gas emissions.

But far from uniting in a push to drive down the cost of cutting pollution, these markets are becoming more fractured, experts told Eurelectric’s To Paris and Beyond conference in Brussels.

“Only domestic offsets are eligible in most markets. It used to be international credits,” said Stig Schjolset, an analyst at Thomson Reuters Point Carbon.

“This is killing the international credit markets and it also means a more fragmented carbon market, as the CDM used to be the glue drawing markets together,” he added.

The UN’s CDM has issued 1.5 billion carbon credits and channelled $350 billion of investments to carbon-cutting projects in developing countries, but investment has slowed to a trickle due to low CER prices and as Chinese and Korean developers seek to convert their projects to deliver units eligible for their fledgling domestic markets.

North America’s WCI market has a burgeoning offset scene, but to date it only accepts projects within the US and Canada. Meanwhile, newer policies in Mexico and South Africa seek to make use of domestic or regional crediting only.

EU HESITANT

The EU, home to the world’s biggest market, has no current plans to source more foreign carbon credits and appears in no hurry to connect its scheme with others.

The EU’s top climate official Jos Delbeke said other governments must first get their carbon markets up and running before the EU is prepared to negotiate linking to its ETS.

“Before you get into a debate on linking you have to have an established ETS,” he said, adding that the linking of carbon markets “politically is not yet on our table” with any other entity except Switzerland.

“For others to link, for example China, it’s too early. Time will tell, we had one experience with Australia and things were really quite advanced. And then the politics changed,” he said.

He was referring to the link that was due to start by 2015, but Australia’s market was scrapped by Tony Abbott’s Liberal party upon taking office in 2013.

The EU has been in negotiations with Switzerland off-and-on for many years, and is only expected to conclude linking talks later this year and complete the connection between the respective schemes in 2017.

Delbeke added that EU officials are working closely with their counterparts implementing schemes in other parts of the world, which could make linking easier should the opportunity arise.

“We are in contact with Quebec and California. We give and share their best experiences, so when political linking debate comes up it’s not going to be too complicated,” he said, referring to the jointly-operated WCI market.

The EU will launch a technical collaboration next year with South Korea, and the bloc has recently renewed its cooperation with China.

NAÏVE

“It would just be naïve to suggest that a China-EU ETS link could be established any time in the next decade,” said Maarten Neelis, a consultant at Ecofys who has spent several years in China working on carbon market issues.

“The market is becoming more and more domestic. I’m very positive about the future of carbon pricing domestically, but pessimistic about any form of linking,” he added.

“There are intentions but it’s very unlikely they will lead to direct linking in the near future.”

GLOBAL OUTLOOK

The current list of INDCs suggests there could be up to 1.9 billion tonnes of CO2 market demand over 2021-2030, observers have calculated.

But the nature of the pledges and the lack of international outlook from major emitters such as the EU, US and China is likely to limit the prospects of a burgeoning transnational carbon market or a resurgence of the CDM, according to Point Carbon’s Schjolset.

“Looking at INDCs, a lot of countries say they will use or support markets, but if you look at who will buy any UN credits, the list is incredibly short: New Zealand, Switzerland, potentially Norway, (and) there it stops,” he said.

“Most of those that are supportive would like to sell. That’s hardly enough to support an international market. And I don’t think that will change anytime soon.”

By Ben Garside – ben@carbon-pulse.com