2010 has not been a good year for the carbon markets. The cap and trade system at the Chicago Climate Exchange has just closed, and the US Congress and the Obama administration gave up on a national cap-and-trade policy. Fortunately, European carbon markets remained active and the Western Climate Initiative, a cap-and-trade program, which includes several Western states and Canadian provinces, continues on its planned launch in 2012.

California has the world’s eighth-largest economy and the highest gross state product in the United States, at $1.7 trillion in 2009. California’s law is the key reason the state leads the other 49 in clean-tech venture capital, with more than $1 billion in the second quarter of 2010. That accounts for 70 percent of total U.S. clean-tech investment, according to the Bay Area Council Economic Institute.

This week California regulators voted to approve the most comprehensive U.S. cap yet on greenhouse gases as the nation’s first economy-wide, market-based greenhouse gas scheme in the absence of federal action. This will create the biggest carbon market in the country. This climate change law, which goes into effect in 2012, paves the way for a “cap and trade” system that will cover 85 percent of the state’s industrial emissions by the time it ends in 2020.

In this system, all emitters will start out receiving enough free permits to cover the majority of their emissions, but will gradually have to buy more, via quarterly auctions that will begin in February 2012. Companies emitting less than their state-mandated limit can trade their unused allowance – also known as carbon credits, or offsets – with companies that may be seeking to emit more than their mandated share. Over time, this is designed to limit the 25,000 tons of CO2 per year from the state’s 500 largest emitters – mostly power plants, oil & gas refineries, steel manufacturers, and heavy industry.

Pacific Carbon Exchange, PCarbX, will operate the carbon market for California, and plans to commence the trading of carbon futures and options trading next year, pending a full rollout when the bell officially rings in January 2012. The market is estimated to range $3 billion to $58 billion by 2020 – the target year for California’s emissions to be lowered.
Incubated by the Bay Area Council, PCarbX has developed its trading infrastructure for the past two years and is in the process of obtaining the certifications and accreditations from the U.S. Commodity and Futures Exchange Commission. In September, it signed a memorandum of understanding with the Shanghai Environment and Energy Exchange to explore the establishment of more carbon markets in the United States and China. More work remained to be done over the next year, including calculating allowance levels for emitters, creating more offsets, determining whether biomass emissions should be covered under the cap and calculating final allowances to be handed to utilities.

Financial analysts have estimated the 2.7 billion allowances will be worth $15-$60 by 2020; a forward trade conducted last month put the price at $11.50 per tonne. The global Intercontinental Exchange and the Green Exchange, are also expected to enter the Californian market.

Bloomberg New Energy Finance reported that global carbon markets are expected to grow 15 percent in 2011 to 107 billion euros ($139 billion) this year from 93 billion euros last year as European power producers buy more permits before they are forced to pay higher prices at auctions starting in 2013.

The carbon market’s value rose 5 percent in 2010 as global prices increased 17 percent, despite trading volumes dropping 10 percent to 6.9 billion metric tons. European Union carbon allowances for delivery in 2011 rose 0.9 percent of 14.66 euros today on the ICE Futures Europe exchange in London, up 13 percent from a year ago. United Nation’s credits for 2011 fell 0.3 percent to 11.20 euros.

Europe dominates the carbon market with 81 percent of total trades in 2010. The world’s carbon markets could reach up to 1.7 trillion euros in 2020 if these countries were to implement meaningful cap-and-trade schemes.