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Economist: Carbon markets after Copenhagen: Don't hold your breath

February 4, 2010

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The Economist offers two explainations for the failure of carbon markets to take off. One is that the markets had already priced in the likelihood of seeing neither a deal in Copenhagen nor a cap-and-trade bill on Barack Obama's desk. Another is that their long-term prospects remain reasonable, if humble.

SOMETHING curious has been happening in the carbon markets. They are entirely political creations-even the most inventive financial engineers would not, on their own, have come up with the idea of a difference in value between the air people breathe in and the air they breathe out. Yet traders seem pretty uninterested in political cues. At the chaotic end of the Copenhagen climate summit in December, prices in the largest market in carbon-dioxide emissions, the European Emissions Trading Scheme (ETS), did drop from €14.60 ($20.50) to €12.70. But that still left the price of a tonne of carbon dioxide comfortably above its lowest level last year.

The Democrats' subsequent Senate-election loss in Massachusetts, which dealt a crippling blow to the prospects of an American cap-and-trade system that would have greatly expanded world carbon markets, had even less effect. And the announcement this week of the commitments to carbon reduction that countries were willing to accept under the Copenhagen "accord" caused scarcely a ripple.

There are two explanations for this sangfroid. One is that the markets had already priced in the likelihood of seeing neither a deal in Copenhagen nor a cap-and-trade bill on Barack Obama's desk. Another is that their long-term prospects remain reasonable, if humble.

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