There is a flux in the global carbon emissions trading markets. Prices of European Union Allowances (EUAs) as well as Certified Emission Reduction (CER) credits issued by the United Nations have fallen to multi-year lows even as countries like Australia are pushing ahead with their plans for seeding a carbon market.

The European Union?s Emissions Trading System is the world?s biggest cap-and-trade programme. Prices have been subdued as the economic woes of the region depressed demand. CER credits, which are derived from projects in developing countries but can be used in the EU market to a limited extent for compliance, have also witnessed a slide in prices as the market has been oversupplied.

EUAs for December delivery sank to ?9.37 per metric tonne on the ICE Futures Europe exchange in London last week?the lowest level since February 2009. CER prices dropped to their lowest ever level of ?6.67.

Bloomberg New Energy Finance estimates global carbon markets will be worth ?94 billion in 2011?a 13% rise from 2010 but an 11% reduction on our forecast made in July 2011.

The market is estimated to grow to ?680 billion by 2020.

The future price of carbon will depend on developments on some critical fronts, which will impact demand, or supply, or both. Let?s take aviation first. The proposed inclusion of emissions from airlines in the EU scheme in 2012 would see a significant spurt in demand, which would lead to higher prices. All airlines landing or taking off from these countries would have to comply with the emission norms. Many countries, including the US, Russia, China and India, are opposed to what is seen as a unilateral move by the EU.

The future emissions-control-protocol also has a significant bearing on the carbon markets. About 200 nations are set to meet in Durban later this month to try and thrash out a climate change action plan. They will debate whether to extend the 1997 Kyoto Protocol, replace it with a new treaty or do something in between. The first commitment period under the Kyoto agreement?which binds developed countries to reduce emissions?ends in 2012.

Despite several preparatory rounds ahead of the conference in South Africa, talks are at an impasse for several reasons, including the lack of consensus over which nations should take on binding targets to reduce emissions. The Kyoto pact, which was never ratified by the US, distinguished between developed and developing countries, and imposed emission limits only on the former. Some industrialised nations are now demanding binding emission targets for large emerging economies like China, Brazil and India.

India?s environment minister Jayanthi Natarajan said she ?strongly? believes there should be an extension of the Kyoto Protocol. Watch out for November 28, when the talks begin.

The broader state of the economy?which determines the extent of emissions-intensive activity?also impacts the demand and supply of emissions. The intensity of Europe?s economic pain, and the extent to which it is transmitted around the world, will determine the demand for emission credits. The state of the economy also influences the appetite for clean energy investment, which has a bearing on the supply side of credits.

New carbon markets

There are nevertheless a host of countries and states that are working on cap-and-trade plans for carbon emissions. California state is one. Large emitters would have to hold a permit for every tonne of carbon released beginning January 1, 2013. Bloomberg New Energy Finance analysts expect allowance prices at $13 per tonne of carbon dioxide emitted in 2013, going up to $59 by 2020.

Australia?s lower house passed Prime Minister Julia Gillard?s carbon plan last month. The developed world?s biggest per-capita polluter plans to make about 500 companies pay AUD 23 a tonne for their carbon emissions starting in July 2012, before the country switches to a cap-and-trade system three years later.

In Asia, China revealed that it is studying an environmental protection tax. The world?s largest emitter of carbon has pledged to reduce emissions per unit of gross domestic product by as much as 45% in 2020 from 2005 levels. South Korea is aiming to pass a law this year to start carbon emissions trading by 2015, despite opposition from industry. The country has pledged a 30% reduction in emissions from business-as-usual levels by 2020. New Zealand already has an operational carbon market.

Vandana Gombar is the Editor, South Asia for Bloomberg New Energy Finance (www.bnef.com), a leading provider of independent analysis, data and news in the clean energy and carbon markets, headquartered in the UK