As climate change becomes a hotly-debated international issue, CO₂ emission right has become a new investment product, attracting large amounts of capital. According to the estimation of the UN and the World Bank, global carbon trading market will reach $150 billion in 2012, and may surpass the oil market as the largest market in the world. Generally speaking, carbon trading market can be classified into quota trading market and Voluntary Carbon Market (VCM). The quota trading market is intended for countries and companies that have an upper limit for greenhouse gas emission; they trade in this market so as to meet their targets for emission reduction. However, VCM is for meeting the goals concerning corporate social responsibility, brand building, social effect, etc.

Quota carbon trading can be classified into two types. One is the quota-based trading: under the Cap-and-Trade system, the buyer buys the emission reduction quotas that are set, distributed and auctioned by authorities. The quotas may be the AAUs under the Kyoto Protocol or the EUAs under the EU Emission Trading System (ETS). The other one is the project-based trading: the buyer buys quotas from projects that have been verified to be reducing emission. Typical examples of this type of quotas are the CERs and Emission Reduction Units (ERUs) generated under the CDM and the Joint Implementation (JI) mechanism. According to an estimation, developed countries’ emission reduction goal is 5 to 5.5 billion tons of CO₂ (2008-2012), and among them, about 2.4 billion tons are realized through flexible mechanisms, mainly the CDM. An analysis of UNEP resources center’s data shows that the CDM projects that have entered development process by September, 2008, will have generated 2.74 billion tons of emission reduction by 2012. However, as a result of the facts that some projects do not have additionality and do not generate CERs, and that the UN’s review and approval process is inefficient and becoming more rigorous, the real supply will be much lower than that. Table 3-1 gives the latest predictions on supply by three authoritative institutions. It can be seen that there is still a supply gap of 400-700 million tons on the market.

Table 3-1 Perdition of Carbon Credit Supply by Authoritative Institutions

As EU companies save the CERs for use in the third period (2013-2020) of the EU-ETS, analysts predict the supply gap of CER will be 0.7-1.3 billion tons. If positive results can be achieved in post-Kyoto talks, the demand for CER will multiply.

As a result of the above facts, since the Kyoto Protocol came into force in 2005, many top financial conglomerates, including Britain’s Standard Chattered Bank, Germany’s Deutsche Bank, and the Netherlands Development Finance Company (FMO), have entered the carbon trading market. Currently, financial institutions like Morgan Stanley, Merrill Lynch, Goldman Sachs are expanding their carbon trading business, and the Bank of America, Societe General and Fortis Bank are establishing carbon trading funds. According to a recent report by Hexun.com, China Investment Corporation is also paying close attention to the carbon trading market, and intends to grasp the opportunities in the high return investment.