"The post-2012 market is currently insufficiently liquid and transparent for consistent price discovery," said Jill Barker, global marketing executive at Ecosecurities, a Dublin-based developer and supplier of emissions reduction projects.

The Kyoto protocol obliges rich countries to reduce emissions of six greenhouse gases by some 5 per cent below the 1990 level during the period 2008-2012, and countries can partly meet those commitments by buying UN-backed offset credits. The most active carbon credit scheme is the Kyoto protocol's clean development mechanism (CDM). The CDM allows companies and governments in rich nations with caps on emissions to trade carbon credits for compliance purposes, in return for their investments in emissions-reduction projects in developing countries.

Point Carbon analysts pegged last year’s CDM market value at nearly $20 billion, and some analysts say global carbon trading has the potential to reach some $100 billion by 2020.

The bulk of global demand for CDM carbon credits, called certified emissions reductions, comes from companies participating in the European emissions trading scheme – the 27-nation bloc’s main policy tool to help member states meet their international and regional targets. But uncertainty prevails over both demand for credits and how a future UN offsetting scheme might be shaped after 2012.

“We can have an idea about supply if we make some hypotheses, but we don’t know much about demand (post-2012),” Emmanuel Fages, analyst a financial services firm Societe Generale, told Point Carbon.

International negotiators have agreed to conclude talks on finding a potential successor to the Kyoto protocol by the end of 2009, and a revamp of the CDM is on the agenda for the talks. However, negotiations are at an early stage, with large emitting countries like the US, Russia, China and India wary about taking on post-2012 binding emissions reduction targets.The EU bloc is currently debating new rules for its emissions trading scheme from 2013, which could affect future demand for CDM credits – depending on whether there is a post-2012 international agreement. The market would have much more clarity about demand if the US committed to binding emissions reductions targets in a post-2012 agreement, said Fages.

The EU aims to have the post-2012 design of its carbon trading scheme enshrined in law by early 2009, although some observers remain sceptical it will manage to meet that deadline.

Price range

The current price range for post-2012 carbon credits generated by CDM projects is about €5.50-€7.50 ($8.51-$11.60) per tonne of carbon dioxide equivalent, according to Urs Brodmann, chief risk officer and member of the executive board of First Climate, a carbon asset management company. “The price range really depends on the quality of the project,” he said. Brodmann pointed out that a higher premium would be paid for projects offering higher delivery certainty or environmental and social side benefits. “Generally, the volume of trades involving a firm offtake obligation for the buyer is today quite small compared to the volume of trades in Kyoto vintages,” he said.

Still, Brodmann said that the future development of the post-2012 CER price range largely hinges on the outcome of international climate negotiations in December 2009.

“December 2009 will be the earliest date when an agreement can be adopted, and then any agreement will need to be ratified, which could still take some years,” Brodmann said. “We don’t expect the (post-2012 CER) price range to change much in the near term,” he said, adding that “we see ourselves as an important driver of demand so the price range will be supported.”

First Climate, as investment adviser, together with Conning Asset Management Ltd, manage a €125 million, post-2012 carbon credit fund, which is supported by the European Investment Bank (EIB) and four European bank partners. The fund will purchase and trade Kyoto protocol carbon credits from 2013 to 2022.

“The most important thing for project developers to remember when deciding how to handle their post-2012 volumes is that they need a reliable counterparty, which is likely to be around post-2012,” said Ecosecurities' Barker. “Ecosecurities is already signing contracts which last up to 2017, as we have every intention of being a large player in the market for years to come. However, not all counterparties may be able to sustain their business model this long,” she added.