Expected Growth of the Carbon Trading Market

Why Will the Carbon Market Grow so Quickly?

Freely traded markets work according to the basic laws of supply and demand:

When supply is low, and demand is high, prices (and therefore market value) will be high or increasing.

This is what’s going to happen with the carbon trading market. Governments have set “caps” on the carbon they want to have output from their countries. They issue a certain amount of carbon credits or permits up to that cap total.

A business can only emit carbon dioxide or other greenhouse gases if they have permits to do so. Once those permits are all used up, they’re gone.

However, some companies won’t use all of their credits. This is why the market exists. These companies can choose to sell their excess carbon permits to higher-polluting companies who need more credits.

The real goal of carbon trading schemes is for the government to reduce overall emissions nationwide over a period of several years to several decades. Therefore, an existing cap will be progressively lowered over time.

When a cap on carbon emissions is lowered, fewer permits or credits will be made available, although the same companies will be vying for them. That means increasing demand for a lower supply - prices will go up. They’ll continue to go up until we get to a point where most businesses have opted to severely decrease their carbon emissions rather than being willing to pay for more credits. For some industries, buying credits may always be the more cost-effective option.

Because we know for a fact that the government is committed to lowering emissions further in the future, we know that the supply of carbon credits will eventually decrease (likely several times as caps are adjusted). This is why analysts can somewhat safely predict the growth of the carbon market, and why, by its very nature, it’s set to become the largest commodity market in the world.

Last updated 22 September 2008