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Special report: Carbon capping

Special report: Carbon capping

The Middle East’s cap and trade system could mean big money for regional companies, but first both they – and governments – need to embrace it.

May 7, 2010 9:54 by

When the European Union announced that carbon emissions fell more sharply in 2009 than ever before, the news could have been a positive endorsement of companies in the region that make money selling carbon reduction projects to their European counterparts.

Instead, the dramatic drop was largely attributed to decreased production created by the financial crisis. Both the economic downturn and legal uncertainties mean plans for a regional carbon exchange and for Middle East participation in the complicated world of energy related financial instruments have been delayed. In 2007, Doha Bank and the Dubai Mercantile Exchange, working with EcoSecurties, both announced plans to debut a Middle East carbon exchange. Three years later, these plans seem to have passed from the public eye.

A researcher at the Belfar Center’s Dubai Initiative at Harvard, Justin Dargin, completed a set of policy recommendations for the UAE government on establishing a Middle East carbon trading platform. Dargin said he would ideally like to see a carbon exchange platform introduced in phases beginning in 2012, but concrete plans have been delayed, likely for another year or two.

Using the EU’s exchange as a model, Dargin proposed an initial voluntary phase during which companies and traders could become accustomed to the system. Europe is the only place with a mandatory cap-and-trade system, which limits a company’s carbon emissions and provides for the sale of any unused emissions to other companies.

Yet voluntary markets, such as the one in Chicago, face criticism.

“If you see voluntary schemes then it is much more up to the exchanges [to determine] the criteria for what is deemed environmental integrity,” the chief executive of Point Carbon, Per Otto Wold, says. “With the voluntary market in Chicago, there has been more criticisms towards the environmental integrity of what’s traded there as opposed to the European Climate Exchange, which is mandatory.”

A Middle East-based exchange for carbon emissions would undoubtedly face challenges, not least of all ones stemming from liquidity. In the Gulf, Saudi Arabia’s stock market is the most liquid, but a propensity for private family ownership and relatively small appetites for transparency mean that many stock exchanges have trouble with liquidity.

Under the Kyoto Protocol, an exchange in a developing market can be voluntary, much like the one in Chicago. Dargin argues that an initial voluntary program would help resolve liquidity issues. “You want to have a liquid carbon trading system and the UAE is not really that large. So you should start off initially with at least getting started with the carbon trading platform, to get industry internalizing the carbon trading platform.” says Dargin.

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