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Post-Copenhagen, carbon market in 'bit of a vacuum'

The fledgling carbon market is stumbling in confusion after the inconclusive end to the Copenhagen climate conference, pushing prices down on the official European exchange and stoking uncertainty among traders in North America.

Benchmark prices on the European Climate Exchange, the world's main carbon trading hub, closed at €12.71 ($19.14) per tonne yesterday, up from €12.45 on Monday but down from €13.58 last Friday, the final day of the Copenhagen summit. The price is now 15-per-cent lower than this month's high of €15.01 reached on Dec. 7, the day the conference began.

Buyers and sellers of carbon credits - which companies use to offset their greenhouse-gas emissions - said the lack of a new international framework that demands specific reductions has put the carbon market in limbo. In North America, where the carbon market has stalled in the absence of legislation, attention now turns to the potential of the U.S. Congress to pass a law that would cap emissions and establish a market for trading of credits.

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Participants in the European and Kyoto accord-linked markets said this week's dip is because of the post-Copenhagen confusion and might not last, given that the Kyoto system still has three years of legal force.

"I don't take a lot of stock in a short-term depression in price. The market's assessing the impact. It's quite possible the market will bounce back," said Don Wharton, vice-president of sustainable development at TransAlta Corp., a Calgary-based coal-power company.

Amid the uncertainty, and with the holiday season under way, carbon players are now awaiting the new year to recharge their businesses.

"We were hoping we'd be in a better position to take longer-term positions after Copenhagen, and we're not in that in the position," said Donovan Woollard, chief operating officer of Vancouver-based broker Offsetters, which has delayed the closing of several deals.

"Any time there's a lack of clarity or a postponement on clarity, it makes it more challenging," he added.

In Alberta, home to Canada's only emissions regulations, carbon-credit sales are typically busy only in the three-month runup to the end of the province's fiscal year, March 31.

One way to comply with regulations is to purchase credits, from various sources such as no-till farming (which reduces the amount of carbon emitted from agricultural activity). Other options include actually reducing emissions (typically the most expensive and difficult), or paying $15 a tonne to a technology fund. Experts have estimated the real cost to implement technology to reduce emissions would cost roughly $50 a tonne.

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Prices early this year on deals in Alberta were less than $15 a tonne, according to Robert Andrews, president of broker Blue Source Canada. The Calgary company helps develop projects from which carbon credits can be sold, and works with companies that need credits.

"We're looking to invest in new projects and it's very difficult to do this given that the carbon risk [for emitters]is ill-defined," Mr. Andrews said.

The current scene is one of partial paralysis for companies looking to purchase credits as a way to comply with regulations, or for those that want to sell credits. "Both sides are operating in a bit of a vacuum," Mr. Andrews said.

The price of carbon is erratic. Volume on the European exchange has nearly doubled in 2009, to about five billion tonnes, and prices peaked at €16.63 in May - about the same as the €16.20 that opened the year - and the low close was €8.43 in February.

Although trading in Europe has been active since its exchange opened in 2005, in the wake of the Kyoto accord, the Chicago and Montreal climate exchanges are basically frozen; few contracts trade and the price sits at 15 cents a tonne.

A real cap-and-trade system, if established by Congress and the Obama administration, would spark new vigour, carbon-market players have said. Canada has indicated it would essentially replicate what the U.S. does. A coalition of states and provinces, led by California, is pushing to start a cap-and-trade system by 2012 and would meld it with a national U.S. program when one emerges.

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