A very quick comparison of the proposed Waxman-Markey Cap-and-Trade Scheme, the EU Emissions Trading Scheme and the Carbon Pollution Reduction Scheme in Australia.





EMISSIONS TARGETS 3% below 2005 levels by 2012.

20% below 2005 levels by 2020.

83% below 2005 levels by 2050.

21% below 2005 levels by 2020 in absence of global agreement.

30% below 2000 levels by 2020 in event of global agreement.

80% below 2000 levels by 2050.

108% of 2000 levels by 2012.

5% below 2000 levels by 2020 in absence of global agreement.

15% below 2000 levels by 2020 in event of global agreement.

60% below 2000 levels by 2050.

COVERAGE 86% of US emissions.

Coverage of both upstream and downstream sources, including electricity, iron & steel, cement, paper, refining, transport fuel, natural gas.

Excluding aviation.

All six GHGs.

52% of EU emissions from Phase 3.

Covering +12,000 sites.

Covering direct downstream sources, including electricity, iron & steel, cement, paper, aviation (from Phase 3).

Excluding transport.

CO2 emissions in Phase 1. N2O and PFC emissions from selected sources in Phase 3.

75% of Australian emissions.

Covering 1,000 sites.

Focus on upstream sources, including coal, natural gas, transport fuel, iron & steel, cement, paper.

Including aviation via upstream fuel use.

All six GHGs.

ALLOCATION Gratis allocation of about 20% of allowances to selected liable parties, notably trade exposed industries, declining over time and phased-out by 2035.

Gratis allocation of about 40% of allowances to selected sectors to reduce impact of scheme on consumers, notably electricity, natural gas and heating oil suppliers.

Gratis allocation of about 20% of allowances to selected sectors to encourage development of clean technologies, notably state governments, automakers and CCS pilot sites.

Remaining allowances auctioned, increasing from 18% in initial years to about 70% by 2030.

Gratis allocation to most liable parties to date with some limited auctioning on a country-by-country basis.

From phase 3 estimate about 60% of allowances will be auctioned and the remainder allocated gratis to worst-affected sectors.

Gratis allocation will be phased out by 2020.

Majority auctioned with price cap.

Portion reserved for allocation to trade-exposed industries.

INDUSTRY SUPPORT Support provided to trade exposed sectors via gratis allocation of allowances.

Support provided to affected industries via gratis allocation of allowances to offset energy price increases.

Financial support provided to low income households and affected workers from revenue from auction of allowances.

Support provided indirectly via gratis allocation of allowances to energy intensive sectors and new entrant reserves. Support provided to electricity generators and trade exposed energy intensive industries via gratis allocation of allowances and funding.

Financial support to affected regions and industries from revenue from auction of allowances.

Estimated A$23 billion to be transferred to various support programs over first four years of scheme, including A$750 million for indirect assistance to coal mining sector.

PRICE CONTROLS Minimum auction price of US$10, rising at 5% plus CPI each year.

No price cap.

No price cap. Price cap of A$40 for first 5 years, rising at twice CPI.

Two-year compliance period with unlimited borrowing within the compliance period.

Borrowing up to 15% of allowances from 2 to 5 years ahead at 8% interest.

Strategic reserve of 5% (rising to 10%) of allowances available for auction if allowance prices exceed 160% of average price over rolling 3 year period.

Unlimited banking.

Five-year compliance period with unlimited borrowing within the compliance period.

Reserve of 5% of allowances will be retained for new entrants.

Unlimited banking.

Price cap of A$40/AEU for first 5 years rising at twice CPI.

EMISSION OFFSETS Allow up to 2 billion offsets per year.

Allow up to 1 billion international offsets, rising to 1.5 billion under certain circumstances.

Allow up to 1 billion domestic offsets.

Offsets from forestry, agriculture and landuse changes are eligible.

Allow use of CERs and ERUs up to 50% of the emission reduction task, equivalent to about 200 million CERs/ERUs per year over 2008 to 2020.

From Phase 3 domestic offsets are eligible but there are no guidelines yet published.

Offsets from forestry, agriculture and landuse changes are not eligible.

Allow unlimited use of selected Kyoto Instruments (CERs & ERUs).

Provisions exist to expand accepted instruments over time.

Offsets from forestry are eligible; offsets from agriculture are not eligible at the outset, but this will be reviewed in 2013.

REGULATION OF TRADING Federal Energy Regulatory Commission responsible for regulation of cash market in allowances and offsets.

Commodity Futures Trading Commission responsible for regulation of derivatives market.

Over-the-counter trading of derivatives prohibited.

Regulation is the responsibility of individual national regulators, such as the Financial Services Authority in the UK, or the Autorité des Marchés Financiers in France.

Over-the-counter trading of derivatives is permitted.

Derivatives will be defined as financial instruments and regulated under the Australian Financial Services Act.
TRADE MEASURES In absence of international agreement, obligation to introduce an import credit scheme on imported products, linked to the emission trading scheme. No trade measures proposed. No trade measures proposed.

If we take a look at some of the numbers behind the Waxman-Markey Bill, we get a clearer sense of its ambition, its limitations and the winners and losers.

Content of the Bill

From reading much of the coverage of the bill, one might be forgiven for believing that the bill is nothing more than a cap-and-trade scheme. In point of fact it is a lot more than just a trading scheme. The bill includes provisions that mandate emission performance standards for new coal-fired power stations, making it virtually mandatory for such sites to install CCS. It includes a mandatory nationwide renewable energy standard and funding provisions for a range of renewable energy, energy efficiency and clean transport technologies. The bill also sets objectives to reduce tropical deforestation and it would make use of the revenue generated from allowance allocations to fund domestic and international adaptation, as well as international technology transfer. You’ll find an overview of the bill here.

Coverage of Cap-and-Trade

The bill proposes a cap-and-trade scheme which would cover 84.5% of US emissions by 2016. This compares more than favourably with the EU’s coverage of just 52 percent (assuming the proposals to extend the scope of the EU ETS are accepted), or the coverage under the proposed Australian CPRS of about 75 percent. When we take into account that the bill also allows for the participation of domestic emission offsets, it is evident that there will be very few US emissions sources that will not participate in the scheme in one way or another.

Emissions Reductions

The bill would cap emissions from large sources at 17% below 2005 levels in 2020 and at 83% below 2005 levels in 2050. Relative to the EPA’s projected business-as-usual emissions, this is equivalent to an emissions reduction of 1.4Gt-CO2 and 7.1Gt-CO2 respectively. If these targets are met, US per capita emission will fall from their current level of about 24.5t-CO2, to 17.8t-CO2 in 2020 and 3.07t-CO2 in 2050. The latter figure is in line with the attainment of a global emissions target of 27Gt-CO2, assuming all other countries are able to achieve the same per capita emissions. By 2050 the US emissions per unit of GDP would have declined to one-tenth of their current levels.

Role of International Emissions Offsets

The bill allows for liable parties under the cap-and-trade scheme to use up to 2 billion emission offsets per year in order to meet their emissions caps. Half of these emissions offsets may be obtained from international projects. Given the emission reductions that are required to achieve the caps, this would mean that the US could meet its entire emission reduction task using international offsets from the beginning of the scheme through until 2018. Thereafter, the US could meet 70 percent of its emission reduction task in 2020 with the use of international offsets, falling to 14 percent by 2050.

Effects on the Global Carbon Market

In 2016, 5.4 billion allowances will be allocated or auctioned under the proposed scheme. Compare this with the 1.9 billion EU ETS allowances that would be allocated or auctioned in 2016 under the proposals for Phase III of the EU ETS. In terms of the underlying carbon asset, the proposed US scheme would be almost three times the size of the expanded EU ETS.

Renewables Development

The bill mandates the generation of 20 percent of total electricity from renewable sources by 2020, with the possibility to use energy efficiency measures to cover 5 percent of the target. This would equate to a renewable energy target of 650 TWh (given the EIA forecast of electricity consumption in the US in 2020 is 4,311 TWh and assuming energy efficiency measures are used to cover 5 percent of the target). Current renewable capacity in the US (excluding conventional hydro) is about 30 GW and generates about 100 TWh of electricity per year. So to achieve the target, will require the development of about 120GW of new renewable capacity, which is about four times greater than the current installed renewable capacity (excluding conventional hydro). However, the bill is less ambitious than it at first appears. This is because the earlier American Recovery and Reinvestment Act (ARRA) has already provided a significant boost to renewables, which the EIA estimates will be in the order of 50 GW of additional new renewable capacity by 2020. So the bill itself would only add another 70 GW to that figure up to 2020. It is certainly less ambitious than the target proposed under the EU Renewable Energy Directive, which would require about 3,000TWh of installed new renewable generation by 2020 – almost five times greater than that proposed under the bill.

Energy Efficiency Potential

As noted above, the bill would allow States to meet 5 percent of the renewable energy standard using energy efficiency measures (rising to 8 percent under certain circumstances). This means an annual market for energy efficiency improvements of 220 TWh by 2020, which is the equivalent of half of the UK’s annual electricity generation. The bill also sets forth a number of other energy efficiency provisions relating to lighting products, appliances, and commercial furnaces, as well as funding for energy efficiency technologies. Nevertheless, energy efficiency is one area where the bill is relatively unambitious. Even with all measures introduced as proposed in the bill, the EPA estimate that US energy intensity (primary energy consumption per dollar of real GDP) would fall by less than 12 percent by 2050. This is extremely small, when compared with the 46 percent drop in US energy intensity that was achieved between 1975 and 2005. Energy efficiency is the bill’s biggest missed opportunity.

Reductions from CCS

The bill includes provisions that would effectively make it mandatory for new coal-fired power stations to install CCS technology. In their analysis of the bill, the EPA estimates that an additional 56 GW of CCS would need to be installed by 2025, increasing to 162 GW in 2050. That means 56 GW of CCS plant would need to be built in just 17 years – when there is not a single commercially operating example anywhere in the world. Incidentally, this would also mean that approximately 300Mt-CO2e per annum would need to be sequestered by 2025 – that is greater than the total annual emissions from a country like The Netherlands. There is a lot riding on CCS.

The Biggest Winner is Nuclear

While the bill greatly encourages the development of renewable energy, the biggest winner is nuclear. This is not evident from the text of the bill, but it is evident from a study of the EPA and EIA data. In the absence of the bill, the EIA estimated that there would be 7GW of new nuclear capacity by 2025 and 12 GW of new nuclear capacity by 2050. However, if we look at the EPA analysis, they estimate that with the passage of the bill, new nuclear capacity would increase to 34 GW in 2025 and 161 GW in 2050. There is a certain rationale behind these results: fossil fuel generation is forecast to fall dramatically; the renewable energy targets are not massively higher than the EIA was already forecasting; and the energy efficiency measures are very modest. These facts combine to create a significant gap in supply, which (rightly or wrongly) the EPA expect nuclear to fill.

The American Clean Energy and Security Act, ACES, H.R. 2454, previously known as the Waxman-Markey climate and energy bill, was recently passed by the US House of Representatives on 26 June 2009. The key elements of the bill are presented below.


The Bill is authored by the House Energy & Commerce Committee and is sponsored by the Committee’s Chairman, Congressmen, Henry Waxman (D-California) and by the Chairman of the Environment & Energy Sub-committee, Ed Markey (D-Massachusetts).

Progress to Date

The Bill was drafted by the House Energy and Commerce Committee. It was released in a draft form in March 2009 and was subsequently amended. It passed the House Energy and Commerce Committee on 21 May 2009. The bill was subsequently sent before eight other congressional committees that have responsibilities relating to the content of the bill. The most important of these committees were the Natural Resources Committee, the Ways and Means Committee and the Committee on Agriculture. These Committees reviewed and endorsed the bill. On 26 June, the Bill was sent to the US House of Representatives, where it was passed by a vote of 219 to 212.

Next Steps

After the summer recess, the bill will be sent to the Senate, which has drafted a comparable bill on energy and climate change. The Senate bill, called the American Clean Energy Leadership Act (ACELA), is a bipartisan bill, authored by the Senate Committee on Energy & Natural Resources under the chairmanship of Senator Jeff Bingaman (D-New Mexico). This bill passed the Senate Energy & Natural Resources Committee on 17 June 2009. In addition, the Senate’s Environment and Public Works Committee, chaired by Senator Barbara Boxer (D-California) has been charged with developing provisions for a cap-and-trade scheme that will be incorporated into the ACELA. The Senate Majority Leader, Harry Reid (D-Nevada) has requested that these provisions, as well as all Committee mark-ups of the ACELA, be completed by 28 September. In all likelihood, for the Waxman-Markey Bill to pass the Senate, it will need to be ‘reconciled’ with the Senate’s ACELA, which will mean further changes and compromises. If this can be achieved, the joint legislation will be sent to both chambers for a final vote, before being sent to the President for signing into law.

Overview of the Bill

The bill comprises five titles.

Title I – Clean Energy: would set standards for conventional and renewable energy technologies and provide funds to support the development of clean energy projects and technologies.

Title II – Energy Efficiency: would mandate new energy efficiency standards for appliances, buildings, transport and industry and provide funds to support energy efficiency projects and technologies.

Title III – Reducing Global Warming Pollution: would create a national cap-and-trade scheme that would reduce GHG emissions from major sources by 17 percent by 2020 and 83 percent by 2050 relative to 2005 levels.

Title IV – Transitioning to a Clean Energy Economy: would provide financial assistance to those industries and persons affected by the Bill’s provisions and protect consumers from increases in energy prices.

Title V – Offsets from Domestic Forestry & Agriculture: would provide opportunities for domestic emissions from the forestry and agricultural sectors.

Overview of waxman-Markey Bill

Overview of Waxman-Markey Bill

The Key Elements of the Bill

Clean Energy

Renewable electricity standard

The bill would create a nationwide renewable electricity standard (RES). States would be required to produce 6 percent of total electricity from renewable sources by 2012 and 20 percent by 2020. Up to 5% of the RES may be met with energy efficiency measures in place of renewables, rising to 8 percent under certain circumstances.

Eligible renewable sources are defined as wind, solar, geothermal, renewable biomass, biogas derived exclusively from renewable biomass, biofuels derived exclusively from renewable biomass, qualified hydropower commissioned after 1992, and marine and hydrokinetic sources.

Performance Standards for New Coal-Fired Power Plants & Carbon Capture and Sequestration

The bill would require coal-fired electricity generators to meet strict emission performance standards. These standards would effectively make the implementation of CCS technology mandatory at new coal-fired power stations. New coal-fired power stations that implement CCS technologies would be eligible to receive federal financial assistance in the form of freely allocated emission allowances, under certain conditions.

Coal-fired plant permitted between 2009 and 2015 Must achieve a 50 percent reduction in emissions by 2025. Would be eligible for federal financial assistance if CCS is implemented within 5 years of commencement of operations.
Coal-fired plant permitted between 2015 and 2020 Must achieve a 50 percent reduction in emissions by 2025. Would be eligible for federal financial assistance if CCS is implemented upon commencement of operations.
Coal-fired plant permitted after 2020 Must achieve a 65 percent reduction in emissions upon commencement of operations.

The 2025 deadline may be brought forward in the event that more than 4GW of CCS is installed before this date, or it may be extended by up to 18 months on a case by case basis, at the discretion of the EPA.

Funds of US$1 billion per year would be made available for CCS demonstration and deployment – the proceeds to come from a levy or ‘wire charge’ on electricity produced from fossil fuels.

Investments in Clean Energy Technologies

The bill would direct an estimated US$190 billion through 2025 towards a range of clean energy technologies, including:

  • $90 billion to renewable-energy and energy-efficiency programmes;
  • $60 billion to carbon capture and sequestration technologies;
  • $20 billion to electric and other advanced vehicles technologies; and
  • $20 billion for basic research and development.

The bill would also create the Clean Energy Deployment Administration within the federal government to support private investments in clean energy technologies, including nuclear power.

Modernizing the Electricity Grid.

The bill also includes provisions to develop smart grid technologies and to improve the national transmission grid in order to accommodate the growth in renewable electricity sources.

Energy Efficiency

Energy Efficiency Standards for New Buildings

The bill would require State governments to update building codes, which would require new buildings to be 30 percent more energy efficiency by 2012 and 50 percent more efficient by 2016.

Energy Efficiency Standards for Lighting & Appliances

The bill would mandate new efficiency standards for lighting products, commercial furnaces, and other appliances.

Fuel Standards for Heavy Vehicles

The bill would require the EPA to introduce fuel efficiency standards for heave and off-road vehicles.

National Cap-and-Trade Scheme

The bill would create a national cap-and-trade scheme covering 85 percent of US emissions with the long-term goal of delivering an 80 percent reduction in GHG emissions relative to 2005 levels by 2050.


Emissions caps would be placed electricity generators, oil refiners, natural gas suppliers, and energy intensive industries such as iron and steel, cement and paper. The caps would cover approximately 85 percent of US GHG emissions by 2016.

Emissions Caps

The proposed scheme would commence in 2012. Emissions caps would be defined relative to 2005 levels and would rise from a 3% reduction by 2012, to 17 percent by 2020, 42 percent by 2030 and 83 percent by 2050.

Allocation of Emission Allowances

At the start of the scheme, approximately 15 percent of emission allowances would be auctioned. This percentage would increase gradually over time. The revenue raised form auctions would be recycled to consumers through a combination of refundable tax credits and electronic benefit payments to minimize the impact of the scheme on low- and middle-income earners. The bill sets a minimum auction price of US$10 in 2012, rising at 5 percent plus inflation in subsequent years.

At the start of the scheme, approximately 85 percent of emission allowances would be allocated gratis. Of those allowances, about one-fifth would be allocated to liable parties, in order to reduce the impact of the scheme on key sectors.

Party Free Allocation
Liable Parties
Energy intensive industries, such as iron and steel, cement and paper. 15 percent from 2014, gradually reduced in line with emission reductions, then phased-out after 2025.
Coal-fired electricity generators and other electricity generators under long term supply contracts. 5 percent through 2025, then phased-out by 2030.
Oil refineries. 2 percent through 2025.
Electric utilities – CCS technology development 2 percent through 2017, rising to 5 percent thereafter – to be used to cover the costs of CCS.

About two-thirds would be allocated to parties not covered by the scheme, in order to support the development of clean technologies and to reduce the impact of the scheme on low- and middle-income households.

Party Free Allocation
Affected Parties
Electricity distributors. 32 percent through 2025, then phased-out by 2030 The proceeds to be used to offset increases in retail electricity prices arising from the scheme.
State governments. 10 percent through 2015, then declining gradually to 5 percent by 2022.

1.6 percent through 2025.

The proceeds to be used to fund renewable energy, energy efficiency, clean transport and transmission infrastructure projects.

The proceeds to be used to offset increases in home heating oil.

Natural gas distributors. 9 percent through 2025, then phased-out by 2030. The proceeds to be used to offset increases in retail energy prices arising from the scheme and to fund energy-efficiency projects.
Vehicle manufacturers. 3 percent through 2017, then 1 percent through 2025. The proceeds to be used to fund the development of clean vehicle technologies.

And about ten percent of allowances would be allocated to help support the transition to a clean economy, adaptation and international technology transfer.

Party Free Allocation
Domestic Adaptation 2 percent through 2012, then 4 percent through 2026, then 8 percent thereafter. The proceeds to be used to fund domestic adaptation.
Preventing Tropical Deforestation 5 percent through 2025, then 3 percent through to 2030, then 2 percent thereafter. The proceeds to be used to prevent tropical deforestation and build capacity in this area.
International Adaptation 2 percent through 2021, then 4 percent through to 2026, then 8 percent thereafter. The proceeds to be used for international adaptation and clean technology transfer.
Worker Training 0.5% through 2021, then 1 percent thereafter. The proceeds to be used for worker assistance and job training.

Preliminary modelling by the EPA estimate that allowances will be worth between US$11 to US$15 in 2012 and US$22 to US$28 in 2025. The total value of all allowances would be US$60 billion in 2012 and US$113 billion in 2025.

Cost-Containment Measures

The bill contains a number of provisions that are designed to provide flexibility and contain the costs of the scheme. These include:

  • unlimited banking of allowances;
  • a two-year compliance period (which permits borrowing one year in advance);
  • the right to borrow up to 15% of allowances from years 2 to 5 beyond the current year, but subject to payment of 8% interest;
  • a strategic reserve of allowances that are available for auction if allowance prices exceed 160% of their three-year average.
  • a minimum price of US$28 in 2012 for allowances auctioned under the strategic reserve provisions, thereafter rising at 5% plus the rate of inflation up to 2014. Thereafter, the minimum price will be 160% of the three-year average price of traded allowances.

Emission Offsets

The bill would permit liable parties to use up to 2 billion emission offsets to meet their obligations under the scheme in any given year.

Half of these offsets must be obtained from domestic sources and half from international sources. In the event that insufficient domestic emission offsets are available, the portion of international offsets may be increased from 50 percent to 75 percent of the total.

The EPA will determine the eligibility of offset projects on the advice of the Offsets Integrity Advisory Panel, which would be established under the Bill.

The US Department of Agriculture (USDA) will oversee the offsets from domestic forestry and agricultural sources.

Penalties for non-compliance

The penalty for failure to comply with the emission cap will be a fine of two times the ‘fair market value’ of the missing allowances.

Interaction with pre-existing Trading Schemes

The bill would require that pre-existing state and regional emissions trading schemes be suspended over the period 2012 to 2017. Allowances issued under these schemes before 31 December 2011, would be redeemed or exchanged for federal allowances.

Regulation of Trading

The bill sets out a framework for the regulation of trading in allowances and their derivatives. The Federal Energy Regulatory Commissions will be charged with the regulation of the cash market in allowances and offsets; while the Commodity Futures Trading Commission will have responsibility for the regulation and oversight of the derivatives market. Notably, the bill would prohibit over-the-counter trading of derivatives.

Transition to a Clean Economy

Cost-Containment Measures

The bill also includes a number of additional measures intended to reduce the impacts of the bill on those persons likely to be the worst affected by the transition to a clean economy. These measures include:

  • increased funding for the Energy Worker Training Program;
  • entitlements for workers displaced as a result of the Bill; and
  • college and university grants to prepare students for careers in the renewable energy and energy efficiency fields.

Trade Measures

The final version of the bill also introduces new trade provisions. These provisions would requrie the President, from 2018 and in the absence of an ‘equitable’ international agreement, to introduce a system of international reserve allowances for imported goods. These provisions would effectively extend the proposed cap-and-trade scheme to designated imports. Under such a scheme, importers would have to acquire allowances before products covered by the scheme could be sold in the US. The price for these international reserve allowances would be set daily so that it was ‘equivalent’ to the auction clearing price for domestic emission allowances. In this sense, it is similar to an import permit program. Provided that these provisions are applied equally to domestic and imported ‘like products’ they would be entirely consistent with WTO rules. Nevertheless, the devil will be in the detail. A great deal will rest upon how embodied CO2 can be included in the definition of ‘like products’ – this will raise a number of extremely complex issues relating to the calculation of embodied CO2 in a manner that is consistent between like products – each of which would conceivably be subject to challenge under WTO rules. The President and the Congress may waive these provisions.

Costs of the Scheme

The Congressional Budget Office (CBO) estimates that the bill would increase government revenues by US$873 billion over the 2010-2019 period and would increase direct government spending by US$864 billion over that 10-year period – creating a net revenue in the order of  US$9 billion. The CBO estimates that the bill will increase energy costs for an average American household by US$175 a year.

Useful Sources

US House of Representatives, Committee on Energy & Commerce

US House of Representatives, Committee on Energy & Commerce, Full text of The American Clean Energy and Security Act

Environmental Protection Agency, Analysis of The American Clean Energy and Security Act

Congressional Budget Office, Cost Estimate of The American Clean Energy and Security Act

The current Australian drought and the government’s response to this crisis, provide striking lessons for how we should respond to climate change.


In the last one hundred years Australia has suffered six major droughts and fifteen less severe droughts. The current drought that is ravaging the Australian continent, its inhabitants and its economy is simply the latest and most severe incarnation.

“The Australian inland,” quipped Francis Noble Ratcliffe, “must expect a smashing drought once every decade, and lesser droughts more often”. When Ratcliffe wrote those lines in 1938, in what would turn out to be the founding treatise on Australian conservation, Flying Foxes and Drifting Sands, he would not have expected that it would take us so long to learn from these frequent experiences. But perhaps now, during the worst drought that Australia has experienced in over 100 years, we are beginning to learn our lessons.

In this paper I present a short history of Australian droughts and the government’s response to the current crisis. This narrative is important for two reasons: first, for the striking parallels that we might draw with our attitude to climate change; and second for the lessons we might learn about how best to respond to this challenge.

“This is the death of the earth”[1]

Australia is the driest continent outside of Antarctica and the threat and presence of drought is just a part of life down-under. Since the first recorded drought in 1791 there hasn’t been a single decade when some part of Australia has not been in drought.

Each time that drought has descended on Australia it has ravaged the country. It has wiped out crops, decimated stock numbers, raised terrible, choking dust storms, destroyed outback communities, drained rivers and dams, driven murderous bush fires and marred hundreds of thousands of lives. It has also cost the Australian economy billions of dollars.

The history of Australia is the history of drought. The Federation drought, which began in the mid-1890s and reached its devastating climax in 1902 one year after Federation, threatened water supply in Australia’s largest city, prompting the government to declare 26 February 1902 a day of “humiliation and prayer”. At Bourke the mighty Darling River was reduced to a trickle and in Queensland the State’s sheep flock was all but wiped-out[2].

The 1914-15 drought, which was ushered in by soaring temperatures and widespread bushfires, culminated in the catastrophic failure of the wheat crop. Flows in the Murray River were reduced to just 2% of normal levels and the outback town of Charleville was forced to import water by train.

The World War II drought set-in in 1937 and lasted until 1945. The wheat crop was devastated and sheep and cattle numbers plummeted. Bush fires raged across the States reaching their peak on 13 January 1939 – “Black Friday”. By August 1940, the Nepean dam in New South Wales was empty and water restrictions were put in place in Brisbane, Sydney and Melbourne.

The 1982-83 Drought was short and sharp. Once again the wheat crop failed and stock numbers were decimated. On the 8 September dramatic dust storms, the likes of which Australia had never seen, enveloped the state of Victoria and its capital city Melbourne, and then one week later bush fires added to the misery on what became known as “Ash Wednesday’. In total, the economic losses from the drought were estimated at A$3 billion[3].

“We should all pray for rain,”

The Federation drought was considered to have been the worst drought on record…until now. The current drought, which Australians disarmingly call ‘The Big Dry’, is the most severe drought that Australia has experienced in over 100 years and it is probably the worst since European settlement in 1788.

The drought ‘began’ in 2002 and it is now in its seventh year. It has affected different regions at different times and to differing degrees. By April 2007 the situation was so dire that it prompted the then Prime Minister, John Howard, to appeal to higher powers – “We should all pray for rain,” he said. At that moment, 65 percent of all viable land in Australia was in drought and the water supply in Australian dams had declined to 25 percent of their total capacity[4]. The image below from NASA’s Earth Observatory Satellite, shows the extent of the drought in May 2005. Only the south-west corner of the continent has escaped the ravages of the drought.

Extent of drought - May 2005

Extent of drought, May 2005[5]

Nowhere was the situation more desperate than in the Murray-Darling Basin. The Murray-Darling Basin is the heart of Australia and its precious water its lifeblood. The basin, which covers an area the size of France and Spain combined, comprises more than 150 distinct waterways, supports an agricultural industry worth A$9 billion a year, is home to 16 internationally recognized wetlands and supplies water to more than 3 million Australians[6]. By mid-2007, flows in the Murray-Darling were at 5% of their average, and all along the river system giant red gums were dying from lack of water, fish were floating dead in deoxygenated pools and the precious soil had either been blown away as dust, or baked to concrete[7].

“Man must share the blame with Providence”

We live under the misguided belief that drought is a wholly natural phenomenon over which we have no control. This belief is false. Extremely low rainfall over an extended period of time is a natural phenomenon over which we have no control. But drought arises when this natural phenomenon is combined with a failure to anticipate, plan and adapt.

The drought in Australia was not caused by extremely low rainfall alone. It was also caused by the mismanagement of the country’s water resources over decades and by the public’s casual use of a precious resource and its indifference to the threat. That is not to say that drought could have been avoided even with the most complete planning. Some parts of Australia will always experience severe drought – that is part of the boom-bust cycle that some communities are willing to live with.

It was evident to all concerned that we were heading towards a disaster, yet the Government and the public were unable to take the difficult decisions before the catastrophe was virtually upon us. (And it is worth remembering that for many families the catastrophe was upon them). State Governments were still arguing over the allocation of water rights and citizens in Toowoomba, Queensland were still voting in a referendum against the recycling of their water, when water levels in many of Australia’s largest damns were as low as 15 percent.

It wasn’t until the drought had cost the Australian economy more than A$20 billion, forced 10,000 farming families to flee the land[8], reduced wheat production by more than 60 percent, forced the NSW Government to appropriate water from farmers in order to cover the shortfall in the cities, and caused electricity black-outs because power stations were forced to shut-down production for lack of cooling water, before – finally – there was sufficient will on the part of the Government and the public to act.

Where there is a will, there is a way

As we so often see, where the political will exists, action can be swift. The Australian government and public finally, after years of procrastination, began to respond to the drought with a series of coordinated measures.

These measures included regulatory reform, strict water rationing backed up by heavy penalties, a steep increase in the price of the resource to better correspond with its value, investment in new infrastructure and (critically) a powerful and highly visible public awareness campaign. The response was unprecedented and would have been unimaginable just a few years earlier.

Government cooperation and coordination

After decades of bickering and wrangling over priorities and funding, the Federal and State Governments finally reached agreement on how best to manage Australia’s precious water resources. First came the National Water Initiative, which was signed by the last State government in April 2006[9]. The initiative reforms the way in which Australia’s water resources are regulated and managed, set-outs a framework for water entitlements and the foundation for water trading and underwrites massive funding for water infrastructure programs throughout the country. Then in July 2008, the State and Federal governments finally signed the Intergovernmental Agreement on Murray-Darling Basin Water Reform. It marks the first step to coordinate the management of Australia’s most precious water resource. It is a landmark agreement that has been a long time coming, though many fear that it may have come too late to save the Murray-Darling.

Strict Limits and Penalties

The State governments introduced strict limits on water consumption which they rigorously enforced and backed-up with heavy penalties. These measures placed restrictions on the use of water and in some cases put quantitative limits on household water consumption. Water restrictions were introduced throughout Australia and water consumption targets were introduced in the major urban centres – and on the whole they have been met[10]. Bans were placed on the use of hosepipes, washing your car, watering your garden, or filling your swimming pool. It was made compulsory to install rainwater tanks and water efficient shower heads. Such measures would have been politically unthinkable in other circumstances.

Higher Water Prices

Water prices were increased in most major cities to better reflect the scarcity and value of the resource. Prices in Sydney rose by 20 percent between 2005 and 2006, then by 17 percent in 2008. In Melbourne a 5% levy was introduced. And at the height of the drought, water prices in Brisbane were increased twice within the space of one week[11]. Further price increases are planned by all major water authorities. Water prices in Melbourne will increase by 60 percent over the next four years[12]. By 2018 Brisbane residents will have to pay almost double for their water[13]. And in Sydney, water prices will rise by a further 14 percent between now and 2012[14].

Significant New Investment

The Australian government also made commitments to spend more than A$50 billion on water improvement measures over the next ten years. This will include major projects such as the building of desalination plants and new pipeline infrastructure, as well as investment of A$3.7 billion in water conservation measures in the Murray-Darling Basin. In 2006, Perth became the first Australian city to operate a reverse osmosis seawater desalination plant, which now supplies 17% of Perth’s drinking water supply. Desalination plants are also being planned in other parts of Australia, including Sydney, Melbourne, Adelaide and the Gold Coast. In total, there are hundreds of water improvement projects being funded by government, ranging from the creation of a comprehensive water accounting programme and better water metering in homes, to the construction of massive new water pipelines and improvements to farm irrigation systems[15].

Public Education Campaign

All of the above measures were supported by a powerful and highly visible publicity campaign which stigmatized water misuse. Using water to clean your driveway was now as socially unacceptable as smoking in the office or letting your kids run around in the sun all day without proper sun protection. The drought sensibilised Australian’s to the impact of drought and to the real value of water. Public attitudes to water changed. Between November 2005 and May 2007 (arguably the height of the drought) the percentage of Australians who cited water shortages as their primary concern rose for 22 percent to 55 percent[16]. In a similar vein, in October 2007, on the eve of the national election that unseated then Prime Minister John Howard, NewsPoll ranked water planning as equal second in the nation’s list of political priorities; equal with education, just behind health, and well ahead of national security which ranked eighth. The merits of different shower heads and the best place to find a new rainwater tank became the subject of conversation around dinner tables in most Australian cities.

And the results?

Throughout Australia, water consumption has been reduced. Since the start of the drought, average household water consumption has fallen by more than 40 percent in Brisbane and Canberra and by about 20 percent in Sydney and Melbourne[17]. In Brisbane, at the height of the drought, the average person’s water consumption fell to as low as 116 litres per person per day –compared with levels of 260 before the drought began[18]. In Canberra, water consumption was reduced by 35 percent within the space of just one year. In Melbourne, per capita water consumption in 2008 fell to its lowest level since 1934. And in Sydney, water consumption today is at the same level as it was in 1974, despite 1.2 million additional residents (imagine if we could say the same thing for energy!). These results are even more impressive when you consider that they reverse a nation-wide trend of increasing water consumption between 1993 and 2001, when per capita water consumption increased by 8 percent[19].

Average Annual Water Use - Table

Average Annual Water Use - Graph

Average annual residential water use in selected Australian cities, 2001 to 2007

What can we learn?

What makes the above narrative important are the lessons we might learn for combating climate change. The lessons are striking.

1.  The threat of drought was clearly understood, yet implausible as it may seem, the government and public alike were unable to act despite a compendium of scientific evidence and a long history of repeated severe droughts.
2.  A decades-long period of wrangling between different state governments, gross mismanagement of the water resource and public apathy, disbelief and inaction led directly to the catastrophe.
3.  It was only when this catastrophe was upon us – when the situation was dire – that the government and the public found the collective will to act. Without this near catastrophe, we would have continued to walk into oblivion using too much water in the driest inhabited continent on the planet.
4.  But when they did act it was swift. The Government was prepared to put in place and the public were prepared to accept draconian measures that would previously have been considered unthinkable.

5.  The response was unprecedented in nature and in scale.
–       cooperation across state and federal governments;
–       root and branch reform of water management and planning;
–       introduction of strict limits on the use and consumption of water;
–       increased water prices and the introduction of water trading; and
–       massive public investment in new infrastructure.

6.  That response was backed up by a powerful public awareness and education campaign that changed the public’s attitude towards drought and made it socially unacceptable to waste water. This social element underpinned the regulatory and market response.

7.  The results show that substantial reductions in the use of an essential resource – in the order of 20 to 40 percent – can be achieved in the space of a few years and at relatively low cost.

8.  The public was prepared to accept significant price increases in an essential resource – of between 40 to 70 percent – where the reason for that price increase was understood and where the resource represented a relatively small proportion of the household’s total expenditure.

9.  Both the invisible hand of the market and the visible hand of strong, government intervention were required to achieve these outcomes.

10.  But there can be no ‘quick fix’; the above measures are just a start. We will need many more years of action and many more initiatives before the threat of drought is overcome.


There is no happy ending to the above story – not yet. You don’t solve a problem as great as this in a few years. While the drought has broken in some parts of Australia, large parts of the country, particularly the south-east, are still gripped by the Big Dry. Damn levels are still low. The Thomson Dam that was supposed to ‘drought-proof Melbourne’ is still at just 18% capacity[20]. Our responses have not always been the most cost-effective. Studies that examined the cost-effectiveness of different measures found that the cost per megalitre of water saved ranged from A$770 to A$33,395[21]. The Murray-Darling system is “beyond repair” according to the environment minister Penny Wong – a statement quickly denied by other stakeholders and subsequently corrected by the minister herself. The water consumption targets that were introduced have not always been met. Melbourne’s water target of 155 litres per day was exceeded by 15% this summer. Water prices have risen, but Australians still spend less on water than they spend on any other essential services. The typical Australian household spends three times as much on electricity and twenty-five times as much on food and drink as they spend on water[22]. Each year water companies lose large quantities of water due to leaking pipes and overflows. Water losses in Brisbane, Sydney and Melbourne in 2007 were between 107 and 76 litres per connection per day. For the largest water authorities serving populations of more than 100,000 persons, the cumulative water losses amounted to 129 gigalitres – more than the total water consumption in Brisbane[23]. Many of the promised infrastructure projects are delayed or behind schedule or over budget or all three. And finally, in those areas where the drought has ended, there are signs that average daily water use is already creeping back up[24].

In Australia, it won’t be until we have adapted the social and economic order to the natural order that we will have finally overcome the threat of drought. The same will be true for our global response to climate change.

[1] From the second stanza of T. S. Eliot’s poem Little Gidding

There are flood and drought over the eyes and in the mouth,

Dead water and dead sand contending for the upper hand.

The parched eviscerate soil gapes at the vanity of toil,

Laughs without mirth. This is the death of the earth

[2] Sheep numbers fell from 91 million to 54 million, and cattle from 11.8 million to 7 million.

[3] Australian Bureau of Statistics, 1988, Year Book Australia, 1988, Commonwealth Government, Canberra.

[4] CSIRO, 2009, Water Resources Observation Network, Dam Level Index (http://www.wron.net.au/DemosII/DamData/DamNodeView.aspx)

[5] NASA, Earth Observatory Satellite, Vegetation Anomaly Image, May 2005, NASA, Goddard Space Flight Center, Greenbelt.

[6] The Murray-Darling Basin encompasses 14 percent of Australia’s land mass and generates 39 percent of the national farm income. The Basin produces 53 percent of Australia’s cereal grain, 95 percent of its orange crop and 54 percent of its apple harvest. In 2007 the World Wildlife Fund listed the Murray-Darling as one of the world’s top ten rivers at risk.

[7] CSIRO, 2008, Water Availability in the Murray-Darling Basin, CSIRO, Canberra.

[8] Australian Bureau of Statistics (ABS), 2009, The ABS calculated that 10,636 families gave up farming during the most severe drought years between 2001 and 2006.

[9] The National Water Initiative was signed by the Commonwealth and all State Governments, except Western Australia and Tasmania, in June 2004. Tasmania signed the Agreement in July 2005. Western Australia signed the agreement in April 2006.

[10] Targets of 140, 155 and 135 litres per person per day were introduced in Brisbane, Melbourne and Sydney respectively at the height of the drought. The target in Brisbane has since been increased to 170 litres per person per day following the ‘end’ of the drought.

[11] ABC News, Brisbane water price rises again, 12 May 2006.

[12] Essential Services Commission, 2009, Melbourne metropolitan water price review 2009-10 to 2012-13, Essential Services Commission, Melbourne.

[13] Queensland Water Commission, 2009, Bulk Water Prices 2008/2009 – 2017/2018, Queensland Water Commission, Brisbane.

[14] Independent Pricing and Regulatory Tribunal of New South Wales, 2009, Review of Prices for the

Sydney Catchment Authority From 1 July 2009 to 30 June 2012: Water — Determination and Final Report, June 2009, Independent Pricing and Regulatory Tribunal of New South Wales, Sydney.

[15] Investments include A$450 million for the Bureau of Meteorology to set up a comprehensive water accounting programme; A$620 million is proposed to improve water metering; and A$1.6 billion will be made available to improve the efficiency of farm irrigation systems.

[16] Roseth N., 2008, Research Report 48: Community Views on Recycled Water. CRC for Water Quality and Treatment, National Water Commission, Canberra.

[17] National Water Association of Australia (NWAA), 2008, National Performance Report 2006-07, NWAA, Melbourne.

[18] Queensland Water Commission, The Water Report, 15 February 2009, Queensland Water Commission, Brisbane.

[19] Department of Environment, Water, Heritage & the Arts, 2007, State of the Environment, 2006: Indicator: HS-42 Water consumption per capita, Commonwealth Government, Canberra.

[20] CSIRO, 2009, Water Resources Observation Network, Dam Level Index (http://www.wron.net.au/DemosII/DamData/DamNodeView.aspx)

[21]. Crase & Dollery studying the subsidies paid in Melbourne on water-saving investments for households found the cost per megalitre of water saved ranged from $770 for AAA shower roses, through $9,069 for rainwater tanks, to $33,395 for AAA dishwashers. Crase, L. and Dollery, B. 2005, ‘The inter-sectoral implications of ‘Securing Our Water Future Together’’, International Journal of Environmental, Cultural, Economic and Social Sustainability, Vol. 1, No. 5, pp. 13–22.

[22] The low price of water remains a major obstacle to serious water reform. The typical Australian household spends 0.7% of total expenditure on water, 2.6% on electricity and heat and 17% on food and non-alcoholic beverages. Australian Bureau of Statistics, 2004, Household expenditure Survey and Survey of Income and Housing 2003/04, Commonwealth Government, Canberra.

[23] Losses amongst the 11 largest Water Authorities serving populations of more than 100,000 persons were 128,966ML in 2006/07. Water consumption in Brisbane over the same period was 112,935ML. National Water Association of Australia (NWAA), 2008, National Performance Report 2006-07, NWAA, Melbourne.

[24] Queensland Water Commission, The Water Report, 15 February 2009, Queensland Water Commission, Brisbane.

Whether we are able to address climate change will come down to our ability to develop, commercialise and deploy low carbon technologies. This will not happen miraculously – some type of policy intervention will be necessary, but what type? As a fist step to exploring this subject, I want to look at the lessons that we can draw from other initiatives where policies have been used to support the development and commercialisation of emerging technologies. Such case studies remain the best way of separating fact from fiction. And some of the lessons are surprising.

Take a look at the posts below to follow the story.

Wind Power Technology in Denmark

Atmospheric Fluidised Bed Combustion Technology in the United States

Flue Gas Desulphurisation Technologies in the United States

Government-Industry Partnerships for electronic ballasts lighting systems

The development of strip casting technology in the iron & steel industry

Government policy & the development of electric vehicles in Japan

Fluorescent lights require ballasts that help the lamps to start and then control the current flowing through the lamp; electromagnetic ballasts were the conventional ballast technology in the 1960s. Solid state electronic ballasts, developed in the 1970s and 1980s, improve the energy efficiency of fluorescent lights by 15% to 30%, but initially failed to gain market support due to poor performance, reliability and high cost. Following a coordinated programme of technology support by the U.S. government, electronic ballasts captured a significant market share – rising from negligible production in 1988 to more than 30 million units produced and a 30% market share within 8 years.

Electronic Ballasts Graph

First-generation electronic ballasts were developed and marketed on a small scale in the late 1960s, but these products suffered from performance and reliability problems as well as high cost. Major ballast manufacturers showed little interest in perfecting electronic ballasts, since they had much invested in magnetic ballast production, and the lighting industry in general was satisfied with existing technology.

In 1976, the US Department of Energy (DOE) established a lighting research program at the Lawrence Berkeley National Laboratory (LBL) to accelerate the development and commercialisation of energy-efficient lighting technologies and initiated a joint private-public research programme focused specifically upon the development of electronic ballasts. Following a competitive tendering process, the LBL selected two small independent lighting manufacturers (IOTA Engineering and Stevens Electronics) who quickly developed prototypes that exhibited up to 25% electricity savings, but suffered from reliability problems (Geller et al, 1987).

Following further improvements, the LBL led a field test and evaluation program that confirmed a 25% reduction in energy use – however, the field tests uncovered further design flaws and a significant number of the prototype ballasts failed prematurely. After further improvements, a small number of larger manufacturers began to show an interest in electronic ballasts, and Beatrice Foods, a newcomer to the ballast industry, bought IOTA’s concept and formed a dedicated division within the company to develop and produce the new electronic ballasts. The Stevens design was bought by Luminoptics, a company established to manufacture and market the ballasts.

In 1979, the DOE co-funded another electronic ballast demonstration project with the Veterans Administration. This project involved the successful installation of more than 400 dimmable ballasts in a medical centre in California, following which it became the first federal agency to specify the use of electronic ballasts.

The LBL continued to test the performance and reliability of the electronic ballasts and to disseminate the results of this research and to publicise the benefits of the new technology. It also worked closely with the Federal Communications Commission (FCC) to develop voluntary performance standards. In a similar vein, the LBL served as an intermediary between ballast designers and the American National Standards Institute (ANSI) in helping to establish standards to ensure that electronic ballasts were compatible with fluorescent lamps and fixtures.

The major ballast manufacturers, including Universal, Advanced Transformer and GE were initially uninterested in and even hostile to the concept of electronic ballasts. However, in the mid 1980s they became convinced of the technical and commercial viability of electronic ballasts and began production and in some cases purchased the smaller independent companies that had developed the new technology.

The LBL discontinued its technical support and market development efforts in 1984, having spent a total of US$2.7 million on electronic ballasts over a nine-year period, at which point the performance, reliability and cost of the new technology had been proven. The economic benefits of this public support, reflecting increased revenues to ballast manufacturers and the value of energy saved during the lifetime of electronic ballasts is estimated at more than US$5.6 billion.


  • Public support played a major role in the development of electronic ballasts in the U.S. Most of that support was focused upon joint industry-government support for R&D, field testing and demonstration projects, which were crucial to addressing reliability, performance and cost issues.
  • Small, independent companies were the only businesses willing to invest in the development of the first reliable commercial prototypes. Whereas the larger firms, with existing sunk investments in the incumbent technologies were reluctant to invest in the new technology. It wasn’t until the new technology was proven that the larger firms entered the market – in many cases buying out the original designs developed and proven by the smaller firms.
  • The joint public-private field tests and demonstrations were crucial to solving the outstanding design issues and demonstrating reliability – thereby winning commercial confidence.
  • The US government also provided important niche markets by specifying the use of electronic ballasts in selected federal facilities and played an important role in publicizing the benefits of the new technology.
  • Once the reliability, performance and cost issues had been addressed and the larger players entered the market, the strong business case behind the use of electronic ballasts and the credibility given to the new technology by its use in federal facilities, spurred consumer uptake of the new technology.

[1] Geller, H. & McGaraghan, S. (1998) ‘Successful government-industry partnership: the US Department of Energy’s role in advancing energy-efficient technologies’, Energy Policy, 26(3): 167-177.

While everyone is talking about EUA prices, it’s the volumes that we should be watching. They give us the clearest sign yet that the carbon market is evolving towards a genuine commodity market.

If we take a look at EUA volumes (thanks to the tireless work of Michael Szabo at ThomsonReuters) you will see that there are some very interesting developments afoot.

First let’s compare total EUA exchange traded volumes for calendar year 2008, with the first trimester of 2008 and with the first trimester of 2009.

EUA volumes - Table 1

First thing to note: in calendar year 2008 about 2.6 billion EUAs were traded on European exchanges. For the first time, this was greater than the underlying carbon asset – which was about 1.9 billion EUAs in 2008.

Second thing to note: we’ve traded almost as many EUAs in the first trimester of 2009 as we did in all of 2008, and more than 3 times the volume that was traded in the first trimester of 2008. This is remarkable growth by any standard.

Now let’s compare the type of contracts that are being traded.

EUA volumes - Table 2

What does this tell us: most notably that there has been a massive increase in spot trades. The volume of spot trades in the first trimester of 2009 are 72 times higher than in the first trimester of 2008 and they are already more than twice the volume that was traded in all twelve months of 2008.

Consequently, there has been a shift in the dynamics of the market, with spot contracts growing in market share and in importance. While the traded futures have continued to grow and continue to dominate the market – representing about 60% of traded volumes in the first trimester of 2009 – the volumes of spot trades are now a significant part of the market, representing 28% of total traded volumes in the first trimester of 2009, compared with just 1% over the first trimester of 2008 and 9% over the full 2008 calendar year.

Now let’s look at who is capturing the lion’s share of these trades.

EUA volumes - Table 3

Evidently, the EXC continues to see its traded volumes grow significantly – up two and half times on the previous first trimester’s volumes. And it continues to dominate the market – with a market share of 71% in the first trimester of 2009.

But more impressive is the growth in traded volumes on the BlueNext Exchange, where first trimester traded volumes in 2009 are already more than double that of the full twelve months of 2008; BlueNext has captured 27% of the total traded market. The majority of these trades are in spot contracts and it is BlueNext’s success that is the reason behind the remarkable growth in spot contract traded volumes.

And because, predictions are a fool’s game, and we are all expert players, if we extrapolate the first trimester 2009 volumes in line with 2008 figures, we could quite reasonably expect total exchange traded volumes of EUAs to exceed 6 billion EUAs. This would be about three times the previous years’ volumes and three times the size of the underlying carbon asset in 2009.

So, what does this signify?

A number of reasons have been put forward to explain this steep increase in volumes, particularly in the spot market. Some observers have spoken about the ‘flight to cash’ phenomenon (liable parties selling allowances to generate cash in response to the deteriorating economic conditions). This was the case at the end of 2008, but it is no longer the case. Other structural factors might also explain the increase, such as the fact that compliance falls at the end of the first trimester so it is often a very active trading period, or the fact that the Italian and Polish registries did not issue their allowances until December 2008 and therefore prior to that date Italian and Polish liable parties had limited access to trading.

However, for me, this increase in volumes is the natural evolution of the market and the clearest sign yet that the carbon market has changed in nature in 2009; that it is maturing from a compliance market into a genuine commodity market.

More liable parties are entering the market, where previously they had been reluctant to do so, or had had little need to do so. And those liable parties that are entering the market are doing so on a more frequent basis. Access to the market is becoming easier and the number of products available to market participants is increasing. The number of registered members on exchanges is growing, particularly in the case of BlueNext, where the last trimester of 2008 and 2009 saw 18 new members join, among them some potentially very large market participants such as Mitsui, Deutsch Bank, Essent Trading, Fortis, EDP and Commerzbank.

The EUA market is now trading at volumes greater than the underlying physical asset. If volumes continue to grow as we cite above, the EUA traded volumes in 2009 will probably be 3 to 4 times the underlying physical asset; a sure sign that the commoditization of the market is underway. Nevertheless, this is still well below other markets, such as power where the traded volume is 10 to 20 times the physical asset, or oil where trading volumes are 30 to 40 times the physical market. Which shows us just how far the market could develop now that it is maturing – with all the advantages and disadvantages that a genuine commodity market entails.