The World Bank released a study yesterday which shows that while the world carbon market had more than doubled in size last year to more than $US64 billion, the volume of trades completed under the CDM rose just 2.6 per cent.

OM Financial head of equities Neale Jackson told Carbon News late yesterday that one of the problems with CDMs was the risk that the project didn’t get off the ground or failed to deliver the expected number of carbon credits.

“Ironically, market pressures appear to be going through an inverse phase, due to global uncertainty surrounding project developments costs (high oil prices being one factor) and an offshoot of the global credit crunch which crippled the financial markets.”

Jackson says there appears to be an inverse proportionality between the carbon price and the development of CDM projects – the higher the carbon price, the greater the financial exposure associated with non-delivery or credit risk of a project.

“It becomes less financially viable to in terms of risk to enter into a CDM project rather than to contracturally procure credits from a more dependable source,” he said.

The report came on top of a falling New Zealand dollar pushing up the cost of carbon for New Zealand buyers.

“It’s a double whammy, with the BNZ officially bringing its projected interest rate cut date from December to nearer to September, which has seen the New Zealand dollar fall more than 1 cent against the US dollar in the last 24 hours, driving up the local cost of carbon,” Jackson said.

However, he expects there will come a tipping point at which carbon price becomes too high relative to the cost of implementing a new CDM.

Meanwhile, the author of the State and Trends of the Carbon Market Report 2008 is warning that action is needed to reinvigorate the CDM market.

“At a time when global co-operation to reduce the risk of climate change is more important than ever before, the prospects for developing countries benefiting from the carbon market are in question,” said Karan Capoor.

In another report, the International Emissions Trading Association said that confidence in the market had slipped over the past year.

However, most of the 100 respondents still expected a global carbon market to be established in the next 10 years, with the volume and price of carbon credits expanding to 2012 and beyond.