State and Trends of the Carbon Market Latin American Carbon Forum Alexandre Kossoy Carbon Finance Unit The World Bank Group November 4, 2008 Santiago, Chile
Today ’ s discussion The Carbon Market 2007 The CF in 2008 onwards (within Kyoto) And beyond: mainstream to the CC Agenda 2
Carbon markets surpassed US$100 billion by the end of 2007 … Project-Based Allowance Markets x 3.5 Transactions x 2 JI x 1.3 500 x 12 EU Emission CDM Trading Scheme 7,400 Secondary CDM (same volume) 50,100 5,500 Voluntary New South Wales & Retail Certificates Chicago Climate 270 220 x 4 Exchange x 1 x 2 70 3
… but the markets are fragmented. Kyoto framework EU ETS (domestic) Kyoto signatories outside EU ETS Annex I countries with economies in transition. Potential JI countries Non Annex I countries. Potential CDM host countries Non-Kyoto initiatives Regional Greenhouse Gas Initiative (RGGI): States in the Northeastern United States have also passed carbon regulations for stationary sources Western Regional Climate Initiative: California is a leading participant in a regional initiative to reduce its emissions, along with several Canadian Provinces. 4 Source: Element Markets
Tremendous untapped potential in developing countries 1. Location of CDM projects 2. Many countries are under-penetrated even (percentage of volume, 2007) relative to their emissions CDM activity by country, mid-2007 . Mt CO2e/year 18 16 South Korea 14 12 Mexico 10 Malaysia 8 6 Chile Argentina South Africa 4 Thailand Egypt Algeria Qatar Indonesia Pakistan 2 Saudi Arabia Iran 0 0 50 100 150 200 250 300 350 400 450 500 550 GHG emissions, 2000 (Mt CO 2 e p.a.) Venezuela Source: WB State and Trends of the Carbon Market 2008 Source: McKinsey • Uneven regional focus ; China, India and Brazil = 85% of CDM market share; • Africa still emerging , some successes in 2007; • Smaller projects and aggregation opportunities bypassed ; • Reductions from reforestation and avoided deforestation largely absent. • Many countries with high emissions have relatively low presence in carbon markets. 5
Many opportunities to scale up and extend reach Forestry is barely visible in CDM 64% of 2007 contracts for clean energy 20.0% other 17.4% 18.0% renew ables N20 0% 16.0% 9% HFC Biomass 8% 14.0% 5% LFG 12.0% Wind 5% 7% CMM 10.0% 5% 8.0% Waste 6.0% Hydro management 12% 4.0% 4% Fugitive 2.0% 3% 0.7% 0.0% Other Land use, Land-use change and Forestry 2% Sources of GHG emissions Share of CDM projects Tapping new sectors EE+Fuel sw itch 40% For the first time, agreement reached at Bali to move forward on Reduced Emissions from Deforestation and Building on success to scale up Degradation (REDD), providing opportunity for countries with tropical forests to join the carbon markets. Programmatic approaches will enable scaling up/ Required now: build capacity to measure and verify extending to interventions in key development sectors emissions associated with forests and bring these assets (energy, appliances, waste management, transport, and to market as soon as international regulatory framework newer technologies). Approaches compatible with is in place. financing provided by domestic FIs need special attention. 6 Source: UNEP Risoe, WB State and Trends of the Carbon Market 2008
Today ’ s discussion The Carbon Market 2007 The CF in 2008 onwards (within Kyoto) And beyond: mainstream to the CC Agenda 7
2008: over a US$100 billion • H1 2008: 1.8 GtCO2e traded (US$59 billion) • EU ETS = 1.3 billion EUAs (US$47 billion – 80%) • CDM = 502 MtCO2e (US$ 11.9 billion) • I CDM = 213 MtCO2e • II CDM = 281 MtCO2e > 70% • Options = 7 MtCO2e • JI = 26 MtCO2e (US$0.4 billion) Source: Point Carbon, Carbon • Forecast: 4.2 GtCO2e (US$110.7 billion) Market Monitor July, 2008 > 81% • 9M 2008: US$87 billion • EU ETS = 2.7 billion EUAs (US$69 billion – 79%) • Forecast: 3.9 GtCO2e (US$116 billion) Source: New Carbon Finance, October, 2008 8
Success masks challenges 2-year DOE at validation or req. reg. registered issuance delay 180 days 348 days 328 days 2,645 projects 1,170 projects 403 projects 1,451 MCERs 1,342 MCERs 195 MCERs 6% EE RE Methane Industrial 74% to high yield Other projects (ind. gas) 70% of all projects (half of volumes) have not RE and EE (70%) reached registration stuck somewhere in the pipeline Source: World Bank based on Data from UNEP RISOE 9
Market tiers widen, following risk allocation ER CER CER CER CER EUA ERU voluntary pre-reg. reg. issued secondary (PhII) € 26 Larger projects € 24 Experienced sponsors € 22 Financing in place € 20 Later in pipeline € 18 € 16 € 14 € 12 € 10 Smaller projects € 8 Weaker sponsors € 6 Financing risk high € 4 Early in pipeline € 2 € 0 more risk less risk € 3: registration € 3: firm volume € 3: fungibility to Buyer to Buyer Risk premium 10
Kyoto market balance – Cumm.2008-12 Potential Gap (2008-2012) Potential Supply (2008-2012) 3,547 in MtCO 2 e in MtCO 2 e (with existing measures) (with existing measures) Demand for Kyoto Mechs. Green Invest. Scheme 2,205 at least 2.4 GtCO 2 e (1.4 at least 1GtCO 2 e already contracted) (safety-valve?) 1,695 1,600 1,326 927 869 617 280 136 103 Canada Japan EU-15 other Europe and N.Z. Australia CDM JI Belarus, Croatia EU-10 Ukraine Russia 11
EU-ETS: ready for Phase II 40 EUR per tCO 2 e Dec'13 IIary CERs PhII: ITL/CITL up and running Dec'08 – general cap at 2,098 mlln EUAs per 30 year (6% below 2005 emissions). – average limit imports of CERs & ERUs: 13.4% (280 MtCO 2 e/yr) – price forecasts: € 25 to € 40 on avg 20 (before economic crisis) – More liquidity 10 PhIII: EU proposal (2013-2020) – at least 20% 1990 levels by 2020 (20/20/20) – still many aspects to be negotiated yet 0 A-07 A-08 J-07 J-07 O-07 J-08 J-08 12
Today ’ s discussion The Carbon Market 2007 The CF in 2008 onwards (within Kyoto) And beyond: mainstream to the CC Agenda 13
Reductions of 50 GtCO 2 e/year needed by 2050: Current trading is very small (only 4 GtCO 2 e* expected in 2008) 1. Effort required to stabilize emissions by 2050 (GtCO 2 e) • Dramatic reductions of GHG emissions required. Unless addressed, emissions and temperature will rise to unacceptably high levels. • Stabilization at 550 ppm CO 2 e by 2050 needs emissions to go down 60% from business-as- usual. • Mitigation efforts over the next two to three decades will be critical. Source: Stern, 2007 2. Volume of carbon transacted (GtCO 2 e) • 50 GtCO 2 e per year needed by 2050. 4.50 4.00 • Current carbon trading is 4 GtCO 2 e but actual 3.50 physical volume of reduction barely half of G tCO2e transacted 3.00 Other that amount as the market includes large trade 2.50 JI in permits (essentially quotas repeatedly CDM 2.00 EU ETS changing hands). 1.50 1.00 0.50 • Enormous gap between effort needed and 0.00 current volumes. 2004 2005 2006 2007 2008 (forecast) *GtCO 2 e: Billion tons CO 2 -equivalent Source: WB State and Trends of the Carbon Market 2008, Stern 2007, Point Carbon 14 2008, IPCC 2007, McKinsey, New Carbon Finance
Untapped potential: how much can carbon markets contribute? 2050 scenario (GtCO 2 e) 50 Offsets (such Cost of Climate Change: as credits from • Mitig.: US$200-1,000 billion p.a. developing • Adapt.: US$30-70 billion p.a. countries) could possibly expand 8 times in Actions required to stabilize 30 years emissions at 550 ppm: reduce by 50 billion tons per year. Difficult to quantify, but 25% could 2020 scenario (GtCO 2 e*) come from offset markets. Required Analysts ’ estimates of growth actions by of carbon market 2050 U S $ 5 0 0 • Total market: 9.4 billion tons p.a. b i l l i o n ? ? • Share of offsets: 1.7 billion ton p.a. 12.5? Total carbon 9.4 assets Offsets Total carbon assets 1.7 *GtCO 2 e: giga (x10 9 ) ton of CO 2 -equivalent 2020 data: Point Carbon; 2050: Stern Review, UNFCCC, Costs: UNFCCC, Stern, WB 15
Decisions needed To provide long-term carbon price Define a global goal for 2050 supported by signals and certainty to the private intermediate targets, to be agreed by the UNFCCC sector process. Build a truly global carbon market by linking To facilitate access to new carbon regional carbon schemes and markets to each other markets and sources of capital and through increased access, converging prices and lower costs of abatement harmonized products. Reform the existing market-based mechanisms and To accelerate low-carbon growth in explore new policy instruments – reduced developing countries transaction costs, streamlined processes, simplified methodologies. Facilitate the transfer of low-carbon technologies To scale up and deepen access to and establish sector-based programs to enable carbon markets and finance larger scale investments in cleaner development. Source: Stern, 2008 16
Thank you Full report available at www.carbonfinance.org
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