Introduction to Carbon Finance market instruments to mitigate climate change

1. Introduction to Carbon Financemarket instruments to mitigate climate change Martina Bosi Carbon Finance Unit, The World Bank November 8 , 2006 Washington DC

2. 40 000 35 000 million tonnes of CO2 30 000 25 000 20 000 1990 2000 2010 2020 2030 Coal Oil Gas Alternative Policy Scenario Reference Scenario Global Energy-Related CO2 Emissions In 2030, Alternative Scenario’s CO2 emissions are 16% lower than in the Reference Scenario, but are still more than 50% higher than 1990 Source: International Energy Agency, World Energy Outlook 2004

3. Climate Change: Whose problem is it?

4. The Kyoto Protocol: key features • Entry into force: February 16, 2005 • US and Australia did not ratify • Differentiated commitments: • Developed countries and countries with economies in transition agree to quantified legally-binding targets (overall objective leads to a 5% reduction from 1990 levels by 2008-2012) • Six gases, sources and forestry sinks, 5-year period (2008-2012) • Target should be achieved through: • Domestic Reductions • Carbon Sinks: direct human-induced land use change and forestry activities • International Credits (Kyoto Mechanisms): • International Emissions Trading • Project –Based: Joint Implementation (in industrialized countries) • Project – Based: Clean Development Mechanism (in developing countries) • Negotiations on next period (post-2012) to start in 2005

5. Market Mechanisms to Mitigate Greenhouse Gas Emissions • Emissions Trading and Project-Based Mechanisms • Key feature of the Kyoto Protocol: • Provide flexibility as to the location of emission reductions • Rationale: • Impact of CO2 emissions and/or reductions insensitive to location • Cost and opportunities to reduce CO2 vary between companies, sectors, and countries • Market instruments enable meeting GHG targets cost-effectively • Taking advantage of differences in marginal abatement costs across different emission sources

6. Example of emissions trading Emission allowance Country A Country B € Emissions target prior to trading tCO2 Allowances to buy Allowances to sell New targets after transaction 2008 2012 2008 2012

7. How the Clean Development Mechanism Works baseline emission reductions emissions Project emissions time Emission reductions bring additional revenue stream to CDM projects No single price; but currently in the range of ~$8-$10 (per tCO2)

8. Structure of the Carbon Market 2006(worth close to $22 billion in 2006) CredibleC-asset Project-Based Transactions Allowance Markets EU Emission Trading Scheme Primary JI & CDM 226 MtCO2e 764 MtCO2e Voluntary& Retail Other Compliance New South Wales Certificates UK ETS Chicago Climate Exchange 8 MtCO2e 8 MtCO2e 2 MtCO2e 16 MtCO2e 8 MtCO2e

9. World Bank Carbon Finance Approach • Ensure that carbon finance contributes to sustainable development, beyond its contribution to global environmental efforts • Assist in building, sustaining and expanding the market for GHG emission reductions • Strengthen the capacity of developing countries to benefit from the market for GHG emission reductions • CF-Assist

10. World Bank Carbon Funds & Facilities Total funds pledged = US$ 1.93 billion (13 governments, 62 companies) Prototype Carbon Fund. $180 million. Multi-shareholder. Netherlands Clean Development Mechanism Facility. $267.8 million Netherlands Ministry of Environment. Community Development Carbon Fund. $128.6 million. Multi-shareholder. BioCarbon Fund. $53.8 million. Multi-shareholder. Italian Carbon Fund. $109.4 million Multi-shareholder (from Italy only). Netherlands European Carbon Facility. $40.4 million. Netherlands Ministry of Economic affairs. Spanish Carbon Fund. $281.9 million. Multi-shareholder (for from Spain only). Danish Carbon Fund. $69.3 million. Multi-shareholder (for from Denmark only). Umbrella Carbon Facility. [$727.5 million]. 2 HFC-23 projects in China.

11. How the Funds Work Technology Technology $ $ Finance Finance Industrialized Governments and Companies EITs and Developing Countries CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions

12. Longer Term Challenge for Carbon Market • Carbon Trade could confer large flow of funds to developing countries: tens of billion of dollars per year • But requires a long-term, stable and predictable framework and accompanying regulatory system. • Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure; • Long-term viability of carbon market is not assured • Carbon finance needs regulatory visibility post-2012 • Longer-term regulatory signal for carbon finance could come from: • International: U.N. Framework Convention on Climate Change and Kyoto Protocol • National/multi-national: e.g. EU Trading Scheme • Sub-national: e.g. US States;

13. Conclusions • Market mechanisms allow meeting GHG targets most cost-effectively • Sale of emission reduction creates revenue stream for climate-friendly activities (carbon finance) • Carbon Market is real • Carbon finance is an important source of new and additional development finance • World Bank is a player in the carbon market • Long-term signal (post-2012) is biggest challenge for continuation of carbon market

14. Thank you! For more information, visit: http://www.carbonfinance.org