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Market Situation SOFOFA, March 2005

Market Situation SOFOFA, March 2005 Andrei Marcu President

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Market Situation SOFOFA, March 2005

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  1. Market Situation SOFOFA, March 2005 Andrei Marcu President International Emissions Trading Association

  2. Kyoto’s fundamental architecture • National emissions caps, from countries according to stage of development and responsibilities • Efficiency and incentives through international market mechanism • Trading in allocated instruments e.g. EUA • Global reach & creation of additional credits through project offsets e.g. CDM & JI

  3. Kyoto Party-Level Entity-Level Non-Kyoto Party Global GHG Market Japan Australia, USA Kyoto Units? Canada Projects, CDM/JI European Allowances & Kyoto Units EU25+X Kyoto Units Green Credits? ? ? Russia/Ukraine

  4. Demand/Supply balance • Demand • 3 markets that have KP commitments: Canada, Japan, EU • EU: regulatory market • Canada: about to set up a regulatory market • Japan: voluntary commitments • US markets ?? State level market & voluntary schemes • Elements to be considered • Quantity • Quality • Time horizon

  5. Demand/Supply • Two types of demand • Country demand to meet KP commitment • Company demand to meet Domestic obligation under the DET • Quality to meet • CER from CDM • AAUs from allocation of countries under the KP

  6. Canada • Official overall shortage – about 250 - 330 Mt Co2e/ year • Company shortage 35-55 MtCo2e/yr • Government purchase program – quantity unknown(30-100 Mt) • Quality • CERs from CDM • AAU but not surplus from Eastern Europe

  7. Japan • No official regulatory scheme to create demand • Japanese commitment under the KP • Keidanren made voluntary commitments to be me with CDM/JI • Japanese companies active in Latin America (Chile) and SE Asia

  8. European ETS – Permits and Allowances Permits: • Site-specific • Set monitoring and reporting obligations (EU Guideline) • Set obligation to hold allowances matching emissions each calendar year • Non-transferable Allowances: • Issued by Member States • Entitlement to emit a ton of CO2 (e) • Held in the national registry system • Tradable

  9. Linking Directive • CDM credits accepted independent of the KP • No nukes • No LULUCF • Hydro – WC on Large Dams • Review as part of the 2006 review • Amount of CER per installation to be determine by each MS

  10. How can CERs and ERUs be used in the ETS? • EU ETS and Linking directive • Under the EU ETS each installation is required to surrender a number of allowances corresponding to their verified emission volume for each calendar year • In the event that an installation has insufficient allowances for compliance, the shortage can be covered by: • Purchasing additional allowance from the market • Surrendering a specified number of CERs and, from 2008, ERUs from its operator’s holding account (article 21 [2] EU Registry legislation) • Surrendering of CERs and ERUs are subject to specified preconditions

  11. Will Europe be CO2-constrained? • Comparison of NAPs versus “business-as-usual” • Basis is submitted NAPs Small shortage in old EU 15 … … plus plenty of “hot air” … … equals negligible CO2-constraint Shortfall in CO2 allowances against “business-as-usual” – mln tonnes CO2 50 Substantial overallocation Small shortage 40 30 20 10 0 UK Italy Spain CDMs Poland France Belgium Germany Netherlands CO2 constraint Others in deficit Czech Republic Others in surplus Slide 2

  12. Will CO2 allowance prices go up? Unless forget Kyoto ... ... problem gets worse Tighter constraint by 2008 - 2012 • Less scope for imaginative allocations Extent of CO2 constraint across Europe – mln tonnes per year 2008-2012 BUT competitionfor CDMs CDMs Switch to low CO2intensive generation Source Dresner Kleinworth Wassertein

  13. EU Allowance Prices

  14. Current Prices (at 11 Feb 05)

  15. Criteria for selecting projects 1 = Technology Type 2 = Good governance of host country 3 = Within own core business area 4 = In its own facilities 5= Reliable local partner 6 = Location of projects – geographical preference 7 = Previous CDM experience of the host country 8 = Strong sustainable development characteristics of the project 9 = Compliance certainty of the asset 10 = Credit worthiness of seller

  16. DISTRIBUTION OF UNDERLYING PROJECT FINANCE To be identified 2% Sponsor 13% Commercial Lender 26% Host Country Government 2% Total Underlying Financing of US$3,198 million for $454 million in carbon purchases as of September 2004 Other MDB & Bilateral Fund 24% IFC 23% World Bank 10%

  17. For more information International Emissions Trading Association www.ieta.org Andrei Marcu – President marcu@ieta.org

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