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The Carbon Market (including LULUCF) Philippe Ambrosi Climate Change Team, ENV

The Carbon Market (including LULUCF) Philippe Ambrosi Climate Change Team, ENV Training Seminar for BioCarbon Fund Projects The World Bank, Washington D.C., Feb. 5, 2008. The global carbon market tripled in value in 2006. doubled in 2007. OVERALL $30 billi on (‘06) > US$11 billion (’05)

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The Carbon Market (including LULUCF) Philippe Ambrosi Climate Change Team, ENV

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  1. The Carbon Market (including LULUCF) Philippe Ambrosi Climate Change Team, ENV Training Seminar for BioCarbon Fund Projects The World Bank, Washington D.C.,Feb. 5, 2008

  2. The global carbon market tripled in value in 2006 doubled in 2007 OVERALL $30 billion (‘06)> US$11 billion (’05) Allowance market $24.4 billion (‘06)> US$7.9 billion Project market $4.8 billion (‘06)> US$2.4 billion A secondary market of guaranteed compliance assets emerged$0.5 billion (’06) The voluntary market expanded $0.1 + billion (’06) Capital drawn to the C-market: doubling in 1 year (Q1’06-07) $12 + billion (’07) $ 60 billion (’07) $ 42 billion (’07) $ 10 billion (’07) $8.7 billion (’07) $0.2 + billion (’07)

  3. EU EmissionsTrading Scheme 1,600 CDM 600 Secondary CDM 350 Volumes transacted in 2006 (in MtCO2e) Project-Based Transactions Allowance Markets

  4. Allowances transactions the EU ETS

  5. EU-ETS: ready for Ph II Activity during 2007 • 1.6 blln EUAs or US$ 42 blln • almost exclusively PhII, mostly OTC PhII: more clarity, many uncertainties • general cap at 2,081 mlln EUAs per year: cut of proposed caps by 10.5% (6.3% below 2005 emissions). • average limit imports of CERs & ERUs: 13.4% (280 MtCO2e/yr) • no LULUCF • still uncertainties at the installation level: forecasts from €10 to €35 on avg PhIII: EU proposal (2013-2020) • at least 20% 1990 levels by 2020 • no LULUCF, no avoided deforestation

  6. Project-based transactions CDM

  7. Prices & volumes upfor project-based credits US$ 10.4 /tCO2e CER I $ 10.9 US$ 7.2 /tCO2e ERU $ 8.7 US$ 5.2 /tCO2e

  8. CDM&JI BuyersEU Private Sector 75% of demand (share of volumes) Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006

  9. CDM SellersChina leads supply (share of volumes) Jan. 2006 to Dec. 2006

  10. CDM Asset classes Share of Clean Energy Rises (share of volumes) Clean energy: 11% Clean energy: 25% Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006

  11. 2883 projects 2.4 blln tCO2e by 2012 2.1 blln tCO2e by 2012 (once risk adjusted) CDM supply: # of projects Drying –up as the window of opportunity is starting to close or has closed already?

  12. CDM supply: asset classes LULUCF (A/R) Global (share of expected CERs by 2012 )

  13. A/R projects potential supply: PDDs from 30 projects • 50-70 projects under development – 10 appr. meths • LAC region leads supply • mostly lCERs though tCERsincreasingly popular • typical large-scaleforestry project:6,000-8,000 ha Share of expected ERs • volumes: 20 MtCO2e by 2012 • yield > 15tCO2e/ha very optimistic • issuance score < 100% (~90%) • adjusted volumes: 13.6 MtCO2e by 2012 Annual carbon credit potential per area unit. Source: Neeff et al. (2007). Update on markets for forestry offsets. CATIE (Costa Rica)

  14. A very narrow market forforestry products • A low demand on the Kyoto market • LULUCF credits not eligible under EU ETS (monitoring and verification, non-permanence, price impact, exogenous species) • a limited demand from gov’ts (1% of base year per year:~630MtCO2 over 2008-12) • A window beside Kyoto: compliance (Oregon, NSW), voluntary (OTC, CCX): 36% of OTC in 2006 (3.5 MtCO2e) • a “great story”: Af-/Re-forestation, conservation easily understandable; community benefits: a plus • preference for local action • a series of standards: NSW, CCX, VCS, GS, CCBA, C-fix… • Assets complex to handle • methodological complexity: lack of experience&resources, data requirement, legal & connex issues • monitoring and verification costs relatively high • relatively high upfront investment, relatively low return • A small BUYER market, so far

  15. Prices of project-based assets • Fundamentals of supply-demand • asset class eligible for compliance (eg: no LULUCF) • specific attributes (eg: community benefits or location) • Risk perception and risk sharing • regulatory risk: meth. approval, registration … • finance & operation risk: financial closure, exp. of sponsor, likely delays, performance • flexible delivery, overcollateralization, seniority, sweeping clause, fixed vol.+options, incl. of penalties or delivery guarantee • Other determinants / ERPA tenure • post 2012 purchase, contribution to development costs (PDD,…), upfront payment, being a AAA buyer

  16. A/R mixed, native Avoided deforestation Carbon Prices vs.Risk Profile and Risk Allocation A/R monoculture BioCF CCX Price ranges for forestry assets (RETAIL) from Hamilton et al. (2007), except CCX and BioCF

  17. Outlook

  18. Many opportunities forforestry credits ahead • 2008-12 demand for Kyoto mechanisms~ 2GtCO2e • CDM/JI:How many reductions will they deliver on time? • AAU/GIS: How many, when and at what price? • And beyond 2012? • Need of long-term clarity, Fragmentation and patchy linking: risk ofefficiency loss • For forest projects, promising initiatives, beyond the Kyoto perimeter • Voluntary OTC market (standards, US demand) • FCPF, Norway, Australia • US compliance demand • Develop projects w/ regime/standard openness in mind

  19. Thank you

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