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Architecture of carbon markets and Role of Markets post-2012 WRMA Zurich October 5, 200 7

Architecture of carbon markets and Role of Markets post-2012 WRMA Zurich October 5, 200 7 Michela Beltracchi European Policy Coordinator International Emissions Trading Association. What is IETA?.

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Architecture of carbon markets and Role of Markets post-2012 WRMA Zurich October 5, 200 7

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  1. Architecture of carbon markets and Role of Markets post-2012 WRMA Zurich October 5, 2007 Michela Beltracchi European Policy Coordinator International Emissions Trading Association

  2. What is IETA? • IETA is a business organization with members from industry as well as the GHG trading, legal and services communities actively engaged in the GHG market. • IETA is dedicated to ensuring that the objectives of the UNFCCC and ultimately climate protection are met through the establishment of effective and efficient global systems for trading in greenhouse gas emissions • IETA supports post-2012 action leading to stabilization of GHG concentrations at non-dangerous levels.

  3. Key points • Has EU ETS worked so far? – achievements and lessons learnt • Structure of carbon markets: who buys and sells what? • Moving forward: phase II and III • What is happening outside the EU? • What do we expect from Bali? – i.e. what will happen post-2012 • Is “weather” taken into account when trading CO2?

  4. EU ETS phase I : did it work? YES! • It has attached a price to carbon • It has changed the culture of corporations in a very short time: THE IMPACT OF CARBON IS ON BOARD ROOM AGENDA AND BUILT INTO COMPANY STRATEGIES This is particularly remarkable in capital-intensive sectors • Operators did take action even in the short time available for the pilot phase - Moderate emissions abatement took place • The quality of information about GHG emissions has greatly improved - Monitoring Reporting Verification system is now in place • Management systems and operational experience for phase II • The EU ETS has been instrumental in spurring the development of CDM • Many lessons learnt for phase II and III

  5. Bear in mind: Phase I a “learning-by-doing phase” Were expectations realistic? The scheme was set up very rapidly • Risk-adverse firms • Little information available regarding actual GHG emissions • Fear of competitive disadvantage DO NOT EXPECT TOO MUCH FROM SUCH A SHORT IMPLEMENTATION PERIOD, MANY SECTORS HAVE LONG LEAD TIME FOR INVESTMENTS!!

  6. CDM 450 Structure of the Market 2006 (MtCO2e) Allowance Markets Project-Based Transactions CredibleC-asset JI 16 EU Emission Trading Scheme EU Emission Trading Scheme SecondaryCDM 74 MtCO2e 1,100 25 + Voluntary& Retail Other Compliance New South Wales Certificates Chicago Climate Exchange 10 + 20 19 10 Source: IETA/World Bank Market Report

  7. Carbon Market Overview Figures based on IETA/World Bank Market Report 2007

  8. Supply/demand outlook until 2012: i.e. the market is very good at finding opportunities for abatement • All values are in Mton CO2 Source: UNEP Risoe(Sep07), Wolrd Bank and IETA

  9. How do we see the world evolving? • Major questions face the carbon market • Will there be a second commitment round of the Kyoto Protocol, or a similar agreement? • Will the US join the global carbon market? • Will major developing world emitters take on a different role? • Prospects for movement on this in Bali? • (Almost) everyone wants a global carbon price: top down vs. bottom up agreement

  10. EU post 2012 – moving forward • Unilateral -20 or - 30% reduction goal • EU ETS Review to be published on 5 December together with Renewable Energy and CCS • Main elements: - Centralised cap - Auctioning for power sector: up to 100%? - Benchmarking for sector exposed to international competition? - Broadening of scope: new sectors e.g. CCS and gases e.g. N2O - Harmonised rules for new entrants and closures – to provide incentive for low carbon investments - longer allocation period – at least up to 2020 - banking: possible to use allowances from phase II in Phase III (post 2012 phase) - linking to emerging schemes

  11. What is happening outside the EU? • A spur of activity in the US –question no longer ‘if’ but ‘when’ and ‘how’ – several bills and proposals in Congress for a US federal scheme • Several State and local initiatives (California, RGGI, Climate Registry…) • New ET schemes being set up in Australia and New Zealand • Canada: setting up a scheme based on intensity-target

  12. What do we seek from Bali? • A mandate that shall ensure that post-2012 commitments: create expectation that targets shall be achieved • Governments must reassure investors that new goals are credible and will continue to be adhered to over time.

  13. A post- 2012 consensus should: • Be based on market-based approaches: create a deep, broad and liquid emissions trading market worldwide • Be driven by emission reduction goals and • Use a common carbon currency • Include emerging economies, e.g. by making them eligible for project-based reductions. • Provide a long-term carbon price signal - critical for investors:it drives new investment in GHG reductions

  14. A post- 2012 consensus should also: • Allow access to market mechanisms to all emitters in all jurisdictions for compliance goals. • This would: • ensure the creation of a ‘level playing field’ • avoid distortions in competitiveness and • enhance co-operation.

  15. Are operators taking the “weather factor” into account when trading CO2? • Informal survey among IETA mebers • 4 sectors: - energy intensive industry - utilities - oil & gas - financial institutions and the answer is: NO (or at least not yet!) New market opportunities?

  16. Full Global Trading Large Sources of CO2, CH4, N2O HFC, PFC, SF6 All Major Emitting Countries Canada Japan ? EU ETS CO2 Only ? EU ETS CO2 only, CDM: Any gas, any sector Non-EU JI: Any gas, any sector Phase 1 Phase 2 Beyond 2012 IETA Vision: Global GHG Market Post 2012

  17. Global GHG Market without a global deal Kyoto Party-Level Entity-Level Non-Kyoto Party Japan Australia, USA Voluntary targets Canada Projects, CDM/JI EU25+X European Allowances Russia

  18. BACKGROUND MATERIAL

  19. North American Market

  20. The Lieberman-Warner Proposal • A bipartisan proposal that will be the basis for negotiations this Fall • Linking to other systems (up to 15% of allowances) • Offsets permitted for up to 15% of compliance • Broad sectoral coverage • Carbon Market Efficiency Board – a central bank for the US market • Other design elements will come from compromises based on bills proposed earlier http://www.hillheat.com/articles/2007/08/02/lieberman-warner-plan-unveiled

  21. Overview of Proposed US Bills

  22. Projected Impact on US Emissions

  23. U.S. State Initiatives • RGGI • Expected emission reductions; 5 MtCO2e in 2012, 10 MtCO2e in 2015, 30 MtCO2e in 2018, from 9 Northeastern States • California • AB 32 – aim to reduce emissions by 2020 to its level in 1990 baseline • By next Spring, AB32 implementation will be underway • A California cap-and-trade program ? • Will the trading program allow for CER/ERU use ? • The Climate Registry • 34 states and several tribes participate to standardize best practices in GHG emissions data reporting and management.

  24. US not buying into CDM – new offset standard Right • resistance to shipping capital offshore to deal with emissions that should be other countries responsibility • distrust of United Nations • concerns about environmental integrity of emissions trading in general Left • reductions should happen 'at home' (RGGI, California, Federal, all have this) • concerns about environmental integrity • HFC perverse incentives • will not stimulate clean energy investment • will not stimulate technological innocation

  25. Canada Update • April 2007, the Government announced a plan to slow emissions growth by 2010, and then reduce emissions by 150 MtCO2e by 2020. • Use intensity targets (18% reduction in intensity) and emissions trading, beginning 2010 • After 2010, intensity targets fall by 2% per year, unlimited use of domestic offsets allowed for compliance, CERs up to a 10 % limit.

  26. Elements of Canadian program • Six compliance options • Internal abatement • Inter firm trading on a baseline credit basis • Domestic offsets - unlimited • Purchase of CERs – 10% cap • Technology Fund – declining percentage • Credit for Early Action – too small to be a significant part of a compliance strategy

  27. Will Canada be back to Kyoto ? • June 2007 – Bill C-288 • Senate passed C-288, a law requiring Canada to respect its emission reduction committment under the Kyoto Protocol, against the vote of the minority Government. • The effect of the law is uncertain – it cannot force the expenditure of public money, but is nonetheless the law of the land.

  28. Australia • In July, Prime Minister accepted recommendation of his task force to develop domestic emissions trading • Facing pressure from States developing their own, and an election in October or November • System will come into force in 2011, to play role in post-2012, explicit design objective is a rising forward long-term carbon price

  29. Design elements of Australian system Coverage • Large emitters (>25kt) and upstream fuel suppliers • 70-75% of total emissions at outset • Excluded sectors (agriculture, forestry and waste) included as soon as possible • if excluded for long time, adopt alternative mechanisms to deliver sectoral reductions Cost Constraints • Moderate start, allocation free to trade-exposed, one-time free to others to compensate for initial impact, auctioning for the remainder • Initial (3-year) low ‘safety-valve’ emissions fee • fee then rises to be effective penalty • Use of domestic and international (CDM+) offsets plus international linkages

  30. Historical background:Montreal: The end of the Kyoto Protocol cycle Kyoto : Caps, Timetables and mechanisms Main achievements: • Creation of and experience with GHG markets – offsets and ET • Abatement through market mechanisms - CDM • Lessons learned • Price on GHG for governments and business

  31. Carbon Markets • What they DO • Set a cap and put a price on a ton of carbon • Incentivize over compliance • Economic signal for asset allocation • Provide incentive for the development of clean teach solutions • Provide flexibility • What they don’t do • Do not create reductions • Not Applicable to all sectors - not a silver bullet Source EC

  32. Stern Report: Markets are necessary but not sufficient to meet the challenge of climate change Due to: • Ambitious cuts • Tight timetables. .

  33. Kyoto Flexible Mechanisms: CDM and JI • Offset mechanisms are essential but temporary elements- the target is global ETS • Environmentally sound –source of abatement –strict supervision at UN level - only 5 years old, few bad apples inevitable, room for improvement at COP level • Key to: - maintaining competitiveness of industries in jurisdictions where carbon constraint exists - engaging developing Countries by providing investment in clean technologies - create liquidity in markets, provide more abatement opportunities

  34. Who is buying in the CDM Market? EU Private Sector 75% of demand Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006 Source: IETA/World Bank Market Report

  35. Who is selling in the CDM market? Jan. 2006 to Dec. 2006

  36. CDM Asset classes Share of Clean Energy Rises Clean energy: 25% Clean energy: 11% Jan. 2006 to Dec. 2006 Jan. 2005 to Dec. 2005 (share of volumes) Source: IETA/World Bank Market Report

  37. Expected CERs at 2012 from present projects

  38. Cumulative CDM deals = US$ 7.8 billion US$ ~2.7 billion for clean energy(current prices) $1 carbon =~$8 invested for clean energy US$ 16 billion leveraged for clean energyin developing countries since 2002 US$100 billion invested for clean tech globally in 2006 CDM Leverage for Cleantech

  39. Expected CERs and issued CERs by sector Unep Riso, May 2007

  40. For more information International Emissions Trading Association www.ieta.org Michela Beltracchi beltracchi@ieta.org CARBON FORUM ASIA 2007 November 6-7 CARBON FORUM AMERICA 2008 February 26-27

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