INTERNATIONAL EMISSIONS TRADING ASSOCIATION Crans Montana, CH September 19, 2008 Henry Derwent President and CEO International Emissions Trading Association Carbon Markets and the Economic Impact of the CDM

INTERNATIONAL EMISSIONS TRADING ASSOCIATION What is IETA? IETA is the business organisation promoting emissions trading as the most economically efficient and business- friendly approach to the reduction of greenhouse gas emissions worldwide. Membership: 182 companies IETA members are emitters, project developers, intermediaries, financial institutions, brokers, verifiers, and/or legal firms IETA offices Geneva, Brussels, Washington DC

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Spreading across the World – Kyoto or not Korea - committed Japan – now beyond voluntary China – local experiments Australia – on the way New Zealand – rapid progress Canada – Wide variety California – rapid progress CCX – in operation REGGI – nearly there US – now a certainty EU –in operation, refining and expanding UK – first economy- wide NSW – in operation Norway and Switzerland too Taiwan too UK – pushing further

INTERNATIONAL EMISSIONS TRADING ASSOCIATION First or second stage after ? A full North American system? Europe staying much as it is? Australia finds a way of bringing in Indonesia and PNG? Japan teams up with Korea? China and India partial domestic schemes? Brazil and South Africa still resistant? Truly massive potential – programmatic, policy, forestry, agriculture, SD-PAMs – but when and for how long? What will Russia’s terms be?

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Elements of Design of an Emissions Trading System Trading Foreign Scheme Foreign Scheme Governing Body Domestic offset projects International offset Projects eg CDM Trading Entity A Trading Entity B Compliance Periods Trading Emissions Supply injections Regulation and support

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Value of world carbon market increased by 120% in % 70% 180% 120% Mostly driven by increased volume and price of EUAs Source: New Carbon Finance estimates

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Consequences in terms of GDP cost To achieve Stern’s low GDP costs, transfers to developing countries of between $50 and $100bn a year are required IPCC 4AR: majority of lower-cost opportunities are in non-OECD countries Source: 4AR

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Legal basis in the Kyoto Protocol – Run by Executive Board (EB) answerable to KP Parties – EB back-stopped by UNFCCC secretariat with support for: Registration and issuance Accreditation of certification companies Methodologies for emissions baseline setting and monitoring CDM general overview | International mandate

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Additionality Defines operationally what would happen in the absence of a CDM emission reduction project Two experts – two views Agreement how best to do it A challenge for any offset mechanism/market outside an inventory target-based system CDM general overview | International challenge

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Annual value of CDM/JI - Emission Reductions Transactions (billion USD) (up to 2012 vintages) Source: State and Trends of the Carbon Market Karan Kapoor and Philippe Ambrosi, World Bank, May 2008

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Globally a success, but regionally the CDM has been mixed 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012 Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to non-Annex 1 countries have yet to benefit from any registered CDM project activity

INTERNATIONAL EMISSIONS TRADING ASSOCIATION CDM pipeline August 2008: 1200 CDM projects registered with UNFCCC’s CDM EB, and 2500 projects are in the pipeline. The Pipeline was produced by Jørgen Fenhann, UNEP Risø Centre

INTERNATIONAL EMISSIONS TRADING ASSOCIATION How the Carbon Price does affect clean energy investment – CDM analysis Source: World Bank State of Carbon market 2007

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Prices of CER also expected to increase post 2012

INTERNATIONAL EMISSIONS TRADING ASSOCIATION CDM has been made functional and is now developing very dynamically despite being the first mechanism of its kind at the international level with all associated regulatory challenges. CDM has raised awareness of the climate change issue. It has mobilized great quantities of investment in a short time. CDM permits bottom -up initiatives, which help to move away from the traditional donor transaction approach. A few CDM benefits

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Lessons learned from the CDM so far CDM generates real emission reductions – Although average underperformance at around 11% – More experience has to be gained in certain sectors, e.g. landfill gas, agriculture Additionality remains one of the main rejection criterion Increasing number of reviews of registration and issuance requests continues Transparency of decision making project process still to be improved Enhanced interaction with project developers needed Way forward Scale-up of CDM required Certainty on Post-2012 framework needed

INTERNATIONAL EMISSIONS TRADING ASSOCIATION capital investment * CDM in Africa – registered projects Registered CDM projects... in 27 projects in 7 countries, expected to generate 38 million CERs to 2012 $3.9 billion Estimated *Based on average investment estimates per tonne CO 2 equivalent reduction; from: UNFCCC, Investment and Financial Flows to Address Climate Change

INTERNATIONAL EMISSIONS TRADING ASSOCIATION CDM in Africa – registered and in validation stage Registered projects (27) Projects seeking registration (44) capital investment * $12-18 billion Estimated *Range based on $ average investment/CER and $200 /CER alternate estimate for project mix containing fewer industrial gases projects, from UNFCCC, Investment and Financial Flows to Address Climate Change.

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Focus CDM on technology transfer

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Not an academic concept – CDM is up and running! CDM general overview | World’s largest CO2 offset system  3 years of operational experience (in the context of exponential growth!)  More than US$ 1.5 billion worth of CERs issued (low global administration cost below 1%)  Large pool of learning opportunities

INTERNATIONAL EMISSIONS TRADING ASSOCIATION 1: The State and Sentiment of the Carbon Market

INTERNATIONAL EMISSIONS TRADING ASSOCIATION Significantly higher prices beyond 2012

INTERNATIONAL EMISSIONS TRADING ASSOCIATION 2: The Clean Development Mechanism (CDM)

INTERNATIONAL EMISSIONS TRADING ASSOCIATION National Cap and Trade going from strength to strength EU-ETS expanding in countries, sectors and gases Australia, Japan, Korea changing their minds Developing countries seeing trading as a possible emissions reduction tool US national system looks a near certainty – timing less clear (36 L-W Nays in the Senate)