Overview of Carbon Markets Voluntary & Compliance Markets: Existing Carbon Reduction Units Vladimir Litvak RBEC Energy and Environment Practice Leader UNDP/GEF Regional Coordinator RBEC Energy and Environment Practice Meeting Wednesday 27 th September, 2006 Bratislava, Slovakia

1 RBEC Energy and Environment Practice Meeting: Carbon Finance September $ $ $ Kyoto Protocol $

2 RBEC Energy and Environment Practice Meeting: Carbon Finance September Main Greenhouses Gases addressed in UNFCCC : Carbon Dioxide: CO 2 Methane: CH 4 Nitrous oxide: N 2 O Hydrofluorocarbons: HFCs Perfluorocarbons: PFCs Sulphur hexafluoride: SF 6

3 RBEC Energy and Environment Practice Meeting: Carbon Finance September Greenhouse Gases are generated by the following sectors: Energy: – Fossil Fuel Combustion & – Fugitive emissions from fuels Industrial processes Solvent & other product use Agriculture Waste

4 RBEC Energy and Environment Practice Meeting: Carbon Finance September The Kyoto Map Ratification date: February 16, 2005 Ratified by 160 countries (up to April 12, 2006) Not ratified by Australia and USA that together represent 33% of world total emission

5 RBEC Energy and Environment Practice Meeting: Carbon Finance September Kyoto Mechanisms The Kyoto Protocol broke new ground by defining three innovative “flexibility mechanisms” to lower the overall costs of achieving its emissions targets: Clean Development Mechanism (Art. 12) Joint Implementation (Art.6) Emissions Trading (Art.17) These mechanisms enable Parties to access cost- effective opportunities to reduce emissions or to remove carbon from the atmosphere in other countries.

6 RBEC Energy and Environment Practice Meeting: Carbon Finance September Each Kyoto Mechanism has its own Emission Credits: CDM (Art.12): Certified Emission Reductions (CERs) Joint Implementation (Art. 6): Emission Reduction Units (ERUs): Emission Trading (Art.17): Asigned Amount Units (AAUs): One period of 10 years or 3 x 7 years

7 RBEC Energy and Environment Practice Meeting: Carbon Finance September Different Carbon Markets Allowance-based Transactions The buyer purchases emissions allowances created and allocated by regulators under cap-and-trade regimes such as Assigned Amount Units (AAU’s) under the Kyoto Protocol or EU Allowances (EAU’s) under the EU Emission Trading Scheme. Project-based Transactions The buyer purchases emission credits (CERs, ERUs, VERs) from a project that reduces GHG emissions. Some project-based transactions are conducted to meet voluntary targets, but most are intended to for compliance with the Kyoto Protocol or other regulatory regimes. No difference in quality between emission allowances and project-based credits, once the latter are issued !

8 RBEC Energy and Environment Practice Meeting: Carbon Finance September There are 45 Different Carbon Markets, but 2 main regimes Project-based Markets: The Kyoto Protocol (CDM and JI) – MANDATORY REGIME Marrakech Accords Executive Board (CDM and JI) Methodology Panel National mitigation plans (e.g. Canada, Japan, EU countries) Non-Kyoto Regimes – MANDATORY REGIME USA (individual States; Oregon, California, East Coast) Australia (individual States; New South Wales) Voluntary Regimes Chicago Climate Exchange Retail market Allowance-based Market EU Emissions Trading Scheme (as of Jan. 2004) Linking directive EU-ETS & Kyoto Protocol

9 RBEC Energy and Environment Practice Meeting: Carbon Finance September Structure of Carbon Markets Allowance Markets UK ETS EU Emission Trading Scheme Chicago Climate Exchange New South Wales Certificates Project-Based Transactions JI and CDM Voluntary Retail Other Compliance

10 RBEC Energy and Environment Practice Meeting: Carbon Finance September CDM Projects (3 September 2006) Source:

11 RBEC Energy and Environment Practice Meeting: Carbon Finance September Project-based Transactions – Annual volume of project-based emission reductions and average price is US$/tCO2eq

12 RBEC Energy and Environment Practice Meeting: Carbon Finance September Project-based Transactions – Location of CDM & JI Projects

13 RBEC Energy and Environment Practice Meeting: Carbon Finance September Project-based Transactions – Who is buying?

14 RBEC Energy and Environment Practice Meeting: Carbon Finance September Type of technology in emission reduction projects (as a share of volume contracted)

15 RBEC Energy and Environment Practice Meeting: Carbon Finance September Project-based Transactions – Who is what price level…..? Price levels vary according to (assumed) risk levels: (current – September 2006 – price levels for CERs: €7-8 ($8-10)

16 RBEC Energy and Environment Practice Meeting: Carbon Finance September Allowance-based Transactions – Who is what price level > €28 !? Total of 6.57 billion CO2 allowances for 25 EU countries Trading volume Jan 2006: million CO2 allowances/week

17 RBEC Energy and Environment Practice Meeting: Carbon Finance September Carbon Market outlook to 2012 The countries with shortfalls in their Kyoto emission allowances are likely to need billion Kyoto compliant units by 2012 to meet their commitments. Based on current trends the CDM is probably capable of supplying an average of million CERs per year during the commitment period or, in aggregate, around 800 million CERs by JI is estimated to be able to supply an additional million ERUs per year during , or in total million by Combined CER and ERU supply to 2012 could be around 1,000 million units, which would meet about 15-25% of Kyoto market demand for compliance units. Source: UNDP-EEG, March 2006

18 RBEC Energy and Environment Practice Meeting: Carbon Finance September Kyoto Protocol ends in 2012: What’s next? There exist many uncertainties about the post-Kyoto Regime Which target? Will all countries participate? Mandatory regime for all? It is an ongoing & learning process  high dynamic, high uncertainty Possible Future of CDM: by Project; by Sector; by Programme? First COP/MOP: Montreal (2005) The creation of a market for a Public Good such as GHG is a hard and complex task Climate Change is here  What about adaptation, more a priority? Non Annex I Countries are still asking for poverty alleviation and economic development

19 RBEC Energy and Environment Practice Meeting: Carbon Finance September $ $ $ Kyoto Protocol $ Thank you!