1. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Market Situation SOFOFA, March 2005 Andrei Marcu President International Emissions Trading Association

2. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS 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. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Projects, CDM/JI European Allowances & Kyoto Units EU25+X Australia, USA Kyoto Units Kyoto Units? Japan Kyoto Party-Level Entity-Level Non-Kyoto Party Global GHG Market Green Credits? Russia/Ukraine ?? Canada

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

12. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Will CO 2 allowance prices go up? Unless forget Kyoto...... problem gets worse Tighter constraint by 2008 - 2012 Extent of CO 2 constraint across Europe – mln tonnes per year 2008- 2012 ►Less scope for imaginative allocations CDMs Switch to low CO 2 intensive generation BUT competition for CDMs Source Dresner Kleinworth Wassertein

13. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS EU Allowance Prices

14. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Current Prices (at 11 Feb 05) Commodity TypeVintage Year Price range (Offer) per tonne CO2e Kyoto Compliance Tools CDM - CERs2000 - 2012EUR 1.50 – 5.50 JI - ERUs2008 - 2012EUR 4.00 - 6.00 Commodity TypeVintage YearBid / Offer per allowance National Compliance Tools UK allowances - Bid / Offer2004GBP 3.00 / 3.50 EU allowances - Bid / Offer2005 DeliveryEUR 7.10 / 7.20 EU allowances - Bid / Offer2006 DeliveryEUR 7.20 / 7.30 EU allowances - Bid / Offer2007 DeliveryEUR 7.30 / 7.40

15. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS 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. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS

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

19. SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS International Emissions Trading Association www.ieta.org Andrei Marcu – President marcu@ieta.org For more information