1. Power Sao Paulo, December 7 th, 2006 International CDM Market Dr. Manuel Fuentes

2. Sao Paulo, December 7 th, 2006 Power n International organisation consulting on energy, climate change & international development n Established 1981 in UK n Clients include private companies and banks, UN Agencies, Multilateral Finance Institutions, UK Government, EU and Bilateral Agencies n 70+ staff worldwide IT Power – a brief introduction

3. Sao Paulo, December 7 th, 2006 Power Presentation contents n Structure of Carbon Market n CDM n European Emissions Trading Scheme n Voluntary market

4. Sao Paulo, December 7 th, 2006 Power United Nations Framework Convention on Climate Change (UNFCCC) n First discussed at Earth Summit in Rio de Janeiro in 1992 Objective: “To achieve… stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” Article 2, UNFCCC Objective: “To achieve… stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” Article 2, UNFCCC

5. Sao Paulo, December 7 th, 2006 Power Kyoto Protocol n Most important decision of UNFCCC n Adopted in December 1997 n Developed countries agreed to reduce emissions to 5.2 percent below 1990 levels, within commitment period 2008 to 2012 n Kyoto Protocol enforced February 2005

6. Sao Paulo, December 7 th, 2006 Power 199020002010 GHG Emissions 5.2 % Carbon Dioxide (CO 2 ) Methane (CH 4 ) Nitrous oxide (N 2 O) Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs) Sulfur hexafluoride (SF 6 )

7. Sao Paulo, December 7 th, 2006 Power Mechanisms n Clean Development Mechanism: –Aims to assist non-Annex I countries achieve sustainable development –Annex I countries with emission caps pay to implement projects to achieve emission reductions in developing countries. Credits issues based on emission reductions of project. n Joint Implementation –Annex I country assists another Annex I country to implement project to reduce emissions. n International Emissions Trading –Trade of emissions allowances or reduction credits. Aim is to reduce total costs of achieving collective emissions reductions. Total amount of emissions reductions of Annex I countries does not change.

8. Sao Paulo, December 7 th, 2006 Power Why a Carbon Market? n Regulatory pressure on firms, governments, and even individuals to constrain their greenhouse gases (GHGs) emissions n Voluntary reasons firms, governments, individuals and other organisations constrain emissions – carbon neutral n Both domestic reductions and purchase of outside “GHG emission reductions” n As GHGs settle in the atmosphere, it does not matter where emissions are reduced n Opportunity for countries such as Brazil to benefit from investment in activities to reduce

9. Sao Paulo, December 7 th, 2006 Power Structure of the Carbon Market Kyoto compliance (Annex 1 Governments) EU Emissions Trading Scheme JI & CDM Retail Domestic trading schemes e.g. UK ETS, NSW GHG abatement scheme, Chicago Climate Exchange, Canada domestic scheme, Japan? Voluntary EU, Canada, Japan & New Zealand

10. Sao Paulo, December 7 th, 2006 Power Clean Development Mechanism n Carbon finance for sustainable development projects with benefits such as job creation, clean energy service provision etc. n Reduced Kyoto compliance costs of greenhouse gas reductions for industrialised countries n CDM projects are undertaken in non-Annex I countries and may be n Unilateral (participants: host country only) n bi-lateral (participants: host country + Annex 1 country) n multi-lateral (participants: host country + a number of annex 1 country partners) n The emission reductions credits achieved are referred to as Certified Emission Reductions (CERs): 1 CER = 1 tonne CO 2 equivalent

11. Sao Paulo, December 7 th, 2006 Power CDM Eligibility n Real, measurable and long-term benefits related to mitigating climate change n Voluntary participation of each party involved n Projects must result in GHG reductions that are “additional” n Project must help host country in achieving sustainable development n CERs generated for 10 or 21 (7+7+7) years for reduced GHG (“basket of 6” - in CO 2 eq) emissions compared to “business as usual” scenario – baseline

12. Sao Paulo, December 7 th, 2006 Power Small scale projects n Simplified procedures -administrative levy halved n Possible project activities: i.Renewable energy up to 15MW ii.Energy efficiency improvements up to equivalent of 15GWh/ year iii.Others which reduce emissions and which directly emit less than 15 000 tCO2 per year. E.g. improved fertiliser use, management of rice cultivation…

13. Sao Paulo, December 7 th, 2006 Power What is bundling?

14. Sao Paulo, December 7 th, 2006 Power The EU Emissions Trading Scheme (1)  An entity-based domestic “cap and trade” emissions allowance programme  Governed by Community Law using a special unit of trade – “allowances”  Compatible with international emissions trading under Kyoto, contributing towards Kyoto targets

15. Sao Paulo, December 7 th, 2006 Power Summary: n Phase 1: 2005-07 n Phase 2: 2008 -12 n Covers the EU 15 & the 2004 Accession States n 50% of all carbon emissions in the EU (12,000 plants) The EU Emissions Trading Scheme (2)

16. Sao Paulo, December 7 th, 2006 Power The EU ETS - who is affected? n Energy – combustion installations over 20MW n Ferrous Metals n Minerals – kilns, glass, ceramic, cement n Other –(Pulp and Paper) n Renewables, transport & other sectors are NOT included

17. Sao Paulo, December 7 th, 2006 Power EU Allowances n 1 EUA = 1 tonne CO2 equivalent = 1 CER n 1 EUA trading for 15€ n Penalty value for failing to meet EUA = 100€/EUA for 2008-2012 period!! n 1 CER trading for 6€ n Higher risks associated with CER investors…

18. Sao Paulo, December 7 th, 2006 Power How can CERs and ERUs be used in the ETS? EU ETS and Linking directive n under the EU ETS each installation is required to surrender a number of allowances corresponding to their verified emission volume for each calendar year n 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 –surrendering of CERs and ERUs are subject to specified preconditions

19. Sao Paulo, December 7 th, 2006 Power Preconditions for surrendering CERs Since 2005 CERs can be used for compliance n up to a percentage of the allocation to each installation - specified by its Member State n CERs are not converted into EU allowances – but entered directly into the surrendered allowance table n UNFCCC ITL required for the transfer of CERs into an EU registry –still to be implemented

20. Sao Paulo, December 7 th, 2006 Power Voluntary Action by Firms, Individuals and….even Governments n A large number of companies have engaged in volunatry programs to reduce their GHG emissions –e.g. Novartis (Swiss Pharmaceutical company) to reduce GHGs by 5% below 1990 levels over 2008-2012 (in line with government’s commitment) n Individuals and Firms have engaged in purchases of small amount of emission reductions to become “carbon neutral” (event, corporation, or product) –HSBC to become carbon neutral (made 1 st purchase of 170,000 tCO 2 e assorted credits (3 mths offsetting) –IT Power offsets emissions from international travel n UK Government –chosen to offset emissions from staff/operations through purchase of credits: 1 st purchase from Kuyasa Gold Standard CDM project in South Africa –

21. Sao Paulo, December 7 th, 2006 Power Buyers n Public funds (Government only) n Public-private funds (e.g. Community Development Fund, Baltic Sea Region Testing Ground Facility, Italian Carbon Fund); n Private funds (e.g. European Carbon Fund, Japan Greenhouse Gas Reduction Fund); n Private purchasing pools (e.g. CRM, ICECAP and GG- CAP). n World Bank and other multilateral organisations n Brokers n Direct investment by companies Many and the list keeps growing!!

22. Sao Paulo, December 7 th, 2006 Power Thank you Manuel Fuentes +44 1256 392700 Manuel.fuentes@itpower.co.uk