2. THE KYOTO PROTOCOL, FLEXIBLE MECHANISMS AND ECONOMIC ASPECTS Iñaki Gili Jauregui Barcelona, 24 May 2005

3. Climate change Oil economy Why the Kyoto protocol?

4. Climate change is the greenhouse effect Climate change is not the weather Climate change has consequences CO 2 is not pollutant CO 2 is used as an equivalent measure (to add up different units) … oil, gas, coal Why the Kyoto protocol?

5. New types of environmental markets? The environmentalisation of the economy? The Kyoto protocol, what will happen?

6. From the Kyoto Protocol and the fight against climate change........... to the Kyoto Protocol promoting a change of climate The Climate change, Kyoto and the coming world

7. Experience in the US since 1990 Reduction targets of 10M tons of SO2 to below the 1980 levels Great success: the environmental goals have been met Costs have been reduced by more than 50% Background

8. ... and the economy grew

9. The Kyoto Protocol The countries agree to reduce their GEG emissions by 5.2% globally with regard to 1990 Allows the parties to transfer and buy emission rights and carbon credits Russia ratifies the Protocol in 2004 A strong bid to change the world energy model

10. Policies Flexible mechanisms: - Clean Development Mechanism - Joint Implementation - Emission trading Carbon sinks How to achieve the Kyoto Protocol commitments? (COP3 1997)

11. Energy efficiency of industries Protection and improvement of sinks Sustainable forestry management practices Increased use of renewable energies and carbon sequestration technologies Measures to limit and/or reduce GEG emissions in transport, waste and energy distribution sectors Progressive reduction of market deficiencies, such as tax incentives, deductions of fees and subsidies contrary to the objectives of the Convention How to achieve the Kyoto Protocol commitments? POLICIES

12. How to achieve the Kyoto Protocol commitments? MECHANISMS ENCOURAGE compliance from developed countries with emission reduction commitments at the LOWEST POSSIBLE COST SUPPORT the sustainable development of developing countries, in transition towards market economies

13. How to achieve the Kyoto Protocol commitments? SINKS GEGs can be removed at a relatively low cost by forest arrangement actions Fulfilling commitments entitles to accountable RMU (removal units) Assessment of absorptions and emissions is difficult Requires developing new inventory methods One of the most controversial aspects, with an uncertain development

14. Joint Implementation Obtaining of Emission Reduction Units or (ERUs) by investing in Projects in countries included in Annex I (item 6). Clean Development Mechanism Obtaining of Certified Emission Reductions (CERs) by investing in Projects in developping countries (not in Annex I) (item 12). International Trade of Emissions Compliance of emission limitation commitments by trading of Assigned Amounts or AAUs (item 17). Flexible Mechanisms

15. Joint Implementation Clean Development Mechanism International Trade of Emissions Direct: A country or company invests directly in a JI/CDM project. Indirect: A country or company invests in a financial fund that selects adequate projects in which to invest. Internal reductions and AAU trading Flexible Mechanisms

16. N2O SF6 PFCs HFCs CO2 CH4 Carbon equivalent units

17. Project for Annex I countries reducing or absorbing GEG emissions Reductions or absorptions must be in addition to the initial situation Agreement of all the parties concerned is required Generates ERUs (Emmission Reduction Units) accountable for achieving the goal of the investing party in the project Expected in countries with transitional economies, as the emission reduction margin has a lower cost Joint Implemenation

18. Public or private organisations invest in developing countries (not in Annex I) to reduce GEG emissions Reductions are additionally to the initial situation They generate CERs (Certified Emissions Reductions) Promotes invesments and reasonable technology transfer to developing countries Requires approval from all the parties concerned, in a long and still uncertain procedure Mecanisme de Desenvolupament Net Clean Development Mechanism

19. International Trade of Emissions

20. Emission level Present limit Emitter 1 Emitter 2 Surplus Market operation Future limit Deficit Price per tonne foreseen:?? €

21. The total limit is established It is divided and assigned Monitoring is carried out and ownerships are recorded Non-compliances are sanctioned How a market is designed

22. Financial efficiency Protection of environmental value Clear definition of emission rights – the role of verification Allowing intertemporal banking or trading In order for the market to function

23. Negotiable financial asset? With an expiry date? Taxes? Accountancy? Offered freely by the State? Can it be pledged? Etc. Implications and queries

24. Register of rights Creating emission rights Obligation to submit emission rights equivalent to the total emissions of the installation, for each calender year Inscribed in the register by recording in account Purpose of registration: transfer, cancellation, conversion

25. National Assignment Plan (NAP) Criteria stipulated in the Directive Developed by the Commission 95% Free assignment - 2005-2008 90% Free assignment - 2008-2012

26. Penalties 40 Euros /t 2005- 2008 100 Euros / t 2008-2012 Does not release from the obligation of acquiring sufficient rights to comply with the limit assigned

27. 97,7 92,0 101,6 80 90 100 110 120 199019921994199619982000200220042006200820102012 Index (base year = 100) Greenhouse gas emissionsTarget path 2010 GHG target 2010CO2 emissions Source: European Environmental Agency 2003 GEG Gross Emissions in Europe

28. In the European Union, Directive 2003/87 Largest emission rights market worldwide 10,000 - 17,000 installations Includes industries representing 40% of emissions Energy activities: Power Plants / Refineries Production and process of ferrous metals Mineral industries: Cement / Glass / Ceramics Paper and paper pulp At present, in the initial stage, CO2 only

29. 15 January 2001 => 25.66 $ 4 August 2004 => 40.99 $ 6 April 2005 => 56.30 $ Mecanisme de Desenvolupament Net Evolution of oil prices (Brent barrel /$)

30. Importing of 400M barrels per year An increase of 1 € => 400M € increase in expenditure transferred abroad Energy consumption increases twice as fast as the GNP (“Asian tiger” model) 15% emission increase capacity, having reached 40% increase by November 2004 According to this trend, in three years time the EU emissions per capita will be equalled, athough the latter has a larger economic development A new house in Spain consumes 40% more energy than in France 50% are diffuse emissions, currently the fastest growing and the most difficult to control, this is still THE BIG ISSUE TO BE RESOLVED Reflections, on a Spanish note

31. THE KYOTO PROTOCOL, FLEXIBLE MECHANISMS AND ECONOMIC ASPECTS Iñaki Gili Jauregui Barcelona, 24 May 2005