10 years of carbon markets

Transcription

1 The Title end of free carbon: Title 10 years of carbon markets Valentin Bellassen Date

2 Activities of CDC Climat Carbon registries (Seringas, VCS, ) Kyoto: 9 countries use Seringas (5 EU) VCS: one of the 3 registry holders (with Markit and APX) Investment in emissions reduction projects European Carbon Fund, Fonds Capital Carbone Maroc, Post-2012 carbon fund, Research and analysis on climate economics First ex-post analysis of the test-phase of the EU ETS Club Tendance Carbone Development of the CO2 Domestic Offset Projects framework in France BlueNext (joint venture with NYSE-Blue) Leading exchange for spot carbon credits in Europe

3 The end of free carbon: 10 years of carbon markets 1. Carbon markets, the principles 2. Lessons from the EU ETS: Carbon offsets, the Clean Development Mechanism (CDM) 4. Carbon markets, what s next?

4 1. Carbon markets, the principles Demand for carbon Supply of carbon Geographical reach of carbon markets

5 1. Carbon markets, the principles Climate quality: the tragedy of the commons 5

6 1. Carbon markets, the principles Carbon markets: a public policy aimed at «internalizing» climate quality Economic toolbox Regulation Carbon markets Carbon tax CAP Allowances Credits Efficiency standards Compliance markets Volontary markets 6

7 1. Carbon markets, the principles Compliance demand and supply Boundaries of the company Offset project Emissions Reference year Reduced emissions Emissions to be offset Avoided emissions Emissions before project Avoided emissions Emissions after project Surplus allowances Other company Allowances allocated by the Commission Emissions Reference year Surplus allowances Emissions Compliance period Source: CDC Climat Research

8 1. Carbon markets, the principles Compliance demand: businesses and governments Million tons of CO2e Demand contracted by April 2011 Adjusted f or delivery perf ormance Businesses States Remaining demand by December 2012 Source: World Bank 2011

9 1. Carbon markets, the principles Compliance continent Allowances (Kyoto market, EU ETS, ) 82 G in 2010 Offsets (CDM, JI): 14 G in 2010

10 1. Carbon markets, the principles Voluntary demand and supply Boundaries of the company Renewable energy project Emissions Reference year Reduced emissions Emissions to be offset Avoided emissions Emissions before project Avoided emissions Emissions after project Emissions stored by the project Reforestation project Emissions stored by the project Carbon stock before project Carbon stock before project Source: CDC Climat Research

11 1. Carbon markets, the principles Voluntary demand Voluntary demand is driven by businesses (Eurostar, Avis, Voyageurs du Monde, Air France, BP, ) NGOs (resale) 0% Individuals 1% NGOs (retirement) Others 3% 1% Businesses (precompliance) 21% Governments 1% Businesses (resale) 26% Businesses (retirement) 47% Total : 69 MtCO 2 e exchanged in 2010 Source: Ecosystem Marketplace 2011

12 1. Carbon markets, the principles Compliance continent Allowances (Kyoto market, EU ETS, ) 82 G in 2010 Offsets (CDM, JI): 14 G in 2010 Offsets: 270 M in 2010 Voluntary island

13 1. Carbon markets, the principles Stakehold ers Compliance Companies, countries Voluntary Companies, organisations, individuals Demand Allowance shortage Voluntary emissions target Supply Supernumerary allowances (eg. AAUs, EUAs) Offsets (eg. CERs, ERUs) Offsets (eg. VCUs or GS credits) 40 EUA "spot" EUA "futures" CER Demand + Supply = Price Price ( /tco2) November-05 April-06 August-06 January-07 June-07 October-07 March-08 August-08 December-08 May-09 October-09 March-10 July-10 Source: Bluenext, ECX

14 1. Carbon markets, the principles Geographical reach of carbon markets 2007: Alberta 2005: EU ETS 2013: Local markets in China 2013: CAR 2009: RGGI 2001: CDM : KP first commitment period 2006: JVETS 2015: South Korea & Taiwan 2012: AU ETS 2003: NSWGGAS 2009: NZ ETS

15 1. Carbon markets, the principles Two big fishes The EU ETS in the pond of carbon markets The CDM in the pond of carbon offsets Market value (total 100 G ) Other compliance 1% CDM 14% Voluntary markets 0% EU ETS 85% Source: World Bank 2011

16 1. Carbon markets, the principles Part I: key points Two types of demand: compliance and voluntary Two types of supply: supernumerary allowances and offsets The voluntary market for offsets remains smaller than the compliance market: 0.27 G vs 14 G of transactions in 2010 A big market: 100 G of transactions in 2010, 4 G /year of end demand over

17 The end of free carbon: 10 years of carbon markets 1. Carbon markets, the principles 2. Lessons from the EU ETS: Carbon offsets, the Clean Development Mechanism (CDM) 4. Carbon markets, what s next?

18 2. Lessons from the EU ETS: The rules of the ETS History of the ETS establishment Allocation, new entrants, banking, : the test phase Price Net position of countries, sectors and installations What impact on past and future emissions Lessons learnt: the changes of phase II and III Total cap, allocation, banking rules, new entrants,

19 2. Lessons from the EU ETS: EU ETS test phase: key rules CO2 emissions from large European industries have been capped Every February, each industrial installation is allocated allowances corresponding to its cap (1 allowance = 1 ton of CO2) Every April, each industrial installations must surrender as many allowances as its actual CO2 emissions during the previous year (penalty: 40 /tco2e in phase I, 100 /tco2e in phase II) Allowances are freely tradable all around Europe 3 market periods : , , Free banking and borrowing during each period No possibility of banking and borrowing between the first two periods

20 2. Lessons from the EU ETS: Test phase ( ): allocation of allowances 2.2 GtCO2 (50% of the EU CO2 emissions, industrial installations) 0.13% of allowances auctioned Breakdown per country Breakdown per industrial sector Others 28,1% Germany 23,7% Paper 3% Cement, glass & lime 12% Others 9% Power and combustion France 7,4% Spain 8,3% UK 10,5% Italy 10,6% Poland 11,4% Metals 12% Refining 8% 56% Source: National Allocation Plans

21 2. Lessons from the EU ETS: Test phase ( ): CO2 price CO2 tonnes /t of CO2 35, , , , , d-04 j-05 f-05 m-05 m-05 j-05 j-05 Exchanges on market places EUA OTC prices a-05 o-05 n-05 d-05 j-06 m-06 a-06 m-06 j-06 a-06 OTC Exchanges s-06 o-06 n-06 j-07 f-07 m-07 m-07 EUA Dec- 08 futures prices on ECX 10,00 5,00 0,00 Source : Point Carbon, Powernext and ECX

22 2. Lessons from the EU ETS: Test phase ( ): CO2 price Stage 1 (Jan-Jul 05): increasing price during this phase can be explained by tightness of the market and its lack of symmetry. Demand came from power producers but supply was not there because other players generally not prepared to sell; Stage 2 (Aug 05-Mar 05): expanding market reached equilibrium with the supply at around 25/t. Demand continued to come from power producers; increasing during the winter on account of the rise in gas price; Stage 3 (Apr-May 05): market correction followed European Commission announcement of initial compliance that market was long by approximately 4%; Stage 4 (Jun-Sep 06): market stabilised at around 15/t. Demand of power producers met by increasing supply following initial compliance announcement; Stage 5 (Since Oct 06): divorce between prices for first and second periods became final. First period price fell to 0.5/t while second period price remained in the range 15-20/t. The Commission s tightening of Member State allocation caps for the second period has lead to second period allowance prices rising to 25/t in May Current prices have stabilized around 15/t.

23 2. Lessons from the EU ETS: Test phase ( ): CO 2 price Theory, marginal cost of abatement: the price of an EUA reflects the cost balance between reducing internal emissions and buying reductions from another stakeholder Practice, price determinants during the test phase Institutional announcements Economic growth Climatic factors (temperature, dam filling level, ) Commodity prices (gas vs coal vs oil )

24 2. Lessons from the EU ETS: Test phase ( ): winners and loosers Drax coal power plant (UK) 43 MtCO 2 allocated 65 MtCO 2 emitted Belchatow coal power plant (Poland) 92 MtCO 2 allocated End of 2005, turbine efficiency increased by 3% 90 MtCO 2 emitted Polaniec coal power plant (Poland) 22 MtCO 2 allocated 20% of wood mixed with coal 16 MtCO 2 emitted 22 MtCO 2 bought from installations in Poland, Estonia and France 6 MtCO 2 surplus 2 MtCO 2 surplus

25 2. Lessons from the EU ETS: Test phase ( ): winners and loosers Source: Trotignon & Delbosc 2008

26 2. Lessons from the EU ETS: Test phase ( ): winners and loosers Shortage Million EUAs Surplus a-Electricity production 1b-Rest of combustion 2-Refineries 3-Coke ovens 4-Metal ore 5-Iron and steel 6-Cement 7-Glass 8-Ceramics 9-Paper and board 99-Opted-in All sectors Gross Short Gross Long Net Position Source: Ellerman et al. 2010

27 2. Lessons from the EU ETS: Test phase ( ): winners and loosers largest firms in EUA allocation (44% of total) Period 1 net position (MtCO2) Endesa RWE Enel E-on Electrabel (Suez) EDF Evonik New Energies GmbH DONG Energy Eni Group PKE SA Lafarge BOT Total CEZ Group Shell Vattenfall Corus Group Dalkia Arcelor-Mittal Public Power Corp. SA Source: Ellerman et al. 2010

28 2. Lessons from the EU ETS: Test phase ( ): winners and loosers Globally: 150 Mt long Short: UK, Ireland, Spain, Italy, Greece Long: Germany, France, Nordic countries, Eastern countries Source: Trotignon & Delbosc 2008

29 2. Lessons from the EU ETS: Test phase ( ): winners and loosers Source: Trotignon & Delbosc 2008

30 2. Lessons from the EU ETS: What impact on past emissions? The German example Baseline emissions: E = f(gdp, efficiency) + ε(weather, commodity prices, ) Electricity and industry, different types of abatement Million tonnes CO Electricity Abatement Million tonnes CO Other sectors Abatement Emissions Emissions Source: Ellerman et al. 2010

31 2. Lessons from the EU ETS: What impact on past emissions? Fuel switch Source: Ellerman et al. 2010

32 2. Lessons from the EU ETS: What impact on past emissions? Econometry: EU 25: 210 ± 90 MtCO 2 over 3 years (3% of total emissions) EU 15: 195 MtCO 2 (4%) / EU 10: 25 MtCO 2 (2%) Germany: 71 MtCO 2 (half electricity, half industry) Fuel switch in Britain: MtCO 2 in Modeling: Fuel switch: MtCO 2 in Source: Ellerman et al. 2010

33 2. Lessons from the EU ETS: What impact on future emissions? Lifetime costs of power plants at current commodity and carbon prices Investment Fuel cost Operating and maintenance costs CO2 cost US$2007/MWh Steam coal 2004 Steam coal 2008 Advanced coal 2004 Advanced coal 2008 CCGT 2004 CCGT 2008 Nuclear 2004 Nuclear 2008 Wind 2004 Wind 2008 Source: Ellerman et al. 2010

34 2. Lessons from the EU ETS: What impact on future emissions? Little evolution of investments Impact of commodity prices and limited renewable building capacity % of total planned power 80% 70% 60% 50% 40% 30% 20% 10% 0% Gas/Oil (GW) Coal (GW) CarbonFree (GW) Source: Ellerman et al. 2010

35 2. Lessons from the EU ETS: Changes for phase II ( ) and III ( ) Total cap: 10% lower in 2012, 21%-37% lower in 2020 Auctions: 3% in phase II, 60% in phase III Banking allowed between phase II and phase III Sectors included: aviation in 2012, N2O, PFC, aluminum, and ammonia in phase III Geographical scope: Norway, Island and Liechtenstein included in phase II, CDM credits up to MtCO2e in phase II and III

36 2. Lessons from the EU ETS: Jobs Regulators (EC, Member state) Capped businesses (EDF, Arcellor, Total, ) Traders (EDF Trading, Orbéo, ) Services to markets: brokerage, consultancy, exchange, (BlueNext, CDC Climat, ) Auditors (Deloitte, Ernst & Young, ) Lobbyists (IETA, NGOs, ) Research (CDC Climat Research, Universities, )

37 2. Lessons from the EU ETS: Part II: key messages Winner and loosers at every level: installations, firms, sectors, countries Long market + no banking = price close to 0 at the end of the test phase Despite the long market, reductions occurred (about 1% per year) Lessons are being learnt for phase II and III

38 The end of free carbon: 10 years of carbon markets 1. Carbon markets, the principles 2. Lessons from the EU ETS: Carbon offsets, the Clean Development Mechanism (CDM) 4. Carbon markets, what s next?

39 3. Carbon offsets, the Clean Development Mechanism (CDM) Example of a CDM project The CDM project cycle Which projects in the CDM Price of CDM credits The future of the CDM: pitfalls and solutions

40 3. Carbon offsets, the Clean Development Mechanism (CDM) Principles of carbon offsetting Boundaries of the company or country Boundaries of the offset project Emissions Reference year Reduced emissions Emissions to be offset Avoided emissions Emissions before project Avoided emissions Allowances allocated by the Commission Emissions after project

41 3. Carbon offsets, the Clean Development Mechanism (CDM) Case study: the Tremembe project Location: Brazil Company: Véolia Environment Project type: landfill methane Start date: 2003 First CERs issued: 2007 Expected delivery by 2012: CERs Advance purchase of CERs by the Dutch government Source: Bellassen & Leguet 2008

42 3. Carbon offsets, the Clean Development Mechanism (CDM) Carbon offset projects: 5 key quality criteria Measurement and additionality of emissions reductions Verification Timeline of offset issuance Transparency and tracking of issued offsets The case of forestry: permanence of emissions reductions

43 3. Carbon offsets, the Clean Development Mechanism (CDM) The CDM project cycle Validation of methodology by the CDM Executive Committee Key dates for the Tremembe project Source: MIES, Guide on Project mechanisms

44 3. Carbon offsets, the Clean Development Mechanism (CDM) Project types and country of origin CER issued by 1/10/2011 (total 745 MtCO2e) South Korea 10% Mexico 1% Indonesia 1% India 16% LDC 0% Other 6% Brazil 8% China 58% CER issued by 1/10/2011 (total 745 MtCO2e) Methane 0% Wind 7% HFCs 50% Other 0% Biomass energy 3% EE own generation 5% Fossil fuel switch 3% N2O 24% Hydro 8% Source: UNEP-Risoe data

45 3. Carbon offsets, the Clean Development Mechanism (CDM) 3 keys to the CDM success story of China Political stability High level of industrialisation and implantation of western firms Development of an efficient national CDM framework Evolution of project types Fading eligibility and potential of industrial gases Source : UNEP-Risoe, June 2009 and estimates by CDC Climat Research

46 3. Carbon offsets, the Clean Development Mechanism (CDM) The impact of the CDM on developing countries emissions Source : UNEP-Risoe, June 2009 and estimates by CDC Climat Research

47 3. Carbon offsets, the Clean Development Mechanism (CDM) Generation of CERs, primary market Example 1: the Dutch government First carbon fund launched in 1999 Total investment in projects reducing emissions: 680 million euros Objective: 100 MtCO 2 e over (half of the estimated Dutch reduction effort) Example 2: EDF Carbon fund set up in 2006 Total investment: 300 million euros Involvement in more than 30 projects

48 3. Carbon offsets, the Clean Development Mechanism (CDM) Generation of CERs, secondary market Example 1: Orbeo Rhodia (Rhône-Poulenc) applies its know-how on emissions reductions in the chemical sector to plants located in developing countries (South Korea, Brazil) Joint-venture with Société Générale in 2006 to market the resulting CERs Today: 100 million CERs, CDM projects under development Example 2: Ecosecurities Company created in 1997, based on carbon consulting and project development Today: 158 registered CDM projects, 40 million CERs by 2012 Bought by JP Morgan in November 2009

49 3. Carbon offsets, the Clean Development Mechanism (CDM) Price of CDM credits Close but lower than EUAs: demand driver, limited fungibility, higher delivery risk 40 EUA spot (BNX) EUR future dec 12 (ECX) CER spot (BNX) March-05 July-05 November-05 March-06 July-06 November-06 March-07 July-07 November-07 March-08 July-08 November-08 March-09 July-09 November-09 March-10 July-10 November-10 March-11 July-11 Price ( /tco2) Source: Bluenext, ECX

50 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: reducing delivery risk Inherent risk: overestimation of reductions, project failure, Administrative risk: project rejection and certification delays

51 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM, reducing transaction costs Current transaction costs: up to per project Simplification of the procedure: small-scale projects, voluntary standards Economy of scale: programmatic CDM 0,80 0,70 Source: CDC Climat Research Certification costs ( /VER) 0,60 0,50 0,40 0,30 0,20 Estimates of the certification costs associated with different standards (based on a tco2 hydro project in China) 0,10 0,00 CDM** GS CDM** GS VER VCS VER+ CCX***

52 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: what to do with additionality? Failure to demonstrate additionality is the first cause of project rejection (65%) Additionality questioned: up to 40% of non-additional projects? Performance-based additionality: positive lists, standardized baseline, suppressed demand

53 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: will there still be buyers? Million tons of CO2e Demand contracted by April 2011 Adjusted f or delivery perf ormance Businesses States Remaining demand by December 2012 Source: World Bank 2011

54 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: will there still be buyers? Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20 Oct 20 Apr CERs excluded on May 1st 2013 CERs excluded on May 1st 2015 Accepted CERs ERUs CER et ERU accepted in the EU ETS (MtCO2e) Source: CDC Climat Research

55 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: Joint Implementation Not only Eastern European countries Policy tool & frontier mechanism 60 millions ERUs issued by October 1st, 2011 Ukraine 60% Bulgaria 4% Czech Republic 1% France 6% Germany 3% Hungary 2% Lithuania New 4% Zealand 3% Russia 12% Romania 4% Source: UNEP Risoe 2011

56 3. Carbon offsets, the Clean Development Mechanism (CDM) The future of the CDM: Joint Implementation The State guarantee will make many simplifications possible

57 3. Carbon offsets, the Clean Development Mechanism (CDM) Jobs Regulators (UNFCCC, States, NGOs, ) Project developers (Ecosecurities, Orbéo, ) Trading & services to markets (BlueNext, Registries, ) Auditors (Tüv Süd, Ernst & Young, ) Investors (CDC Climat, EDF, ) Researchers (CDC Climat Research, Deutsche Bank, )

58 3. Carbon offsets, the Clean Development Mechanism (CDM) Part III, key messages 1 3 GtCO 2 reduced by the CDM in its first 10 years Many technologies explored Today, the future of the CDM seems uncertain Internal challenges: delivery delays, additionnality, External challenges: as a mechanism of the Kyoto Protocol, the future of the CDM is tied to the fate of the Protocol

59 The end of free carbon: 10 years of carbon markets 1. Carbon markets, the principles 2. Lessons from the EU ETS: Carbon offsets, the Clean Development Mechanism (CDM) 4. Carbon markets, what s next?

60 4. Carbon markets, what s next? Look West: US Climate policy Look South Reducing Emissions from Deforestation and Degradation (REDD) Emerging economies What about Copenhagen?

61 4. Carbon markets, what s next? Look West: existing US Climate policy CCX, a voluntary carbon market for companies (2003) US Mayors Climate Protection Agreement, a pledge from 141 US cities (2008) RGGI, a carbon market for power plants in the Northeast (2009) California, a state-wide carbon market (2013)

62 4. Carbon markets, what s next? Look West: future US Climate policy Source: Point Carbon, Bank Of America Merill Lynch

63 4. Carbon markets, what s next? Look South: REDD Deforestation globally: 11% of total anthropogenic emissions of about 50 GtCO 2 e in 2004 Residential and commercial buildings 8% Forestry 11% Waste and wastewater 3% Energy supply 28% Transport 14% Agriculture 14% Industry 21% Source: IPCC 2007 revised by van der Werf 2009

64 4. Carbon markets, what s next? Look South: REDD The largest source of emissions for many developing nations Yearly emissions (MtCO2e/yr) Brazil Indonesia D. R. of Congo Deforestation (MtCO2/yr) Total without LULUCF (MtCO2e/yr) Source: CAIT, Houghton 2005

65 4. Carbon markets, what s next? Look South: REDD Key features of a future REDD framework: nationalscale accounting, no-loose target, partial link to carbon markets Rate of deforestation (ha/year) Commitment period Emissions reductions to be rewarded Baseline Average deforestation rate over the commitment period Annual rate of deforestation Time Source: CDC Climat Research

66 4. Carbon markets, what s next? Look South: emerging economies China towards a 40-45% decrease in carbon intensity Six emerging carbon markets India expected to match China Renewable energy certificates Indonesia, 26-41% by 2020 (compared to BAU) Mexico, -8% by 2012 Brazil, a drastical reduction of deforestation and a domestic demand for REDD credits? Emerging carbon market in South Korea Law to pass before 2012, market to begin in 2015 Russia, keeping its hot air

67 4. Carbon markets, what s next? Copenhagen 2009 Scenario 1: a successor to the Kyoto protocol is put into place Scenario 2: the decision is postponed by a year Scenario 3: multilateralism unravels and a series of bilateral agreements take over and REDD? 3 G pledge for early action ( )

68 4. Carbon markets, what s next? The stakes for Durban 2011 Find a successor to the Kyoto protocol Secure the future of project mechanisms Precise the financing source of the Green Fund REDD: Fix the MRV requirements and the baselines Agree on a financing mechanism

69 More about Carbon offsetting Climate economics