Kyoto Protocol and Carbon Market Drivers

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1 Kyoto Protocol and Carbon Market Drivers Dr Venkata R Putti Senior Environmental Specialist Carbon Finance Assist World Bank February 2007

2 Climate Change The Earth s climate is warming and human activities are primarily responsible Global projections (100 years): Warming of 1.4 to 5.8 C C with no emission controls Mid-range even with changes is 2.5 to 3 C 3

3 Global Warming Potential Carbon Dioxide Methane (CO 2 ) 01 (CH 4 ) 21 Nitrous Oxide (N 2 O) 310 Perflurocarbons Hydroflurocarbons Sulfur Fluoride (PFC) 6500 (HFC) (SF 6 ) 23900

4 GHG Emissions GHG Emissions Emissions of Large Countries (m tco2) Per Capita Emissions (tco2) S. Africa Germany Japan Russia USA EC Brazil China India Mexico S. Africa Canada Germany Japan Russia USA EC Brazil China India Mexico Canada

5 Potential Impacts

6 UNFCCC Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere Developed countries (Annex I countries) aim to restore GHG emissions to below 1990 levels Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change Meet as a Conference of Parties annually, to monitor progress

7 Kyoto Protocol 38 Developed Countries and Economies in Transition (included in Annex B) agreed in 1997 to Reduce GHG emissions by 5.2% below 1990 levels in the commitment period Total demand created for GHG Reductions: ~5000 Mt CO2 USA and Australia did not join KP Marrakech Accord: agreed in Nov 2001 sets rules of implementation KP came into force in 2005 February with Russia signing the Protocol

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9 Meeting Commitments Domestic Reductions Carbon Sinks: Direct human-induced land use change and forestry activities (limited to ~330 Mt C0 2e ) International Credits (Kyoto Mechanisms): International Emissions Trading Project Based: Joint Implementation Project Based: Clean Development Mechanism

10 Clean Development Mechanism CDM, Art. 12 KP: Defined: credit for emission reduction (CERs) from investments in developing (non-annex I) countries Objectives: To promote sustainable development in developing countries To assist Annex B countries in meeting their emission reduction targets in cost-effective manner Certified Emission Reductions (CERs) must: Create real, measurable, and long-term benefits related to the mitigation of climate change. (Art. 12.5b) Be additional to any that would occur in the absence of the certified project activity. (Art. 12.5c) Emission Reductions must: be verified by designated operational entity (DOE)

11 CDM and Carbon Trade Developing country with no emissions cap Industrialized country with an emissions cap Domestic action Baseline emissions Emission Reductions (ERs) Project emissions ER $ $ Developing country/economy in transition benefits from technology and financial flows Purchase of ERs Purchase of allowances Emissions target Baseline Scenario Project Scenario

12 Carbon Demand BUSINESS AS USUAL Emissions The Demand: Kyoto Projects EU ETS Allowances AVG: % GHG Emissions ton/ year for Annex B countries 1990: Base Year First Commitment Period:

13 Carbon Market Evolution Regulation 1992 UN Framework Climate Change Convention (UNFCCC) 1997 Kyoto Protocol 2001 Kyoto project mechanism guidelines 2005 Kyoto Protocol in force and EU Emission Trading Scheme Market Very limited voluntary pilot projects WB proposes a global carbon fund Voluntary, risk hedging activity increases but small volumes Mostly within OECD WB Prototype Carbon Fund operational Limited other market, US share declines Kyoto market takes off EU-ETS rapidly becomes the largest market New voluntary and regional markets emerging

14 Key Market Drivers For Buyers (Annex I countries) Compliance targets Sustainable development For Sellers (Non-Annex I Countries) Contribute to sustainable development Facilitate technology transfer Improve financial returns

15 Carbon Market 2005 Project-Based Transactions Allowance Markets JI and CDM 364 MtCO 2 e Credible C-asset (forward) EU Emission Trading Scheme 322 MtCO 2 e Voluntary & Retail 6.1 MtCO 2 e New South Wales UK ETS 0.3 MtCO 2 e Certificates Chicago CE 4.4 MtCO 6.1 MtCO 2 e 2 e 1.5 MtCO 2 e Other Compliance

16 Carbon Market 2006 (September) Project-Based Transactions Credible C-asset Allowance Markets Primary JI & CDM 226 MtCO 2 e Secondary JI & CDM EU Emission Trading Scheme 764 MtCO 2 e Voluntary & Retail Other Compliance 8 MtCO 2 e 8 MtCO 2 e New South Wales Certificates 16 MtCO 2 e Chicago Climate Exchange 8 MtCO 2 e UK ETS 2 MtCO 2 e

17 Global Market in 2006 Market size more than doubled to $27b, from $11b in 2005 Most of the growth attributed to EU-ETS Trade in project-based mechanisms (CDM/JI) is similar to 2005 Average contract prices up across all market segments (~$10/CER) Biggest Primary CER Sellers: China (by volume) and India (by number) Biggest Buyers: EU private sector, for compliance and resale

18 EU Emission Trading Scheme Not part of KP mechanisms, but has strong influence Aimed at helping EU countries meet Kyoto targets EU Allowances to 12,000 installations in 25 EU Countries in key sectors Represents about 30% of all EU GHG emissions Allows importing CDM/JI credits to the system Volatile EU Allowance prices (weather, coal & gas prices, allocations) influence Kyoto Market prices Will continue beyond KP (2017)

19 Status of CDM (January 07) Registered Requested Pipeline Projects 489 (Large 253; Small 236) 38 >1300 Total CERs 730m 60m >1500m Annual CERs m 22.42m

20 CDM Market: Sellers Honduras 2.04% Others 20.65% India 31.70% Nigeria 1% Malaysia 2% Argentina 2% Egypt 1% Indonesia 1% Others 6% China 42% Malaysia 2.45% Chile 2.86% China 7.36% Mexico 14.93% Brazil 18.00% Chile 2% Mexico 5% Korea 10% India 14% Brazil 14% By Number (489) By Annual Volume (111mt)

21 CDM Market: Sectors Transport 0.15% Chemical 0.61% Waste 24.66% Forestry 0.15% Agriculture 10.89% Energy (R/NR) 48.26% Manufacturing 5.45% HFC/SF6 1.51% Fugitive Emissions 8.32%

22 CDM Market: Buyers Finland, 2.6% Canada, 3.2% Spain, 4.2% Sweden, 4.5% France, 2.1% Other, 4.0% UK, 31.3% Switzerland, 7.9% Italy, 3.7% Japan, 9.0% Netherlands, 27.6%

23 Key Challenges Slow demand and slower response in the first commitment period (just around 1/3 of the target so far) Maintaining the integrity of KP on sustainable development (balance between SD projects and high yield non-sd projects) Project performance will be a key concern Expanding the market beyond the Big Five Need for rapid capacity building Issues for a post-2012 regime Making up for shortfalls Continuation of mechanisms Role of LULUCF, CCS, pcdm

24 Future Issues Uncertainty on post-2012 period continues Long project lead times; closing window of opportunity unless clear signals emerge Small regional markets hoped to grow and gradually integrate (US, Australia) EU-ETS ETS likely to continue Continuity of Kyoto regime beyond in what form?

25 Implications for Albania As a CDM country, Albania does not have a quantified GHG emission reduction target under the KP While entering the market relatively late, Albania still has opportunity to undertake project based transactions, if the country works aggressively to develop a carbon project portfolio may need to be prioritized by sector and project type

26 THANK YOU