Kyoto Protocol and Carbon Market

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1 Kyoto Protocol and Carbon Market Dr. Venkata Ramana Putti Workshop on Opportunities in Carbon Market Ankara, Turkey, June 17, 2009

2 Climate Change Earth s climate is warming and human activities are primarily responsible (>90% certainty) 280 to 430ppm concentration between 1850 and 2000 ( o C increase) 550ppm likely by 2035 with 77 99% chance of 2 o C increase 50% chance of 5 o C increase

3 Greenhouse Gases Global Warming Potential Carbon Dioxide (CO 2 ) 01 Volume of GHGs Methane (CH 4 ) 21 Methane 16% High GWP 1% Nitrous Oxide (N 2 O) 310 Perflurocarbons (PFC) 6500 Hydroflurocarbons (HFC) Sulfur Fluoride (SF 6 ) N2O 9% CO2 (LULUCF) 19% CO2 (F&C) 55%

4 Distribution of GHG Emissions GHG Emissions by Sector Buildings 8% Forestry 17% Industry 19% Transport 13% Agriculture 14% Waste 3% 30 GHG Emmisions by Country Energy Supply 26% USA China EU Russia India Japan Red -- % contribution (2004); Blue tco2/capita (2000)

5 Potential Impacts

6 UN Framework Convention on Climate Change Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere Developed countries (Annex I countries) aim to restore GHG emissions to 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 (Annex I countries) took on reduction commitments in 1997 GHG Emissions ton/ year BUSINESS AS USUAL Emissions AVG: % 2008 The Demand: Kyoto Projects EU ETS Allowances : Base Year First Commitment Period:

8 Carbon Market Components Market Transaction Type Credit type Regime Regulatory Allowancebased AAU (Assigned Amount Units) International Emissions Trading EUA EU-Emissions (EU Allowance) Trading Scheme Project-based ERU Joint Implementation (Emission Reduction Unit) CER (Certified Emission Reduction) Clean Development Mechanism Voluntary Mainly project-based VER (Verified Emission Reduction) Voluntary projects

9 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 I countries in meeting their emission reduction targets in cost effective manner Certified Emission Reductions (CERs) must: Createreal, measurable, and long term benefits related to the mitigation of climate change. (Art. 12.5b) Beadditional 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)

10 Clean Development Mechanism Annex I Country Funding Technology Non-Annex I Country Projects to reduce GHG emissions Certified Emission Reduction (CER) Emission reduction compared to an existing baseline

11 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

12 CDM Progress

13 Regional Distribution (Registered Projects)

14 Regional Distribution (Av. Annual CERs)

15 Project Distribution (by Sector)

16 Carbon Market Growth 120 annual value of transactions (US$ billion) 6.5 US$B: CDM in ,4 US$B: CDM in * EU ETS other allowance markets Primary CDM other project markets

17 Carbon Price during Economic Crisis /2/2008 6/16/2008 6/30/2008 7/14/2008 7/28/2008 8/11/2008 8/25/2008 9/8/2008 9/22/ /6/ /20/ /3/ /17/ /1/ /15/ /29/2008 1/12/2009 1/26/2009 2/9/2009 Spot EUA and scer ( per tco 2 e) Price scers Price EUAs Sources: ECX & Bluenext

18 Dramatic Reduction Needed by 2050 Effort required to stabilize emissions by 2050 (GtCO 2 e) Dramatic emission reductions required. Otherwise emissions and temperature will rise to unacceptable levels. Stabilization at 550 ppm CO 2 e by 2050 needs emissions to go down 60% from business asusual. Source: Stern, 2007 Mitigation efforts over the next two to three decades will be critical. Volume of carbon transacted (GtCO 2 e) 50 GtCO 2 e per year needed by G tco2e transacted Other JI CDM EU ETS Current carbon trading is 4 GtCO 2 e but actual volume of reduction barely half of that amount as the market includes large trade in permits (quotas repeatedly changing hands). Enormous gap between effort needed and current volumes (forecast)

19 Significant Potential Yet to Tapped in CDM 1. Location of CDM projects (percentage of volume, 2007) 2. Many countries are under-penetrated even relative to their emissions CDM activity by country, mid-2007 Mt CO2e/year South Korea Mexico 8 Malaysia 6 Chile Argentina South Africa 4 Thailand Qatar Algeria Egypt Pakistan Indonesia 2 Saudi Arabia Iran Venezuela GHG emissions, 2000 (Mt CO 2 e p.a.) Uneven regional focus; China, India and Brazil = 85% of CDM market share; Just 16 projects in ECA = 4 Armenia, 1 Goergia, 3 Cyprus, 4 Moldova, 4 Uzbekistan Reductions from reforestation and avoided deforestation largely absent. Many countries with high emissions have relatively low presence in carbon markets.

20 Opportunities for Scale up and Extension Forestry is barely visible in CDM 64% of 2007 contracts for clean energy 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 17.4% Biomass 5% Wind 7% other renew ables 0% N20 9% HFC 8% LFG 5% CMM 5% 8.0% 6.0% 4.0% 2.0% 0.0% 0.7% Land use, Land-use change and Forestry Hydro 12% Waste management Fugitive 4% 3% Other 2% Sources of GHG emissions Share of CDM projects Agreement reached at Bali to move forward on Reduced Emissions from Deforestation and Degradation (REDD), providing opportunity for countries with tropical forests to join the carbon markets. Required now: build capacity to measure and verify emissions associated with forests and bring these assets to market as soon as international regulatory framework is in place. EE+Fuel sw itch 40% Building on success to scale up Programmatic approaches will enable scaling up/extending to interventions in key development sectors (energy, appliances, waste management, transport, and newer technologies). Approaches compatible with financing provided by domestic FIs need special attention.

21 Need for CDM Reform DOE at validation or req. reg. registered issuance 180 days 348 days 328 days 2-year delay 2,645 projects 1,451 MCERs 1,170 projects 1,342 MCERs 403 projects 195 MCERs EE RE Methane Industrial Other 6% 74% to high yield projects (ind. gas) RE and EE (70%) stuck somewhere in the pipeline 70% of all projects (half of volumes) have not reached registration

22 Need for Strong Decisions To provide long term carbon price signals and certainty to the private sector To facilitate access to new carbon markets and sources of capital and lower costs of abatement To accelerate low carbon growth in developing countries To scale up and deepen access to carbon markets and finance Define a global goal for 2050 supported by intermediate targets, to be agreed by the UNFCCC process Build a truly global carbon market by linking regional carbon schemes and markets to each other through increased access, converging prices and harmonized products Reform the existing market based mechanisms and explore new policy instruments reduced transaction costs, streamlined process, simplified methodologies Facilitate the transfer of low carbon technologies and establish sector based programs to enable larger scale investments in cleaner development

23 Key Messages on Carbon Market 1. Market can play an important role in Greenhouse gas (GHG) emissions reduction 2. Technologies are available now that enable substantial reductions at acceptable marginal abatement costs 3. A variety of policies can lead to reductions of GHG emissions; carbon markets are needed to implement cap and trade and can interconnect policy measures 4. A deep, liquid and global carbon market has the potential to deliver significant benefits to all participants, including for development 5. But countries will need to take decisions to establish long term price signals and gain the full benefits of carbon markets