World Bank Training Program

Transcription

1 World Bank Training Program CLIMATE CHANGE SEMNAR The Global Carbon Market, Carbon Finance and Development and and February 6 th,

2 Greenhouse gases emission reductions: an unusual commodity Emission Reduction = Hypothetical baseline emissions - effective emissions ERs become a commodity after certification. Before certification ERs are very heterogeneous depending on the plausibility of their baseline.

3 Key motivations: Sellers Gain additional revenue Capture private foreign investment Stimulate technology transfer Strategic positioning to take advantage of future demand for ERs (e.g. Costa-Rica) However, at prices much below $3/tCO 2 e, carbon finance has too small an impact on projects IRRs (except maybe for some forestry activities).

4 Motivations of buyers Governments Firms (large utilities, OIL/GAS etc.) Individuals Regulations in place Expect regulations on GHG emissions in the future Hedge against future costs Influence future regulation Learning Strategic positioning Green factor Protecting and projecting image of environmental and social responsibility Differentiating products

5 Early developments of the market 1997 to 2001 Partial information available. Within OECD and EITs: ~60 MtCO 2 e have been transacted. In developing countries: Less activity but growing. Mostly government funded, but private activity growing. General trend towards sophistication: buyers clubs (PCF), traders, financial derivatives (options), integrated marketplaces, etc.

6 $9t/Co2 $8t/Co2 $7t/Co2 $6t/Co2 Carbon prices on past transactions Government approved permits $25/tC $20/tC $5t/Co2 $4t/Co2 $3t/Co2 Non verified ERs Third-Party Verified CDM $15/tC $10/tC $2t/Co2 $1t/Co2 Optionss $5/tC $0t/Co2 $0/tC

7 Demand and supply under Kyoto scenarios Total Annex B demand for ERs Mitigation within Annex B (domestic or via trading or JI) Hot Air! financial flow to Russia and EE Domestic Carbon Sinks CDM Market

8 Volumes in Kyoto w/o the US Gross annual demand for ERs MtCO 2 e between 2008 and Credits for hot air Credits for Annex B Sinks 330 ( 200) = Net demand MtCO 2 e

9 Other Emerging Market Drivers Regulations constraining carbon emissions are being developed National policies (UK, Denmark, The Netherlands, etc.) Sub-national regulations (e.g. some US States) Regional initiatives (EU-wide trading) Corporate voluntary emission commitments

10 Current or projected national policies Trading Start-up Project-based mechanism? EU Yes 2005 At least from 2008 UK Yes Yes France Yes 2003? Yes Norway Yes 2005 or earlier Yes Germany No Later Denmark Yes 2001 Yes Sweden Yes 2005 or later Yes Netherlands Ongoing work Yes Finland Ongoing work Yes Ireland Ongoing work Ongoing work Australia Yes US dependent Yes USA Yes? Yes Canada Yes US dependent Japan Ongoing work Yes New Zealand Yes Not decided Yes Russia No Yes `

11 Regional regulations in the US Oregon: CO 2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms. Washington: New plants must demonstrate the use of best available techniques for CO 2 emissions control. Massachusetts: CO 2 emissions cap for energy utilities effective in Utilities can offset excess emissions using project-based mechanisms. New England and Canadian Eastern Provinces: 10% voluntary reduction of GHG emissions below 1990 levels by 2020

12 The Netherlands Netherlands intends to buy 125 million tons CO2 from CDM/JI Government funded Emission Reduction Unit Procurement Tender (ERU-PT) and Certified Emission Reduction Units Procurement Tender (CERUPT) Buy ERs in Eastern Europe (JI) and non-annex B countries (CDM) respectively 2000 tender (completed): $19 M Average price for first tender: $7/tCO 2 e Second Tender ERUPT underway, First Expression of Interest for CERUPT opened end-january

13 United Kingdom Climate Change Levy (April 2001) Tax on energy use Rebates in exchange for voluntary commitments Benefits recycled in other corporate tax rebates Emission Trading (end of 2001) On a voluntary basis for a limited range of companies Projects outside UK are considered for 2002.

14 Voluntary corporate commitments Rapid survey: fifty companies with one billion tco 2 e emissions in 1999 have pledged to reduce GHG emissions by If baseline is set at 1999 emissions = 500 MtCO 2 e market demand over the next decade. At least eight have said they would use project based mechanisms. Carbon-Neutral Market Growing rapidly: Future Forests Inc, Klima, 500ppm

15 Corporate voluntary commitments 1999 Emissions Commitment Internal Trading CDM/JI Alcoa -- 25% below 1990 in 2010 BP Amoco 79.8 Cumulative 2%/year below 1990!! Chubu EPCo kgco2/kwh in 2005 Dupont % below 1990 in 2010 Kodak -- 20% below 1990 in 2004 Fortum MtCo2e below baseline in 2010! IBM 4.1 Cumulative 4%/year below 1998 until 2004 Intel % below 1995 in 2010 (PFCs) Johns. & John, 1.5 7% below 1990 in 2010 Motorola -- 50% below 1995 in 2010 (PFCs) Ontario Pow.Gen. 26 6% below 1990 in 2010! PEMEX 177-1% per year until 2010!! Shell MtCo2e in 2002!! Statoil MtCo2e below baseline in 2010! Suncor 5-1.5%/year until 2002 (-1%/year for )! Transalta ! Keidanren Level of 1990 in 2010 (34 Japanese industries representing 75% of Japan s industrial emissions)

16 Common Assumptions About Global Carbon Market Hot Air and new Annex I Sinks Allowances depresses CDM/JI market W/o US, up to 100% of OECD needs may be met by Hot Air+sinks. Both CDM/JI project-based Market and Hot Air (emissions trading) market will be policydriven Hot Air may be cheap but politically unpalatable CDM/JI project-based more expensive and difficult but high quality and politically acceptable

17 Common Assumptions and Recent Trends in Prices Assumptions With full competition, simple models of the market suggest: CDM trades from near zero up to $7/tCO 2; Practical Range of $1.50-4/tCO2 Note: PCF currently pays $3-4/tCO2 Non-KP Market drivers are significant: OECD domestic regimes and Corporate Voluntary market Recent Trends Post Marrakech Traders report major increase in bid and offer volumes Prices offered have shifted to US $ /tCO2e (mostly small volumes)

18 An Alternative Market Perspective Global Carbon Market development depends fundamentally on: Availability of Russian Hot Air Cost of carbon abatement in OECD outside of US Availability of supply from CDM/JI

19 Russia has no interest in playing its cards early How much hot air is sold or banked by Russia (and to a lesser degree Ukraine) is critical for market equilibrium. There is no incentive for Russia to make their decision public soon, especially before second commitment period targets are negotiated (2005). We may assume they will only reveal their position in Has no capacity to sell now anyway

20 Abatement costs in Europe may be higher than expected? Most European countries today are above their expected target for Current context adds to uncertainty: Current economic slowdown lowers emissions. But after Sep.11, whether nuclear is a viable alternative is again being questioned (France). European abatement costs will not be tested before EU-wide trading in 2005.

21 A large gap between potential and feasible abatement costs in the EU 100 Carbon price ( /tco2e) Effective supply curve (behind latest EU CC package) EU demand for ERs (Commission estimates) 20 Potential EU supply curve (experts view) Abatement (MtCO2e per year)

22 A possible scenario? EU, Japan and CANZ discover high abatement costs in Simultaneously, it becomes clear US is definitely out for the first commitment period. And Russia decides to bank most of its hot air (or for whatever reason, buying hot air becomes politically too difficult) Annex B (-US) turns to CDM but too late.

23 Illustrative price scenario Price of carbon ($/tco2e) Price spike in EU trading in 2006 = Discovery of high abatement costs Only 6 years remain to prepare JI/CDM projects which will only yield ERs around

24 35 An illustrative price scenario Price of carbon ($/tco2e) Price of "emergency" CDM/JI assuming only 50% of CDM/JI potential is reachable Price of "emergency" CDM/JI 5 0 Price of carbon had the CDM/JI projects been implemented on time

25 How expensive emergency CDM is depends on Delay between project preparation and ER production. Whether the JI/CDM project opportunities available but not used before 2006 are lost or still present in 2006: Fuel switching opportunity disappear when the plant is built, Energy efficiency opportunities may remain for a while Minimum carbon finance required to sufficiently boost projects IRRs (PCF experience = $ is minimum price to make a credible difference)

26 Some final elements In this scenario, China plays a critical role: most of the rapidly accessible CDM potential (fuel switching) is assumed to be there. Futures market may smooth the price path, but how to correctly anticipate when uncertainty is likely to remain high over the next years?

27 Lessons from PCF Transactions CDM Costs are only 20-30% of total costs to deliver an Emissions Reductions Purchase Agreement (ERPA) hence reducing these costs is only a partial solution Learning to Manage unique Kyoto Protocol and carbon asset risk is critical Most common constraints: Government preparedness is limited for CDM/JI operations (Host country agreements/letters of approval, pricing, responsibilities, status of ratification, internal processes) Bringing deals to financial closure is complex often requires matching carbon finance with underlying project financing) Transaction costs on small projects (<$3 million CF) will limit marker access for small countries and small projects

28 Impact of Carbon Finance on Project Financing at $3/t CO2e Technology IRR Project, Not Equity, FIRR. Energy Eff.-District Heating Wind Hydro Bagasse Biomass with methane kick Municipal Solid Waste with methane kick >5.0 >5.0 Note: data are preliminary

29 * Gas vs. coal BL Impact of Carbon Finance on Project Financing at $3/t CO2e Hydro: Off-grid vs. Grid Annual Uganda Costa Rica Chile 1-7MW Mini-Hydro 25MW off-grid grid grid ERs (000 t) * Net Gen.(GWh) CO2 ERs/GWh ER (USc/kWh)

30 Impact of Carbon Finance: Quality and Quantity (at $3/t CO2e) Methane-capture projects: carbon finance can turn dogs into cash cows Traditional renewables: boost return by % Makes some marginal deals bankable Increases profitability and reduces investor risk Often reduces Government subsidy required Improves project s access to capital markets thru: Secure contracted flow of ForeX from reliable counterparty Improved Quality of cash flows as well as volume Payment of CF in dollars to lender mitigates country risk Advance payments can be critical to financial closure " Sponsor can borrow against contract (like PPA)

31 World Bank Response Expand Market Development Activity to buy down learning curve and early market risk for private sector Introduce more countries to CDM/JI opportunity Continue learning-by-doing strategy Open Markets for small countries and small projects: the potentially excluded majority Vehicles PCF: Take up head room of $35m; do fourth year Dutch: contract to buy ~$30m/year Launch Prototype Sequestration Fund: March 2003 Launch Small Country/Small Projects Fund, end-2002

32 End