Download Carbon Market Framework (Nared)

CARBON MARKET
FRAMEWORK
Nives Nared,
Ministry of Agriculture and Environment, Slovenia
Theory: Carbon trade as EI
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Not administrative requirements, but trade driven
Enables portfolio of bussines decisions
Cost efficient GHG emissions reductions
Minimazing influence on global international competition
As a response to Kyoto Protocol requirements
Why a Carbon Market?
• Cost effective achievement of environmental goals, due
to considerable differences in costs for limiting GHG
emissions
• Price signal towards low carbon technologies,
• Price created as a result of reduction possibilities,
• Win win potential: emissions reduction & economic
benefit
• As GHGs settle in the atmosphere, it does not matter
where emissions are reduced
Why a Carbon Market?
• Brings buyers and sellers together thereby creating a
price formation mechanism
• Provides transparency and liquidity
• Allows active financial risk management
• Facilitates the monetisation of excess credits
Kyoto Protocol - basics
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Two general categories:
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Any Annex 1 country that fails to meet its Kyoto target will be penalized by
having its reduction targets decreased by 30% in the next period.
By 2008-2012, Annex 1 countries have to reduce their GHG emissions by
around 5% below their 1990 levels (for many countries, such as the EU
member states, this corresponds to some 15% below their expected GHG
emissions in 2008). Reduction targets expire in 2013.
Kyoto Protocol includes "flexible mechanisms" which allow Annex 1
economies to meet their GHG targets by purchasing GHG emission
reductions from elsewhere. These can be bought either from financial
exchanges (such as the new EU Emissions Trading Scheme) or from
projects which reduce emissions in non-Annex 1 economies under the Clean
Development Mechanism (CDM), or in other Annex-1 countries under the JI.
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– developed countries, referred to as Annex 1 countries (who have accepted GHG
emission reduction obligations); and
– developing countries, referred to as Non-Annex 1 countries (who have no GHG
emission reduction obligations).
Parties to KP
Annex I
Non-Annex I
Not ratified
Kyoto flex mechanisms
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Clean Development Mechanism:
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Joint Implementation
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International Emissions Trading
– Aims to assist non-Annex I countries achieve sustainable development
– Annex I countries with emission caps pay to implement projects to achieve
emission reductions in developing countries. Credits (CERs) issues based on
emission reductions of project.
– Annex I country assists another Annex I country to implement projects to reduce
emissions.
– Trade of emissions allowances or reduction credits. Aim is to reduce total costs
of achieving collective emissions reductions. Total amount of emissions
reductions of Annex I countries does not change.
Kyoto & its flexibility mechanisms
3 flexibility mechanisms
EA Emission Allowance Market
JI Joint Implementation
C
D
M
C
D
M
Annex I
C
D
M
Non Annex I
JI projects create ERUs
What is JI about:
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Annex I Party (with a commitment inscribed in Annex B of the Kyoto
Protocol) may implement an emission-reducing project or a project that
enhances removals by sinks in the territory of another Annex I Party (with
a commitment inscribed in Annex B of the Kyoto Protocol) and count the
resulting emission reduction units (ERUs) towards meeting its own Kyoto
target.
Eligibility criteria:
Projects must result in:
• “real, measurable and long-term benefits related to the mitigation of
climate change”.
• “reductions in emissions that are additional to any that would occur in the
absence of the certified project activity”.
CDM projects create CERs
What is CDM about:
• allows governments or private entities in rich countries to set up emission
reduction projects in developing countries
• to promote sustainable development in developing countries, and to allow
industrialized countries to earn emissions credits from their investments in
emission-reducing projects in developing countries
Eligibility criteria:
• Projects must assist Non-Annex I Parties (developing countries)
“in achieving sustainable development and contributing to the
ultimate objective of the Convention”
Projects must result in:
• “real, measurable and long-term benefits related to the mitigation
of climate change”.
• “reductions in emissions that are additional to any that would
occur in the absence of the certified project activity”.
European Union
NON-ANNEX 1 COUNTRY
€
invested in
CDM project
CERs for
Kyoto Compliance
ANNEX 1 COUNTRY
International ET
• 3rd flexible mechanism under Kyoto Protocol
• Annex B countries will have the option of buying or
selling some portion of their "assigned amount units"
(AAUs)
• Countries/companies with high internal emission
reduction costs would be expected to buy “rights to
emit” from countries/companies with low internal
emission reduction costs
Structure of the Carbon Market
Kyoto
compliance
EU, Canada, Japan
& New Zealand
(Annex 1
Governments)
EU
Emissions
Trading
Scheme
JI & CDM
Retail
Voluntary
Domestic trading schemes e.g. UK
ETS, NSW GHG abatement scheme,
Chicago Climate Exchange, Canada
domestic scheme, Japan?
Carbon markets
ERU
Marché Kyoto : permis et MOC
UQA
CCX
CCAR
EU-ETS
EUA
CER
RGGI
VER
Marché Kyoto : MDP
Marchés volontaires
« gré à gré »
GGAS
NGAC
NZ-ETS
NZU
Marché réglementé
Pays Annexe 1 ayant ratifié le protocole de Kyoto
Pays non Annexe 1
Marché volontaire
Pays n’ayant pas ratifié le protocole de Kyoto
Carbon market
- unmature, still fairly new, but fast growing, “under
development”
- fungibility
- started as not organised, unregulated
- brokers, commodity stock exchanges entered the market
- EU ETS to be a regulated market as from 2013
What is traded
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EU Emission trading: EUA, EUAA,
Trading in project based credits: CERs, ERUs,
International trading: AAUs
Other trading shemes: other allowances
But both the Kyoto Protocol and the EU ETS mix ‘capand-trade’ allowances and project-based credits, and try
to make them mutually exchangeable
The carbon market trend
 A large preponderance of
Allowances (especially EU-ETS)
 A boom of secondary market
(brokers, traders, banks, etc.)
EU ETS as part of Carbon market
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EU as the first mover in the evolution of carbon market
biggest global mandatory systematic market,
11.000 compliance participants, 40% EU GHG emissions
to be linked with other emerging trading shemes
worldwide
What is traded where?
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currency traded is the EU allowance
legal nature of EUA
EUA is a right to emmit 1 ton CO2
trading is not regulated by the Directive
trading takes place between companies, with the help of
market intermediaries (“over-the-counter”) and at
organised exchanges (Amsterdam, Paris, Vienna, Leipzig,
Oslo etc.)
HOW do EUA get to the market ?
- till now mostly free of charge “via” national allocation
plans
- some auctioning by some MS (UK, Austria, Ireland,
Greece)
Who can trade?
• any person (legal or physical) can hold and trade with
EU allowances
• only legal requirement: open account in the registry
How can CERs and ERUs be used in the ETS?
• under the EU ETS each installation is required to
surrender a number of allowances corresponding to
their verified emission volume for each calendar year
• in the event that an installation has insufficient
allowances for compliance, the shortage can be
covered by:
– purchasing additional EUA from the market
– surrendering a specified number of CERs, ERUs
from its operator’s holding account
Real life situation on the carbon market
• Carbon trading strongly reliant on financial markets
infrastructure
– trade in financial instruments amounting to some 90% of total volume
– security incidents led to even greater prominence of the financial
segment
– gradual shift from brokers to exchanges (brokers originated 33% of
transacted volume in 2010 from 65% in 2007)
– approx. 89% of OTC volumes are cleared on exchanges
– less than 10% of the OTC trade is spot
• Market is maturing and growing in size
– 20-fold increase from 2006 to 2010 only
• Supervision so far existent only in financial segment
Market price fluctuations
Price Drivers
• Macro
– Political will
– National developments
– Economic
(growth/recession)
– Innovation
• Micro
– Demand and Supply
– Oil price
– Coal price
– Gas price
– Weather/temperature
– Interest rates
– Other markets
EUA trading to be regulated
• EU allowance would be classified as financial instruments
• Proposal of Amendment to Markets in Financial Instruments
Directive
• Cost of frauds : VAT = 5 Bns € ; EUA threfts = 50 M€.
• Real challenge : the Governance, not the Costs
Where Next?
Aus ETS
EU ETS
445Mt
2,080Mt
NZ ETS
100Mt
CERs bridge the
Regional Schemes
Japan ETS
1,272 Mt
US ETS
5,760Mt
Canada ETS
400Mt
China/India?
EU vision: Concrete steps forward
• Build an international carbon market
• To drive investments and achieve mitigation objectives at least
costs
• To generate important financial flows to developing countries
• Concrete steps:
• Link compatible domestic cap-and-trade systems to
develop an OECD-wide market
• New sector-wide market mechanisms for (advanced)
DCs as a step towards cap-and-trade systems
• Reform and better focus the CDM
• Outcome from Cancun: positive developments (i.e.
standardised baselines, CCS in CDM), but a lot of work
ahead on new market mechanisms