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Prices and Costs in the Carbon Market
The World Bank’s experience
February 16, 2005
HCC Meeting, Washington DC
Basics of Price Formation in the Carbon Market
 Price is related to risk in each transaction and willingness to pay
 There is no delivery risk for EU Allowances or allowance trading
in any other cap and trade domestic regime
 There is currently significant regulatory risk in CDM/JI projects
and there will always be project performance and delivery risk
 There is little difference between prices paid for EU allowances
and delivered costs as trading margins/fees are very small
 There are large and unpredictable differences between contract
prices and all-up costs delivered into registries in CDM/JI
 At delivered costs significantly above US$10/t CO2e:
• The costs of compliance to regulated enterprises will be
unacceptable in competitiveness terms and political resistance to
further regulation will be high and
• There will be major coal/oil to natural gas shifts in most markets at
$15-20/tCO2e or even less
 Differences in marginal cost and “penalties” are NOT price
benchmarks
Changing Contract Prices for Bank-Managed Funds
Year
Maximum Price Paid
PCF/Other Large
Project Funds
2003
3.75
2004
4.25
5.00
2005 to date
5.00
5.50
Maximum Price Paid
CDCF
Average
Contract
Price
US$/tCO2e
All-up
Costs at
end of
Fund Life
Percent to
be delivered
by 2012
Effective
cost of 2012
delivery
Effective Cost
after 20%
performance
discount
PCF
4.00
5.50
80%
6.90
8.60
Other Carbon
Funds
5.00
6.00
70%
8.60
10.75
CDCF Tranche 1
5.00
6.50
60%
10.80
13.50
9.10
Current
Trade in
dollars
equivalent
9.60
After 5%
fees
100%
9.60
9.60
No delivery risk
Fund
EU ETS
Allowances
Bank Roles in CDM Market Development
 Participants in Bank Funds take regulatory risk – hence World Bank
ERPAs make a difference to project financing
•
Private buyers pay only on delivery into registries
 Bank funds typically buy beyond 2012 with expectations that only 6070% of ERs can be delivered by 2012 (less as time passes)
•
Private buyers and many governments only buy up to 2012 vintages
 Bank invests heavily in exploring new markets, new technologies and
processes where CF can drive sustainable development, and in new
methodologies
•
Private sector and other buyers rely on approved methodologies
 Bank takes significant up front project preparation costs risk and helps
mobilize funding for underlying projects
•
This is exceptional in the private market
 As “Lead Buyer” Bank is prepared to develop and manage programmes
and large projects in return for 5-25% of the ERs, creating high quality
low risk assets for sponsors/governments to sell to other buyers on
best available terms