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International CDM Market Dr. Manuel Fuentes Power Sao Paulo, December 7th, 2006 IT Power – a brief introduction International organisation consulting on energy, climate change & international development Established 1981 in UK Clients include private companies and banks, UN Agencies, Multilateral Finance Institutions, UK Government, EU and Bilateral Agencies 70+ staff worldwide Power Sao Paulo, December 7th, 2006 Presentation contents Structure of Carbon Market CDM European Emissions Trading Scheme Voluntary market Power Sao Paulo, December 7th, 2006 United Nations Framework Convention on Climate Change (UNFCCC) First discussed at Earth Summit in Rio de Janeiro in 1992 Objective: “To achieve… stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” Article 2, UNFCCC Power Sao Paulo, December 7th, 2006 Kyoto Protocol Most important decision of UNFCCC Adopted in December 1997 Developed countries agreed to reduce emissions to 5.2 percent below 1990 levels, within commitment period 2008 to 2012 Kyoto Protocol enforced February 2005 Power Sao Paulo, December 7th, 2006 GHG Emissions • Carbon Dioxide (CO2) • Methane (CH4) • Nitrous oxide (N2O) • Hydrofluorocarbons (HFCs) • Perfluorocarbons (PFCs) • Sulfur hexafluoride (SF6) 5.2 % 1990 Power 2000 2010 Sao Paulo, December 7th, 2006 Mechanisms Clean Development Mechanism: – 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 issues based on emission reductions of project. Joint Implementation – Annex I country assists another Annex I country to implement project to reduce emissions. International Emissions Trading – 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. Power Sao Paulo, December 7th, 2006 Why a Carbon Market? Regulatory pressure on firms, governments, and even individuals to constrain their greenhouse gases (GHGs) emissions Voluntary reasons firms, governments, individuals and other organisations constrain emissions – carbon neutral Both domestic reductions and purchase of outside “GHG emission reductions” As GHGs settle in the atmosphere, it does not matter where emissions are reduced Opportunity for countries such as Brazil to benefit from investment in activities to reduce Power Sao Paulo, December 7th, 2006 Structure of the Carbon Market Kyoto compliance EU, Canada, Japan & New Zealand (Annex 1 Governments) EU Emissions Trading Scheme JI & CDM Retail Voluntary Power Domestic trading schemes e.g. UK ETS, NSW GHG abatement scheme, Chicago Climate Exchange, Canada domestic scheme, Japan? Sao Paulo, December 7th, 2006 Clean Development Mechanism Carbon finance for sustainable development projects with benefits such as job creation, clean energy service provision etc. Reduced Kyoto compliance costs of greenhouse gas reductions for industrialised countries CDM projects are undertaken in non-Annex I countries and may be Unilateral (participants: host country only) bi-lateral (participants: host country + Annex 1 country) multi-lateral (participants: host country + a number of annex 1 country partners) The emission reductions credits achieved are referred to as Certified Emission Reductions (CERs): 1 CER = 1 tonne CO2 equivalent Power Sao Paulo, December 7th, 2006 CDM Eligibility Real, measurable and long-term benefits related to mitigating climate change Voluntary participation of each party involved Projects must result in GHG reductions that are “additional” Project must help host country in achieving sustainable development CERs generated for 10 or 21 (7+7+7) years for reduced GHG (“basket of 6” - in CO2eq) emissions compared to “business as usual” scenario – baseline Power Sao Paulo, December 7th, 2006 Small scale projects Simplified procedures -administrative levy halved Possible project activities: i. Renewable energy up to 15MW ii. Energy efficiency improvements up to equivalent of 15GWh/ year iii. Others which reduce emissions and which directly emit less than 15 000 tCO2 per year. E.g. improved fertiliser use, management of rice cultivation… Power Sao Paulo, December 7th, 2006 What is bundling? Multiple greenhouse gas reducing projects One single CDM project Bundling organisation (e.g. ESCO) Power CER Investor Sao Paulo, December 7th, 2006 The EU Emissions Trading Scheme (1) An entity-based domestic “cap and trade” emissions allowance programme Governed by Community Law using a special unit of trade – “allowances” Compatible with international emissions trading under Kyoto, contributing towards Kyoto targets Power Sao Paulo, December 7th, 2006 The EU Emissions Trading Scheme (2) Summary: Phase 1: 2005-07 Phase 2: 2008 -12 Covers the EU 15 & the 2004 Accession States 50% of all carbon emissions in the EU (12,000 plants) Power Sao Paulo, December 7th, 2006 The EU ETS - who is affected? Energy – combustion installations over 20MW Ferrous Metals Minerals – kilns, glass, ceramic, cement Other – (Pulp and Paper) Renewables, transport & other sectors are NOT included Power Sao Paulo, December 7th, 2006 EU Allowances 1 EUA = 1 tonne CO2 equivalent = 1 CER 1 EUA trading for 15€ Penalty value for failing to meet EUA = 100€/EUA for 2008-2012 period!! 1 CER trading for 6€ Higher risks associated with CER investors… Power Sao Paulo, December 7th, 2006 How can CERs and ERUs be used in the ETS? EU ETS and Linking directive 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 allowance from the market – surrendering a specified number of CERs and, from 2008, ERUs from its operator’s holding account – surrendering of CERs and ERUs are subject to specified preconditions Power Sao Paulo, December 7th, 2006 Preconditions for surrendering CERs Since 2005 CERs can be used for compliance up to a percentage of the allocation to each installation - specified by its Member State CERs are not converted into EU allowances – but entered directly into the surrendered allowance table UNFCCC ITL required for the transfer of CERs into an EU registry –still to be implemented Power Sao Paulo, December 7th, 2006 Voluntary Action by Firms, Individuals and….even Governments A large number of companies have engaged in volunatry programs to reduce their GHG emissions – e.g. Novartis (Swiss Pharmaceutical company) to reduce GHGs by 5% below 1990 levels over 2008-2012 (in line with government’s commitment) Individuals and Firms have engaged in purchases of small amount of emission reductions to become “carbon neutral” (event, corporation, or product) – HSBC to become carbon neutral (made 1st purchase of 170,000 tCO2e assorted credits (3 mths offsetting) – IT Power offsets emissions from international travel UK Government – chosen to offset emissions from staff/operations through purchase of credits: 1st purchase from Kuyasa Gold Standard CDM project in South Africa – Power Sao Paulo, December 7th, 2006 Buyers Public funds (Government only) Public-private funds (e.g. Community Development Fund, Baltic Sea Region Testing Ground Facility, Italian Carbon Fund); Private funds (e.g. European Carbon Fund, Japan Greenhouse Gas Reduction Fund); Private purchasing pools (e.g. CRM, ICECAP and GGCAP). World Bank and other multilateral organisations Brokers Direct investment by companies Many and the list keeps growing!! Power Sao Paulo, December 7th, 2006 Thank you Manuel Fuentes +44 1256 392700 [email protected] Power Sao Paulo, December 7th, 2006