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Challenges and Opportunities for Addressing Global Climate Change February 2006 Slide 1 – Outline • • • • • Global Energy Outlook Status and Trends of the Carbon Market Short Term Challenge: is there enough supply to meet Kyoto commitments? Long-Term Challenge: market continuity given post 2012 uncertainty Scaling Up Slide 2 - Historical GHG Emissions Slide 3 - Global Energy Outlook (IEA 2004) 80 % of global emissions are from burning of fossil fuels; energy sector largest contributor to GHG With no significant change in current energy policies: • world energy needs will be 60 % higher in 2030; two thirds of increase from developing countries • Global CO2e emissions on course to increase by 1.7 % per year until 2030; 70 % of which from developing countries • Fossil fuels will continue to dominate the global energy mix, accounting for 85 % of increase in overall energy use until 2030 Renewable Energy: share of renewable energy will decrease slightly from 20 % in 2002 to 18 % in 2030 • renewable energy consumption (including large hydro) could increase by 60 % • share of non-hydro renewable energy in electricity generation could triple from 2 % in 2002 to 6 % in 2030 Markets have to be part of solution Slide 4 - Current Demand Trends in Carbon Market Market driven by Kyoto entry into force: • Requires developed countries to reduce emissions by 5.2% below 1990 levels in 2008-2012 • Total demand about 5.5 billion tons of CO2e • Much of the obligation devolved to private firms, in particular in Europe with coming into force of European Emissions Trading Scheme in January 2006 Demand for international credits in the order of 3 billion tons • Japan short by 1 billion tons • Canada short by 1.2 – 1.5 billion tons • Europe short by 800 million tons -1.3 billion tons Modest demand by European private sector in 2005-2007 Slide 5 - Structure of the Carbon Market Project-Based Transactions JI and CDM Allowance Markets EU Emission Trading Scheme UK ETS Voluntary Retail Other Compliance New South Wales Certificates Chicago Climate Exchange Slide 6 - Eligibility Issues Eligibility Demonstrated through: • Barrier analysis: project faces barriers that prevent its implementation • Investment analysis: project is economically or financially less attractive than other alternatives Relatively simple for project which generate no financial or economic benefit other than the sale of emission reductions For other projects, use financial indicator such as IRR, NPV, etc. to compare alternatives Common Practice: project is likely eligible if project is not common practice Slide 7 - Total Value of Contracts over 1 b$ (data in million U.S.$, nominal) 600 500 Known Estimated 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 (Jan-Apr) Slide 8 -Main Buyers: European Governments & Firms In percent of volume purchased From Jan.04 to Apr.05 USA 4% Japan 21% Australia 3% Canada 5% New Zealand 7% Gov. Netherlands 16% Other EU 32% UK 12% Slide 9 - Supply Concentrated in Middle-Income Countries In percent of volume sold from January 2004 to April 2005 Rest of Latin America 22% OECD 14% Transition Economies 6% Africa 0% Brazil 13% India 31% Rest of Asia 14% Slide 10 – Non-CO2 Gases Dominate In percent of volume purchased from Jan.04 to Apr.05 Landfill Gas Capture 10% Other N2O 7% 4% Hydro 12% HFC 25% Wind 7% Forestry (LULUCF) 4% Energy Efficiency 2% Biomass 11% Animal Waste 18% Slide 11 - Carbon Economics Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e Technology DIRR financial Hydro, Wind, Geothermal Gas Flaring 0.5-2.5% 2- 4 % Crop/Forest Residues 3-7% Municipal Solid Waste 5-15+% Slide 12 - Short Term Challenge: Is there enough supply in the carbon market? Domestic efforts: at least 50 percent of effort will come from domestic efforts (2.5 to 3 billion tons) Clean Development Mechanism: reduction of CO2 and CH4 assets (from energy, waste management and agro-forestry): not likely to be much more than 400 Mt for 2012 delivery Clean Development Mechanism: reduction of industrial gases such as HFC23 and N20 (primarily from China) could supply 1 billion tons Joint Implementation will be small, no more than 50 Mt Remainder must come from Emissions Trading with Economies in Transition, but greening will be required – implies about $30 billion of new investment over the next 4-5 years Slide 13 – Lead Time Required to Deliver CDM Assets High Demand on Project Finance High Delivery Risk Long Lead Times High Contribution to long term lowcarbon infrastructure and adaptation Clean-Coal Coal-to-Gas Large Hydro Urban and Agri-waste to Energy Industrial Energy Efficiency 5yrs 4yrs 3yrs 2yrs BioCarbon sinks Repowering Medium Hydro Wind, Biomass Cogen/CHP 1yr N2O, HFC23, PFCs 6months Perflourocarbons Small-Scale Energy Efficiency and Renewable Energy Projects Negligible Demand on Project Finance Low Delivery Risk Short Lead Times Low Contribution to long term lowcarbon infrastructure and adaptation 14 Slide 14 – Longer Term Challenge • • • • Long-term viability of carbon market is not assured Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure; Bank Carbon Funds uniquely purchases beyond 2012 Without a commitment of governments to limit GHG emissions beyond 2012, the carbon market will remain soft and the private sector is unlikely to enter in a meaningful manner The real challenge is set a long-term stabilization target for atmospheric concentrations of GHGs, which would equate to an emissions target – the challenge would be to agree on intermediate emissions targets, allocations of emissions rights, and long term stable market mechanisms to ensure economic efficiency and resource transfers to support lowcarbon growth paths Slide 15 - Scaling Up Opportunity: Carbon Market has potential to be larger than ODA flows between 2013 - 2050 Potential to use the carbon market as a mechanism to catalyze high volumes of transactions and investments However, we need to move from current project-by-project approach to programmatic and sectoral approaches > Need to lower regulatory risk to monetize carbon revenues and cover the incremental cost and risk of lower carbon development Slide 16 - Standardization of Carbon Assets in Energy Sector Some technologies are amenable to global tests of eligibility: off-grid renewable power (diesel standard), composting and recycling of solid waste Other technologies will require national standards: on-grid renewable power, use of efficient equipment depending on national common practice Public-incentive schemes / regulations should be eligible for carbon finance Challenges and Opportunities for Addressing Global Climate Change February 2006