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Kyoto Protocol and Carbon Market Dr. Venkata Ramana Putti Workshop on Carbon Finance Sarajevo, Bosnia-Hercegovina April 17, 2009 Climate Change Earth’s climate is warming and human activities are primarily responsible (>90% certainty) 280 to 430ppm concentration between 1850 and 2000 (0.5-0.8oC increase) 550ppm likely by 2035 with 77-99% chance of 2oC increase 50% chance of 5oC increase Greenhouse Gases Global Warming Potential • Carbon Dioxide (CO2) Volume of GHGs 01 • Methane (CH4) 21 • Nitrous Oxide (N2O) 310 Methane 16% High GWP 1% N2O 9% CO2 (F&C) 55% • • • Perflurocarbons (PFC) Hydroflurocarbons (HFC) Sulfur Fluoride (SF6) 6500 11700 23900 CO2 (LULUCF) 19% Distribution of GHG Emissions GHG Emissions by Sector Buildings 8% Forestry 17% Industry 19% Agriculture 14% GHG Emmisions by Country Transport 13% Waste 3% Energy Supply 26% 30 25 24.09 22.2 20 18.4 15 14.7 10 10.74 12.91 9.65 5.6 4.9 5 4.6 3.05 1.34 0 USA China EU Russia India Japan Red -- % contribution (2004); Blue – tCO2/capita (2000) Potential Impacts UN Framework Convention on Climate Change • Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere • Developed countries (Annex I countries) aim to restore G HG emissions to 1990 levels • Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change • Meet as a “Conference of Parties” annually, to monitor progress Kyoto Protocol GHG Emissions ton/ year 38 Developed Countries and Economies in Transition (Annex I countries) took on reduction commitments in 1997 The Demand: • Kyoto Projects • EU ETS Allowances 1990: Base Year 2012 2008 AVG: 1990 - 5.2% First Commitment Period: 2008-2012 Carbon Market Components Market Regulatory Transaction Type Allowancebased Credit type Regime AAU (Assigned Amount Units) International Emissions Trading EUA (EU Allowance) EU-Emissions Trading Scheme Project-based ERU Joint Implementation (Emission Reduction Unit) CER (Certified Emission Reduction) Voluntary VER Mainly project-based (Verified Emission Reduction) Clean Development Mechanism Voluntary projects Clean Development Mechanism CDM, Art. 12 KP: Defined: credit for emission reduction (CERs) from investments in developing (non-Annex I) countries Objectives: • To promote sustainable development in developing countries • To assist Annex I countries in meeting their emission reduction targets in cost-effective manner Certified Emission Reductions (CERs) must: • Create real, measurable, and long-term benefits related to the mitigation of climate change. (Art. 12.5b) • Be additional to any that would occur in the absence of the certified project activity. (Art. 12.5c) Emission Reductions must: be verified by designated operational entity (DOE) Clean Development Mechanism Annex I Non-Annex I Country Funding Country Technology Projects to reduce GHG emissions Emission reduction compared to an existing baseline Certified Emission Reduction (CER) Key Market Drivers • For Buyers (Annex I countries) – Compliance targets – Sustainable development • For Sellers (Non-Annex I Countries) – Contribute to sustainable development – Facilitate technology transfer – Improve financial returns CDM Status (02/04/09) Registered Requested Pipeline Projects 1550 49 >2600 Total CERs 1520m 30m >1350m Annual CERs 280m 8.8m A fast-growing market, dominated by EU ETS as primary CDM stalls. Carbon Market Growth 120 annual value of transactions (US$ billion) 80 7,4 US$B: CDM in 07 40 2002 EU ETS 2003 2004 2005 other allowance markets 2006 Primary CDM 2007 2008* other project markets Spot EUA and sCER (€ per tCO2e) Price sCERs Price EUAs 00 9 9/ 2 2/ 20 09 26 / 1/ 20 09 20 08 9/ 20 08 5/ 12 / 1/ 12 /2 12 /1 /2 00 8 20 08 7/ 12 /1 11 /1 /2 00 8 20 08 /2 00 8 0/ 11 /3 10 /2 10 /6 00 8 20 08 22 / 9/ 8/ 2 9/ 20 08 25 / 8/ 20 08 11 / 8/ 20 08 28 / 7/ 20 08 14 / 7/ 20 08 30 / 6/ 20 08 16 / 6/ 00 8 2/ 2 6/ Carbon Price during Economic Crisis € 30.00 € 25.00 € 20.00 € 15.00 € 10.00 € 5.00 Sources: ECX & Bluenext Dramatic Reduction Needed by 2050 Effort required to stabilize emissions by 2050 (GtCO2e) • Dramatic emission reductions required. Otherwise emissions and temperature will rise to unacceptable levels. • Stabilization at 550 ppm CO2e by 2050 needs emissions to go down 60% from business-asusual. • Mitigation efforts over the next two to three decades will be critical. Source: Stern, 2007 Volume of carbon transacted (GtCO2e) • 50 GtCO2e per year needed by 2050. 4.50 4.00 G tCO2e transacted 3.50 3.00 Other 2.50 JI 2.00 CDM • Current carbon trading is 4 GtCO2e but actual volume of reduction barely half of that amount as the market includes large trade in permits (quotas repeatedly changing hands). EU ETS 1.50 • Enormous gap between effort needed and current volumes. 1.00 0.50 0.00 2004 2005 2006 2007 2008 (forecast) Brazil 16 India 17 5 9 18 13 59 Significant Potential Yet to Tapped in CDM 46 37 China 2005 1. Location of CDM projects (percentage of volume, 2007) 2006 2007* 2. Many countries are under-penetrated even Many countriesrelative are under-penetrated relative to emissions to their emissions CDM activity by country, mid-2007 . Mt CO2e/year 18 16 South Korea 14 12 Mexico 10 8 Malaysia Chile 6 4 Qatar Algeria Egypt 2 0 0 50 100 150 Venezuela Argentina South Africa Thailand Indonesia Pakistan Saudi Arabia Iran 200 250 300 350 400 450 500 550 GHG emissions, 2000 (Mt CO2 e p.a.) Source: UNEP, WRI, team analysis •Uneven regional focus; China, India and Brazil = 85% of CDM market share; •Just 16 projects in ECA = 4 Armenia, 1 Goergia, 3 Cyprus, 4 Moldova, 4 Uzbekistan •Reductions from reforestation and avoided deforestation largely absent. •Many countries with high emissions have relatively low presence in carbon markets. Opportunities for Scale-up and Extension Forestry is barely visible in CDM 64% of 2007 contracts for clean energy other renew ables 0% 20.0% 18.0% 17.4% 16.0% N20 9% Biomass 5% 14.0% LFG 5% Wind 7% 12.0% CMM 5% 10.0% 8.0% Waste management 4% Fugitive Hydro 12% 6.0% HFC 8% 4.0% 3% 2.0% 0.7% Other 2% 0.0% Land use, Land-use change and Forestry Sources of GHG emissions Share of CDM projects EE+Fuel sw itch 40% Agreement reached at Bali to move forward on Reduced Emissions from Deforestation and Degradation (REDD), providing opportunity for countries with tropical forests to join the carbon markets. Required now: build capacity to measure and verify emissions associated with forests and bring these assets to market as soon as international regulatory framework is in place. Building on success to scale up Programmatic approaches will enable scaling up/extending to interventions in key development sectors (energy, appliances, waste management, transport, and newer technologies). Approaches compatible with financing provided by domestic FIs need special attention. Need for CDM Reform DOE at validation or req. reg. 180 days registered 348 days issuance 328 days 2,645 projects 1,170 projects 403 projects 1,451 MCERs 1,342 MCERs 195 MCERs 2-year delay 6% EE RE Methane Industrial 74% to high yield projects (ind. gas) Other RE and EE (70%) stuck somewhere in the pipeline 70% of all projects (half of volumes) have not reached registration Need for Strong Decisions i To provide long-term carbon price s Define a global goal for 2050 supported by ignals and certainty to the private s ntermediate targets, to be agreed by the UNFCCC process ector Build a truly global carbon market by linking To facilitate access to new carbon m regional carbon schemes and markets to each o arkets and sources of capital and lo ther through increased access, converging prices a wer costs of abatement nd harmonized products To accelerate low-carbon growth n developing countries To scale up and deepen access to arbon markets and finance Reform the existing market-based mechanisms i and explore new policy instruments – reduced transaction costs, streamlined process, simplified methodologies c Facilitate the transfer of low-carbon technologies and establish sector-based programs to enable larger scale investments in cleaner development Key Messages on Carbon Market 1. Market can play an important role in Greenhouse gas (GHG) emissions reduction 2. Technologies are available now that enable substantial reductions at a cceptable marginal abatement costs 3. A variety of policies can lead to reductions of GHG emissions; carbon markets are needed to implement cap-and-trade and can interconnect policy measures 4. A deep, liquid and global carbon market has the potential to deliver significant benefits to all participants, including for development 5. But countries will need to take decisions to establish long-term price ignals and gain the full benefits of carbon markets s