Download Methodology and Additionality: key concepts

Introduction to Carbon Finance
market instruments to mitigate climate
change
Martina Bosi
Carbon Finance Unit, The World Bank
November 8 , 2006
Washington DC
Global Energy-Related CO2 Emissions
million tonnes of CO2
40 000
35 000
30 000
25 000
20 000
1990
Coal
2000
Oil
Gas
2010
Alternative Policy Scenario
2020
2030
Reference Scenario
In 2030, Alternative Scenario’s CO2 emissions are 16% lower than in the Reference
Scenario, but are still more than 50% higher than 1990
Source: International Energy Agency, World Energy Outlook 2004
Climate Change: Whose problem is it?
The Kyoto Protocol: key features
• Entry into force: February 16, 2005
– US and Australia did not ratify
• Differentiated commitments:
– Developed countries and countries with economies in transition agree to
quantified legally-binding targets (overall objective leads to a 5% reduction
from 1990 levels by 2008-2012)
• Six gases, sources and forestry sinks, 5-year period (2008-2012)
• Target should be achieved through:
– Domestic Reductions
– Carbon Sinks: direct human-induced land use change and
forestry activities
– International Credits (Kyoto Mechanisms):
• International Emissions Trading
• Project –Based: Joint Implementation (in industrialized countries)
• Project – Based: Clean Development Mechanism (in developing countries)
• Negotiations on next period (post-2012) to start in 2005
Market Mechanisms to Mitigate
Greenhouse Gas Emissions
• Emissions Trading and Project-Based Mechanisms
• Key feature of the Kyoto Protocol:
– Provide flexibility as to the location of emission reductions
• Rationale:
– Impact of CO2 emissions and/or reductions insensitive to
location
– Cost and opportunities to reduce CO2 vary between companies,
sectors, and countries
 Market instruments enable meeting GHG targets costeffectively
 Taking advantage of differences in marginal abatement costs
across different emission sources
Example of emissions trading
Emission allowance
Country A
Country B
€
Emissions target prior to trading
tCO2
Allowances to buy
Allowances to sell
New targets after
transaction
2008
2012
2008
2012
How the Clean Development
Mechanism Works
emissions
baseline
emission
reductions
Project emissions
time
•Emission reductions bring additional revenue stream to CDM projects
•No single price; but currently in the range of ~$8-$10 (per tCO2)
Structure of the Carbon Market 2006
(worth close to $22 billion in 2006)
Project-Based
Transactions
Credible
C-asset
EU Emission
Trading Scheme
Primary JI &
CDM
226 MtCO2e
Voluntary
& Retail
8 MtCO2e
Other
Compliance
8 MtCO2e
Allowance Markets
764 MtCO2e
New South Wales
Certificates
16 MtCO2e
Chicago Climate UK ETS
2 MtCO2e
Exchange
8 MtCO2e
World Bank Carbon Finance Approach
• Ensure that carbon finance contributes to
sustainable development, beyond its
contribution to global environmental efforts
• Assist in building, sustaining and expanding
the market for GHG emission reductions
• Strengthen the capacity of developing
countries to benefit from the market for GHG
emission reductions
CF-Assist
World Bank Carbon Funds & Facilities
Total funds pledged = US$ 1.93 billion (13 governments, 62 companies)
Prototype Carbon Fund. $180 million. Multi-shareholder.
Netherlands Clean Development Mechanism Facility. $267.8 million Netherlands
Ministry of Environment.
Community Development Carbon Fund. $128.6 million. Multi-shareholder.
BioCarbon Fund. $53.8 million. Multi-shareholder.
Italian Carbon Fund. $109.4 million Multi-shareholder (from Italy only).
Netherlands European Carbon Facility. $40.4 million. Netherlands Ministry of
Economic affairs.
Spanish Carbon Fund. $281.9 million. Multi-shareholder (for from Spain only).
Danish Carbon Fund. $69.3 million. Multi-shareholder (for from Denmark only).
Umbrella Carbon Facility. [$727.5 million]. 2 HFC-23 projects in China.
How the Funds Work
Technology
$
Finance
Industrialized
Governments and
Companies
CO
2 Equivalent
Emission Reductions
Technology
$
Finance
EITs and Developing
Countries
CO
2 Equivalent
Emission Reductions
Longer Term Challenge for Carbon Market
• Carbon Trade could confer large flow of funds to
developing countries: tens of billion of dollars per year
– But requires a long-term, stable and predictable framework and
accompanying regulatory system.
• Most energy-sector projects, need 10 years of secure
carbon revenues for projects to reach financial closure;
• Long-term viability of carbon market is not assured
• Carbon finance needs regulatory visibility post-2012
• Longer-term regulatory signal for carbon finance could
come from:
International: U.N. Framework Convention on Climate
Change and Kyoto Protocol
National/multi-national: e.g. EU Trading Scheme
Sub-national: e.g. US States;
Conclusions
• Market mechanisms allow meeting GHG targets
most cost-effectively
• Sale of emission reduction creates revenue stream
for climate-friendly activities (carbon finance)
• Carbon Market is real
• Carbon finance is an important source of new and
additional development finance
• World Bank is a player in the carbon market
• Long-term signal (post-2012) is biggest challenge for
continuation of carbon market
Thank you!
For more information, visit:
http://www.carbonfinance.org