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Carbon 2008Post-2012 is now
11 March 2008
TO THE POINT
This report was published at Point Carbons 5th annual conerence, Carbon Market Insights 2008 in
Copenhagen 11 - 13 March 2008. For more inormation, see www.pointcarbon.com
Global carbon markets worth 40 billion in 2007, up by 80 percent from 2006.The total traded
volume increased by 64 percent rom 1.6 Gt (1.6 billion tonnes) in 2006 to 2.7 Gt in
2007.
The EU emissions trading scheme saw a traded volume in 2007 of 1.6 Gt and a value of 28
billion.This represents a volume growth o 62 percent and a value growth o 55 percent
rom 2006. The EU ETS now holds 62 percent o the physical global carbon market and
70 percent o the nancial market.
The CDM market increased to 947 Mt and 12bn in 2007. This is an increase o 68 percent in
volume terms, and a staggering 200 percent in value terms rom 2006, constituting 35
percent o the physical market and 29 percent o the nancial market.
The market for secondary trading of CDM credits is the fastest growing segment. From limited
activity at the start o the year, over 2007 the market saw around 300 Mt o sCER
trades, much o this related to EUA-sCER swaps.
Two-thirds of survey respondents say EU ETS will result in internal abatement. Taken together,
our surveys in January and April 2007 and January-February 2008 indicate that at least
two-thirds o EU ETS companies are involved in or are planning emission reductions o
some kind.
Carbon prices important for investment decisions. 73 per cent o EU ETS survey respondentsagree that the carbon price is relevant to investment decisions. Only 6 percent say the
carbon price has no impact on new investments.
Survey respondents expect a carbon price of 24 in 2010, and 35/t in 2020. This is up 6 or the
2010 price and 10 or the 2020 price, compared to last year.
A federal US ETS likely, according to respondents. They expect it to be less strict than the
EU ETS Phase 2, however, despite the ambitious bills now beore the US Congress.
Borrowing could be widely used. Nearly hal o the survey respondents could borrow rom
2009 allocation to use or compliance in 2008.
Voluntary market is small and non-transparent. Only 10 percent o the respondents consider
the voluntary market to be transparent, yet 50 percent think it is more mature now thanone year ago.
Integrated global market by 2020? Seventy-three percent o our sample think that there
will be a global reerence carbon price in 2020.
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Carbon 2008
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About the report:This report was written and edited by Kjetil Rine, Endre Tvinnereim and Henrik Hasselknippe.
For citations, please reer to: Point Carbon (2008): Carbon 2008 - Post-2012 is now Rine, K., E.
Tvinnereim and H. Hasselknippe (eds.) 60 pages.
About Point CarbonProviding critical insights into energy and environmental markets
Point Carbon is a world-leading provider o independent news, analysis and consulting services
or European and global power, gas and carbon markets. Point Carbons comprehensive servicesprovide proessionals with market-moving inormation through monitoring undamental
inormation, key market players and business and policy developments.
Point Carbons in-depth knowledge o power, gas and CO2 emissions market dynamics
positions us as the number one supplier o unrivalled market intelligence on these markets.
Our sta includes experts in international and regional climate policy, mathematical and
economic modelling, orecasting methodologies, risk management and market reporting.
Point Carbon now has more than 15,000 clients, including the worlds major energy companies,
nancial institutions, organisations and governments, in over 150 countries. Reports are
translated rom English into Japanese, Chinese, Portuguese, Polish, French, Spanish and
Russian.
Every year, Point Carbons Carbon Market Insights conerences gather thousands o keyplayers or the carbon communitys most important annual conerences. Point Carbon also
runs a number o high-level networking events, workshops and training courses.
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Executive Summary
All rights reserved 2008 Point Carbon
11 March 2008
This report presents an overview o the carbon market
in 2007, our outlook or 2008, and expectations orthe remainder o rst Kyoto period and beyond. It
is based on the results o the largest survey ever
conducted into the carbon market. We received 3
703 responses to our web-based questionnaire and 1
462 o the respondents trade or own European UnionAllowances (EUAs) or Certied Emission Reductions
(CERs). The survey results are complemented by
analysis undertaken by Point Carbon.
The global carbon market is consolidating at a time
o ever-increasing attention to climate change. Last
year was another record one in the market, with anincrease rom 1.6 bn tonnes in 2006 to 2.7 Gt in 2007.
The total traded volume increased by 64 percent. As
global temperatures and media coverage increase,
so does the volume o emission allowances and
credits.
In value term, the growth was even steeper in 2007.
The global carbon markets were worth more than
40 billion in 2007, up by 80 percent rom 2006.
The EU Emissions Trading Scheme (EU ETS) is stilldominating the global carbon market. EU ETS saw
a traded volume in 2007 o 1.6 Gt and a value o28 billion. This represents a volume growth o 62
percent and a value growth o 55 percent rom 2006.
The EU ETS now holds 62 percent o the physical
global carbon market and 70 percent o the nancial
market. The higher share o the value o EU ETScompared to the volume is due to the high prices in
EU ETS compared to other markets.
The CDM market comes second, both in volume
and value terms. It increased to 947 Mt and 12bn
in 2007. This is an increase o 68 percent in volume
terms, and an astonishing 199 percent in value termsrom 2006, constituting 35 percent o the physical
market and 29 percent o the nancial market.
The market or secondary trading o CDM credits is
the astest growing segment. From limited activity
at the start o the year, the market saw around 300Mt o sCER trades over the course o 2007, much o
this related to EUA-sCER swaps. This emphasises
the dominant position o EU ETS in the global carbon
market last year.
Traded volumes in the Joint Implementation (JI)
market almost doubled rom 21 Mt in 2006 to 38
Mt in 2007. Higher prices in 2007 compared to 2006
meant that the value o the JI segment more thantripled, rom 95m in 2006 to 326m in 2007.
The direct market participants were not, however, let
by themselves last year and there were signicant
activities in the political arena. The climate change
challenge was at the top o the political agenda, andthe UNFCCC summit in Bali in December succeeded
in starting negotiations on a post-2012 agreement,with the aim o signing the agreement at the COP
meeting in Copenhagen in 2009.
In our survey, we asked whether a global post-2012
climate agreement will be reached beore 2012.Around 70 percent o the respondents think there
will be an agreement. O these, 80 percent think
there will be a post-2012 agreement, regardless o
whether the US participates and around 60 percent
o the respondents (N=3013) think that the US willjoin an international agreement. Interestingly, more
than 75 percent believe that Canada is also likely to
join the agreement, despite currently being a long
way rom meeting its Kyoto target.
Second, the European Commission (EC) ruled on
the National Allocation Plans (NAPs) or Phase 2. Theoverall impression was that the EC had learnt rom
Phase 1 and was suciently tight on the EUA cap,
but that it was more generous when it came to the
credit limit. Hence, taking into account the amount
o carbon credits allowed to be used or compliancein Phase 2, it seemed that no emission reductions
were needed within the EU over the period.
This was to a large extent corrected in January 2008
when the EC proposed its revision o the EU ETS
Directive. I a satisactory international agreement
is not reached, the EC proposes that the credit limitor Phase 2 (2008-20012) should be valid or both
Phase 2 and Phase 3 combined (2008-2020). I,
however, a satisactory international agreement is
reached, the credit limit would be increased by hal
o the additional reduction eorts going rom the20 percent reduction scenario up to, at most, a 30
percent reduction rom the 1990 level.
A third crucial development in the political arena in
2007, which indeed will continue to develop in 2008
and beyond, was the emission trading initiatives
that are being taken on at both state and ederallevel in the US. RGGI will start on 1 January 2009
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(with some early auctions in 2008), while initiatives
in the West and Mid-West will take a ew moreyears to materialise. Most important, however, is
the Lieberman-Warner Bill now going through the
Senate. The bill suggests establishing an emission
trading scheme covering around 75 percent o GHG
emissions in the US, with a cap more than 2.5 timeshigher than in EU ETS Phase 2. This will decrease by
around 100 Mt a year towards 2050. I it becomes
a reality, this will be the largest emission tradingscheme in the world.
Moreover, the bill suggests allowing international
credits to be employed or compliance purposes,primarily EUAs and Kyoto credits. This indicates
that there will be a close bond between upcoming
regional emissions trading schemes and existing
schemes, primarily the EU ETS.
The carbon market is still, and will remain, a politicallydriven market, as supply and demand or credits
are determined to a signicant degree by political
decisions
The proposal or a ederal US ETS indicates a tighterscheme than we see in the EU ETS. It is interesting
then, that most o our survey respondents donot think that a ederal US ETS will be particularly
ambitious.
Two-thirds o our survey respondents say that EU
ETS will result in internal abatement. Taken together,
our surveys in January and April 2007 and January-February 2008 indicate that at least two-thirds o
EU ETS companies are involved in or are planning
emission reductions o some kind. These eorts are
yet to be seen in the veried emission data.
The respondents expect the EUA prices to rise
towards 2020. In Carbon Market Survey 2007, therespondents estimated that the EUA price in 2010
would be around 18/tonne. This year, the average
EUA price orecast or 2010 has increased by 6 to
24/tonne.
Going urther, the average EUA price in 2020 wasestimated by last years respondents to be 25/
tonne, while the 2020 price estimate given this year
has increased to 35/tonne. Thus, there is a bullish
impression o carbon market development in the
last year, both rom a short term (2010) and a long
term perspective (2020).
The importance o the carbon market or its
participants is clearly seen rom the long-terminvestment perspective. 73 per cent o EU ETS survey
respondents agree that the carbon price is relevant
to investment decisions. Only 6 percent say the
carbon price has no impact on new investments.
Besides the compliance markets, primarily connectedto the Kyoto Protocol, a voluntary carbon market has
emerged. Although it is still limited in size, only 10percent o the respondents to our survey nd the
voluntary market to be transparent.
Moreover, less than 30 percent think the voluntary
carbon market produces real emissions reductions,while more than 40 percent believe that the voluntary
carbon market poses a risk to the reputation o the
compliance markets. Having said that, a majority o
the respondents think that the voluntary market is
more mature now than it was a year ago.
It is air to say that the main activities and trades
in the carbon markets years ahead will be in
connection with compliance schemes - either
determined through an international agreement ornational or regional schems independent on an post-
2012 agreement.
Given the development o an increasingly interlinked
global carbon market, we asked our survey
recipients the ollowing question: Will there be a
global reerence price or CO2 emissions in the year
2020? The existence o such a price (regardless
o its level) would be a reliable indicator o policysuccess. Seventy-three percent o our sample think
that there will be a global reerence carbon price in
2020.
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Foreword
Developments witnessed over the past year, as
well as developments so ar in 2008, signal a newera or the carbon markets. We have now entered
the rst year o the rst commitment period under
the Kyoto protocol, and also the rst year o the
second phase o the EU emissions trading scheme.
Companies operating in the European carbon marketnow (at least in most cases) know their compliance
requirements until 2012, and can base their trading
and investment decisions both on day-to-day changesin undamentals and expectations about the uture.
The recent proposal rom the European Commission
also provides greater insight into the developmento the market until 2020, although the uncertainties
will remain or still some time.
When we published the previous version o this
report, in March 2007, we noted that climate change
and carbon markets were the subject o record
high public interest. Little did we know that the resto 2007 would bring with it even greater interest
rom media, decision makers, and the general
public. Particular mention should be given to the
Nobel Peace Prize being awarded jointly to theIntergovernmental Panel on Climate Change and AlGore, our keynote speaker at last years conerence.
We are both honoured and privileged to have
chairman o Nobel laureate IPCC, Dr. R. K. Pachauri,
with us or this years conerence.
The results rom our annual survey, and presented in
this report, highlight three things in particular. First,there seems to be a generally bullish sentiment on
carbon, not necessarily refected in current market
prices. Survey respondents now on average expect
the 2010 price to be 6 higher than they did a year
ago. The expectation or a 2020 price has increased
even more, and now stands 10 higher than it didlast year. In our view, this demonstrates that market
participants now realise that the EU ETS will ace
a real and considerable shortage, and that much o
this will have to be met through reductions taking
place in Europe.
Secondly, once again the survey respondents
seem optimistic that we are moving towards a
global carbon market and that the international
community will be able to agree on a new climate
agreement rom 2013 onwards. More than 70 percent o respondents see it as likely that a climate
agreement or the post-2012 period will be agreed
upon beore the end o the Kyoto period. In our view,
getting the United States on board will be vital or anew agreement. Interestingly, survey respondents
do not necessarily agree, with about 77 per cent
expecting an agreement to be reached regardless o
whether or not the U.S. participates. However, more
than hal o the respondents expect the U.S. to takeon reduction commitments and to participate in a
new agreement.
Finally, the results rom our survey conrm that carbon
prices are now seen as an important actor in the
operating and investment decisions o companies.
Over two-thirds o survey respondents claim thatthe EU ETS has caused emission reductions o
some kind, either already implemented or at the
planning stage. While this might be good news or
the development o greenhouse gas emissions in
Europe, we expect to see similar developments in
other places around the world in the years to come.Over 72 per cent o the survey respondents expect
there to be a global reerence price or carbon by
2020. As the world increasingly takes into account
the cost o emissions, and the value o reductions,the carbon market will continue to incentiviseinvestments in cleaner technology and emission
reductions. And in the end, that is what this market
is supposed to lead to.
You can read more about these ndings, and a lot
more, in this report. We believe that this report
presents the most up-to-date and comprehensiveanalysis or the carbon market as a whole. It certainly
represents the global analysis work that takes place
in Point Carbon every day, and we hope you will nd
it both interesting as well as inspirational.
Per-Otto Wold
CEO
Point Carbon
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1 Introduction
2 Carbon markets and policies in 2007
2.1 Overview
2.2 EU ETS
2.3 CDM
2.4 JI
2.5. Voluntary markets
3 Carbon markets towards 2012
3.1 Expectations for global 2008 volumes
and trends
3.2 EU ETS
3.3 CDM market in the Kyoto period
3.4 JI - existing market, deliveries now?
3.5 AAU - large potential, limited supply?
3.6 Regional Greenhouse Gas Initiative
(RGGI)
4 Carbon markets beyond 2012
4.1 Towards a new global climate
agreement
4.2 Carbon markets in North America
4.3 Other upcoming markets
4.4 Towards a global market?
1
3
3
6
17
19
20
23
23
24
33
36
37
39
41
41
44
46
47
Table o contents
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1. IntroductionThe initial year o the rst Kyoto commitment period(2008-2012) has now begun. Starting this year, the
countries listed in Annex B o the Kyoto Protocol
(apart rom the US) will have to measure, estimate
and account or their greenhouse gas (GHG)
emissions. Annex B comprises those countriesthat were considered industrialised in 1992, when
the UN Framework Convention on Climate Change
(UNFCCC) was negotiated.
Phase 2 o the EU Emissions Trading Scheme (EU
ETS) also commenced this year, and is scheduledto run alongside the rst Kyoto period. Moreover,January saw the release o the ECs proposal or the
structure o Phase 3, extending the EU ETS horizon
to 2020. With new nancial products and trading
strategies, the EU market is about to come o age.
And yet 2008 is not only the year o Kyoto. This year
we expect important developments in US carbonmarkets in particular. At the state level, we have just
seen the rst ever GHG compliance trade under the
ten-state Regional Greenhouse Gas Initiative (RGGI),
and expect much more to come.
At the ederal level, a comprehensive and ambitious
cap-and-trade is awaiting a Senate foor vote this
year, while all the 2008 presidential candidates
with a reasonable chance o winning are in support
o emissions trading as part o an active climateagenda.
This report is our third annual presentation o thestatus o the carbon market. We aim to provide a
comprehensive overview o all compliance markets
currently in operation, as well as other markets thatwe believe are imminent. Given the wealth o data
available or the Kyoto markets in particular the
EU ETS and Clean Development Mechanism (CDM)
these will be discussed in the greatest detail.
However, we will also consider the developments
that have been made in Japan, Russia, Ukraine,Australia and o course the US.
Our report includes inormation derived rom a
number o sources. The primary source is Point
Carbons annual Carbon Market Survey, whichran rom 18 January to 6 February 2008, using aweb-based survey tool. In total there were 3 703
respondents, compared to 2 250 last year and 800
0% 5% 10% 15% 20% 25% 30% 35% 40%
Company covered by CO2 regulation
other than EU ETS
Government
Other
Financial institution/bank
Company with emissions regulated
under the EU ETS
CER project developer/aggregator
Source: Point Carbon
Figure 1.1: Trading EUAs and CERsN=1462. Respondents saying they buy/sell/hold EUAs and/or CERs
1406 respondents buy, sell or holdEUAs or project credits
11 March 2008
3703 participants in our web-surveythis year, up rom 2250 in 2007
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in 2006. O this years respondents, 1 462 (~40
percent) stated that they are involved in EuropeanUnion Allowance (EUA) or Certied Emission
Reduction (CER) trading, or own EUAs/CERs. Figure
1.1 below shows the distribution o respondents
among this subset.
O the 1 462 respondents holding or trading EUAs/CERs, 473 work or companies with emissions
regulated under the EU ETS, with about the same
number or CDM project developers/aggregators.
Some 220 respondents represent nancial
institutions.
Our typical respondent has a degree in eitherengineering or nance/economics, while 13 percent
hold a PhD. Two-thirds are between the ages o 25
and 44. The largest number o respondents is ound
in the US a total o 292; the other countries with
three-digit response totals are the UK (281), India
(142) and Germany (107). In total, 101 countries
are represented and almost 50 percent o therespondents are located in Europe.
In addition to the Carbon Market Survey 2008, this
report is based on Point Carbons in-depth analyses
o international climate policy and the carbon market
in our publication series: Carbon Market Analyst
(CMA), Carbon Market Monitor (CMM), CarbonMarket Brie (CMB) and Carbon Policy Update (CPU)
in particular; as well as on Point Carbons proprietary
databases, models and applications: Carbon Market
Trader (CMT) and Carbon Project Manager (CPM).
The outline o this report is as ollows:
Chapter 2 provides a review o carbon market
developments in 2007. We report traded volumes
and values, price drivers and evaluations o the EU
Almost 50 % o respondents locatedin Europe, down rom 55 % last year
Figure 1.2: Most o the respondents come rom...Top 15 countries (out o 101 with responses). N=2291.
12.7%
12.3%
6.2%
4.7%
4.1%
3.8%
3.8%
3.2%
2.8%
2.8%
2.7%
2.7%
2.4%
2.2%
2.1%
0 50 100 150 200 250 300 350
United States
United Kingdom
India
Germany
France
Australia
Canada
Brazil
Japan
Netherlands
Norway
Italy
Spain
China
Belgium
Source: Point Carbon
Carbon Market Survey 2008 is themain source o inormation
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ETS, CDM and Joint Implementation (JI) markets.
We also provide statistics on buyers, sellers and
project types in the CDM. The chapter ends with
a discussion o recent developments in voluntary
carbon markets, emphasising the US position.
Chapter 3 presents our expectations or the global
carbon market in the Kyoto period and or 2008 in
particular. We discuss the policies providing the
ramework or the EU ETS and much o the CDM and
JI markets, with a ocus on decisions and proposals
by the European Commission (EC). We also suggestwhat to expect rom the RGGI market in 2009, and
discuss the likelihood that Assigned Amount Units(AAUs) will start trading in 2008.
Chapter 4 looks at the emerging landscape o the
carbon world ater 2012. We begin by presentingour analysis o the events o the Bali conerence
in December 2007. Recognising that US action is
a sine qua non or serious international action on
climate change, we then outline domestic proposals
or emissions trading in the US, both at the ederal
and state level.
We also assess the likelihood o domestic emissions
trading in other countries, notably Japan. Finally, we
ask whether a global carbon market will exist in
2020, and i so, what the price o carbon might be12 years rom now.
2. Carbon markets and policies in2007
2.1 Overview
Climate change was at the top o the global agenda
in 2007, most notably ollowing publication o theIntergovernmental Panel on Climate Changes (IPCC)
ourth assessment report (4AR). The report stated
that climate change was unequivocal and made
it extremely dicult or anyone to remain a climate
sceptic.
Moreover, ormer Vice President Al Gores
documentary lm, An Inconvenient Truth, brought
the climate issue to the masses worldwide.
Governments across the world have been orced to
take action as a result o the change in public opinion
on climate change and increased media coverage.
2.1.1 The carbon markets
In the carbon market, equally important events have
taken place. The total traded volume in the globalcarbon market grew rom 1.6 Gt (1.6 billion tonnes) in
2006, to 2.7 Gt in 2007 an increase o 64 percent
(see Figure 2.1). The value o the carbon traded grew
even more, by 80 percent in the same period, rom22bn ($33bn) to 40bn ($60bn).
Figure 2.1: Stairway to 07
Annual contract volumes 2005-07 in billion tonnes (Gt) CO2 equivalen
0
1
2
3
4
5
2005 2006 2007
Annualvolum
e(Gt)
Other
JI
CDM total
EU ETS total
Source: Point Carbon
64%
104%
56%
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ERU volumes almost doubled in the Joint
Implementation (JI) market, rom 21 Mt in 2006
to 38 Mt in 2007. Furthermore, higher ERU prices
meant that the value o the JI segment more than
tripled, rom 95m in 2006 to 326 in 2007.
Financial players joined the carbon market in orce in
2007. We have seen US hedge unds take positions
in the market, especially in options and long CER
positions. Towards the end o the year, NYMEX,
the worlds largest physical commodities utures
and options exchange, announced that it would
join the market by launching its own CO2 emissionproducts. This move by NYMEX indicates at least
two things: First, carbon trading is about to enter
the mainstream in the US. Second, major market
players are condent that GHG emission trading is
about to take o in the US, whether at the statelevel (RGGI, the West and Midwest), at the ederal
level, or both.
That being said, current activity in existing Australian
and US carbon markets did in act decrease rom2006 to 2007. Most signicantly, total traded value is
down 63 percent, to 186m in the mandatory New
The EU ETS is still by ar the largest carbon market
worldwide, with 62 percent o the physical market
and 70 percent o the nancial market (Figure 2.2).
The EU ETS grew over the course o 2007, with a
traded volume o 1.6 Gt and a value o 28m. Thisrepresents a volume growth o 62 percent and a
value growth o 55 percent rom 2006.
Activity within Kyotos fexible mechanisms
specically the Clean Development Mechanism(CDM) grew more than expected in 2007. In
total, the CDM market increased rom 563 Mt and
3.9bn in 2006 to 947 Mt and 12bn in 2007. Thisis an increase o 68 percent in volume terms, and
a staggering 199 percent in value terms rom 2006,
and in total constituting 35 percent o the physical
market and 29 percent o the nancial market.
Within the CDM, the growth o the secondary
CER (sCER) market has been the most impressive,starting in the rst months o 2007 and growing to
around 300 Mt over the whole year. This represents
a remarkable increase rom 2006, much o which is
related to EUA-CER swaps. With the growth in sCERtrading, the total CER market could well overtakethe EUA traded volume in 2009 or 2010.
CDM market increased to 947 Mtand 12bn in 2007
EU ETS still by ar the largest carbonmarket worldwide
Figure 2.2: Still dominated by the EU ETSDistribution o 2007 traded volume (let) and nancial value (right) across the main market
segments.
EU ETS
62%
CDM primary
22%
CDM secondary
13%
JI
1%
Other2%
Total volume: 2.7 Gt
EU ETS70%
CDM primary15%
CDM secondary14%
JI1%
Other0.5%
Total financial value: 40bn
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agreement will be accepted in the EU ETS up to a
limit.
In general, 2007 has been a good year or the
EC. Having had to endure criticisms over its initial
handling o the EU ETS, the Commission showeddetermination in cutting allocations and credit
limits in Phase 2 NAPs, as well as in pushing or
the inclusion o the aviation sector in the trading
scheme.
At the beginning o 2008, the EC also nally seemed
much more likely to succeed in harmonising thetotal EU cap and auction a much greater share o
allowances in Phase 3 an agenda it has been
promoting or years.
Outside the Kyoto markets, important progress
was made towards domestic emission trading, inthe US in particular. At the state level this is due
to the Regional Greenhouse Gas Initiative (RGGI),
the 10-state scheme due or launch in 2009, and in
the Western region led by Caliornia. A ederal cap-
and-trade bill sponsored by Senators Lieberman andWarner moved through both subcommittee andcommittee in November and December.
South Wales market and on the voluntary Chicago
Climate Exchange. With total volume almost
unchanged, this all is largely due to carbon price
drops in both markets and the all o the US dollar.
2.1.2 Carbon policies
Although we are just at the start o EU ETS Phase 2,
the ongoing review process or Phase 3 has alreadyproduced a number o concrete suggestions rom
the European Commission (EC). For example, it
already seems clear that the cap will be considerably
tighter than in Phase 2, as the overall emissions in
the EU ETS in 2020 are expected to be capped ataround 21 percent below the 2005 level.
In addition, the EC suggests reducing the level oree allocation linearly towards zero in 2020. All
allowances allocated to the power and heat sector
will be auctioned as early as 2013. Moreover, beore
a new international agreement is nalised, the
credit limit or the 2008-2012 period is eectively
extended to also cover the 2013-2020 period, and
no additional import o credits is permitted. Oncea uture international climate agreement has been
reached, CERs rom countries that have ratied the
EC suggest EU ETS emissions to be21 percent below 2005 level
No additional import o credits permit-
ted unless satisactory agreement
Figure 2.3: Ups and downs in 2007Quarterly volumes and values in the EU ETS 2007, million tonnes and million
0
50
100
150
200
250
300
350
400
450
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
MtCO2
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
mill
8%
17% -12%
80%
14%
3%
Source: Point Carbon
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Crowning the events o the year, the Bali climate
summit produced a mandate to launch negotiations
or a global post-2012 ramework. At the summit,
all UNFCCC member countries including the US
agreed to negotiate a successor to the Kyotoprotocol.
This eat was made possible by a change in theUS position earlier in the year. The turnaround was
rst evidenced at the G-8 summit in June, whenthe Bush administration announced its intention to
return to the negotiating table.
While this decision may not be rooted in a hearteltdesire to take decisive action on climate issues, it
is certainly a positive step towards kick-starting the
international process under Bush.
I nothing else, laying the groundwork in this way will
make progress aster under the next administrationand progress with the Lieberman-Warner bill will
acilitate this. The new Australian Government is also
planning to speed up the introduction o a national
ETS.
2.2 EU ETS
The EU ETS was the main driving orce o the
global carbon market in 2007. This dominance wasunderlined by the trades in sCERs estimated at
around 17 percent o the market in 2007 as this
market is propelled by EUA sCER swaps. Although
the excitement o Phase 1 was long gone by 2007, it
was still an important year or the EU ETS.
The nal rulings o the National Allocation Plans(NAPs) were made, and the EU ETS review crucial
or the shape o Phase 3 was nalised. Hence, much
o the uncertainty or the uture phases o the EU
ETS was removed, although the nal agreement on
the Directive review is still at least 1 year away.
2.2.1 Volumes and values
2007 saw healthy growth in the OTC market and on
the exchanges, with a daily average traded volume
o around 5.6 Mt. As shown in Figure 2.1, volumeshave increased annually since 2005. The total volume
traded in the 2007 EU market, excluding exclusivedirect bilateral trades (company-to-company) , was 1
443m EUAs. O this, around 1 Gt (~70 percent) was
Australia and the US turned towardsclimate regime in 2007
Figure 2.4: No changes on the exchangesMonthly EUA volumes transacted on exchanges. Last years gures in parentheses.
0
5
10
15
20
25
30
35
40
45
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
MtCO2
ECX Powernext Nord Pool EEXSource: Point Carbon
ECX 86.7% (75.6%)
Powernext 5.5% (13.3%)
Nord Pool 6.3% (7.4%)
EEX 1.4% (3.1%)
EXAA 0.0% (0.1%)
Secondary CERs took around 17percent o the market in 2007
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traded in the brokered over-the-counter (OTC) market
and the remainder was traded on the exchanges.
Quarterly volumes were relatively stable, with a peak
in Q3, while the value o transactions increased asPhase 2 contracts took over and prices increased
see Figure 2.3.
O the exchanged volume, the London-based
European Climate Exchange (ECX) accounted or
377 Mt, or 87 percent. This was up rom 76 percentin 2006, thus cementing its dominance in this market see Figure 2.4. The other exchanges consequently
show lower volumes, but Oslo-based Nord Pool (6.3
percent) was the second largest in 2007, with the
French Powernext third, with 5.5 percent.
The share o the exchanges has increased in recentyears, with 20 percent o the market in 2005 and 30
percent in 2007. In addition to OTC transactions and
trades on the exchanges, there still is a signicant
volume traded bilaterally (company-to-company),
and the combined total o all transactions in 2007
was around 1 650 Mt.
2007 also marked the end o Phase 1 o the EU ETS,
alling rom a 4 level at the beginning o the year
to 0.03 in December. As seen rom Figure 2.5, the
ate o the EUA Phase 1 allowances was sealed asearly as April 2006 and reconrmed through the
verication o 2006 emissions in April 2007.
Since October 2006, Phase 2 contracts have been
the only ones that have deserved any attention. Over
the course o 2007, Dec 08 EUAs traded in a rangebetween 12.25 and 25.28. The contract closed
at 17.55 on the rst trading day o the year, then
declined to the years lowest point on 20 February.
The Dec 08 EUA then grew rapidly, at over 4 per
month, until the high o 25.28 was reached on 29
May. Subsequently it ell below 19 twice, in Julyand August, beore remaining largely within the
20-24 range or the rest o the year and closing at
22.43 on 31 December.
The decline in the EUA price early in the year was
caused by alling power and gas prices, which
produced lower coal-to-gas switching levels, as well
as by a mild (or even absent) winter that depressedboth Phase 1 and Phase 2 contracts.
European Climate Exchange (ECX)accounted or 87 percent o market
Figure 2.5: Volumes and prices in the EU ETS 2004-07Daily OTC prices using Point Carbons bid/oer methodology.
0
5
10
15
20
25
30
35
1/12/04 6/9/05 14/6/06 21/3/07 28/12/07
/to
nne
0
10
20
MillionEU
Astraded
Volume EUA 2007
EUA 2008 sCER08
Source: Point Carbon's Carbon Market Trader
Around 1 650 Mt traded in EU ETSin 2007, sCER excluded
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Figure 2.6: UK carbon-adjusted dark and spark spreads in 2007Forward prices or delivery in Q2 and Q3, 2008. The chart shows the theoretical prots rom
standard coal and gas power plants, based on uel, power and carbon prices.
0
5
10
15
20
2-Jan-07 7-Mar-07 15-May-07 20-Jul-07 25-Sep-07 28-Nov-07
/M
Wh
0
5
10
15
20
25
30
/tonne
Dark spread summer 08 Spark spread summer 08 EUA Dec 08
Source: Point Carbon's Carbon Market Trader
Figure 2.7: German carbon-adjusted dark spreadForward prices or delivery in 2008. Dates: 11 Dec 2006 -- 20 Dec 2007
0
5
10
15
20
25
11-Dec-06 14-Mar-07 20-Jun-07 19-Sep-07 19-Dec-07
/MWh
0
5
10
15
20
25
30
/tonne
Clean dark spread Cal 08 EUA Dec 08
Source: Point Carbon's Carbon Market Trader
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As can be seen rom Figure 2.6, gas was in the money
against coal or most o 2007, and particularly in the
April-October period. Carbon-adjusted prots or coalgeneration (dark spreads) and gas generation (spark
spreads) or UK power delivered in the summer o
2008, traded mainly inside a band o 5-10/MWh
until mid-November, when both shot upwards.
The subsequent bull-run came on the back o a
lingering hot summer scare, pushing up Germanpower or Q3 2007 and Cal 08 delivery, and Dec 08
EUAs along with it. A strict ruling by the EC on the
Italian NAP, as well as other NAP cuts, boosted the
bullish sentiment as Phase 2 looked progressively
more likely to be short. In addition, there were
ears o a possible CER crunch in 2008, includingbut not limited to worries about delivery through the
international transaction log (ITL).
Ater the peak in May, the trading range narrowed
or the rest o the year, as the NAP process had
established the Phase 2 allocation while coal, gas,
oil and power prices balanced each other in keeping
the EUA stable.
Forward prices or delivery in Q2 and Q3, 2008. The
chart shows the theoretical prots rom standardcoal and gas power plants, based on uel, power and
carbon prices.
The German carbon-adjusted dark spread or the
2008 calendar year saw a dierent development,
declining steadily through the year, see Figure 2.7.The highest price o the year 19.10/MWh was
seen on 11 January. On 27 November, however,
the prot made by German generators o coal-red
power was down by more than two-thirds at 7.21/MWh, the years lowest price.
The vast majority o EUA trading activities in 2007
were orward contracts or Phase 2. Figure 2.8
shows the correlations between uel and Dec 08
EUA contracts. The Cal 08 contracts correlated quite
well with the Dec 08 EUA contracts, being 0.78
on average in 2007. Gas and oil correlations wereconsiderably lower at 0.42 and 0.26, respectively.
Correlation to Dec 07 contracts were absent as the
price or these was marginal throughout the year.
Cal08 and Dec08 EUA correlatedairly well in 2007
Figure 2.8: EUA price correlation with uel and powerCorrelations with the EUA December 2008 contract
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07
German cal 08
NBP summer 08
Crude oil frontmonth
Correlations:
Cal08: 0.78
NBP: 0.42
Crude oil: 0.26
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The Dec 08 sCER closed at 15.70 on 21 May, whenour records began. It traded at a discount o more
than 7 to the Dec 08 EUA or most o June, withthe spread going as high as 7.98 on 4 June.
The average Dec 08 sCER price in 2007 was
16.37. The other OTC sCER contract tracked by
Point Carbon, the Kyoto strip or delivery each
December o the 2008-2012 period, traded at anaverage 16.50 during our seven months o records
in 2007. This indicates a real backwardation in the
sCER market, as the spread between the Dec 08 and
the Kyoto strip is much less than the cost o carry.
Indeed, the backwardation was absolute throughout
most o August, as the Dec 08 sCER was valuedabove the Kyoto strip. The most general explanation
or this phenomenon is concerns or a CER supply
crunch in 2008 and 2009, and good supply in later
years.
2.2.2 Does the EU ETS work?
The launch o the ECs proposal or a climate-
energy package clearly showed that in the uture
more emission reductions will take place in theEU, particularly i a satisactory international
agreement is reached ollowing the Kyoto Protocol.
This begs the ollowing questions: are companies
ready or this and do we see any signs o internalabatement due to EU ETS?
A series o questions that Point Carbon has beenasking annually since 2006 could prove instructive.
Respondents are asked to choose one alternative
on a scale rom 1 (completely disagree) to 5
(completely agree). We count options 4 and 5
as agreement, options 1 and 2 as disagreement,and the middle option 3 as neither agreement nor
disagreement see Figure 2.9.
The results are almost the same in 2008 as in 2006
and 2007. The only exception is the statement
EU ETS is a mature market, which has gained a
somewhat higher score this year (although it is stillairly low).
The answers to the question on emissions reductions
have not changed markedly in the last three years.
Obviously, in the case o the statement EU ETS
acilitates emissions reductions, the question is
where within the EU or in CDM/JI countries. This
Respondents: EU ETS signicant
more mature now than one year ago
Figure 2.9 Assessing the EU ETSShare o respondents agreeing with the given statements (options 4 and 5). The number o
respondents is between 800 (in 2006) and 3,479 (in 2008).
0% 20% 40% 60%
EU ETS is a success
EU ETS facilitates
emissions reductions [in
the EU]
EU ETS is the most cost-
efficient way to reduce
emissions [in the EU]
EU ETS is a mature market
2008
2007
2006
Source: Point Carbon
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Figure 2.10 Sector emissions-to-cap (E-t-C) in 2006 compared to 2005E-t-C calculated using veried emission data and aggregate installation-level caps in each sector.
Positive numbers signiy greater emissions than allowance allocation.
Figure 2.11: Changes in EU ETS emissions at country level, 2005-2006Top ve increases and decreases in absolute terms.
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Figure 2.12: Compliance strategies in the EU ETSN=451. Companies with emissions covered by the EU ETS.
0% 10% 20% 30% 40% 50%
Other
A combination of the
above
Developing CDM/JI
projects
Trading
Reducing our own
emissions (internal
abatement)
Source: Point Carbon
year we made the question more specic, asking
whether EU ETS acilitates emissions reductions
in the EU. The answers were rather similar to
2006 and 2007, with more than 50 percent o the
respondents agreeing with this statement. But canthese emission reductions also be seen rom the
veried data rom 2006?
What do the verifcation data tell us?
The veried 2006 emissions increased to 2 028, up
22 Mt (1.1 percent) rom 2005. At the sector level,
2006 saw the same picture as in 2005: a shortpower sector and long industry sectors. The higher
emissions can be explained mainly by production
growth, but uel prices and weather also contributed.
Lower hydro production meant higher emissionsin the Nordic region, but the opposite situation in
Iberia.
Figure 2.10 compares 2005-2006 emissions
aggregated by sector or EU-23. O the 22 Mt
emissions growth rom 2005 to 2006, 12 Mt wereaccounted or by the sector comprising public
electricity and heat production (power and heat),
whereas an additional 10 Mt were emitted by the
industry sectors.
The metal and cement/lime/glass sectors emitted
7.5 Mt and 6 Mt more in 2006, respectively.
Installations in the oil and gas sector emitted 1.5 Mtless, others emitted 1.4 Mt less and the pulp and
paper sector emitted just 50 kt more in 2006 than in
2005. Despite the higher emissions, there was still a
comortable surplus o allowances in 2006.
Most countries that had surpluses in 2005 also
had surpluses in 2006, with Denmark as a notableexception. Figure 2.11 shows the countries with the
greatest changes in emissions rom 2005 to 2006.
More than hal o the countries included in the rst
phase 13 in total saw small changes that ell
between a reduction o 2 Mt and an increase o 3
Mt.
The increased emissions in Finland and Denmark
in particular, were due to low hydro levels in the
Nordic region in the rst three quarters o the year,
and consequently lower hydroelectric production.In the UK, coal consumption or power generation
20 percent o respondents use tra-ding as primary compliance strategy
Veried emissions increased 1.1
percent rom 2005 to 2006
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was 11 percent higher in 2006 than in 2005, growing
rom 33 to 37 percent o total electricity production.
Conversely, gas-red generation, which produces
less than hal the amount o emissions than coal,
was down by 8 percent.
Fuel price changes alone would explain only a small
part o the increase in emissions. NBP gas prices or
spot delivery went up our percent rom an average
40.27 pence per therm in 2005 to 41.94 pence per
therm in 2006. At the same time, API2 coal or
spot delivery in Europe was up ve percent romUS$ 60.72 on average in 2005, to US$ 63.77. These
changes are more or less in line with infation.
Unlike in 2005, when gas-red generation in the
UK was slightly more protable than coal-red
generation during the entire summer season, coal
was consistently in the money against gas throughout2006 in the UK. Coal-red generation was helped in
part by a reduction in the average summer carbon
price (Q2 and Q3) rom 21.04 in 2005 to 17.91 the
ollowing year. Given the relatively small changes inuel prices, the lower carbon prices are likely to haveplayed a substantial part in this role reversal.
On the surplus side, improved hydrology in Iberia
and France, combined with a mild winter as well
as a temperate summer in continental Europe,
account or the alling emissions in Portugal, Spain
and France. Spain in particular saw hydroelectricgeneration increase by 32 percent and combined
cycle gas-red generation go up by 30 percent,
while coal-red ell by 15 percent.
So ar, we have seen the role o undamentals
uel prices, demand and weather in infuencing
emission levels in 2006. However, emissions arealso a unction o company behaviour, notably o
eorts to reduce emissions. Such eorts need to be
ramped up in Phase 2 and Phase 3 o the scheme to
achieve tougher overall reduction targets. How will
this be done? How much o this has already begun
in Phase 1? What did companies do to comply in2007?
Generally speaking, compliance will be a result o
internal abatement, trading, osets development
and changes in production patterns. In Figure 2.12we display the responses to our question asking ora companys main compliance strategy. Aside rom
Figure 2.13: Has the EU ETS caused your company to reduce its own emissions?N=420 (2008) and 447 (2007). Companies covered by EU ETS (2008) or CO2 regulation in general
(2007)
0%
10%
20%
30%
40%
50%
The EU ETS has not
caused any emission
reductions in our
company
The EU ETS has
caused reductions to
be planned but not yet
started
The EU ETS has
already caused
emission reductions in
my company
Don't know (2008) /
not relevant (2007)
2007
2008
Source: Point Carbon
Fundamentals can to a large extentexplain the increase in 2006 emissions
Do we see any signes o internalabatement?
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Table 2.1: Reported reduction activities by sector in the EU ETSReported emission reduction eorts by sector, weighted by 2005 emissions. The percentages indicate the share o companies
that have done something to reduce emissions in 2006, not the level o such reductions. Total volume represents the 2005
emissions o respondents installations.
the combination and other strategies, the most
requent is internal abatement. We will return to thisstrategy below.
Abatement
The veried emissions do not show indications o
large-scale abatement in the EU ETS. Emissions are
up in all sectors except or oil and gas. Nevertheless,
71 percent o the companies represented in a PointCarbon survey conducted in April 2007 had already
introduced some measures to reduce emissions
(Table 2.1). These measures were ound particularlyin the orm o uel switching or energy eciency.
We also asked about abatement in our 2007 and2008 carbon market surveys. The results o these
surveys are given in Figure 2.13. Compared to last
years survey, there is very little change in the share
o companies that report reducing or planning to
reduce emissions because o the EU ETS. Last year,
Sector Energy saving Fuel switch Process Output red.
Power&heat 31% 34% 23% 12%
Metals 19% 2% 54% 25%
Oil/gas 42% 10% 5% 42%
Cement/lime/glass 22% 37% 35% 5%
Pulp/paper 47% 21% 14% 17%
Other 38% 19% 13% 30%
Total 31% 27% 25% 17%
Figure 2.14: The EU ETS and current investments at company levelHas the price o carbon infuenced the degree o new investments in your company?
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
0% 10% 20% 30% 40% 50%
No
To some extent
Yes
2008 2007Source: Point Carbon
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Figure 2.15: The role o long-term carbon prices at industry levelHas the price o carbon infuenced the degree o new investments in your company?
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
0% 10% 20% 30% 40% 50% 60%
No importance
Influencing
calculation, but not
decisive
Decisive factor
2007 2008Source: Point Carbon
Figure 2.16: You can runHas your company considered moving production outside the EU ETS area because o carbon
costs? N=380. Companies covered by the EU ETS.
0% 20% 40% 60% 80% 100%
Yes, have already
moved production
Yes, have planned
to move production
Yes, are consideringmoving production
No
Source: Point Carbon
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2.3 CDM
Activity within Kyotos fexible mechanisms
specically the CDM grew signicantly in 2007,to 947 Mt and 12bn. Given that sCER prices are
much higher than in the primary market (16 vs.
10 in our calculations), the increased sCER volume
has signicantly boosted the total value o the CDM
market segment in 2007.
2.3.1 Primary CDM market
Some o the increased activity in the CDM market
is due to a tripling o issuance rates compared to
2006, with 76.6 m CERs having been issued in 2007.Although 2007 saw a signicant increase in infow
o new CDM projects, especially within renewables,
there is still a squeeze in terms o expected issuance
or the rst two years o the Kyoto commitment
period (2008-2009).
In early spring, the primary CER market prices or
immature projects sprung to about 9-11, but sincethen the price has been stable, perhaps increasing
slightly. The price movement was probably due toa sustained demand or primary CERs. In general,
prices in the primary CER market still depend
on project stage, project type and counterparty.
Registered projects etched around 12, while
issued CER attracted prices between 14 and 17.
Moreover, hydro projects traded at a slight discount
due to uncertainty over to what extent CERs romlarge hydro projects will be usable in EU ETS. Wind
projects, on the other hand, etched a slight premium
due to a good and stable perormance combined
with a high score on sustainability.
Gold Standard CERs traded at a premium o about
1-2 per tonne. One reason or this was healthy
demand combined with low supply, since only ourCDM projects have qualied under the standard so
ar.
Supply grew healthily over the year. The UNFCCC`s
pipeline o projects surpassed 2 800 projects in 2007,
compared to approximately 1 500 a year earlier.
However, two notable eatures were the constantdecline in size o projects and the increased infux o
small-scale renewable energy projects. Renewable
energy was the largest transacted project category
in 2007, accounting or 29 percent o total conrmedtransaction volume. Furthermore, energy eciencyalmost tripled its market share to 20 percent.
Figure 2.18: China in your handThe relative share o CDM country sellers (let) and buyers (right) in 2007
United Kingdom
46%
Japan
15%
Luxembourg
11%
Austria
3%
France
8%
Germany
7%
Other
10%
China
62%
Uzbekistan
2%
Other
7%
Mexico
4%
India
5%
Chile
2%
Brazil
8%
Indonesia
10%
Source: Point Carbon
Signicant increase in infow o newCDM projects in 2007
Still a squeeze o expected CER is-suance in 2008 and 2009
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The losers were projects reducing industrial gas
emissions. HFC-23 and N2O destruction projects
ell rom a combined 54 percent o 2006 volume to
only 22 percent in 2007. This development should
be taken to heart by those who have previously
criticised the CDM or channelling money into low-cost industrial gas projects rather than renewables.
There was a lot o talk about the market acing a
signicant bottleneck due to the EB process when
several developers blamed the down-writing o their
portolios on the rigorous approval process. Theremay be some truth to this, but it is certainly not
the only actor. Low perormance rates or certainproject types combined with general project delays
have also contributed to the slow issuance rate.
That being said, without reorm o the approval
process, the market could see yet another year with
a low issuance volume. The year did, however, endon a promising note, with a deal in Bali or a thorough
review o the CDM process. Private buyers solidiy
their dominance, with 78 percent o conrmed CDM
transaction volume in 2007 see Figure 2.17. Thisis up rom 58 percent in 2006. These buyers eat into
the shares o carbon unds and governments alike,
both o which have seen their relative market share
cut in hal.
On the supply side, China is still bigger than all the
rest, although it has inched down rom 70 percent in
2006 to 62 percent o transaction volume last year see Figure 2.18. Brazils volume is somewhat up
on our last update, whereas Indias volume is down.
Interesting newcomers in this league o top seller
countries are Indonesia and Mexico.
The UK reigns supreme among buyer countries,
which indicates that a sizeable share o buyers
in 2007 were nancial institutions rather thancompliance buyers. Luxembourgs 11 percent
supports this inerence. Japan is second on the list
at 15 percent up rom a surprisingly low 3 percent
last year suggesting continued compliance
buying by the countrys government, power sector
and heavy industry.
2.3.2 Secondary CDM market
The gold rush or primary CERs continued throughout
the year as numerous new participants entered themarket and started competing or market share.
HFC-23 and N2O projects were con-siderably ewer in 2007 than in 2006
China still by ar the largest CDMselling country
Figure 2.19: Evaluations o the CDM market, 2006-2008Share o respondents agreeing with given statements. Note: 2007 and 2006 surveys ask about the
CDM/JI market as a whole. N= 3176/2016/777.
0% 20% 40% 60%
The CDM market is
mature
The CDM market is a
success
The CDM market is the
most cost-efficient way
to reduce emissions
The CDM market
facilitates emissions
reductions
2008
2007
2006
Source: Point Carbon
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But unsurprisingly it was the sCER market that
attracted most attention. Secondary CER trading
was established as a signicant market segment o
its own in the course o 2007, albeit one still lacking
the liquidity o the EUA market.
The sCER market has changed almost beyond
recognition over the past year, with an estimated
total traded volume o 350 Mt compared to 40 Mt
in 2006. The Dec 08 sCER contract began the year
at 14 but ell throughout the winter months with
a declining EUA-price to an all-time low 10.70 inFebruary. By the end o May the price had recovered,
peaking at 17.45.
Looking at the EUA-sCER spread, sCERs were trading
at 90 percent o the EUA price in the early months o
2007. Back then, many assumed that the two prices
would converge. However, recent volatility in the
EUA market saw only moderate reaction in the priceo issued CERs in the secondary market. On 31
December, Dec 08 sCERs were worth 76 percent o
the EUA price (around 17.13) while the 08-12 strip
spread was at 73 percent o the EUA price.The market also saw the rst CERs traded on anexchange, when Nord Pool launched a CER contract
in June.
Last year saw some major milestones in the CDM
market. The moment we all had been waiting or
nally arrived when the international transaction log(ITL) went online and linked the Japanese national
registry with the CDM registry. Immediately
ollowing this, the rst CER spot trade took place.
The event removed some o the uncertainty in the
CDM market, as the lack o a delivery path had
been one reason cited or the CER price discount
compared to EUA prices.
The CDM Executive Board (EB) made some important
decisions last year, the most notable o which was
the decision in June to nally approve the guidelines
and procedures or Programmes o Activities (PoAs),
and their surprising decision in September to approvethe supercritical coal methodology or using less
GHG intensive technologies or energy production
based on ossil uels. Both decisions sent positive
supply signals to the market. On the other hand, the
EBs lack o agreement on several proposed biouelmethodologies constituted signals in the opposite
direction.
Moreover, the UNFCCC secretariat received greater
resources and took on more people to help the EB
in 2007. This gave the EB more time and capacity
to scrutinise projects and the request or review
at both registration and issuance stage increasedsignicantly, with a total o 100 projects put on review
throughout the year, compared to 23 in 2006. Also,
the additionality criteria have been interpreted more
strictly by the EB than in previous years. Throughout
the year, a total o 43 projects were rejected.
How well does the CDM market work? For thethird time, we asked our respondents to provide a
general evaluation o the project market this yearwith specic questions about the CDM (and JI).
The results show continuity above all. Respondents
see some more maturity in the CDM market, butthe level is still low, with only 12 percent agreeing
(Figure 2.19). Hal the sample still disagrees with the
notion that the CDM market is mature.
2.4 JI
During 2007, 16 Emission Reduction Purchase
Agreements (ERPAs) with a total volume o 12.7Mt were conrmed by market players. The ERUs
or these contracts are generated by projects
represented by renewables, nitrous oxide, biomass,energy eciency and ugitive emissions types. It is
notable that the N2O projects account or one-third
o total volume, ollowed by renewables and landll
projects (19 and 13 percent respectively). Early-stagenegotiations have been reported by market players
in energy eciency and landll gas projects.
On average, ERU price ranges have increased
compared to the previous year, with the price range
across contracts becoming narrower. While citedERU prices or standard o-take contracts varied
rom 6 to 10 depending on project risk, sellers
expectations or the ERU price were higher due to
the signicant increase o CER prices throughoutthe past year.
In 2007, the numbers and volumes o projectssubmitted to the JI supervisory committee (JISC)
or verication were boosted. Overall, 84 projects
with a total volume o 117m ERUs were submitted
to the JI Supervisory Committee (JISC) or public
comment during 2007, taking the pipeline to a total
sCERs traded 350 Mt in 2007, uprom 40 Mt in 2006
N2O projects account or 1/3 o totalJI volume in 2007
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may use is more constrained than in the voluntary
market, which is largely unregulated. The voluntary
market, on the other hand, permits the use o creditssuch as veried emission reductions (VERs), non-
veried emission reductions (ERs) and prospective
emission reductions (PERs), as well as CERs, ERUs,EUAs and other credits and allowances generated
or the compliance market.
Our denition excludes trades between project
developers and nancial institutions, where the nal
purpose o trading is to supply compliance carbon
credits to compliance buyers. It also excludes
trades intended to ull agreements between theJapanese government and major companies to
reduce their GHG emission intensity, even though
these are termed voluntary. This is because these
agreements represent industry-wide commitments
intended as a strong alternative to binding targets inreaching Japans Kyoto goals, with a view to making
legislation unnecessary.
2.5.2 Volumes and values
Combining data rom brokers and voluntary oset
credit providers in the US and Europe, as well as
rom the voluntary Chicago Climate Exchange (CCX),
we nd that the voluntary market traded around 55
Mt CO2e in the rst three quarters o 2007. The total2007 volume was an estimated 75 Mt compared to
less than 20 Mt in 2006.
Our market size assessment indicates strong growth
in the voluntary carbon market. Furthermore, in our
survey, 45 percent thought that the voluntary market
had grown more mature over the past year (see
gure 2.22). On the negative side, only ten percent
thought o the voluntary market as transparent.
A majority o the transaction volume takes place in
the US, where more than 30 Mt have traded this year
to date, or about 60 percent o the total. The CCX
accounts or hal this volume, with the remainder
made up by the corporate voluntary market andthe consumer retail market. Carbon credit prices
in the US vary between $2/tonne and $15/tonne,
depending on project type.
2007 was the year in which North American market
players announced ambitious carbon strategies,
rom calculating ootprints to developing internal
abatement opportunities, or buying, building or
Total voluntary volume in 2007 esti-mated to 75 Mt
Prices range rom $2/tonne to $15/tonne or voluntary project credits
Figure 2.21: Much that separates, a little in common?The range o carbon credits available or purchase by voluntary market participants. Note that carbon credits
originally generated or compliance purposes could also end up in the voluntary market. NGAC = New South Wales
Greenhouse Gas Abatement Certicates.
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partnering in developing oset projects. Estimatedtransactions involving new projects quadrupled in
2007. Subsequently, a ourold increase is expected
or oset credits registered in 2008, while the number
o projects rom new contractual agreements couldslow down or even decline.
Outside the US, the voluntary market is strongly
infuenced by the Kyoto market, with CDM and JI
project developers supplying VERs to voluntary
buyers. Some oset credit providers also oer CERs
or non-compliance purposes.
We estimate that voluntary CER transactions willtotal only 1-3 Mt in 2007, which means that there
will be no eect on CER prices. On the other hand,
i transparency and standards in the voluntary
market do not improve over time, CER demand rom
voluntary buyers could increase signicantly in the
coming years.
2.5.3 Supply
To satisy demand, developers are now scramblingto create new projects that meet standards
complementing or supplementing the CCX Carbon
Financial Instrument. Credits may not be available
yet, but the quality o the pipeline, in terms o
expected certication through the Voluntary Carbon
Standard, Gold Standard, CCB standard, etc, isresponding to market demand or osets rom
specic project types linked to established standards
and methodologies.
The voluntary US supply pipeline totals 140 Mt,
counting all projects or which we have data. Waste
methane and energy eciency projects dominate
the US pipeline in volume terms. Looking at Kyoto
projects, potential VER supply rom CDM projectshas a current maximum volume o 100 Mt to theend o 2007.
Voluntary markets have an impact on compliance
markets not only by trading the same or similar
credits, but also by providing models or emerging
compliance markets. In particular, the currentpipeline o US voluntary oset supply will infuence
the volume, type and quality o osets available to
the 10-state RGGI.
Current oset providers to the voluntary US market
also have a voice in the development o a uture US
cap-and-trade scheme. We may, or example, see a
greater emphasis placed on agricultural projects andcarbon capture and storage (CCS) in the US than is
currently the case in the CDM or EU ETS.
Finally, the quality o voluntary oset credits
worldwide will infuence public opinion and thereputation not just o the voluntary market, but o
emission trading in general. Forty percent o those
taking our 2008 survey share this concern, as
indicated in gure 2.18. Conversely, 28 percent think
there is no signicant reputational risk.
Figure 2.22: Voluntary carbon: Prospect or peril?Share o respondents agreeing with given statements. N=2998
0% 10% 20% 30% 40% 50%
The voluntary carbon market is transparent
The voluntary carbon market produces real
emissions reductions
The voluntary carbon market fosters
innovation in emission reduction methods
The voluntary carbon market poses a risk for
the reputation of the compliance markets
The voluntary carbon market is more mature
now than one year ago
Source: Point Carbon
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3. Carbon markets towards 2012The rst Kyoto commitment period, which endson 31 December 2012, is set to be dominated
by the EU ETS and CDM on the market side. The
interlinked EU ETS and CDM markets will see the
greatest cumulative volume and value, as they are
consolidating and getting more sophisticated. Inaddition, the next ve years will see the JI market
deliver its rst credits and possibly an emerging
market in national Kyoto allowances or AAUs.
Beyond Kyoto, the ten-state RGGI has already
produced the rst US compliance trade, and more
is expected.
3.1 Expectations or global 2008 volumesand trends
The total traded volume in global carbon markets
in 2007 was 2.7 Gt, valued at just over 40 bn. We
expect this to grow to 4.2 billion tonnes CO2e in
2008, up 56 percent rom 2007 see Figure 3.1.
The EU ETS maintains its position as the largest
market. Traded volume in the EU ETS is expectedto be 2.6 Gt in 2008. At current prices, this would
be equivalent to 63bn (US$ 92bn).
We expect that the general trend o increasingtraded volumes will continue as the global market
becomes more mature and sophisticated. An increase
in contract types, more players and markets and
greater competition between market players (such
as exchanges and brokers) will together generate
momentum or higher volumes. As a consequence,liquidity providers will be attracted to this market.
On the other hand, turbulence in global nancial
markets may contribute to less vigorous growth in
transacted volumes.
We expect that the 2008 carbon market will dier
rom 2007 in several ways. First, the EU ETS Phase
2 is considerably tighter than Phase 1. Moreover,the start o short-term prompt trading or Phase 2,
where only orward trading was seen previously,
is expected to contribute to increased traded
volumes.
Second, the EU climate and energy package,
launched on 23 January this year, has sent apotentially bearish long-term signal to the project
markets by placing uncertainty on the uture o
the Clean Development Mechanism (CDM). More
immediately, the reduced average credit limits onCER/ERU and the tight Phase 3 are expected todampen EUA-sCER swaps.
Carbon market expected to grow 56percent in 2008
Figure 3.1: Stairway to the frst Kyoto period, take 2Reported and estimated contracts 2005-07; orecast or 2008, Gt CO2e
0
1
2
3
4
5
2005 2006 2007 2008 (forecast)
Annualvolume(Gt
)
Other
JI
CDM total
EU ETS total
Source: Point Carbon
64%
104%
56%
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Third, new policies in key countries such as the US
and Australia imply that we will see trading in newmarkets. This will be accelerated by the ongoing
negotiations under the Bali action plan.
3.2 EUA market
In the EU ETS, which covers about 2.1bn tonnes
CO2e annually o underlying assets, new nancial
instruments are developing and their use is
spreading. What are the main developments in
the EU ETS market rom a trading perspective?
What eects does the EU ETS have on company
behaviour when it comes to abatement, investment,production and other ways o managing emissions?
And beyond current bid/oer spreads, what prices
do compliance and nancial players oresee or the
period?
3.2.1 EU ETS in 2008
The 2007 volume in the OTC market and on the
exchanges corresponds to almost ve times the
annual Phase 2 shortage o about 300 Mt in thepower and heat sector. This gap needs to be lled
every year. We estimate that in 2008 this volume
will increase to about seven times the power and
heat gap.
There are several reasons why we expect this
growth. First, the tightness o the Phase 2 cap isexpected to increase the traded volume compared
to 2007, simply because more players are short o
allowances. Industrials that were long in Phase 1
are in general balanced or slightly in Phase 2, while
power and heat installations that were short inPhase 2 have now become even shorter.
Figure 3.2 displays the shortness o companies
covered by the EU ETS, as reported in our 2008
survey. Only 15 percent o the respondents expectto be long in Phase 2, that is, to have an allocation
that is sucient or compliance and surplus EUAs to
sell. About one-third expected to be in the powersector will need their ull allocation, credit limit and
extra EUAs. Shortness will mean more trading since
ewer can ignore the EU ETS. As a consequence,
Phase 2 volume will go up compared to Phase 1.
Second, a tighter cap gives higher volatility becauseprices become more sensitive to changes in
undamentals. This will be attractive to nancial
players as well as compliance traders, consequently
increasing the traded volume. As seen in Figure 3.3,
EU ETS to trade seven times powerand heat shortage in 2008
Figure 3.2: Long on shorts.EU ETS company allowances and credit limits compared to expected emissions in Phase 2. N=433.
Companies covered by EU ETS.
0% 10% 20% 30%
Allocation is sufficient for compliance. We will have
surplus EUAs to sell.
Allocation is sufficient for compliance. We have no
surplus EUAs.
Allocation + some of the credit limit needed for
compliance.
Allocation + full credit limit needed for compliance.
Allocation + full credit l imit needed. We also need to
buy EUAs.
Allocation + full credit l imit needed. We also need to
buy EUAs. We will have surplus CERs to sell/swap.
Don't know
Source: Point Carbon
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Figure 3.4: Rapid growth in optionsOptions volume (notional) on the ECX, January 2007 - January 2008. The volume includes options
traded on the exchange and options traded elsewhere but cleared on the exchange.
0
5
10
15
20
25
30
35
40
45
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
NotionaloptionsvolumeinEUAmillion
Source: ECX
Figure 3.3: Gearing up or a volatile 2008?EUA volatility and moving-average daily volume (OTC and exchanges) in 2007 and 2008 to date.
0
1
2
3
4
5
6
7
8
9
10
2/1/07
25/1/07
19/2/07
14/3/07
10/4/07
3/5/07
29/5/07
21/6/07
16/7/07
8/8/07
31/8/07
25/9/07
18/10/07
12/11/07
5/12/07
2/1/08
25/1/08
19/2/08
DailyEUA
volume(Mt).
0%
10%
20%
30%
40%
50%
60%
70%
Volatility
30-day MA volume EUA 40-day volatility
Source: Point Carbon's Carbon Market Trader
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the 30-day moving average on daily volume in 2007
remained quite stable despite lower volatility in the
second hal o 2007, while it has increased in 2008
so ar, along with higher volatility.
Third, the act that Phase 2 has now begun implies
that there will be compliance buying on the prompt,
and undamentals such as uel prices and weather
will contribute to increased volatility. This, in turn, will
lead to higher volumes. Factors such as temperature,
wind, precipitation and power outages will have an
immediate impact on EUA prices.
Fourth, Phase 2 will involve signicantly more
auctions than Phase 1, which will contribute directly
to increased transaction volume.
Finally, option trading has increased rapidly in the
EUA market in the last ew months, especially in
January 2008 see Figure 3.4. The EUA options
market took o in 2007, with the ECX reporting a
notional volume o 58m EUA options (see Figure
3.3). This growth continued into January 2008, whichsaw 45m EUA options traded on the exchange.
Our survey results refect the penetration o options
in the carbon market. Figure 3.5 demonstrates
how 55 percent o our respondents in the EU ETS
and CDM markets have either entered or plan toenter the options market. CER project developers
and aggregators are the most active in the options
market almost two-thirds o this group state that
they have traded options or plan to do so. In the
EU ETS, this was the case or around hal o therespondents.
Options trading expected to growsignicantly in 2008
Figure 3.5: Options in the EUA and CER marketsHave you bought/sold or will you buy/sell EUA or CER
options? N=1,254. Respondents in the EUA/CER market.
0% 10% 20% 30% 40% 50%
Have not/will not
buy/sell options
Yes, will buy/sell
options
Yes, have bought/sold
options
Source: Point Carbon
Figure 3.6: The fnal cutComparable caps in Phase 1 and Phase 2. Includes EU27 and Norway
1,500
1,700
1,900
2,100
2,300
2,500
Phase 1 cap Phase 2 Submitted EC Cuts Final phase 2 cap BAU Emissions
Mt/year
Source: Point Carbon
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Figure 3.7: Willingness to buy/sell EUAs at various pricesN=311. Companies with emissions covered by the EU ETS.
0%
20%
40%
60%
80%
100%
0-10
10-15
15-20
20-25
25-30
30-35
35-50
50-100
>1
00
/tonne
Share
ofrespon
dents
would buy at max
would sell at min
Source: Point Carbon
Financials or companies with an EUA allocation may
either hedge their EUA positions directly through
options, or as part o structured EUA-sCER swap
deals. Options are attractive or liquidity providers,
as they do not require the provider to take a positionin the underlying commodity.
Option trading is expected to increase as volatility
grows, and the hedging and re-hedging o options
also produces signicant trading volume o EUA
orwards.
Despite the growth momentum in the EU ETS,
there are also actors pulling against the volume. For
instance, industrials are likely to reduce their EUA-
sCER swap trades due to the stricter credit limit
proposed by the EC. Viewed in isolation, this will
reduce the transacted volume.
On the other hand, less swap trading could mean a
higher EUA price, as ewer credits will be available in
the market. This could cause growth in volume that
outweighs the relative decline in EUA-sCER swaps.
Our 2008 orecast or the EU ETS is comparable tothe underlying assets, i.e. the total 2008 allocation.
In comparison, the turnover in mature markets, such
as the Nordic power market and the oil market, is 6-
700 percent. In this context the carbon market is stilla young market with a considerable upside.
3.2.2 Towards 2012 and beyond
In its rulings on Phase 2 national allocation plans,
which took place rom November 2006 to October
2007, the EC was unquestionably tough. As a
consequence, the caps in 2008-2012 are muchtighter than in Phase 1.
The initial shortage in the 2008-2012 period creates
a demand or real emission reductions, either at
home or in non-Annex 1 countries.
The overall cap or Phase 2 or EU-28 (EU-27+Norway)is currently at 2 103.5 Mt/year. In total, the EC has
cut the allocation by 245 Mt/year or 10.4 percent compared to the allocation suggested in the NAPs
(see Figure 3.7).
The largest cuts in volume terms have beenrequested in Poland (76 Mt), Germany (29 Mt) and
Bulgaria (25 Mt). The largest cuts in relative terms
have been requested in countries located in Eastern
Europe, with the three Baltic States (about hal) and
Bulgaria (37 percent) at the top o the list.
The credit limits, dened as the maximum CDM/JIvolumes that can be used or compliance purposes
in Phase 2, were set quite generously, as every
country was guaranteed a minimum 10 percent.
Table 3.1 shows the suggested caps by member
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Table 1: The decided and undecided ones..The table shows the status or the Member States on whose NAPs the European Commission has
made a decision and or those countries where the EC has not yet made a decision. All in Mt/year.
COUNTRY NAP EC decision Reduction [Mt/%] Credit limit
AUT 32.8 30.7 2.1 (6 %) 10.0 %
BEL 63.3 58.5 4.8 (8%) 8.4 %
BGR 67.6 42.3 25.3 (37%) 12.6 %
CYP 7.1 5.5 1.6 (23%) 10.0 %
CZE 101.9 86.8 15.1 (15 %) 10.0 %
DEU 482.0 453.1 28.9 (6%) 22.0 %
DNK 24.5 24.5 0.0 (o%) 17.0 %
ESP 152.7 152.3 0.4 (0.3%) 20.0 %
EST 24.6 12.7 11.7 (48%) 0.0 %
FIN 39.6 37.6 2.0 (5%) 10.0 %
FRA 132.8 132.8 0.0 (0%) 13.5 %
GBR 246.2 246.2 0.0 (0%) 8.0 %
GRC 75.5 69.1 6.4 (8%) 9.0 %
HUN 30.7 26.9 3.8 (12%) 10.0 %
IRL 22.6 22.3 0.3 (1.3%) 10.0 %ITA 215.2 201.6 13.6 (6%) 15.0 %
LTU 16.6 8.8 7.8 (47%) 20.0 %
LUX 4.0 2.5 1.5 (38%) 10.0 %
LVA 7.7 3.4 4.3 (56%) 10.0 %
MAL 3.0 2.1 0.9 (30%) -
NLD 90.4 85.8 4.6 (5%) 10.0 %
NOR 15 15 0.0 (0%) 20.0 %
POL 284.6 208.5 76.1 (27%) 10.0 %
PRT 35.9 34.8 1.1 (3%) 10.0 %
ROM97.6 75.9 21.7 (22%) 10.0 %
SVK 41.3 32.6 8.7 (21%) 7.0 %
SVN 8.3 8.3 0.0 (0%) 15.8 %
SWE 25.2 22.8 2.4 (10 %) 10.0 %
TOTAL (EU28) 2348.4 2103.4 245 (10.4 %) n.a.
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state, the EC decision and the credit limit as
originally set beore the launch o the EC proposalon 23 January this year.
It is generally accepted that the EC did a good job insetting the caps, but was more generous in setting
the credit limit. Consequently, Phase 2 could in
theory produce no emissions reductions in Europe,
just credit imports rom CDM and JI countries.
The Commission corrected this through the EUETS review and the Phase 3 proposal in January
this year. The undamental balance o the EU ETS
in Phase 2 is now merged with that o Phase 3
(2013-2020). This is because EUAs can be banked
without limits rom one year to the next. Higher
Phase 3 prices should thus also translate into higherPhase 2 prices.
All the proposals in the EC energy and climate
package are to some extent related to the overall
EU climate and energy targets, i.e. a 20 percent
reduction in GHG emissions, a 20 percent share orenewables in nal energy consumption and a 20
percent increase in energy eciency. All targets
would be achieve
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