the carbon market karan capoor world bank carbon & environmental finance biocarbon fund...

The Carbon MarketKaran Capoor

World Bank

Carbon & Environmental Finance

BioCarbon Fund

Washington DC, 12 September 2005

The findings and opinions expressed in this paper are the sole responsibility of the authors. They do not necessarily reflect the views of the International Emissions Trading Association (IETA) or of IETA member companies, who cannot be held responsible for the accuracy, completeness, reliability of the content of this study or non-infringement of third parties’ intellectual property rights. The findings and opinions expressed in this paper also do not necessarily reflect the views of the World Bank, its executive directors, or the countries they represent; nor do they necessarily reflect the views of the World Bank Carbon Finance Business Team, or of any of the participants in the Carbon Funds managed by the World Bank. Finally, findings and opinions expressed in this paper do not necessarily

represent the views and opinions of Evolution Markets LLC or of Natsource LLC. The CF-Assist program of the World Bank Carbon Finance Business funded this research.

Why a Carbon Market?

• Regulations, present or anticipated, create constraints on greenhouse gas (GHG) emissions of governments, firms (e.g. Kyoto Protocol obligates industrial Parties to reduce emissions by avg 5 % below their 1990 emissions over 2008-12.

• Since GHGs mix in the atmosphere, it does not matter where emissions are reduced

• Compliance with regulation can be achieved through in-house (“make”) or flexibly through purchase (“buy”) “GHG commodities”, giving rise to the Carbon Market

Structure of the Carbon Market

Allowance Markets

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

Project-Based Transactions

JI and CDM

Voluntary

RetailOther

Compliance

Annex BNon-Annex B

The Kyoto Protocol

• Assigns GHG emission targets to Annex B countries between 2008 and 2012

• 3 Flexibility Mechanisms

- Joint Imple-

mentation

- Emission

s Allowance Market

- Clean Development

Mechanism

EU Emissions Trading Scheme

• Caps over 40% of EU CO2 emissions• 2 phases : 05-07 and 08-12

• JI and CDM authorized…• But NOT LULUCF (review in 2006)

Canada

• Sectoral covenants being negotiated• Domestic carbon market

• At least 50 MtCO2e through flexibility mechanisms

Japan

• National Policies still in the making

• Firms and increasingly government active on CDM market

USA

• Policies constraining GHG emissions in various States (e.g., Oregon, Mass., etc.)

• Chicago Climate Exchange (CCX), private allowance market

Voluntary Action by Firms and Individuals• A large number of companies have engaged in

programs to reduce their GHG emissions even absent regulations

– Various motivations: inter alia, corporate responsibility, strategic positioning, competitive advantage, learning-by-doing, public relations, etc.

– These firms have large-scale emissions (2002 survey: 18 firms with more CO2 emissions than France had voluntary targets for 2010)

• Individuals and Firms have engaged in purchases of small amount of emission reduction to become “carbon neutral” (event, corporation, or product)

Methodology

• Limited information on carbon transactions is publicly available

• This study is based on material provided by Evolution Markets LLC, Natsource LLC, and on interviews with many market players

• Database of 487 project-based transactions (signed or advanced stage of negotiation) + aggregated data on allowance markets

Volume Traded Through Projects: Growing (in million tCO2e)

(Jan-Apr)

0

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005

Main Buyers: European Governments and Firms In percent of volume purchased From Jan.04 to Apr.05

Other EU32%

UK12%

Gov. Netherlands16%

Japan21%

New Zealand7%

Canada5%

Australia3%

USA4%

Supply Concentrated in Middle-Income CountriesIn percent of volume sold from January 2004 to April 2005

OECD14%

TransitionEconomies

6%

Africa0%

India31%

Rest of Asia14%

Brazil13%

Rest of Latin America22%

Share of LULUCF 4%Down from 7% in 2002-03In percent of volume purchased from Jan.04 to Apr.05

Landfill GasCapture

10%

Hydro12%

Wind7%

Biomass11%

AnimalWaste18%

EnergyEfficiency

2%

Forestry(LULUCF)

4%

HFC25%

N2O4%

Other7%

Average LULUCF Price was lowfor volumes purchased from Jan.04 to Apr.05

LULUCF Prices

From Jan ’04 to April ’05: $2.27

From Jan ’05 to April ’05: $4.26 (mainly retail)

Highest single price: NSW for compliance purposes (price not disclosed)

Lowest price: US voluntary markets (average $1.87)

Prices Depend on Risks(weighted average prices from Jan. 2004 to April 2005 in U.S.$ per metric tonne of CO2e)

$0.00

$2.00

$4.00

$6.00

$8.00

ER VER CER ERU

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005

Known Estimated

Total Value of Contracts over 1 b$ (data in million U.S.$, nominal)

(Jan-Apr)

Allowance Markets Exploding (in million tCO2e)

(Jan.-March)

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005

Insights on Price Differential• Large price differential:

– EU Allowances: 7 up to 17 euros / tCO2e (spot and forward contracts)

– Project-based: 3 to 7+ dollars / tCO2e (forward contracts on expected CERs)

• Allowances and project-based contracts have very different risk profiles:

– Project and country risks: high in CDM, none in allowances

– Compliance/regulatory risks: high in CDM, none in allowance

– Delivery risks: higher in CDM

Market for LULUCF

• Very few transactions (4% total volume)

– Most LULUCF transactions are outside of the Kyoto Protocol (Australia, U.S. or ‘retail’)

– Three signed deals under Kyoto:• Moldova PCF• Plantar PCF• Romania PCF

• Key reasons:

– Political reluctance to LULUCF– Late decision on LULUCF rules (COP9)– LULUCF barred from EU-ETS– Permanence?

Outlook• The market has responded to the entry into force of

the Kyoto Protocol and of the EU ETS – now a real compliance market

• Volumes should increase rapidly for both project and allowance segments…..

• … although important uncertainties still need to be addressed

• Overall supply / demand picture (e.g. under Kyoto Protocol) is still unclear:

– How much volume will JI/CDM deliver? Issue of projects lead-time

– How many allowances will Russia and Ukraine bring to market?

www.carbonfinance.org

State and Trends of the Carbon Market 2005 Report available at