State and Trends of the Carbon Markets

Alexandre Kossoy Climate Policy and Finance Department

World Bank

Aviation and Climate Change Seminar, ICAO Headquarters, Montréal, Canada, 23-24

October 2012 1

$0

$60

$120

$180

2005 2006 2007 2008 2009 2010 2011

Other project-based

Other allowances

Secondary CER

Primary CER post-2012

Primary CER pre-2013

EU Allowances

Steady increase of global market value

135

176

11

31

63

(in Billion US$)

144

159

0.3 0.3

EU and other markets increasing value

EU ETS Allowances

147.8

JI AAU

pre-2013 CDM

1.0

-32% +11%

Secondary

CDM + JI

23.1

(in Billion US$)

N. America

0.5

-18%

New Zealand

0.4

+249%

-36% -49%

post-2012

CDM

2.0

+63%

+12%

EU ETS: how to deal with oversupply

• Oversupplied Phases II + III

reflected in historic low

prices

• Increasing trading volumes

as demand shrinks:

financially-driven trades

• Policy intervention under

discussion to deal with the

imbalance: supply set-aside

(€ per tCO2e)

EUA, secondary CER & primary CER prices

€1

€6

€11

€16

€21

€26 EUA

Secondary CER

Primary CER

An emerging post-2012 CDM market

• Pre-2013 market closing and a

post-2012 market emerging

• EU ETS oversupply and

uncertain non-EU eligibility

criteria and volumes lead to

weak contractual obligations

– Provisional safety clauses

– “Quasi-options”

• More prominent Africa as

buyers seek risk management

and portfolio diversification

Pre-2013 and post-2012

market values (US$ million)

0

2,000

4,000

6,000

8,000

2007 2008 2009 2010 2011

Pre-2013 CER

Post-2012 CER

f(price) = macro-economic scenario & asset risk profile

€ 1.00

€ 6.00

€ 11.00

€ 16.00

€ 21.00

€ 26.00

Daily prices (€)

EUA

Secondary CER

Primary CER

Primary CER post-2012

2-y of relatively low volatility & stable prices

EU debt crisis & oversupply post-2012

(CERs & EUAs decouple)

Peak of demand in "sellers market"

2008-09 Financial crisis and economic downturn

CDM & JI Buyers (pre-2013)

2011

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

an

nu

al vo

lum

e o

f C

DM

&J

I tr

an

sa

cti

on

s (

MtC

O2e)

Other & Unsp.

Other Europe

UK

Switzerland

Denmark, Finland, Norway, and Sweden

France, Germany, Italy, Netherlands, Portugal, and Spain

Japan

Other Europe includes Ireland, Austria, Belgium, Luxembourg, Iceland and Greece.

Other and Unsp. include s USA, Australia, Canada, New Zealand, Rep. of Korea, and others unspecified.

Japan 1%

France, Germany,

Italy, Netherlands, Portugal, and Spain

19%

Denmark, Finland,

Norway, and Sweden

6%

Switzerland 23%

UK 40%

Other Europe

4% Other & Unsp.

7%

Who’s selling Pre-2013

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Pre

-20

13

vo

lum

es t

ran

sa

cte

d (

MtC

O2

e)

Other & Unsp.

Africa

Latin America

Others Asia

China

Latam 2%

China 87%

Others Asia 7%

Africa 4%

Post-2012

China 43%

India 5%

Vietnam 7%

Others Asia 13%

Latam 11%

DRC 5%

Nigeria 2%

South Africa

1%

Others Africa 13%

CDM Sectors pre-2013

2011

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

pre

-20

13

vo

lum

es tra

nsa

cte

d (

MtC

O2

e)

Other & Unsp.

LFG + waste mng't

E.E. + Fuel switch

Renewables

Industrial gasHydro 26%

Wind 30%

Biomass energy

5%

Other Renewables

2%

E.E. + Fuel switch

7%

LFG and other waste

mg't 11%

CMM and other fugitive

9%

N2O 1%

HFC 3%

Others 6%

Virtual demand until 2012

Contracted

(nominal)

Contracted (risk-

adjusted) Demand for Kyoto

Assets 2008-12

• Demand: 1.64 billion tCO2e

• Supply:

– 2.6 billion CERs & ERUs +

280 million AAUs =

2.86 GtCO2e (nominal)

– 1.15 + 0.28 = 1.43 GtCO2e (risk-

adjusted)

• Aggregate picture; not all buyers purchased the volume they need

• Residual demand: 290 MtCO2e (136 Mt in 2011)

290 MtCO2e,

mostly from EU

governments

CDM

&

JI

CDM

&

JI

AAU

1.43 GtCO2e

1.64 GtCO2e

2.86 GtCO2e

AAU

0.28 Gt

2.6 Gt

0.28 Gt

1.2 Gt

*Including Iceland, Liechtenstein, and Norway

** Including New Zealand, North America, and Switzerland

MtC

O2e

Market projections indicate

constrained demand over 2013-20

Maximum demand (conservative scenario) Supply

CDM others CDM ETS-eligible

0

1000

2000

3000

4000

Other Annex B** Japan AustraliaEU gov* EU ETS

3.2 GtCO2e

New CER sub-

limit in the EU-

AU link proposal

Regulatory improvements & new

markets popping up worldwide

• Durban decisions increased the

regulatory clarity on existing market

and advanced on new market

instruments

• Several jurisdictions passed climate

bills, including market initiatives

– Australia, California, Quebec, Republic

of Korea, Mexico

• AU – EU linkage no later than 2018

• New initiatives signal that solutions

to climate challenge will emerge.

What has been done so far

• Cumulative pCERs transacted equals 2.4 bln CERs in 2002-11

… which is larger than the annual EU ETS emissions

… and 80% of Kyoto’s total targets (~3 bln tCO2e over 2008-12)

• ERPAs reach US$28 bln (and will support about US$150 bln in

low-carbon investments, mostly from private sector) …

… vs. all clean energy investments to developing countries of about

US$80 bln annually in 2010 and 2011

• … at long-term average price of $10-$15 per ton …

… which is much lower than the marginal abatement cost for

developed countries (reduce emissions through domestic measures)

OVERVIEW OF CARBON FINANCE VEHICLES

€20-28 per tCO2e

($31-43 billion p.a.)

Copenhage

n high

€12-20 per tCO2e

($5-9 billion p.a.)

Copenhage

n low

€35

€40

€ 0

€ 5

€ 10

€ 15

€ 20

€ 25

€ 30

€39 per tCO2e

($150 billion p.a.)

2 degrees

Where Next for Carbon Markets ?

€ 0.00

€ 5.00

€ 10.00

€ 15.00

€ 20.00

€ 25.00

€ 30.00

OVERVIEW OF CARBON FINANCE VEHICLES

15

A Growing Menu of Climate Finance

Instruments to Catalyze and Leverage

15

OVERVIEW OF CARBON FINANCE VEHICLES

Adaptation Mitigation

FY11 FY12 FY11 FY12

$2.3 bln

$4.6 bln

$7.0 bln $7.1 bln

WB: Climate co-benefits in IBRD/IDA lending

OVERVIEW OF CARBON FINANCE VEHICLES

17

A Growing Menu of Climate Finance Instruments to

Catalyze and Leverage

17

OVERVIEW OF CARBON FINANCE VEHICLES

18

The Unit’s first generation of carbon funds

Prototype Carbon Fund

April 2000

$220,000,000

World’s First Global Carbon Fund

Community Development Carbon Fund

March 2003

$128,600,000

Poorest country focused

BioCarbon Fund Tranches I & II

May 2004

$90,400,000

Afforestation, Reforestation, REDD+

& soil carbon

Netherlands Clean Development

Mechanism Facility

May 2002

**

Pioneer purchaser of CDM

Danish Carbon Fund

January 2005

€ 90,000,000

Government & private sector

Spanish Carbon Fund

March 2005

€ 220,000,000

Government & private sector

Umbrella Carbon Facility Tranches

I & II

August 2006

€ 904,100,000

Adding liquidity to market at key moments

Italian Carbon Fund

March 2004

$155,600,000

Government & private sector

Carbon Fund for Europe

March 2007

€ 50,000,000

Governments & private sector

Netherlands European Carbon

Facility

August 2004

**

Purchasing JI

** Unpublished

OVERVIEW OF CARBON FINANCE VEHICLES

Private Sector Partners F

ina

nc

ials

O

il &

Ga

s

Uti

liti

es

In

du

str

ials

O

the

rs

OVERVIEW OF CARBON FINANCE VEHICLES

THE UNITED KINGDOM

THE UNITED STATES

JAPAN

SWITZERLAND

THE EUROPEAN COMMISSION

SPAIN

GERMANY

AUSTRALIA

NETHERLANDS

AUSTRIA

SWEDEN

FINLAND

DENMARK

ITALY

NORWAY

REGIONAL GOVERNMENTS OF

BRUSSELS-CAPITAL, FLEMISH

AND WALLOON REGIONS

IRELAND

AGENCE FRANÇAISE

DE DÉVELOPPEMENT JAPAN INTERNATIONAL

COOPERATION AGENCY

LUXEMBOURG

PORTUGAL

Public Sector Partners

OVERVIEW OF CARBON FINANCE VEHICLES

21

Responding to the challenges in the market (1 of 2) –

preparing for the future with market readiness support

FCPF Readiness

Fund

National &

sub-national

REDD+

pioneer

Capacity

building to

support

market based

tools for GHG

reduction

Guiding readiness and carbon

finance for REDD+

Forging partnerships between

developed and developing

countries

Enhancing capacity building and

technical assistance

Supporting countries’

development of readiness

component for market

instruments

Helping developing countries

explore, pilot and test emissions

trading

Building on country priorities

for low-carbon growth

Partnership for

Market

Readiness

$240 million

$100 million*

36 country

participants

including 13

donor

governments

25 country

participants

including 10

donor

governments

WB Facility Focus Resources Partners Program

*Target, current $90 million raised

OVERVIEW OF CARBON FINANCE VEHICLES

22

Responding to the challenges in the market (2 of 2) –

pairing readiness with action: carbon credit purchases

FCPF Carbon Fund

Testing

purchase of

REDD+ credits

Scaling-up

carbon

finance

Guiding readiness and carbon

finance for REDD+

Forging partnerships between

developed and developing

countries

Pioneer of PoAs – innovate to

broaden reach of CDM

Utilize carbon finance to scale up

systematic approaches to low

carbon growth

Testing ground for new

mechanism purchases

$220 million

$147 million^

7 public and 2

private and 1

non-profit

participants

6 selling

country, 3

buying

country and 2

donor

participants

WB Facility Focus Resources Partners Program

^All components

Scale up of

afforestation

&

reforestation

and soil

carbon

Scaling up afforestation and

reforestation

Piloting soil carbon sequestration

including rice paddies, wetlands,

grasslands and pastureland mgt.

Exploring landscape accounting

approach and valuation of

ecosystem services

$90 million in

tranches 1&2,

$75 million

target for

Tranche 3

Anticipating

mix of public

and private

participants BioCarbon Fund

Tranche 3

Thank you