SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Market Situation SOFOFA, March 2005 Andrei Marcu President International Emissions Trading

SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS

Market SituationSOFOFA, March 2005

Andrei Marcu President

International Emissions Trading Association


Kyoto’s fundamental architecture

National emissions caps, from countries according to stage of development and responsibilities

Efficiency and incentives through international market mechanism• Trading in allocated instruments e.g. EUA• Global reach & creation of additional credits

through project offsets e.g. CDM & JI


Projects,CDM/JI

European A

llowances

& K

yoto Units

EU

25+X

Australia,USAK

yoto

Uni

ts

Kyoto Units?

Japan

Kyoto Party-Level

Entity-Level

Non-Kyoto Party

Global GHG Market

Green Credits?

Russia/Ukraine

? ?

Can

ada


Demand/Supply balance

Demand•3 markets that have KP commitments: Canada, Japan, EU

EU: regulatory marketCanada: about to set up a regulatory marketJapan: voluntary commitments

•US markets ?? State level market & voluntary schemes

Elements to be considered•Quantity•Quality•Time horizon


Demand/Supply

Two types of demand

•Country demand to meet KP commitment

•Company demand to meet Domestic obligation under the DET

Quality to meet

•CER from CDM

•AAUs from allocation of countries under the KP


Canada

•Official overall shortage – about 250 - 330 Mt Co2e/ year

•Company shortage 35-55 MtCo2e/yr

•Government purchase program – quantity unknown(30-100 Mt)

•Quality•CERs from CDM•AAU but not surplus from Eastern Europe


Japan

• No official regulatory scheme to create demand

•Japanese commitment under the KP

•Keidanren made voluntary commitments to be me with CDM/JI

•Japanese companies active in Latin America (Chile) and SE Asia


European ETS – Permits and Allowances

Permits: Site-specific Set monitoring and

reporting obligations (EU Guideline)

Set obligation to hold allowances matching emissions each calendar year

Non-transferable

Allowances: Issued by Member

States Entitlement to emit

a ton of CO2 (e) Held in the national

registry system Tradable


Linking Directive

•CDM credits accepted independent of the KP

•No nukes

•No LULUCF

•Hydro – WC on Large Dams

•Review as part of the 2006 review

•Amount of CER per installation to be determine by each MS


How can CERs and ERUs be used in the ETS?

EU ETS and Linking directive• Under the EU ETS each installation is required to

surrender a number of allowances corresponding to their verified emission volume for each calendar year

• In the event that an installation has insufficient allowances for compliance, the shortage can be covered by:

- Purchasing additional allowance from the market - Surrendering a specified number of CERs and, from

2008, ERUs from its operator’s holding account (article 21 [2] EU Registry legislation)

• Surrendering of CERs and ERUs are subject to specified preconditions


Comparison of NAPs versus “business-as-usual” Basis is submitted NAPs

Small shortage in old Small shortage in old EU 15 …EU 15 …

… … plus plenty of “hot plus plenty of “hot air” …air” …

… … equals negligible equals negligible COCO22-constraint-constraint

Will Europe be CO2-constrained?

Shortfall in CO2 allowances against “business-as-usual” – mln tonnes CO2

Small shortageSubstantial

overallocation

0

10

20

30

40

50

UK

Germ

an

y

Fran

ce

Italy

Sp

ain

Neth

erl

an

ds

Belg

ium

Oth

ers

in

defici

t

Pola

nd

Cze

ch R

ep

ub

lic

Oth

ers

in

su

rplu

s

CD

Ms

CO

2 c

on

stra

int


Will CO2 allowance prices go up?

Unless forget Unless forget Kyoto ...Kyoto ...

... problem gets worse... problem gets worse

Tighter constraint by 2008 - 2012Tighter constraint by 2008 - 2012

0

20

40

60

80

100

120

140

160

180

200

220

240

260

UK

Germ

any

Fra

nce

Italy

Spain

Neth

erlands

Belg

ium

Oth

ers

in d

efic

it

Pola

nd

Czech R

epublic

Oth

ers

in s

urp

lus

CO

2 c

onstr

ain

t

Extent of CO2 constraint across Europe – mln tonnes per year 2008-2012

► Less scope for imaginative allocations

CDMs

Switch to low CO2

intensive generation

Government funded purchases of CDM/JIs

Over 2008-2012mt/year

Austria 7.0Belgium 3.5Denmark 3.7Ireland 3.7Netherlands 20.0Portugal 5.1Spain 20Total from approved NAPs 63.0Italy 55Total 118.0

BUT competitionfor CDMs

Source Dresner Kleinworth Wassertein


EU Allowance Prices


Current Prices (at 11 Feb 05)

Commodity Type Vintage YearPrice range (Offer) per

tonne CO2e

Kyoto Compliance Tools

CDM - CERs 2000 - 2012 EUR 1.50 – 5.50

JI - ERUs 2008 - 2012 EUR 4.00 - 6.00

Commodity Type Vintage Year Bid / Offer per allowance

National Compliance Tools

UK allowances - Bid / Offer 2004 GBP 3.00 / 3.50

EU allowances - Bid / Offer 2005 Delivery EUR 7.10 / 7.20




Criteria for selecting projects

0

1

2

3

4

5

6

7

8

9

10

Q-9 Q-2 Q-3 Q-5 Q-10 Q-4 Q-1 Q-8 Q-6 Q-7

EU ETS

Non EU ETS

1 = Technology Type2 = Good governance of host country3 = Within own core business area4 = In its own facilities5= Reliable local partner

6 = Location of projects – geographical preference7 = Previous CDM experience of the host country8 = Strong sustainable development characteristics of the project9 = Compliance certainty of the asset10 = Credit worthiness of seller


12%

25%

26%

27%

10%

GEOGRAPHICAL DISTRIBUTION OF ACTIVE PIPELINE PROJECTS (Total approx. US$544 million with indicated purchase of 134 Million tons of CO2e for 106 projects as Nov 2004)

South & Central Asia

AfricaEastern Europe

Latin America

East Asia


3%5%

2%

23%

5%1%

8%4%

30%

3%1%1%

9%

5%

TECHNOLOGICAL DISTRIBUTION OF ACTIVE PIPELINE PROJECTS(Total Approx. US$544 million with indicative purchase of 134 Million tons of CO2e for 106 projects as of Nov 2004)

BagassseBiomass

Biogas

Wind Power

Geothermal

Small Hydro

Energy Efficiency

N2O removal

LULUCF

Coal mine methane

Cement manafacturing

Municipal Solid Waste Management

Waste Water Management

Gas Flaring Reduction


To be identified2%

Sponsor 13%

Host Country Government

2%

Other MDB &

Bilateral Fund 24%

World Bank10%

IFC 23%

Commercial Lender 26%

DISTRIBUTION OF UNDERLYING PROJECT FINANCE

Total Underlying Financing of US$3,198 million for $454 million in carbon purchases as of September 2004


International Emissions Trading Association

www.ieta.org

Andrei Marcu – President

[email protected]

For more information

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SUSTAINABLE MARKET SOLUTIONS FOR GLOBAL ENVIRONMENTAL PROBLEMS Market Situation SOFOFA, March 2005 Andrei Marcu President International Emissions Trading