Niclas Svenningsen

Manager Strategy & Policy, UNFCCC

Emerging Markets and International Negotiations

Chile-CO2 Seminar

Santiago, Chile, 17 January 2012

2

Content

1. Snapshot of Carbon markets today

2. COP 17 Durban Decisions

3. Emerging Markets

4. What‟s next?

5. Conclusion

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Snapshot: Basic Principles for Carbon Markets

1. Creation & trade of offset units

2. Allows investment in emission

reductions where it is financially most

beneficial (“most bang for the buck”)

3. Engages private sector investments

in climate mitigation

Optional

A. Verification of offsets

B. Types of offset (type of activities, gases, sectors, countries…)

C. Contribution to other objectives (e.g. sustainable development)

D. Design of market based mechanism (allowances, carry-over,

reduction targets, penalties…)

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Snapshot: Carbon Market Value 2010

119,800

19,800

1,100 1,200

0

20000

40000

60000

80000

100000

120000

EU-ETS CDM Other markets1,1 Voluntary

Value (million US$)

Source: World Bank 2011

5

Snapshot: CDM development

Source: UNFCCC 2011

6

Snapshot: registered CDM project 2011

Source: UNFCCC 2011

7

Snapshot: No of CER issued by host country

8

Snapshot: % CER issued by project type

Biomass

Cement

CO2 usage

Coal bed methane

Energy distribution

EE Households

EE Industry

EE own generation

EE service

EE supply side

Fossil fuel switch

Fugitive

Geothermal

HFC

Hydro

Landfill gas

methane avoidance

N2O

PFC & SF6

HFC

N2O

Hydro

Wind Biomass

Source: UNFEP 2011

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Snapshot: Offset prices: EUA & CER

0

5

10

15

20

25

30

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Time

Eu

ros

/t C

O2

eq

v

EUA

CER

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Snapshot: Factors affecting carbon prices

• Demand & supply • Mitigation targets

• Auctioning of allocations

• Carry-over of AAU

• Hedging for future demand

• Issuance under CDM

• Macro-economic conditions • Euro-zone economic problems

• Overall economic outlook

(GDP) at demand side

• Weather (cold winters increase

demand)

• Overall economic performance of

commodities

• Real or expected policy

developments

• Everything else…

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Snapshot: Basic Questions

Can mitigation targets (scientific or political)

be reached without the active

participation of the private sector?

Are market based instruments likely to

remain central components

of the future climate regime?

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• Basic idea of offsetting – is it only

moving mitigation from one country to

another?

• Additionality: How can we know that a project would not have

happened without CDM?

• Governance: CDM Executive Board Members appointed from

regional groupings and in addition to other work (Conflict of interest)

• Carbon leakage: Do companies “flee” countries with carbon

markets?

• Contribution to sustainable development: is it real?

• Regional distribution: Why so many projects in so few countries?

• Impact on mitigation: Is scale of mitigation sufficient?

Snapshot: Issues with CDM

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• Decided to establish the Durban

Platform for Enhanced Action

• An agreement with legal force under the

Convention applicable to all parties.

• The ad-how working group on the

Durban Platform shall start its work in

2012 and complete it by COP21 (2015)

• The Durban Platform is to be

implemented from 2020

COP 17: The Durban Platform

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• The Kyoto Mechanisms will continue in a second

commitment period

• Duration of second commitment period 31 Dec 2017 or 2020,

to be decided at CMP 8 / COP 18 (Nov/Dec 2012)

• Economy-wide emission targets to be converted into QELRO‟s

by 1 May 2012.

• Carry over of AAU‟s to CP2 to be decided at CMP 8

• Carbon Capture & Storage included

• NF3 added to Kyoto gases

• Continued work on baselines,

efficiency, suppressed demand…

COP 17: The Durban Decisions: CDM, JI & ET

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• A New Market Based Mechanism was “defined”

(established)

• Modalities and Procedures to be developed in 2012

• A core requirement for the EU to agree to a second

commitment period

• A work program to consider a Framework for Various

Approaches was decided to be conducted in 2012.

• Responds to Cancun mandate to consider various

approaches for market based and non-market based

mechanisms.

• Seen by many parties as the “glue” to connect and recognize

future national & regional mechanisms under UNFCCC.

COP 17: Decisions on New Mechanisms

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• The New Market Based Mechanism

• Can be seen as a new top-down (UNFCCC) common market

based mechanism

• Parties are still to agree on the features of this mechanism

• EU has in earlier submission proposed a Sectoral Crediting

Mechanism

• To improve impact of

market based mitigation

• To move from projects

towards mitigation in sectors,

regions/cities, economies

• To improve governance and

efficiency

• Other parties may have other views

COP 17: The New Market Based Mechanism

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• Framework for Various Approaches

• May allow offsets generated by national/

regional mechanisms to be recognized

under UNFCCC.

• Widely supported THAT a framework is needed to be

established.

• Diverging views about WHAT the Framework will be:

• On one end Japan, USA, Canada: Wish to have a

Framework with no prescriptions for what is accepted as

mechanisms/offsets under UNFCCC.

• On the other end, EU, EIG, AOSIS and most of G77:

Wish to have clear rules governing requirements for

mechanisms/offsets to be recognized under UNFCCC.

COP 17: Framework for Various Approaches

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• New Mechanisms are expected to maintain and build

existing KP mechanisms.

• CDM, JI, ET to continue at least until end of second commitment

period (2017 or 2020)

• Procedures and modalities for the New Market Mechanism, as

well as the Framework, to be considered at COP 18 (Nov/Dec

2012)

• New Mechanisms are not intended to replace CDM/JI

(not at first instance at least) but to complement them.

• Clear move towards an expanded market with room for

more mechanisms.

• Role of UNFCCC support function for mechanisms may

change considerably.

COP 17: Existing vs. New Mechanisms

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Emerging Markets: EU-ETS

• Four key developments:

• Cap: 20% by 2020…or 30%?

• Inclusion of aviation from 1 January 2012 (183 Mt CO2-e/year)

• Quantitative restrictions: ~2,4 billion t CO2-e from 2008 to

2020. To be reached by mid-2013?

• Qualitative restrictions:

• No industrial gas projects

• Only projects from LDCs registered after 2012

• No large dam projects not complying with World

Commission on Dams guidelines

Over supply internally and restricted demand for

external offset credits

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Australia

• Carbon mechanisms law passed (Nov 2011)

• Tax to take effect mid-2012 before moving to a carbon-trading

scheme in mid 2015

• KP units fungible as of 2015

• Price initially set at A$23 per tonne (until 2015)

• Aims to cut carbon pollution by 159 million tonnes by 2020 or by

5 percent based on year 2000 levels

New Zealand

• NZ-ETS set to reach full coverage by 2015 (incl. agriculture),

• Trading at 14 NZ$ (8 Eur) per tonne

• NZ-ETS seeking to link with Aust-ETS by 2015

Emerging Markets: Australia & New Zealand

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Emerging Markets: North America

California

• Carbon caps from 2013, covering 600 oil refineries

and factories (more than 25.000 tonnes CO2-e/year)

• Target: 22% reduction by 2020 compared to 1990:

Covering 85% of emissions from 2015 (incl. transport),

• 8% of reductions eligible for offsetting = ~221 million tonnes CO2

eqv 2012-2020. Possible linking with external markets.

Quebec

• Cap & Trade scheme with first compliance period 2013-2014. Cover

industry and power sectors with more than 25.000 t CO2-e /year.

• Allowances based on unit of production. Reduced by 1-2% per year

• Developed as part of Western Climate Initiative and

intend to link with other schemes, incl California.

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China

• Seven regional pilot schemes to be launched in 2013,

possibly being replaced by a national market in 2015.

• Linked to national 5-year targets for energy carbon and

energy intensity. Covers power sector + potentially cement,

steel & buildings.

• May cover up to 40% of energy related GHG emissions

• National registry under development

India:

• Perform & Trade Scheme covers 9 industrial sectors (25% of GDP,

45% of commercial energy use). First 3-year period to start in 2012(?)

• Users are provided with energy consumption target. Users

exceeding targets receives tradable energy saving certificates

• Design still in early phases and no experience gained so far.

Emerging Markets: China & India

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Japan:

• 50-60% emission reduction target by 2050 but Japan

does not intend to sign on to second KP commitment period.

• Several domestic markets, including:

• Japan Voluntary Emission Trading Scheme

• Tokyo ETS: 300+ projects covering 220.000 t CO2 eqv at average

price of US$ 198/t CO2 eqv

• Keidaren (Japan business federation) Voluntary Action Plan

• 320 million credits purchased in CP1. Expected to increase in CP2

even without formal CP2 commitment.

• Pursuing bilateral offset schemes with Asia and African countries; 90

Bilateral Offset Credit Mechanism projects under consideration.

Emerging Markets: Japan

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Republic of Korea

• Low Carbon Green Growth Act (2010) sets 30% mitigation

target by 2020 = ~400 million tons/year

• Plans to expand existing voluntary Korea Emission Trading scheme (KET)

to it make mandatory for 300 largest companies by 2015 to cover 60% of

national GHG emissions.

• Intended to be linked with KP (UNFCCC markets).

World Bank Partnership for Market Readiness (PMR)

• Provides up to US$ 100 million grant funding for testing of new

market instruments for both domestic and international markets.

• Confirmed participating countries include Brazil, Chile, China,

Colombia, Costa Rica, India, Jordan, Mexico, Morocco, South

Africa, Indonesia, Thailand, Turkey, Ukraine and Vietnam

Emerging Markets: Korea & PMR

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• Significant and increasing

attention to carbon markets.

• Markets developed as domestic

schemes but with scope to link

with other markets

• More mature markets (e.g.

EU-ETS) is looking for

reforming existing mechanisms

to increase efficiency

• Market developers are not

waiting for UNFCCC

Emerging Markets: Big Picture

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What‟s next? - Linking Markets?

• On one side: KP mechanisms + new market mechanism

+ framework.

• On the other side: large number of emerging national

market based mechanisms.

• The Framework for Various Approaches could serve to

link mechanisms, with some obvious benefits:

• Recognition of offsets under UNFCCC (e.g internationally

tradable)

• Increased access to supply & demand options

• Reduced exposure to national/regional economic cycles (but

global ones)

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„What‟s next? - Linking Markets?

• But linking requires common minimum

requirements, such as:

• Type and scope of schemes

• Transparency & verification

• Methodologies / baseline calculations

• Comparable (linkable) policies for allocation and auctioning

• Mechanism operating purely inside a country are not concerned.

• Likewise, international mechanisms can be established outside a

UNFCCC Framework IF participating countries do not count offsets

towards national UNFCCC mitigation targets OR IF all participating

countries supply national inventories according to UNFCCC

process (similar to the case of EU-ETS).

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What is next? – Supply-Demand equation

Approx. 3,0 Bt CO2-e in CDM

pipeline until 2020.

+ JI (100-150 Mt by 2020)

+ CCS (100-300 Mt/year by 2020)

+ Non-KP (bilateral agreements)

- China domestic (60% of global supply)

? Carry over and possible use of AAU

(7,9 Bt CO2-e)

KP markets

Other markets

Supply Demand

2,3-3,0 Bt CO2-e in EU-

ETS, Japan, Switzerland

+ New markets: Australia,

NZ, Korea (530 Mt CO2-e)

New markets: California,

Quebec..

+ New markets: Brazil,

Chile, India (PMR)

- EU limits: type and amount

(2,4 Bt)

Anticipated changes in supply-demand

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What„s next? - Other items in the news

China to up CO2 targets for heaviest emitters

Broker exodus from primary CDM market continues

Spain approves 3.4 million euros for World Bank fund

UN chief says it's time to cough up climate cash

Barcap slashes CO2 outlook, market in “dark place”

CDM clean coal projects at risk after Meth Panel thumbs-down

WCI creates body to oversee carbon market

EEX to sell Lithuania's surplus EUAs

Ireland's greenhouse gas emissions fall 1.1 pct in 2010

CEZ coal-based power output down 0.7 pct

World has 5 years to avoid dangerous climate change: IEA

GDP growth biggest threat to China CO2 targets: report

Poland to give away fewer EUAs in 2012

China sees first voluntary forest carbon trade

Ukraine gets cash to ready CO2 market

Deutsche books 310 mln euro charge for CO2 fraud

EU steel output rises 4.3 pct in Jan-Sep

Japan backs more studies on alternative CO2 offsets

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Conclusion

1. Markets mechanisms are highly likely to

remain key components of the international

climate cooperation architecture.

2. Domestic markets are proven as means to engage

private sector financing, and to redistribute investments

to where they have the most impact.

3. CDM shows that international carbon markets work,

but is also a huge learning-by-doing project.

4. Future international carbon markets will at least include

CDM, JI, and a New Market Mechanism.

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Conclusion

5. Future carbon markets will include an expanding

number of domestic markets.

6. Future domestic markets may be linked, either under

UNFCCC, or under bilateral agreements.

7. “Interesting times” ahead! Keep eyes on negotiations

and on domestic-regional developments up to 2015.

8. Carbon prices remain subject to short-term

expectations and vague long-term speculation. Don‟t

get too jumpy even if the market does.

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Thank You!