KyotoKyoto ProtocolProtocol andand CarbonCarbon MarketMarket Dr. Venkata Ramana Putti Workshop on Opportunities in Carbon Market Ankara, Turkey, June 17, 2009 Climate Change Earth’s climate is warming and human activities are primarily responsible (>90% certainty) 280 to 430ppm concentration between 1850 and 2000 (0.5‐0.8oC increase) 550ppm likely by 2035 with 77‐99% chance of 2oC increase 50% chance of 5oC increase Greenhouse Gases Global Warming Potential Volume of GHGs •Carbon Dioxide (CO2)01 High GWP Methane 1% • Methane (CH4)21 16% N2O • Nitrous Oxide (N2O) 310 9% CO2 (F&C) 55% • Perflurocarbons (PFC) 6500 CO2 (LULUCF) 19% • Hydroflurocarbons (HFC) 11700 • Sulfur Fluoride (SF6) 23900 Distribution of GHG Emissions GHG Emissions by Sector Buildings Forestry 8% 17% Industry 19% Agriculture 14% GHG Emmisions by Country Waste Transport 3% 13% 30 Energy Supply 25 26% 24.09 22.2 20 18.4 15 14.7 12.91 10.74 10 9.65 5.6 4.9 5 4.6 3.05 1.34 0 USA China EU Russia India Japan Red -- % contribution (2004); Blue – tCO2/capita (2000) Potential Impacts UN Framework Convention on Climate Change • Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere • Developed countries (Annex I countries) aim to restore GHG emissions to 1990 levels • Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change •Meet as a “Conference of Parties” annually, to monitor progress Kyoto 38 Developed Countries and Protocol Econom countries) took on reduction commitments in 1997 ies in Transition (Annex I “BUSINESS AS USUAL”Emissions The Demand: • Kyoto Projects • EU ETS Allowances GHG Emissions ton/ year AVG: 1990 - 5.2% 1990: 2008 Base Year 2012 First Commitment Period: 2008-2012 Carbon Market Components Transaction Market Type Credit type Regime Regulatory Allowance- AAU International based (Assigned Amount Units) Emissions Trading EUA EU-Emissions (EU Allowance) Trading Scheme Project-based ERU Joint Implementation (Emission Reduction Unit) CER Clean Development (Certified Emission Reduction) Mechanism Voluntary Mainly VER Voluntary projects project-based (Verified Emission Reduction) Clean Development Mechanism CDM, Art. 12 KP: Defined: credit for emission reduction (CERs) from investments in developing (non‐Annex I) countries Objectives: •To promote sustainable development in developing countries •To assist Annex I countries in meeting their emission reduction targets in cost‐effective manner Certified Emission Reductions (CERs) must: •Createreal, measurable, and long‐term benefits related to the mitigation of climate change. (Art. 12.5b) •Beadditional to any that would occur in the absence of the certified project activity. (Art. 12.5c) Emission Reductions must: be verified by designated operational entity (DOE) Clean Development Mechanism Non-Annex I Country Annex I Funding Country Technology Projects to reduce GHG emissions Emission reduction compared to an existing baseline Certified Emission Reduction (CER) Key Market Drivers •For Buyers (Annex I countries) – Compliance targets –Sustainable development •For Sellers (Non‐Annex I Countries) – Contribute to sustainable development – Facilitate technology transfer –Improve financial returns CDM Progress Regional Distribution (Registered Projects) Regional Distribution (Av. Annual CERs) Project Distribution (by Sector) Carbon Market Growth 120 annual value of transactions (US$ billion) 6.5 US$B: CDM in 08 80 7,4 US$B: CDM in 07 40 - 2002 2003 2004 2005 2006 2007 2008* EU ETS other allowance markets Primary CDM other project markets € 30.00 Carbon € 25.00 € 20.00 Price € 15.00 during € 10.00 € 5.00 Economic 6/2/2008 Spot EUA and sCER (€ per tCO 6/16/2008 6/30/2008 7/14/2008 Crisis 7/28/2008 8/11/2008 8/25/2008 9/8/2008 2 e) 9/22/2008 Price sCERs10/6/2008 10/20/2008 11/3/2008 Price EUAs11/17/2008 12/1/2008 12/15/2008 12/29/2008 Sources: ECX & Bluenext 1/12/2009 1/26/2009 2/9/2009 Dramatic Reduction Needed by 2050 Effort required to stabilize emissions by 2050 (GtCO2e) •Dramatic emission reductions required. Otherwise emissions and temperature will rise to unacceptable levels. • Stabilization at 550 ppm CO2e by 2050 needs emissions to go down 60% from business‐as‐ usual. • Mitigation efforts over the next two to three decades will be critical. Source: Stern, 2007 Volume of carbon transacted (GtCO2e) • 50 GtCO2e per year needed by 2050. 4.50 4.00 • Current carbon trading is 4 GtCO2e but actual 3.50 volume of reduction barely half of that 3.00 Other amount as the market includes large trade in 2.50 JI permits (quotas repeatedly changing hands). 2.00 CDM EU ETS 1.50 G tCO2e transacted 1.00 •Enormous gap between effort needed and 0.50 current volumes. 0.00 2004 2005 2006 2007 2008 (forecast) Significant Potential Yet to Tapped in CDM 1. Location of CDM projects 2. Many countries are under-penetrated even (percentage of volume, 2007) relative to their emissions CDM activity by country, mid-2007 Mt CO2e/year. 18 16 South Korea 14 12 10 Mexico 8 Malaysia 6 Ch ile Argentina South Africa 4 Algeria Egypt Tha ila nd Qatar Pakistan Indonesia 2 Saudi Arabia Iran 0 0 50 100 150 200 250 300 350 400 450 500 550 Venezuela GHG emissions, 2000 (Mt CO2e p.a.) •Uneven regional focus; China, India and Brazil = 85% of CDM market share; •Just 16 projects in ECA = 4 Armenia, 1 Goergia, 3 Cyprus, 4 Moldova, 4 Uzbekistan •Reductions from reforestation and avoided deforestation largely absent. •Many countries with high emissions have relatively low presence in carbon markets. Opportunities for Scale‐up and Extension Forestry is barely visible in CDM 64% of 2007 contracts for clean energy 20.0% other renew ables 18.0% 17.4% N20 0% 9% HFC 16.0% Biomass 8% 5% 14.0% LFG 12.0% Wind 5% 7% CMM 10.0% 5% 8.0% Hydro Waste 6.0% 12% management 4.0% Fugitive4% 3% 2.0% 0.7% Other 0.0% 2% Land use, Land-use change and Forestry Sources of GHG emissions Share of CDM projects EE+Fuel switch 40% Agreement reached at Bali to move forward on Reduced Emissions from Deforestation and Degradation (REDD), Building on success to scale up providing opportunity for countries with tropical forests to Programmatic approaches will enable scaling join the carbon markets. up/extending to interventions in key development Required now: build capacity to measure and verify sectors (energy, appliances, waste management, emissions associated with forests and bring these assets to transport, and newer technologies). Approaches market as soon as international regulatory framework is in compatible with financing provided by domestic FIs place. need special attention. Need for CDM Reform DOE at validation or req. reg. registered issuance 2-year delay 180 days 348 days 328 days 2,645 projects 1,170 projects 403 projects 1,451 MCERs 1,342 MCERs 195 MCERs 6% EE RE Methane Industrial Other 74% to high yield projects (ind. gas) 70% of all projects (half RE and EE (70%) of volumes) have not stuck somewhere reached registration in the pipeline Need for Strong Decisions To provide long‐term carbon price Define a global goal for 2050 supported by signals and certainty to the private intermediate targets, to be agreed by the UNFCCC sector process Build a truly global carbon market by linking To facilitate access to new carbon regional carbon schemes and markets to each markets and sources of capital and other through increased access, converging prices lower costs of abatement and harmonized products Reform the existing market‐based mechanisms To accelerate low‐carbon growth and explore new policy instruments – reduced in developing countries transaction costs, streamlined process, simplified methodologies Facilitate the transfer of low‐carbon technologies To scale up and deepen access to and establish sector‐based programs to enable carbon markets and finance larger scale investments in cleaner development Key Messages on Carbon Market 1. Market can play an important role in Greenhouse gas (GHG) emissions reduction 2. Technologies are available now that enable substantial reductions at acceptable marginal abatement costs 3. A variety of policies can lead to reductions of GHG emissions; carbon markets are needed to implement cap‐and‐trade and can interconnect policy measures 4. A deep, liquid and global carbon market has the potential to deliver significant benefits to all participants, including for development 5. But countries will need to take decisions to establish long‐term price signals and gain the full benefits of carbon markets.