Carbon Markets – General Introduction Urs Brodmann First Climate IATA / IETA Workshop Singapore, 22 March 2017 Your partner for climate protection and sustainability – since 1999 First Climate is a globally leading carbon market service provider. We Our products and develop emission reduction projects, originate and trade carbon credits services at a glance and manage portfolios of carbon assets. We act as a consultant to corporate and public sector clients. CO2-Compliance Services Climate Neutral Services Carbon/Water Project Development Green Energy Services Public Climate Action Carbon Asset Management Water Management Services Pellets2go 2 Facts & Figures Facilitated over VERs retired on More than 500 200,000,000 EUR in behalf of our clients: corporate clients project finance 24.000.000 Generated Renewable energy 32.000.000 We support more than certificates sourced on CERs 200 carbon offset projects behalf of more than 150 clients 3 Outline 1. Introduction to Carbon Markets 2. Key Concepts for Baseline & Credit Mechanisms 3. Credit Types and Standards 4. Carbon Markets to Date; Supply/Demand Considerations 4 Compliance vs. Voluntary Markets • Carbon markets exist both under compliance schemes and as voluntary programs • Compliance markets are created and regulated by mandatory regional , national, and international carbon reduction regimes, such as the Kyoto Protocol an the EU Emissions Trading Scheme (EU-ETS) • Voluntary markets function outside of the compliance markets and enable companies, governments and individuals to purchase carbon offsets on a voluntary basis 5 Cap & Trade vs. Baseline & Credit Cap & Trade Schemes (ETS) • Regulator defines upper limit for emissions in selected economic sectors (the "Cap") • Emissions allowances equal to cap are distributed/auctioned ex ante to covered entities • Covered entities surrender allowances corresponding to their emissions after each compliance period • Trading of allowances to cover shortfall, monetize surplus Baseline & Credit Schemes • Crediting of emission reductions achieved by specified projects or programmes • Emission reductions quantified against a pre-defined baseline • Tradable credits, used for compliance with mandatory or voluntary targets, including cap & trade schemes … In GHG markets, one allowance / credit usually equals one metric tonne of carbon dioxide equivalent (1 t CO2e) 6 From the Kyoto Protocol to the Paris Agreement ICAO Paris Agreement Mechanisms (post-2020): • Cooperative Mechanisms (PA, Art. 6.2) Agreement EU ETS Paris • Sustainable Development Mechanism (PA, Art. 6.4) 2016 2005 Agreement 1997 COP 21 2015 2020 Sustainable Development Goals Kyoto Mechanisms (till 2020): • International Emissions Trading (KP, Art. 17) • Clean Development Mechanism (KP, Art. 12) • Joint Implementation (KP, Art. 6) Domestic Emissions Trading Schemes for cost-effective compliance with national / regional targets 7 Linking of Markets Today (Kyoto) Joint Implementation (ERU) Annex I* Annex I e.g. Germany e.g. Ukraine International Voluntary EU ETS Emissions Carbon (EUA) Trade (AAU) Market (VER) Annex I e.g. France Clean non-Annex I Development e.g. India Mechanism (CER) Other ETS * Annex I to UNFCCC Source: First Climate 8 Carbon Market – Key Players Project Owners/Sellers Governments Consultants Standard Compliance & Organizations Voluntary Buyers Verifiers Carbon Registries Funds Intermediary Brokers Entities Aggregators Exchanges 9 Outline 1. The Carbon Market 2. Key Concepts for Baseline & Credit Mechanisms 3. Credit Types and Standards 4. Carbon Markets to Date; Supply/Demand Considerations 10 What is a Carbon Credit? • Tradable certificate representing the reduction, avoidance or sequestration of one metric ton of carbon dioxide equivalent • Credits can be purchased to meet a specific emission reduction target • Allowance ≠ Credit • Credit Types: • Certified Emission Reduction (CER) – Clean Development Mechanism (CDM) • Emission Reduction Unit (ERU) – Joint Implementation (JI) • Climate Reserve Ton (CRT) – Climate Action Reserve • Registry Offset Credits (ROCs) + Early Action Offset Credits (EAOCs) – American Carbon Registry (ACR) • Verified Emission Reduction (VER) – Voluntary Carbon Market • “Mitigation outcome” – SDM/EMM, Article 6, Paris Agreement 11 Baselines, Additionality, Quality • Emission reductions are calculated against a hypothetical reference scenario (baseline) • Baselines are set pursuant to pre-approved methodologies • Project is additional if it is not the most likely baseline scenario • Different additionality tests: positive lists, investment analysis, barrier analysis, common practice analysis Quality of carbon credits mainly dependent on: • Robustness of additionality test • Robustness of ER calculation and MRV methodology "Environmental Integrity" • Avoidance of double-counting • Ancillary benefits re. sustainable development goals 12 Avoiding Double Counting • Two parties should not count the same emission reductions towards their target achievement • Under Kyoto Protocol, established modalities (adjustment of Assigned Amounts) • Under Paris Agreement, modalities tba ("… corresponding adjustment to emissions covered by NDC") AAUs Emission Kyoto: ERUs converted reduction acquired to ERUs Transfer of Assigned Amount Units (converted to ERUs) Assigned Assigned Emissions Emissions Amount Amount Transferring country Acquiring country 13 CDM Project Cycle Project CER Design CDM Executive Board Issuance Project Owner Document Designated Host Designated Verification Operational Entity Country Approval National Entity Designated Project Owner Monitoring Validation Operational Entity Registration CDM Executive Board 14 Outline 1. The Carbon Market 2. Key Concepts for Baseline & Credit Mechanisms 3. Credit Types and Standards 4. Carbon Markets to Date; Supply/Demand Considerations 15 UN Baseline & Credit Mechanisms Clean Development Mechanism Joint Implementation Sustainable Development Features (CDM) (JI) Mechanism (SDM) Governing Body & UNFCCC UNFCCC UNFCCC Legal basis Kyoto Protocol Kyoto Protocol Paris Agreement Certified Emission Reduction Emission Reduction Unit Carbon Unit PA, Art. 6.4, to be specified (CER) (ERU) Main Markets Compliance Compliance Compliance Projects hosted by Non-Annex 1* Projects hosted by Annex 1* Regional Scope Global ("developing") countries ("industrialized") countries All except nuclear No restrictions, Eligible types and Project Types > 180 approved methodologies "ad hoc methodologies" methodologies to be specified * Annex 1 to UNFCCC 16 Other Baseline & Credit Standards Verified Carbon Climate Action American Carbon Features Gold Standard (GS) Standard (VCS) Reserve (CAR) Registry (ACR) Gold Standard California Air Resources Winrock Board of Governing Body VCS Association Foundation Board Directors Registry Offset Credits Verified Emission Verified Carbon Unit Climate Reserve Ton Carbon Unit (ROCs) + Early Action Reduction (VER) (VCU) (CRT) Offset Credits (EAOCs) Voluntary carbon market Voluntary carbon market Voluntary and Type of Market Voluntary Market and California's and California's Compliance Market regulated carbon market regulated carbon market Implemented in non- Implemented in California compliance Annex 1 countries + in Regional Scope countries without an USA market + global countries without an emission cap voluntary carbon market emission cap All including REDD, Project Types EE, RE, Afforestation excluding GHG reduction All types new HFC … plus domestic standards e.g. in Japan, Australia, Switzerland, … 17 Outline 1. The Carbon Market 2. Key Concepts for Baseline & Credit Mechanisms 3. Credit Types and Standards 4. Carbon Markets to Date; Supply/Demand Considerations 18 ETS in force Emission Trading Schemes to date ETS scheduled ETS considered Reach 4 continents, 35 Countries, 13 Provinces/States, 7 Cities Carbon offsetting Integral part of most ETS Constant Expansion New ETS to be launched in Asia and LAC region; linking of schemes being tested Source: ICAP (2015): Emissions Trading Worldwide: ICAP Status Report 2015 19 Carbon Price and Emissions Coverage Source: World Bank (2016): State and Trends of Carbon Pricing 20 Annual and cumulative CER and ERU Issuance, secondary CER Prices and Voluntary Offset Issuance and Prices Source: World Bank (2016): State and Trends of Carbon Pricing 21 Future Scenario: Potential Supply of CERs until 2020 … and beyond 2020? Source: World Bank (2016): State and Trends of Carbon Pricing 22 Int. Aviation – Demand Scenarios ICAO demand estimates: 2025: 142 – 174 Mt/a* 2030: 288 – 376 Mt/a* 2035: 443 – 596 Mt/a* 2020 – 2035 cumulative: 2,500 Mt/a** * without phased implementation ** with phased implementation Source: IETA Post-ICAO General Assembly Webinar , 11 Oct. 2016 23 Aviation Industry – Future Emissions Scenarios Source: European Parliament, EP CO2 Standard Briefing IPOL_BRI(2016)569991_EN, based on data of IEA, ICAO and Lee et al. 24 Factors affecting future supply and demand • Which types of carbon credits will be eligible for CORSIA? - Standards: UNFCCC vs. voluntary vs. domestic emissions allowances - Restrictions on early projects & vintages? Decision maker & timeline: ICAO, 2018 • What will be the role of project-based credits in the Paris Agreement (PA)? All countries to make reductions under PA. Can project owners sell credits to airlines? Decision maker & timeline: COP 24 / CMA 3, December 2018 • Will market signals be sufficient to incentivize development of new projects? Project developers need to see firm demand (contracts). Long lead times until