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Carbon Markets and the Economic Impact of the CDM

Carbon Markets and the Economic Impact of the CDM. Crans Montana, CH September 19, 2008 Henry Derwent President and CEO International Emissions Trading Association. What is IETA?.

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Carbon Markets and the Economic Impact of the CDM

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  1. Carbon Markets and the Economic Impact of the CDM Crans Montana, CH September 19, 2008 Henry Derwent President and CEO International Emissions Trading Association

  2. What is IETA? • IETA is the business organisation promoting emissions trading as the most economically efficient and business-friendly approach to the reduction of greenhouse gas emissions worldwide. • Membership: 182 companies • IETA members are emitters, project developers, intermediaries, financial institutions, brokers, verifiers, and/or legal firms • IETA offices • Geneva, Brussels, Washington DC

  3. Spreading across the World – Kyoto or not EU –in operation, refining and expanding UK – first economy-wide Norway and Switzerland too UK – pushing further Canada – Wide variety Korea - committed California – rapid progress Japan – now beyond voluntary CCX – in operation China – local experiments REGGI – nearly there Australia –on the way Taiwan too US – now a certainty New Zealand – rapid progress NSW – in operation

  4. First or second stage after 2012...? Europe staying much as it is? What will Russia’s terms be? China and India partial domestic schemes? Japan teams up with Korea? A full North American system? Australia finds a way of bringing in Indonesia and PNG? Brazil and South Africa still resistant? Truly massive potential – programmatic, policy, forestry, agriculture, SD-PAMs – but when and for how long?

  5. Elements of Design of an Emissions Trading System Governing Body International offset Projects eg CDM Domestic offset projects Supply injections Supply injections Trading Entity A Trading Entity B Foreign Scheme Regulation and support Trading Trading Foreign Scheme Emissions Emissions Compliance Periods 1 2 3 1 2 3

  6. Value of world carbon market increased by 120% in 2007 • Mostly driven by increased volume and price of EUAs 70% 120% 150% 180% Source: New Carbon Finance estimates

  7. Consequences in terms of GDP cost IPCC 4AR: majority of lower-cost opportunities are in non-OECD countries Source: 4AR To achieve Stern’s low GDP costs, transfers to developing countries of between $50 and $100bn a year are required

  8. CDM general overview| International mandate • Legal basis in the Kyoto Protocol • Run by Executive Board (EB) answerable to KP Parties • EB back-stopped by UNFCCC secretariat with support for: • Registration and issuance • Accreditation of certification companies • Methodologies for emissions baseline setting and monitoring

  9. CDM general overview| International challenge Additionality Defines operationally what would happen in the absence of a CDM emission reduction project • Two experts – two views • Agreement how best to do it A challenge for any offset mechanism/market outside an inventory target-based system

  10. Annual value of CDM/JI - Emission Reductions Transactions (billion USD)(up to 2012 vintages) Source: State and Trends of the Carbon Market 2008. Karan Kapoor and Philippe Ambrosi, World Bank, May 2008

  11. Globally a success, but regionally the CDM has been mixed • 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012 • Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012 • 88 non-Annex 1 countries have yet to benefit from any registered CDM project activity

  12. CDM pipeline August 2008: 1200 CDM projects registered with UNFCCC’s CDM EB, and 2500 projects are in the pipeline. The Pipeline was produced by Jørgen Fenhann, UNEP Risø Centre 01-08-08

  13. How the Carbon Price does affect clean energy investment – CDM analysis Source: World Bank State of Carbon market 2007

  14. Prices of CER also expected to increase post 2012

  15. A few CDM benefits • CDM has been made functional and is now developing very dynamically despite being the first mechanism of its kind at the international level with all associated regulatory challenges. • CDM has raised awareness of the climate change issue. • It has mobilized great quantities of investment in a short time. • CDM permits bottom -up initiatives, which help to move away from the traditional donor transaction approach.

  16. Lessons learned from the CDM so far • CDM generates real emission reductions • Although average underperformance at around 11% • More experience has to be gained in certain sectors, e.g. landfill gas, agriculture • Additionality remains one of the main rejection criterion • Increasing number of reviews of registration and issuance requests continues • Transparency of decision making project process still to be improved • Enhanced interaction with project developers needed Way forward • Scale-up of CDM required • Certainty on Post-2012 framework needed

  17. CDM in Africa –registered projects Estimated $3.9 billion capital investment* . . . in 27 projectsin 7 countries,expected to generate38 million CERsto 2012 Registered CDM projects * Based on average investment estimates per tonne CO2 equivalent reduction; from: UNFCCC, Investment and Financial Flows to Address Climate Change

  18. Registered projects (27) Projects seekingregistration (44) CDM in Africa –registered and in validation stage Estimated $12-18 billion capital investment* * Range based on $137.39 average investment/CER and $200 /CER alternate estimate for project mix containing fewer industrial gases projects, from UNFCCC, Investment and Financial Flows to Address Climate Change.

  19. Focus CDM on technology transfer

  20. CDM general overview| World’s largest CO2 offset system Not an academic concept – CDM is up and running! • 3 years of operational experience (in the context of exponential growth!) • More than US$ 1.5 billion worth of CERs issued (low global administration cost below 1%) • Large pool of learning opportunities

  21. 1: The State and Sentiment of the Carbon Market

  22. Significantly higher prices beyond 2012

  23. 2: The Clean Development Mechanism (CDM)

  24. National Cap and Trade going from strength to strength EU-ETS expanding in countries, sectors and gases Australia, Japan, Korea changing their minds Developing countries seeing trading as a possible emissions reduction tool US national system looks a near certainty – timing less clear (36 L-W Nays in the Senate)

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