Kyoto Protocol and Carbon MarketKyoto Protocol and Carbon Market

Dr. Venkata Ramana Putti

Workshop on Opportunities in Carbon MarketAnkara, Turkey, June 17, 2009

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

Climate Change

Global Warming Potential• Carbon Dioxide (CO2) 01

• Methane (CH4) 21

• Nitrous Oxide (N2O) 310

• Perflurocarbons (PFC) 6500

• Hydroflurocarbons (HFC) 11700

• Sulfur Fluoride (SF6) 23900

Greenhouse Gases

Volume of GHGs

CO2 (F&C)55%

CO2 (LULUCF)19%

N2O9%

Methane16%

High GWP1%

Distribution of GHG EmissionsGHG Emissions by Sector

Forestry17%

Agriculture14%

Waste3%

Energy Supply26%

Transport13%

Industry19%

Buildings8%

GHG Emmisions by Country

22.2

18.4

14.7

4.6

24.09

3.05

10.7412.91

1.34

9.65

4.95.6

0

5

10

15

20

25

30

USA China EU Russia India Japan

Red -- % contribution (2004); Blue – tCO2/capita (2000)

Potential Impacts

• 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 technologytransfer to developing countries to mitigate, and to adapt to climate change 

• Meet as a “Conference of Parties” annually, to monitorprogress

UN Framework Convention on Climate Change

AVG: 1990 - 5.2%

GH

G E

mis

sion

s to

n/ y

ear

1990

: B

ase

Yea

r

2012

2008

First Commitment Period: 2008-2012

“BUSINESS AS USUAL” Emissions

The Demand:• Kyoto Projects• EU ETS Allowances

Kyoto Protocol

38 Developed Countries and Economies in Transition (Annex I countries) took on reduction commitments in 1997

Market Transaction Type Credit type Regime

Regulatory Allowance-based

AAU(Assigned Amount Units)

International Emissions Trading

EUA(EU Allowance)

EU-EmissionsTrading Scheme

Project-based ERU (Emission Reduction Unit)

Joint Implementation

CER(Certified Emission Reduction)

Clean Development Mechanism

Voluntary Mainly project-based

VER (Verified Emission Reduction)

Voluntary projects

Carbon Market Components

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:   

• Create real, measurable, and long‐term benefits related to the mitigation of climate change. (Art. 12.5b)

• Be additional 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

Annex I

Country

Non-Annex I CountryFunding

TechnologyProjects to reduce GHG

emissions

Certified Emission Reduction (CER)

Emission reduction compared to an existing

baseline

Clean Development Mechanism

• 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

Key Market Drivers

CDM Progress

Regional Distribution (Registered Projects)

Regional Distribution (Av. Annual CERs)

Project Distribution (by Sector)

Carbon Market Growth

-

40

80

120

2002 2003 2004 2005 2006 2007 2008*EU ETS other allowance markets Primary CDM other project markets

annual value of transactions(US$ billion)

7,4 US$B: CDM in 07

6.5 US$B: CDM in 08

Carbon Price during Economic Crisis

€ 5.00

€ 1 0.00

€ 1 5.00

€ 2 0.00

€ 2 5.00

€ 3 0.00

6/2/20

086/1

6/2008

6/30 /20

087/14

/2008

7/28/2

0088/1

1 /2008

8/25/200

89/8

/2008

9/22/20

0810/6

/2008

10/20/2

008

11/3 /20

0811

/17/200

812

/1/20

0812/1

5/2008

12/29

/2008

1/12/2

0091/2

6 /2009

2/9/20

09

Pr ice sCERs P rice EUAs Sources: ECX & BluenextSpot EUA and sCER (€ per tCO2e)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2004 2005 2006 2007 2008 (forecast)

G tC

O2e

tran

sact

ed

OtherJICDMEU ETS

Volume of carbon transacted (GtCO2e) • 50 GtCO2e per year needed by 2050.

• Current carbon trading is 4 GtCO2e but actual  volume of reduction barely half of that amount as the market includes large trade in permits (quotas repeatedly changing hands).

• Enormous gap between effort needed and current volumes.

• 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. 

Effort required to stabilize emissions by 2050 (GtCO2e)

Source: Stern, 2007

Dramatic Reduction Needed by 2050

CDM activity by country, mid-2007Mt CO2e/year

02468

1012141618

0 50 100 150 200 250 300 350 400 450 500 550

Mexico

South Korea

IndonesiaIran

South Africa

Saudi Arabia

Argentina

PakistanThailand

Venezuela

Egypt

Malaysia

Algeria

Chile

Qatar

.

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.

2. Many countries are under-penetrated even relative to their emissions

1. Location of CDM projects(percentage of volume, 2007)

Significant Potential Yet to Tapped in CDM

Forestry is barely visible in CDM

17.4%

0.7%0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Land use, Land-use change and Forestry

Sources of GHG emissions Share of CDM projects

Agreement reached at Bali to move forward on Reduced Emissions from Deforestation and Degradation (REDD), providing opportunity for countries with tropical forests to join the carbon markets. Required now: build capacity to measure and verify emissions associated with forests and bring these assets to market as soon as international regulatory framework is in place. 

EE+Fu e l s w itc h40%

Hy d ro12 %

W ind7 %

B iomas s5%

othe r rene w ab les

0%N209% HFC

8%LFG5%

CMM5%

W as te ma nageme n t

4%Fug itiv e3 %

O the r2%

64% of 2007 contracts for clean energy

Building on success to scale upProgrammatic approaches will enable scaling up/extending to interventions in key development sectors (energy, appliances, waste management, transport, and newer technologies). Approaches compatible with financing provided by domestic FIs need special attention.

Opportunities for Scale‐up and Extension

at validation or req. reg. registered issuance

2,645 projects

1,451 MCERs

403 projects

195 MCERs

1,170 projects

1,342 MCERs

348 days 328 days180 days

74% to high yield projects (ind. gas)

70% of all projects (half of volumes) have not reached registration

DOE 2-yeardelay

RE and EE (70%) stuck somewhere

in the pipeline

EE

REMethane

IndustrialOther

6%

Need for CDM Reform

To provide long‐term carbon price   signals and certainty to the private  sector

Define a global goal for 2050 supported by             intermediate targets, to be agreed by the UNFCCC process

To facilitate access to new carbon  markets and sources of capital and   lower costs of abatement

Build a truly global carbon market by linking           regional carbon schemes and markets to each      other through increased access, converging prices and harmonized products

To accelerate low‐carbon growth      in developing countries

Reform the existing market‐based mechanisms     and explore new policy instruments – reduced       transaction costs, streamlined process, simplified methodologies

To scale up and deepen access to     carbon markets and finance

Facilitate the transfer of low‐carbon technologies and establish sector‐based programs to enable      larger scale investments in cleaner development 

Need for Strong Decisions

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

Key Messages on Carbon Market