Carbon Trading and the Kyoto Protocol

1
Carbon Trading and the Kyoto Protocol

• Antonio Lim
• Sustainable Development Department
• Europe and Central Asia Region
• World Bank
• Sarajevo, Bosnia-Herzegovina
• April 16, 2009

2
Overview

• Kyoto Protocol and the Carbon Market
• Features of a Carbon Finance Project
• Mitigation Project Examples

3
Climate Change and Global Warming
Earths climate is warming and human activities
are primarily responsible (gt90 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
4
Global Warming Potential (GWP)

• Measure the impact that particular GHG on
  radiative forcing the additional heat/energy
  retained in the earths ecosystem through the
  addition of this gas to the atmosphere
• Unit of Measure ton of CO2equivalent (tCO2e)

5
Global Warming Potential (GWP)

• Carbon Dioxide (CO2) 1
• Methane (CH4) 21
• Nitrous Oxide (N2O) 310
• Perflurocarbons (PFC) 6500
• Hydroflurocarbons (HFC) 11700
• Sulfur Fluoride (SF6) 23900

6
Potential Impacts
7
The Kyoto Protocol

• 38 Developed Countries and Economies in
  Transition (Annex I) agreed in 1997 to
• Reduce GHG emissions by 5.2 below 1990 levels in
  the commitment period 2008-2012
• Total demand created for GHG Reductions 5
  billion tCO2e, including the US
• Marrakech Accord agreed on the rules of
  implementation in November 2001
• KP came into force in 2005 February with Russia
  ratifying the Protocol

8
Global Market Created by the Kyoto Protocol

• Most OECD countries have a reduction target, on
  average 5.2 below 1990
• Targets to be achieved through
• Reductions at home
• Purchasing emission reductions credits and
  international emission allowances
• Credits from projects in developing countries
  (Clean Development Mechanism CDM)
• Credits from projects in economies in transition
  (Joint Implementation JI)
• International Emissions Trading of allowances

Carbon Market
9
How Carbon Trading Operates
Buyers side
Domestic action
Purchase of allowances
Purchase of ERs is supplemental to domestic action

Emissions target

Host country benefits from technology and
financial flows
10
Mobilizing Resources for Climate Change
Mitigation

• Emission reduction projects located in Kyoto
  countries ?Clean Development Mechanism (CDM) and
  Joint Implementation (JI)
• Traded Unit Certified Emission Reductions (CERs)
• Emission reduction projects in Non-Kyoto
  countries ?Voluntary Market
• Traded Unit Verified Emission Reductions (VERs)
• ? Dynamic rules and conditions involving
  continuous change in standards, requirements,
  demand profile, supply, etc.

11
Growth of the Carbon Market
Mil. USD 2006 2007 2008
Compliance Markets 31,165 63,770 117,084
Voluntary Markets 70 265 499
12
Critical Operational Concepts in Carbon Finance
Projects

• Baseline
• Which GHG emissions will be reduced?
• Business-as-Usual (BAU) Scenario
• What is the future without the proposed project?
• How many years will the emission reductions last?
• What are the project boundaries?
• Additionality

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Concept of Additionality

• Investment Barrier
• A more financially viable alternative can lead to
  higher emissions
• Technological Barrier
• Less advanced technology leads to higher emission
• Common Practice Analysis
• Prevailing practice, existing regulatory or
  policy requirements
• Benefits Analysis
• A more viable strategic alternative can lead to
  higher emissions

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Baseline/Additionality
Certified emission Reductions (CER)
The difference between the actual project
emissions and the emission baseline constitute
the volume of CERs If project emission baseline
emission ? no CERs
emissions
time
15
Investment in Schools Heat Saving Structures in
Serbia
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Mitigation Impact for the Schools

• Total number of schools 16 / 54,035 ?2
• Heat for space heating (MWhe/y)
• before 11,168 -gt after 6,321 (-43.4)
• Average specific heat consumption for space
  heating
• before 207 ?Wh/ m2/y -gt after 117 ?Wh/ ?2/y
• CO2 emission reduction
• before 3,303 t/y -gt after 1,844 t/y (-44.2)
• Specific investments
• Average 38.8/m2 in range 18.1 to 97.4 /m2

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Investments in Hospitals Heat Saving Structures
in Serbia
18
Impact of the Investment in the Hospitals in
Serbia

• Total number of hospital buildings 11 / 50,934
  m2
• Annual heat for space heating (MWhe/y)
• before 16,747 -gt after 10,673 reduction of
  36.3
• Specific heat consumption
• Before 329 ?Wh/ m2,y -gt after 210 ?Wh/ m2,y
  (-36.3)
• CO2 emission
• Before 4,668 t/y -gt after 3,101 t/year (-33.6)
• Specific investments
• Average 29.23/m2 range 19 to 58.8/m2

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The Road Ahead for B-H

• EU 20-20-20 Vision
• US renewed engagement in international
  negotiations
• Post 2012 International Agreement (post Kyoto
  Protocol) December 2009 Copenhagen COP 15 Final
  Negotiations
• Transformative Approach in Mitigation
  programmatic and sectoral approaches

20
Carbon markets surpassed US130billion in 2008
Allowance markets (US million)
Project-based transactions (US million)
Future w/ EU
EU Emissions Trading Scheme 100,000 (twice over
2007)
CDM 6,000
Opportunity for B-H
Secondary CDM 25,600
Assigned Amount Units 180
New South Wales Certificates 180
Regional GHG Initiative 240
Voluntary market in 2008 niche segments (US
million)
Voluntary retail 500 ?
Chicago Climate Exchange 310
Source WB State and Trends of the Carbon Market
2009, forthcoming, Point Carbon, Reuters
21
Thank You

• www.carbonfinance.org
• www.unfccc.int

22
Overview of CDM and Voluntary Standards
Standard Description Eligible Project Types
CDM Certification of Offset Projects and carbon credits Excluding Nuclear, new HFC and REDD

Gold Standard Certification of Offset Projects and carbon credits Only Renewables and Energy Efficiency
VCS Certification of Offset Projects and carbon credits New HFc excl.
VER Certification of Offset Projects and carbon neutral products Nuclear, HFC and large hydro excl.
CCX Certification of CCX Offset Projects and credits New HFC excl.
CCB Standards Certification of Offset Projects Only LULUCF
ISO 14064 Certification of carbon credits, offsetting and emissions No restriction
23
Comparison of CDM and GS
Criteria CDM Gold Standard
Organization UN-backed Backed by 60 NGOs charities
Supervising Body UNFCCC EB GS TAC
Registration Process Rigorous Bureaucratic CDM-like with strong sustainable development focus community consultation component
Project Types Almost all types eligible Only renewables and Energy Efficiency
Additionality CDM additionality tool Same as CDM
Sustainability Assessment Host country criteria apply additional sustainability criteria (SD matrix)
Stakeholder Consultation 1-step consultation 2-step consultation (also at project design)
Prices Roughly standard prices Project dependent
Crediting Period 10 / 21 years (LULUCF) Same as CDM
Methodology CDM methodologies CDM methodologies additional methodologies
Issuance of Credits By EB By GS, into the GS Registry account