Kyoto Protocol and Carbon Market

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Kyoto Protocol and Carbon Market

• Dr. Venkata Ramana Putti
• Workshop on Carbon Finance
• Sarajevo, Bosnia-Hercegovina
• April 17, 2009

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Climate Change
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
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Greenhouse Gases

• Global Warming Potential
• Carbon Dioxide (CO2) 01
• Methane (CH4) 21
• Nitrous Oxide (N2O) 310
• Perflurocarbons (PFC) 6500
• Hydroflurocarbons (HFC) 11700
• Sulfur Fluoride (SF6) 23900

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Distribution of GHG Emissions
Red -- contribution (2004) Blue tCO2/capita
(2000)
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Potential Impacts
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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

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Kyoto Protocol
38 Developed Countries and Economies in
Transition (Annex I countries) took on reduction
commitments in 1997
BUSINESS AS USUAL Emissions

• The Demand
• Kyoto Projects
• EU ETS Allowances

GHG Emissions ton/ year
AVG 1990 - 5.2
2008
2012
1990 Base Year
First Commitment Period 2008-2012
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Carbon Market Components
Market Transaction Type Credit type Regime
Regulatory Allowance-based AAU (Assigned Amount Units) International Emissions Trading
Regulatory Allowance-based EUA (EU Allowance) EU-Emissions Trading Scheme
Regulatory Project-based ERU (Emission Reduction Unit) Joint Implementation
Regulatory Project-based CER (Certified Emission Reduction) Clean Development Mechanism
Voluntary Mainly project-based VER (Verified Emission Reduction) Voluntary projects
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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
• 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)

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Clean Development Mechanism

• Non-Annex I Country

Annex I Country
Funding
Technology
Projects to reduce GHG emissions
Emission reduction compared to an existing
baseline
Certified Emission Reduction (CER)
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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

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CDM Status (02/04/09)
Registered Requested Pipeline
Projects 1550 49 gt2600
Total CERs 1520m 30m gt1350m
Annual CERs 280m 8.8m
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Carbon Market Growth
7,4 USB CDM in 07
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Carbon Price during Economic Crisis
Spot EUA and sCER ( per tCO2e)
Sources ECX Bluenext
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Dramatic Reduction Needed by 2050

• 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
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.

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Significant Potential Yet to Tapped in CDM
2. Many countries are under-penetrated even
relative to their emissions
1. Location of CDM projects (percentage of
volume, 2007)

• 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.

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Opportunities for Scale-up and Extension
Forestry is barely visible in CDM
64 of 2007 contracts for clean energy
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.
Building on success to scale up
Programmatic 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.
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Need for CDM Reform
2-year delay
at validation or req. reg.
registered
issuance
DOE
348 days
180 days
328 days
2,645 projects 1,451 MCERs
403 projects 195 MCERs
1,170 projects 1,342 MCERs
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74 to high yield projects (ind. gas)
70 of all projects (half of volumes) have not
reached registration
RE and EE (70) stuck somewhere in the pipeline
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Need for Strong Decisions
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
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Key Messages on Carbon Market
Market can play an important role in Greenhouse gas (GHG) emissions reduction
Technologies are available now that enable substantial reductions at acceptable marginal abatement costs
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
A deep, liquid and global carbon market has the potential to deliver significant benefits to all participants, including for development
But countries will need to take decisions to establish long-term price signals and gain the full benefits of carbon markets