1. Overview of Carbon Markets SIO Fall 2007 Environmental Science and Policy Forum Mitigation and Adaption in a High CO2 World 1 Melanie McCutchan MPIA Candidate 2009 UCSD IR/PS October 23, 2007

2. Outline Carbon Markets Regulatory Voluntary EU ETS and Lessons Learned Market Prices for Carbon 2

3. Carbon Markets Regulation Based Existing Clean Development Mechanism (Kyoto) European Union Emission Trading Scheme (EU ETS) Australian Carbon Trading Scheme United Kingdom ETS Under Development California - Global Warming Solutions Act NE States -Regional Greenhouse Gas Initiative Under Debate “Cap & Trade” Bill in Senate 3

4. Carbon Markets Voluntary Emission Reduction Markets 4 Keidanren Voluntary Action Plan Over the Counter (OTC) Market Chicago Climate Exchange

5. Market Growth 5 Source: World Bank. State and Trends of the Carbon Market 2007. p. 3

6. EU ETS Linked to Kyoto Protocol Developed Nation (Annex 1) Targets GHG Emissions to 1990 levels by 2000 5% reduction by 2008-2012 Kyoto Expires 2012 New negotiations now under way in Bali 6

7. European Union Emission Trading Scheme (EU ETS ) Trading began 2005 Covers: Electric Power and Major Industrial Sectors 45% of EU C0 2 e emissions Allowances with some Auctioning Phase I 5% Phase II 10% National Allocation Plans 7

8. 8 Source: Parliament of the United Kingdom at http://www.publications.parliament.uk/pa/cm200607/cmselect/cmenvaud/70/7004.htm 10/18/2007

9. 9 Source: World Bank. State and Trends of the Carbon Market 2007. p. 12

10. Effects of the EU ETS Market Some reduction 1-4% of EU’s 2005 Emissions (Ellerman and Buchner 2006) Price signal resulted in internal abatement (Point Carbon 2007) 10

11. Lessons from the EU ETS Market 11 Challenges Allocating allowances Technical Political Creating an appropriately constrained market

12. Price of Carbon Phase II EU ETS Market $20-$25/tCO 2 e 12 Sources: For EU ETS Phase II Price: World Bank. State and Trends of the Carbon Market 2007. p. 3 For CCX Auction: CCX Press Release at http://www.chicagoclimatex.com/market/pdf/CER_Auction_Results_2007.pdf Chicago Climate Exchange Auction Carbon Credits from Wind Farm in India $22/tCO 2

13. Insert13

14. Insert14 $8.70/metric ton.8 metric tons

15. The Future Price of Carbon Depends on a number of unknowns: – New International Agreements – Market Rules 15

16. Links Carbon Markets: European Union Emission Trading Scheme ec.europa.eu/environment/climat/emission.htm Chicago Climate Exchange www.chicagoclimateexchange.com Keidanren Voluntary Action Plan www.keidanren.or.jp/index.html Further Reading: World Bank: “State and Trends of the World Carbon Markets 2007” carbonfinance.org/docs/Carbon_Trends_2007-_FINAL_-_May_2.pdf "Business is getting down to cutting carbon, but needs more incentives to make much difference to climate change" www.economist.com/specialreports/displayStory.cfm?story_id=9217992 “Recommendations for a Greenhouse Gas Cap and Trade System for California” (page 4-6 executive summary) www.climatechange.ca.gov/documents/2007-06 16