Prices and Costs in the Carbon Market The World Bank’s experience HCC Meeting, Washington DC February 16, 2005

Basics of Price Formation in the Carbon Market Price is related to risk in each transaction and willingness to pay There is no delivery risk for EU Allowances or allowance trading in any other cap and trade domestic regime There is currently significant regulatory risk in CDM/JI projects and there will always be project performance and delivery risk There is little difference between prices paid for EU allowances and delivered costs as trading margins/fees are very small There are large and unpredictable differences between contract prices and all-up costs delivered into registries in CDM/JI At delivered costs significantly above US$10/t CO2e: The costs of compliance to regulated enterprises will be unacceptable in competitiveness terms and political resistance to further regulation will be high and There will be major coal/oil to natural gas shifts in most markets at $15-20/tCO2e or even less Differences in marginal cost and “penalties” are NOT price benchmarks

Year Maximum Price Paid PCF/Other Large Project Funds Maximum Price Paid CDCF to date Changing Contract Prices for Bank-Managed Funds

Fund Average Contract Price US$/tCO2e All-up Costs at end of Fund Life Percent to be delivered by 2012 Effective cost of 2012 delivery Effective Cost after 20% performance discount PCF % Other Carbon Funds % CDCF Tranche % EU ETS Allowances 9.10 Current Trade in dollars equivalent 9.60 After 5% fees 100%9.60 No delivery risk

Bank Roles in CDM Market Development Participants in Bank Funds take regulatory risk – hence World Bank ERPAs make a difference to project financing Private buyers pay only on delivery into registries Bank funds typically buy beyond 2012 with expectations that only % of ERs can be delivered by 2012 (less as time passes) Private buyers and many governments only buy up to 2012 vintages Bank invests heavily in exploring new markets, new technologies and processes where CF can drive sustainable development, and in new methodologies Private sector and other buyers rely on approved methodologies Bank takes significant up front project preparation costs risk and helps mobilize funding for underlying projects This is exceptional in the private market As “Lead Buyer” Bank is prepared to develop and manage programmes and large projects in return for 5-25% of the ERs, creating high quality low risk assets for sponsors/governments to sell to other buyers on best available terms