1. Carbon Finance Unit, The World Bank
Introduction to Carbon Finance market instruments to mitigate climate change
Martina Bosi
Carbon Finance Unit, The World Bank
November 8 , 2006
Washington DC

2. Global Energy-Related CO2 Emissions
20 000
25 000
30 000
35 000
40 000
1990
2000
2010
2020
2030
million tonnes of CO2
Coal
Oil
Gas
Alternative Policy Scenario
Reference Scenario
In 2030, Alternative Scenario’s CO2 emissions are 16% lower than in the Reference Scenario, but are still more than 50% higher than 1990
Source: International Energy Agency, World Energy Outlook 2004

3. Climate Change: Whose problem is it?
Industrial countries created the problem
US: generated 30.3% of 20thc GHG emissions
Latin America: 3.8%
Poor countries suffer the most
Population centers in flood-prone areas
Agricultural economies
Arid and semi-arid regions most exposed

4. The Kyoto Protocol: key features
Entry into force: February 16, 2005
US and Australia did not ratify
Differentiated commitments:
Developed countries and countries with economies in transition agree to quantified legally-binding targets (overall objective leads to a 5% reduction from 1990 levels by )
Six gases, sources and forestry sinks, 5-year period ( )
Target should be achieved through:
Domestic Reductions
Carbon Sinks: direct human-induced land use change and forestry activities
International Credits (Kyoto Mechanisms):
International Emissions Trading
Project –Based: Joint Implementation (in industrialized countries)
Project – Based: Clean Development Mechanism (in developing countries)
Negotiations on next period (post-2012) to start in 2005
First, if and when Kyoto enters into force, it will establish a market for CO2 emission allowances among industrialised nations. CO2 has now a price, for those companies that are subject to emission caps, or wish to voluntarily offset their emissions. Some governments are purchasing CO2 quotas from other governments, or based on greenhouse gas reduction projects.
The EU has brought this logic a step closer to the reality. Starting 2005, European industry will be subject to an industry-based CO2 « cap and trade » system covering 2.2 billion tons of CO2 emissions annually, and several thousand installations.
It covers power generation – more than 60% of the total in the trading scheme –; but also a host of other large users of fossil fuels, including oil refining, iron and steel, cement, glass and paper.
This move has raised concerns about C-ness: industry is taking this very seriously. It realises that it will need to make production and investment choices that it would not have made otherwise, in order to comply with emission goals. And that this likely to increase its cost.
Note that industry is not the only source of greenhouse gases: transport and buildings record rapid growth and are not addressed as effectively as industry is.
However impressive this may sound – and in fact the EU is introducing by far the largest tradeable emission permit scheme in the world, Kyoto can only be a first step: it covers only 32% of global co2 emissions, and certainly not enough to stabilise concentrations. Many energy-related investments around the world are unlikely to be affected by the Kyoto Protocol as it is now.
A worthy question is: how far and how fast can we bring emissions down in the near term, with on-the-shelf technology and policy design?

5. Market Mechanisms to Mitigate Greenhouse Gas Emissions
Emissions Trading and Project-Based Mechanisms
Key feature of the Kyoto Protocol:
Provide flexibility as to the location of emission reductions
Rationale:
Impact of CO2 emissions and/or reductions insensitive to location
Cost and opportunities to reduce CO2 vary between companies, sectors, and countries
Market instruments enable meeting GHG targets cost-effectively
Taking advantage of differences in marginal abatement costs across different emission sources

6. Example of emissions trading
Emission allowance
Country A
Country B €
Emissions target prior to trading
tCO2
Allowances to buy
Allowances to sell
New targets after transaction
2008
2012
2008
2012

7. How the Clean Development Mechanism Works
time
emissions
Project emissions
baseline
emission
reductions
Emission reductions bring additional revenue stream to CDM projects
No single price; but currently in the range of ~$8-$10 (per tCO2)

8. EU Emission Trading Scheme Chicago Climate Exchange
Structure of the Carbon Market 2006 (worth close to $22 billion in 2006)
Credible C-asset
Project-Based Transactions
Allowance Markets
EU Emission Trading Scheme
Primary JI & CDM
226 MtCO2e
764 MtCO2e
Voluntary & Retail
Other Compliance
New South Wales Certificates
UK ETS
Chicago Climate Exchange
8 MtCO2e
8 MtCO2e
2 MtCO2e
16 MtCO2e
8 MtCO2e

9. World Bank Carbon Finance Approach
Ensure that carbon finance contributes to sustainable development, beyond its contribution to global environmental efforts
Assist in building, sustaining and expanding the market for GHG emission reductions
Strengthen the capacity of developing countries to benefit from the market for GHG emission reductions
CF-Assist

10. World Bank Carbon Funds & Facilities
Total funds pledged = US$ 1.93 billion (13 governments, 62 companies)
Prototype Carbon Fund. $180 million. Multi-shareholder.
Netherlands Clean Development Mechanism Facility. $267.8 million Netherlands Ministry of Environment.
Community Development Carbon Fund. $128.6 million. Multi-shareholder.
BioCarbon Fund. $53.8 million. Multi-shareholder.
Italian Carbon Fund. $109.4 million Multi-shareholder (from Italy only).
Netherlands European Carbon Facility. $40.4 million. Netherlands Ministry of Economic affairs.
Spanish Carbon Fund. $281.9 million. Multi-shareholder (for from Spain only).
Danish Carbon Fund. $69.3 million. Multi-shareholder (for from Denmark only).
Umbrella Carbon Facility. [$727.5 million]. 2 HFC-23 projects in China.

11. How the Funds Work $ Industrialized Governments and Companies
EITs and Developing Countries $
Technology
Finance
CO Equivalent 2
Emission Reductions

12. Longer Term Challenge for Carbon Market
Carbon Trade could confer large flow of funds to developing countries: tens of billion of dollars per year
But requires a long-term, stable and predictable framework and accompanying regulatory system.
Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure;
Long-term viability of carbon market is not assured
Carbon finance needs regulatory visibility post-2012
Longer-term regulatory signal for carbon finance could come from:
International: U.N. Framework Convention on Climate Change and Kyoto Protocol
National/multi-national: e.g. EU Trading Scheme
Sub-national: e.g. US States;

13. Conclusions
Market mechanisms allow meeting GHG targets most cost-effectively
Sale of emission reduction creates revenue stream for climate-friendly activities (carbon finance)
Carbon Market is real
Carbon finance is an important source of new and additional development finance
World Bank is a player in the carbon market
Long-term signal (post-2012) is biggest challenge for continuation of carbon market

14. For more information, visit: http://www.carbonfinance.org
Thank you!
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