1. Overview of Carbon Markets Voluntary & Compliance Markets: Existing Carbon Reduction Units Vladimir Litvak RBEC Energy and Environment Practice Leader UNDP/GEF Regional Coordinator RBEC Energy and Environment Practice Meeting Wednesday 27 th September, 2006 Bratislava, Slovakia

2. 1 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 1 $ $ $ Kyoto Protocol $

3. 2 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 2 6 Main Greenhouses Gases addressed in UNFCCC : Carbon Dioxide: CO 2 Methane: CH 4 Nitrous oxide: N 2 O Hydrofluorocarbons: HFCs Perfluorocarbons: PFCs Sulphur hexafluoride: SF 6

4. 3 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 3 Greenhouse Gases are generated by the following sectors: Energy: – Fossil Fuel Combustion & – Fugitive emissions from fuels Industrial processes Solvent & other product use Agriculture Waste

5. 4 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 4 The Kyoto Map Ratification date: February 16, 2005 Ratified by 160 countries (up to April 12, 2006) Not ratified by Australia and USA that together represent 33% of world total emission

6. 5 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 5 3 Kyoto Mechanisms The Kyoto Protocol broke new ground by defining three innovative “flexibility mechanisms” to lower the overall costs of achieving its emissions targets: Clean Development Mechanism (Art. 12) Joint Implementation (Art.6) Emissions Trading (Art.17) These mechanisms enable Parties to access cost- effective opportunities to reduce emissions or to remove carbon from the atmosphere in other countries.

7. 6 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 6 Each Kyoto Mechanism has its own Emission Credits: CDM (Art.12): Certified Emission Reductions (CERs) Joint Implementation (Art. 6): Emission Reduction Units (ERUs): Emission Trading (Art.17): Asigned Amount Units (AAUs): One period of 10 years or 3 x 7 years

8. 7 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 7 Different Carbon Markets Allowance-based Transactions The buyer purchases emissions allowances created and allocated by regulators under cap-and-trade regimes such as Assigned Amount Units (AAU’s) under the Kyoto Protocol or EU Allowances (EAU’s) under the EU Emission Trading Scheme. Project-based Transactions The buyer purchases emission credits (CERs, ERUs, VERs) from a project that reduces GHG emissions. Some project-based transactions are conducted to meet voluntary targets, but most are intended to for compliance with the Kyoto Protocol or other regulatory regimes. No difference in quality between emission allowances and project-based credits, once the latter are issued !

9. 8 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 8 There are 45 Different Carbon Markets, but 2 main regimes Project-based Markets: The Kyoto Protocol (CDM and JI) – MANDATORY REGIME Marrakech Accords Executive Board (CDM and JI) Methodology Panel National mitigation plans (e.g. Canada, Japan, EU countries) Non-Kyoto Regimes – MANDATORY REGIME USA (individual States; Oregon, California, East Coast) Australia (individual States; New South Wales) Voluntary Regimes Chicago Climate Exchange Retail market Allowance-based Market EU Emissions Trading Scheme (as of Jan. 2004) Linking directive EU-ETS & Kyoto Protocol

10. 9 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 9 Structure of Carbon Markets Allowance Markets UK ETS EU Emission Trading Scheme Chicago Climate Exchange New South Wales Certificates Project-Based Transactions JI and CDM Voluntary Retail Other Compliance

11. 10 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 10 CDM Projects (3 September 2006) Source: www.unfccc.org

12. 11 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 11 Project-based Transactions – Annual volume of project-based emission reductions and average price is US$/tCO2eq

13. 12 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 12 Project-based Transactions – Location of CDM & JI Projects

14. 13 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 13 Project-based Transactions – Who is buying?

15. 14 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 14 Type of technology in emission reduction projects (as a share of volume contracted)

16. 15 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 15 Project-based Transactions – Who is buying @ what price level…..? Price levels vary according to (assumed) risk levels: (current – September 2006 – price levels for CERs: €7-8 ($8-10)

17. 16 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 16 Allowance-based Transactions – Who is buying @ what price level > €28 !? Total of 6.57 billion CO2 allowances for 25 EU countries Trading volume Jan 2006: 35-40 million CO2 allowances/week

18. 17 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 17 Carbon Market outlook to 2012 The countries with shortfalls in their Kyoto emission allowances are likely to need 4.0-5.0 billion Kyoto compliant units by 2012 to meet their commitments. Based on current trends the CDM is probably capable of supplying an average of 100-200 million CERs per year during the commitment period or, in aggregate, around 800 million CERs by 2012. JI is estimated to be able to supply an additional 40-50 million ERUs per year during 2008-2012, or in total 200-250 million by 2012. Combined CER and ERU supply to 2012 could be around 1,000 million units, which would meet about 15-25% of Kyoto market demand for compliance units. Source: UNDP-EEG, March 2006

19. 18 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 18 Kyoto Protocol ends in 2012: What’s next? There exist many uncertainties about the post-Kyoto Regime Which target? Will all countries participate? Mandatory regime for all? It is an ongoing & learning process  high dynamic, high uncertainty Possible Future of CDM: by Project; by Sector; by Programme? First COP/MOP: Montreal (2005) The creation of a market for a Public Good such as GHG is a hard and complex task Climate Change is here  What about adaptation, more a priority? Non Annex I Countries are still asking for poverty alleviation and economic development

20. 19 RBEC Energy and Environment Practice Meeting: Carbon Finance September 2006 19 $ $ $ Kyoto Protocol $ Thank you!