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Washington DC, June 2011

state and trends of the

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state and trends of the

2011

Environment Department

This report was prepared by a World Bank team comprising ofNicholas Linacre, Alexandre Kossoy and Philippe Ambrosi,with important contributions from Manelle At Sahlia, Veronique Bishop,Benot Bosquet, Christophe de Gouvello, Taisei Matsuki and Monali Ranade.


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2 | State and Trends of the Carbon Market 2011

New Approach for the 2011 Report

With the goal o providing a comprehensive discus-sion o the issues that most aected the carbon mar-ket in , the authors o last years report have re-structured State and Trends of the Carbon Marketor. Te report still provides an overview o the sizeand reach o the carbon markets, as well as the evolu-tion o the Kyoto exibility mechanisms, and oerspotential supply/demand scenarios or coming years.However, it no longer includes a detailed breakdowno carbon transactions, as in previous years. Instead,the report provides a more in-depth analytical dis-

cussion o the regulation and policy issues that willguide uture carbon market development.

The findings and opinions expressed in this report are the soleresponsibility of the authors and should not be cited withoutpermission. They do not necessarily reflect the views of the WorldBank Group, its Executive Directors, the countries they representor of any of the participants in the carbon funds or facilities man-aged by the World Bank. The World Bank does not guaranteethe accuracy of the data included in this work. This report is notintended to form the basis of an investment decision. The bound-aries, colors, denominations, and other information shown in this

work do not imply any judgment on the part of The World Bankconcerning the legal status of any territory or the endorsement oracceptance of such boundaries.

Section 1 photo credit: Jan Golinski / UNFCCCSection 2 photo credit: Veer IncorporatedSection 3 photo credit: Veer IncorporatedSection 4 photo credit: Dreamstime LLCSection 2 photo credit: Veer IncorporatedDesign: Studio GrafikPrinting: Westland Printers


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State and Trends of the Carbon Market 2011 |

Acknowledgements

Te report benetted greatly rom colleagues in thecarbon market who provided their written contribu-tions and perspectives: Olga Christyakova, MartinLawless, and Damien Meadows.

We wish to extend our gratitude to those who oeredtheir cooperation and insights during the elaborationo this report: Edwin Aalders, Schwan Badirou Gaari,Ellysar Baroudy, Jean-Jacques Barberis, FranoisBeaurain, Luca Bertali, Agns Biscaglia, MartinaBosi, Ana Bucher, Marcos Castro, Lance Coogan,

Isabelle Curien, Keith Davis, Karen Degouve deNuncques, Eduardo Dopazo, Jason Dunn, SaaEichberger, Emmanuel Fages, Laura Fidao, GregerFlodin, James Foster, Javier Freire Coloma, MartinFrench, Pranab Ghosh, Matthew Gray, PierreGuigon, Isabel Hagbrink, Katherine Hamilton,Henrik Hasselknippe, Carina Heimdal, AndrewHoward, Robert M. Hunt, Daigo Koga, WernerKornexl, Ganna Korniyenko, Benot Leguet, GautierLe Maux, Mark Lewis, Zijun Li, Peter Lloyd, TomasMarcello, Allison McManus, Rachel Mountain,

Akiko Nishimae, John OBrien, Klaus Oppermann,Molly Peters-Stanley, Vicky Pollard, Leila Pourarkin,Neeraj Prasad, Brice J. M. Quesnel, David Rapin,Heike Reichelt, Renaud Scardina, Kai-UweBarani Schmidt, Guido Schmidt-raub, ChandraShekhar Sinha, revor Sikorski, Milo Sjardin, YvonSlingenberg, Sara Stahl, Andy Stone, Aurelien ignol,Sarah Underwood, Laurent Valiergue, John Virgoe,Alessandro Vitelli, George Waldburg, Xueman Wang,Vikram Widge, Yevgen Yesyrkenov, Peter Zapel, IvanZelenko, Elizabeth Zelljadt.

We would also like to thank all o those who tooktime to respond to the market survey. Without yourresponses the report would be less than it is. Finally,we want to thank the many market participants strug-gling to make a dierence on a critical global issue.

Te State and rends o the Carbon Market re-ceived nancial support rom the CF-Assist Program,managed by the World Bank Institute (WBI).


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List of Abbreviations and Acronyms

AAU Assigned Amount UnitAAUPA AAU Purchase AgreementAB 32 Global Warming Solutions Act of 2006

Assembly Bill 32ACR American Carbon RegistryADB Asian Development BankAfDB African Development BankAMF Autorit des Marchs FinanciersAWG-KP Ad Hoc Working Group on Further

Commitments for Annex I Parties underthe Kyoto Protocol

AWG-LCA Ad Hoc Working Group on Long-termCollaborative Action

CAPEX Capital Expenditures

CARB California Air Resources BoardCAR Climate Action ReserveCCP central counterpartiesCCS Carbon Capture and StorageCCX Chicago Climate ExchangeCDM Clean Development MechanismCER Certified Emission ReductionCFL Compact Fluorescent LampCFTC Commodities Future Trading CommissionCH

4Methane

CMM Coal Mine MethaneCMP Conference of the Parties serving as the

Meeting of the Parties to the Kyoto ProtocolCPF Carbon Partnership FacilityCO

2Carbon Dioxide

CO2e Carbon Dioxide Equivalent

COP Conference of the PartiesCPA CDM Programme ActivityCPRS Carbon Pollution Reduction SchemeCP-1 First Commitment Period under the Kyoto

ProtocolCRE Commission de rgulation de lnergieCRT Climate Reserve TonneDNA Designated National AuthorityDOE Designated Operational EntityEB Executive Board of the CDMEBRD European Bank for Reconstruction and

DevelopmentEC European CommissionECX European Climate ExchangeEE Energy Efficiency

EIT Economy in TransitionEITE Emission-intensive, Trade-exposedER Emission ReductionERPA Emission Reduction Purchase AgreementERU Emission Reduction UnitESC Energy Savings CertificateESS Energy Savings SchemeETS Emissions Trading SchemeEU European Union

EUA European Union AllowanceEU ETS European Union Emissions Trading SchemeEURIBOR Euro Interbank Offered RateFSB Financial Stability BoardGDP Gross Domestic ProductGGAS New South Wales Greenhouse Gas

Reduction SchemeGHG Greenhouse GasGIS Green Investment SchemeHFC HydrochlorofluorocarbonIFC International Finance CorporationIEA International Energy AgencyIFI International Financial InstitutionIFRS International Financial Reporting Standard

IMF International Monetary FundIRR Internal Rate of ReturnJ-VETS Japan-Voluntary Emissions Trading SchemeJI Joint ImplementationJISC Joint Implementation Supervisory

CommitteeKM Kyoto MechanismLBFR Law on Banking and Financial RegulationLDC Least Developed CountryLEDS Low Emission Development StrategieslCER Long-term Certified Emission ReductionLFG Landfill GasLoA Letter of ApprovalLRET Large-scale Renewable Energy TargetLULUCF Land Use, Land Use Change and ForestryMAD Market Abuse DirectiveMCCF Multilateral Carbon Credit FundMDB Multilateral Development BankMiFiD Markets in Financial Instruments DirectiveMOP Meeting of the PartiesMRET Mandatory Renewable Energy TargetMRV Measurement, Reporting and VerificationNAMA Nationally Appropriate Mitigation ActionNCCP National Climate Change PolicyNDRC National Development and Reform

CommissionN

2O Nitrous Oxide

NAP National Allocation PlanNPV Net Present ValueNZ ETS New Zealand Emissions Trading SchemeNZU New Zealand Unit

OECD Organization for Economic Co-operationand Development

OTC Over-the-CounterpCER Primary Certified Emission ReductionPDD Project Design DocumentPFC PerfluorocarbonPIN Project Idea NotePMR Partnership for Market ReadinessPoA CDM Programme of Activities


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POI Proof of IdentityPP Project ParticipantR&D Research and DevelopmentRE Renewable EnergyREC Renewable Energy CertificateREDD Reducing Emissions from Deforestation and

Forest DegradationREDD+ Extends REDD by including sustainable

forest management, conservation of forests,and enhancement of carbon sinks.

REMIT Regulation on Energy Markets Integrity andTransparency

RET Renewable Energy TargetRGGI Regional Greenhouse Gas Initiative

RMU Removal UnitsCER Secondary Certified Emission ReductionSCF Strategic Climate FundSEI Sustainable Energy Initiative

SF6

Sulfur HexafluorideSME Small and Medium-size EnterpriseSRES Small-scale Renewable Energy SchemetCO

2Ton of Carbon Dioxide

tCO2e Ton of Carbon Dioxide Equivalent

tCER Temporary Certified Emission ReductionUN United NationsUNEP United Nations Environment ProgrammeUNFCCC United Nations Framework Convention on

Climate ChangeVAT Value-added TaxVCS Voluntary Carbon StandardVCU Verified Carbon UnitsVER Verified Emission Reduction

WB World BankWCI Western Climate InitiativeWTI West Texas IntermediateWTO World Trade Organization


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Contents

Acknowledgements 3Overview 9Introduction 11

1. International DevelopmentsCancun Conference and the Post-2012 Environment 131.1 Improvements to the Clean Development Mechanism and

Continuing Support for Market Mechanisms 141.2 Climate Finance and the Establishment of the Green Climate Fund 161.3 Recognition of Developing Country Contributions to Mitigation and a

Better Representation of Forestry-related Activities 161.4 Beyond CancunMarket Perceptions 171.5 Conclusions 18

2. Domestic Policy DevelopmentsA Story of Fragmentation 212.1 Annex I Countries 222.2 Non-Annex I Countries 332.3 Linking Emissions Trading Schemes 362.4 Conclusions 37

3. How Market Participants TransactRisk and Regulation 393.1 The Changing Regulatory LandscapeThe Impact of Financial Market Reforms 393.2 Over-the-counter MarketRegulation is Coming Down the Pike 423.3 Primary Issuance MarketEmission Allowance Auctions 423.4 Secondary MarketsControlling Risk and Ensuring Transparency and Accountability 433.5 Conclusions 45

4. Carbon and Climate Finance 47

4.1 Kyoto MarketA post-2012 Facing Low Demand and Low Supply 474.1.1 CERsWhat Did or Did Not Happen in 2010? 484.1.2 ERUsWhat Lies Ahead? 514.1.3 AAUsResponding to the Lack of Demand 52

4.2 Voluntary Markets 534.3 Mobilizing Low-carbon InvestmentBeyond Carbon Revenue Streams 554.4 New Asset Classes Coming to the Market 57

4.4.1 REDD and REDD+ 574.4.2 Sustainable Land ManagementAgricultural Soil Carbon 59

4.5 Conclusions 59

5. Outlook - Demand and Supply Balance 615.1 Demand and Supply Balance Through to 2012 61

5.1.1 Sovereign Demand 61

5.1.2 Private Sector Demand 635.1.3 Supply Through to 2012 645.1.4 Residual Demand136 MtCO

2e 64

5.2 Will there be Enough Emission Reductions Generated in Developing Countries After 2012? 655.3 Conclusions 68

Methodology 70Appendix 1. Assumptions for Estimates of Potential Demand for Offsets from non-Annex I Countries 71Glossary 73


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BoxesBox 1. The European Unions Approach to International Credits 15Box 2. North American Offset Prices 31Box 3. Brief History of Carbon Market Fraud in the EU ETS 40Box 4. A Point of View on the EU ETS 41

Box 5. Voluntary Markets 54FiguresFigure 1. Carbon Market at a Glance, Market Values, 200410 9Figure 2. Respondents Views on a Future Multilateral Framework 18Figure 3. RGGI Forecast Emissions 33

TablesTable 1. Carbon Market at a Glance, Market Values, 200410 9Table 2. Current State Climate Change Policies in Australia 23Table 3. Current Province Climate Change Policies in Canada 23Table 4. EU ETS Phase II Auctions 25Table 5. Aviation Directive Summary 27Table 6. Some Examples of U.K. Complementary Measures 28Table 7. Current Climate Change Policies in Japan 29Table 8. Offset Supply and Demand Forecast for Californias Cap-and-trade 31Table 9. Current U.S. State and Regional Climate Change Policy in North America 32Table 10. Current Trading Platforms in China 35Table 11. Voluntary Market Prices and Volumes 54Table 12. Supply and Demand in PerspectiveKyoto Market Balance, 200812 62Table 13. Potential Demand, Contracted Supply, and Residual Demand, 200812 65Table 14. Scenarios of Potential Demand for Offsets Generated in non-Annex I

Countries 201320 (MtCO2e). 66

Table 15. Estimates of Potential Supply Under the CDM and JI up to 2020 (MtCO2e) 67


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Overview

HOW LONG CAN A MARKETBE IN TRANSITION?

Ater ve consecutive years o robust growth, thetotal value o the global carbon market stalled at$4 billion (see Figure )., Suering rom thelack o post- regulatory clarity, the value o theprimary Clean Development Mechanism (CDM)market ell by double-digits or the third year in arow, ending lower than it was in 5, the rst yearo the Kyoto Protocol. Te Assigned Amount Unit

(AAU) market, which grew in 9 with strong sov-ereign support, shrank as well in . Finally, themarket that had grown most in 9allowancesunder the U.S. Regional Greenhouse Gas Initiative(RGGI)saw that years gains erased in .

As these segments declined, the dominance o theEuropean Union Allowances (EUAs) market becamemore pronounced than ever. EUAs accounted or 84percent o global carbon market value in . Withthe value o the secondary CDM transactions takeninto account, the share o the carbon market primar-

ily driven by the EU Emissions rading Scheme (EUES) rose to 97 percent, dwarng the remainingsegments o the market (see able ).

Secondary CDM

Other Offsets

Primary CDM

Other Allowances

EU ETS Allowances

CarbonMarketEvolution($billion)

Figure 1. CarboMarket at aGlance, MarketValues, 20041

Carbon Market Evolution, values ($ billion), 200410

EU ETS

Allowances

Other

Allowances

Primary CDM Secondary

CDM

Other Offsets Total

2005 7.9 0.1 2.6 0.2 0.3 11.0

2006 24.4 0.3 5.8 0.4 0.3 31.2

2007 49.1 0.3 7.4 5.5 0.8 63.0

2008 100.5 1.0 6.5 26.3 0.8 135.1

2009 118.5 4.3 2.7 17.5 0.7 143.72010 119.8 1.1 1.5 18.3 1.2 141.9

Sources: World Bank, Thomson Reuters Point Carbon, Bloomberg New Energy Finance and Ecosystem MarketplaceNote: Numbers may not add up due to rounding.

Table 1. CarbonMarket at a GlaMarket Values,200410

Sources: World Bank, Thomson Reuters Point Carbon, BloombergNew Energy Finance, and Ecosystem Marketplace

1. For details on the methodology refer to the Methodology Section at the end of the report.2. Still, carbon volumes traded contracted by over 10 percent during the same period as prices declined in some markets.


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Te global carbon market stagnated even as the globaleconomy stabilized and began a tentative recovery in. Te carbon market growth halted at a particu-larly inopportune time: proved to be the hotteston record,3 while emission levels continued their seem-

ingly inexorable rise.4 In the end, however, the year maybe remembered most or the political opportunitiesthat arose, yet were ultimately ailed to materialize.

In the United States, there was not enough sup-port to pass ederal cap-and-trade legislation. TeJapanese Basic Act on Global Warming, whichpassed in the Diets lower house, was halted whenthe government lost control o the upper house aew months later. Australias Senate ailed to pass theCarbon Pollution Reduction Scheme and Australiasgovernment subsequently chose to reeze its plansor a domestic cap-and-trade scheme. Even the years

rare good news, namely the Republic o Koreasadoption o the Framework Act on Low CarbonGreen Growth, turned sour when the government,acing internal opposition, decided in early to delay the implementation o its cap-and-tradescheme until 5.

At the global regulatory level, in mid- the CDMExecutive Board temporarily halted issuance oCertied Emission Reductions (CERs) rom hydro-uorocarbon (HFC-3) projects over baseline con-cerns. As concerns revealed not to be substantiated,

issuance resumed at the end o the year. Nonetheless,the European Commission soon thereater proposedqualitative restriction in the EU ES o carbon o-sets related to CDM industrial gas projects. Te pro-posal was adopted by the European Member States,which in January conrmed the ban o CERsrom HFC and nitrous oxide (N

O) adipic acid

projects starting, in 3.

Some o the most notable events in and early were unortunately related to ramework loop-holes and criminal activities directed against theEU ES. In addition to the carousel value-addedtax (VA) raud that suraced in 9,5 the last 8

months witnessed the sale o recycled CERs, phish-ing attempts on Germanys national registries and aseries o subsequent cyber-thets that underminedthe European market,6 highlighting security short-comings and increasing the urgency o stakeholderspleas to strengthen inrastructure.

Nevertheless, there were a ew reasons or guardedoptimism in . Europe started to crat its road-map or moving toward a competitive low-carboneconomy in 5. Also, while the Copenhagen cli-mate summit in 9 ailed to meet expectations,progress was achieved during the Conerence o the

Parties in Cancun last December. Such progress waswelcomed by the market and helped to restore somecondence in UN negotiations on climate change.Still, as Parties continue their deliberations,7 muchremains to be done. Dierences among major emit-ters regarding domestic priorities, approaches andambition will need to be resolved beore a robustand sustainable international agreement can emerge.

While the international regulatory environment re-mains uncertain, national and local initiatives havenoticeably picked up and may oer the potential to

collectively overcome the international regulatory gap.Te most prominent o these initiatives is Caliorniascap-and-trade scheme, which is expected to begin op-erating in . Other low-carbon initiatives, includ-ing domestic emission reduction targets, clean energycerticate programs, voluntary and pre-compliance do-mestic oset trading programs, and carbon exchanges,have gained increasing traction in developing econo-mies such as Brazil, China, India, and Mexico. Teseinitiatives signal that, one way or another, solutions thataddress the climate challenge will emerge.

3. 2010 ranked as the warmest year on record, together with 2005 and 1998, World Meteorological Organization (WMO) (http://www.wmo.int/pages/mediacentre/press_releases/pr_906_en.html). 2010 tied with 2005 as the warmest year of the global surface temperaturerecord, beginning in 1880, The U.S. National Oceanic and Atmospheric Administration (NOAA) (http://www.noaanews.noaa.gov/sto-ries2011/20110112_globalstats.html).4. 2010 ended with CO

2emission concentrations of 389.68 ppm, NOAA, January 7, 2011.

5. Some of the issues evidenced in 2009 were explained in detail in the State and Trends 2010 report: http://siteresources.worldbank.org/INTCARBONFINANCE/Resources/State_and_Trends_of_the_Carbon_Market_2010_low_res.pdf Access date 15 April 2011.6. Over 3 million European Union [emission] allowances (EUAs) were reported stolen from at least 5 European national registries from No-vember 2010 until January 2011. As a consequence, the transfer of allowances has been temporarily suspended in the European registriesand the spot-trade of carbon assets was frozen for several days early 2011 (http://ec.europa.eu/clima/news/index_en.htm).7. Under the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol and the Ad Hoc Working Groupon Long-term Cooperative Action under the Convention.


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State and Trends of the Carbon Market 2011 | 1

Introduction

Tis report covers many o the issues acing thecarbon market today. Te Overview provides high-lights rom the report and inormation on the sizeo the carbon market. Te body o the report coversinternational developments (Section ), domesticpolicies (Section ), risk and regulation o markets(Section 3), carbon and climate nance (Section 4),and market outlook (Section 5).

Te international developments section briey dis-cusses the positive outcomes or carbon markets

and climate nance resulting rom the CancunConerence. International developments have im-portant implications or market condence andhence vital private capital investment. Te reportincludes the results rom a market sentiment sur-vey conducted by the World Banks Carbon FinanceUnit. Te results show that, despite well-document-ed short-term uncertainty surrounding the carbonmarket, respondents are optimistic about the pos-sibility o a binding agreement in the longer term.Tis section o the report also establishes the broadparameters used in the projection scenarios devel-

oped in the market outlook.

Te report provides a summary o some nationaland regional mitigation measures being implement-ed, including important Nationally AppropriateMitigation Actions (NAMAs) rom some majoremitters. Te inormation in this section supportsthe increasingly common perspective among market

participants o the emergence o a ragmented butworkable carbon market that could urther evolvethrough linking and acceptance o similar levels oambition.

An issue related to domestic and regional mitiga-tion policies is the considerable activity currentlysurrounding carbon market risk and regulatory de-velopment. Tis section provides details on many is-sues aced by policy makers, regulators, and marketparticipants. Considerable change occurred during

and is expected to continue over . Tereis convergence on regulatory approaches as moreEuropean countries move toward robust and trans-parent regulation o the carbon market to ensuremarket and public condence. Tis includes a re-evaluation o such long-held principles as universalparticipation.

While Sections 3 summarize the geopolitical andregulatory environment aecting the carbon market,Section 4 on carbon and climate nance provides amore detailed analysis o the impacts o these actors

on current Kyoto primary market prices, volumes,and market behavior. Tis part o the report alsobriey discusses climate nance and new emergingasset classes such as REDD plus. Finally, in Section5, the report brings all this inormation together inthe market outlook, which discusses the supply anddemand balance going orward.


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SECTION1


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International DevelopmentsCancun

Conference and the Post-2012 Environment

THE DISAPPOINTMENT resulting rom the United Nations Climate Change

Conerence in Copenhagen in 2009 was replaced by the renewed optimism o the

Cancun Conerence in 2010, which restored some market condence in the United

Nations Framework Convention on Climate Change (UNFCCC) process. At the Cancun

Conerence, countries agreed to keep average global temperature warming below 2C in

comparison to preindustrial levels. Tey also agreed to review the adequacy o this com-

mitment with the possibility o moving to a 1.5C target as new scientic evidence on

impacts becomes available.8

Te Cancun Conerence resulted in a number o oth-er positive outcomes or carbon markets and climatenance:9 the decision to establish the Green ClimateFund; the continuation o the Kyoto mechanisms,including important improvements and reorms to

the Clean Development Mechanism (CDM); theinclusion o reduced deorestation through REDDand REDD plus (REDD+); and the ormal recogni-tion o developing countries pledges o NationallyAppropriate Mitigation Actions, which are aimed atachieving a deviation in their GHG emissions com-pared to business-as-usual trends by .

Te best case analysis rom the United NationsEnvironment Programme (UNEP) EmissionsGap Report estimates that developed and devel-oping country pledges are 6 percent o what isneeded by to place the world onto a trajec-

tory that will keep global temperature rises to less

than C in comparison to preindustrial levels.Te International Energy Agency (IEA ) alsoestimates that the C goal will only be achievablewith a dramatic scaling-up eort, particularly rommajor emitters.

Tis section ocuses on key elements o the Cancun

Agreements and current market sentiment.

Developed and developing countrypledges are 60 percent of what isneeded by 2020 to place the world

onto a trajectory that will keep global

temperature rises to less than 2C

8. http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_kp.pdf Access date 28 Feb 2011.9. The United Nations Climate Change Conference took place in Cancun, Mexico, from 29 November to 10 December 2010. It encom-passed the sixteenth Conference of the Parties (COP) and the sixth Conference of the Parties serving as the Meeting of the Parties to theKyoto Protocol (CMP).10. UNEP 2010. Emissions Gap Report. Are the Copenhagen Accord Pledges Sufficient to Limit Global Warming to 2C or 1.5C? APreliminary Assessment. http://www.unep.org/publications/ebooks/emissionsgapreport/ Access date 9 March 2011.11. IEA 2010. World Energy Outlook. http://www.worldenergyoutlook.org/ Access date 29 March 2011.


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1.1 IMPROVEMENTS TO THE CLEANDEVELOPMENT MECHANISM ANDCONTINUING SUPPORT FOR MARKETMECHANISMS

Te major area o improvement and reorm o theCDM is arguably the introduction o standardizedbaselines and monitoring methodologies. Tese deci-

sions are aimed at maintaining environmental integ-rity, but reducing transaction costs, enhancing trans-parency and predictability, and acilitating access tounderrepresented project types and regions.

Such decisions that seek to improve the access ounder-represented regions in the CDM are particu-larly important in the ace o the EUs decision torestrict CERs rom CDM projects registered aterDecember 3, to those generated by projectslocated in least developed countries (LDCs). A sig-nicant change is needed in order to be able to scale

up the virtual absence o LDC projects rom theCDM pipeline (or urther details see Section 4.).

Emissions trading and the project-based mechanismsunder the Kyoto Protocol will continue to be avail-able to Annex I Parties as means to meet their quan-tied emission limitation and reduction objectives,3but the uture o the Kyoto Protocol itsel remainsunresolved. Additionally the Cancun Conerenceunder the Ad Hoc Working Group on Long-termCooperative Action under the Convention (AWG-

LCA) negotiation track agreed to consider the estab-lishment o one or more market-based mechanismsto enhance the cost-eectiveness o mitigation ac-tions by Parties.4

Tese changes are not yet providing the regulatorypredictability the market is seeking. Clarity is stillurgently needed on the post- international cli-mate change regime and on countries plans to usemarket-based mechanisms to meet domestic GHGobjectives. As highlighted in Box , the EuropeanUnion is seeking to provide such clarity.

Emissions trading and the project-based mechanisms under theKyoto Protocol will continue to be available to Annex I Parties asmeans to meet their quantified emission limitation and reduction

objectives, but the future of the Kyoto Protocol itself remainsunresolved.

12. COP 16. Decision -/CMP.6. Further guidance relating to the clean development mechanism. http://unfccc.int/files/meetings/cop_16/conference_documents/application/pdf/20101204_cop16_cmp_guidance_cdm.pdf Access date 4 Feb 2011.13. Outcome of the work of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol at itsfifteenth session http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_kp.pdf Access date 28 Feb 2011.14. http://unfccc.int/resource/docs/2010/cop16/eng/07a01.pdf#page=2 Access date 29 April 2011.


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BOX 1. The European Unions Approach to International Credits

The strategic importance of a broad and deep

international carbon market

The EU is by far the biggest buyer of emission re-duction credits15 from third countries, providing for

continued financial flows and technology transfer todeveloping countries, also after 2012 even in the ab-

sence of the certainty that should come from a newinternational agreement to effectively tackle climatechange. If designed properly and underpinned by ro-

bust targets, the international carbon market can playa major role in global abatement efforts, and create

increasing financial flows to support mitigation activi-ties in developing countries.

Design limitations of the CDM

To make this happen, we need to improve our existingtools and create new, advanced and scaled-up mar-

ket mechanisms. Despite its successes, as a project-based systemand one that in practice covers so far

a limited number of project typesthe CDM is simplynot designed to drive the structural transformation ofindustry in developing countries that the transition to

a low-carbon economy requires. By definition, offsetmechanisms such as the CDM cannot reduce global

emissions in net termsyet this is what is needed ifwe are to keep global warming below 2C.

Need for a move to sectoral crediting

mechanisms

That is why the EU and other Parties are advocat-

ing the creation of new and more ambitious sec-toral mechanisms that make it possible to tap into

far greater emissions-saving potentials and providemore revenue for financing reductions in developingcountries. Because only actions that go beyond a

previously defined threshold or target are credited,this would ensure net benefits to the atmosphere.

Sectoral mechanisms and the CDM could co-exist but

the CDM should increasingly focus on less developed

countries, where it should continue to target low costoptions for saving emissions. For the major emergingeconomies in the developing world, the CDM should

gradually be replaced by new sectoral mechanisms.

Provisions in the climate and energy package

Several provisions of the EUs domestic climate leg-

islation provide the tools to incentivise a move awayfrom the CDM and towards sectoral mechanisms.

The EU ETS and Effort Sharing Decision foresee thatafter 2012, even without an international agreement,

these instruments can provide a market for CERs

from new projects in Least Developed Countries. Inaddition, CERs from existing projects in other coun-

tries can continue to be used. The EUs standardson HFC-23 and adipic N

2O credits, which have been

discussed extensively and will apply from 2013, cre-ate more space for other CDM credits and can pro-

mote a shift to credits from bilateral or multilateralagreements. The EU is interested in engaging withour partners to set up such pilots so that the experi-

ence gained can inform the international negotiations.Participation in the initiatives such as the Partnership

for Market Readiness can facilitate the designing ofrobust pilots and finding interested partners.

EUs vision for the international carbon market

Europes vision for the international carbon marketremains to link up the EU ETS with other compat-

ible emission trading systems around the world andto develop robust sectoral mechanisms. We see an

eventual network of links between cap and trade sys-tems as forming the backbone of an expanded andstrengthened international carbon market. In this per-

spective, sectoral crediting is a necessary step be-yond the CDMs project-based approach.

Kindly provided by Damien Meadows, Head of Unit, InternationalCarbon Market, Aviation and Maritime, DG Climate ActionEuropean Commission.

15. Project-based emission reductions are commonly referred to as credits, offset credits or offsets.


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1.2 CLIMATE FINANCE AND THEESTABLISHMENT OF THE GREENCLIMATE FUND

Te Cancun Agreements ormalized the commit-

ment made by developed countries in Copenhagento mobilize $ billion a year by to addressthe mitigation and adaptation needs o developingcountries. Importantly, the Cancun Conerence de-cided to establish a Green Climate Fund. It is envi-sioned that the Fund will manage a portion o theseadditional resources.

Te sources o unding are not yet clear. It is ex-pected, however, that a portion o the $ billionwill come rom private sources, which may be mo-bilized through carbon markets.6 Carbon nanceand other nancial instruments will be important

or leveraging these unds to scale up the nancingo mitigation and adaptation activities. Policy mak-ers will need to ensure that market-based capacity ismaintained in both the public and private sectors toensure mobilization o the pledged climate nance.

Te Fund will be governed by the Green ClimateBoard, comprising 4 members as well as alternatemembers, with an equal number o members romdeveloping and developed country Parties. Te WorldBank will serve as the interim trustee o the GreenClimate Fund, subject to a review three years ater

operationalization o the Fund. An independent sec-retariat will support the operations o the Fund.7

Te Green Climate Fund will be designed by aransitional Committee in accordance with theterms o reerence. Te ransitional Committeecomprises 4 members, with 5 members rom

developed country Parties and 5 members rom de-veloping country Parties, with members having thenecessary experience and skills, notably in the area onance and climate change.8

1.3 RECOGNITION OF DEVELOPINGCOUNTRY CONTRIBUTIONSTO MITIGATION AND A BETTERREPRESENTATION OF FORESTRY-RELATED ACTIVITIES

Te Cancun Conerence ormally recognized devel-oping countries Nationally Appropriate MitigationActions (NAMAs), which were pledged ater theCopenhagen Conerence. In the context o sustain-able development, developing countries agreed toundertake NAMAs aimed at reducing emissions rela-

tive to business-as-usual emissions in contin-gent upon the provision o nance, technology, andcapacity building provided by developed countries.9A registry is to be established under the UNFCCCto record NAMAs seeking international support andto acilitate matching o nance, technology, andcapacity-building support to these actions.

At the time o writing, 45 countries have regis-tered a wide range o mitigation actions with theUNFCCC. Tese actions range rom broad enunci-ated targets with varying ormabsolute reductions

on business-as-usual (BAU) or intensity limitswith varying base years, to detailed programs oactivities with and without quantied GHG emis-sion reductions.3,4

Te particularity o NAMAs, especially those seek-ing support rom international sources, is a need or

16. Final Report of the UN High-Level Advisory Group on Climate Change Financing. 2010. http://www.un.org/wcm/content/site/climat-echange/pages/financeadvisorygroup/pid/13300 Access date 29 March 2009.17. http://unfccc.int/cancun_agreements/green_climate_fund/items/5869.php Access date 29 April 2011.18. http://unfccc.int/files/na/application/pdf/07a01-1.pdf Access date 29 April 2011.19. List of Nationally Appropriate Mitigation Actions of Developing Country Parties. http://unfccc.int/meetings/cop_15/copenhagen_ac-

cord/items/5265.php Access date 8 April 2011.20. COP 16. 2010. Outcome of the work of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention. http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf Access date 28 Feb 2011.21. Mexico aims at reducing its GHG emissions up to 30 percent with respect to the business as usual scenario by 2020. http://unfccc.int/files/meetings/cop_15/copenhagen_accord/application/pdf/mexicocphaccord_app2.pdf Access date 8 April 2011.22. India will endeavor to reduce the emissions intensity of its GDP by 20-25 percent by 2020 in comparison to the 2005 level. http://unfccc.int/files/meetings/cop_15/copenhagen_accord/application/pdf/indiacphaccord_app2.pdf Access date 8 April 2011.23. Brazil has a range of quantified emissions reductions from different activities. http://unfccc.int/files/meetings/cop_15/copenhagen_ac-cord/application/pdf/brazilcphaccord_app2.pdf Access date 07 April 2011.24. Ethiopia quantifies many reduction actions in terms of power generation potential http://unfccc.int/files/meetings/cop_15/copenha-gen_accord/application/pdf/ethiopiacphaccord_app2.pdf Access date 08 April.


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monitoring, reporting, and verication (MRV) ca-pacity. Clear boundaries and tracking will be neces-sary to avoid overlapping and double counting sup-port or NAMAs.

Te Cancun Conerence recognized the muchbroader contribution o orest-related activities ineorts to limit climate change. Specic recogni-tion was given to the reduction o deorestation anddegradation through such initiatives as REDD andREDD+. Tis means that orests will be included inany uture agreement with the possibility o generat-ing international credits rom these activities.5

Measurement o orest carbon will occur at the na-tional level, thus enabling programmatic approach-es. Tis measure is expected to encourage greatergeographic diversication (or urther details see

Section 4.4).

1.4 BEYOND CANCUNMARKET PERCEPTIONS

Developing countries are united in their support ora second commitment period o the Kyoto Protocol,as a critical element o the international communitysght against climate change. Among the developedcountries, the European Union continues to supportthe multilateral ramework through the UNFCCC6

and the Kyoto Protocol, but some countries haveexpressed opposition to the extension o the KyotoProtocol in which only some countries are obligatedto reduce emissions.7 Te uncertain uture o theinternational negotiations aects market percep-tions. Participants partly deal with this uncertaintythrough scenario analysis.

Te New Zealand government, as part o the cur-rent review o the New Zealand Emissions radingScheme (NZ ES), has identied three broad sce-narios or the evolving near-term international

ramework. Te scenarios include the ollowing: ()a continuation o the current multilateral rameworkwith legally binding limits on emissions; () a non-binding multilateral accord; and (3) no multilateralramework in the short-term.8

As scenario development is important or marketparticipants, the World Banks Carbon Finance Unitsurveyed them on ve questions regarding the suc-cess o an international agreement post-:

. How condent are you that there will be a new le-gally binding multilateral ramework, similar to thecurrent Kyoto Protocol, with legally binding com-mitments to reduce emissions, underpinned byrelatively strong multilateral rules and institutions?

. How condent are you that there will be a newpolitical multilateral accord, building on the

Copenhagen Accord and Cancun Agreements, un-der which countries make voluntary political com-mitments, supported by at least some multilateralrules and institutions, but without legal orce?

3. How likely do you think it is that there will beno multilateral ramework or accord in the nearterm? Countries continue to negotiate, but inthe interim, action is mainly driven at a nationallevel or through other international links.

4. Do you think a comprehensive agreement underthe auspices o the UNFCCC is undamental orcountries to address the climate change agenda?

5. Are there other scenarios, apart rom those listedabove, which should be considered?

Survey respondents were not optimistic that a bind-ing international agreement could be achieved in theshort term. However, they were optimistic about thepossibility o a binding agreement in the longer term(see Figure ). Respondents believed that a nonbindingmultilateral accord is more likely in the short term.9

Te majority o respondents also believed that therewill be a short-term hiatus in the international

25. COP 16. 2010. Outcome of the work of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention. http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf Access date 4 Feb 2011.26. EC Communication. 2010. International climate policy post-Copenhagen: Acting now to reinvigorate global action on climate change.http://ec.europa.eu/clima/documentation/finance/docs/com_2010_86.pdf Access date 19 March 2011.27. For example, Japan. See Ministry of Foreign Affairs of Japan. Japans Basic Position at COP16 as well as on the Kyoto Protocol. http://www.mofa.go.jp/announce/media/2010/12/1203.html Access date 19 March 2011.28. New Zealand Emissions Trading Scheme Review 2011. http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/issues-statement.pdf Access date 19 March 2011.29. The survey did not test respondents views on the relative likelihood of a binding agreement compared to the multilateral accord.


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ramework, with countries continuing to negoti-ate, and that the absence o international rame-work should not impede countries rom continuingto act. Several respondents suggested that bilateralmechanisms may provide an alternative model.

1.5 CONCLUSIONS

Te international situation remains complex andthe direction or the international negotiations mayboth surprise and disappoint as the world continuesthe arduous process o moving orward on an inter-national ramework or combating climate change.As highlighted in the report by the High-LevelAdvisory Group on Climate Change Financingestablished by the UN Secretary-General, market-based instruments can play a vital role in helping

meet ambitious GHG objectives by incentivizingthe deployment o private capital, but countriesneed to provide the market with regulatory con-dence in the post- environment.3

Figure 2.Respondents

Views ona Future

MultilateralFramework

How confident are you that there will be a newlegally-binding multilateral framework, similar to thecurrent Kyoto Protocol, with legally-binding commit-ments to reduce emissions, underpinned by relativelystrong multilateral rules and institutions?

Optimistic [> 75%]

Slightly Optimistic [50% to 75%]

Slightly Pessimistic [30% to 50%]

Pessimistic [ < 30%]

Market-based instrumentscan play a vital role in helpingmeet ambitious GHG emission

reduction objectives by

incentivizing the deployment of

private capital.

30. Final Report of the UN High-Level Advisory Group on Climate Change Financing. 2010. http://www.un.org/wcm/content/site/climat-echange/pages/financeadvisorygroup/pid/13300 Access date 29 March 2011.


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SECTION


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Domestic Policy Developments

A Story of Fragmentation

THIS SECTION SUMMARIZES SOME OF THE POLICY INITIATIVES around the

world, with an in-depth examination o the EU ES, which is the international driving

orce o carbon markets. Te inormation in this section supports the increasingly common

perspective among market participants o the emergence o a ragmented but workable

international carbon market that could urther evolve through linking and acceptance o

similar levels o ambition. Te list o countries is not exhaustive. It illustrates the diversity

o approaches and measures being either considered or implemented in several countries.

o drive emission reductions, countries are adopt-ing a range o domestic policies that all under oneo the ollowing categories: cap-and-trade schemes,baseline and credit mechanism, renewable energyand energy efciency certicates, carbon taxes, sub-sidies, and emission standards. In many cases, mul-tiple policy approaches are being used that may be

complementary and sometimes contradictory, andwhich oten have dierent costs and benets accru-ing at dierent times and geographical scales. It isimportant in the overall design o mitigation policiesthat policy makers consider the interaction betweensimilar and dierentmarket and non-marketpolicy measures at dierent jurisdictional levels.

For example, the current discussion in the EU onthe set-aside o EUAs results rom the interactiono energy efciency measures and the EU ES. Teintroduction in the United Kingdom o a CarbonPrice Floor3 provides another example were somemarket analysts argue that the price oor may o-er limited benets due to interactions with the EU

ES.

3

Te interaction between individual voluntaryactions and Australias now shelved Carbon PollutionReduction Scheme (CPRS) also shows the need orcareul design.33 Finally, some academic work arguesthat multiple policies such as cap-and-trade and re-newable energy policies will not necessarily createadditional environmental benets.34

31. As announced in the U.K. 2011 Budget from April 1, 2013, the United Kingdom will introduce a carbon price floor for the powersector. The floor, which in reality constitutes a tax floor rather than a price floor, will start at around 16 per ton of carbon dioxide (tCO

2)

and follow a linear path to target 30/tCO2

in 2020 (both in 2009 prices). The carbon price support rates in 201314 will be equivalent

to 4.94/tCO2. Indicative rates for 201415 and 201516 are 7.28/tCO2 and 9.86/tCO2 respectively. http://www.hm-treasury.gov.uk/consult_carbon_price_support.htm Access date 4 April 2011.32. Point Carbon. Carbon Market Daily March 25. UK carbon floor could distort EUA price.33. The shelved Australian CPRS provides an example of voluntary action interacting with a cap-and-trade scheme. http://www.climat-echange.gov.au/government/initiatives/cprs/cprs-progress/voluntary-action.aspx Access date 27 April 2011. The situation is more compli-cated when AAUs are considered, as the countries initial assigned amount must also be reduced to preserve the effects of the voluntaryaction on global reductions.34. See Fischer C., and L. Preonas. 2010. Combining Policies for Renewable Energy, Resources for the Future. Fischer and Preonas ar-gue that in the presence of a binding emissions cap, additional renewable policies do not affect emissions. Their effects on the ETS shouldbe recognized. Policies that expand renewables make it easier to meet the cap, driving down allowance prices to the benefit of the relativelydirty sources and to the detriment of the relatively clean nonrenewable sources. http://www.rff.org/documents/RFF-DP-10-19.pdf Accessdate 2 April 2011.


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2.1 ANNEX I COUNTRIES

AustraliaPreparing to Price Carbon

During , the Australian government an-

nounced plans or a carbon price mechanism witha three-to-ve-year annually increasing xed-priceperiod that will transition into an emissions tradingscheme. Te government will start pricing carbon onJuly , , subject to negotiating an agreementwith a majority in both houses o Parliament andpassing legislation this year.35

With support rom the Greens and Independents,the government should be able to pass the legisla-tion in both houses o Parliament as a result o theincoming senate in July . Te legislation wouldneed to pass during the spring Parliamentary sittings

(AugustNovember ) to avoid being delayeduntil the autumn Parliamentary sittings (FebruaryMarch ).

Australia is also developing a domestic osets schemeknown as the Carbon Farming Initiative (CFI),36which aims to provide new economic opportunitiesto armers, orest growers, and landholders and tohelp the environment by reducing carbon pollution.Some osets may be allowed during the xed-priceperiod.37

At the national level, the Renewable Energy arget(RE) scheme remains the main market-basedmechanism in use to achieve emission reductions.

During , the Australian Parliament passedlegislation to separate the RE into two parts,with the new scheme commencing on January ,. Te RE was separated into the Large-scaleRenewable Energy arget (LRE) and the Small-scale Renewable Energy Scheme (SRES).38

Splitting the RE scheme was in response to indus-try pressure to reorm the scheme ater a collapsein prices o certicates resulting rom a ood oRenewable Energy Certicates (RECs) rom small-scale projects. It is reported that the generation o

RECs was partly due to the interaction o state andederal renewable energy incentives and the REscheme.39,4

Te Australian government also closed several emis-sion reduction programs in , including theHome Insulation Program, which was terminatedbecause o saety concerns,4 and the Green Loansprogram.4

At the state level, various initiatives are in place,including the New South Wales Greenhouse GasReduction Scheme (GGAS), which commenced

on January , 3. It is one o the rst manda-tory greenhouse gas emissions trading schemes inthe world. GGAS aims to reduce greenhouse gasemissions associated with the production and useo electricity. It achieves this by using project-basedactivities to oset the production o greenhouse gasemissions (see able or urther details on state cli-mate change policies in Australia).

CanadaProvinces Forging Ahead

At the ederal level, Canada is taking a sectoral ap-

proach to GHG emissions, largely ocusing on ob-taining reductions rom the transport sector. Canadahas aligned its international commitment with thatmade by the United States and plans to reduce to-tal greenhouse gas emissions by 7 percent rom5 levels by . Te target is inscribed in theCopenhagen Accord.

35. http://www.pm.gov.au/press-office/climate-change-framework-announced Access date 24 Feb 2011.36. http://www.climatechange.gov.au/government/initiatives/carbon-farming-initative.aspx Access date 21 February 2011.37. http://www.garnautreview.org.au/update-2011/update-papers/up6-carbon-pricing-and-reducing-australias-emissions.pdf Access date22 March 2011.38. http://www.climatechange.gov.au/government/initiatives/renewable-target.aspx Access date 07 April 2011.39. Price Hit Put Wind Power Projects in Limbo. Herald Sun. http://www.heraldsun.com.au/ipad/price-hit-puts-wind-projects-in-limbo/story-fn6bfmgc-1225976910971 Access date 29 April 2011.40. Renewable Energy Target Needs a Rethink. The Australian. http://www.theaustralian.com.au/business/industry-sectors/renewable-energy-target-needs-a-rethink/story-e6frg976-1225785558866 Access date 29 April 2011.41. http://www.climatechange.gov.au/government/programs-and-rebates/hisp.aspx Access date 03 February 2011.42. http://www.climatechange.gov.au/government/programs-and-rebates/green-loans.aspx Access date 03 February 2011.


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EuropeA Year o Consolidationand a Roadmap or 2050

During , the EU ES continued to be the worldsmost important market mechanism or reducing GHG

emissions. Te EU ES operates in 3 countries (the7 EU Member States plus Iceland, Liechtenstein,and Norway) and is expected to reduce total emissionsby percent in compared to 5 levels. Teyear-on-year declines in GHG emissions experiencedby installations in 8 and 9 now appear to beover, with GHG emissions rising by 3.3 percentarebound due to the end o the economic downturn in. When accounting or new entrants, the overallyear-on-year increase is 3.5 percent.5,53

Europe continues the task o transitioning to a low-carbon society by 5. Te European Commission

(EC) is looking beyond the objectives and isestablishing a plan to meet the long-term target oreducing domestic emissions by 8 to 95 percent bymid-centuryEuropes Roadmap or 5. Duringthe year, there was speculation that Europe wouldmove to reduce GHG emissions by 3 percent by compared to 99 levels. Te EC has sincereafrmed that the EU ambition is to achieve a percent reduction by on 99 levels.54

From 3, the revised EU ES Directive providesor:55

A centralized EU-wide cap on emission allow-ances, which will reduce each year by .74 percento the average annual level o the Phase II cap. Tecap will deliver an overall reduction o percentbelow 5 veried emissions by .

ecapfortheyear2013hasbeendeterminedat ,39,5,88 allowances, that is just under.4 billion allowances.56 Tis is not the nal3 cap.57

erewillbeanincreaseinauctioninglevelsat

least 5 percent o allowances will be auctionedrom 3, compared to about 3 percent inPhase II. Tis will improve the economic e-ciency o the EU ES. In most EU MemberStates, there will be percent auctioning orthe power sector.

AccesstoprojectosetsundertheKyotoProtocolrom outside the EU will be limited to no morethan 5 percent o the reductions required in theEU ES. Tis is a reduction rom Phase II. Itmeans a much larger share o emission reduc-tions will happen within the EU borders.

Twelvepercentofthetotalallowancesauctioned

will be redistributed to Member States with low-er gross domestic product (GDP) in the interestso solidarity. Tese are mostly the newer easternMember States.

EUMemberStatesproposetospendatleasthalfo the revenues rom auctioning to tackle cli-mate change both in the EU and in developingcountries.

Dueto internationalcompetitivenessandleak-age concerns, industrial sectors will be allocat-ed allowances or ree on the basis o productbenchmarks. Te benchmarks will be set on the

basis o the average o the top percent mostgreenhouse gasefcient installations in the EU.Sectors deemed at signicant risk o relocatingproduction outside o the EU because o thecarbon pricecarbon leakagewill receive percent o the benchmarked allocation or ree.Sectors not deemed at signicant risk o carbon

52. On April 5, 2011, the EC published updated data for a perimeter corresponding to 94.4 percent of 2009 volumes: the 10,500 plantsreporting in both years (out of 12,802 listed in CITL, 82 percent) emitted 1,833 Mt in 2010 compared to 1,775 Mt in 2009, resulting in a3.3 percent increase in emissions. Source: SG orbeo Carbon Specials, April 7, 2011, Socit Gnrale.53. http://ec.europa.eu/clima/documentation/ets/registries_en.htm Access date 4 April 2011.54. http://ec.europa.eu/clima/documentation/roadmap/docs/com_2011_112_en.pdf Access date 24 March 2011.

55. EU ETS Phase III (2013-20) http://www.decc.gov.uk/eu_ets/phase_iii/phase_iii.aspx Access date 07 April 2011.56. The EU ETS cap is the total amount of emission allowances to be issued for a given year under the EU Emissions Trading System (EUETS). The total number of allowances, that is, the cap, determines the maximum amount of emissions possible under the EU ETS. The capwill decrease each year by 1.74 percent of the average annual total quantity of allowances issued by the Member States in 200812. Thisannual reduction will continue beyond 2020, but it may be subject to revision not later than 2025. http://ec.europa.eu/clima/policies/ets/cap_en.htm Access date 07 April 2011.57. The 2013 cap that has been released so far is not the final 2013 cap. It is the Phase I I scope provisional cap and does not account forthe cap for aviation and new sectors and gases entering the ETS from 2013. Deutsche Bank estimates that the 2013 cap for the Phase IIscope should be worth 1,966 Mt. Counting the 1.3 Mt cap for opt-ins and the 106.9 Mt 2013 cap for new sectors and gases, DeutscheBank estimates the 2013 cap should be worth 2,074 Mt, not accounting for aviation. From Curien I., and M. C. Lewis. 2011. May You Livein Interesting Times ... Market Update from Deutsche Bank.


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leakage will receive 8 percent o their bench-marked allocation or ree in 3, declining to3 percent in and percent in 7.

Up to 300 million allowances from the newentrants reserve o the EU ES will be used tosupport the demonstration o carbon captureand storage (CCS) and innovative renewable

technologies. MemberStatesmayexcludesmallemittersandhospitals so as to reduce regulatory burden.

During and early , the allowance auction(primary issuance) market (see Section 3.3) con-tinued to develop, with Germany and the United

Kingdom auctioning allowances. Access to KyotoProtocol project osets (namely CDM and JI) wereurther limited with constraints on project types (seeSection 4.).65 Te EU ES continued to be plaguedby market irregularitiesthe EU has addressedthese issues through a series o directives and pro-posed measures (see Section 3.4).66 Further activity

occurred on coverage with airlines expected to jointhe EU ES in .67 Member States continuedto develop complementary measures to comply withthe Eort Sharing Decision that places an annualbinding GHG emission targets on sectors not cov-ered by the EU ES or the period 3.68

Table 4. EUETS Phase IIAuctions58

Member

State

Average Annual Quantity

to Be Auctioned

Comments

Germany 40 million (about 9 percent) Auctions from January 2010 are held weeklyspot auctions on Tuesdayand futures auctions on Wednesdayat the European Energy Exchange(EEX).59 During 2008 and 2009 a banking group, on behalf of theGerman government, sold allowances at the market price at the relevantexchanges.

UnitedKingdom

17 million (7 percent) An auction schedule with dates and volumes for future auctions, up toNovember 2011, is available on the U.K. Debt Management Office.60 Asof January 2010, a noncompetitive bidding facility has also been put inplace.61

Netherlands 3.2 million (3.7 percent) The first auction of 4 million allowances was carried out by the DutchState Treasury Agency and took place on April 15, 2010.62 On October27 and November 18, 2010, two further auctions of 2 million allow-ances each were held by Climex.63 The Dutch authorities have not yetdecided the details of the auctioning of the remaining allowances (some8 million).

Austria 400,000 (1.3 percent) For 200912, two auct ions per year are foreseen.64

Ireland 557,065 (0.5 percent) Ireland sold 185,000 allowances in January 2009, and the same number

again in February 2010. The remainder for the 200812 period is alsolikely to be sold instead of auctioned.

Hungary 2.7 mill ion (2 percent) Frequency and scope are not yet decided.

58. Auction details for EU ETS Phase II. http://ec.europa.eu/clima/policies/ets/auctioning_second_en.htm Access date 07 April 2011.59. European Energy Exchange (EEX). http://www.eex.com/en/EEX/Products%20%26%20Fees/Emission_Rights/EUA%20Primary%20Market%20Auction Access date 07 April 2011.60. U.K. Debt Management Office EU Emissions Trading Scheme Web site. http://www.dmo.gov.uk/index.aspx?page=ETS/AuctionInfoAccess date 07 April 2011.

61. http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/emissions/eu_ets/euets_phase_ii/auctioning/noncompbidding/noncompbidding.aspx Access date 07 April 2011.62. http://www.dsta.nl/english/Subjects/Carbon_auctions Access date 07 April 2011.63. http://www.climex.com/government-auctions.aspx Access date 07 April 2011.64. Austrian National Registry. http://www.emissionshandelsregister.at/emission_trading/auction/index.html Access date 07 April 2011.65. In taking this action, the EC identified the high proportion of CDM credits generated by the small number of industrial gas projects that,the EC argues, favor a limited number of advanced developing countries and do not encourage geographic diversification. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/56 Access date 4 Feb 2011.66. The details are discussed in the section on How Market Participants TransactRisk and Regulation.67. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:008:0003:0021:EN:PDF Access date 22 March 2011.68. http://ec.europa.eu/clima/policies/effort/framework_en.htm Access date 22 March 2011.


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Auctioning

able 4 illustrates the auctioning o some EU allow-ances. During Phase II (8) the majority o al-lowances continued to be allocated or ree. However,

when Phase III starts in 3, about hal o the allow-ances are expected to be auctioned. On November ,, the EU Commission ormally adopted the EUAuctioning Regulation. Tis is an EU-wide regulationthat determines how some billion allowances will beauctioned each year during Phase III.

Te regulation provides or a common platorm thatall Member States can use, but Member States mayalso opt out rom the common platorm. o hosttheir own platorms, Member States had to submita notication to the Commission by February 8,, which would then be proposed to and voted

on by the Climate Change Committee.69

Te European Commission proposes to auction million allowances in , ahead o the start oPhase III. Te volume o early auctions is to be de-termined by means o an amendment to the EU ESAuctioning Regulation. It is expected that almost 6percent o the total allowances auctioned in Phase IIIwill enter the market via the common platorm.

Te procurement o both the common auction plat-orm and the single auction monitor that will over-

see auctions on all auction platorms is ongoing.

7

Germany, Poland, and the United Kingdom have in-ormed the Commission that they intend to opt out othe planned common platorm or auctioning emissionallowances or Phase III o the EU ES. Each will in-stead appoint its own auction platorm.

Aviation

Direct emissions rom aviation account or about3 percent o the EUs total GHG emissions, withthe majority o these emissions rom international

ights, or example, ights between two MemberStates or between a Member State and a non-EUcountry.7 Aviation emissions are growing rapidly,however, so the EU plans to cover emissions rom alldomestic and international ights that arrive at ordepart rom an EU airport.

Te expansion o coverage will translate into approx-imately million o additional allowances annu-ally. O this number, 8 percent o the allowanceswill be reely allocated to aircrat operators and 5percent will be auctioned. Te remaining 3 percentwill be allocated to a special new entrants reserve

(see able 5 or a summary).7

Te move to include aviation in the EU ES is notwithout controversy with airlines in both Chinaand the United States opposing the inclusion otheir emissions in the EU ES. Te Air ransportAssociation o America (AA)acting on behalo American Airlines, Continental, and UnitedAirlinesis challenging the EU directive in thecourts.73 News reports also suggest that the ChinaAir ransport Association (Cata) has threatened re-taliatory measures i Chinese airlines are required to

participate in the EU ES, with Cataacting onbehal o three Chinese airlinesjoining the AAsexisting legal challenge to the EU directive.74

Te EC Directive on Aviation has provisions or ex-empting non-EU based airlines rom the EU ESwhere similar measures are in place.75

69. U.K. Department of Energy and Climate Change. The EU Emissions Trading System: Preparing for Phase III (and implementation ofPhase II). http://www.decc.gov.uk/assets/decc/what%20we%20do/global%20climate%20change%20and%20energy/tackling%20cli-mate%20change/emissions%20trading/eu_ets/phase%20iii/1016-euets-preparing-phase-III.pdf Access date 07 April 2011.70. The first auctions of EUAs will take place at the latest in 2013. No firm date is fixed yet, as the volume of any early auctions before2013 remains to be decided. The first auctions of European Union Aviation Allowances (EUAAs) will take place in 2012, which is the yearwhen aircraft operators come under the EU ETS. http://ec.europa.eu/clima/faq/ets/auctioning_third_en.htm Access date 07 April 2011.

71. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/139 Access date 24 March 2011.72. http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/emissions/eu_ets/aviation/aviation.aspx Accessdate 23 March 2011.73. http://www.airlines.org/News/Releases/Pages/news_5-27-10.aspx Access date 22 March 2011.74. http://www.pointcarbon.com/news/1.1522877 Access date 31 March 2011.75. DIRECTIVE 2008/101/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 November 2008 amending Directive2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community. Wherea third country adopts measures for reducing the climate change impact of flights departing from that country which land in the Community,the Commission, after consulting with that third country, and with Member States shall consider options available in order to provide foroptimal interaction between the Community scheme and that countrys measures. Where necessary, the Commission may adopt amend-ments to provide for flights arriving from the third country concerned to be excluded from the aviation activities in the EU ETS. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:008:0003:0021:EN:PDF Access date 07 April 2011.


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Eort Sharing

Te Eort Sharing Decision establishes annualbinding GHG emission targets or Member Statesor emissions not included in the EU ES or the3 period. It is the responsibility o MemberStates to dene and implement policies and mea-sures to limit emissions o non-EU ES coveredsectors under the Eort Sharing Decision. As a resultEU Member States are likely to implement comple-mentary measures in such areas as transport, build-ings, agriculture, and waste (see able 6).77

Te level o eort varies between EU Member Statesdepending on their relative wealth (GDP/capita).

At the EU level, this will deliver an approximate percent reduction o emissions rom the uncoveredsectors in compared with 5 levels. Te e-ort-sharing targets vary by EU Member State, withthe greatest decreases being required or Denmark,Ireland, and Luxembourg, and with the greatest in-creases allowed in Bulgaria, Latvia, and Romania.78Cost-control measures include allowing MemberStates to transer part o their annual emission alloca-tion to other EU Member States as well as the useo credits rom Joint Implementation (JI) and CDM.

Table 5.AviationDirectiveSummary

Issue Comment

Timing 2012: Inclusion of all flights arriving at and departing from EU airports

Level of emissions cap 2012: 97 percent of average 200406 emissions2013: 95 percent of 200406 emissions

Auctioning 2012: 15 percent auctioning2013: The volume to be auctioned over 201320 is already set to 15 percent peryear, but may be revised.

Free allocation criteria Great circle distance plus 95 km (fixed). Operators may choose to apply (i) actual weight,(ii) standard weight, or (iii) default passenger weight of 100 kg.

Special reserve Creation of a reserve for new entrants and fast-growing airlines from within the cap. Threepercent of the total capped allowances for that phase. Allocated to new operators andthose whose activity data shows an increase of more than 18 percent per annum.

A new type of allowances notbacked anymore with AAUs willbe created in 2012 to be al-located/auctioned to airline opera-tors. Access to Certified EmissionReductions (CERs) and Emission

Reduction Units (ERUs)

Open trading scheme, but with the removal of the clause that allows convertibilitybetween Assigned Amounts Units (AAUs) and EU Allowance Units (EUAs)762012: 15 percent access to CERs and ERUs2012+: to be confirmed as part of ETS review negotiations

Notable exemptions.A full list is available on theEuropean Commission Web site

Weight certified 5.7t maximum take-off mass thresholdHeads of State exemption restricted to non-EUExemption for Public Service Obligations where they are either on specific routes betweenoutermost regions or where capacity offered does not exceed 30,000 seats per yearActivity threshold exemption for commercial air operators who operate at a frequencylower than 243 flights per period into, out of, or within the EU for three consecutivefour-month periods, or with an emissions threshold of less than 10,000 tCO

2a year

76. Pers Comm. cdc climat. EUAs can be used for compliance by airline operators, whereas allowances from the Aviation Trading Scheme(ATS) cannot be used for compliance in the EU ETS.77. DECISION No 406/2009/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009 on the effort of Mem-ber States to reduce their greenhouse gas emissions to meet the Communitys greenhouse gas emission reduction commitments up to2020. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0136:0148:EN:PDF Access date 23 March 2011.78. http://ec.europa.eu/clima/documentation/effort/docs/targets2020.pdf Access date 4 April 2011.


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Member States that have to reduce their non-ESemissions, or are allowed to increase them by up to5 percent o 5 emissions, may use an additional percent o CDM and JI credits. Tese credits cancome only rom CDM projects in least developedcountries and small-island developing states; theyare nonbankable and nontranserable, and they are

available only to Member States meeting at least oneo the ollowing our conditions:83

eoverallcostofthepackagefortheMemberStateconcerned is higher than or equal to .7 percent oGDP according to the ECs impact assessment.

Acostincreaseofatleast0.1percentofGDP,ac-cording to the ECs impact assessment, as a resulto setting targets on the basis o the GDP percapita instead o the basis o cost-efciency.

Morethan50percentoftheMemberStatestotalemissions covered by the Eort Sharing Decision

are transport-related. eMemberStatesrenewableenergytargetisinexcess o 3 percent.

Further details on the EU ES can be ound inSections 3, 4, and 5.

JapanReviewing the arget

In March , the government o Japan introducedthe Basic Act on Global Warming Countermeasures.Te ES component o the Basic Act has met withstrong opposition, which has strengthened with rising

concerns about costs to the economy and a lack oextensive consultations with industry groups.

Te government o Japan considers the ES com-ponent an important policy measure or Japan toachieve its announced target o reducing GHGemissions by 5 percent by compared to 99levels. Tis reduction is premised on the establish-ment o a air and eective international agreementcovering all major economies.

In the absence o such an agreement, it appears unlikelythat Japan will make a unilateral 5 percent cut. As aconsequence o these actors, the Diet has deerred dis-cussion o the ES component o the Basic Act. Tecurrent state o policy is summarized in able 7.

Despite the deerral o the ES, other componentso the Basic Act (introducing a carbon tax and estab-lishing a eed-in tari or all renewable energy sourc-es) may pass in . Tese measures are expected tobe needed or Japan to meet its yet undecided unilat-

eral emission reduction goal.

Te passage o these measures through the Diet isalso supported by Japans energy plan. Te measuresintroduce an anti-global warming tax on oil, coal,and natural gas, as well as a eed-in tari that sup-ports the goal o increasing domestic energy genera-tion rom renewable sources o up to percent ototal primary energy supply by .

Te Japanese government also views access to in-ternational osets as an important contribution toJapanese emission reduction eorts. As an agreement

on the post- regime has yet to be achieved, it iscurrently unclear how Japan will access oset markets;

79. http://www.vcacarfueldata.org.uk/ Access date 03 February 2011.80. An introduction to the U.K.s Climate Change Levy (CCL). http://customs.hmrc.gov.uk/ Access date 4 February 2011.81. http://www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/renewable/feedin_tariff/feedin_tariff.aspx Access date 4February 2011.82. A summary of the U.K.s Renewable Heat Incentive (RH I) Scheme. http://www.decc.gov.uk/renewable_heat/incentive.aspx Access 4Feb 2011.83. From Questions and Answers on the Effort Sharing Decision. http://ec.europa.eu/clima/faq/effort/index_en.htm Access date 4 April 2011.

Table 6. SomeExamples of U.K.Complementary

Measures

Measure Comment

Vehicle Emissions Tax79 Vehicle tax based on emissions measured in grams per kilometer (g/km) driven.

Climate Change Levy80 The levy is chargeable on the industrial and commercial supply of taxable commodi-ties for lighting, heating and power by consumers in the following sectors of busi-ness: industry, commerce, agriculture, public administration, and other services.

Renewable Energy Feed-in Tariffs81 Incentivizes small-scale (less than 5 MW), low-carbon electricity generation.

Renewable Heat Incentive82 Incentivizes generation of heat from renewable sources at all scales (expectedlaunch June 2011).


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it may develop a bilateral oset scheme.84 Te recentearthquake and tsunami and associated nuclear saetyconcerns may cause the Japanese government to re-consider its energy plans and climate change policies(or more details see Section 5..).

New ZealandUnder Review

In November , the New Zealand Parliamentpassed the Climate Change Reponses Act .85 Teact was subsequently amended in September 8,introducing the greenhouse gas Emissions radingScheme (NZ ES), which retrospectively covers orest-ry rom January 8. In November 8, the newlyelected government suspended, except or orestry op-erations, the NZ ES, and launched a review o thecountrys climate change policy. A urther amendedscheme came into existence in November 9.86

During , the NZ ES was expanded to cover

uels and industry. In early , a review o the NZES commenced, as required by Climate ChangeResponse Act . Te review seeks to highlight

whether the ES is unctioning efciently and eec-tively. Recommendations rom the review process willbe orwarded to the Minister or Climate Change bySeptember .Te scope o the review includes theollowing: coverage o agriculture, allocation mecha-nisms or New Zealand Units (NZUs), whether ornot to keep the xed-price cap o NZ$5 and the

one-or-two obligation or emitters, and whethersynthetic greenhouse gases should be included in theES. Te review also examines the impact o the ESon investment and operational decisions.87

Over the past year, the New Zealand market orNZUs has remained relatively at. Te market hastraded between NZ$7 (9.34) and NZ$ (.)and tends to ollow the CER price at around a to 5 percent discount, which reects the act thatNZUs are subject to a price cap o NZ$5 and cannotbe sold to companies participating in the EU ES.

Demand in the NZ ES mainly stems rom localutilities, local industry, and uel companies, with aew transactions rom government buyers. In terms

Table 7. CurrenClimate ChangPolicies in Japa

Policy Jurisdiction Details

Emissions TradingScheme (deferred)

Japan On March 12, 2010, the government of Japan proposed the Basic Act onGlobal Warming Countermeasures, an overall climate change policy frame-work that includes introducing an ETS.

Feed-in Tariffs Japan Feed-in tariff for all renewable energy sources with the goal of increasing

domestic energy generation from renewable sources to 10 percent of totalprimary energy supply by 2020.

Anti-global WarmingMeasure Tax

Japan Anti-global warming tax is proposed as add-on to existing taxes coveringwide range of fuels, of which rates are proportional to CO2 emission.

VoluntaryExperimentalIntegrated ETS

715organizations

715 organizations had applied to participate, of which 521 supplied targets(as of July 2009).The trial scheme aims to bring together several existinginitiatives, such as the Keidanren Voluntary Action Plan, plans for a domes-tic offsets scheme, and the Japan-Voluntary Emissions Trading Scheme(J-VETS), which targets smaller emitters.

Tokyo EmissionsTrading Scheme(Cap-and-Trade)

Tokyo The Tokyo metropolitan area launched its own mandatory cap-and-tradescheme on April 1, 2010, which targets office and commercial buildings (in-cluding universities) and factories. The scheme covers approximately 1,400installations and 1 percent of the countrys emissions.

Saitama PrefectureTrading Scheme(Cap-and-Trade)

SaitamaPrefecture Starting April 1, 2011, Saitama, the fifth largest prefecture in Japan, will be-come the second Japanese prefecture to implement a mandatory emissionstrading scheme. Saitama and Tokyo signed a pact to link their cap-and-tradeschemes in the future.

84. Japan confirms bilateral offsets support. Point Carbon http://www.pointcarbon.com/news/1.1466069 Access date 15 April 2011.85. http://www.legislation.govt.nz/act/public/2002/0040/latest/DLM158584.html Access date 17 March 2011.86. http://www.legislation.govt.nz/act/public/2009/0057/latest/DLM2381636.html Access date 15 April 2011.87. http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/issues-statement.pdf Access date 19 March 2011.


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o supply, however, it appears that a large percentageo the allocations o NZUs are not coming to mar-ket as ast as envisioned, thus increasing the marketprice. An expected surplus o supply or NZUs hasso ar ailed to materialize.88

Russian FederationTe Bear Awakes

Russia, as part o the Copenhagen accord, has com-mitted to reductions o between 5 and 5 percent on99 levels by . Tese reductions are predicatedon the inclusion o orestry in Russias eorts to meetits anthropogenic emission reductions and its successin imposing binding obligations on major emitters.89

Russia also continues to be active in the JI marketthrough the generation o Emission Reduction Units(ERUs). For urther details see Section 4...

United States and North AmericaIt is all about Caliornia

Uncertainty in U.S. climate policy continues as newlegislators and administrators at the U.S. state and ed-eral levels reevaluate previous climate policy positions,aecting market sentiment and investment decisions.Tere appears to be bipartisan congressional support ora two-year suspension o the EPAs authority to regulateGHG emissions under the Clean Air Act (CAA).9

In the Presidents address on the State o the Union

, a Federal Clean Energy Standard was madean aspiration or the new Congress. Early reportssuggest possible Senate support or a Clean EnergyStandard that includes coal carbon capture and stor-age (CCS), natural gas, nuclear energy, and renew-able energy sources such as wind, geothermal, andsolar.9 At this time, House support is unclear.9

Tis means that approaches centered on Caliorniawill drive the carbon market landscape in the UnitedStates and North America or the oreseeable uture

(see able 9 or a summary o state and regional cli-mate change policies).

Caliornia

Caliornia continues to champion market-based mea-sures in the United States through the Global WarmingSolutions Act o 6 Assembly Bill 3 (AB 3). AB3 requires Caliornia to cut greenhouse gas emissionsto 99 levels by . It also identies a cap-and-trade program as one o the strategies the state will em-ploy to reduce GHG emissions. As part o the publicconsultation process on the proposed cap-and-tradeplan, the Caliornia Air Resources Board (CARB)held a rule-making meeting in December andapproved resolution 4 outlining elements o theprogram. Te regulation is not expected to be nalizeduntil all (SeptemberNovember).

As a cost-control measure, AB 3 allows entities cov-ered by the scheme to purchase and use osets or com-pliance purposes, but volumes are limited to 8 percento annual emissions. Osets will come rom a domesticosets program with the possibility o importing inter-national orest osets (see Section 4.4..).93 Caliorniaalso has a strong renewable energy mandate and a re-quirement that the carbon content o the states vehicleuels be cut by percent by .94

During , opponents o AB 3 supported

Proposition 3 with the aim o suspending AB 3. TeProposition 3 was deeated, but a related Caliorniaballot, Proposition 6, was passed. Proposition 6 re-quires certain state and local ees be approved by atwo-thirds vote. Fees include those that address ad-verse impacts on society or the environment causedby the ee-payers business. Proposition 6 expandsthe denition o a tax under Caliornia law and somelegal opinion speculates that it may aect the imple-mentation o AB 3.95 Nonetheless, advice rom theState Attorney Generals ofce argues that Proposition

88. This section benefited from a Pers. Comm., with John OBrien, Carbon Market Solution.89. http://unfccc.int/files/meetings/cop_15/copenhagen_accord/application/pdf/russiacphaccord_app1engl.pdf Access date 10 April 2011.90. There is a House bill to amend the Clean Air Act to prohibit the Administrator of the Environmental Protect ion Agency from promulgatingany regulation concerning, taking action relating to, or taking into consideration the emission of a greenhouse gas to address climate change,and for other purposes. http://www.gpo.gov/fdsys/pkg/BILLS-112hr910rfs/pdf/BILLS-112hr910rfs.pdf Access date 15 April 2011.91. http://www.reuters.com/article/2011/01/31/us-usa-bingaman-nuclear-idUSTRE70U64Z20110131 Access date 17 March 2011.92. http://upton.house.gov/News/DocumentSingle.aspx?DocumentID=229488 Access date 17 March 2011.93. http://www.arb.ca.gov/newsrel/newsrelease.php?id=170 Access date 11 March 2011.94. http://www.arb.ca.gov/cc/ab32/ab32.htm Access date 4 Feb 2011.95. http://cdn.law.ucla.edu/SiteCollectionDocuments/EnvironmentalLaw/PayingforPollution.pdf Access date 11 Feb 2011.


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Years Supply (Mt) Demand (Mt) Shortage (Mt)

201214 38 42 (4)

201517 52 100 (48)

201820 75 91 (16)

Source: Thomson Reuters Point Carbons Carbon Market Analyst, A price forecast for California: Gauging Uncertainty, February 2011.

Kindly provided by Olga N. Chistyakova, Senior Analyst, Point Carbon

Table 8. OffsetSupply andDemandForecast forCaliforniasCap-and-trade

BOX 2. North American Offset Prices

North American Offset Prices: 201011

In 2010, the expectations of the North Americancarbon market refocused from federal legislation toCalifornias cap-and-trade. Between January and

July, prices for offset credits in the United Stateswere driven by the signals from federal legislation

of whether the credit was likely to be eligible for ananticipated federal cap-and-trade program. BetweenAugust and October, the market was mostly illiquid,

but in November it was reawakened by the release ofCalifornias cap-and-trade regulation.

The Climate Reserve Tonnes (CRTs) issued by the

Climate Action Reserve (CAR) were the first choice

for sourcing early action credits in the federal billsthat came through the 111th Congress, including the

Waxman-Markey climate bill that passed the Houseof Representatives in the summer of 2010. Average

prices lingered from January 2010 to July 2010 at$5.90/t for national forestry vintage 2009 CRTs, at

$3.50/t for landfill gas vintage 2009 CRTs, and at$4.20/t for V11-12 CRT forwards from ozone deplet-ing substance (ODS) projects.

However, CRTs from forestry projects located in

California went for an average of $6.90/t and heldsteady throughout the year to be knocked down to

an average of $5.50/t for a brief time in October onthe back of fears that Proposition 23 could have pre-vented the California cap-and-trade program from

moving forward. The California forestry CRTs carrieda premium over other project types as those were

thought to be most likely to be eligible in a then loom-ing California cap-and-trade scheme.

Various iterations of federal legislation did not give theVerified Carbon Units (VCUs) from the Verified Carbon

Standard (VCS) as much hope for early action accep-tance as for CRTs. As a result, the average VCU price

was at $2.40/t from January through July, dropping toan average of $1.50/t for the remainder of the year as

the market lost confidence in federal legislation.

As Proposition 23 was voted down in November and

the market gained confidence in the California cap-

and-trade scheme, the price for CRTs from U.S. forest-ry, livestock methane, and ODS projects convergedinto one CARB eligible CRT price at an average of

$7.00/t, jumping approximately 40% by January to anaverage of $9.75/t. In February and March 2011, on

the back of the court case of Association of IrritatedResidents v CARB and markets concern with theinvalidation of CRT prices were once again down by

approximately 17% to average of $8.10/t. CARB eli-gible CRT prices are expected to stay at this level until

further developments in the court case.

Will there be enough supply for

Californias cap-and-trade?

In December 2010, CARB approved four U.S. basedproject typesurban forestry, forestry, livestock meth-

ane, and ODSto generate offsets for Californias cap-and-trade system. In order to ensure supply of offsets

at the start of the program in 2012, the legislation al-lows early supply of CRTs from the above listed projecttypes with vintages 200514, as long as the project

started prior to 2012. Offsets from jurisdictions underthe Western Climate Initiative may also be accepted,

but Certified Emission Reductions (CERs) from theClean Development Mechanism (CDM) are not eligible.

CARBs regulations suggest a cumulative demand of233 million tonnes of offsets from 2012 to 2020, or

8.7% of the total cap. To forecast supply, ThomsonReuters Point Carbon included projections from four

project types CARB has approved. The projections alsoincluded REDD supply from Acre, Brazil and Chiapas,

Mexico, and from U.S. based agricultural sequestra-tion (cropland management and nutrient management),protocols for which CARB is likely to consider next for

inclusion. The supply estimates show that there will notbe enough offsets to meet the maximum theoretical de-

mand in any of the schemes 3 ph