The Carbon Market (including LULUCF)

Philippe AmbrosiClimate Change Team, ENV

Training Seminar for BioCarbon Fund ProjectsThe World Bank, Washington D.C., Feb. 5, 2008

22

The global carbon market tripled in value in 2006

OVERALL $30 billion (‘06) > US$11 billion (’05)

Allowance market $24.4 billion (‘06) > US$7.9 billionProject market $4.8 billion (‘06) > US$2.4 billion

A secondary market of guaranteed compliance assets emerged $0.5 billion (’06)

The voluntary market expanded $0.1 + billion (’06)

Capital drawn to the C-market: doubling in 1 year (Q1’06-07) $12 + billion (’07)

$0.2 + billion (’07)

$8.7 billion (’07)

doubled in 2007

$ 10 billion (’07)

$ 42 billion (’07)

$ 60 billion (’07)

33

Volumes transacted in 2006(in MtCO2e)

Allowance MarketsProject-Based Transactions

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

CDM

450

CDM

450

Other Compliance

19

na

10 MtCO2e

20

1,100

Voluntary& Retail

10 +

SecondaryCDM25 +

JI16 EU Emissions

Trading Scheme

1,600

CDM

600Secondary

CDM

350

44

Allowances transactions

the EU ETS

55

EU-ETS: ready for Ph IIActivity during 2007

– 1.6 blln EUAs or US$ 42 blln– almost exclusively PhII, mostly OTC

PhII: more clarity, many uncertainties– general cap at 2,081 mlln EUAs per

year: cut of proposed caps by 10.5% (6.3% below 2005 emissions).

– average limit imports of CERs & ERUs: 13.4% (280 MtCO2e/yr)

– no LULUCF– still uncertainties at the installation

level: forecasts from €10 to €35 on avg

PhIII: EU proposal (2013-2020)– at least 20% 1990 levels by 2020– no LULUCF, no avoided

deforestation

0

5

10

15

20

25

30

J-07

F-07M

-07A-0

7M

-07J-

07J-

07A-0

7S-0

7O-0

7N-0

7

EU

R p

er t

CO

2e

Dec'08

IIary CERs

Dec'07

66

Project-based transactions

CDM

77

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005 2006

ann

ual

vo

lum

e o

f p

roje

ct-b

ased

tra

nsa

ctio

ns

(MtC

O2e)

Voluntary

Other compliance

JI

CDM

Prices & volumes upfor project-based credits

US$ 5.2 /tCO2e

US$ 7.2 /tCO2e

US$ 10.4 /tCO2e

CER I $ 10.9

ERU $ 8.7

88

CDM&JI BuyersEU Private Sector 75% of demand

Jan. 2005 to Dec. 2005

(share of volumes)

Jan. 2006 to Dec. 2006

UK15%

Netherlands8%

Japan46%

Europe-Baltic Sea9%

Spain7%

Other & Unsp.3%Other Europe

12%

Spain6%

Other & Unsp.7%

Other Europe10%

Italy10%

UK50%

Austria3%

Europe-Baltic Sea3%

Netherlands4%

Japan7%

99

CDM SellersChina leads supply

(share of volumes)

Jan. 2006 to Dec. 2006

0

100

200

300

400

500

2002 2003 2004 2005 2006

pri

mar

y C

DM

an

nu

al v

olu

mes

tra

nsa

cted

(M

tCO

2e)

Other & Unsp.

Africa

R. of Latin America

Brazil

R. of Asia

India

China

China61%

Africa3%

Other & Unsp.7%

Brazil4%

R. of Latin America

6%

R. of Asia7%

India12%

1010

CDM Asset classes Share of Clean Energy Rises

(share of volumes)

Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006

HFC67%

Animal Waste2%

LFG8%

CMM7%

Other5%

Hydro3%Wind2%

EE+Fuel s.1%

Other Renewables 2%

Biomass3%

Hydro6%

Wind5%

EE+Fuel s.9%

HFC34%

Other13%

Agro-forestry1%

CMM7%

LFG5%

N2O13%

Animal Waste2%

Biomass3%

Other Renewables 2%

Clean energy: 11% Clean energy: 25%

1111

CDM supply: # of projects

Drying –up as the window of opportunity is starting to close or has closed already?

0

20

40

60

80

100

120

140

160

180

200

d-03

f-04

a-04

j-04

a-04

o-04

d-04

f-05

a-05

j-05

a-05

o-05

d-05

f-06

a-06

j-06

a-06

o-06

d-06

f-07

a-07

j-07

a-07

o-07

d-07

# o

f p

roje

cts

en

teri

ng

th

e p

ipe

line

other

Brazil

Mexico

India

China

2883 projects

2.4 blln tCO2e by 2012

2.1 blln tCO2e by 2012 (once risk adjusted)

1212

CDM supply: asset classes

(share of expected CERs by 2012 )

Hydro14%

Other renewables

1%

EE+Fuel switching

19%

Oil and gas sector

2%LFG10%

other waste mngt.

4%

HFC & other industrial gases

30%

other2%

Wind6%

Biomass7%

CMM5%

LULUCF0%

Tanzania (1)28%

Uganda (1)0%

Colombia (1)25%Chile (1)

2%

Moldova (1)25%

India (4)16%

China (2)3%

Philippines (2)1%

Global

LULUCF (A/R)

1313

A/R projects potential supply: PDDs from 30 projects

Source: Neeff et al. (2007). Update on markets for forestry offsets. CATIE (Costa Rica)

•50-70 projects under development – 10 appr. meths

•LAC region leads supply

•mostly lCERs though tCERsincreasingly popular

•typical large-scaleforestry project:6,000-8,000 ha

•volumes: 20 MtCO2e by 2012

•yield > 15tCO2e/ha very optimistic

•issuance score < 100% (~90%)

•adjusted volumes: 13.6 MtCO2e by 2012 Annual carbon credit potential per area unit.

Share of expected ERs

1414

A very narrow market forforestry products

A low demand on the Kyoto market– LULUCF credits not eligible under EU ETS (monitoring and verification,

non-permanence, price impact, exogenous species)– a limited demand from gov’ts (1% of base year per year:~630MtCO2

over 2008-12)

A window beside Kyoto: compliance (Oregon, NSW), voluntary (OTC, CCX): 36% of OTC in 2006 (3.5 MtCO2e)– a “great story”: Af-/Re-forestation, conservation easily understandable;

community benefits: a plus– preference for local action– a series of standards: NSW, CCX, VCS, GS, CCBA, C-fix…

Assets complex to handle– methodological complexity: lack of experience&resources, data

requirement, legal & connex issues– monitoring and verification costs relatively high– relatively high upfront investment, relatively low return

A small BUYER market, so far

1515

Prices of project-based assets

Fundamentals of supply-demand– asset class eligible for compliance (eg: no LULUCF)– specific attributes (eg: community benefits or location)

Risk perception and risk sharing– regulatory risk: meth. approval, registration …– finance & operation risk: financial closure, exp. of

sponsor, likely delays, performance– flexible delivery, overcollateralization, seniority,

sweeping clause, fixed vol.+options, incl. of penalties or delivery guarantee

Other determinants / ERPA tenure– post 2012 purchase, contribution to development costs

(PDD,…), upfront payment, being a AAA buyer

1616

Carbon Prices vs.Risk Profile and Risk Allocation

ERsvoluntary

ERUs CERspre-reg.

CERsreg.

CERsissued

CERssecondary

EUAs(Ph II)

€ 22€ 20€ 18€ 16€ 14€ 12€ 10€ 8€ 6€ 4€ 2€ 0

A/R monoculture

A/R mixed, native

Avoided deforestation

Price ranges for forestry assets (RETAIL) from Hamilton et al. (2007), except CCX and BioCF

CCXBioCF

1717

Outlook

1818

Many opportunities forforestry credits ahead 2008-12 demand for Kyoto mechanisms

~ 2GtCO2e – CDM/JI: How many reductions will they deliver on time? – AAU/GIS: How many, when and at what price?

And beyond 2012?– Need of long-term clarity, Fragmentation and patchy linking: risk of

efficiency loss For forest projects, promising initiatives, beyond the

Kyoto perimeter– Voluntary OTC market (standards, US demand)– FCPF, Norway, Australia– US compliance demand

Develop projects w/ regime/standard openness in mind

1919

Thank you