The emerging carbon market
an introduction
Presentation to the PCF/WBI Training
Integrating Carbon Finance in Bank’s Work
November 19, 2001
Franck Lecocq – DECRG / PCFplus Research
Early carbon market
1996-2001
2
Greenhouse gases emission reductions
an unusual commodity
Emission Reductions
=
Hypothetical baseline emissions - Effective emissions
• Different “qualities” of ERs depending on the
credibility of the baseline scenario
• Players are interested in different “brands”
depending on their objectives
3
$9t/Co2
$8t/Co2
$7t/Co2
Carbon prices in past
transactions
Government
approved permits
$25/tC
$20/tC
$6t/Co2
$5t/Co2
$4t/Co2
Non verified
ERs
$3t/Co2
$2t/Co2
Optionss
$15/tC
Third-Party
Verified
CDM
$10/tC
$5/tC
$1t/Co2
$0t/Co2
$0/tC
4
Sellers
• Key motivations:
– Gain additional revenue
– Strategic positioning to take advantage of future
demand for ERs (e.g. Costa-Rica)
• However, at prices much below $3/tCO2e,
carbon finance has too small an impact on
projects’ IRRs (except maybe for some forestry
activities).
5
Motivations of buyers
Governments
Firms
(large utilities,
energy cies, etc.)
Individuals
• Regulations in place
• Expect regulations on GHG
emissions in the future
–
–
–
–
Hedge against future costs
Influence future regulation
Learning
Strategic positioning
• “Green” factor
– Hedge against risk of appearing bad
– Differentiating products
6
Quantities in past transactions
• Partial information available.
• Within OECD and EITs: 40-60 MtCO2e have been
transacted.
• In developing countries: Less activity but growing.
Mostly government funded, but private activity
growing.
• General trend towards sophistication: buyers clubs
(PCF), traders, financial derivatives (options),
integrated marketplaces, etc.
7
How may the market look like in
coming years?
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Emerging market drivers
1. Regulations constraining GHG emissions are
being developed:
–
–
–
National policies (e.g. UK, The Netherlands)
Subnational regulations (e.g. some US States)
Regional initiatives (EU-wide trading)
2. Firms are increasingly taking action, in
particular voluntary emission commitments
3. Parallel markets are emerging: e.g. carbon
neutral certification.
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Current or projected national policies
Trading?
EU
UK
France
Norway
Germany
Denmark
Sweden
Netherlands
Finland
Ireland
Australia
USA
Canada
Japan
New Zealand
Russia
Yes
Yes
.
Yes
Yes
No
Yes
Yes
Ongoing work
Ongoing work
Ongoing work
Yes
Yes
Yes
Ongoing work
Yes
No
Start-up
2005
2001
2003?
2005 or earlier

2001
2005 or later



US dependent
?
US dependent

Not decided

Project-based mechanism?
At least from 2008
Yes
Yes
Yes
Later
Yes
Yes
Yes
Yes
Ongoing work
Yes
Yes

Yes
Yes
Yes
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The Netherlands
• Government funded Emission Reduction Unit
Procurement Tender (ERU-PT) and Certified Emission
Reduction Units Procurement Tender (CERUPT)
• Buy ERs in Eastern Europe (JI) and non-Annex B
countries (CDM) respectively
• 2000 tender (completed): $19 M
• Average price for first tender: $7/tCO2e
• Second Tender ERUPT, First Tender CERUPT opened.
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United Kingdom
• Climate Change Levy (April 2001)
– Tax on energy use
– Rebates in exchange for voluntary commitments
– Benefits recycled in other corporate tax rebates
• Emission Trading (end of 2001)
– On a voluntary basis for a limited range of
companies
– Projects outside UK are considered for 2002.
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Regional regulations US/Canada
• Oregon: CO2 emissions standard for new energy
utilities. Price cap: $0.57/tCo2. Utilities can offset
emissions using project based mechanisms.
• Washington: New plants must demonstrate the use of
best available techniques for CO2 emissions control.
• Massachusetts: CO2 emissions cap for energy utilities
effective in 2005. Utilities can offset excess emissions
using project-based mechanisms.
• New-England + Eastern Canadian Provinces: -20% in
2020 compared to 1990.
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Voluntary corporate commitments
• Rapid survey indicates 52 major companies representing
1 billion tCO2e emissions in 1999 have pledged to reduce
GHG emissions by 2010.
• Resulting demand depends on the baseline. If we set
baseline at 1999 emissions, we obtain a total demand of 500
MtCO2e over the next decade.
• At least eight have said they would use project based
mechanisms.
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Voluntary corporate commitments
1999 Emissions
Alcoa
BP Amoco
Chubu EPCo.
Dupont
Kaidanren
Kodak
Fortum
IBM
Intel
Johns.&Johns.
Motorola
Ontario PG
PEMEX
Shell
Statoil
Suncor
Transalta
-79.8
51.3
44.4
478.6
-9
4.1
3.3
1.5
-26
177
99
8.3
5
38.5
Commitment
25% below 1990 in 2010
Cumulative 2%/year below 1990
0.410 kgCo2/kWh in 2005
65% below 1990 in 2010
Internal
CDM/JI
Trading


level of 1990 in 2010
20% below 1990 in 2004
0.5 MtCo2e below baseline in 2010
Cumulative 4%/year below 1998 until 2004
10% below 1995 in 2010 (PFCs)
7% below 1990 in 2010
50% below 1995 in 2010 (PFCs)
6% below 1990 in 2010
-1% per year until 2010

103 MtCo2e in 2002

1.5 MtCo2e below baseline in 2010
-1.5%/year until 2002 (-1%/year for 2003-2008)
-----






15
In addition, Canada and Australia have voluntary
ER programs with very good coverage of key
emitting sectors.
16
Chicago Climate Exchange
• 42 entities (mostly firms + Chicago and Mexico
city) will agree on emission targets by the end
of 2001 and start trading in 2002.
• Objectives: -2% below 1998 level in 2002,
additional -1% period year between 2003 and
2005.
• Allows for offsets through project-based
mechanisms.
17
Emerging carbon funds
Prototype Carbon Fund +…
• About 5 private sector funds to capture JI/CDM
Carbon credits in all investments.
• Handful of private equity funds also seeking carbon
credit investors to raise IRR in deals.
• Major forestry funds thinking about C credits.
• New energy private equity and mutual funds might
seek C credit deals if demand rises.
• Social funds use C as screening indicator.
18
Market for “carbon neutral”
products and services
• Increasingly, individuals and private or public
organizations are looking for credible ways to
offset the emissions their activities cause.
• Some firms provide this service – Future
Forests, 550ppm or Klima – and buy ERs.
• Typically market for third-party verified ERs
(but not necessarily Kyoto compatible)
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Conclusion
• The carbon market already exists, and is growing
rapidly.
• With success in Bonn/Marrakesh, market for Kyoto
compatible ERs (CDM, JI) and Emission Quotas
(Trading) now likely to grow.
• However, demand for non-Kyoto ERs likely to
remain strong because of US-based demand, climate
neutral business activity and “green” motivation.
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For more information
State and Trends of the Carbon Market – Natsource
Summary available at www.prototypecarbonfund.org (PCFplus
Research section). Full report available to Bank Staff on demand
to PCF.
Carbon Market Intelligence Report – EcoSecurities
Two reports available at www.prototypecarbonfund.org (PCFplus
Research section). Third report expected Febr. 2002.
National Strategic Studies
Explore ER supply opportunities for some of the Bank’s client
countries. Available at http://www-esd.worldbank.org/cc/.
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Annex: some insights on future
prices and quantities
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Demand and supply with Kyoto
Hot Air financial flow to Russia and EE
Total
Annex B
demand
for ERs
Domestic Carbon Sinks
Mitigation within Annex B
(domestic or via trading or JI)
CDM Market
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Hot Air
1500
Emission target
1400
Annual GHG emissions (MtCe)
hot air
1300
1200
1100
1000
900
800
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
>
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Volumes in Kyoto w/o the US
Gross annual demand for ERs 1400 – 2400
between 2008 and 2012
- Credits for hot air
- Credits for Annex B Sinks
= Net demand
MtCO2e
950 – 2150
 330 ( 200)
0 – 1800
MtCO2e
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Carbon Market Impact
• Hot-air and new Annex I sinks allowances depress
CDM/JI market
– W/o US, up to 100% of OECD needs may be met by hot
air + sinks.
• Both CDM/JI “project-based” and “hot –air”
(emissions trading) markets will be “policy-driven”
– Hot air may be cheap but politically unpalatable
– CDM/JI project-based more expensive and difficult but
high quality and politically acceptable
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Prices in Post CoP6 World
• With full competition, our market analysis suggests:
– CDM trades from near zero up to $8/tCO2e
– Range of $1.50-4/tCO2e more likely in our view
– PCF currently pays $3-4/tCO2e
• Non-KP Market drivers are significant: OECD
domestic regimes and Corporate Voluntary market
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