76837 state and trends of the Washington DC, May 2012 2012 state and trends of the Washington DC, May 2012 2012 Lead authors Alexandre Kossoy, Team leader Pierre Guigon This World Bank report benefited greatly from contributions of Bianca Ingrid Sylvester. Other insightful perspectives were provided by Martina Bosi, Klaus Oppermann, and Felicity Spors. The findings and opinions expressed in this report are the sole responsibility of the authors and should not be cited without permission. They do not necessarily reflect the views of the World Bank group, its Executive Directors, the countries they represent, or of any of the participants in the carbon funds or facilities managed by the World Bank. The World Bank does not guarantee the accuracy of the data included in this work and accepts no responsibility whatsoever for any consequence of their use. This report is not intended to form the basis of an investment decision. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The State and Trends of the Carbon Market 2012 received financial support from the CF-Assist Program, managed by the World Bank Institute (WBI). Photo credits: page 72 flickr/longhorndave, all others: istockphoto.com Editing: Steigman Communications Design: Studio Grafik Printing: Westland Printers State and Trends of the Carbon Market 2012 1 List of abbreviations and acronyms  ACCU Australian Carbon Credit Unit CP-1 First Commitment Period under the AAU Assigned Amount Unit Kyoto Protocol AAUPA AAU Purchase Agreement CRT Climate Reserve Ton AB 32 Global Warming Solutions Act of CU Carbon Unit 2006 Assembly Bill 32 DC Designated Consumer ACR American Carbon Registry DNA Designated National Authority ADB Asian Development Bank DOE Designated Operational Entity aEUA Aviation European Union Allowance EB Executive Board of the CDM AfDB African Development Bank EBRD European Bank for Reconstruction AWG-KP Ad Hoc Working Group on Further and Development Commitments for Annex I Parties EC European Commission under the Kyoto Protocol ECJ Court of Justice of the European AWG-LCA Ad Hoc Working Group on Long- Union term Collaborative Action ECX European Climate Exchange BC British Columbia EE Energy Efficiency BOCM Bilateral Offset Credit Mechanism ER Emission Reduction CAPEX Capital Expenditures ERPA Emission Reduction Purchase CARB California Air Resources Board Agreement CAR Climate Action Reserve ERU Emission Reduction Unit CCA California Carbon Allowance ETS Emissions Trading Scheme CCFE Chicago Climate Futures Exchange EU European Union CCS Carbon Capture and Storage EUA European Union Allowance CCX Chicago Climate Exchange EU ETS European Union Emissions Trading CDM Clean Development Mechanism Scheme CER Certified Emission Reduction EUTL European Union Transaction Log CFI Carbon Farming Initiative FY Fiscal Year CH4 Methane FYP Five-Year Plan CME Coordinating Managing Entity GCF Green Climate Fund CMM Coal Mine Methane GDP Gross Domestic Product CMP Conference of the Parties serving GGAS New South Wales Greenhouse Gas as the Meeting of the Parties to the Reduction Scheme Kyoto Protocol GHG Greenhouse Gas CO2 Carbon Dioxide GIS Green Investment Scheme CO2e Carbon Dioxide Equivalent GW Gigawatt COD Chemical Oxygen Demand HFC Hydrochlorofluorocarbon COP Conference of the Parties ICE IntercontinentalExchange CPA CDM Programme Activity IFC International Finance Corporation CPF Carbon Partnership Facility IEA International Energy Agency CPM Carbon Price Mechanism IFI International Financial Institution CPUC California Public Utilities IFRS International Financial Reporting Commission Standard IMF International Monetary Fund 2 State and Trends of the Carbon Market 2012 IOU Investor-Owned Utility PAT Perform Achieve and Trade IRR Internal Rate of Return pCER Primary Certified Emission Reduction J-VER Japan Verified Emission Reduction PDD Project Design Document J-VETS Japan-Voluntary Emissions Trading PFC Perfluorocarbon Scheme PIN Project Idea Note JI Joint Implementation PMR Partnership for Market Readiness JISC Joint Implementation Supervisory PoA CDM Programme of Activities Committee RE Renewable Energy KM Kyoto Mechanism REC Renewable Energy Certificate KP Kyoto Protocol REDD Reducing Emissions from LDC Least Developed Country Deforestation and Forest lCER Long-term Certified Emission Degradation Reduction REDD+ Extends REDD by including sustain- LFG Landfill Gas able forest management, conserva- LoA Letter of Approval tion of forests, and enhancement of LULUCF Land Use, Land Use Change and carbon sinks. Forestry RET Renewable Energy Target MAD Market Abuse Directive RGGI Regional Greenhouse Gas Initiative MDB Multilateral Development Bank RMU Removal Unit MiFiD Markets in Financial Instruments sCER Secondary Certified Emission Directive Reduction MOP Meeting of the Parties SCF Strategic Climate Fund MRV Measurement, Reporting and SF6 Sulfur Hexafluoride Verification SME Small and Medium-size Enterprise MW Megawatt tce Tons of Coal Equivalent MWh Megawatt hour tCER Temporary Certified Emission NAMA Nationally Appropriate Mitigation Reduction Action tCO2 Ton of Carbon Dioxide NAP National Allocation Plan tCO2e Ton of Carbon Dioxide Equivalent NAPCC National Action Plan on Climate TMS Target Management System Change UN United Nations NDRC National Development and Reform UNEP United Nations Environment Commission Programme N2O Nitrous Oxide UNFCCC United Nations Framework NMM New Market Mechanism Convention on Climate Change NPV Net Present Value VAT Value-added Tax NZ ETS New Zealand Emissions Trading VCS Voluntary Carbon Standard Scheme VCU Verified Carbon Units NZU New Zealand Unit VER Verified Emission Reduction OECD Organisation for Economic Co- WB World Bank operation and Development WCI Western Climate Initiative OTC Over-the-Counter YOY Year on Year State and Trends of the Carbon Market 2012 3 Contents List of abbreviations and acronyms 1 Contents 3 1. Executive summary 9 2. Introduction: a changing climate 13 3. European Union Emissions Trading Scheme (EU ETS) 17 3.1 At a glance 17 3.2 An expanded scope for the emissions cap in the EU starting in 2012 18 3.2.1 New gases and assets are integrated into the Scheme 18 3.2.2 Many fewer allowances will be allocated for free 19 3.3 A quick review of the supplementarity limit for offsets in the European Scheme 21 3.4 Did the Durban outcomes change anything for the Kyoto offsets in the EU ETS? 21 3.5 Ensuring the relevance of the EU ETS in the EU’s objectives to curb emissions 22 3.5.1 Many low-carbon initiatives; too many? 22 3.5.2 And then comes a set-aside and its arduous decision process 23 3.6 Infrastructure and market integrity: the importance of being secure 26 3.6.1 Market response: a spot market in dormancy 26 3.6.2 Regulatory response: enhanced registry infrastructure 29 3.6.3 Market oversight review: toward classifying carbon as a financial instrument 30 3.7 EU Allowances: the numbers behind the growing trading volumes 31 3.7.1 The primary EU Allowance market 32 3.7.2 A Shrinking spot market 32 3.7.3 Increasing bilateral trades 32 3.7.4 Who is trading, how, and why they trade 34 3.8 Secondary offsets: smaller figures, similar patterns 37 3.8.1 Myths and facts 37 3.8.2 Futures market with the lion’s share 38 3.8.3 What spreads can tell 38 3.9 Aviation: the polemic new kid on the block 39 3.9.1 Background: 39 3.9.2 Rules and participants: 40 3.9.3 How representative is aviation within the EU ETS? 41 4. Market instruments under the UNFCCC 45 4.1 Durban climate negotiations and policy evolution 45 4.2 Kyoto flexibility instruments 48 4.2.1 The Clean Development Mechanism 48 4.2.2 Joint Implementation 58 4.2.3 Assigned Amount Units 61 4.2.4 Removal Units 62 4 State and Trends of the Carbon Market 2012 4.3 New market instruments 62 4.3.1 Nationally Appropriate Mitigation Actions 62 4.3.2 New approaches to market instruments 64 5. Outlook – 2012 demand and supply balance 67 5.1 Government demand 67 5.2 Private sector demand 69 5.3 Supply through to 2012 70 5.4 Residual demand—290 MtCO2e 71 6. Emissions trading and other low-carbon initiatives around the world 73 6.1 Australia 73 6.1.1 The Clean Energy Future Package 73 6.1.2 The Carbon Farming Initiative 78 6.2 New Zealand 78 6.3 North America 80 6.3.1 Regional Greenhouse Gas Initiative 80 6.3.2 California, Québec and the Western Climate Initiative 81 6.3.3 Alberta 88 6.3.4 British Columbia 89 6.3.5 Chicago Climate Exchange 90 6.4 Republic of Korea 90 6.5 Mexico 92 6.6 Brazil 93 6.7 China 94 6.7.1 A look back at the 11th Five-Year Plan (2006-2010): what’s in China’s tool box? 95 6.7.2 12th Five-Year Plan (2011-2015): “piloting� market mechanisms 95 6.7.3 Building emissions trading in China: who is involved? 96 6.7.4 Current status: is it the journey or the destination? 98 6.8 India 100 6.9 Japan 102 6.10 Switzerland 103 6.11 Other initiatives 104 Annex 1: International reaction to aviation in the EU ETS 109 Annex 2: Land-use carbon 112 Annex 3: The state of the voluntary market 115 Annex 4: California’s cap-and-trade design features 117 Annex 5: Québec’s cap-and trade design features 119 Annex 6: China: targets and supporting measures under the Five-Year Plans 120 Annex 7: India PAT: market design and governance elements 121 Annex 8: Assumptions for estimates of potential demand for offsets from non-Annex I Countries 122 Methodology 124 Acknowledgments 127 Glossary 128 State and Trends of the Carbon Market 2012 5 Boxes Box 1: Trading around the risk of receiving stolen allowances 27 Box 2: Within the trades 34 Box 3: The point of view of a market player: the right pathway to address aviation emissions 42 Box 4: Key elements of the Durban decisions 46 Box 5: Brazil integrated solid waste management and carbon finance program 57 Box 6: Track 1 versus Track 2 JI 59 Box 7: The Swiss policy measures to reduce GHG emissions 104 Box 8: Will there be demand for emission reductions after 2012? 106 Figures Figure 1: Prices and volumes for EUAs, CERs and ERUs in the secondary market, 2008-2011 18 Figure 2: EU registry infrastructure: transition to the Union Registry 30 Figure 3: Annual volume of primary EUAs sold by member states, 2008-2011 32 Figure 4: Annual EUA volumes, 2008-2011 32 Figure 5: Transactions in the EU ETS 33 Figure 6: Trading alternatives: exchange, OTC, and bilateral trades 33 Figure 7: Annual CER and ERU volumes, 2008-2011 38 Figure 8: Spreads CERs versus ERUs and “green� versus “standard� CERs, 2011-2012 38 Figure 9: Volumes and average prices for pre-2013 CER transactions since 2002 49 Figure 10: Pre-2013 volumes transacted by seller 2002-2011 (MtCO2e) 53 Figure 11: Post-2012 volumes transacted per seller, 2010-2011 53 Figure 12: Pre-2013 volumes transacted per sector 2002-2011 (MtCO2e) 54 Figure 13: Post-2012 pCERs per sector, 2010-2011 (%) 54 Figure 14: CER issuance, 2005-2011 55 Figure 15: CDM projects registered until 2011 and projects at validation in 2012 56 Figure 16: Regional distribution of pCDM and CDM (%) 56 Figure 17: Number of existing projects in the JI pipeline per country 59 Figure 18: Cumulative ERU issuance per track Q1 2009 – Q1 2012 (MtCO2e) 60 Figure 19: Annual pERUs volumes transacted per seller since 2003 61 Figure 20: Estimated changes to the national generation mix in 2011 and 2050 75 Figure 21: Australian GHG emissions and abatement forecasts – government policy scenario 76 Figure 22: Market volumes and prices on the RGGI, 2008-2011 80 Figure 23: California’s historical GHG emissions, projections, and reduction targets 82 Figure 24: Pricing for CARB eligible market instruments 85 Figure 25: Québec’s historical GHG emissions, projections, and reduction targets 86 Figure 26: WCI annual market balance through 2020 88 Figure 27: Alberta offsets: historic volume and prices 2007-2011 89 Figure 28: Purchases of BC offsets by the government of British Columbia 2009-2011 89 Figure 29: CCX Carbon Financial Instruments (CFI) - historical volumes and price 90 Figure 30: China in world’s energy-related CO2 emissions 91 Figure 31: Building pilot emissions trading schemes in China 94 Figure 32: Renewable Energy Certificates – traded volumes and clearing prices 97 6 State and Trends of the Carbon Market 2012 Tables Table 1: Carbon market at a glance, volumes and values, calendar 2010-2011 10 Table 2: New registry security measures in the EU ETS 29 Table 3: Volumes and value for CER transactions in the primary market, 2010-2011 49 Table 4: Volumes and value for JI transactions, 2010-2011 60 Table 5: Supply and demand in perspective – Kyoto market balance, 2008-2012 68 Table 6: Potential demand, contracted supply, and residual demand, 2008-2012 71 Table 7: Australia’s CPM at a glance 74 Table 8: Eligibility of international units in compliance markets 76 Table 9: Republic of Korea – emissions trading scheme 91 Table 10: China: pilot jurisdictions and current ETS status 99 Table 11: Emerging domestic initiatives and supporting readiness programs (non-exhaustive) 105 Table 12: Scenario of potential demand for offsets in non-Annex I Countries 2013–20 (MtCO2e) 106 Table 13: Estimates of potential supply under the CDM and JI up to 2020 (MtCO2e) 108 Table 14: Investment funds and land-use carbon 113 State and Trends of the Carbon Market 2012 7 1 8 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 9 Executive summary With memories of the 2008-2009 financial crisis still vivid, 2011 emerged as yet another turbulent year for capital markets. Volatility increased for energy-related commodities, including carbon, with the onset of the Arab Spring, the shutdown of nuclear power stations in Japan and Germany in the wake of the Fukushima disaster,1 and the downgrade of the United States’ AAA credit rating. Equally relevant was the crisis of confidence that ensued as the Greek debt crisis intensified, spurred by fears that it would spread to other European Union (EU) economies and lead to a double-dip recession. Carbon markets were not immune to the eco- activity, trading volumes for secondary Kyoto off- nomic volatility. Compounded by increas- sets also soared in 2011, increasing by 43% yoy ing signs of long-term oversupply in the EU to 1.8 billion tons of CO2e, valued at US$23 bil- Emissions Trading Scheme (EU ETS), the back- lion (€17 billion). Largely driven by hedging and bone of the EU’s climate policy and the engine arbitrage, trading volumes for all assets increased of the global carbon market, carbon prices plum- as annual greenhouse gas (GHG) emissions in meted toward the end of the year.2 Yet even as Europe declined for the second time in three years prices declined, the value of the global carbon (primarily driven by weak industrial activity in the market climbed in 2011, driven predominant- EU) and forecasts of compliance demand were ly by a robust increase in transaction volumes. dwarfed by the oversupply of allowances. As com- The total value of the market grew by 11 per- pliance demand and prices deteriorated, the issue cent (%) year on year (yoy) to US$176 billion of whether current carbon prices can sufficiently (€126 billion), and transaction volumes reached spur long-term low-carbon investments emerged a new high of 10.3 billion tons of carbon dioxide in the debate, surfacing a key challenge in this equivalent (CO2e) (see Table 1).3 market: an oversupply created as a consequence of demand responding to the current macroeco- Central to the rise in global transaction vol- nomic scenario versus a pre-established supply de- umes, EU Allowance (EUA) trading volumes termined under very different market conditions. increased, reaching 7.9 billion tons of CO2e, val- ued at US$148 billion (€106 billion). Supported The value of the pre-2013 primary CER market by increased liquidity in the Certified Emission declined once again in 2011 as a consequence of Reduction (CER) market and in nascent secondary the imminent end of the first commitment period Emission Reduction Unit (ERU) exchange-based of the Kyoto Protocol. Market value fell by 32% 1. The Fukushima disaster was a consequence of the earthquake and tsunami in Japan in March 2011. 2. Prices for December 2012 delivery of EU Allowances (Dec 12 EUA) and December 2012 delivery of Certified Emission Reductions (December 12 CERs) fell by 50% year on year (yoy) and 62% yoy respectively, from January 3, 2011, to December 30, 2011. Source: IntercontinentalExchange (ICE) Futures Europe. 3. Differences in 2010 figures reflect changes in the methodology to calculate the value and volume of trades. For detailed information regarding the methodology used to measure asset volumes and values, see the Methodology section at the end of this Report. 10 State and Trends of the Carbon Market 2012 Table 1: 2010 2011 Carbon market at Volume (MtCO2e) Value (US$ million) Volume (MtCO2e) Value (US$ million) a glance, volumes Allowances market and values, calendar EUA 6,789 133,598 7,853 147,848 2010-2011 AAU 62 626 47 318 RMU - - 4 12 NZU 7 101 27 351 RGGI 210 458 120 249 CCA - - 4 63 Others 94 151 26 40 Subtotal 7,162 134,935 8,081 148,881 Spot & Secondary offset market sCER 1,260 20,453 1,734 22,333 sERU 6 94 76 780 Others 10 90 12 137 Subtotal 1,275 20,637 1,822 23,250 Forward (primary) project-based transactions pCER pre-2013 124 1,458 91 990 pCER post-2012 100 1,217 173 1,990 pERU 41 530 28 339 Voluntary market 69 414 87 569 Subtotal 334 3,620 378 3,889 TOTAL 8,772 159,191 10,281 176,020 Sources: World Bank, Forest Trends-Ecosystem Marketplace for data on the voluntary market and Thomson Reuters Point Carbon for data on the California offsets Subtotals and totals may not add up due to rounding yoy to US$1.0 billion (€0.7 billion). The size of The year ended with the 17th Conference of the the ERU and Assigned Amount Unit (AAU) mar- Parties (COP) in Durban, South Africa. While kets also decreased, by 36% and 49% respectively. COP 17 did not adopt the incremental emission In stark contrast to this, the post-2012 primary reduction commitments necessary to close the gap market increased by a robust 63% yoy to US$2 as per the ambitious level set by the UNFCCC billion (€1.4 billion) despite depressed prices. Parties, it signaled a political commitment to re- Although China remained the largest source of solve critical issues that were far from certain prior contracted CERs, African countries – largely by- to the meeting. In particular, three key results passed in the pre-2013 market – emerged stron- formed the backbone of the Durban Platform for ger in 2011 and accounted for 21% of post-2012 Enhanced Action: (i) the formal provision for a sec- CERs contracted during the year. Despite the in- ond commitment period of the Kyoto Protocol;4 crease in post-2012 volumes, purchase agreements (ii) the launch of the Green Climate Fund to scale became less binding due to lingering uncertain- up long-term climate finance to developing coun- ties regarding residual compliance demand and tries; and (iii) the formal provision for a roadmap the eligibility of international credits in existing toward a global legal agreement on climate change frameworks and schemes under development. (the “Durban Platform�) to be agreed in 2015 and 4. To become a reality, the necessary decision to that effect will need to be adopted at COP 18. State and Trends of the Carbon Market 2012 11 take effect in 2020. The decision on a new market for 2015, the plan is expected to cover 85% of mechanism further strengthens the international California’s annual emissions. Québec, which trust in the UNFCCC process. Still, the restricted emits 12% of Canada’s annual GHG emissions, geographic scope of the Kyoto Protocol’s second adopted its own cap-and-trade plan, and the commitment period and prospects for a global province is now working toward linking it with deal to take effect in 10 years did not satisfy the California’s (within the context of the Western immediate needs of the existing carbon market in- Climate Initiative) starting in 2013. In addition, frastructure, and the Durban Platform could not both Mexico and the Republic of Korea got their reverse the downward spiraling of the carbon price comprehensive climate bills passed a few days that produced record lows through early 2012. apart in April 2012. These initiatives combined mean five new jurisdictions are adopting econo- At a time when uncertainties surround the exist- my-wide cap-and-trade schemes. These events are ing carbon markets, it becomes more important particularly noteworthy in contrast to 2010, when than ever to take stock of the cumulative impact no such initiatives were launched. Now the world of carbon market mechanisms. To date, US$28 looks with particular attention to China, which billion worth of pre-2013 CERs have been con- is also among the frontrunners in the race to be- tracted forward (US$30 billion, combined with come a low-carbon economy. Its advanced plan to ERUs); if all underlying projects are imple- pilot several regional cap-and-trade schemes is ex- mented, these contracts will have supported ad- pected to provide the foundation for a nationwide ditional investments of more than US$130 bil- scheme in the coming years. lion in developing countries5,6 and confirm that project-based mechanisms have the capacity to Initiatives that attract competitive private sec- mobilize capital efficiently toward cost-effective tor participation are essential to identifying and low-carbon investments. More broadly, low-car- implementing least-cost solutions for climate bon initiatives, including market mechanisms, change mitigation and adaptation, and market- have broken the inertia and significantly raised based mechanisms can catalyze such participa- awareness of the climate challenge. tion. However, the allocation of private capital toward the deployment of new low-carbon tech- In this context, several domestic and regional low- nologies at scale has been constrained by the low carbon initiatives, including market mechanisms, price prevailing in the short term and the ab- gained increasing traction in both developed and sence of a price signal in the long term, and com- developing economies in 2011 and early 2012. pounded by nervous financial markets that favor The global carbon market welcomed the news exposure to less risky assets and markets. More in late 2011 that the Australian Parliament had ambitious targets are needed from a larger num- passed the ambitious Clean Energy Act, which ber of countries to foster demand that can set the will bring a nationwide cap-and-trade scheme to groundwork for a truly transformational carbon Australia by 2015. The scheme is expected to cov- market – one that can emerge from fragmented er roughly 60% of the country’s 600 million tons but workable market initiatives. The challenge of CO2e per year. In 2011, California’s cap-and- then will be to chart a course to further evolve trade regulation was adopted by the California Air these initiatives through linking and potentially Resources Board. California’s plan is set to go into reshaping the global carbon map. effect in 2013; with a coverage expansion planned 5. World Bank estimates from 2011 and based on CDM projects in its own pipeline led to an average 1º:5 ratio between CER purchase values and the additional investments required for the underlying project to be implemented. 6. This value refers to the cumulative 2.4 billion CERs contracted in the primary market from 2002-2011. The value does not ensure the actual transfer of funds from the buyer to the seller as payments for emission reductions purchased in the primary market are commonly made upon delivery. 2 12 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 13 Introduction: a changing climate Since 2007, both climate science and climate economics have advanced dramatically, mainly in response to the Stern Review in 2006 and the Intergovernmental Panel on Climate Change’s Fourth Assessment Report in 2007. As climate science has matured, its limitations have also been revealed, meaning that the impacts of climate change are still difficult to predict. Carbon-cycle positive feedbacks may lead to far-reaching changes that are increasingly difficult to reverse once they have taken place. In addition, climate risks involve tipping points at which abrupt, perhaps irreversible transitions could occur.7 Climate damages have already begun to occur; 1.5 degrees.� The Copenhagen Accord also in- these are disproportionally impacting the poor, vited parties to submit mitigation plans with the who are the least resilient and most vulnerable. UNFCCC. To date, 90 countries, including 48 From 1970-2008, over 95 percent (%) of natu- developing nations8 have registered plans with ral-disaster-related deaths occurred in developing the UNFCCC to reduce emissions by 2020. countries. Even under rapid mitigation scenarios, the magnitude and rate of climate change-related Despite international efforts, the climate change damage is expected to worsen in years to come, challenge remains daunting and the search for caused by the delayed effects of past emissions long-term solutions continues. Total anthropo- and emissions expected in the near future (i.e., genic greenhouse gas (GHG) emissions at the the cumulative emissions over time). end of 2009 were estimated at 49.5 gigatons of carbon dioxide equivalent (GtCO2e) and GHG As agreed at the 15th Conference of the Parties emission levels of approximately 39-44 GtCO2e (COP) under the United Nations Framework in 2020 would be consistent with a “likely� Convention on Climate Change (UNFCCC) chance of limiting global warming to 2° C. in 2009, the Copenhagen Accord declared that However, under business-as-usual projections, deep cuts in global emissions are required “so as global emissions could reach 56 GtCO2e by to hold the increase in global temperature below 2020; even if the highest ambitions of all coun- two degrees Celsius.� It also called for an assess- tries associated with the Copenhagen Accord are ment that would consider strengthening the implemented, annual (GHG) emissions would long-term goal, including “temperature rises of still reach 49 GtCO2e by 2020.9 7. Source: Stockholm Environment Institute. Climate Economics: The State of the Art, November 2011. 8. Source: Mobilizing Climate Finance, a paper prepared at the request of the G20 finance ministries, 2011 (http://climatechange. worldbank.org/content/mobilizing-climate-finance). 9. Source: UNEP, The Emissions Gap Report, November 2010. 14 State and Trends of the Carbon Market 2012 Other scenarios show that the world is on a trajec- being made in non-OECD countries.12 If strin- tory that results in a level of emissions consistent gent new action is not forthcoming by 2017, with a long-term average temperature increase of the energy-related infrastructure then in place more than 3.5° C, assuming the implementation will generate all the CO2 emissions allowed up of recent government policy commitments, or 6° C to 2035, leaving no room for additional power or more without them.10 plants, factories, and other infrastructure unless they are zero-carbon.13 In addition, as the global population heads to- ward 9 billion by 2050,11 there is likely to be At times of macroeconomic uncertainty, “climate increased pressure on the natural resources that change will test the ability of governments to lead, supply energy and food. Global investments of as never before. Trade-offs will be necessary in the US$38 trillion in energy-supply infrastructure choices policymakers must make – between the are required between 2011 and 2035, two-thirds urgency of today’s problems and the need to pre- of this in non-OECD countries. However, to- pare for future risks.�14 Furthermore, the interplay tal new investments in clean energy reached between climate change mitigation, adaptation, US$260 billion only in 2011, with less than one- and disaster risk management will have a major third of all clean energy financial investments influence on resilient and sustainable pathways. 10. Source: International Energy Agency (IEA), World Energy Outlook 2011, November 2011. 11. Source: OECD. Environmental Outlook to 2050: The Consequences of Inaction, 2012. 12. In addition, total renewable energy subsidies totaled US$66 billion, compared to US$409 billion in global fossil-fuel subsidies in 2011. Source: Bloomberg New Energy Finance, Finance Summit, March 20, 2012. 13. Four-fifths of the total energy-related CO2 emissions permissible by 2035 are already “locked-in� by our existing capital stock (power plants, buildings, factories, etc.). Source: International Energy Agency (IEA), World Energy Outlook 2011, November 2011. 14. Source: World Resources Institute (WRI) in collaboration with United Nations Development Programme, United Nations Environment Programme, and World Bank. World Resources 2010–2011: Decision Making in a Changing Climate – Adaptation Challenges and Choices, 2011. 3 16 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 17 European Union Emissions Trading Scheme (EU ETS) 3.1 At a glance In 2011, the total transaction value in the European Union Emissions Trading Scheme (EU ETS) rose 11 percent (%) year on year (yoy) to US$171.0 billion (€122.3 billion). The primary catalyst was a steep increase in the trading volume of European Union Allowances (EUAs), secondary Certified Emission Reductions (sCERs), and Emission Reduction Units (ERUs), which collectively rose 20% to 9.7 billion tons. EUA volumes15 represented 81% of all EU ETS transactions during the year. The growth in overall transaction value occurred concern about a second EU recession in recent despite annual average prices falling substan- years. Fears about weak demand intensified in tially for all three asset classes. The annual aver- June when the European Union (EU) proposed age EUA price declined 4% yoy to US$18.8/ton a new Energy Efficiency Directive (EED) that (€13.5/ton). Similarly, the annual average sec- mandated energy efficiency measures.18 ondary CER and ERU combined price declined 21% yoy to US$12.8/ton (€9.2/ton).16 The new factors for concern were compounded by: (i) the dramatic reduction in EU emissions Although average prices ended down, the year during the 2008-2009 economic downturn, started strongly. EUA prices staged a robust 20% followed by a weak industrial recovery;19 (ii) increase during the first 5 months of 2011,17 substantial investment in domestic renewable tracking broad-based gains in other commod- energy capacity in recent years;20 and (iii) the ity markets. The rally extended through to May current supply of international offsets – largely 2011 before peaking, reversing all gains, and stimulated by the EU ETS itself. Together these then hitting new lows. The trend down coin- factors painted a clear picture that the oversup- cided (see Figure 1) with the worsening of the ply of EUAs already seen in Phases I and II of Greek debt crisis, which sparked fears of systemic the EU Scheme would likely remain for several contagion (particularly to Spain and Italy) and more years. 15. Including primary EUAs sold by member states, which accounted for approximately 1% of EUA volumes and values. 16. Differences in 2010 figures reflect changes in the methodology to calculate the value and volume of trades. For detailed information regarding the methodology used to measure asset volumes and values, see Methodology. 17. A 20% increase versus the closing price on January 3, 2011. 18. Prices fell by almost 20% over the three days following the publication of the draft EED on June 22, 2011. 19. The GHG emissions declined 11% between 2008 and 2009, following a 15% reduction in the EU industrial activity in the same period. Source: Communication from Sikorski, Trevor, Barclays Capital, March 2012. 20. Investments in wind and solar capacity in 2010 and 2011 amounted to 50 gigawatts in Europe. 18 State and Trends of the Carbon Market 2012 Figure 1: 1,000 50 Prices and volumes 900 for EUAs, CERs 800 40 Monthly volumes (million tons) Monthly average prices (US$) and ERUs in the secondary market, 700 2008-201121 600 30 500 400 20 300 200 10 100 0 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2008 2009 2010 2011 EUA volumes Average Price of EUA front Dec CER volumes Average Price of CER front Dec ERU volumes Average Price of ERU front Dec Source: World Bank “ Trading volumes soared in 2011, coinciding with the second decline in verified emissions A considerable portion of the trades is primar- ily motivated by hedging, portfolio adjustments, profit taking, and arbitrage. in three years. A considerable portion of the trades is primarily motivated by hedging, 3.2 An expanded scope for portfolio adjustments, profit taking, and the emissions cap in the EU � starting in 2012 arbitrage. Trading volumes soared in 2011, coinciding 3.2.1 New gases and assets are integrated with the second decline in verified emissions in into the Scheme three years.22,23 This was mainly driven by weak industrial activity in the EU ETS perimeter and Substantive changes in the operation and emis- oversupply dwarfing compliance demand. A sions coverage of the EU ETS are set to start in milder winter in Europe also contributed to the 2013, as part of its Phase III. The process actually decline in emissions, as less fuels were burned started in 2012 with preparatory measures and for heating. These are strong indications that the the inclusion of the aviation sector. That sector collective demand for carbon permits and offsets will represent the second-largest emitting sector has a limited impact in market players’ trading. covered by the scheme. 21. Prices are based on the front-December contracts for each respective year (Source: ICE). Volumes exclude primary EUAs sold by EU governments. 22. On April 2, 2012, the European Commission released verified emissions data for the EU ETS (89% of installations have reported until that date). Emissions declined by 2.4%, from 1.75 billion tons in 2010 to 1.7 billion tons in 2011. 23. In April 2012, the EC published additional 2011 EU ETS verified emissions data. With around 97% of installations reporting their emissions, final estimates for 2011 reached 1,896 Mt, or a 2.2% fall in emissions from 1,938mt in 2010. The figure includes new entrants and excludes installations that failed to comply. By including them, the decline would be 2.5%. Source: Jefferies Bache, Global Commodities, April 12, 2012. State and Trends of the Carbon Market 2012 19 The power sector remains the largest sector cov- in 2013 and decline to 2,024 MtCO2e in 2020.25 ered by the EU ETS. Since its early days, the The Phase III of the EU ETS is expected to pro- EU ETS has covered emissions in power stations vide stronger price signals due to a longer trad- and other combustion plants, oil refineries, coke ing period (eight years versus five years in Phase ovens, iron and steel plants, cement, glass, lime, II), the annually declining emissions cap, and bricks, ceramics, pulp, paper, and board sectors. a substantial increase in the level of auction- Through 2012, the only greenhouse gas (GHGs) ing (from less than 4% in Phase II to over 50% covered by the scheme is carbon dioxide (CO2).24 in Phase III).26 Over 1,200 million EUAs are expected to be auctioned every year starting in As of 2013, the scope of the ETS will be extended 2013, compared to less than 100 million EUAs to include other sectors and GHGs. CO2 emissions sold in 2011.27 from petrochemicals, ammonia, and aluminium will be included, as will N2O emissions from the nitric, 3.2.2 Many fewer allowances will be adipic and glyocalic acid production, and perfluoro- allocated for free carbons from the aluminium sector. The capture, transport, and geological storage of CO2 emissions Full auctioning becomes the rule from 2013 will also be covered. These sectors will receive free onward for electricity generators, who emit the allowances, based on industry-specific benchmarks. majority of GHG emissions in the EU ETS. Few member states will be given the option to The total number of allowances in the EU-wide postpone the full auctioning process temporar- cap in 2013 will be equivalent to the average to- ily; most will start with 30% auctioning in 2013 tal number of allowances issued by member states and progressively get to 100% by 2020. For oth- during Phase II. The cap has been established to er sectors, free allocations will be progressively deliver an overall reduction of 21% in the verified phased out starting at 80% in 2013, decreas- emissions by 2020 against 2005 levels. In contrast ing to 30% in 2020, and reaching 0% in 2027. to previous phases, the number of allowances will Exceptions will apply for installations in sectors decrease 1.74% annually until 2020. The linear that are found to be exposed to a significant risk annual decrease will better represent the expected of “carbon leakage.�28 decline in emissions over that period. Harmonization has also been an objective in ar- The preliminary cap for the year 2013 has been eas resulting in an EU-wide emissions cap (re- set at 2,039 million tons of CO2 equivalent placing the national caps for member states in (MtCO2e). The final number will be adjusted, Phases I and II) and rules for transitional free however, to reflect the broadened scope of the allocations (EU-wide rules will apply equally to scheme starting in 2013, any small operators all installations across the EU with the same or that member states have chosen to exclude, the similar activities). inclusion of the aviation sector, and the inclu- sion of emissions from Norway, Iceland, and As of January 2013, auctioning will take place on Liechtenstein. Accounting for the changes in a common EU-wide platform for most European scope, these numbers may start at 2,291 MtCO2e member states. However, in February 2011, 24. Netherlands has opted to also cover emissions from nitrous oxide (N2O). 25. Source: Deutsche Bank, EU Emissions: Scoping the Cap over Phase 3, February 13, 2012. 26. In the interest of solidarity, 12% of the total allowances auctioned will be redistributed to member states with lower GDP. 27. Directive 2003/87/EC allows Member States to auction and/or sell up to 5% of their EUAs in Phase I and 10% in Phase II. These may include EUAs from closure and surplus of the New Entrant Reserve. 28. Two thirds of the emissions in these sectors come from industry exposed to significant risks of carbon leakage and will benefit from full free allocation up to their industry specific benchmarks until 2020. Benchmarks reflect the 10% most efficient installations, with the 90% less efficient installations being required to either reach the benchmark or purchase additional allowances. 20 State and Trends of the Carbon Market 2012 Germany, Poland, and the United Kingdom • On April 25, an amendment to Annex 3 of informed the European Commission (EC) of the Auction Regulation, to list the German their decision to opt out of the common auction transitional platform, was endorsed by the platform and instead appoint their own auction EU’s Climate Change Committee. This platforms. These platforms still need to satisfy amendment has been submitted to the the rules of the Auctioning Regulation and will Council and the European Parliament for a require approval from the EC, the Council and three-month scrutiny period. Provided no the European Parliament. objections are raised, the Commission can adopt the amendment. This platform would A decision was taken to establish a transitional become operational and could start early auc- common auction platform in 2012 to conduct tions in September 2012 the earliest. auctions on a provisional basis. A subsequent • In the end of April, the UK notified the common auction platform, to which the provi- Commission that it intends to appoint sions of the Auctioning Regulation will apply IntercontinentalExchange (ICE) as its opt- in full, is to be appointed soon thereafter. On a out auction platform. competitive procurement basis, common auction • In the summer of 2012, the selection of the platforms will be appointed for a period of maxi- common transitional platform is expected to mum 5 years. The amendment to the Auctioning be announced. Regulation agreed to by member states in July • As the auction platform proposed by 2011 provides for the auctioning of 120 mil- Germany, also the auction platform pro- lion Phase III EU allowances (EUAs) in 2012. posed by the UK is to be listed in Annex 3 The first auctions of EU Aviation Allowances to the Auctioning Regulation, following the (aEUAs) will also take place in 2012, which is same procedures. At the earliest in November the year in which aircraft operators come under of 2012, the UK platform could start early the EU ETS. auctions. • Auctions on the transitional common auc- The estimated timetable of the early auctions is tion platform are to start after summer 2012. as follows:29 The Commission has refrained from provid- ing precise estimates for a starting date. • In December 2011, Germany closed the pro- • Poland has not yet launched a tender pro- curement for its transitional platform. cedure for its opt-out auction platform. • In February 2012, the UK closed the pro- Though no formal decisions are known as of curement for its platform.30 the writing of this report, Poland indicated • On March 9, Germany notified the it would turn to the transitional common Commission that it intends to appoint the auction platform for auctioning its share of European Energy Exchange AG (EEX) in allowances until its opt-out auction platform Leipzig as its transitional opt-out auction is appointed and approved, as foreseen in the platform. Auctioning Regulation. • On March 24, the call for tender for the transitional common auction plat- The first stage of the procurement procedure to form under the EU ETS was pub- appoint an auction monitor – that will monitor lished (with a closing date of May 3). the auctions on all auction platforms – is to be published soon. 29. Some data were sourced from Dufour, Claire. Auctions in 2012 & 2013 Expected volumes and calendar, February 2012. 30. The maximum appointment duration for any auction platform is five years. State and Trends of the Carbon Market 2012 21 In December 2011, the European Investment before 1 January 2013 (CP-1), will have to be Bank started the monetization of Phase-3 EUAs swapped into EUAs by March 31, 2015. Credits under the “NER 300,� a program focused on issued against emission reductions occurred after supporting the deployment of commercial low- 2012 (CP-2), but generated from projects reg- carbon demonstration projects (primarily car- istered before December 31, 2012, will be fully bon capture and storage (CCS) and innovative fungible throughout Phase III. Finally, CP-2 renewable technologies). The program will be credits from projects registered after December funded from the sale of 300 million EUAs from 31, 2012, will only be eligible (and swapped into the Phase III New Entrants Reserve (NER) of EUAs) if they come from a project in a Least the EU ETS. The European Investment Bank Developed Country (LDC) or a country with (EIB) was chosen by the European Commission whom the EU has signed a bilateral agreement.32 and member states as the agent to conduct the These restrictions might have been avoided if an sale, with the responsibility for monetizing the international agreement had been reached at the first tranche of 200 million allowances within 10 COP 15 in Copenhagen. months of delivery (an indicative volume of sales of 20 million allowances per month).31 The ban of credits from hydrofluorocarbons (HFCs) and from adipic acid N2O projects com- pletes the known list of qualitative restrictions. 3.3 A quick review of the CP-2 credits generated from these projects will supplementarity limit for not be eligible for compliance, while the surren- offsets in the European Scheme der of CP-1 HFC and adipic acid N2O credits will only be eligible for Phase II compliance until Phase III of the EU ETS also marks a substan- April 30, 2013. tial reduction in the relative volume of inter- national credits that are eligible for compli- For further details regarding Phase III of the EU ance purposes. A total of 1,400 million tons ETS, including import volumes and rules gov- of CERs and ERUs are eligible for compliance erning the import of offsets into the EU ETS, by installations during Phase II of the scheme, please refer to State and Trends of the Carbon representing approximately 13% of the aver- Market 2010.33 age allocation in the period 2008-2012 (about 280 MtCO2e per year). In contrast, the import cap for international credits in Phases II and 3.4 Did the Durban outcomes III combined (2008-2020), defined under the change anything for the revised EU ETS Directive, is approximately Kyoto offsets in the EU ETS? 1,700 MtCO2e, corresponding to an average supplementarity limit of 6%, or less than half of The COP-17 in Durban in December 2011 the average supplementarity limit in Phase II. concluded with the adoption of the Durban Platform for Enhanced Action. The associated As broadly known since 2009, during Phase III Ad Hoc Working Group on a Durban Platform Kyoto credits will no longer be de facto compli- for Enhanced Action (AWG-DP) was mandated ance units and their fungibility into EUAs will to develop a “protocol, legal instrument, or an be conditional. In addition, CERs and ERUs is- agreed outcome with legal force� to be adopted by sued against emissions reductions taking place 2015 and to come into effect and be implemented 31. Until March 31, 2012, the EIB reported having sold 78.6M EUAs, for a total value of € 670.6 million. 32. For the list of LDCs, see http://ec.europa.eu/clima/policies/ets/linking/docs/def_ldc_en.pdf. 33. Source: Kossoy, A. and Ambrosi, P., State and Trends of the Carbon Market 2010 – “What lies ahead for the EU ETS� and “Annex I: Supplementarity under the EU Climate and Energy Package� pages 17 and 63, respectively, June 2010. 22 State and Trends of the Carbon Market 2012 starting in 2020. This outcome raised questions does not ratify the agreement. In practice, this in the market as to whether the Durban Platform means that a CER holder will not know whether met the requirements of an effective “international assets are eligible until their delivery. agreement on climate change� per Article 11a(7) of the EU ETS Directive and Article 5(3) of the The EC has made clear that the current restric- Effort Sharing Decision. Some players initially tions could be expanded if deemed appropriate, argued that the Durban outcomes were sufficient heightening even more the uncertainties faced to remove the proposed qualitative restrictions on by project developers and market players hold- the eligibility of some Kyoto offsets, including ing Kyoto offsets. CP-2 credits from projects registered after 2012 in countries other than LDCs. 3.5 Ensuring the relevance In response to the debate, the EC in January of the EU ETS in the EU’s 2012 clarified that Articles 11a(7) of the EU ETS objectives to curb emissions Directive and Article 5(3) referred to the adoption of a future international agreement at the COP- 3.5.1 Many low-carbon initiatives; too many? 15 in Copenhagen in 2009 (which did not hap- pen), and that they “limit�, rather than “broaden� The EU has historically taken international lead- the acceptance of CDM credits. The EC added ership in initiatives toward reaching a low-carbon that “the adoption of a second commitment pe- economy. Maybe as a consequence of that impe- riod of the Kyoto Protocol without a legally bind- tus, however, the parallel establishment of several ing agreement for the period beyond 2012 under policies and initiatives has raised concern as to which other developed countries commit them- whether these mechanisms can co-exist without selves to comparable emission reductions and eco- undermining one another given the overlaps and nomically more advanced developing countries competing outcomes. commit themselves to contributing adequately according to their responsibilities and capabilities One example is the UK carbon floor price intro- is therefore not an international agreement as re- duced in March 2011 and set to be implemented ferred to in Article 11a(7) of the EU ETS Directive as of April 2013. The floor price is targeted at fos- and Article 5(3) of the Effort Sharing Decision.� sil fuel power generators and aims to tax the dif- They also said, “Once an international agreement ference between the price of EUAs and the UK’s is reached, the limitation to CDM credits from notional carbon floor price. The purpose of the new projects from the LDCs for the period start- tax is to encourage investment in new low carbon ing in 2013 continues to apply… Credits from generation.34 Although it is acknowledged that projects in LDCs and other countries started be- complementary measures to the EU ETS will be fore 2013 will only be accepted if they originate needed for the UK to meet its ambitious 80% from countries that have ratified the agreement.� emission reduction target by 2050 (relative to If an international agreement is adopted in 2015, 1990 levels), some market participants have ex- even a currently eligible CP-2 credit from a proj- pressed concern that the unilateral UK measure ect registered by the CDM Executive Board prior could potentially result in carbon “leakage.�35 to December 31, 2012, could become ineligible In addition, if successfully implemented, the for surrender if deriving from a host country that measure could put downward pressure on EUA 34. The floor will start at around £16/tCO2e in 2013 and follow a linear path, increasing at around £2/tCO2e per year to target £30/ tCO2 e in 2020, rising to £70/tCO2e in 2030 (in 2009 prices). The “carbon price support rates� (the levy on fossil fuels) will be equivalent to £4.94/tCO2 in 2013-2014. Source: HM Treasury. Carbon Price Floor Consultation: The Government Response, March 2011. In March 2012, the UK administration set the rate for 2014-2015 at £9.55/tCO2e (i.e., about 30% higher than the £7.28/tCO2 e previously indicated for the same period). 35. Investment may eventually be relocated to other countries with lower carbon taxes. State and Trends of the Carbon Market 2012 23 prices due to lower demand from cleaner British The new EED is designed to lower energy utilities, and eventually provide a disincentive for consumption and GHG emissions in the EU. further EU abatement in the short run. Similar to the UK floor price proposal, however, the measure does not tighten the cap. As a result, An Energy Efficiency Directive (EED),36 pro- it will create a surplus of allowances that may po- posed by the EC on June 22, 2011, might also tentially push EUA prices down. end up putting downward pressure on EUA prices. The aim of the EED is to save energy and 3.5.2 And then comes a set-aside and its to reach the EC’s self-imposed target of a 20% arduous decision process cut in primary energy consumption by 2020 (relative to 1990 levels).37 Expected to be imple- Recognizing its possible impact on carbon prices mented by January 1, 2014, the EED is designed and the importance of providing a long-term to incentivize energy efficiency at several stages price signal, the EED includes a proposal to set of each member state’s energy chain – from the aside a number of EUAs from the Phase III auc- transformation of energy and its distribution to tions as an option to spur low-carbon investment its final consumption. The EED defines several and to support carbon prices in the EU ETS.38 proposed measures, including: A proposal to set aside EUAs is not new. It was • Energy distributors or retail energy sale com- first mentioned by the EC in mid-2010,39 and the panies across all member states will have the same language used in the EED was inserted in the legal obligation to save 1.5% of their energy “Roadmap for moving to a competitive low-carbon sale volumes every year. economy in 2050�40 in March 2011. While the set- • Public sector entities will have to purchase aside has been brought on the table by the EC at energy efficient buildings, products, and several occasions, the key motivation has evolved services. In addition, they will also have to over time. In 2010 the set-aside was mentioned as progressively reduce the energy consumed a way to smooth the transition to a more ambitious on their own premises by carrying out an- 30% reduction target. In the low-carbon roadmap nual renovation works covering at least 3% of it was mentioned as a tool to neutralize the price de- their total floor area. pressing effect arising from more aggressive energy • Member states will have to ensure that all efficiency measures. In June 2011, and just days be- new thermal electricity generation with total fore ascending to a six-month presidency of the EU, thermal input exceeding 20 MW are provid- Poland – a country with high coal-based electricity ed with equipment allowing for heat recovery generation – vetoed the Council’s conclusions on by high-efficiency cogeneration. the EU’s Climate Roadmap for the first time. 36. Source: Proposal for a Directive of the European Parliament and of the Council on Energy Efficiency and Repealing Directives 2004/8/EC and 2006/32/EC, June 22, 2011 (http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0370:FIN:EN:HTML). 37. Equivalent to 368 million tons of oil equivalent (Mtoe) reduction compared to the projected consumption of 1,842 Mtoe in 2020. 38. “In the implementation of the 20% energy efficiency target, the Commission will have to monitor the impact of new measures on Directive 2003/87/EC establishing the EU’s Directive on emissions trading in order to maintain the incentives in the emissions trading system rewarding low carbon investments and preparing the ETS sectors for the innovations needed in the future. In this respect, appropriate measures need to be considered, including recalibrating the emissions trading system by setting aside a corresponding number of allowances from the part to be auctioned during the period 2013 to 2020, should a corresponding political decision be taken.� Source: Proposal for a Directive of the European Parliament and of the Council on Energy Efficiency and Repealing Directives 2004/8/EC and 2006/32/EC, June 22, 2011. 39. The EU Emissions Trading Scheme could reach a 30% emission reductions target by setting aside 1.4 billion allowances in Phase III, corresponding to an average reduction of 15% in auctioning rights per member state. Source: Carbon Finance Online, referring to a EC communication, May 2010. 40. In order to keep climate change below 2ºC, the European Council reconfirmed in February 2011 the EU objective of reducing greenhouse gas emissions by 80-95% by 2050 compared to 1990. The “Roadmap for moving to a competitive low-carbon economy in 2050,� published by the European Commission on March 8, 2011, laid out a plan for the EU to meet that target. It indicates that a cost effective and gradual transition toward a competitive low carbon economy would require a 40% domestic reduction of greenhouse gas emissions compared to 1990 as a milestone for 2030, and 80% for 2050 compared to 1990. http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2011:0112:FIN:EN:HTML. 24 State and Trends of the Carbon Market 2012 The set-aside discussion could not be more perti- compromise amendment. The ITRE vote nent. On April 2, 2012, based on data reported diluted the amendments previously voted on by almost 10,000 installations representing 89% by the ENVI. It left open the possibility of of EU ETS emissions, verified emissions cov- a set-aside at some point, but only subject ered by the scheme declined 2.4% yoy in 2011. to a Commission assessment and no longer Although 19 out of the 26 countries that report- specifying the number of EUAs that should ed data had reduced their emissions, the larg- be withheld (“The Commission shall, if ap- est drops were observed in Finland, Denmark, propriate, amend the regulation referred to Lithuania, and Sweden. In contrast, the biggest in article 10 (4) of Directive 2003/87/EC increases came from Spain and Romania. The in order to implement appropriate measures fall in emissions was mainly driven by a 3.1% which may include to withhold the neces- decline in emissions from the power sector.41 sary amount of allowances.�). Moreover, the The decline translates into an additional surplus ITRE also left open whether or not any fu- of about 380 million EUAs in the scheme, now ture set-aside would constitute a permanent expected to be oversupplied by about one billion or provisional withdrawal of allowances.45 tons until 2020.42 Some analysts believe the decision on perma- nence might take a couple of years. For a draft Directive to become law in the EU, it must pass through a tripartite co-decision pro- • So-called informal trilogues between the Council cess, involving the initial proposal by the EC, of Ministers, the European Parliament, and the followed by negotiation and approvals by the EU European Commission are expected to be held Parliament and the Council of Ministers.43 What between mid-April and mid-May, 2012. follows is a summary of the relevant steps in the EED process – those taken and those remaining: • The next steps in the process are votes in the Parliament (June 11) and the Council (June • On December 20, 2011, the Environment, 15). If both the Parliament and the Council Public Health and Food Safety Committee agree to leaving open the option of a set-aside (ENVI) of the EU Parliament voted favor- within the Energy Efficiency Directive, this ably to amend the EED in order to withhold would invite the Commission to propose an amount of EUAs from the EU ETS. The withholding a certain number of EUAs from amendments included (i) allowing for a set- the market for the period 2013-20.46 aside of 1.4 billion allowances, and (i) a tight- ening of the annual linear-reduction factor to Although several stakeholders have also voiced be used to calculate the ETS cap from 2014 support for a set-aside as a tool to neutralize the ef- (to 2.25% from the existing 1.74%).44 fect of the severe economic recession, which led to • Still as part of the parliamentary approval the oversupply of allowances, this process has also process, on February 28 the Industry and raised questions as to whether a regulatory change Trade Committee (ITRE) of the European to reduce the oversupply temporarily and support Parliament – which is the lead Parliamentary carbon prices is worth the risks it creates. Unless Committee on this Directive – voted on a a permanent cancellation of allowances is agreed 41. Still, emissions by the largest emitters in the EU ETS (all power plants) increased. Emissions in the Polish state-owned power plant Belchatow, the top emitter for the fourth year in a row, increased by 11%. Source: Thomson Reuters Point Carbon. Carbon Market Daily, April 2, 2012. 42. Source: Deutsche Bank. EU Emissions: 2011 VED Raises the Pressure, April 4, 2012. 43. European Commission, Co-decision Step by Step (http://ec.europa.eu/codecision/stepbystep/diagram_en.htm). 44. Source: Deutsche Bank. ENVI Vote Underpins Option Value, Global Markets Research, December 20, 2011. 45. The ITRE did not vote to raise the linear-reduction factor used to set the cap. Source: Deutsche Bank. ITRE Vote Underpins Option Value, Global Markets Research, February 28, 2012. 46. Source: Deutsche Bank. EU Carbon Markets: Q2: Moment of Truth for a Set-Aside, March 27, 2012. State and Trends of the Carbon Market 2012 25 upon,47 withholding volumes at the beginning of trajectory. It is expected that the collapse in car- Phase III just to return them later will not change bon prices has reduced revenues from EU ETS the overall supply for Phase III. In addition, some auctions by the order of €100bn to 2020.51 market analysts believe that the downside inter- However, in light of the current oversupply in vention may set a precedent for a similar interven- the market, a reserve price for auctions could tion on the other side when/if prices rise. only be implemented if accompanied by the set- aside or it could freeze investors’ purchases of al- Despite a general consensus against direct price lowances at the auctions. In the absence of a con- intervention in the market and the adoption of sensus for a set-aside, a reserve price could still be extraordinary measures introduced on an ad hoc evaluated in the context of wider carbon market basis as short-term fixes,48 market players and reforms. Other possibilities discussed include the regulators still agree that a long-term price signal establishment of a carbon central bank.52 is required for the scheme to continue to drive low-carbon investment. The deep wounds of the During the Informal Environment Council meet- economic downturn in EU industrial activity are ing on April 19, 2012, the European Climate unlikely to heal soon and should lead to a pro- Action Commissioner announced that aiming to longed oversupply of allowances in the market. achieve a smooth transition to the third phase of The EU would need an average annual 4.3% the EU ETS starting next year the Commission growth in its Gross Domestic Product (GDP) the EC would produce a first annual report on from 2013 onward to cancel out the oversupply.49 the functioning of the European carbon market In this context, the adoption of specific targets and conduct a review of the auction time profile for 2030 and beyond (i.e., the 2050 Roadmap) for Phase III. This review could lead to a propos- would provide the long-term trajectory required al to amend the EU ETS Auctioning Regulation to sustain confidence in the market mechanism before the end of the year with the aim to auc- and promote low-carbon investment. tion fewer allowances in the early years of phase III.53 This provisional withdrawal of allowances Finally, subject to the same concerns regarding in the beginning of Phase III could represent an the credibility risk resulting from short-term easier way compared to a change in the EED, to market interventions, other alternatives that restore longer-term scarcity in the EU ETS, as have been suggested by market participants in- its approval would only require qualified major- clude restoring the scarcity initially conceived ity in Climate Change Committee (Comitology for the EU ETS through the adoption of tighter Procedure). caps beyond 2020 and mandating an EUA price floor. While the former is extremely unlikely During the discussions on supply-side manage- to gain political traction, the latter could be ment, prices have remained volatile as market par- achieved through the adoption of a reserve price ticipants nervously reacted to each new announce- in the Phase III auctions.50 It would remove the ment or rumor. A market analyst summarized this downside risk and provide a transparent signal by saying that “this perhaps reflects how desperate to the market of the EU’s long-term low-carbon EU ETS participants have become when they are 47. A permanent cancellation or removal of allowances would require a change to the EU ETS Directive, to reduce the emissions cap to 2020 and then cancel a volume of EUAs in the set-aside consistent with the new cap, while a set-aside to be reintroduced should only require a change of the Auction Regulation, i.e., a lighter regulatory process. 48. These could reduce the predictability of the scheme, and undermine support for and trust in it. Source: Centre for European Policy Studies, The EU Emissions Trading Scheme as a Driver for Future Carbon Markets, 2012. 49. Panel discussion hosted by the European Energy Exchange (EEX) on “The European Carbon Market in 2012,� March 2012. 50. Although the “reserve price� is foreseen in the existing ETS Auctioning Regulation, it can only be used to align auction clearing price with the going secondary market price and not to impose a price higher than the secondary market price. 51. Source: Climate Strategies, Strengthening the EU ETS - Creating a stable platform for EU energy sector investment, March 2012. 52 Sources: Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012. 53 http://ec.europa.eu/commission_2010-2014/hedegaard/headlines/news/2012-04-19_01_en.htm 26 State and Trends of the Carbon Market 2012 reduced to reacting to the possibility of a decision guarantee of being exhaustive or up to date. The to recommend a study into potentially making a risks perceived by market participants were two- proposal at some point in the future.�54 fold. First, a criminal liability risk for possession of the stolen carbon units was exposed. Second, an economic risk, because it was unclear whether 3.6 Infrastructure and market the current holder would have to return them integrity: the importance of to the initial holder. The confusion amongst being secure market participants was worsened by the lack of harmonization across the EU over the legal clas- After VAT fraud and CER recycling, in 2009 and sification of carbon units as a type of property 2010 respectively, the EU ETS in early 2011 saw and the absence of a mandate for the European a wave of cyber-attacks targeting its registry infra- Commission to centralize information and pub- structure. At least three million units were stolen lish the list of allegedly stolen allowances.59 from national registries,55 accounting for roughly 0.15% of overall emissions allowances (€50 mil- Spot trading was suspended on most exchanges, lion).56 Fraudsters used classic cyber-criminality ahead of or right after the European Commission techniques57 to access accounts in several national closed the national registries. ICE delisted dai- registries and to transfer allowances, perhaps ben- ly EUA and CER contracts, which are yet to efiting from weak security safeguards and the speed be reintroduced as of April 2012.60 The Green of transaction execution. To prevent further attacks, Exchange also suspended its Daily EUA con- the European Commission suspended all registries tract. It re-listed it in April 201161 – forbidding on January 19, 2011. They were reopened gradu- delivery of those allegedly stolen carbon units ally, after each country provided sufficient evidence reported by national registries – but saw only its registry met minimum security criteria. The final 1,000 EUAs traded throughout the rest of the registry (Lithuania) reopened a full three months year.62 BlueNext resumed spot trading in May after the first suspension. 2011, after strong market model revamping. The applied security measures consisted of limiting 3.6.1 Market response: a spot market in trading to carbon units, the origin of which had dormancy been verified and legitimated prior to joining the platform.63 Although this initiative allowed ex- Although the national registries subjected to change-based spot transactions to resume in the cyber-attacks quickly published lists of serial EU ETS, the restrictions kept liquidity and vol- numbers58 of allegedly stolen carbon units, these umes at lower levels than they were before the cy- were only based on the incidents actually pub- ber attacks. To handle spot trading, some market licized by account holders and thus brought no participants turned to over-the-counter bilateral 54. Source: JEFCO2 Flash Note, January 24, 2012. 55. Thefts were reported in Austria, Czech Republic, Germany, Greece, Italy, and Romania. 56. Source: De Perthuis, Christian. Carbon markets regulation: The case for a CO2 Central Bank, Climate Economics Chair, 2011. 57. Two types of cyber-attacks were used: “Phishing,� which consists of duping an account holder to obtain confidential access information (e.g., a fake official e-mail or Web site), and “hacking,� which are direct attacks on registries using Trojan horse-type viruses to break into the account structure. 58. And, subsequently, a number of carbon exchanges. 59. Source: Sartor, O. Closing the door to fraud in the EU ETS. CDC Climat Research, 2011. 60. Source: ICE Clear Europe. Circular 11/007-Suspension of trading in EUA and CER Daily Futures Contracts. January 19, 2011. 61. Green Exchange also suspended futures contracts for March 2011 delivery. Source: Green Exchange, Delisting of In Delivery Month European Union Allowance (EUA) Futures Contract (codes EAF and 6T) for delivery in March 2011. CME Group, Advisory notice, March 10, 2011. 62. Source: Green Exchange, Suspension of Trading and Force Majeure Declaration with Respect to Daily European Union Allowance (EUA) Futures (code EUL) Contract. CME Group, advisory notice, January 19, 2011. 63. Under a so-called “Safe Harbor Initiative,� the carbon units which are candidates to join BlueNext’s trading platform must enroll in a two-step verification process. First, the exchange identifies each transfer that the unit has been subject to up to the account it originates (i.e., state’s account (EUA, ERU) or CDM Registry (CER)). Second, each transfer identified must be declared legitimate by an authorized representative of the account that the transfer was initiated from. State and Trends of the Carbon Market 2012 27 transactions with well-known counterparties (see The security measures set up by the exchanges Section 3.7.3), deploying purchase agreements consisted of a consolidated list of allegedly stolen with new liability clauses for the seller to com- carbon units prohibited for delivery at settlement pensate the buyer should the transacted units be of the relevant exchange contracts. Although this subject to claims in the future. Interestingly, no brings no guarantee that the units delivered will such disruption was observed on the exchange- not be subject to claims in the future, market based Futures and Options market, with vol- participants appear to have deemed the risk as umes growing during 2011 (see Section 3.7.2). marginal.64 Box 1: Trading around the risk of receiving stolen allowances By Peter Zaman, Partner, Reed Smith. Any market will face the risk of attracting criminal elements if the market is poorly regulated and provides the opportunity for criminal elements to act with ease. For reasons well known to all, the EU ETS market faced such challenges between 2010 and 2011, the impact of which is still felt today with the continued suspension of exchange-based spot trading. To their credit, market regulators woke up to the weaknesses that the criminal elements were ex- ploiting and took rapid steps to try to eradicate them. Most of these steps are incorporated into the technical changes introduced via the Registries Regulations; others, in particular those relating to the future regulatory treatment of carbon units, are still being finalized. In a very short period of time, the EU ETS market will notice a sea change in both the way it operates its trading activities as well as the way such activities are regulated. While it remains to be seen just how effective these new rules will be in securing the market, the overall position is likely to be much improved – especially once trading transitions to the new Union Registry in the middle of 2012. That said, one must assume that the determined efforts of cyber attackers cannot be prevented indefinitely. A risk of receipt of stolen allowances will continue to exist, even when trading transfers to the Union Registry. The biggest issue faced by market participants following their receipt of stolen carbon units in 2010 and 2011 arose from the legal uncertainty as to what type of legal property right they should be classified under. For example, where a person receives stolen goods, the laws of a member state will know under what circumstances the receiver of the goods will or will not acquire good title to those goods. This is because in most jurisdictions there is a specific or established legal framework dealing with goods and it is generally known whether a particular type of property is or is not a good. If the property in question is not a good (e.g., if it is a dematerialized instrument), there is likely to be a different legal framework that would be applicable to determining the question of whether good title may be received by the receiver. The issue facing the market was the lack of certainty as to which of these various legal frameworks a car- bon unit fell within. This is because there was almost no national level determination and no EU-wide de- termination of what type of property right a carbon unit is. Even if the legal classification was established in one member state, once the carbon unit moved across the border to another registry it became subject to the laws of that member state – and the issue would need to be settled in accordance with the conflicts of law rules between those two member states. In short, no certainty could be gained as to determining the legitimacy of a claim for the return of the stolen carbon units by the victim of the cyber theft. This led to inertia in the market, most immediately reflected in the unwillingness of market participants to trade spot carbon credits. Rather curiously, the volume of futures contracts was less impacted. 64. We estimate that roughly 215 million EUAs and 63 million CERs were delivered at expiration of the December 2011 contracts across the different exchanges. This accounts for 5% and 7% respectively of the total volumes exchanged for those contracts since inception, which is comparable to previous year’s figures (e.g., 5% EUA and 4% CER in 2010). If market participants had perceived any risk over the units to be delivered, we believe they would have closed long open positions, or rolled them over to the December 2012 expiry. 28 State and Trends of the Carbon Market 2012 Box 1: Trading around the risk of receiving stolen allowances (continued) Rightly or wrongly, a perception exists that spot trading is riskier than futures trading in carbon units. The accuracy of this perception can be argued both ways. On the one hand, exchange-based spot trading was unregulated; as a result, participation in exchange-based spot trading did not invite the same degree of regulatory supervision as the futures markets. Given that many exchanges that offered futures products also offered spot products, and the requirements for participation in the exchange did not wildly differ between the two products, it is not clear that the lack of regulation of exchange-based spot trading was any more dangerous that futures trading. Similarly, the shorter settlement life of a spot transaction reduces the credit risk exposure faced by counterparties com- pared to those trading futures. However, given that most exchanges maintain margin collateral for their futures exposures, comfort is drawn from this against executing such trades. In terms of the legal uncertainty that would arise where a counterparty would receive stolen carbon units, however, the issue would be the same whether they were received under a spot transaction or a futures transaction. The only difference is volumetric, in that for a futures contract the risk arises only on the settlement date of that contract; whereas, for a spot contract with a T+2 settlement, the risk arises each time a spot trade settles. This creates the risk of a legal issue occurring more frequently. The solution proposed by the regulators in Article 37 of the Registries Regulation does not solve the legal property question but rather leaves it to be answered by national laws. In the absence of a common approach adopted by all member states this maintains the status quo problem. That is not to say that Article 37 does not give some guidance to member states as to how a carbon unit should be viewed under its national laws. For example, Article 37 invites member states to treat carbon credits as fungible units to which the crediting of those carbon credits in an account in the Union Registry is meant to “prima facie� represent evidence of title. Further, a purchaser of a carbon unit for value in good faith should receive good title to that carbon unit even where the seller himself did not have good title. Unfortunately, Article 37 goes on nonetheless to allow the national laws of a member state to continue to apply as long as the impact of such laws does not lead to the unwind- ing of a settled delivery of a carbon unit. For example, equitable claims (such as those raised in the recent English case of Armstrong DLW GmBH v. Winnington Networks Limited) may continue to be available to victims of the thefts to pursue against the holders of allegedly stolen carbon units. Although Article 37 has improved the position of the receiver of an allegedly stolen carbon unit, its benefits seem to be available only after the Union Registry is fully operational and trading has migrated there. It is understood that exchanges that have suspended their spot offerings are likely to re-engage with the market once the transition to the Union Registry has been completed. This is clearly a positive reaction to the efforts of the regulator. Similarly, in the context of the OTC markets, IETA and EFET have both adopted uniform language in their latest standard market documentation that deals with the allocation of the risk of receipt of stolen carbon units between the buyer and the seller. It relies on the regulator’s approach of introducing Article 37 to give protection to innocent purchasers and, at its core, is recognition that the best way to prevent the market from becoming frozen with fear of receipt of stolen carbon units is to reduce the risk of the claim in the first place. This is not to say that some claims will not arise, but the circumstances in which they arise, will now depend on the strength of the protections that Article 37 affords the holder of stolen carbon units. If the exchanges also adopt the solution introduced in the OTC markets, the management of risk for dealing with stolen carbon units would be greatly mitigated. State and Trends of the Carbon Market 2012 29 3.6.2 Regulatory response: enhanced registry Regulation also contains provisions that amend infrastructure the 2010 Registries Regulation in response to the January 2011 cyber-attacks (see Table 2). Since the first Registry Regulation65 in 2004, sev- eral amending texts have been introduced to re- In addition, in 2012, the EU will fully decou- spond to the challenges faced by the EU ETS and ple its registry operations from the National to adapt to its evolutions.66 Accurate accounting Registries established under the Kyoto Protocol and transaction integrity within the EU registry and centralize technical management in a Union system currently relies on two texts: the 2010 Registry (UR) built as a single infrastructure and Registry Regulation,67 which replaced the 2004 operated by a single software. text as of January 1, 2012, and the 2011 Registry Regulation,68 passed in November 2011, which The Community Independent Transaction sets the new registry functioning rules for the Log (CITL) currently automatically checks, third phase of the EU ETS. The 2011 Registry records, and authorizes all transactions of EU Measure Description Application date Table 2: Enhanced Stronger and harmonized Know-Your-Costumer (KYC) checks. The November 2011 New Registry control for following document must be provided and certified by the competent (enter into force of Security Measures account authorities: ID, certified power of attorney, company registration the 2011 Registry in the EU ETS opening certificate, VAT registration number, financial statement, and domiciliation Regulation). certificate. Enhanced - Two-factor authentication (e.g., login and password + SMS/ token/ Activation of the transactions certificate). Union Registry security - Four-eye principle (two authorized representatives). (expected - Out-of-band confirmation of transactions (e.g., SMS). mid-2012). - 26-hour delay is applied at initiation of a transfer. Does not apply to *available after the transfers to a trusted account. summer. - Transfers can be initiated anytime but they are processed between 10am and 4pm CET from Monday to Friday. - Trusted account list.* - New account categories with flexibility over application of transaction security measures.* Strengthened - Registry administrators can suspend access to their registry, and/or November 2011 registry blocks transfers upon suspicions of security breach or fraud. (enter into force of oversight - European Police Office (Europol) has permanent access to data stored the 2011 Registry in the Union Registry and European Union Transaction Log (EUTL). Regulation). Enhanced - Non-display of the serial numbers of allowances. For Kyoto units, Activation of the protection of only the country code and project number is visible. Access limited to Union Registry the good faith registry administrators. (expected acquirer - Full fungibility of allowances (substitutability). mid-2012). - Irrevocability of transfers. - Acquisition in good faith will gives full entitlement to purchased allowances. Source: World Bank, European Commission. 65. Source: European Commission, Commission Regulation (EC) No 2216/2004 of 21 December 2004 for a standardized and secured system of registries, 2004. 66. Source: Rapin, D. Sécurité des registres et transactions, Club Tendances Carbone, CDC Climat Research, June 2011. 67. Source: European Commission, Commission Regulation (EC) No 920/2010 of October 7, 2010 for a standardized and secured system of registries, 2010. 68. Source: European Commission, Commission Regulation (EC) No 1193/2011, November 18, 2011, establishing a Union Registry for the trading period commencing on January 1, 2013, and subsequent trading periods, of the Union emissions trading scheme, 2011. 30 State and Trends of the Carbon Market 2012 ETS-compliant instruments (EUAs, CERs and its country’s accounts within the UR, and man- ERUs) that take place between accounts in the age the EU ETS participants’ accounts that fall national registries of its 27 Members States, plus within its jurisdiction. those of Norway, Iceland, and Liechtenstein (see Figure 2). The International Transaction Log 3.6.3 Market oversight review: toward (ITL) performs the same functions on Kyoto classifying carbon as a financial instrument units (AAUs, RMUs, CERs, ERUs etc.) between the national registries of Annex B countries. As In the EU ETS, most secondary market transac- EUAs are currently tagged AAUs, and thus Kyoto tions involve derivatives contracts.70 Such trans- units, their transactions are also overseen by the actions fall under the scope of EU financial regu- ITL. The activation of the Union Registry (UR) lation, and thus are protected by strict integrity necessitates the full migration of all EU ETS par- and transparency requirements. These are mainly ticipants’ accounts from the national registries to specified in the Markets in Financial Instruments the UR National accounts. National registries Directive (MiFID), which sets transaction re- must remain active and linked to the ITL until porting obligations, and the Market Abuse 2015 for the purpose of Kyoto compliance. They Directive (MAD), which allows national super- will be kept separate in a Consolidated System visory authorities to take measures against ob- of European Registries (CSEUR). All EU ETS served market abuse (i.e., market manipulation compliance units (EUAs, aEUAs, CERs, ERUs) and/or insider dealing).71 Although the primary will be traded within the UR and overseen by auction market – through which States sell emis- the EUTL, and only Kyoto Units (CERs and sion allowances – does not fall under financial ERUs) will be subject to ITL controls. Each na- regulation, the Auctioning Regulation sets a spe- tional registry administrator will be in charge of cific oversight framework with similar integrity Figure 2: Current EU ETS Infrastructure Union Registry Activation (mid-2012) EU registry infrastructure: transition to the Union Registry *tCERs and lCERs refer to temporary CERs generated from Land-Use, Land-Use Change, and Forestry (LULUCF) CDM projects. Source: World Bank, European Commission, Clifford Chance,69 BlueNext 69. Zaman, P. Changing times: Trading carbon in Phase 3 and the fallout from cyber thefts, Clifford Chance, 2011. 70. Derivatives contracts are financial instruments whose value derives from that of an underlying asset. 71. Other requirements cross-referencing to MIFID are set in the provisions of the Anti-Money Laundering Directive and the Settlement Finality Directive. State and Trends of the Carbon Market 2012 31 and transparency measures. Secondary market however require investment firm status under spot transactions involving emission allowances MiFID rules. The impact on carbon market and Kyoto credits, however, do not benefit from participants of these changes cannot be fully as- any regulatory supervision.72 In a December sessed as of today as a number of aspects are still 2010 Communication to the Parliament, the under discussion. For example, the limit between European Commission called for consideration proprietary trading and intermediation may be of two options to address this existing gap.73 The tested for those energy groups that include car- first option would consist of classifying carbon bon procurement in their power sales contacts units as financial instruments. The EC took with covered industrials. It is also still to be deter- the opportunity of the ongoing reviews of both mined if carbon offset originators will fall under MiFID and MAD throughout 2011-2012 to the financial regulation. Votes by the Economic integrate them into the list of financial instru- and Monetary Affairs Committee (ECON) and ments, with necessary adjustments to avoid in a plenary session of the Parliament are expect- knock-on effects.74 The second option would cre- ed in July and September 2012 respectively. The ate a new oversight regime “tailor-made� to the revised directive would enter into force in 2013. specificities of spot carbon trading. Despite in- dustry’s concerns over the inclusion of carbon in MIFID,75 emissions allowances and Kyoto cred- 3.7 EU Allowances: the its were added to the proposal to revise MiFID numbers behind the growing submitted by the EC to the European Parliament trading volumes and Council in October 2011.76 EUA transactions in 2011 reached US$147.8 Financially regulated entities must conform to billion (€105.7 billion), representing an 11% organizational, operational, and reporting obli- yoy increase compared to US$133.6 billion gations,77 and thus may bear the implied com- (€101.1 billion) in 2010. The increase was led pliance costs. To illustrate, financially regulated by a 16% yoy increase in the volumes traded. A entities are subject to risk-based capital require- total of 7.9 billion EUAs were traded in the mar- ments, which mandate them to maintain a mini- ket in 2011, compared to 6.8 billion EUAs the mum capital reserve, and therefore limit cash previous year. The increase in volumes was partly availability for production and investment. In offset by a 4% decline in prices. The weight- addition, intermediation activities are subject ed average EUA price fell from US$19.7/ton to Know-Your-Customer (KYC) standards (i.e., in 2010 to US$18.8/ton in 2011. The decline established customer due diligence procedures). was more pronounced in the asset’s official cur- Current proposals would exempt ETS opera- rency (Euros), falling from €14.9/ton in 2010 to tors from compliance obligations to the extent €13.5/ton in 2011 (10% decline). Prices contin- that spot carbon trading is for their own ac- ued to fall in the first months of 2012, reaching count and remains ancillary to their core activ- historic lows of €6.2/ton in early April.78 ity. Intermediation services in spot trades would 72. Spot transactions through a regulated market platform are subject to the financial regulation. 73. Source: European Commission, Communication to the European Parliament, Towards an enhanced market oversight framework for the EU Emissions Trading Scheme, December 2010. 74. Source: European Commission, Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organized by the commission services, May 2011. 75. Source: International Emissions Trading Association, IETA Response MiFID Consultation, February 2011. 76. Source: European Commission. Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council, October 2011. 77. Source: Patay, M. Alberola, E. Le marché secondaire sous régulation financière: la MiFID. Club Tendances Carbone, CDC Climat Research, March 2012. 78. Historic low prices during Phase II of the EU ETS based on ICE Daily futures on April 2, 2012. Prices were not tracked after this date. 32 State and Trends of the Carbon Market 2012 3.7.1 The primary EU Allowance market Figure 3: 100 Annual volume of 4.0 About US$1.7 billion (€1.2 billion), or slightly 90 8.0 primary EUAs sold 6.3 more than 1% of the total EUA market value, was 6.3 0.9 Lithuania by member states, 80 0.4 10.0 represented by EUAs sold in the primary market 12.7 2008-2011 70 0.2 Austria by European governments through auctions or Volume (million tCO2e) 0.4 35.8 direct sales. About 92.9 million EUAs were sold 60 30.7 by eight governments in 2011. Germany and the 25.0 50 UK combined to be responsible for 77% of the 4.0 0.2 0.2 total volume, or 71.4 million tons (see Figure 3). 40 0.2 Ireland 30 3.7.2 A Shrinking spot market 40.0 40.0 41.1 40.7 20 Following the security issues discussed in Section 10 3.6, many market players had to rethink their 0 trading strategies. The spot market, which to- 2008 2009 2010 2011 taled US$7.5 billion and represented 7% of the EUA market in 2008, dramatically increased to Netherlands Austria US$26.8 billion in 2009 (22% of all EUAs in Norway UK the market that year). This was partly explained Lithuania Ireland by the VAT fraud volumes; however, its value Greece Germany steadily declined in the following years. Last year, spot EUA trades totaled US$2.8 billion, Volumes include auctions and regular sales, realized through exchanges, private banks and/or directly. or 2% of the EUA annual trading value. The Source: World Bank decline in EUA spot trade value becomes even more evident if the total sale of primary EUAs by Figure 4: 8,000 most member states is excluded. About US$1.2 Annual EUA billion, or 42% of the EUA spot value in 2011, 7,000 volumes, consisted of primary EUA transactions. 2008-2011 6,000 Volume (million tCO2e) 5,000 In 2011, EUA futures volumes grew by 32% yoy to 7.0 billion EUAs, valued at US$130.8 4,000 billion (see Figure 4), representing over 88% of 3,000 all EUA transactions. Options on EUAs contin- 2,000 ued to expand, totaling US$14.2 billion in 2011 (representing 10% of EUA transaction value), a 1,000 US$13.6 billion increase on 2008 values when 0 2008 2009 2010 2011 options represented US$0.6 billion (1% of EUA transaction value at the time). FUTURES OPTIONS SPOT 3.7.3 Increasing bilateral trades Source: World Bank Transactions in the EU ETS may follow several different paths. Negotiations may happen within (e.g., screen transactions) or on off-exchange plat- forms. The latter may still be intermediated by brokers or cleared on the exchanges (see Figure 5). State and Trends of the Carbon Market 2012 33 Types of Transactions Figure 5: Negotiation within Negotiation outside exchanges Transactions in the exchanges† Cleared at exchanges Not cleared EU ETS Intermediated‡ Not intermediated& Intermediated# Not intermediated* † Exchange-based: assets negotiated within the exchanges’ platform i.e., screen) ‡ Over-the-Counter (OTC): assets negotiated outside the exchanges, with the intermediation of brokerage firms, still cleared at exchanges # Over-the-Counter (OTC): assets negotiated outside the exchanges, with the intermediation of brokerage firms, not cleared at exchanges & Billateral: assets negotiated bilaterally (buyers and seller), without intermediation of brokerage firms, still cleared at exchanges * Billateral: assets negotiated bilaterally (buyer and seller), without intermediation of brokerage firms, not cleared at exchanges Source: World Bank About 15% of all trading volume in the sec- 180 Figure 6: ondary spot and futures markets – for both EU 160 Trading alternatives: Allowances and offsets (i.e., CERs and ERUs) exchange, OTC, and 140 – has been reported as realized bilaterally and bilateral trades 120 Value (US$ billion) not intermediated (i.e., not through brokers nor cleared on the existing European exchanges). 100 These transactions are represented with the sym- 80 bol “*� in Figure 5.79 60 40 In 2011, with the occurrence of stolen EUAs, 20 another significant change was observed in the 0 modus operandi of the market. A portion of spot 2008 2009 2010 2011 allowance and offset volumes previously traded over the counter (OTC) or on an exchange was Bilateral OTC Screen migrated toward bilateral transactions. These Source: World Bank transactions are mainly composed of trades be- tween utilities or financial players with their cli- ents, many of them industrials with limited or no access to exchanges due to the high fees and strin- Bilateral trades reached over US$17.3 billion gent access rules. The shift occurred as exchanges worth of transactions in the secondary EUA exercised increased scrutiny (which certain market market (i.e., excluding the volumes sold by participants viewed as cumbersome) in an effort member states), or a 15% increase yoy, and to contain market oversight. In addition, some US$2.9 billion for secondary Kyoto offsets, an players reported favoring long-term relationships 18% growth yoy. with trustworthy commercial partners. More broadly, bilateral transactions have been reported Most transactions during 2011, however, were ex- as enabling large volume transactions and reduc- change-based screen trades. Following a steady in- ing administrative complexity (e.g., no exchange crease since 2005, screen trades for EUAs, CERs, or brokerage documentation and fees). and ERUs combined to represent 49% of all trade values, reaching US$82.9 billion in 2011.80 OTC trades reached 39% (most cleared at the exchang- es); bilateral trades, 12%81 (see Figure 6). 79. The data for the screen and exchange-cleared transactions are obtained from the exchanges. The data for the OTC transactions are obtained from brokers. In order to avoid double counting for the OTC transactions cleared at exchanges and obtained from both exchanges and brokers, the authors count the largest among the two data on a daily basis. 80. Primary EUAs were treated separately and are not included in these numbers. 81. Bilateral overall values are lower than 15% since options markets are exclusively traded through OTC or exchanges. 34 State and Trends of the Carbon Market 2012 3.7.4 Who is trading, how, and why they trade alongside the first signs of the pricing crunch in mid-2011. Their exit has also contributed to The EU ETS witnessed a substantial number the accentuation of the decline in prices. of transactions in 2011 originated by few large players. Throughout the year, a handful of the With the increasing share of futures and options largest players were responsible for approxi- in the carbon market, sophisticated trading tools mately one third of all trades in the scheme. (including financial and macroeconomic indices, The process of market consolidation that com- statistical algorithms, and model forecasts) are be- menced a few years ago and continued in 2011 ing used to inform decision making. Some of the has accentuated this process. Large players con- parameters include the correlation between car- tinued to acquire under-valued portfolios from bon and other energy-related commodities (e.g., smaller (including cash-strapped) players and power prices in Germany as the largest economy rapidly expanded their market positions and in the EU and with utilities representing the larg- influence. est buyer sector in the scheme), gas-coal switch costs in Europe (i.e., clean dark and clean spark At the time that compliance becomes less rel- spreads),82 and open interest (reflecting market evant than trading opportunities, it is not sur- moves and players’ future expectations).83 prising that some large non-EU players are in- volved in the market. In 2010 and during the The following text and figures provide further first half of 2011, about 10% of volumes traded details as to how the above-mentioned and other in the EU ETS were reportedly originated from indices and parameters are considered by traders outside the EU block. Engagement by non- in their search for profit opportunities and port- EU players in the market, however, shrunk folio adjustments (see Box 2). Box 2: Within the trades By Carine Hemery, Energy Market Analyst, Orbeo The EU ETS, the main carbon market in the world, operates in 30 countries and covers CO2 emis- sions from installations such as power stations and industrial factories. In order to anticipate the behavior of the compliance buyers and sellers, major traders follow several indicators that play on carbon price dynamics. Due to the design of Phases II and III, it is estimated that the industrial sector is mainly in excess of allowances while the utilities sector faces a shortage. In the EU ETS, the power and heat sec- tor has a crucial role in influencing supply and demand. As utilities are the main players in this market, their need for carbon allowances and their buying strategies influence a lot the evolution of carbon prices. Utilities are the most active participants in the market and their behavior influences the evolution of carbon prices. as the evaluate their carbon needs in line with their energy mix. Furthermore, utilities can decide whether to sell part of their power production on the forward mar- ket (up to three years) as a way of managing the risk linked to price fluctuations and the associated 82. Among key indicators are the clean dark spread and clean spark spread. The former refers to the theoretical gross margin of a coal- fired power generator from selling a unit of electricity after paying for the cost of fuel and carbon allowances. High clean dark spreads in practice mean that coal-fired generation is economically viable, considering both fuel and EUA prices. The clean spark spread is a similar indicator that refers to the theoretical gross margin calculation for a gas-fired generator. 83. Open interest refers to the total number of open contracts, and it applies to the futures and options market. It is often used to confirm trends and trend reversals. An increase in open interest along with an increase in daily prices indicates an upward trend. Similarly, an increase in open interest along with a decrease in prices indicates a downward trend. An increase or decrease in prices while open interest declines indicates a possible trend reversal. State and Trends of the Carbon Market 2012 35 Box 2: Within the trades (continued) impact on their revenue. When they sell their power forwards to get rid of price risk, utilities relate the sales to their anticipated generation. In effect, they commit plants and technology clusters of their production fleet and make the sales correspond to types of plants according to their ma- turity and the shape of the power delivered (baseload, mid-merit, peak). Then, according to merit order (which depends on the relative competitiveness of fuels at the time of the decision), large coal or baseload gas plants (CCGT) are hedged. Companies that sell power forwards generally simultaneously buy the required inputs (coal, gas, and carbon), reflecting a management practice to secure the generation margins as they sell their power. Utilities, therefore, have to hedge their carbon emissions. For arbitrage purposes, utilities look at their margin and follow the evolution of clean spark spread and clean dark spread. First, if spark and dark spreads increase, utilities take advantage of higher margins and sell more power forwards to take advantage of improving clean spreads. This should in turn increase demand for carbon allowances and support carbon prices. Market traders following these indicators could decide to buy allowances in order to take advantage of rising prices. Second, traders follow the gap between clean dark and clean spark spreads. If the clean spark spread is above the clean dark spread, and if this discrepancy increases, utilities have more incentive to produce electricity via gas plants (CCGT) as clean spark spreads evolve in favor of gas use. In this case, utilities should emit less CO2 and their demand for carbon allowances should decrease, pushing prices down. In this case, traders could decide to sell EUAs in order to capture the anticipate price drop. 25 20 15 10 5 0 -5 -10 Jan 10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 German Dark Spread (Next calendar) German Spark Spread (Next calendar) German Dark Spread - German spark Spread (Next calendar) Utilities closely follow the evolution of European energy prices in order to take advantage of im- proving margins. Therefore, European energy prices are one of the main drivers of carbon prices. Over time, this link evolves and is more or less important. In order to follow this relationship, trad- ers look at the evolution of the correlation between carbon prices and European energy prices (European gas or power prices). For example, if the correlation is high between European gas (Next season NBP gas) and carbon (Dec12 EUA), traders analyze the fundamental picture (e.g., weather, storage level, and so forth) of the European gas market in order to anticipate the evolu- tion of gas prices in the short term and trade directly on the carbon market. 36 State and Trends of the Carbon Market 2012 Box 2: Within the trades (continued) 100% 80% 60% 40% 20% 0% Apr-11 Jun-11 Aug-11 Oct 11 Dec-11 Feb-12 Apr-12 EUA Dec12 & DE power baseload next Cal (€) EUA Dec12 & UK power baseload next Cal (€) Regarding the industrial sector, the surplus of allowances depends mainly on the industrial pro- duction and the economic activity across Europe. Indeed, following the 2008 financial crisis, Europe entered into a recession and industrial activity fell strongly. European emissions from the industrial sector decreased drastically, generating an excess of allowances. This led industrials to sell their excess carbon allowances and pushed carbon prices down. Traders follow key economic indicators, including those published weekly and/or monthly the Eurozone Purchasing Managers Index (PMI), industrial new orders, and expected gross domestic output (GDO) growth. If these indicators are improving or better than market expectations, traders anticipate that European economic activity should increase the need for allowances by industrials and push carbon prices upward. Traders expecting this dynamic either buy allowances or decide to wait to sell. The carbon market is more and more traded and liquid. Traders use techniques applied in equity, oil, and other very liquid markets. Technical analysis is one of the best known techniques and is a method for forecasting price movements based on the study of past price movements. This meth- od is based on several indicators of estimated past prices and several charts of prices over time in order to define the future trajectory. The main indicators are the Moving Average Convergence- Divergence (MACD), the Relative Strength Index (RSI), and the Slow and Fast Stochastics. The value of these different in- dicators relative to target levels indicates whether the contract is overbought or oversold. If several indica- tors show that the contract is overbought, then prices should fall. As is shown in this chart, Slow Stochastics and MACD give profitable buy or sell signals. Traders following these indicators would sell carbon allowanc- es from date A, anticipating that carbon prices should fall in the coming days or weeks. State and Trends of the Carbon Market 2012 37 3.8 Secondary offsets: 3.8.1 Myths and facts smaller figures, similar patterns In the past, many have attributed declining CER prices to a decline in the CER issuance (i.e., low In 2011, the value of secondary CER and ERU CER liquidity would damage its credibility as an transactions combined rose 12% yoy to US$23.1 effective compliance asset in the EU Scheme), as billion (€16.6 billion), compared to US$20.5 well as to an increase in the CER issuance (i.e., billion (€15.6 billion) in 2010. Traded volumes accentuating the oversupply in the market). rose by a robust 43% yoy to 1.8 billion tons, Also, many have attributed both low and high compared to 1.3 billion tons in 2010. temporary CER-EUA spreads to pushing CER prices down. Despite secondary CER and ERU traded vol- umes increasing, prices fell dramatically in 2011, To date, the price of Kyoto assets is almost en- particularly during the second half of the year. tirely driven by the EU ETS; this is a one-way The decline in offset prices was much more street. The proportion of CERs and ERUs in the pronounced than for EUAs. The weighted av- EU Scheme is limited (i.e., about 1.7 billion tons erage price for CERs and ERUs combined fell until 2020, representing about 6% of the overall 21% from US$16.2/ton (€12.3/ton) in 2010 to EU ETS cap for the same period), and their eligi- US$12.8/ton (€9.2/ton) in 2011. Having hov- bility is uncertain until their usage. In addition, ered around €13/ton in April and May of 2011, it is clear that the supply of CERs and ERUs will CER prices landed slightly above €4/ton by year be much greater than their import limit into the end, after hitting consecutive lows almost on a EU Scheme, and that these credits will be avail- weekly basis in the previous three months. able much earlier than the expiration of their eligibility period (i.e., CP-2 credits from projects The accentuated decline in Kyoto offset prices led to be registered prior to the end of 2012 are, in to a widening of the CER versus EUA spread. The principle, eligible until 2020). price of a secondary CER at year end was slightly above 60% of the EUA price, having started 2011 The truth is that short-term issuance rates or at 86% of the EUA price. The spread continued to momentary trading dynamics have limited influ- widen in the first months of 2012 and for the first ence in the long-term Kyoto asset prices. Unless time ever, in early February, secondary CER prices the CER price is sufficiently low (relative to the reached levels below 50% of EUAs.84 EUA price) to account for the incremental risk of importing them, demand for CERs will de- In 2011, CERs continued to represent the bulk cline (in favor of less risky EUAs). Furthermore, of secondary Kyoto offset transactions, totaling the supplementarity limit under the EU ETS US$22.3 billion, or 97%. In the previous year, is quickly being exhausted. Once it is reached the nascent ERU market had represented only (and most analysts forecast this period to be 0.5% of the total Kyoto offset trading value. reached in the next 1-3 years),85 the CER and ERU volumes, expected to be in billions of tons, will require much more than the welcome but insufficient demand coming from the nascent Australian market. 84. ICE Daily futures on February 8, 2012, reached €8.13 and €4.06 for EUAs and CERs, respectively. 85. CDC Climat Research recently forecasted that the demand for CERs and ERUs will be saturated by 2013-2014. Source: “Valentin Bellassen, Nicolas Stephan and Benoît Leguet. Will there still be a market price for CERs and ERUs in two years time? CDC Climat Research, Climate Brief n°13, March 2012. 38 State and Trends of the Carbon Market 2012 Figure 7: 2,000 Annual CER 1,800 and ERU 1,600 volumes, 1,400 Volume (million tCO2e) 2008-2011 1,200 1,000 800 600 400 200 0 2008 2009 2010 2011 FUTURES OPTIONS SPOT Source: World Bank Figure 8: €0.25 traded in the futures market reached US$21.2 Spreads €0.20 billion in the period (out of the total secondary CERs versus offset trading value of US$23.1 billion). ERUs and €0.15 “green� versus Secondary CER and ERU futures volumes in- “standard� €0.10 creased by 122% compared to 2008 – when this CERs, market started gaining traction alongside the in- 2011-2012 €0.05 crease in CER issuance (see Figure 7). €0.00 3.8.3 What spreads can tell A clear trend can be observed in the price dif- Spread CER ERU ferential between those CERs that are eligible in Spread Green Standard CER Phase III of the EU ETS (i.e., so-called Green Source: World Bank CERs) and those CERs that will not be eligible. The spread between the two asset classes more than quadrupled from January 2011 to date,86 3.8.2 Futures market with the lion’s share indicating that the market is pricing in these qualitative restrictions.87 As in the EUA market, the bulk of secondary CERs and ERUs were traded in the futures mar- The narrow spread between CERs and ERUs re- ket. Secondary CER and ERU futures volumes flects less liquidity in the latter asset. The spread increased by 56% yoy to almost 1.7 billion tons between the two asset classes has risen by only in 2011, representing 92% of secondary offset €0.05 since January 2011 (see Figure 8).88 volumes traded (and the same percentage was observed for CERs and ERUs when evaluated separately). The value of the secondary offsets 86. As of April 2012. 87. Source: Spot prices from BlueNext. 88. Data reflect prices collected until early April 2012. State and Trends of the Carbon Market 2012 39 3.9 Aviation: the polemic new the ICAO’s 36th Assembly held in September kid on the block of 2007, and recalling that the 1944 Chicago Convention on International Civil Aviation 3.9.1 Background: (“Chicago Convention�) expressly recognizes the right of each contracting party to apply on The Kyoto Protocol states: “The Parties in- a non-discriminatory basis its own air laws and cluded in Annex I shall pursue limitation or regulations to the aircraft of all States, the mem- reduction of emissions of greenhouse gases not ber states of the European Community, and 15 controlled by the Montreal Protocol from avia- other European States reserved the right under tion and marine bunker fuels, working through the Chicago Convention to enact and apply the International Civil Aviation Organization market-based measures on a non-discriminatory and the International Maritime Organization, basis to all aircraft operators of all States provid- respectively.�89 ing services to, from, or within their territory. Although discussions on how to reduce global Thus, on November 19, 2008, Directive emissions from aviation have evolved under 2008/101/EC of the European Parliament and the auspices of the International Civil Aviation of the Council amended Directive 2003/87/EC Organization (ICAO),90 only very recently has that had established emissions trading in the some progress been made.91 Meanwhile, the European community, so as to include aviation global GHG emissions released from the avia- activities in the scheme as of January 1, 2012. tion sector increased by more than 40% between The Directive states: “Aviation contributes to the 1997 and 2008. According to ICAO, the bulk overall climate change impact of human activities of emissions in the sector still come from inter- and the environmental impact of greenhouse gas national flights (62%).92 In addition, despite the emissions from aircraft can be mitigated through fast growth of international aviation emissions in measures to tackle climate change in the EU and developing countries, particularly in Asia, emis- third countries, especially in developing coun- sions in industrialized countries account for 65% tries, and to fund research and development for of total emissions in the sector.93 Thus, including mitigation and adaptation including in particu- the aviation sector in the EU Emission Trading lar in the fields of aeronautics and air transport.� Scheme (EU ETS) represents the first significant regulatory initiative to cap CO2 emissions in this The Directive also allows some flexibility, giving air- sector and address the issue at scale. lines from other countries the option of seeking alter- native ways to reduce or mitigate airline emissions: In addition, since 2002 the European Council has “The Community and its Member States should repeatedly called on the European Commission continue to be in contact with third parties during (EC) to propose action to reduce the climate the implementation of this Directive and to encour- change impact of international air transport. At age third countries to take equivalent measures. If a 89. The Kyoto Protocol to the UNFCCC of December 11, 1997. 90. ICAO is a specialized agency of the United Nations created in 1944 to promote the safe and orderly development of international civil aviation throughout the world. 91. In October 2010, the ICAO Assembly adopted Resolution A37-19, aiming to include a 2% annual fuel efficiency improvement up to year 2050 and a medium-term goal of stabilizing global CO2 emissions at 2020 levels. Measures to meet these targets include improving the fuel economy of new planes; replacing less-efficient aircraft; improving the operation of existing flights in ways that economize on fuel; development of a global CO2 certification standard for aircraft; and facilitating the development and deployment of sustainable alternative fuels for aviation. The ICAO Assembly also agreed on a set of guiding principles for the design and implementation of market- based-instruments, such as minimizing carbon leakage and market distortions, avoiding double charging for aviation emissions, and fair treatment of aviation relative to other sectors. Source: Keen, M., Parry, I., and Strand, J. Market-Based Instruments for International Aviation and Shipping as a Source of Climate Finance, 2012. 92. All flights between EU Member States are considered to be international flights. 93. Source: Keen, M., Parry, I., and Strand, J. Market-Based Instruments for International Aviation and Shipping as a Source of Climate Finance referring to ICAO, 2009 (data from 2007), 2012. 40 State and Trends of the Carbon Market 2012 third country adopts measures, to reduce the climate test of the EU’s proactive climate policy of en- impact of flights to the Community, the Commission gaging other countries to participate in a global can adopt implementing legislation to exempt in- low-carbon economy. coming flights from that country to provide for op- timal interaction between the Community scheme Although included in the scheme in 2012, air- and that country’s measures, after consulting with line operators will be required to join the other that country.�94 European compliance installations, offset, and report their actual annual emissions for the pre- 3.9.2 Rules and participants: vious year in March 2013 only.97 Different from other ETS sectors, the 2020 target for aviation The EU Emissions Trading Scheme (EU ETS) is not set at -21% from 2005 levels. In 2012, was launched in 2005 as one of the pillars of the the aviation sector has to reduce its emissions by Union’s efforts to combat climate change. The 3% compared with its average historical annual inclusion of the aviation sector from January 1, emission (2004-2006), between 2013 and 2020, 2012 onward represents a new step in the imple- the sector will have to reduce its annual emis- mentation of the EU ETS. sions by 5% per year. All flights that arrive at or depart from an EU The allocation of the allowances or emission permits airport are included in the EU ETS. Some ex- – called EU Aviation Allowances (aEUAs) – to air- ceptions apply, including commercial air trans- craft operators will be mostly free of charge,98 with port operators that operate for three consecutive 15% of the allowances put up for auction. Starting four-month periods with fewer than 243 flights in 2013, 3% will be set aside for new operators and per period; flights with total annual CO2 emis- to assist aircraft operators with sharp increases in sions below 10,000 tons per year; and military, the number of tons of kilometers performed (i.e., firefighting, humanitarian, emergency medical fast-growing airlines).99 The number of allowances service, and training flights. to be auctioned in each period by each member state will be proportionate to its share in the total In addition to the 27 EU member states, the attributed aviation emissions for all member states scheme for aviation also covers Iceland and for the reference year reported. For the period from Norway.95 Croatia will be included in 2013 to January 1 to December 31, 2012, the reference the extent that the country accedes to the EU.96 year shall be 2010; for each subsequent period, the reference year shall be the calendar year ending 24 A large number of the airline operators affected months before the start of the period to which the by the EU ETS are of non-European origin. As auction relates. Other rules include: a result, the inclusion of aviation is also a major 94. “The EU is firm on the implementation of its aviation ETS legislation, while engaging positively in the International Civil Aviation Organization (ICAO)’s accelerated work on market-based measures. This work under ICAO should move beyond discussions in order for decisions to be made to limit global aviation emissions. The EU cannot suspend its legislation. However, our legislation foresees flexibility to exempt incoming flights to take into account action by third countries. Furthermore, we will review and possibly amend our legislation if and when an agreement on market-based measures is found in ICAO.� Statement by Mr. Jos Delbeke, Director-General for Climate Action, February 8, 2012, and following a speech at the conference A New Flightplan - Getting global aviation climate measures off the ground, February 7, 2012. 95. Already integrated in the European civil aviation market through the European Economic Area (EEA; 1994), on June 21, 2011, Iceland and Norway also signed an agreement adopting the Civil Aviation Agreement between the U.S. and the EU. 96. Switzerland is not covered, but the country is currently in negotiations with the EC on linking its domestic emissions trading scheme to the EU ETS starting in 2013. If the two schemes are linked this would include the aviation sector. Source: Thomson Reuters Point Carbon, Carbon Market Monitor, November 4, 2011. 97. On January 30, 2012, the European Commission has partially activated the new Union Registry to enable access for aircraft operators. 98. Allocations to all commercial airlines with significant operations to or from the EU are published at http://ec.europa.eu/clima/policies/ transport/aviation/allowances/links_en.htm. 99. If unused by the end of the period, the aEUAs set aside for the special reserve will be auctioned to airlines. State and Trends of the Carbon Market 2012 41 • At least 15 months before the start of each pe- they are required to surrender. Under Directive riod the Commission shall calculate and adopt Article 11a, airlines can carry over their 15% a decision setting out (a) the total quantity of offset entitlement from 2012 into subsequent allowances to be allocated for that period; b) years. For subsequent periods until 2020, the the number of allowances to be auctioned; (c) usage of CERs and ERUs is set at a minimum the number of allowances in the special reserve of 1.5% of verified emissions.101 for aircraft operators; and (d) the number of • All revenues from auctioning aviation allowanc- allowances to be allocated free of charge (i.e., es are to be used on climate-related initiatives.102 the difference between the sum of b and c, and the total). • Within three months from the date on which the Commission adopts a decision, each ad- ministering member state shall calculate and “ The aviation sector will therefore become the second largest economic sector in publish the total allocation of allowances for the period (and for each year) to each aircraft operator whose application was submitted to the EU ETS after energy generation. � the Commission. The allocation will be based on performance benchmarks. 3.9.3 How representative is aviation within • By February 28, 2012, and by February 28 of the EU ETS? each subsequent year, the competent author- ity of the administering member state shall In 2008, the aviation sector accounted for 4% issue to each aircraft operator the number of of total CO2 emissions from fuel combustion in allowances allocated to that aircraft operator the EU, and 13% of emissions from all transport for that year. sources. In 2012, around 4,000 airlines are expect- • aEUAs can only be used by airline operators ed to increase the emissions covered by the EU ETS to account for their emissions,100 whereas EU by approximately 223 MtCO2e,103 representing Allowances (EUAs), which are issued to the 11% of covered emissions. The aviation sector will existing power and industrial plants, are eli- therefore become the second largest economic sec- gible for compliance by all sectors covered by tor in the EU ETS after energy generation. It is es- the cap-and-trade scheme, including opera- timated that aviation emissions in the EU ETS will tors in the aviation sector. rise above 300 MtCO2e in 2020, indicating a much • Aviation operators are allowed to use ERUs more dynamic growth rate than other sectors. This and CERs to comply with their obligations year, based on its historic emissions, airlines using under the scheme. For the 2012 compliance EU airports receive 213 million aEUAs, and 208.5 period, aircraft operators may use CERs and MtCO2e per year from 2013 onward.104 About ERUs up to 15% of the number of allowances 180 million aEUAs (i.e., 85% of the total), will be 100. Installations from other sectors covered by the EU ETS cannot use aEUAs for their own compliance since the Kyoto Protocol does not cover emissions from aviation. 101. Source: Directive 2009/29/EC of the European Parliament and of the Council of April 23, 2009. 102. Revenues “should be used to tackle climate change in the EU and third countries, inter alia, to reduce greenhouse gas emissions, to adapt to the impacts of climate change in the EU and third countries, especially developing countries, to fund research and development for mitigation and adaptation, including in particular in the fields of aeronautics and air transport, to reduce emissions through low-emission transport and to cover the cost of administering the Community scheme. The proceeds of auctioning should also be used to fund contributions to the Global Energy Efficiency and Renewable Energy Fund, and measures to avoid deforestation. Member States shall inform the Commission of actions taken pursuant to this paragraph.� Source: Directive 2008/101/EC of the European Parliament and of the Council, November 19, 2008. 103. Source: Deutsche Bank, EU Emissions: Scoping the Cap over Phase 3, February 3, 2012. 104. “Based on average annual historical aviation emissions for the period 2004-2006, the number of aviation allowances to be created in 2012 amounts to 212,892,052 tons (97% of historic aviation emissions), and the number of aviation allowances to be created each year from 2013 onwards amounts to 208,502,525 tons (95% of historic aviation emissions).� Source: Questions & Answers on historic aviation emissions and the inclusion of aviation in the EU’s Emission Trading System (EU ETS), press release, Europa Web site, March 7, 2011. 42 State and Trends of the Carbon Market 2012 allocated for free to airlines in 2012. From 2013- a potential increase in the range of 1.3-6.5%. 2020, the level of free allocations will decline by ap- However, the possibility of passing through proximately 3%, and operators will receive about these costs to consumers depends on the price 170 MtCO2e in free allowances per year. The 3% elasticity of demand for aviation tickets108 as well of free aEUAs will be set-aside in a special reserve. as to the extent to which airlines are exposed to competition. Some U.S. airlines have recently Still, airline operators are expected to be short of announced a US$3 increase in their tariffs for allowances in 2012 and through the entire period. flights to Europe. The sector’s overall requirement has been estimat- ed at about 400 MtCO2e over the period from Airline companies are expected to enter the mar- 2012 to 2020.105 Assuming the price of Kyoto ket gradually, depending on the extent of their offsets will remain lower than the price for allow- compliance requirements, even though the low ances and that they will be available in sufficient carbon price is already spurring them to some amounts, the sector should use those assets up action. Lufthansa and Air France-KLM have to the import limit, reaching a demand of up to already joined European exchanges (i.e., EEX around 63 MtCO2e until 2020. These numbers and BlueNext, respectively) as part of their trade are likely to be lower, though, as fuel efficiency strategies. In addition, it has been reported that gains reduce CO2 emissions from aircraft.106 the international airline partnership Star Alliance will likely tender for a broker this year to help its Depending on airlines’ decisions on how much members buy CO2 permits; Air France-KLM, a to pass on the additional cost to end users, the member of rival group SkyTeam, has said its alli- cost of a flight per passenger could rise by €2- ance partners would give a right of first refusal to 12 (US$2.66-15.96).107 Other studies refer to each other when selling allowances. Box 3: The point of view of a market player: the right pathway to address aviation emissions By Pierre Albano, Head of Environment, Air France Aviation achieved outstanding track record in reducing carbon intensity Aviation has achieved CO2 efficiency improvements unparalleled in other transport modes. A jet aircraft coming off the production line today is over 70% more fuel efficient per passenger seat kilometer than one delivered in the 1960s. Aircraft operators, manufacturers, airports, and air navi- gation service providers are joining forces in a comprehensive strategy to further improve emis- sions efficiency. But the 1.5 to 2% annual improvement achieved with best available and foreseen technologies and procedures is not enough to offset the 4 to 5% annual growth of the air transport demand. The aviation sector is determined to do its fair share to address the global challenge of climate change and, in 2008, and the whole industry committed to cap net aircraft emissions from 2020 onward and work to achieve the ambitious goal of a 50% reduction in net emissions by 2050 compared to 2005 levels. 105. Deutsche Bank estimates the aviation net EUA demand at 390 MtCO2 (EU Emissions: What is the Value of a Political Option, November 29, 2011); CDC Climat Research estimates 420MtCO2 (Aviation in the EU ETS: ECJ clears the runway, Tendances Carbone #65, January 2012). 106. It is estimated that technological improvements will reduce CO2 emissions by between 1-2% per year from 2010 to 2020. Optimization of passenger load factors and use of sustainable alternative jet fuels available by the end of the decade can add another 5.5% reduction in the sector CO2 emissions. Source: De Perthuis, C., Jouvet, P.A., Climate Economics in Progress 2011, 2011. 107. Source: Thomson Reuters Point Carbon, citing information from the EC, Carbon Market Daily, December 21, 2011. 108. If the price of aviation increases by 10%, then the quantity demanded will decrease by 6% to 14%. Source: Faber, J., Brinke, L., The Inclusion of Aviation in the EU Emissions Trading System, September 2011. State and Trends of the Carbon Market 2012 43 Box 3: The point of view of a market player: the right pathway to address aviation emissions (continued) Aviation can only be a net carbon credits buyer Transporting people and goods, aviation provides an essential service and brings enormous benefits to communities and economies around the globe. This mission was enshrined in the preamble of the Chicago Convention governing international aviation since 1946. Demand for air transport is not expected to decline. In the near future, no breakthrough technology for low carbon aircraft or fuel is foreseen and the actual emissions can only continue to grow. Meeting its emissions targets and closing the gap will therefore require the aviation sector to turn to the use of available mitigation measures outside the sector through the full and unrestricted access to the global carbon market. No doubt aviation will remain a net carbon credit buyer until biofuels and new-generation technolo- gies are broadly deployed. Aviation in the EU ETS Aviation is an ultimate global and interconnected industry. Any mechanism, be it a carbon offset or cap and trade, can only be efficiently developed at the global level. Governments, meeting in the United Nation’s specialized agency for aviation (ICAO) have not reached any agreement on a global framework. The difficulties and slow pace of progress are not different from those encountered within the global climate negotiations dividing developed and developing nations. Considering the lack of progress, the European Union unilaterally decided to include international aviation in the first of its kind regional ETS. Although this type of instrument is relevant to aviation, as recognized by ICAO, the EU ETS is fiercely opposed by almost all non-EU countries. Indeed, the EU ETS is the legal framework for the EU’s independent commitment to reduce its emissions. In this context, it is hardly conceivable for non-EU countries to let their nationals contribute to meeting the EU’s self- imposed targets, particularly while they have not been part of the decision whatsoever. Beyond the sovereignty issue, aviation being a net buyer means that international operators are invited to purchase permits from other EU-based sectors, thus ultimately financing de-pollution in- vestments within Europe. China or India for instance already prohibits their airlines from complying with the EU ETS obligations and, in many countries, countermeasures and restrictions on European airlines are being considered. ICAO must be the solution provider An aggressive unilateral EU position would raise the risk of a major trade conflict; in a sector interna- tional by nature, multilateralism must prevail. Governments have a key role to play in ICAO in agree- ing upon a global regulation for international aviation emissions. The current momentum, especially after the Durban unanimous commitment for a legally binding treaty by 2015, must help in finding a mechanism, hopefully based on a much-needed global carbon market, for adoption at the ICAO Assembly in autumn 2013. The EU ETS is the law. Although a compromise solution must be found, in the meantime airlines will start trading carbon credits on EU market. For additional information, please refer to Annex 1: International Reaction to Aviation in the EU ETS. 4 44 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 45 Market instruments under the UNFCCC 4.1 Durban climate negotiations and policy evolution The seventeenth Conference of the Parties (COP 17) to the United Nations Framework Convention on Climate Change (UNFCCC) took place in Durban, South Africa in December 2011. While the outcome provides no guarantee that the UNFCCC 2°C tar- get will be reached, it represents a political commitment to resolve critical issues that were far from certain prior to the meeting. Three key results formed the backbone of the “provisional application.�109 Under this provi- Durban Platform for Enhanced Action that sional legal framework, the second commitment brought Parties to agreement. These include: (i) period is to start on January 1, 2013, and con- provision for the Kyoto Protocol (KP)’s second clude at either the end of 2017 or 2020 (yet to commitment period to become a reality, with be decided). The scale of ambition and quantified agreement that the necessary decision to that ef- GHG targets (referred to as quantified emission fect will be adopted at COP 18; (ii) the launch of limitations or reductions objectives – QELROs) the Green Climate Fund to scale-up long-term of Annex I Parties is to be determined at the end climate finance to developing countries; and of 2012. The provisional framework was a further (iii) provision for a roadmap toward a global le- important milestone for the continuation of the gal agreement on climate change by 2015 (the Kyoto Protocol’s Clean Development Mechanism “Durban Platform�). These key decisions – along (CDM) with no gap when the current phase con- with other elements of the Durban Agreement cludes at the end of 2012. (see Box 4), particularly relating to new mecha- nisms – signaled continued confidence in the The second commitment period is expected to be UNFCCC process as the forum to address global limited to the 27 Parties forming the European climate change and contribute momentum to- Union (EU), as well as Norway, Switzerland, and ward climate action. Iceland. Croatia will also join upon its ascension to the EU. While Canada decided to withdraw from While the provision on the second commitment the KP late 2011, Japan, and the Russian Federation period to the Kyoto Protocol represents an impor- remain signatories of the KP but have already com- tant milestone, it still requires eventual accession municated their intention not to participate in its or ratification by the requisite number of parties second commitment period. Australia and New to enter into force. Until then, the Kyoto Protocol Zealand have yet to confirm their intention to rati- Second Commitment Period will operate under fy the second commitment period.110 109. “Provisional application is a recognized technique in treaty law by which states undertake to apply a treaty pending its entry into force� – Vienna Convention on the Law of Treaties Article 25. It is designed to prevent legal gaps between successive treaty regimes and allows states to provisionally apply legal obligations that are largely the same as if the treaty were entered into force. 110. No decision has been taken by the two countries at the time of writing this Report. 46 State and Trends of the Carbon Market 2012 Box 4: Key elements of the Durban decisions • The Durban Platform for Enhanced Action. By 2015 a “protocol, legal instrument, or an agreed outcome with legal force� will be defined, to be implemented by 2020. • The Kyoto Protocol will see a second commitment period from 2013 until either 2017 or 2020. Annex I Parties participating in the 2nd commitment period are to submit information on their emis- sions targets (quantified emission limitations and reduction objectives - QELROs) by May 2012 with a decision to adopt them to be taken in December 2012. NF3 is an additional gas under this 2nd period. • The Green Climate Fund will start operations with the World Bank as interim trustee and the UNFCCC and Global Environment Facility as interim secretariat. It will be accountable to and function under the guidance of the Conference of the Parties. The GCF will help scaling up long- term financing for developing countries – rising to US$100 billion per year by 2020. • The Adaptation Committee is to start work by defining what information is to be incorporated into National Adaptation Plans. • The modalities and procedures of the Technology Executive Committee (TEC) to assist technol- ogy development and transfer have been approved. • There is agreement to develop general guidelines for measurement, reporting, and verification (MRV) of domestic actions in developing and developed countries. • Modalities and Procedures for a New Market Mechanism (NMM) operating under the guidance and authority of the COP to be considered by the COP in December 2012. A decision on a framework for various approaches, including market-based approaches not developed under the UNFCC, will also be considered. • Further CDM improvements to increase efficiency, scale, and outreach confirmed, using stan- dardized baselines, PoAs, and simplified additionality approaches. Carbon capture and storage projects are now eligible. The materiality standard was completed. • Modalities for countries to submit reference levels for REDD+ were agreed. Decision on REDD+ financing allows for both public and private financing for REDD+, including recognizing that mar- ket-based approaches may be developed in the coming years. The effectiveness of the decision on the KP’s sec- from 2020� that is applicable to “all parties.�111 ond commitment period has further come into These negotiations are to be completed no lat- question due to the lack of agreement on the car- er than 2015 and to come into effect by 2020. ryover of Assigned Amount Units (AAUs) from Negotiators wrestled over this language until the first to the second commitment periods. This past the COP deadline to forge the compromise issue has the capacity to affect the scale of ambi- considered essential to the formation of the next tion considerably and is to be the subject of ne- phase in a global climate agreement. gotiations at COP 18 in December 2012. The Durban Platform also calls for an ambitious Perhaps most critically, the Durban Platform rise in the level of mitigation, to be informed by launches a process to develop a “protocol, le- the scientific assessment of the Intergovernmental gal instrument, or agreed outcome with legal Panel on Climate Change (IPCC). In addition force...to come into effect and be implemented to making progress on mitigation, the Durban 111. The reference to “all parties� is significant in that is signals a break from the categories of “Annex I� (those parties – developed countries and economies in transition – with emissions obligations) and “non-Annex I� (those parties – developing countries - without emissions obligations) that characterizes previous UNFCCC decisions. It reflects the need for global action, beyond mitigation by the developed countries and economies in transition, to achieve the ultimate objective of stabilizing GHG concentrations in the atmosphere to a level below 2ºC above pre-industrial levels deemed necessary to prevent dangerous human-made interference with the climate system. State and Trends of the Carbon Market 2012 47 Platform identifies the need to ensure progress on and c) the guidelines on suppressed demand, other key negotiating issues, namely adaptation, which allow countries with suppressed de- finance, technology development and transfer, mand to define the baseline using predicted transparency of action, and support for capac- consumption or production rates rather ity building. Finally, two other policy discussions than relying on historic data. The UNFCCC witnessed significant progress: the continuation Secretariat is currently conducting an assess- of the CDM reform and the development of new ment of all methodologies to determine what market mechanism. elements could be standardized. The standard- ized baseline framework is also to be extended The Durban Platform signals sustained interest to forestry and transport projects.113 in continuing to improve the effectiveness and • Streamlining administrative procedures: A efficiency of the CDM. Significant progress was key example of this is the merger of the two achieved in Durban toward establishing a ma- procedures to handle post-registration chang- teriality standard in the context of the CDM. es (deviations from the monitoring plan and Parties also agreed to include carbon capture and project design changes) into one approval step, storage (CCS) as an eligible CDM project activi- which became effective upon the adoption of ty. A high-level policy dialogue on the CDM was the new project cycle procedure,114 thus saving launched by the Executive Board of the CDM. time and transaction cost. A second example is the introduction of risk-based control systems Negotiators also recognized the progress made that move away from assessing 100 percent (%) in 2011 to implement the CDM reform deci- of cases and relieve the regulator from dealing sions taken at the sixth Conference of the Parties with “straightforward� cases of issuance.115 serving as the meeting of the Parties (CMP6) in Cancun (2010) with regard to the following: Negotiators decided that reform in these areas would continue in 2012, including the simpli- • Standardization: Standardization refers to re- fication of regulations governing Programmes of placing requirements for individual analysis Activities (PoAs). While no major progress on of projects by using pre-approved values or as- PoAs was achieved in 2011, the Durban CDM sumptions that are deemed applicable to a class decision provides for opportunities to make of projects. The purpose of standardization is progress on PoA regulatory reform in 2012. to promote efficiency and multiplier effects by Furthermore, ongoing work on standardization replacing subjective analysis with default ap- could prepare the ground for more far-reaching plication criteria. Key achievements in 2011 improvements on PoAs as well as the project cy- in this regard are the a) micro-scale addition- cle for standalone projects.116 ality guidelines,112 which allow positive lists to determine whether projects are additional; b) Major progress was also made on the development the UNFCCC’s framework for sector-specific of new market mechanisms under the Convention baselines, which refers to the standardization (UNFCCC).117 This led to a decision on “vari- of baseline emission factors and additionality; ous approaches, including opportunities for using 112. Source: EB 63, Annex 23, Guidelines for demonstrating of additionality of micro-scale project activities, http://cdm.unfccc.int/ UserManagement/FileStorage/WVI3RN692YMCGLZT40QXBOUA8H5KFP. 113. Source: http://unfccc.int/resource/docs/2011/cmp7/eng/03p01.pdf, p. 7, paragraph 19. 114. The procedure can be found on the UNFCCC Web site under information for the EB 63 meeting Annotated Agenda, Annex 11 - Draft clean development mechanism project cycle procedure. 115. Source: EB 61 Annotated Agenda, Annex 5 - Assessment report of CDM project cycle operations. EB 61 Report, Annex 23 - Guidance for the development, revision and consolidation of standards and procedures related to the CDM project cycle (version 01). 116. Source: World Bank. Improving efficiency and outreach of the CDM through standardization, May 2012. 117. Distinct from the negotiations on market mechanisms taking place under the Kyoto Protocol. 48 State and Trends of the Carbon Market 2012 “ These decisions represent the foundation upon which national or regional schemes, and/or by devising a means to credit other sectoral activities. governments can indicate that there At the same time, Durban highlighted the dis- parities in national preferences and priorities, is a global consensus toward regional, casting uncertainty around the path toward a national, and local initiatives that help global agreement. These outcomes, in particu- � lar relating to the restricted geographic scope of address climate change the Kyoto Protocol’s second commitment period and prospects for a global deal to take effect in markets to enhance the cost-effectiveness of, and to 2020 only did not satisfy the immediate needs of promote mitigation actions,� and provided for (i) a the existing carbon market participants. To this framework for treatment of “various approaches,� extent, the Durban Platform failed to reverse the which is understood to cover non-market-based downward spiraling price trajectory that pro- approaches as well as GHG crediting programs duced consecutive record lows into early 2012. developed outside the UNFCCC; and (ii) the es- tablishment of a New Market Mechanism (NMM) operating under the guidance and authority of the 4.2 Kyoto flexibility Conference of the Parties (with modalities and pro- instruments cedures to be elaborated). 4.2.1 The Clean Development Mechanism Building on the 2010 Cancun decision, the NMM is to (i) stimulate mitigation across broad 4.2.1.1 At a glance segments of the economy (i.e., go beyond a proj- The primary market for pre-2013 Kyoto offsets ect-by-project approach); (ii) safeguard environ- continued to decline in 2011. The volume of pri- mental integrity; (iii) ensure a net decrease and/ mary CERs (pCERs) contracted fell 27% year on or avoidance of global GHGs; (iv) assist devel- year (yoy) to approximately 91 million tons of oped countries to meet their mitigation targets; carbon dioxide equivalent (tCO2e). As a result, and (v) ensure good governance and robust mar- the total value of the primary CDM market fell ket functioning and regulation. by 32% yoy to US$ 990 million (€711 million). These decisions represent the foundation upon The sharp decline in market value reflects the which national governments can indicate that downward trend in average prices, tracking there is a global consensus toward regional, na- movements in the secondary market. The aver- tional, and local initiatives that help address cli- age estimated offset price for all CER contracts mate change, even if the design of a global regula- signed in 2011 fell from US$11.8 (€9.1/ton) in tory framework is still not clear. Thus, while the 2010 to US$10.9 (€7.9/ton) (see Figure 9). Durban outcome in and of itself is not the kind of global market that was envisioned in 1997 with As the first commitment period of the Kyoto the adoption of the Kyoto mechanisms, Durban Protocol comes to an end, the above numbers leaves open the door to a wider array of market- become less meaningful, as only one year of con- based climate-friendly actions. These actions may tract volumes (and value) can be counted. Thus, offer the potential to be credited in the future, given the narrow scope of the pre-2013 market, whether through a “new market mechanism,� the a separate analysis is necessary for the post-2012 docking of national actions within other national segment of the market. State and Trends of the Carbon Market 2012 49 The post-2012 market tells a very different story. contracted on existing projects, representing the In 2011, the market for post-2012 pCERs grew CERs not yet transacted in existing ERPAs and substantially and took over the pre-2013 market, up to the end of the project’s crediting period of at about twice its size. Volumes contracted rose 10 or 21 (3 times 7) years. The vast majority of to 173 million tCO2e (MtCO2e), equating to a these were for projects in China. 63% yoy rise in market value to nearly US$2 bil- “ lion (€1.4 billion) (see Table 3). without a brighter market outlook, it is The contractual terms in the Emission Reductions unlikely that a substantial proportion of Purchase Agreements (ERPAs) reveal important information necessary for understanding the shape these post-2012 ERPAs will be exercised and form of the current post-2012 primary market at the indicative prices and volumes � as well as the trends. The strong conditional prec- edents imposed by buyers for ERPAs to become established in these documents. effective118 encouraged many buyers to sign those contracts with the confidence that they would be 600 18 Figure 9: able to exit from their commitments if and when needed. Due to the conditional safety clauses and 16 Volumes 500 without a brighter market outlook, it is unlikely 14 and average that a substantial proportion of these post-2012 12 prices for Volume (MtCO2e) 400 Price (US$/ton) ERPAs will be exercised at the indicative prices and 10 pre-2013 CER 300 volumes established in these documents. 8 transactions 200 6 since 2002121 In addition to the emergence of less-binding pur- 4 chase obligations, uncertainty surrounding post- 100 2 2012 demand and the eligibility of pCERs led 0 0 most buyers to contract volumes using option 02 03 04 05 06 07 08 09 10 11 structures.119 As in 2010, a significant portion of 20 20 20 20 20 20 20 20 20 20 the primary market in 2011 was transacted us- Volume Price ing call options in an effort to manage risk and also take positions.120 Options were primarily Source: World Bank 2010 2011 Table 3: Volume (MtCO2e) Value (US$ million) Volume (MtCO2e) Value (US$ million) Volumes and Pre-2013 124 1,458 91 990 value for CER Post-2012 100 1,217 173 1,990 transactions in the primary Total 224 2,675 263 2,980 market, Source: World Bank 2010-2011122 118. Refer to the next sections for further details. 119. Since the buyer of an option gains the right but not the obligation to execute, these volumes have not been accounted for in this report. 120. Although all volumes have been tracked, the authors have decided to only account for firm contractual obligations in this report. For further details, see Methodology. 121. Please note that differences between the numbers reported this year and last reflect the change in the methodology adopted, as well as additional information obtained after the last report was released concerning earlier transactions. 122. In order to determine the post-2012 market value, annual volumes were multiplied by either the fixed price in these contracts, or by the corresponding December-expiring contract prices (from ICE) in the case of contracts with floating prices. Unless the specific discount was reported, a discount equivalent to 15% was applied over December-expiring contract prices for 2010 deals and 25% for 2011 deals. For further details, see Methodology. 50 State and Trends of the Carbon Market 2012 Very few post-2012 projects have been grant- EU ETS operators, the residual amount allowed ed Letters of Approval (LoAs) by the Chinese into the EU Scheme until 2020 up to its exhaus- National Development and Reform Commission tion is likely to be considerably lower than one (NDRC)123 for post-2012 CERs. When pro- billion (see Section 3.5.2). If the figures above vided, volumes in the LoAs implied that CERs are confirmed, EU ETS operators would thus would be generated until approximately 2015. not need to import any additional offsets beyond This can be explained by the fact that China has what has already been secured.124 indicated its intention to launch a domestic mar- ket in the next few years; it is assumed by many Finally, the carbon market has continued to con- analysts that these credits could provide liquidity solidate (e.g., Carbon Resource Management for this market. In addition, it is likely that, by was fully acquired by Vitol in early 2011, and 2015, the EU ETS will have reached its import Climate Change Capital was acquired by Bunge cap on international credits. As a result, all post- Limited, in February 2012). Project portfolios 2015 volumes reported in China were contract- were also absorbed – at sometimes undervalued ed through options. levels – as part of these acquisitions. This shifted investment away from new projects and was an- 4.2.1.2 Lack of demand determines the new other contributing factor to the downward trend contract dynamics in pre-2012 primary market deals and the conse- As reported last year, those governments that quent buyers’ market that exists today. have historically engaged in origination activi- ties and have been large promoters of the proj- The minimal pre-2013 residual compliance de- ect-based primary market have gradually shifted mand and signals of oversupply through to 2020 their efforts toward the Assigned Amount Unit have also increased the bargaining power of active (AAUs) and secondary CER (sCER) markets. buyers. This has been reflected in ERPAs where This is because AAUs deliver predictable vol- the terms and conditions increasingly transfer umes (this is important as the first commitment offset eligibility risk to the seller. As a result, pre- period of the Kyoto Protocol comes to an end). 2013 project registration and EU ETS eligibility Similarly, sCERs have minimal delivery risks and have become standard clauses in the majority of can be obtained through fast and simple contrac- ERPAs. In addition, more stringent conditionality tual processes. and guarantee clauses have been reported. These include pricing realignment with voluntary mar- Compliance-driven demand for primary offsets ket (or other market) levels and the shift from firm from the private sector has also dropped substan- commitment into options if the market is not liq- tially. As annual emissions in the EU fell for the uid enough to absorb the offsets at the buyer’s dis- second time in three years due to weak industrial cretion, even if the offsets remain eligible. activity, demand for compliance assets as a whole also fell. As reported in the section 3, analysts’ A more-complex dynamic emerged in the sec- forecasts estimate that the scheme will be collec- ond half of 2011. As explained above, buyers tively oversupplied by over one billion tons until have incorporated the lessons learnt from pre- 2020, including the exhaustion of the Kyoto off- 2013 ERPAs to negotiate softer and less binding sets allowed into the scheme (these forecasts as- post-2012 ERPAs. However, to further mini- sume that the necessary volume of Kyoto offsets mize risk, several buyers who in the past had an will be available in the market at a price lower incentive to keep contracts operational, sought than the EUAs). However, due to the high vol- renegotiation of existing ERPA volumes and ume of CERs and ERUs already contracted by prices. Others simply terminated ERPAs in their 123. NDRC represents the Chinese designated national authority (DNA) responsible for authorizing the sale of the credits. 124. Still, the achievement of the collective targets does not mean that every operator has reached its targets. State and Trends of the Carbon Market 2012 51 entirety. Motives and arguments included any 4.2.1.3 A fading pre-2013 market and a window of opportunity to be found in the terms promising post-2012 market of unfulfilled contractual clauses, such as annual Pre-2013: despite many sellers’ preferences for or cumulative delivery volumes. fixed-price contracts, buyers were reportedly able to negotiate most pre-2013 ERPAs at floating It has been reported that many sellers have tried to prices. As explained in previous reports, the buy- find mutually acceptable compromise solutions ers’ preference for floating prices is a clear indica- to deal with these new challenges. In many cases, tion that downside risk prevails in today’s market. sellers resolved to convert fixed-price contracts to Most deals were reportedly signed at 80-95% of floating-price contracts or negotiated post-2012 the spot CER price at the time of delivery. offsets in exchange for pre-2013 offsets. Others resolved to temporarily hold project verification Those fixed-price ERPAs that were observed in and/or payment of delivered offsets to avoid the 2011 were primarily in China where the NDRC’s possibility of price and volume cuts.125 indicative national floor price remains. Overall, the pCER price averaged €7.9 and hovered in Some large buyers also reportedly used their size the €7–9 range across the market. Prices fell by and contractual position to impose ERPA renego- 11% on an annual basis compared to the average tiations. Having hired the Designated Operational €8.9 average price in 2010. Entity (DOE) themselves, these buyers threatened to delay verification or cancel the DOE contract. Above prices reflect deals almost entirely signed Alternatively, by being the sole CDM focal point during the first half of the year, when sCER in certain projects, they renegotiated contracts prices were still being traded in the €11.5–13.0 based on the fact that the project’s CERs would range. In the second half of the year, the accen- only be transferred upon their sole request, thus tuated decline of sCER prices led both buyers leaving sellers with no choice other than to accept and sellers to lose pricing references and origina- new contractual terms. tion activity froze. Buyers were concerned about where the bottom line would be. By the end of A few deals have still been reportedly signed the year, prices had dropped to levels that forced above prevailing secondary market prices, main- project developers to make sure prices were still ly by governments. Reasons to pay above-market above the underlying project’s marginal abate- prices are that (i) low prices do not secure the ment cost (i.e., their natural breakeven point). CER delivery (i.e., projects may not remain com- mercially viable and collapse before delivering, At the same time, the very few CP-1 CERs from or sellers may be inclined to breach the contract industrial gases – although not eligible for the when/if prices recover); (ii) low prices would pri- EU ETS after April 2013 – continued to be on marily attract riskier projects rather than more the radar screen of government buyers that can solid ones – thus increasing the chance for un- potentially use them until the end of the Kyoto derdelivery; and (iii) low prices would ultimately Protocol “true up� period in 2015. They were lead to more fundamental questions related to purchased either in the primary or secondary the project’s additionality. In addition, some markets, and prices for these assets followed the large investors had reasons to pay above the AAU prevailing prices, which are equally accept- prevailing market prices, especially when deal- able as Kyoto compliance assets. ing with state-owned companies, since carbon would be for them an entry point to negotiate Post-2012: the weighted average price for post- much bigger contracts in other sectors. 2012 primary market deals in 2011 was €8.3, 125. Similar practices were reported by Thomson Reuters Point Carbon, on CER buyers seek contract rejigs, exits as prices collapse, January 6, 2010. 52 State and Trends of the Carbon Market 2012 down from €9.2 in 2010. As already explained, per se. These market players can benefit from fa- in order to estimate the post-2012 market value, vorable prices, commercial terms, and the trans- weighted average prices in this report were cal- fer of eligibility risk to sellers. Nevertheless, these culated using either the fixed prices reported or, same low prices and safety provisions undermine in the case of ERPAs with floating prices, the the possibility for these projects to succeed. Since December-expiring CER prices from ICE for carbon revenues are difficult to forecast and ex- each future date (e.g., Dec-13, Dec-14, and so tremely limited under these circumstances, it is on). Then a 25% discount, consistent with mar- challenging to assert that a project would not ket practices reported, was applied to the result- have happened without the CDM, thus ques- ing prices for those future vintages. Given the tioning its additionality. fact that post-2012 sCERs trade at a premium to pre-2013 CERs (i.e., these are CERs eligible To date, sCER prices represent a natural ceiling for for the EU ETS Phase III), the weighted average pCERs (i.e., the buyers opportunity cost). These prices provided in this report are higher than the prices are at the same level – or even at a lower price in the €6–8 range in the rare fixed-price level than – what is perceived to be the breakeven contracts reported, mostly until mid-2011. point for several CDM investments, which repre- sents the natural floor for pCERs from the sup- Safety provisions made almost all ERPAs look ply (i.e., project developer) side. These conditions like quasi-options, with extremely few exceptions have created a strong mismatch in pricing expec- being reported. At the time when many govern- tations between buyers and sellers. ment buyers continued to receive clear instruc- tions to refrain from any exposure to post-2012 Current prices and practices provide little incen- offsets, private sector buyers were responsible for tive for project developers to pursue either new the majority of contracts. Still, post-2012 CERs CDM credits or pursue issuance from existing continue to be valued at zero by many buyers CDM projects, given that monitoring and veri- concerned about the possibility of financial loss- fication costs and CDM fees combined can out- es. Although few ERPAs up to 2020 reported, weigh the risk-adjusted revenues from selling most contracts limited to the end of the project’s CERs, particularly for smaller projects. It is clear first crediting period or 2015, whichever comes that a curbed supply will not be noticed, given that first. In effect, this reduces the overall value of the EU ETS is largely oversupplied. However, this ERPA contracts for monetization purposes. situation undermines the further development of this market mechanism and its capacity to direct The unpredictable futures market and the over- capital toward effective, low-cost solutions. supplied EU ETS led buyers to pursue post-2012 deals at floating prices. On the other hand, sellers 4.2.1.4 Who bought and who sold seeking finance have indicated a strong prefer- The decline in pCER prices and looser com- ence for fixed-price contracts, at least for the ini- mercial terms incentivized some private sector tial years of their contracts. However, in a buy- buyers to capitalize on low-hanging fruits and ers’ market, very few succeeded to conclude sales early mover opportunities for both pre-2013 and contracts at fixed prices. As a result, some sellers post-2012 CERs. In addition, some government simply chose not to sell. Prices traded in a range buyers remained engaged partly to honor previ- of 70-85% of the spot CER price at delivery. ous commitments, as did a handful of multilat- eral and governmental agencies that wound up The post-2012 market resembles the early days of funds close to full subscription. the carbon market, when activity was primarily motivated by either testing ground objectives or China increased its share of pre-2013 transac- by first mover opportunities rather than demand tions to a record 79 million tons or 87% of all State and Trends of the Carbon Market 2012 53 700 Figure 10: volumes contracted in the primary market dur- Pre-2013 volumes transacted (MtCO2e) Pre-2013 ing the year. Paradoxically, since global pre-2013 600 volumes pCER transacting volumes shrunk to record 500 transacted by lows, the volumes contracted in China in 2011 seller 2002- also represent the lowest volumes in absolute 400 2011 (MtCO2e) terms since 2005. Cumulatively, China has been 300 the host to 1.6 billion pCERs or 71% of the 2.3 200 billion CERs contracted in the primary market since 2005 (see Figure 10). 100 0 Other Asian countries produced about 6% of 02 03 04 05 06 07 08 09 10 11 20 20 20 20 20 20 20 20 20 20 pre-2013 pCER transactions in 2011, followed by Africa with 4%. Latin America, a region China Africa which was the source of almost 20% of the global Others Asia Other & Unsp. pCERs contracted in 2005, after having almost sourced most of its projects in advanced stage of Latin America development, represented 2% of the market in Source: World Bank 2011 (the same percentage as the previous year). Although new primary market transactions de- creased in Latin America, in April of 2012 the market welcomed the issuance of the first tempo- “ Africa emerged as a significant newcomer, accounting for 36 million rary CERs in a reforestation project in Brazil.126,127 The post-2012 market offers a very different tons or 21% of post-2012 CERs. � picture (see Figure 11). China accounted for 200 Figure 11: Post-2012 volumes transacted (MtCO2e) 73 million tons or 43% of post-2012 pCERs in Post-2012 2011.128 Other Asian countries, including India, volumes 150 Vietnam, and Indonesia, accounted for 43 mil- transacted lion tons or 25% of the volume. Africa emerged per seller, as a significant newcomer, accounting for 36 mil- 100 2010-2011129 lion tons or 21% of post-2012 CERs. Key coun- tries included Democratic Republic of Congo, 50 Burundi, and Nigeria, among others. Contracts based on stronger commitments were reported for ERPAs signed in Africa, particularly in Least 0 2010 2011 Developed Countries (LDCs), given the eligibil- China Africa ity of these assets in Phase III of the EU ETS. As in the pre-2013 market, a smaller market share Others Asia Other & Unsp. (19 million tons or 11% of the volume) derived Latin America from Latin American countries. Source: World Bank 126. Over 4 million tCERs were issued in the “Reforestation as Renewable Source of Wood Supplies for Industrial Use in Brazil�. 127. For additional information on land-use activities and investment, please refer to Annex 2: Land-use Carbon 128. As previously explained, much larger volumes were reported in China, but sourced as options rather than purchase agreements. 129. Post-2012 transactions were not being collected prior to 2010. 54 State and Trends of the Carbon Market 2012 The larger interest in Africa comes at a time No significant shift was observed in CDM proj- when buyers reiterate their desire to diversify ect technologies. Carbon revenues continue to the geographic origin of their project portfolio leverage relatively low-risk investments in proven in order to reduce their risk exposure to the few technologies by improving the marginal rates of traditional sellers. The emergence of Africa is also return and enhance the chances of the projects becoming increasingly evident in other stages of being developed and remaining operational. As project development. The 46 projects located in a result, after almost completely exhausting the the Sub-Saharan Africa region that started vali- market for HFCs and N2O, most primary CERs dation in 2011 have the potential to deliver al- in recent years have been generated from wind, most 30 million CERs in the coming years.130 hydro, and other renewable energy projects. On trend with 2010, these projects produced 57 mil- lion tons or 63% of all pre-2013 CERs in 2011. Figure 12: 600 Other prominent project activities included pre-2013 volumes transacted (MtCO2e) Pre-2013 energy efficiency, waste management, and coal 500 volumes mine methane (see Figure 12). transacted 400 per sector 300 The post-2012 market looks very similar. 2002-2011 Renewable energy projects accounted for 97 mil- 200 (MtCO2e) lion tons, representing 56% of market share (up 100 from 71 million tons in 2010). The largest vol- 0 umes in 2010 and 2011 came from hydro (34 million tons or 34% in 2010, and 45Mt or 26% 02 03 04 05 06 07 08 09 10 11 20 20 20 20 20 20 20 20 20 20 in 2011) and wind (23Mt or 23% in 2010, and Industrial gas LFG + waste mng't 28Mt or 16% in 2011). Other large volumes in Renewables Other & Unsp. both years derived from energy efficiency, bio- mass energy, waste management, and fuel switch E.E. + Fuel switch projects (see Figure 13). Source: World Bank 3% N2O 6% Other Figure 13: 2% CMM and 4% Other 3% N2O Post-2012 other fugitive 6% CMM and other fugitive pCERs per 34% Hydro 11% LFG 26% Hydro sector, 2010- and other waste mg't 2011 (%) 14% LFG 12% and other EE+Fuel waste mg't LFG and other waste mg't switch 16% 4% Other 16% Wind 10% EE+Fuel Renewables Biomass switch 8% energy 23% Wind Biomass energy 6% Other Renewables post-2012 pCERs per sector (%) 2010 post-2012 pCERs per sector (%) 2011 Source: World Bank 130. Source: UNEP Risoe, CDM Pipeline, April 2012. State and Trends of the Carbon Market 2012 55 The geographic origin of primary offset buyers 350 1,600 Figure 14: shifted due to market consolidation and interest 1,400 CER issuance, 300 in alternative mechanisms. As in 2010, Japan re- 1,200 2005-2011 250 Number of issuances duced its position in the pre-2013 and post-2012 Volume (million tons) 1,000 primary market following its announcement to 200 support bilateral schemes rather than Kyoto flex- 800 150 ibility mechanisms. Japanese buyers contracted 600 only 1% of the pre-2013 market (for both CERs 100 400 and ERUs), down from 13% in 2009, and 2% 50 200 of the post-2012 market, down from 24% in 2009 (in this case pCERs only). Entities in the 0 0 05 06 07 08 09 10 11 UK transacted the largest share, accounting for 20 20 20 20 20 20 20 47Mt or 39% of pre-2013 pCERs and 44Mt or 26% of post-2012 pCERs. The primary catalyst CERs issued (million tons) for this was the high concentration of buyers in # issuances processed the UK. However, a large portion of these vol- Source: World Bank, IGES umes are known to be redistributed upon deliv- ery. Switzerland had a robust increase in 2010 and in 2011 in both pre-2013 and post-2012 alone, 315 million CERs were issued, represent- markets compared to previous years. The Swiss ing a 140% increase over 2010 and about 40% market share came right after the UK, for the of all issuances until that year. In order to have same reasons as the latter. those CERs issued, the EB handled over 1,500 issuance requests in the year, another substantial For project-based transactions in the voluntary increase from previous years (see Figure 14). market, please refer to Annex 3: The State of the Voluntary Market. Despite of the higher CER issuance rates, out of the over 8,500 projects that have entered the CDM How many projects may be registered in 2012? pipeline since 2003,131 approximately 3,500 projects With the first commitment period of the Kyoto are currently in the validation process. Taking the Protocol approaching its end as well as the dead- 859 projects registered in 2011 as a sample for cal- line for project registration to ensure EU ETS culation purposes, the average validation time was eligibility, it is interesting to zoom in on the sup- 525 days. Assuming that the validation processing ply side to see how many projects will be able to time will not materially change in 2012, many proj- make the EU ETS cut. Another question as rel- ects that had not started validation by the first half evant as the former is whether or not the projects of 2011 will have limited chances to pass validation making the cut will be able to sell their credits and request verification on time prior to 2013 when at a time when the maximum volume of offsets the new EU ETS restrictions on offsets take effect. (e.g., supplementarity limit) allowed into the About 1,800 projects are in that category. Another scheme is being quickly exhausted. 500 projects initiated validation more than three years ago, and many have chronic problems that In fact, the reason for CERs and ERUs ap- might prevent them from being validated. proaching the cap so fast is partly due to the fact that issuance picked up at impressive rates The remaining 1,200 projects should be able to in 2011, with the CDM Executive Board (EB) request registration before the end of 2012. For successfully cleaning up old backlogs. In 2011 illustration purposes, the maximum number of 131. As of February 2012. 56 State and Trends of the Carbon Market 2012 projects processed by the CDM Executive Board Additional regulatory procedures may also affect (EB) in a year was 859 (i.e., also an all-time high those projects seeking registration in 2012. These in 2011). Thus, unless the projects submitted include the introduction of last-minute changes pass the completeness check, they may not have to CDM regulation without granting grace peri- sufficient time to make the necessary adjust- ods beyond the end of 2012, such as the intro- ments before December 2012 (see Figure 15). duction of the new Validation and Verification Standard (VVS) that will become mandatory by Figure 15: 4,000 October 2012 at the latest. CDM projects registered 4.2.1.6 Programmes of Activities: 3,000 until 2011 scaling up the CDM and projects A Programme of Activities (PoA) is a voluntary at validation in 2,000 coordinated action by a private or public entity 2012 that coordinates and implements any policy/ measure or stated goal (e.g., incentive schemes 1,000 and voluntary programs) that leads to anthropo- genic GHG emission reductions or net anthro- 0 pogenic greenhouse gas removals by sinks that 04 05 06 07 08 09 10 11 12 are additional to any that would occur in the 20 20 20 20 20 20 20 20 20 absence of the PoA, via an unlimited number of projects projects at validation CDM program activities (CPAs).132 PoAs allow registered after 1H'11 to use carbon revenues as a source to fund incen- projects at validation projects at validation tive schemes and policy implementation schemes 2009-1H'11 more 3-y with that PoAs have the potential to substantially Source: World Bank, IGES up-scale the CDM and to test new approaches to carbon crediting beyond a project-by-project limitation. Figure 16: 100% Regional 90% As of today 269 PoAs have entered the CDM distribution 81 cycle. The PoA pipeline provides a more diverse 80% of pCDM and geographical distribution relative to standalone 70% CDM (%) CDM projects, with Africa accounting for 28% 60% of the PoAs (versus fewer than 3% in the project- 51 50% based CDM).133 This illustrates the potential of 40% PoAs to improve regional access to the CDM 30% 28 (see Figure 16). 20% 17 14 Despite the progress achieved, PoAs are still 10% 1 1.1 2.8 2 1.1 under early stage of development and the PoA 0% regulation is far from enabling its full potential. Latin Asia Europe & Africa Middle-East America & Pacific Central Against this background the discussion on im- Asia proving PoA regulation is expected to continue pCDM CDM in 2012 covering, among others, the following Source: UNEP Risoe key elements: 132. Source: EB 47. Procedures for Registration of a Programme of Activities as a Single CDM Project Activity and Issuance of Certified Emission Reductions for a Programme of Activities, Annex 29, May 2009. 133. Source: UNEP Risoe, PoA Pipeline, April 2012. State and Trends of the Carbon Market 2012 57 • Application of small-scale/micro thresholds to one or more DOEs for each verification to the units under a CPA and not to the CPA ensure timely completion. itself. This would allow to fully use the positive list approach to additionality for PoAs address- PoAs have the potential to both expand the scale ing micro scale activities and facilitate the de- of CDM project activities and to simplify project sign of corresponding incentive schemes while preparation and registration procedures (relative reducing regulatory risk without compromis- to standalone CDM projects), thereby overcom- ing on environmental integrity. ing host country capacity constraints and long • Introduction of standardized inclusion processing times. If the CME can also provide procedures for micro-scale activities into the underlying finance for the CPAs, the lat- PoAs with a potential to reduce transac- ter can overcome the investment barrier faced tion costs substantially and to facilitate by standalone CDM projects (i.e., the primary PoA-operationalization.134 reason for most project failures). In addition, a • Increase flexibility on verification require- sophisticated and creditworthy CME naturally ment for PoAs without compromising envi- reduces the counterparty risk in an ERPA, en- ronmental integrity, including by allowing abling CPAs to access higher CER prices and a Coordinating Managing Entity (CME) to more commercially attractive ERPA clauses. The choose between one or several verifications following example (see Box 5) provides a good per year and by allowing a CME to contract sense of the transformational potential of PoAs. Box 5: Brazil integrated solid waste management and carbon finance program The Brazil Integrated Solid Waste Management (SWM) and Carbon Finance PoA aims to support the recently enacted National Solid Waste Policy. The PoA focuses on scaling-up the implementa- tion of carbon finance in the solid waste sector in Brazil. Caixa Econômica Federal (CAIXA)135 will be the CME of the program. Several CPAs have already been identified, giving this PoA the potential to reduce over 30 MtCO2e in the next 15 years.136 Solid waste management is a sector with relatively poor records in the country, with a large number of uncontrolled waste dump sites posing significant environmental and social liabilities. This can be attributed to lack of investment in the sector, partially due to municipalities with decentralized responsibilities and limited investment capacity and access to credit for SWM services, as well as to limited private-sector interest.137 The recently enacted National Solid Waste Policy aims to tackle this situation by mandating that municipal and state governments prepare solid waste management plans, with the objective of eradi- cating garbage dumps within four years. In this context, CAIXA aims to play a major role in the implementation of the National Solid Waste Policy and the transformation of the solid waste sector in Brazil. The entity developed a strategy to 134. Source: World Bank, Improving efficiency and outreach of the CDM. May 2012. 135. CAIXA is the second largest public bank in Brazil and the main financing source for municipalities in the country. CAIXA invested R$514 million (US$286 million) in clean-tech initiatives in 2011; it expects to increase that amount in the coming years, partly triggered by the possibility of blending carbon finance with traditional lending. 136. An Emission Reductions Purchase Agreement between CAIXA and the Carbon Partnership Facility of the World Bank was signed in 2011 aiming for the purchase of CERs until 2018. 137. Investment barriers associated with capital-intensive projects with low investment rates of return (IRR) has been a major reason for many low-carbon technologies not accessing adequate sources of underlying finance. 58 State and Trends of the Carbon Market 2012 Box 5: Brazil integrated solid waste management and carbon finance program (continued) cooperate with states and/or consortia of municipalities. This strategy seeks the promotion of new operations, such as regional landfills, which will make feasible both the final disposal and treatment of urban solid waste from small municipalities and the access of these municipalities to the carbon markets. As part of its strategy, CAIXA has put together an innovative financing package with the following objectives: a. Improving the technical capacity of municipalities on concessions. Several municipalities in Brazil have limited capacity to prepare and conduct concession processes, deal with issues related to waste pickers, and process environmental licensing. CAIXA’s program will support these processes by providing technical assistance to interested municipalities to structure their SWM operations (e.g., preparation of bidding documents for private concessions). b. Enabling public entities to access carbon markets through innovative financing packag- es in the SWM sector. Under this program, eligible projects will benefit from financing options that integrate carbon finance revenues. CAIXA will accept the future carbon revenues as partial guarantee toward the loan. In addition, the terms, including the debt service of the loan, will be linked to the performance of the CDM project, mitigating risks and providing a strong incentive to the operator of the landfill. CAIXA will also provide technical assistance to the municipalities on the development of carbon-finance-related documentation. c. Supporting municipalities on the social aspects of SWM Projects. The program will also help to develop adequate social inclusion strategies for waste pickers, a requirement under the new law. 4.2.2 Joint Implementation guidelines in an effort to improve the transparen- cy and credibility of the mechanism. To this end, 4.2.2.1 A perspective for continuation CMP 7 invited observer organizations to submit The Joint Implementation (JI) mechanism pro- views on the revision of the JI guidelines by April vides a common basis for countries with quanti- 16, 2012.138 The JISC’s recommendations to fied emission targets to collaborate in the mitiga- date include merging Tracks 1 and 2 (see Box 6). tion of climate change. In principle, therefore, It is recommended that this single, unified track the decision at CMP 7 to adopt a second com- be governed by a single verification supervisory mitment period of the Kyoto Protocol allows JI body. In addition, it is proposed that the respon- to continue. However, regulatory uncertainty sibility for ERU issuance be transferred from the remains regarding the adoption of quantified host country to the UNFCCC. emission limitation or reduction objectives (QUELROs), the length of the second commit- Following the rules applicable to CERs, the EU ment period (2017 or 2020), and whether and ETS allows the surrender of ERUs generated and how AAUs from the first commitment period issued until 2012 as well as ERUs generated and can be transferred to the second. issued from 2013 onward, from projects regis- tered before 2013.139 However, the Kyoto frame- The Joint Implementation Supervisory work does not enable ERUs to be created from Committee (JISC) is currently revising the JI 2013 onward in the absence of new quantified 138. These views were not available when this report was written. 139. “To the extent that the levels of CER and ERU use … competent authorities shall allow operators to exchange CERs and ERUs from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from 2013 onward.� Source: Directive 2009/29/EC of the European Parliament and of the Council (http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2009:140:0063:0087:en:PDF), Articles 11a.2 and 3, April 23, 2009. State and Trends of the Carbon Market 2012 59 This has raised concerns regarding consistency in Box 6: Track 1 versus Track 2 JI the application of procedures and issuance across Track 1 jurisdictions, including information provided in • The host party verifies the emission reduc- national languages instead of English. tions /enhancements of removals. • The host party issues and transfers the 4.2.2.2 Numbers: same old pattern, increased ERUs. volumes To date, there are 570 existing projects in dif- Track 2 ferent stages of development, in the JI pipeline. • The emission reductions /enhancements Almost 60% of this pipeline is hosted in the of removals are verified following the verifi- cation procedure under the JISC. Ukraine and the Russian Federation (167 and • The host party issues and transfers the ERUs. 164 projects, respectively). Other active coun- tries include the Czech Republic and Bulgaria (59 and 40 projects, respectively). France hosts the largest number of JI projects outside of emission targets in place for host countries.140 A Eastern Europe (26 projects) (see Figure 17).141 mainly political question is whether emission re- ductions generated after 2012, based on AAUs The Ukraine and the Russian Federation also mo- carried over from the first commitment period nopolize ERU issuance. Until March 2012, out of (CP-1), can qualify for ERUs. This regulatory the 131 million ERUs already issued, 66 million uncertainty has hindered new investment in tons (50%) were generated in the Ukraine and the mechanism and can only be clarified by the 32 million (26%), from the Russian Federation. UNFCCC (this is expected in 2012). The disparity in issuance volumes can be attrib- uted to the Ukraine moving ahead with issuance Under the Track 1 process, countries are entitled earlier than the Russian Federation. However, to determine the eligibility of projects unilaterally, issuance has accelerated in the latter; in June apply their own methodologies for baseline set- 2011, the President of the Russian Federation ting, and monitor and verify emission reductions. signaled that the country needed to scale up its 180 Figure 17: 150 Number of existing projects 120 in the JI pipeline 90 per country 60 30 0 e ia p. ia d a a e ry Ze y d d n Sw a en ia a an i ni i in an nc an an ai Re ss ar an ak tv ga ni ed ua Sp ra La m to lg a l al nl Ru ov m Po un Fr Uk h er th Bu Fi Es Ro ec Sl H Li G ew Cz N Source: World Bank, UNEP Risoe 140. There are views in the market that CP-1 ERUs can still be created based on CP-1 AAUs, even for emission reductions occurring after 2012. 141. Source: UNEP Risoe, JI pipeline, April 1, 2012. 60 State and Trends of the Carbon Market 2012 JI program to take advantage of the mechanism Primary ERU prices in 2011 averaged US$12.1 before the end of the first commitment period of (€8.7), falling 7% from US$13.0 in 2010. Volume the Kyoto Protocol. A couple of months follow- of primary ERUs (pERUs) contracted also fell, by ing the announcement, Russia issued 17 million 31% yoy, to 28 million tons. Thus, the total value of ERUs and launched a 70-million-ton tender. In the primary JI market fell by 36% yoy to 339 million September, an amendment to the Russian JI pro- (€256 million) (see Table 4). ERU prices remained gram was signed, setting the ERU issuance limit higher than CER prices in the primary market de- at 300 million until 2012.142 spite the removal of the Russian Federation’s €10 floor price, because JI ERPAs were signed on projects To date, most projects and issuances have taken at a more advanced stage of development than in the place under Track 1 (see Figure 18).143 However, CDM (i.e., closer to final determination). the data available does not necessarily paint an accurate picture of the market in real time, as Not surprisingly, the largest volumes transacted Track 1 does not require host countries to pub- in the primary market came from Ukraine and lish approved projects. Even the International the Russian Federation (98% of the 28 million Transaction Log (ITL), established and adminis- tons contracted in 2011). However, for the first tered by the UNFCCC Secretariat, does not have time in five years, the Russian Federation was no the mandate to communicate or disclose data so longer the primary source of pERUs, accounting temporary discrepancies have been reported.144 for 10.7 million (38%) tons versus 16.7 million (60%) from Ukraine (see Figure 19). Table 4: 2010 2011 Volumes and Value Value value for JI Volume (US$ Volume (US$ transactions, (MtCO2e) million) (MtCO2e) million) 2010-2011 41 530 28 339 Source: World Bank, UNEP Risoe Figure 18: 140 Cumulative 120 ERU Volumes issued (MtCO2e) ERU issuance per track Q1 100 2009 – Q1 80 2012 (MtCO2e) 60 40 20 0 09 9 9 9 10 0 0 0 11 1 1 1 12 r-1 l-1 -1 r-1 l-1 -1 r-0 l-0 -0 n- n- n- n- ct ct ct Ju Ju Ju Ap Ap Ap Ja Ja Ja Ja O O O Total issuance Track 1 Track 2 Source: World Bank, UNEP Risoe 142. Source: CDC Climat Research. Joint Implementation in Russia: On track to overtake Brazil as the third largest supplier of Kyoto offsets, October of 2011. 143. Source: UNEP Risoe, JI pipeline, April 1, 2012. 144. Source: Shishlov, I., Bellassen, V., Leguet, B. Joint Implementation: a frontier mechanism within the borders of an emissions cap (Climate Report No. 33), CDC Climat Research, 2012. State and Trends of the Carbon Market 2012 61 50 4.2.3 Assigned Amount Units Figure 19: Annual pERUs 40 In 2011, AAU prices continued to decline from primary JI annual volumes volumes transacted (MtCO2e) the €5–7 range observed at the end of 2010 to be- transacted per 30 low €5, and some prices have reportedly reached seller since as low as €1 per ton toward the end of the year. 2003 20 Since most of the 2011 AAU transactions were signed in the first half of the year (before prices 10 plunged), the average AAU prices reported in 2011 was €5.1. 0 03 04 05 06 07 08 09 10 11 20 20 20 20 20 20 20 20 20 Contract negotiation for AAUs can take rela- tively lengthy periods of time depending on Russia Hungary the level of complexity of the underlying GIS. Ukraine Other Europe Although prices plunged towards the end of the year, AAU deals were concluded at prices higher Bulgaria New Zealand than prevailing market prices (i.e., prices reflect- Poland Estonia ing market conditions in earlier months). Buyers Romania Lithuania honored earlier commercial terms and signed the AAU Purchase Agreements since AAU sellers are Source: World Bank governments. A few options were also reported. pace of their purchases, thereby reducing AAU The downward trend coincided with the overall trading opportunities for private-sector players. trajectory for all carbon assets, motivated primar- Still, the faster decline in AAU prices compared ily by lower-than-expected emissions and length to pCERs and ERUs resulted in a large spread in allowance supply. Other contributing factors between these assets, offering some profitable include (i) regulatory uncertainty surrounding swap opportunities for private-sector firms, surplus AAUs and how they will be treated in mostly Japanese. The same interest was reported the second commitment period of the Kyoto coming from government buyers facing restrict- Protocol, and (ii) the fact that some Japanese ed budgets. private entities, who had been key AAU buy- ers since 2009, shifted their priorities elsewhere Total volumes of transacted AAUs declined 23% after the Fukushima incident. This fueled the yoy to 47 million tons. As in 2010, Estonia downward trajectory as sellers increased and ac- sold the largest number of AAUs, followed by celerated sales, even at lower prices, suppressing Lithuania, which emerged as a newcomer follow- AAU prices further. Against this backdrop, new ing the development of its GIS program in 2010. host countries seemed to be discouraged from Other active countries, most of which were entering the market, compounded by increasing early movers and have now commenced GIS pressure to launch accountable and transparent implementation as agreed upon under previous Green Investment Schemes (GIS) to reduce the Assigned Amount Unit Purchase Agreements “greening risk.� (AAUPAs), include the Czech Republic, Poland, and Latvia. Following previous years’ trends, Japanese pri- vate buyers still absorbed a large portion of the In 2011, Estonia established the “Electro- volumes contracted, albeit less than in previous mobility Program 2011-2013�, which consists years. As Annex 1 government buyers approach of deploying electric cars in municipalities for their Kyoto obligation targets, they reduce the use by social workers. More than 500 of those 62 State and Trends of the Carbon Market 2012 cars were bought from the proceeds of a sale In October 2011, the National Development of 10 million AAUs to Japanese Mitsubishi Ministry of Hungary announced it had issued Corporation in March 2011.145 Another sale 3.9 million RMUs.149,150 The country also an- of 1.5 million AAUs to Marubeni Corporation nounced that the revenue from the sale of the was approved in January 2012, and the proceeds units would be used to support environmentally raised will be invested into energy efficiency friendly investments. The sale of a certain vol- measures in Estonian theatres.146 ume was announced in December 2011. Neither the volume nor its value were confirmed; howev- 4.2.4 Removal Units er, in a press briefing, the Hungarian government confirmed that Kyoto permit revenues in 2011 These units can be issued by parties on the ba- totaled HUF 2.7 billion ($11.5 million) and sis of land use, land-use change and forestry that it expects further HUF 1.6 billion in 2012. (LULUCF) activities such as reforestation. Since no AAU deal was announced by Hungary RMUs represent the same compliance value as in 2011, it is likely that revenues came from the other Kyoto flexibility mechanisms and can be RMU sale. Finally, the New Zealand registry traded among parties. The first RMUs were is- showed the transfer of 3.9 million RMUs from sued in 2011, in the National Registries of overseas in 2011.151 Although not confirmed, if France, Australia, Russia, and Hungary. At the the volume shown in the New Zealand registry end of 2011, both France and Australia held corresponds to the purchase of the Hungarian 23 million RMUs in their National Registries. RMUs, average prices for the transaction were Russia held 4 million RMUs at the end of 2011, US$2.95 per RMU (US$11.5 million for 3.9 and was issued 462 million RMUs in February million RMUs). 2012.147 2011 witnessed the first sale of Removal Units 4.3 New market instruments (RMUs), coming from Hungary.148 Hungary’s forests cover around a fifth of the country after 4.3.1 Nationally Appropriate Mitigation Actions its forested area grew 13% to 19,217 square kilo- meters between 1990 and 2011, referring to data Over 50 developing countries have now submit- from the Hungarian Statistic Office. As a result, ted proposals to the UNFCCC152 to limit the Hungary issued itself the first RMUs in 2011 growth of greenhouse gas emissions by 2020. after the UN finalized the country’s 2008 green- These proposals, also known as Nationally house gas emissions data in the previous years. Appropriate Mitigation Actions (NAMAs), re- The country, along with Denmark, France, and fer to a set of mitigation policies and/or actions Switzerland, has opted to print RMUs annually, that a developing country voluntarily under- while other Kyoto signatories will receive RMUs takes in an effort to reduce its GHG emissions in 2014, two years after emissions data for the and report these reductions to the UNFCCC. entire 2008-2012 Kyoto period is finalized. The concept of NAMAs emerged in 2007 145. Source: Tuisk, J. Ministry of Economic Affairs and Communications of Estonia, Estonian Electromobility Program 2011-2013, 2011. 146. Government of Estonia, Proceeds from the sales of AAUs to Marubeni Corporation will be invested into energy efficiency in Estonian theatres, January 26, 2012. 147. Source: Thomson Reuters Point Carbon, Outlook for 2012-2014: Entering a new phase, February 2012. 148. Based on 2008-09 inventory data, analysts forecast 1.2 billion RMUs issued over CP-1. Source: Valentin Bellassen, Dossier du Club Carbone Forêt-Bois n°3, Résultats nationaux des pays de l’Annexe 1, 2011. 149. Source: Business Recorder, Hungary pioneers sale Kyoto units-Point Carbon, December 2011. 150. Source: http://www.bbj.hu/economy/hungary-has-about-39m-rmus-to-sell_60873. 151. Source: https://app.eur.govt.nz/eats/nz/index.cfm?fuseaction=search.nzeur_incoming_transaction_year&hc=IilOPCAK&nc=3C7EA 3755D487F29CBF884FAA35537A7. 152. See a compilation of the proposals in document FCCC/AWGLCA/2011/INF.1, posted on the UNFCCC Web site. State and Trends of the Carbon Market 2012 63 under the UNFCCC Bali Action Plan, which supported NAMAs will be recorded in a regis- called for “[the implementation of ] Nationally try to match proposed mitigation actions with Appropriate Mitigation Actions by developing international financial, technology, and capac- country parties in the context of sustainable de- ity-building support. Accordingly, a registry velopment, supported and enabled by technol- prototype shall be developed by the UNFCCC ogy, financing, and capacity building, in a mea- Secretariat by the time of the 36th session of the surable, reportable, and verifiable manner.� The Subsidiary Body for Implementation with the Cancun Agreement achieved significant progress design to be finalized at COP 18 in December in the concept and, inter alia, set milestones for 2012. Parties also agreed that Non-Annex-I the development of a central registry of NAMAs Parties shall submit National Communications (including those seeking international funding every four years and Biennial Update Reports support) and guidelines for measuring, report- (BURs) with information on their NAMAs – ing, and verification (MRV). There is no official as well as on their national inventories - every definition of a NAMA; therefore the proposals to two years (UNFCCC 2011a). The Subsidiary date indicate a wide variety of approaches. These Body for Scientific and Technological Advice is encompass policies, programs, and projects, as also to develop guidelines for domestic MRV well as sectoral or national emission goals. The of Unilateral NAMAs (UNFCCC 2011b). openness of the definition places emissions miti- Negotiations continue on equivalent guidelines gation and low emissions development within for supported NAMAs to further define the the context of a nation’s economic and social ob- concept and its underlying assumptions as well jectives and allows for climate change mitigation as achieve some level of consistency and trans- beyond the project offsetting structure of the parency so that mitigation actions are not only Clean Development Mechanism (CDM). nationally appropriate but also meet some form of global appropriateness. While many aspects of Discussions and literature on NAMAs often refer the policy architecture around NAMAs is yet to to two types of NAMAs based on the sources of be defined, much progress has been achieved on funding: an operational level, particularly in Non-Annex 1 countries. These bottom-up activities are likely • Unilateral NAMAs, which are financed and to provide valuable lessons for the development supported entirely by the host country. of the NAMA framework at the international • Supported NAMAs, which will be imple- policy level. mented if provided with the needed interna- tional support. Many developing countries are in the process of identifying, selecting, and preparing proposals For several countries, the supported NAMAs for NAMAs. By way of example, the 30 NAMAs may be financed through the sale of carbon cred- tracked by the Ecofys NAMA database153 as “un- its and have been referred to as credited NAMAs; der development� indicate that: they thus have a link to the negotiations on a new international market-based instrument. • Geographical distribution is weighted to Latin America (13 activities or 43%), fol- Some guidance on NAMA was laid out in the lowed by Asia, Africa and Europe. This con- 2010 Cancun Agreement and in the COP 17 trasts with the CDM, which has been more decisions in Durban (2011). Parties agreed that highly used in Asia. 153. Source: Roser et al., 2011 and Ecofys NAMA database, September 30, 2011. 64 State and Trends of the Carbon Market 2012 • Sectoral distribution is weighted towards have been reflected in the domestic climate change transport (12 activities or 40%), followed programs and laws – making them mandatory in- by energy, waste, industry, buildings, for- ternally. As a result, national debates are heating estry, and agriculture. This contrasts with the up, and the Ministries of Finance and/or Planning CDM, where only 0.6% percent of projects are heavily investing in identifying the domestic relate to transport.154 instruments needed to integrate these new objec- • Activity types are categorized as strategies/ tives in an efficient way consistent with national plans, policies/programs, and projects, with development requirements. This is a turning point a relatively equal distribution amongst them. in the political economy of climate change in Conversely, CDM to date has been strictly emerging economies. In this new context, the key project based. words are “national policies� and “domestic instru- • The scope is generally nation- or sector-wide. ments,� with NAMAs being a partial reflection of CDM PoAs share the most resemblance with these initiatives in the international negotiations NAMAs and may provide valuable insights arena. NAMAs will certainly become important for credited NAMA, particularly in deter- means to articulate domestic voluntary efforts and mining baselines and associated MRV. international support. Implementation of NAMAs requires financing at 4.3.2 New approaches to market instruments the scale that may not be the same as those that have been most targeted by the CDM, but also COP 17 represented an important step forward offers investment opportunities. Several coun- in defining new approaches to market instru- tries are looking at the possibility of leveraging ments. Parties reached agreement that the role of financing through a new crediting mechanism. these instruments is to “enhance cost-effective- ness of, and to promote, mitigation action�,156 The bottom-up NAMA activities that Non- bearing in mind the different circumstances of Annex I countries have identified as well as exist- developed and developing countries. Among the ing ground work on new market instruments155 various approaches discussed was a proposal for can provide valuable experience and insights for a framework that would enable Parties to design the development of the international policy ar- and implement their own approaches under de- chitecture. While progress continues at the oper- centralized governance and, on the other hand, ational level, negotiations continue on the form a mechanism to be guided by the COP under and scope of NAMAs as well as on an overarch- centralized governance. These two approaches ing framework to translate them into a market- are discussed below. based mechanism. 4.3.2.1 Framework for various approaches In several developing countries, climate change COP 17 recognized Parties’ abilities to develop champions used to be primarily international- and implement their own approaches to contrib- negotiations-oriented staff. However, Ministries uting to global GHG reductions and sustainable of Finance and/or Planning have increasingly be- development. Such approaches may support off- come engaged on this topic. The main reason is setting or crediting through bilateral or regional that many countries have taken voluntary com- cooperation. The pursuit of such a flexible and mitments since Copenhagen COP, and these com- decentralized mechanism is intended to allow mitments although not binding internationally, swift implementation at low transaction costs. 154. Source: UNEP RISOE Centre, 2011. 155. Initiatives such as the World Bank’s Partnership for Market Readiness (PMR). 156. Decision 2, COP 17, para 83. State and Trends of the Carbon Market 2012 65 “ COP 17 recognized Parties’ abilities to develop • Crediting: Emissions from a broad sector of an economy will be checked against an ex-an- te agreed crediting threshold. If emissions are and implement their own below this threshold, emission credits will be issued ex post, which can be sold to recover, approaches to contributing to at least partly, the cost of mitigation activities. global GHG reductions and If emissions are not below the threshold, no � penalty will be applied (no-lose target). sustainable development. • Trading: In accordance with an ex-ante de- fined absolute target for a broad sector of an However, important to note that such an ap- economy, emissions allowances will be issued proach must “meet standards that delivery real, ex ante. If emissions are lower than the num- permanent, additional and verified mitigation ber of issued allowances, excess allowances outcomes, avoid double counting of effort, and can be sold to recover, at least partly, the cost achieve a net decrease and/or avoidance of green- of mitigation activities. If emissions are high- house gas emissions.� Specific issues have been er than the number of allowances issued, ad- proposed for elaboration, include: ditional allowances need to be purchased on the global carbon market to comply with the • Eligibility criteria for the projects and the target agreed for the broad segment. project selection process. • Underlying principles of methodologies and Going forward, essential elements for defining a their approval process. NMM include: • Roles of third-party certification entities and their accreditation process. • Eligibility/participation requirements • Approaches to managing projects and credits • Boundaries issued (including measures to avoid double • Baselines and targets, including timelines counting). • Monitoring, reporting, and review • The UNFCCC Parties will elaborate a frame- • Technical requirements to facilitate issuance work for various approaches with the objec- and safe transfer of units tive to making a recommendation to COP 18 • Institutional requirements which will take place in December 2012 in Doha. Countries have provided a diverse range of sub- missions on the elaboration of the modalities 4.3.2.2 New Market-Based Mechanism and procedures under both approaches so that a In addition to the decentralized means of the decision can be adopted at COP 18. While the framework for various approaches, the UNFCCC purpose of the new market approaches is to con- is also considering defining a new market-based tribute to ensuring cost-efficient mitigation ac- mechanism (NMM) as a means to encourage tion globally, it remains to be seen whether they mitigation efforts and financial flows at scale. can provide an overarching framework and clear Though the definition and modality for the guidance as to what asset can be legitimately and NMM are yet to be elaborated, the UNFCCC transparently traded as a result of domestic miti- Parties agreed that NMM should stimulate gation activity. mitigation across “broad segments of economy�. Specific suggestions have been proposed: 5 66 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 67 Outlook – 2012 demand and supply balance This chapter investigates the balance between the demand for the Kyoto assets, including demand from governments and private sector entities,157 and the supply of these Kyoto assets. We have revised our estimates, and com- pared to last year, we found a higher residual demand of 290 million tCO2e (MtCO2e), virtually all coming from European governments. Although GHG emissions data for the first three years of the first commitment period of the Kyoto period (2008-2010) hint at larger shortfalls than previously expected, the market balance remains unchanged due to the larger oversupply of Kyoto assets, notably AAUs. 5.1 Government demand flexibility mechanisms to ensure that their indi- vidual Kyoto targets are met. Demand estimates for Kyoto assets from Annex B governments were revised upward, to 574 MtCO2e Estimates from the 2011 report were revised, from 437 MtCO2e estimated in last year’s report. taking into account new data on GHG emis- The EU-15 accounts for about 75% of the total sions in non-EU ETS sectors (2010) as well as and Japan for almost 17% (see Table 5). updated figures for governments’ intended use of Kyoto units and sinks.159 Declared intended Updated emissions projections that reflect pro- use of Kyoto assets now amount to roughly 443 longed global economic downturn show that MtCO2e from 2008 to 2012, mainly from Spain, the EU-15 and the EU as a whole continue to Italy, the Netherlands, and Austria. In addition, expect to meet and overachieve their Kyoto tar- in our estimates it appears that several countries gets with current policies in place.158 However, (Austria, Italy, and the Netherlands) show a gap it cannot be assumed that overachievement of between their intended purchases of Kyoto assets the collective target will enable certain member and their GHG emissions targets. According to states to cover shortfalls from others. Therefore, our estimates, if in 2011 and 2012 their respective some EU-15 members plan to use the Kyoto sinks and additional measures do not sequester 157. Those are entities covered by existing or anticipated domestic climate regulation, like the EU ETS or the NZ ETS, or participants to sectoral agreements, like the Keidanren Voluntary Action Plan in Japan. For the vast majority, they belong to the private sector; however, some public installations (like hospitals under the EU ETS) are also regulated. 158. “The EU-15 is expected to over-achieve its Kyoto target by an amount equivalent to 4.6-5.1% of base-year emissions, depending on whether the expected effects of additional measures are realized by 2012.� Source: European Environment Agency, Tracking progress towards Kyoto and 2020 targets in Europe, October 2011. 159. Our projections are based on GHG emissions for 2008, 2009, and 2010 from National Inventory Submissions to UNFCCC (April 2012), adjusted for the economic outlook for 2011 and 2012. Emissions projections have been revised using GDP forecasts by the International Monetary Fund (Source: IMF, World Economic Outlook Update, April, 2012). The following figures are sourced from the European Environment Agency: annual emissions and removals from LULUCF activities, intended annual use of Kyoto mechanisms, and emissions in sectors not covered by the EU ETS, in the EU Member States, and Lichtenstein, Norway, and Switzerland. Source: European Environment Agency, Tracking progress towards Kyoto and 2020 targets in Europe, October 2011. 68 State and Trends of the Carbon Market 2012 and reduce GHG emissions more than in 2008, 2011, Japan was still unable to determine the real 2009, and 2010, these countries may have to col- implication for its Kyoto achievement target.161 lectively purchase 75 MtCO2e in addition to their In addition, Japan did not purchase carbon units intended purchases.160 On the other hand, we esti- in 2011, leaving cumulative acquisitions to 97.8 mate that some countries may not need to buy the MtCO2e since the commencement of the buy- amount of Kyoto units initially intended. These ing program in 2006.162 In this context, gross include Spain, Belgium, Portugal, and Denmark. demand for Kyoto assets from the Government Based on these results and assumptions, we of Japan is maintained at 100 MtCO2e, its initial therefore estimate the governmental demand for public procurement goal. Kyoto assets in the EU-15 taken as a whole at 428 MtCO2e (see Table 6), compared to the 315 Gross demand from other Annex B governments MtCO2e estimated last year. is estimated at 46 MtCO2e, mainly through Norway and Switzerland. Although Norway The earthquake and tsunami that struck Japan’s seems likely to meet its Kyoto target (+1%) northeast in 2011 may lead the country to use solely through domestic policy and measures, more carbon-intensive fossil fuels to compensate its demand for Kyoto mechanisms stems from for the loss of nuclear capacity. Nevertheless, the its long-term commitment to carbon neutrality, increased carbon intensity of output in Japan, including an overachievement of its Kyoto tar- though will likely be offset by subdued economic get by 10%. On the contrary, we estimate that growth over the coming months. As of December Switzerland may have to purchase 7 MtCO2e Table 5: Potential Demand from Industrialized Countries Potential Supplies (MtCO2e) Supply and (MtCO2e) Demand in Country or entity Kyoto assets demand Official target* Perspective – Kyoto EU 1,293 Potential GIS >1,500 Market Balance, Government (EU-15) 428 Ukraine 500–700 Private sector (EU ETS) 865 Russian Federation 200 2008-2012 Czech Republic 120 Other EU-10 600 Japan 300 Government 100 Private sector 200 Rest of Annex B 51 CDM & JI 1,573 range: 1,500–1,658 Government 46 CDM 1,273 1,250–1,301 Private sector 5 JI 300 250–357 TOTAL 1,644 Government 574 Private Sector 1,070 * These numbers correspond to the amounts of AAUs governments intend to sell. They are much lower than the whole amount of excess AAUs, now estimated at more than 10 billion tCO2e over the first commitment period, with Russia accounting for half, Ukraine one-quarter, and Poland one-fifth. 160. Although we used reported emissions data for 2008-2010, our estimates rely on projections for 2011 and 2012 emissions. These are only based on expected economic growth factors, and thus consider the performance of national sinks and additional measures over 2011-2012 constant from 2008-2010. If those were to outperform in the last two years of the Kyoto period, our figures would consequently need to be revised downward. 161. “On the other hand, due to many factors that are difficult to estimate those impacts after the Great East Japan Earthquake, such as operational status of nuclear power plants, electricity demand, and business activity, as well as weather forecast, it is difficult to estimate GHGs emissions for the rest of the years of the 1st KP period at this stage.� Source: Global Warming Prevention Headquarters under the Cabinet of Japan, Progress Report of the Kyoto Protocol Target Achievement Plan, December 2011. (p3, translated from Japanese). 162. Source: Ministry of Environment of Japan, Government Purchase of Kyoto Credit, April 2, 2012. State and Trends of the Carbon Market 2012 69 more than initially intended (10 MtCO2e). However, it is expected that some installations – Australia and New Zealand continue to expect to primarily utilities and airlines – will be short.165 A meet their Kyoto obligations through domestic shortfall of 400 MtCO2e is expected for airlines policy measures and carbon sinks.163 until 2020. This may be supplied with CERs and ERUs (up to 63 MtCO2e throughout 2020), or with Aviation EU Allowances (see Section 3.9). 5.2 Private sector demand Remaining demand could also come from gener- ators that start to hedge their future exposure in Gross demand from private entities has been re- Phase III as a result of tighter caps and increased vised up 12% from last year, to 1,070 MtCO2e auctioning. Depending on the schedule of antic- (see Table 5), with demand in the EU ETS ac- ipated sales or auctions of Phase III allowances, counting for 81% of the total. The main reason this hedging behavior could induce some volatil- for this increase is the expected preferential sur- ity in the EU ETS market during the transition render of CERs and ERUs (instead of EUAs) by from Phase II to Phase III. Changes in the gener- EU ETS operators in response to the EC’s quali- ation mix, brought by shifts in Germany’s nucle- tative restrictions on the eligibility of offsets in ar energy policy or overheating in global energy Phase III as well as low prices for Kyoto offsets prices, for instance, could further push compli- since the end of 2011. ance demand from power sector installations. Analysts expect Phase II of the EU ETS to be So far, EU ETS participants have contracted ap- oversupplied by about 1,300-1,600 MtCO2e. The proximately 1.9 billion CERs and ERUs (nominal), surplus will be banked in the form of allowances, with CERs from HFC and adipic acid projects ac- including remaining reserves, set-asides, and un- counting for about 25% of that amount.166 Despite used offsets.164 In addition, prolonged economic the market being long, EU ETS operators may downturn, investment in renewable energy gener- nonetheless seek to benefit from the price differ- ation, and expected incremental energy efficiency ence existing between CERs (or ERUs) and EUAs, measures in the EU have led analysts to expect and therefore sell or bank EUAs to use CERs (i.e., the EU ETS to remain oversupplied throughout “CER/EUA swap� operation). In addition, given Phase III, with a 750-1,300 MtCO2e surplus in the ban of CERs from HFC and adipic acid proj- 2020 (including offsets). Thus, by contrast with ects in Phase III, it is expected that installations will the demand from governments reflecting actual actually increase their use of CERs and ERUs over shortfalls, the demand from the private sector en- the end of Phase II. In this context, last year’s esti- compasses arbitrage opportunities, even under an mate of CDM and JI credits use over Phase II has oversupplied scenario. been revised from an average 750 MtCO2e to 865 MtCO2e (see Table 6) over 2008-2012.167 163. Source: Department of Climate Change and Energy Efficiency of Australia, Quarterly Update of Australia’s National Greenhouse Gas Inventory, December 2011. New Zealand estimates it will have a surplus of 23.1 MtCO2e for the Kyoto Period of 2008-2012. Source: Ministry of Environment of New Zealand, April 2012. 164. Sources: Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012: Long position over Phase II: 677 MtCO2e, use of CERs and ERUs over Phase II: 819 MtCO2e. Societe Generale. Carbon Specials, March 20, 2012: Long position over Phase II: 486 MtCO2e, use of CERs and ERUs over Phase II: 831 MtCO2e. Barclays Capital. Monthly Carbon Standard, March 26, 2012: long position over Phase II: 675 MtCO2e, use of CERs and ERUs over Phase II: 945 MtCO2e. 165. Based on 90% of the verified emissions for 2011, published verified emissions for the first four years of Phase II (2008-2011) showed that the power and heat sector, which accounts for 74% of the emissions, was short by 10.3% accumulated over 2008-2011 (against free allowances), while the surplus was attributable to the remaining sectors which were long by 24.1%.. Source: Köppl, A., et al. Views of the EU ETS, Climate Policy Brief, Austrian Institute of Economic Research, April 2012. 166. We estimate this amount to be 828 million CERs and ERUs after adjustment for risk performance. For details on the risk-adjustment calculation, see Methodology. 167. The CERs and ERUs surrendered by EU ETS operators amounted to 84 MtCO2e in 2008, 81 MtCO2e in 2009, 137 MtCO2e in 2010, and 254 MtCO2e in 2011. With an estimate of 865 MtCO2e surrendered over 2008-2012, this leaves 311 MtCO2e to be surrendered in 2011 and 2012. 70 State and Trends of the Carbon Market 2012 Private-sector companies in Japan have report- 5.3 Supply through to 2012 edly contracted more than 465 MtCO2e in CERs, ERUs, and AAUs (273 MtCO2e after risk adjust- About 1,270 million CERs are expected to be ment) that can be surrendered under the Keidanren issued pre-2013, of which slightly more than Voluntary Action Plan, which should amply cover half should be issued to HFC and adipic acid their estimated needs of 200 MtCO2e. We see two projects.170 Supply projections are up 10% on explanations as to why Japanese private companies average since last year, reflecting primarily im- continue to purchase Kyoto units. First, power and proved timelines for registration. First, the CMP steel companies anticipate increasing emissions decision in Cancun to move forward the start- from the shutdown of nuclear capacity in Japan. ing date of the crediting period has the potential Although the government has yet to estimate how to add three to six months worth of CERs (or this will impact national emissions (as explained the average time from request of registration to above), there are estimates that the shutdown of effective registration) to a project’s expected de- nuclear capacity in Japan could create an additional liveries.171 In 2011, 315 million CERs were is- demand of 60–70 MtCO2e.168 In addition, the ob- sued, which was a 140% increase over 2010 and served increasing purchase of AAUs versus CERs accounted for 40% of all issuance to-date (see and ERUs by Japanese private companies could Section 4.2.1.5). Second, the inflow of projects also be regarded as the first indications of Japanese entering the CDM pipeline doubled from the market participants exchanging the CERs and start to the end of 2011, from 330 new projects ERUs they acquired in the primary market against in Q1 2011 up to 609 in Q4 2011. This is the AAUs in order to cash in on the price difference highest rate ever — perhaps reflecting the fact between those assets.169 that project developers are rushing to get projects registered before 2013 in light of EU eligibility Reported private-sector purchases beyond the restrictions for Phase III.172 EU and Japan (e.g., U.S, Republic of Korea) have mainly been driven by intermediaries seeking re- Market analysts estimate that around 300 mil- turns in selling CERs and ERUs in the secondary lion ERUs will be issued through 2012. This is market. Although the New Zealand and Australia an increase over last year’s estimate (+20%), and emissions trading schemes do and will accept is largely a result of Russian efforts to increase CERs and ERUs, we did not track any primary supply.173 The supply of ERUs was roughly mul- market transaction in 2010 and 2011 intended tiplied by five from 25 MtCO2e in December to serve these markets. Private participants in the 2010 to 119 million ERUs in January 31, 2012. market indicated procurements occur through the secondary market, the liquidity of which is bet- The supply of AAUs remains far larger than ter hedged against the market price volatility and the anticipated demand (i.e. countries have an- uncertainties over the utilization of Kyoto credits. nounced intentions to sell over 1,500 million 168. Sources: Deutsche Bank. Japan’s Quake & The Implications for Commodities. Commodities Special Report, March 14, 2011: 70 MtCO2e. Barclays Capital. Monthly Carbon Standard, April 11, 2011: 60 MtCO2e. 169. We tracked 23 MtCO2e AAUs and 0.9 MtCO2e CERs and ERUs purchased by Japanese private companies in 2011. For comparison, in 2009 we tracked 36 MtCO2e and 29 MtCO2e respectively. 170. Sources: Cormier, A., Bellassen, V. The risks of CDM projects: how did only 30% of expected credits come through? CDC Climat Research, 2012 and Shishlov, I., Bellassen, V., Leguet, B. Joint Implementation: a frontier mechanism within the borders of an emissions cap. CDC Climat Research, 2012 and Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012. Thomson Reuters Point Carbon, Carbon Project Manager, April 26, 2012. 171. The CDM Executive Board was requested to revise the procedures for registration to allow the effective registration date/start of crediting period “to be the date on which a complete request of registration has been submitted by the designated operational entity where the project activity has been registered automatically.� 172. 330 new projects entering the CDM pipeline in Q1 2011, 385 in Q2, 510 in Q3, and 609 in Q4. Source: World Bank, from UNEP Risoe, CDM Pipeline, February 2012. 173. The Russian increase in issuance of ERUs in 2011 came in response to an amendment to the Russian JI program, signed in September 2001, and setting up the ERU issuance limit at 300 million until 2012. Source: CDC Climat Research, Paris. Shishlov, I., Bellassen, V., Leguet, B., 2012. Joint Implementation: A frontier mechanism within the borders of an emissions cap (Climate Report No. 33). CDC Climat Research. State and Trends of the Carbon Market 2012 71 AAUs), and the uncertainties regarding the The three Kyoto flexibility mechanisms are ex- bankability of AAUs has a fundamental role to pected to be used by government buyers to meet play in the existing supply and demand imbal- their demand for Kyoto assets. Although they ance and market dynamics. In addition, the first will be able to surrender Kyoto assets until the RMUs were issued in 2011 (see Section 4.2.4). end of the “true-up� period running through mid-2015, most remaining purchases are expect- ed to occur by the end of 2013 as many will use 5.4 Residual demand—290 MtCO2e the remaining year to fine-tune purchases only (by that time, they will have a better handle on Expected gross use of Kyoto assets now stands at the actual gap they have to compensate for). Our 1.64 billion tCO2e over 2008–12 (up 18% from estimates show that over 2008-2011, EU-15 last year), with approximately 65% of demand governments bought less than 50% of the Kyoto coming from the private sector and 35% from assets they may need; following the practices seen governments. in previous years, it is anticipated that they will favor the use of AAUs and secondary offsets to Adjusting the approximately 2.6 billion CERs meet their residual needs. As an example, Austria and ERUs contracted (nominal) for risk of un- announced in April 2012 that it sought to buy at derdelivery, and accounting for AAU transactions least 32 million AAUs to cover its entire expected as well as some secondary transactions by govern- shortfall following revised GHG projections.174 ments, leads to an estimated residual demand of 290 MtCO2e of Kyoto assets by the end of 2012 A brief exercise on supply and demand for post- (up from 136 MtCO2e last year), virtually all from 2012 is provided in Box 8. European governments (see Table 6). Potential demand Contracted CERs and ERUs AAUs/RMUs Residual demand Table 6: Adjusted for Potential demand, nominal performance contracted (MtCO2e) (MtCO2e) (MtCO2e) (MtCO2e) (MtCO2e) supply, and EU 1,293 2,175 969 79 245 residual demand, Government (EU-15) 428 259 141 79 208 2008-2012 Private sector (EU 865 1,916 828 0 37 ETS) Japan 300 380 169 194 9 Government of Japan 100 34 15 76 9 Japanese private 200 346 154 119 0 (-73) sector Rest of Annex B 51 29 13 4 35 and others Government 46 24 11 0 35 Private sector 5 5 2 4 0 (-1) Total 1,644 2,584 1,151 277 290 Government 574 316 167 154 253 Private sector 1,070 2,267 984 122 37 Note: Numbers may not add up due to rounding. Although the Government of Switzerland is included in “Rest of Annex B and others,� we incorporated the CERs and ERUs contracted by private participants based in Switzerland in “Private section (EU ETS)� as we consider that those are purchased by intermediaries based in Switzerland but serving EU ETS participants and EU-15 governments. 174. Source: Thomson Reuters Point Carbon, Austria to buy 32 mln AAUs: minister, April 4, 2012. 6 72 State and Trends of the Carbon Market 2012 SECTION State and Trends of the Carbon Market 2012 73 Emissions trading and other low-carbon initiatives around the world Several domestic and regional low-carbon initiatives, includ- ing market mechanisms, emerged in both developed and developing economies in 2011 and early 2012. The global carbon market witnessed the approval of an ambitious bill that will bring a nationwide cap-and-trade scheme to Australia by 2015 and is expected to cover roughly 60% of the country’s annual GHG emissions. California’s cap-and- trade regulation is set to go into effect in 2013, and by 2015 the plan is expected to cover 85% of California’s annual emissions. Québec adopted its own cap-and-trade plan and is now working toward linking it with California’s (within the context of the Western Climate Initiative). Both Mexico and the Republic of Korea got their compre- hensive climate bills passed a few days apart in April 2012. These initiatives combined mean five new jurisdictions are adopting economy-wide cap-and-trade schemes. Now the world looks with particular attention to China, which is also among the frontrun- ners in the race to become a low-carbon economy. Its advanced plan to pilot several regional cap-and-trade schemes is expected to provide the foundation for a nationwide scheme in the coming years. In addition to the new initiatives, this section 6.1 Australia also summarizes some of the regional, national, and sub-national policy and market-based initia- 6.1.1 The Clean Energy Future Package tives that currently exist to support global cli- mate change efforts. While the list of countries In November 2011, the Australian Parliament described is not exhaustive, it does illustrate the passed the Clean Energy Legislative Package as diversity of measures that are either under con- part of an effort to comply with Australia’s un- sideration or implementation. conditional target of reducing net emissions by five percent (%) below 2000 levels by 2020.175 “ The legislative package, known as the Clean the Australian Parliament Energy Future Package, includes a Carbon Price passed the Clean Energy Mechanism (CPM) that is to take effect from July � 2012 and link with international offset markets Legislative Package from July 2015, as well as includes significant 175. The “net emissions� pledge allows for Australia to use international emission reductions to help meet the target. 74 State and Trends of the Carbon Market 2012 additional measures such as the establishment of different to an ordinary levy or tax. The purpose a Clean Energy Finance Corporation (CEFC) to of this initial phase is to ease the transition to a invest A$10 billion in renewable energy over 10 trading scheme, although business groups have years from 2013-14 (complementing the exist- raised concern that the high fixed price may re- ing Renewable Energy Target which requires that sult in it instead being punitive to industry and to 20% of Australia’s electricity be produced from competitiveness. During this phase, scheme par- renewable energy sources by 2020)176 (see Table ticipants may not surrender international units, 7). The passage of the legislation provides business but may surrender Kyoto-compliant Australian with increased policy certainty following a decade Carbon Credit Units (ACCUs) created under of debate on the issue. However, there is still need the Carbon Farming Initiative (CFI) to meet up for further regulatory and political clarity. to 5% of their obligation. The CPM will commence with a fixed price From July 2015, the domestic price will float – for the first three years. The price will be set at but be subject to a price floor and a ceiling until A$23/ton (€18.50) (indexed annually by 2.5%) July 2018,177 when the price is to float freely. The and will operate similar to a tax. However, the floor will be set at A$15 and the ceiling will be Scheme will require participants to acquire and set at A$20 above the international price (indexed surrender permits, tradable as personal prop- annually at 4% and 5% respectively). Throughout erty and regulated as financial products - quite this stage, the number of Carbon Units (CUs) Table 7: Indicator Detail Australia’s CPM Objective • Help to lower Australia’s carbon emissions by 5% by 2020 (relative to 2000 levels) at a glance and by 80% (also relative to 2000 levels) by 2050. Commencement • Fixed price period : July 1, 2012; • Flexible price period : July 1, 2015; and • Floating price: July 1, 2018. Coverage • Four Kyoto Protocol GHG gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), perfluorocarbons (PFCs). Sulphur hexafluoride (SF6) and hydrofluorocarbon-23 (HFC 23) will be regulated by non-trading legislation; and Broad coverage. Forestry, agriculture and some transport not covered. Compliance basis • Annual, based upon 30 June year-end. Caps • Caps will be set by May 2014 for the first five years of the flexible price period of the CPM; and • Each year thereafter a further year’s cap will be determined such that there will always be caps set five years in advance. • Eligible from July 1, 2015 (up to 50% of annual obligation for liable entities); International offsets • Qualitative restrictions apply to some CERs; and • Subject to a ‘surrender charge’ during the flexible price period. Assistance • Households to be the largest recipients of assistance; and • The bulk of sectoral assistance will be provided primarily in the form of free permits to trade exposed industries. 176. In addition to complementary measures, the adoption of the legislation has also replaced the need for some existing measures. These include the New South Wales Greenhouse Gas Abatement Scheme (GGAS), which the state government has agreed to abandon on July 1, 2012, upon commencement of the CPM. The baseline and credit scheme has operated since 2003, targeting emission reductions primarily in the state’s electricity sector but also in industry and forestry. Data relating to this scheme is included in this report as part of “Other Schemes.� 177. Domestic ACCUs will not be subject to the price floor or cap. State and Trends of the Carbon Market 2012 75 100% Figure 20: made available by the Government will be limited by a cap which will be set by May 2014 for the Estimated 80% changes to first five years of the flexible price period of the CPM. Each year thereafter a further year’s cap will the national 60% be determined such that there will always be caps generation mix in Percent set five years in advance. The flexibility to set the 2011 and 2050 40% fifth year cap annually contrasts with the EU ETS and is designed to ensure that the caps underpin 20% Australia’s medium- and long-term targets, taking into account a range of economic, environmental 0% and other relevant factors. Of the CUs made avail- 2011 2050 able, a portion will be freely allocated to business- Black coal Gas and oil es to support jobs and competitiveness and to ease the transition. The remainder will be sold by the Brown coal Gas CCS Clean Energy Regulator (the Regulator) at auc- Coal CCS Renewables tion. During this period, scheme participants may also purchase international offsets to meet 50% of Source: Department of Climate Change and Energy Efficiency, their obligations to 2020 in addition to ACCUs Australian Treasury Modeling, Strong Growth, Low Pollution, Modeling a Carbon Price, Update (2011). for which there will be no quantitative restriction. The CPM is expected to cover approximately allocated to low- and middle-income households 500 businesses representing 60% of Australian over four years. GHG emissions from electricity generation, in- dustrial facilities, fugitive emissions, and some From July 2015, scheme participants can meet landfills sectors.178 An equivalent carbon price up to 50% of their emissions obligation with will be applied to some business transport emis- international units. Unlike the EU ETS, there sions; big fuel users may opt into the scheme. are not yet constraints on the geographic origin The agricultural and land sectors will not be cov- of international units or constraints on units ered, but emission-reducing opportunities are from projects registered post-2012 (see Table offered through the CFI. 8). Like New Zealand, Australia may therefore be a source of demand for those CERs that will Figure 20 indicates the sectoral impact of the no longer be eligible in the EU ETS starting in Scheme and measures to achieve Australia’s 2013. Scheme participants may also surrender mitigation target. Several sectors will receive as- any international units which might subsequent- sistance in the form of free permits: electricity ly be allowed by the Australian Government. generators will receive A$5.5 billion over five Importantly, the Government reserves the right years; Emissions-intensive Trade-exposed (EITE) to disallow the use of some international units industries will receive A$8.6 billion to 2015179 in at any time to ensure the environmental integ- the form of free permits set at two assistance lev- rity of the Scheme.180 The Australian market will els (94.5% or 66%) as well as grants to increase need to manage the risk around changing eligi- energy efficiency. Households will be the largest bility with reference to this. recipients of assistance with over A$15.1 billion 178. Source: Australian Government, Clean Energy Future Fact Sheet, Carbon Pricing Mechanism: Who is liable? 179. Source: Australian Government, Mid-year Economic and Fiscal Outlook 2011-12. 180. The Government may allow other international units by regulation where they do not compromise the CPM’s environmental integrity and with advance notification to the market. For disallowed units, liable parties will be able to use such units for the compliance year in which they were disallowed, but not subsequently. This effectively represents a “grace period� of 7-19 months in case of regulatory change, compared with the EU ETS “grace period� of 6 months - 3 years from which a decision to exclude a project type may enter into force. 76 State and Trends of the Carbon Market 2012 Table 8: International unit Eligibility* Eligibility of CPM EU ETS NZ ETS international CERs ✔ ✔ ✔ units in CERs – registered post 2012 and outside of LDCs ✔ ✖ ✔ compliance CERs - HFC-23, adipic acid, nuclear, afforestation, reforestation and large ✖ markets181 ✖ ✖ scale hydro not compliant with World Commission on Dam guidelines Ex. Large hydro ERUs ✔ ✔ ✔ RMUs ✔ ✖ ✔ *Subject to restrictions Figure 21: 1200 Abatement Australian GHG 2020 2050 152 897 emissions and 1000 abatement forecasts – 800 Domestic abatement government 58 MtCO2e policy scenario 600 94 463 435 400 Internationally-sourced abatement 200 0 2010 2020 2030 2040 2050 Without carbon pricing With carbon pricing Including overseas abatement Note: Emissions without carbon pricing include CFI abatement Source: Treasury estimates from Monash Multi-Regional Forecasting (MMRF). Note that the internationally-sourced abatement forecasts throughout the remainder of this document refer to the internationally-sourced abatement forecasts in the Strong Growth Low Pollution (SGLP) modeling forecasts of 97 MtCO2e at 2020. Figure 21 indicates the anticipated level of assumes, amongst other things, a A$29 (€23.3) Australia’s net emissions (with a carbon price) carbon price.183 It is also estimated that roughly to meet its commitment to a 5% reduction on 350-400 MtCO2e of international units will be 2000 emissions levels by 2020 and the antici- imported over the entire 2015-2020 period.184 pated extent of imports of international units.182 This equates to approximately 26% of covered The Australian Treasury estimates that these emissions in 2020. Secondary CERs, rather than could reach 97 million tCO2e at 2020; this primary CERs, are likely to represent the bulk 181. Source: Australian National Registry of Emissions Units Bill 2011; New Zealand Government, The New Zealand Emissions Trading Scheme, Guidance on the use of CERs in the NZ ETS¸ February 2012; Kossoy, A. and Ambrosi, P., State and Trends of the Carbon Market 2010, What lies ahead for the EU ETS and Annex I: Supplementarity under the EU Climate and Energy Package, pages 17 and 63, respectively, June 2010. 182. Based on results from Australian Treasury Modeling, SGLP, Modeling a Carbon Price, Update, 2011. 183. Source: Australian Government Treasury, Strong Growth, Low Pollution, Modeling a Carbon Price - September, 2011. 184. Sources: Australian government (communication) and Thomson Reuters Point Carbon, Carbon Market Australia-New Zealand, October 2011. State and Trends of the Carbon Market 2012 77 of this abatement as these units are highly liquid and fungible and currently trade at relatively low prices, especially given the strong Australian dol- “ It is also estimated that roughly 350-400 MtCO2e of international lar.185 However, it is important to note that, dur- units will be imported over the entire ing the flexible price period, entities that choose to surrender international permits will need to 2015-2020 period. Secondary CERs, pay an additional surrender charge on top of the rather than primary CERs, are likely to � international permit price.186 The Government has released a discussion paper that outlines represent the bulk of this abatement four different ways to implement the surrender charge. The options discussed range from valu- • Freely allocated CUs that may be sold to other ing the offset at the actual price versus the market entities or back to the government. However, price at the time it was purchased versus the mar- in the fixed price stage, these units cannot be ket price at the time of surrender. The introduc- banked into subsequent periods. tion of the surrender charge has been the sub- • Auctioned CUs: The government is likely ject of extensive discussions, including whether to commence advance auctions of up to 15 its implementation constrains the capacity for million CUs for each floating price year. scheme participants to meet their obligations in Although the timetable has not yet been set, a flexible, low-cost way. the government’s proposal is to commence auctions in FY 2013-14, most likely in early Despite the scheme’s liberal linking provisions 2014.187,188 and low international unit prices, purchases of • ACCUs. These credits will be an attractive these units are likely to be depressed until further option during the fixed-price period if they clarity is provided on: trade below the fixed price. However, as ACCUs are a new type of unit, there is as yet • The structure of the Government’s Surrender no set pricing for them. Charge, to be clarified in forthcoming regulations. • Exchange products. Australia’s main bourse, • The level of the caps that will be set by a non- the Australian Stock Exchange (ASX), is ex- political and independent Climate Change pected to introduce carbon futures trading, Authority and will help to inform scheme offering both CUs and A$ denominated in- participants of their need for offsets. ternational units. • Overall political situation, given pledges by the opposition leader to repeal the carbon The CPM is designed to link with other emis- price after the next election. sions trading schemes operating internation- ally. The Australian Government is engaged in In the absence of international unit purchases, a discussions with the European Union and New range of domestic trading opportunities may arise Zealand regarding the possibility of linking their in the medium term. These include the trade of: schemes with the CPM. 185. A question remains as to whether Australian entities may be able to use CERs if its government decides not to sign up for the second commitment period of the KP. 186. When the international price is lower than the floor price. 187. Source: Australian Government, Legislative Instrument for auctioning carbon units in Australia’s Carbon Pricing Mechanism, February 2012. This position paper indicates that the government’s preferred position is to implement a sequential ascending clock auction. Accordingly, bidders will not be permitted to increase the bid quantity as the auction progresses. This type of auction is designed to optimize price discovery and contrasts with EU trading auctions, which are mainly uniform price sealed bid auctions (price discovery is less of an objective as a liquid secondary market exists). The government is expected to finalize the auction design in the first half of 2012. 188. While auctioning CUs ahead of the next federal election may reduce the risk that the opposition party, if elected, will unwind the scheme, there is also concern that a pre-election auction would see limited demand due to perceived sovereign risk. 78 State and Trends of the Carbon Market 2012 6.1.2 The Carbon Farming Initiative for activities rather than for projects and, there- fore, represents a streamlined way of identifying Alongside the CPM, the Australian Government activities that are not common practice. The CFI has also formally launched the first regulated pro- is one of the first carbon offset schemes to use gram that allows abatement activities from the a Positive List approach to additionality. As at land sector to generate carbon offsets. ACCUs February 2012, three activities have been identi- will be issued in respect of each ton of abatement fied as Positive List activities: vegetation and wet- achieved by: land restoration, legacy landfill gas, and livestock management. • Reducing or avoiding emissions (e.g., capture of methane emissions from landfills, reducing ACCU supply is expected to be limited at the out- emissions from savannah burning, livestock set, due to the long lead-time of projects, meth- production, and fertilizer use). odological complexity and uncertainty over mea- • Removing carbon from the atmosphere suring emissions. The Government has estimated through bio-sequestration (e.g., growing abatement from Kyoto ACCUs at 7 MtCO2e trees) or sequestration within the ground in 2020.189 The CPM will provide demand for (e.g., soil carbon). Kyoto ACCUs, while the Australian Government will be a direct source of demand for non-Kyoto CFI abatements that count toward Australia’s ACCUs in order to support the development of Kyoto Protocol target can earn Kyoto ACCUs these projects, for which it has allocated A$250m that will be fungible in both the CPM and in the over six years from 2012-13 for this purpose. international compliance market established un- In addition, Australia’s National Carbon Offset der the Kyoto Protocol. Eligible sources include Standard190 will be amended to recognize both reforestation, and reducing emissions from live- Kyoto and non-Kyoto ACCUs as eligible. stock, manure, fertilizer, and waste deposited in landfills (before July 1, 2012). Some sources of While abatement opportunities are likely to be CFI abatement will not be included in Australia’s leveraged in the medium to long term, the CFI national greenhouse accounts under the Kyoto offers an important opportunity for road testing Protocol. Through the CFI, these activities can approaches to land-use offsets and additionality earn non-Kyoto ACCUs. Eligible sources in- through positive lists. As such, the scheme has clude soil carbon, feral animal management, been awarded bipartisan support. and improved forest management. ACCUs will also only be issued for additional 6.2 New Zealand abatement. This means that ACCUs will not be available for projects that are required by law In its third surrender year for mandatory sectors, (regulatory additionality), or activities that are New Zealand’s Emissions Trading Scheme (NZ common practice and already widely adopted. ETS) closely tracked international markets given While regulatory additionality will be assessed low international offset prices. A government- for individual projects, activities that go be- appointed review of the scheme was also com- yond common practice will be assessed using a pleted; it recommended that the scheme contin- Positive List. This approach assesses additionality ue, but at a slower pace. This recommendation 189. Source: Australian Treasury Modeling, Strong Growth, Low Pollution, Modeling a Carbon Price. Update 2011. 190. National Carbon Offset Standard – The Australian Government introduced the National Carbon Offset Standard (NCOS) on July 1, 2010 to provide national consistency and consumer confidence in the voluntary carbon market. The standard serves two primary functions – it provides guidance on what is a genuine voluntary offset and sets minimum requirements for calculating, auditing and offsetting the carbon footprint of an organization or product to achieve ‘carbon neutrality’. State and Trends of the Carbon Market 2012 79 was on the basis that New Zealand is on track to In April 2012, the government released a con- meet its Kyoto Protocol obligations (emissions to sultation paper that considers these recommen- remain at 1990 levels) as well as its conditional dations. The paper proposes a raft of changes in 10-20% reduction target by 2020 and 50% re- an effort to improve the operation of the ETS duction target by 2050. and to create more consistent incentives for domestic abatement. Some of the key propos- The independent government-appointed review als include setting an absolute cap on covered of the NZ ETS, published in September 2011, emissions; limiting the use of international off- considered the operation and effectiveness of the set credits; maintaining the NZ$25 price ceil- scheme since it commenced for forestry in 2008 ing beyond 2015; changing the ETS rules for and for energy producers, industrial processes, pre-1990 forest-owners to bring them into line and transport in 2010. In view of the status of with new international forestry rules decided at UNFCCC negotiations, and actions by its key COP 17 in Durban last year; and allocating al- trading partners, the Review also provided rec- lowances through auctions from 2014 or 2015. ommendations on how the scheme should oper- Once the public consultation phase is complete, ate post-2012, as follows: an amendment bill is expected to follow. • Gradually scaling up the current provision In 2011, scheme participants secured enough to surrender one emission unit for every two secondary CERs to achieve compliance for the tCO2e from 2013 to 2015 (increasing at in- next two to three years,193 given low CER prices, tervals of 67% in 2013, 83% in 2014, and a strong New Zealand dollar, and the scheme’s 100% in 2015). 100% international offset provisions. Domestic • Agriculture surrenders one unit per every two activity in the NZ ETS has been assessed based on tCO2e for the first two years of its entry into the internal transfers194 tracked within the New the ETS in 2015.191 Zealand Emissions Unit Register (NZEUR). It • Including the waste sector and the synthetic indicates that about 27 million New Zealand gas sector in 2013. This will cover methane units (NZUs) changed hands in 2011, represent- from landfills, and hydrocarbons and perflu- ing a total value of US$351 million.195 rocarbons for refrigeration and other uses. • Maintaining commitments to cover agricul- The steady inflow of international offsets placed ture from 2015 and exclude any price floors. pressure on domestic emission permits, which • Scrutinizing the eligibility of Certified fell from NZ$20 in May to converge close to Emission Reductions (CERs) generated from secondary CERs, at NZ$7.00, in December hydrofluorocarbon-23 (HFC 23) and nitrous 2011. While this has dampened the short-term oxide (N2O) projects on the basis of environ- incentive to increase forest coverage, some forest- mental integrity and supply-side concerns. ers remain present in the market and, according The government responded by regulating to brokers, have been buying back New Zealand a ban on these credits from December 23, Units (NZUs) that had been previously sold at 2011.192 higher prices. Prior to the slump in domestic prices, forest plantings had risen 27% in the year to April 1, 2011.196 191. To increase by NZ$5 each year. 192. Credits already purchased from these projects may be used for compliance in 2012 and 2013. 193. According to local brokers. 194. It is therefore conservatively assumed that most transactions are made on a spot basis, given the low level of maturity (most demand-side participants joining the ETS in July 2010) and sophistication of the market (absence of exchange-based trades). 195. Source: Prices kindly provided by Westpac. 196. Source: Thomson Reuters Point Carbon, Carbon scheme boosts NZ tree planting, December 20, 2011. 80 State and Trends of the Carbon Market 2012 In addition to its liberal international linking CO2e (stCO2e)199 from 123.7 million stCO2e provisions with the Kyoto Protocol’s flexibility (MstCO2e) to 121 MstCO2e. This is 36% low- mechanisms, New Zealand is considering link- er than the annual cap, which was set at 188 ing with the Australian carbon market from MstCO2e, based on an analysis of 2000-2004 2015. As in Australia, a question remains as to emissions. The primary catalysts for the decline whether New Zealand entities will be able to ac- in emissions from 2005 onward include lower cess CERs if its government decides not to sign electricity demand due to the development of en- up for a second commitment period of the KP. ergy efficiency measures and weather conditions; fuel switching from coal and petroleum to gas triggered by lower relative natural gas prices; and 6.3 North America197 increasing power generation from non-emitting sources such as nuclear and renewable energy. 6.3.1 Regional Greenhouse Gas Initiative The first compliance period of the scheme was In 2009, the Regional Greenhouse Gas Initiative therefore marked by significant over-allocation (RGGI) was launched. It became the first man- and prices that tracked the US$1.86 floor price datory Emissions Trading Scheme (ETS) in (US$1.86 in 2010 and US$1.89 in 2011) from the United States, and it covers emissions from September 2010 onward (see Figure 22). power plants in the Northeast and Mid-Atlantic States198 through to 2018. The scheme is charac- Coinciding with the over-allocation of permits terized by three compliance periods, the first of and low prices, the share of secondary market which was completed in 2011. Over the course exchange-based transactions fell from 85% in of the first compliance period, emissions across 2009 to 6% in 2011, with most transactions the 10 participating states remained relatively conducted on a bilateral spot basis. The average stable, declining only 2.7 million short tons of daily volume of RGGI futures contracts listed on the Chicago Futures Exchange (CCFE) de- clined by a factor of 100 over the same period, Figure 22: 1,000 4.0 from an average daily volume of 2.7 MstCO2e in Market volumes 900 3.5 2009 to 0.28 MstCO2e in 2011. The little dif- 3.52 and prices 800 ference between the average settlement price of Volume (Million short tons) 3.0 on the RGGI, 700 2.97 auctions (US$1.89/stCO2e) and that of bilateral 2.5 2008-2011 600 transactions through the RGGI CO2 Allowance 500 2.0 Tracking System (RGGI COATS) (US$1.91/ US$ 1.96 1.89 400 1.5 stCO2e) in 2011 tends to show that most bilat- 300 eral transactions were spot. Such a radical move 1.0 200 may hint at a decreasing interest from compli- 0.5 100 ance participants in hedging positions through 0 0.0 2008 2009 2010 2011 derivatives contracts in the context of an over-al- located market, and/or the exit of some financial Auction Exchange participants that used to provide liquidity onto Bilateral Price the CCFE platform. Source: World Bank, data from RGGI COATS, CCFE, ICE. 197. The sequence of jurisdictions follows alphabetical order. 198. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. 199. A short ton of CO2e is equal to 0.9072 metric tons of CO2e. For the sake of data homogeneity with other markets, we convert volumes in metric tons in our global market figures in Chapter 1 (i.e., in 2011, 132x0.9072 = 120MtCO2e). State and Trends of the Carbon Market 2012 81 As of December 31, 2011, 89% of first compli- cap for this period is set at 165 MstCO2e, still ance period CO2 allowances were sold at auc- far above the trend for emissions. However, in tion. Since commencement in September 2008, 2012, the program embarked on a comprehen- auction revenues have totaled about US$952 sive review, as specified in the 2005 memoran- million200 and have been roughly allocated across dum of understanding establishing the RGGI. all RGGI states on an average basis as follows:201 The review is expected to result in a set of recom- mendations for consideration in late-2012, and • 48% to energy efficiency programs promot- will be applied, following relevant rulemaking, ing new installations and retrofits in residen- legislative, and public processes in each partici- tial and commercial facilities (e.g., insula- pating state. The states are working with stake- tion). These measures are estimated to have holders to evaluate key program design elements, generated electricity bill savings of US$1.3 such as the redefinitions of the cap trajectory and billion for residential, commercial, and in- the price floor level, the introduction of further dustrial consumers across the participating price collars, imported electricity and associated states. Savings in non-electric energy supply emissions,204 and the place of the offset program (natural gas, heating oil) amount to an ad- in the scheme. ditional US$174 million; • 20% to states’ general budgets; 6.3.2 California, Québec and the Western • 14% to direct electricity bill assistance; Climate Initiative • 7% to support renewable power generation; • 11% to various other environment related In 2007, the Western Climate Initiative (WCI) programs and outreach activities. was launched; it now encompasses the Canadian provinces of British Columbia, Manitoba, Although electricity generators lost US$1.6 bil- Ontario, and Québec, as well as the U.S. State lion in revenue over the period (2009-2011) due of California. Since then, all partners have to lower demand caused by RGGI-funded energy been working together to develop harmonized efficiency investments, consumer gains and other cap-and-trade legislation, with the intention to benefits, including cash injection into the econ- have their laws be adopted, implemented, and omy, led to a net economic impact of US$1.6 regulated under each jurisdiction’s authority. In billion and the creation of 16,000 jobs.202 November 2011, a nonprofit corporation WCI, Inc., was created to provide the partners with ad- Only nine states will participate in the second ministrative and technical support to help them compliance period, from 2012-2014, following operate their programs. In 2011, California and New Jersey’s announcement that it would with- Québec were the first two jurisdictions to adopt draw from the program in 2011.203 The annual cap-and-trade regulations. Although some of 200. A total of 22% of the allowances offered at auctions were not sold. In December 2011, the states of Connecticut, Delaware, Maryland, Massachusetts, New York, Rhode Island, Vermont, and, by default, New Jersey, announced their intent to retire 93.6% of those unsold allowances from the market; the States of Maine and New Hampshire had not, as of early April, agreed to do the same.. 201. Source: P. J. Hibbard, S. F. Tierney, A. M. Okie, P. G. Darling, The Economic Impacts of the Regional Greenhouse Gas Initiative in Ten Northeast and Mid-Atlantic States. Review of the Use of RGGI Auction Proceeds from the First Three-year Compliance Period, Analysis Group, 2011. 202. Source: P. J. Hibbard, S. F. Tierney, A. M. Okie, P. G. Darling, The Economic Impacts of the Regional Greenhouse Gas Initiative in Ten Northeast and Mid-Atlantic States. Review of the Use of RGGI Auction Proceeds from the First Three-year Compliance Period, Analysis Group, 2011. 203. Source: Department of Environmental Protection, State of New Jersey. Notice of withdrawal of agreement to the RGGI memorandum of understanding, November 29, 2011. 204. An econometric analysis performed by the New York Independent System Operator (the electricity grid administrator) finds no evidence of interstate leakage from 2008-2010 caused by RGGI compliance costs, but does forecast such impact with higher RGGI allowance prices. Source: A. G. Kindle, D. L. Shawhan. An Empirical Test for Inter-State Carbon-Dioxide Emissions Leakage Resulting from the Regional Greenhouse Gas Initiative. New York Independent System Operator Inc., and Rensselaer Polytechnic Institute, 2011. 82 State and Trends of the Carbon Market 2012 them are reported to be facing their own politi- across the state economy to provide incentives cal challenges,205 the other three WCI partners for reducing the state’s dependence on fossil fu- continue efforts to develop and adopt their re- els, stimulating investment in clean and efficient spective programs. As recommended by WCI technologies, and improving public health.207 rules,206 California and Québec are now working Under AB 32, a 2008 Scoping Plan was created toward linking from the start of their programs which calls for the establishment of a broad-based in January 2013. cap-and-trade scheme as the core instrument of California’s climate change strategy. The cap- 6.3.2.1 California and-trade scheme is to cover 85% of statewide The Global Warming Solutions Act of 2006 GHG emissions of which transport and power – known as Assembly Bill (AB) 32 – requires accounted for 38% and 25% in 2008 respectively California to cut GHG emissions to 1990 levels (see Figure 23).208 It joins a suite of other major by 2020 and directs the California Air Resources measures, including standards for ultra-clean cars, Board (CARB) to develop and adopt regulations low-carbon fuels, and renewable electricity.209 Figure 23: 600 BAU TOTAL California’s EMISSIONS 507 historical GHG -16% 500 emissions, 427 427 TARGET TOTAL EMISSIONS projections, and BAU CAPPED 400 378 366 Emissions - MtCO2e 409 reduction targets210 355 EMISSIONS 332 321 310 -24% 300 CAP 200 160 157 100 0 18 20 90 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 19 Electricity Transport Industry Building Agriculture Not specified and Forestry CAP TOTAL BAU Total capped TOTAL 2020 TARGET Source: World Bank, CARB. 205. Source: Lancaster. R, Counting Down Carbon Trading magazine, February 2012. 206. Source: Western Climate Initiative, Design for the WCI Regional Program, 2010. 207. Source: State of California, Global Warming Solutions Act of 2006, 2006. 208. Source: California Air Resources Board, California Greenhouse Gas Inventory for 2000-2008, 2010. 209. The main measures in the electricity sector include the expansion of the 2002 Renewable Portfolio Standard (RPS) up to 2020, with a 33% target for the share of renewable energy in utilities’ power generation or procurement, as well as energy efficiency standards for buildings and new appliances. For transport, a “Low Fuel Carbon Standard� sets a 10% carbon intensity reduction target for fuel vehicles by 2020, and a “Low Emission Vehicle� (LEV) program will further bring down existing emission standard targets for new passenger motor vehicles produced up to 2025. Source: California Air Resources Board, State of California, Climate Change Scoping Plan, 2008. 210. CARB’s 2020 forecast includes projected reductions from existing RPS and LEV programs (38 MtCO2e in total). Cap data results from the total allowance budget minus the allowances set aside in the Price Containment Reserve (PCR, thereafter described) and Voluntary Renewable Electricity (VRE) program. The result is a 16% reduction from business-as-usual (BAU) levels in 2020 for total emissions and 24% for those under the cap. Source: California Air Resources Board, California GHG Emissions - Forecast (2008- 2020), 2010. State and Trends of the Carbon Market 2012 83 California’s cap-and-trade regulation was adopted auctions, the first of which is expected to be held by CARB in October 2011 and will be enforced on November 14, 2012.212 The minimum bid is from January 1, 2013. In the program’s first com- set at US$10 in 2012, and will increase 5% (plus pliance period (2013-2014), it will cover large sta- inflation) annually. In its 2012-2013 budget, tionary sources that emit at least 25,000 tCO2e per California’s Department of Finance estimates it year in the industry and electricity sectors, includ- will receive US$1 billion in revenues from auc- ing out-of-state generation (i.e., imports). From tions. Half is planned to be used to cover the 2015, distributors of transportation, residential, state’s costs related to GHG mitigation activi- and commercial fuels will enter the scheme, bring- ties, while the remaining half shall be invested in ing the number of covered entities to about 600. clean and efficient energy, low–carbon transpor- The cap is set in 2013 at about 2% below CARB’s tation, natural resource protection, and sustain- 2012 emissions level forecast, declines 2% in 2014, able infrastructure development.213 and then 3% annually from 2015.211 Several cost-containment mechanisms will be es- Allocation to industrial facilities is based on a tablished to limit compliance participants’ expo- carbon emissions efficiency benchmark specific sure to high prices. A percentage of each annual to each manufactured product. Facilities with allowance budget will be set aside in an Allowance products too complex for product benchmark- Price Containment Reserve (PCR). Those allow- ing will be given their allocations using an en- ances will be available to compliance participants ergy-based allocation method. From scheme from 2013, at a fixed pre-determined price and commencement, they will receive most allow- until the reserve is exhausted, if these face or ex- ances for free to lessen the financial impacts of pect high prices (see Annex 4: California’s Cap- the scheme and minimize emissions leakage. and-Trade Design Features). The use of offsets For those with the least level of trade exposure is limited to 8% of covered entities’ compliance and emissions leakage risks (e.g., pharmaceutical obligation, which amount to a maximum of 218 and medicine manufacturing), the share of free MtCO2e over 2013-2020.214 allowances will decline from 100% in the first compliance period (CP1) down to 50% in CP2 Eligible offsets can be generated through four and 30% in CP3. In the power sector, only dis- sources: tributors – as opposed to generators – will be giv- en free allowances. Private entities, referred to as • “Compliance Offsets Credits� issued by Investor Owned Utilities (IOUs), are required to CARB from a project in the U.S. or its fully monetize them at auction; Publicly Owned Territories, Canada, or Mexico, and devel- Utilities (POUs) can also use them to cover oped according to a compliance offset proto- compliance obligations. The California Public col approved by CARB. As of today, four off- Utilities Commission (CPUC), which regulates set protocols have been approved by CARB: IOUs, is currently looking at how to spend the U.S. Forest Projects, Livestock Projects, resulting proceeds to maximize end-consumers’ Ozone Depleting Substances Projects, and benefits on their electricity bills. Additional al- Urban Forest Projects. The four approved lowances will be accessible through quarterly protocols restrict eligible activities to the 211. The cap in Figure 23 is the annual allowance budget netted by the allowances joining the Allowance Price Containment Reserve. 212. Source: California Air Resources Board, Testimony of Chairman Mary D. Nichols at Senate Select Committee on Environment, Economy & Climate Change, 2012. 213. Source: Department of Finance of the State of California, Governor’s Budget 2012-2013, Environmental Protection Budget, 2012. 214. 28.0 MtCO2e over 2013-2014 (CP1), which is 8% of the allowance budget for that period, 99.8 MtCO2e in CP2, and 90.3 MtCO2e in CP3. 84 State and Trends of the Carbon Market 2012 U.S., which means that additional protocols Following the signature of a Memorandum would be needed for projects to be in Canada of Understanding with the states of Acre in or Mexico. Additional protocols are currently Brazil and Chiapas in Mexico in 2010, a under consideration.215 “REDD Offset Working Group� was estab- • “Early Action Offsets Credits� issued by lished to inform the potential inclusion of a voluntary program approved by CARB, such credits. This will, however, be subject to and generated from a U.S.-based project further regulation. developed according to a CARB-approved • Compliance Offset Credits issued by a protocol for emission reductions and/or se- linked regulatory program, subject to further questration achieved between January 2005 rulemaking. and December 2014. Before an Early Action Offset Credit can be transacted on CARB’s All offset credits issued by CARB are subject to tracking system and/or used for compli- an invalidation provision, under which CARB ance, it must first undergo regulatory veri- may remove or require replacement of those fication and review. CARB will then issue a credits, the generation of which has proved to Compliance Offset Credit, based on a one- result from an over-estimation of the GHG re- to-one basis. As of today, only four Climate duced and/or removed or be in breach of ap- Action Reserve (CAR) project types can gen- plicable law. This provision has attracted strong erate Early Action Offset Credits.216 As of criticism from the industry as it places poten- April 5, 2012, CAR had issued 7.5 million tial liability on buyers of the credits.218 In April Climate Reserve Tons (CRTs) under those 2012, the CPUC approved rules for IOUs’ car- four protocols. Of these, 1.2 million CRTs bon procurement. These require that IOUs only have been retired for voluntary purposes, engage in bilateral transactions of carbon units in leaving approximately 5.3 million CRTs the secondary market through public Requests available for conversion for compliance use. for Offers. The rules also restrict offsets procure- CAR expects to issue 29.5 million of those ment to spot transactions219 and forbid the pur- by the end of CP1 in 2014.217 Should all of chases of early action credits. them be compliance-oriented and succeed in converting to CARB-issued compliance off- California’s market has yet to take off, as it has sets, they could support the entire demand been hampered by strong regulatory uncertain- for offsets for CP1 (i.e., 28 MtCO2e). ty; this is largely due to several legal challenges • “Sector-Based Offset Credits� from crediting faced by the cap-and-trade scheme in the past. programs (including REDD) in an eligible The absence of IOUs, whose authorization and developing country or some of its jurisdic- conditions for participation have yet to be ruled tions. Such credits are subject to a sub-limit by CPUC, has also restrained market liquidity. of 2% of compliance obligation in CP1, and Exchange-based trading of California Carbon 4% in CP2 and CP3, which represents about Allowances (CCAs) started in September 2011 97.7 MtCO2e maximum over 2013-2020. with the introduction of derivatives contracts 215. Notably, some of the protocols developed by the American Carbon Registry: Emissions Reductions in Rice Management Systems, N2O Emissions Reductions from Changes in Fertilizer Management, and Conversion of High-Bleed Pneumatic Controllers in Oil & Natural Gas Systems. 216. Several CAR protocols can be used to cover the four project types for which CARB has a compliance offset protocol. These are the Climate Action Reserve Urban Forest Project Protocol versions 1.0 through 1.1, U.S. Ozone Depleting Substances Project Protocol version 1.0, U.S. Livestock Project Protocol versions 1.0 through 3.0, and Forest Project Protocol version 2.1 and versions 3.0 through 3.2. 217. Source: Climate Action Reserve, Projections of future CRT issuance, April 5, 2012. 218. Source: International Emissions Trading Association, IETA submission to CARB on AB32 program rules during first commenting period, 2011. 219. Source: Public Utilities Commission, State of California, Decision on System Track I and Rules Track III of the Long-Term Procurement Plan Proceeding and Approving Settlement, April 2012. State and Trends of the Carbon Market 2012 85 on the ICE and the Green Exchange. A total credits – as opposed to CCAs, which have no of 3.927 million CCAs were exchanged, mostly offset limits and thus enjoy higher liquidity. through ICE’s OTC platform.220 In addition, In addition, offsets carry the invalidation risk, Point Carbon tracked 196,000 CCAs that were unique to California’s market, and therefore dif- exchanged bilaterally. We estimate the total value fer from that existing between EUAs and CERs for the CCA market in 2011 at US$63 million. in the EU ETS. The “CARB non-guaranteed offset contact� traded at a 12% discount from In 2011, 7.375 million tons of U.S. domestic off- the latter offset. These contracts do not provide sets subject to transactions motivated by compli- a guaranty that a credit will be replaced in case it ance in California (US$67.7 million value) were is revoked. A third category of contract provides tracked.221 A series of contracts have emerged delivery of credits issued by the Climate Action on the market, and as many price references, Reserve, the so called “Climate Reserve Tons according to the risk of eligibility in the future (CRTs)�, under four protocols – U.S. forest, compliance regime of the underlying assets. The ozone-depleting substances, livestock methane, “CARB guaranteed offset contract� captures the and urban forestry – from 2005-2014, eligible highest value, as it provides buyers with the guar- to be converted into CARB Early Action Offset antee to be delivered CARB-issued Compliance Credits. In March 2012, those voluntary credits, Offset Credits at expiration and guarantees that, yet regarded as “pre-compliance,� ranged from if the credits are revoked by CARB, the seller US$7.75 to US$8.25, which is roughly 35% will replace them. According to Point Carbon, below the price of CARB-guaranteed offsets. the corresponding December 2013 forward con- This discount therefore reflects the risk attached tract traded at an average US$12.25 in March to the further regulatory verification and review 2012, which was 12.5% off the CCA price (see which is necessary for eligible CRTs to be con- Figure 24). This discount can be explained by verted into compliance offset credits by CARB. the 8% offset utilization limit applied to offset 20 Figure 24: 18 Pricing for CARB 16 eligible market US$/tCO2e 14 instruments 12 10 8 6 4 2 0 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 CARB non-guaranteed CARB guaranteed CRTs for US forest offset Dec-13 offset Dec-13 projects V3.1 CRTs from ODS projects CRTs for livestock CCAs Dec 13 methane projects Source: Thomson Reuters Point Carbon 220. Green Exchange lists futures and option contracts for delivery in Decembers 2012, 2013, 2014, and 2015. 0.025 Million CCAs Futures were traded in 2011. ICE offers OTC clearing services on forward and option contracts for delivery in December 2012, 2013, 2014, and 2015. A total of 2.377 million futures and 1.525 million options were cleared on ICE in 2011. 221. Thomson Reuters Point Carbon communication. 86 State and Trends of the Carbon Market 2012 6.3.2.2 Québec of total GHG emissions), as 97% of its electric- In 2009, Québec emitted 81.8 MtCO2e, ac- ity is sourced from hydropower plants.224 counting for 11.9% of Canada’s GHG emis- sions.222 The 2009 per capita GHG emissions In November 2009, Québec adopted the target stood at 10.4 tCO2e, which is almost half of the to reduce GHG emissions to 20% below 1990 nationwide figure.223 As in California, the trans- levels by 2020; this is equivalent to a 19% drop port sector accounts for the largest share of GHG by 2020 from a business-as-usual scenario (see emissions, with 43.5% of the total; these have Figure 25).225 A key instrument to achieve the increased 26.6% from their 1990 level. Industry target will be a cap-and-trade program passed in stands at 28%, buildings at 14%, agriculture at December 2011226 within the broader context of 7.9%, waste at 5.9%, and electricity generation the WCI, which will start operations in January at 0.8%. It is in the last sector that Québec dif- 2013. Québec joined WCI in April 2008.227 ferentiates itself the most from California (25% Figure 25: 100 Québec’s 90 83.9 81.8 82.3 BAU TOTAL historical GHG EMISSIONS 80 -19% emissions, Emissions - million tons CO2e 67.1 (-20% from projections, 70 1990) 61.1 58.6 TARGET TOTAL and reduction 60 56.2 EMISSIONS 52.1 49.7 targets 47.3 50 40 30 23.5 23.1 20 10 0 90 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 19 Electricity Transport Industry Building Agriculture Waste and Forestry CAP TOTAL BAU TOTAL 2020 TARGET Source: World Bank, Ministry of Sustainable Development, Environment and Parks of Québec. 222. GHG inventory excludes emissions from land use, land-use change, and forestry (LULUCF). Source: Ministry of Sustainable Development, Environment and Parks of Québec. Inventaire Québécois des émissions de gaz à effet de serre en 2009 et leur évolution depuis 1990, 2011. 223. Canada’s per capita GHG emissions stood at 20.5 tCO2e. For reference, Alberta reached 63.7 tCO2e per capita in 2009, and California 13.1 tCO2e per capita. 224. Source: Ministry of Natural Resources and Wildlife of Québec. 225. Projections from Québec’s Ministry of Sustainable Development, Environment and Parks. Source: Ministry of Sustainable Development, Environment and Parks of Québec, Etat des lieux de la lute contre les changements climatiques au Québec, 2011. 226. The cap-and trade program is part of the Québec’s Climate Change Plan. The first Plan covered 2006-2012 and its measures resulted in a drop of 2.5% of GHG emissions from 1990 to 2009. New measures will be defined in the upcoming Plan will cover 2013- 2020. Source: Ministry of Sustainable Development, Environment and Parks of Québec, 2006–2012 Action Plan, Québec and climate change, a challenge for the future, 2008. 227. Source: Government of Québec, Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, Environment Quality Act, 2012. State and Trends of the Carbon Market 2012 87 From 2013, the cap-and-trade program will industry, renewable energy for households’ heat- cover about 75 industrial and power facilities ing systems, and other GHG reduction-related emitting more than 25,000 tCO2e per year. measures. Distributors of fuels for the transportation and building sectors will enter the scheme from 6.3.2.3 Linking California’s and Québec’s 2015. Although it will cover roughly seven times emission trading schemes less emissions than California’s plan,228 Québec’s California and Québec are taking the necessary regulation features very similar design and pro- step to establish a single regional carbon market visions (see Annex 5: Québec’s Cap-and Trade with full fungibility of each other’s compliance Design Features). However, it includes some no- instruments from January 1, 2013. Although table differences: although industrials will also be both regulations were developed in accordance allocated free allowances based on a performance with WCI guidelines, further rulemaking and benchmark, only 75% of these will be allocated technical revisions are necessary to accommo- every year; the remaining 25% will be set aside date such linkage. On March 30, 2012, CARB until the following year, and will eventually be at- staff published a discussion draft with proposed tributed based on verified emissions. In addition, amendments to its cap-and-trade regulation. the regulator may also claim back any allowance Those mainly relate to market infrastructures proved to have been over-allocated. Compliance (e.g., account structure) and administration obligations are not due annually, but only the “ year following the end of the compliance period (i.e., 2015, 2018, and 2021). Offset provisions California and Québec are taking are similar to those of California, with a limit set the necessary step to establish a at 8% of compliance obligations for each compli- ance period. Further detail on the use of offsets single regional carbon market with full is not yet known as Québec’s offset regulation fungibility of each other’s compliance is still under development and will not be pre- sented before the summer of 2012. In addition, emitters will be issued Early Reduction Credits instruments from January 1, 2013. � (ERCs) for permanent, additional, and irrevers- (e.g., exchange rate management) to ensure con- ible emissions reductions achieved ahead of the sistent operation of a single market across juris- program start, up to January 1, 2008. dictions. The proposed linkage regulation is ex- pected to be submitted for Board consideration Québec’s budget for 2012-2013 provides for on June 28, 2012. It is expected that Québec will green investments in an amount of CN$2.7 undergo the same process over 2012 and enforce billion, 70% higher than the previous year.229 necessary amendments ahead of the first auction. Almost 90% is expected to come from auctions The first joint auction previously planned for revenues under the cap-and-trade program. Two- August 2012 was postponed to November 14, thirds of the funds will be allocated to the trans- 2012, with no expected impact on the start of port sector for the development of an efficient the program or on the volume of allowances of- network and fleet for Québec’s mass transport fered in 2012.230 system. The other third will contribute to the de- velopment of energy efficiency in building and 228. Source: Government of Québec, Annual caps on greenhouse gas emission units relating to the cap-and-trade system for greenhouse gas emission allowances for the 2013-2020 period, Draft Regulation, Environment Quality Act, 2012. 229. Source: Ministry of Finance of Québec, Budget 2012-2013, Québec and Climate Change a Greener Environment, 2012. 230. Source: California Air Resources Board, 2012, Testimony of Chairman Mary D. Nichols at Senate Select Committee on Environment, Economy & Climate Change. 88 State and Trends of the Carbon Market 2012 500 Figure 26: WCI annual market 450 balance through 400 2020 350 Mt 300 250 200 150 100 50 0 2013 2014 2015 2016 2017 2018 2019 2020 CA net cap Offset forecast Emissions QC net cap PCR + VRE deduction Source: Point Carbon. It is estimated that California’s and Québec’s 6.3.3 Alberta combined GHG emissions under a business-as- usual scenario would decline from current lev- Alberta is Canada’s largest greenhouse gas els through 2020, largely driven by California’s (GHG) emitting province, accounting for 34% complementary measures, such as the 33% of the country’s total GHG emissions in 2010. Renewable Portfolio Standard (see Figure 26).231 This represents 235 MtCO2e, a 41% increase However, both jurisdictions feature high mar- from 1990 levels, driven primarily by increased ginal abatement costs for power generators and production activity in its oil and gas sector.232 limited opportunities for reductions in transport fuel consumption. It is therefore expected that On July 1, 2007, Alberta launched a manda- offset supply availability will be the main allow- tory GHG emission intensity-based mechanism, ance price driver in the WCI regional market. enacting the first GHG emissions legislation in This would stand at US$12-27/tCO2e in 2013 Canada. Approximately 100 entities with annual and US$60-131/tCO2e in 2020, with the high emissions exceeding 100,000 tCO2e (ktCO2e), end of the range in a scenario where respective are required by the legislation to reduce their offset programs would not expand beyond the emission intensity by 12% from average 2003- four protocols approved by California. 2005 levels.233 Entities that do not meet reduc- tion requirements on a given year may choose to meet these obligations by: 231. Source: Thomson Reuters Point Carbon, WCI price forecast – the offset gap, March 29, 2012. 232. Source: Government of Canada, Canada’s Greenhouse Gas Inventory Submission to the UN Framework Convention on Climate Change, April 2012. 233. Source: Government of Alberta, Climate Change Emissions Management Act, 2007. State and Trends of the Carbon Market 2012 89 4.5 16.0 Figure 27: • Trading “Emissions Performance Credits� 14.2 4.0 13.4 13.3 Alberta offsets: (EPC) that are awarded to covered entities 13 14.0 historic volume and that reduce emissions below their set target; 3.5 12.0 prices 2007-2011 • Paying CN$15 (US$15.2) into a technology 3.0 10.0 8.7 MtCO2e fund; and/or 2.5 8.0 US$ • Purchasing Alberta-based offsets issued by the 2.0 Alberta Offsets Registry under an approved 6.0 1.5 protocol. Offset credits are only available on 1.0 4.0 a “go-forward crediting� basis in accordance 2.0 0.5 with changes to the regulations that took ef- 0.0 0.0 fect on January 1, 2012. Previously, produc- 2007 2008 2009 2010 2011 ers were eligible for retroactive crediting. As Volume Price (US$) per the new regulations, retroactive credits from 2002 to 2011 must be registered with Source: World Bank, Government of Alberta,238 Karbone.239 the government by March 31, 2012.234 Although the volume of Alberta offsets retired in 0.8 29 Figure 28: 2011 was not yet made public at the time of writ- Purchases of BC 0.7 28.5 ing, it is estimated be similar to that of 2010 (see 28 offsets by the Figure 27). Thus, we estimate that the 2011 mar- 0.6 27 government of ket value was roughly US$51.5 million (US$202 0.5 British Columbia MtCO2e 26 million since the start of the market in 2007). US$ 0.4 25.8 2009-2011 25 0.3 24.7 6.3.4 British Columbia 24 0.2 The 2007 Greenhouse Gas Reduction Targets 0.1 23 Act235 commits the Government of British 0.0 22 2009 2010 2011 Columbia to reduce its GHG emissions by 33% from 2007 levels by 2020 and at least 80% by 2050. Volume Price (US$) The regulation also directs public sector organiza- tions – including schools, hospitals, post-second- Source: World Bank, Pacific Carbon Trust. ary institutions, and core government ministries – to reach carbon neutrality from 2010 onward, In 2011, the Government of British Columbia using offsets for unavoidable GHG emissions. The bought 729,782 tCO2e of BC offsets from PCT 2008 Emission Offsets Regulation236 gives exclu- (US$18 million). In 2010, the British Columbia sive mandate to the Pacific Carbon Trust (PCT), a government became carbon neutral in accor- Crown corporation of the Government of British dance with the first year of the full carbon neu- Columbia,237 to source British Columbia-based trality program. Purchases of offsets prior to this (BC) offsets, with a broader directive to stimulate (i.e., 2009 and 2010) were used to offset govern- the growth of the green economy in BC. ment travel (see Figure 28). 234. Source: Government of Alberta, Alberta Environment and Water, Notice of Final Deadlines for Claiming Historic Offset Credits, December 2011. 235. Source: Government of British Columbia, Bill 44 – 2007: Greenhouse Gas Reduction Targets Act, 2007. 236. Source: Government of British Columbia, Emission Offsets Regulation, 2008. 237. Crown corporations are business enterprises established by the Government of Canada to implement public policy. 238. Source: Government of Alberta, Alberta Environment and Water, Specified Gas Emitters Regulation Results for the 2010 Compliance Year, May 2011. 239. Average price series also integrates sales of EPCs, which trade at similar price level to offsets. Source: Karbone Research and Advisory Group. Alberta Specified Gas Emitters Regulation: Carbon Offset Market Overview, April 2012. 90 State and Trends of the Carbon Market 2012 6.3.5 Chicago Climate Exchange Following buyout of CCX’s owner, Climate Exchange Group, the CCX program and platform From 2003 through 2010, the Chicago Climate was discontinued in January 2011.243 The Chicago Exchange (CCX) operated as a voluntary cap- Climate Future Exchange (CCFE), which was and-trade scheme. Its “full members� were mostly the U.S. Derivatives branch of Climate Exchange U.S-based entities that had made a commitment Group, also delisted all contracts in February with the exchange to reduce GHG emissions. Each 2012;244 it migrated some of them to ICE Futures year, covered entities needed to surrender enough Europe.245 From 2003 to 2011, 745 MtCO2e of CCX compliance instruments – so-called Carbon CCX compliance instruments were traded on the Financial Instruments (CFIs) – to comply with their CCX, the CCFE, or the CCX offset registry, rep- reductions commitments.240 The total program resenting a cumulative value of US$290 million.246 baseline covered approximately 700 MtCO2e.241 In 2011, 203,000 tCO2e of CCX offsets were ex- Offset project developers could also participate in changed on the CCX Offset registry, representing a the scheme as “participant members� and provide total value of US$64,715 (see Figure 29).247 the trading platform with CCX verified offsets. Once on the platform, these offsets would be recog- nized as CFIs, as would CCX emissions allowances 6.4 Republic of Korea that could be purchased by members or liquidity providers for compliance or other purposes.242 In early 2010, the Republic of Korea enacted the Framework Act on Low Carbon and Green Figure 29: 120 5.0 Growth.248 The act establishes the legal frame- CCX Carbon 4.5 work to implement policies and measures set 100 Financial 4.0 out in the country’s Green Growth Strategy and Instruments (CFI) - 80 3.5 its pledge to reduce GHG emissions by 30% historical volumes 3.0 below business-as-usual levels by 2020. It is in- MtCO2e 60 2.5 tended that the main instrument of the national US$ and price 2.0 climate change policy will be the implementa- 40 1.5 tion of a nationwide emissions trading scheme 1.0 (ETS). On May 2, 2012, after almost a year of 20 0.5 review, the ETS Act249 passed the Legislation 0 0.0 and Judiciary Committee, and the National 03 04 05 06 07 08 09 10 11 Assembly as a whole, lifting the last hurdles to 20 20 20 20 20 20 20 20 20 ETS implementation. CCX CFI (spot) CCFE CFI Options CCFE CFI Futures Spot price Source: World Bank, CCX, CCFE, ICE. 240. 1 CFI=100tCO2e 241. Source: IntercontinentalExchange, Chicago Climate Exchange Fact Sheet, December 2011. 242. Source: Guigon, P., Bellassen, V., Ambrosi, P, Voluntary Carbon Markets: What the Standards Say, CDC Climat Research, 2009. 243. Source: Chicago Climate Exchange, CCX Advisory 2010-16, December 2010. 244. Source: Chicago Climate Future Exchange, CCFE Advisory 2012-04, February 2012. 245. In its place, ICE launched a new CCX registry program in February 2011 that allowed for the issuance and OTC trading of CCX offsets to continue. The new “CCX Offset Registry Program� also allowed for OTC transactions of CCX allowances for entities formerly covered by the CCX program to close off their 2010 compliance obligations throughout 2011. 246. CCX compliance instruments refer to CFI contracts, CCX allowances, and CCX offsets. CCX offered spot trading for CFI contracts, and CCFE for Futures and Options CFI contracts. The CCX Offset Registry now allows for spot transaction of CCX allowances and offsets. 247. CCX offsets exchanged were 79.3% landfill, 11% renewable energy, 7.2% forestry, and 1.1% fuel switch, with the remaining from agricultural methane, agricultural soil, energy efficiency, and organic waste methane. 248. Source: Ministry of Government Legislation, Republic of Korea, Framework Act and its Presidential Decree on Low Carbon and Green Growth in Korea, 2010. 249. Republic of Korea, Act on Allocation and Trading of GHG Emissions Allowances, May 2, 2012. State and Trends of the Carbon Market 2012 91 “ after almost a year of review, the ETS Act passed that emit over 15,000 tCO2e per year.251 A total of 468 entities that collectively account for 60% of national GHG emissions are to be covered.252 the National Assembly, lifting The economy-wide ETS is set to start in 2015, the last hurdles to ETS � including the entities and facilities covered by implementation. the TMS. The ETS will cover entities that emit above 125,000 tCO2e per year and facilities that In 2011 the Republic of Korea also implemented a emit above 25,000 tCO2e per year (see Table 9). GHG/Energy Target Management System (TMS) Facilities emitting between 15,000-25,000 tCO2e to support the development of the infrastructure per year will remain covered by the TMS, al- and measuring, reporting, and verification (MRV) though they will have the option to join the ETS frameworks necessary to implement the ETS. By on a voluntary basis. In response to strong opposi- 2014, the TMS will mandate all entities that emit tion from industry, the ETS legislation has been over 50,000 tCO2e per year to meet sectoral GHG softened since it was first introduced. The original reduction targets based on the last three years of proposal to start the scheme in 2013 has been de- GHG emissions records.250 The TMS will also ferred to 2015,253 and most allowances are now cover other entities that do not reach the threshold to be allocated for free over the first (2015-2017) but own individual facilities (e.g., industrial plants) and second (2018-2020) phases of the scheme. GHG CO2, CH4, N2O, HFCs, PFCs, SF6. Table 9: Sectoral scope -60% of the national total GHG emissions. Republic of Korea -Inclusion threshold: – emissions trading Entities emitting more than 125,000 tCO2e; scheme Individual facilities emitting over 25,000 tCO2e. Compliance periods -Compliance periods (CP): CP1 2015-2017, CP2 2018-2020. -CPs to last 5 years from CP3. Allocation -Over 95% free allowances in CP1 and CP2. -100% free for energy-intensive trade-exposed sectors. -Future allocation by Presidential decree. Auctions Early auctioning allowed. Banking & borrowing -Banking allowed over a CP and first year of the following CP. -Borrowing allowed over a CP only. Other cost containment A maximum of 25 % allowances will be reserved for the new entrant. Offsets Applicable standards (e.g. CDM and/or own standard) and utilization limit for international offsets to be specified by Presidential decree (expected in 2012) Penalty for Up to 3 allowances for each allowance not surrendered (at most) with the non-compliance maximum cap of 10 million Korean Won (KRW) per allowance (8,800 US$). Linking Considered in the future. Source: World Bank, Presidential Committee on Green Growth. 250. A total of 372 entities in the industry and energy sectors, 46 in the building and transportation sectors, 23 in the waste sector, and 27 in the agriculture sector. Source: Taehee, K., Korea’s Policy to Reduce GHGs, Target Management System & Emission Trading Scheme, Presidential Committee on green Growth, Republic of Korea, March 2012. 251. The inclusion threshold under the TMS progressively decreases from 125,000 tCO2e per year for entities and 25,000 tCO2e per year for individual facilities in 2011, to 50,000 tCO2e per year for entities and 15,000 tCO2e per year for individual facilities in 2014. 252. Total GHG emissions in the Republic of Korea stood at 607.6 MtCO2e in 2009 (excluding LULUCF), representing a 105% increase from 1990 levels. Source: Greenhouse Gas Inventory & Research Center of Korea, Korea’s Third National Communication Under the UNFCCC, October 2011. 253. Source: Park, Hyoung Kun (Leo), Development of Korean Emissions Trading Scheme, Presidential Committee on Green Growth of the Republic of South Korea, Greenhouse Gas Market 2011, IETA, October 2011. 92 State and Trends of the Carbon Market 2012 6.5 Mexico The new framework also defines the responsibili- ties of existing ministries and the three levels of In April 2012, Mexico’s Congress passed a government, and it allows them to explicitly al- General Law on Climate Change to support its locate financial resources to climate change miti- target of reducing greenhouse gas (GHG) emis- gation and adaptation. As such, it mandates the sions by 30% below business-as-usual levels by Ministry of Energy to create policies and incen- 2020. The law also establishes a framework for tives for the deployment of low-carbon technolo- the development of mitigation and adaptation gies and the Environment, Finance, and Energy actions. In doing so, it provides the government Ministries to define and create programs to in- with a clearer mandate to act. The law comple- centivize emission reductions. In addition, it pro- ments existing initiatives, including the Public vides authority to the Ministry of Environment Service Electricity law that requires the consider- to create a voluntary emissions trading system, ation of externalities when evaluating the cost of in which participants could perform transactions electricity generation technologies and sets limits and operations linked to other international sys- on electricity generation from fossil fuels (65% tems (e.g., through bilateral mechanisms). by 2024, 60% by 2035, and 50% by 2050). Finally, the law also transforms or creates new institutions to carry out policies, strategies, and “ In April 2012, Mexico’s Congress passed a General Law on Climate actions, including (but not limited to): • A National Ecology and Climate Change Change to support its target of reducing Institute (previously the National Ecology Institute). The Institute will perform research greenhouse gas (GHG) emissions by 30% and development activities and will advise the below business-as-usual levels by 2020. � Ministry of Environment on technical issues. It will have greater independence and a bud- get of its own. The general law on climate change provides the • Inter-Ministerial Commission on Climate federal government with the authority to create Change. The Commission will supplant the programs, policies, and actions to mitigate emis- previous Commission (created by presiden- sions, including an emissions trading scheme tial decree), and will be the main body in (ETS). It is envisioned that these will likely be charge of developing climate change policy. implemented in two phases: (i) a voluntary capac- • Climate Change Council. The Council was ity-building phase, followed by (ii) the establish- established as a permanent consultation body ment of specific mitigation goals. To support its of the Commission; it will be composed of implementation, a National Emissions Registry members of civil society. is to be created by the Ministry of Environment. The law also prioritizes sectors that could be While much progress is still required to imple- covered under these programs, including energy ment the activities that the law provides for, its generation and use, transport, agriculture, forests passage is a significant step forward and signals and land use, waste, and industrial processes. Mexico’s strong commitment to the climate change agenda. State and Trends of the Carbon Market 2012 93 6.6 Brazil254 law also establishes a comprehensive REDD+ policy. Other initiatives include: (i) the creation In recent years, climate change policies and sub- of the Promotion and Environmental Services sequent capital mobilization have created an en- Enterprise259, a public-private partnership aim- abling environment for low-carbon investment ing to develop local capacity through the estab- and market initiatives in Brazil. Further invest- lishment of domestic and international network- ment is envisioned ahead of Brazil’s hosting of ing; and (ii) the participation in the Governors’ the Soccer World Cup in 2014 and the Olympic Climate and Forest Task Force.260 Finally, in Games in 2016. In this context, the federal gov- November of 2010, Acre signed a Memorandum ernment, sub-national governments, and the pri- of Understanding for environmental cooperation vate sector have pursued green infrastructure op- with the states of California (United States) and portunities. This is likely to be showcased when Chiapas (Mexico), which includes the possibility Brazil hosts the Rio+20 Conference (June 20-22, to provide REDD+ credits to the California cap- 2012), which is to focus on how to build a green and-trade scheme (AB32).261 economy and develop an institutional frame- work for sustainable development. Two forward-looking initiatives already under- way may place the state and the city of Rio de A federal law laid out the conditions for a nation- Janeiro among the front-runners of the carbon al carbon market. Passed in December 2009, the market in Brazil. An emissions trading scheme National Policy on Climate Change mandated a (ETS) for the State of Rio de Janeiro will have its voluntary national target to reduce emissions by first legally binding period for private companies 36.1% to 38.9% by 2020. The provision does starting in 2013.262 The program will be present- not specify the principles for a national carbon ed during the Rio+20 Conference, with the first market, but does allow for the national stock ex- pilot stage ending in 2015; subsequent stages will changes to be integrated into the scheme.255 An run in three 5-year phases. The initial targets will approved regulation included sectoral goals.256 A primarily cover the oil and gas, steel, chemical, technical working group led by the Ministry of petrochemical, and cement sectors. The second Finance was established to make proposals for a activity is a partnership between the state and the national carbon market. In addition, sub-nation- city of Rio de Janeiro to create the BVRio, the al jurisdictions are also moving ahead with low- Rio de Janeiro Environmental Asset Exchange. carbon initiatives.257 BVRio will provide a carbon market platform for companies to negotiate and trade environmen- Acre has been a pioneer in the development of tal assets in the form of allowances, offsets, and public policies aiming at the sustainable use of other carbon-linked financial products. natural resources. In 2010, Acre passed a law258 establishing the State’s System of Incentives for In 2009, the State of Sao Paulo passed a law de- Environmental Services (SISA) to preserve and fining a mandatory target to reduce its economy- foster a forest-based, low-carbon economy. The wide emissions by 20% by 2020 to 112 MtCO2e, 254. The text benefited from the generous and thoughtful insight provided by Ludovino Lopes, Eufran Amaral, Fabio Vaz, Monica Julissa, Walter Figueiredo de Simoni, and Fabiana Ferreira Candiano. 255. Source: Law nº 12.187, December 29, 2009. 256. Source: Regulation of the National Policy by Decree Number 7.390, December 9, 2010. 257. States are intentionally listed in alphabetical order. 258. Law nº. 2.308/2010. 259. Companhia de Fomento a Serviços Ambientais, in Portuguese. 260. The Governors’ Climate and Forest Task Force is a multi-jurisdictional collaborative effort between 16 States and provinces from Brazil, Indonesia, Mexico, Nigeria, Peru, and the U.S. focused on the development of rules and capabilities necessary to generate compliance-grade assets from REDD. 261. To implement this memorandum, the Sub-national REDD Task Force (ROW) was created. 262. Source: Thomson Reuters Point Carbon. Rio releases ETS details, sets periods for 3 phases, March 29, 2012. 94 State and Trends of the Carbon Market 2012 down from 140 MtCO2e in 2005.263 Sectoral Despite a slow start, voluntary carbon markets are targets are yet to be defined. Although the law also gaining momentum. Although voluntary car- anticipates the creation of economic, financial bon markets in Brazil are in the early stages, they and fiscal incentives to foster the development of already represent 60% of the voluntary credits low carbon projects, it does not include a provi- originated in Latin America. Two private standards sion for a domestic carbon market. In addition, have been developed: Brasil Mata Viva (BMV), the State’s Green Economy Promotion program a certification program for forestry projects, and was created to offer credit lines for actions aim- the Social Carbon Standard. The Association for ing at curbing GHG emissions.265,265 Among the Standardization (ABNT) recently developed guide- existing private-sector initiatives, the Brazilian lines for voluntary transactions of Verified Emission Securities, Commodities, and Futures Exchange Reductions (VERs) in Brazil269 and started a capac- (BM&FBOVESPA) has played an active role in ity-building program to assist small and medium auctioning carbon credits.266 Ahead of the game, enterprises (SME) in building GHG inventories 57 of the largest companies in the country, most and exploring carbon opportunities.270,271 of them based in Sao Paulo, have already estab- lished voluntary emission reduction plans.267 6.7 China272 Figure 30: China has witnessed phenomenal economic 30 25% China in world’s growth over the last decade,273 lifting it to become 23.6 energy-related 25 the world’s second largest economy in 2010.274 It 20% has been accompanied by rising primary energy Emissions - Billion tCO2 CO2 emissions268 20 PRC's share (%) 15% consumption and increasing pressure on its do- 15 mestic energy supply, giving rise to a number of 12.9 10% environmental and social challenges. China’s 11th 10 Five-Year-Plan (FYP), covering the period 2006- 7.8 5 5% 2010, addressed energy savings and environmental protection by establishing a series of quantitative 0 0% goals and policy initiatives. Notwithstanding these 80 90 85 95 09 00 05 efforts, China emerged as the world’s largest green- 20 20 19 19 20 19 19 World PRC PRC's share house gas (GHG) emitter in 2008 (see Figure 30), fueling international pressure for it to further inten- Source: World Bank, International Energy Agency. sify domestic environmental policies and initiatives. 263. Source: Inventario de emissoes antropicas de gases de efeito estufa diretos e indiretos do Estado de Sao Paulo, comunicacao estadual / CETESB, 2011. 264. Source: Law 13.798, November 9, 2009, regulated by decree n. 55.947, June 24, 2010. 265. Source: 1° Relatório de Referência do Estado de São Paulo de Emissões e Remoções Antrópicas de Gases de Efeito Estufa, período de 1990-2008. 266. Both initiatives are supported by the Inter-American Development Bank (IADB). 267. Preview of Climatescope 2012. 268. Source: International Energy Agency, CO2 emissions from fuel combustion, 2011. 269. Source: ABNT NBR 15498:2011. Voluntary carbon market – Principles, requirements, and guidelines to commercialize verified emission reductions, April 25, 2012. 270. Both standards counted on 36 projects as of late 2011 (Presentation of PMR Expression of Interest – Brazil, http:// wbcarbonfinance.org/docs/3_PA2_EoI_Presentation_Brazil.pdf accessed on 4/16/2012). 271. FUMIN apoia oportunidades de negócios na gestão de gases de efeito estufa para PME brasileiras. http://www.iadb.org/pt/noticias/comunicados-de-imprensa/2012-01-05/brasil-gestao-de-gases-do-efeito-estufa-apra-as-pme,9802.html 272. This section benefited from the generous and thoughtful insight provided by Mr. Jiang Kejun, researcher at the Energy Research Institute (ERI) of the National Development and Reform Commission (NDRC), and Ms. Wen Wang, researcher at the Climate Economics Chair (CEC) of Paris-Dauphine University and Climate Change Research Centre of the Chinese Academy of Agricultural Sciences (CAAS). 273. The Gross Domestic Product (GDP) increased 10.5% year on year according to China’s National Bureau of Statistics. 274. Source: World Bank. An Eye on East Asia and Pacific, The Role of China for Regional Prosperity, April 2011. State and Trends of the Carbon Market 2012 95 The 12th FYP, which entered into force in March • The “Phasing-out of Outdated Production 2011, further strengthens these policies in response Capacity Program.� This initiative required to the international climate community. As such, it local authorities to assign phase-out targets calls for the deployment of innovative domestic ini- to industrial companies, which were required tiatives and emissions trading designed to address to shut down their least efficient small plants. the carbon intensity of its economy. For example, in the cement sector, 330 million tons of cement production capacity was re- 6.7.1 A look back at the 11th Five-Year Plan moved, which led to a 28.6% decline in energy (2006-2010): what’s in China’s tool box? consumption per ton of cement produced. Throughout the 11th FYP, China’s primary energy Reductions in primary energy consumption consumption per unit of GDP dropped 19.1%, were complemented by efforts to expand clean within close reach of the 20% energy intensity energy through feed-in tariff and subsidy poli- target for the period set by the central govern- cies. From 2006-2010, renewable generation ment, thereby reducing GHG emissions by 1.46 capacity more than doubled, with an additional billion tCO2e in absolute terms.275 133 GW installed.278 These achievements can be attributed to strength- 6.7.2 12th Five-Year Plan (2011-2015): ened regulatory framework276 that was enforced “piloting� market mechanisms locally (i.e., through provinces and municipali- ties) as well as new initiatives such as: The 12th FYP targets annual GDP growth of 7% and defines 24 key indicators of economic and so- • The “Ten Key Energy Conservation Projects.� cial development with 2015 targets. As shown in This initiative called on the government to Annex 6: China: Targets and Supporting Measures provide financial incentives to support the under the Five-Year-Plans, energy intensity is set deployment of new equipment and processes to decrease 16% below 2010 levels. In addition, in the industrial (e.g., coal-fired boilers) and the forest cover is aimed to increase a further building (e.g., energy-saving bulbs) sectors. 12.5 million hectares. In addition, two new in- • The “Top-1000 Enterprises Energy Conservation dicators were specifically introduced to respond Program.� This initiative set energy-saving tar- to climate change and reflect China’s mitigation gets to the largest energy-consuming indus- action pledge under the UNFCCC for the years tries, accounting for one third of national en- 2013-2020.279 First, the quantity of CO2 emitted ergy consumption.277 Covered enterprises were per unit of GDP (or the “carbon intensity� of the required to develop an energy conservation economy) was assigned a reduction target of 17% plan and perform audits to allow local authori- below 2010 levels by 2015. Second, nationwide ties to monitor progress. forest stock is to increase by an additional 14.3 275. Source: National Development and Reform Commission (NDRC), Remarkable energy saving results achieved - 11th Five-Year review of energy saving, March 10, 2011, National Development and Reform Commission (NDRC). 276. The main pieces of legislation were the revised “Renewable Energy Promotion Law� and the “Energy Conservation Law,� respectively enforced in 2006 and 2007. 277. Source: Price, L., Wang, X., Yun, J. China’s Top-1000 Energy- Consuming Enterprises Program: Reducing Energy Consumption of the 1000 Largest Industrial Enterprises in China, 2008. 278. This is an additional 133 gigawatt (GW) of non-fossil-fuel installed capacity, which consists of +92.00GW hydro power, +32.33 GW wind, +1.30 GW solar, 2.50 GW biomass, +0.80 GW bio-ethanol, and +4.01 GW nuclear. In addition, at the end of 2010, 31.00 gigawatts of extra nuclear installed capacity was under construction. 279. On January 28th 2010, Director General of Climate Division of the National Development and Reform Commission Su Wei submitted China’s climate mitigation actions under the Copenhagen Accord. China’s pledges had been previously announced by President Hu Jintao at the United Nations General Assembly in September 2009, and consist of reducing China’s carbon dioxide emissions by 40-45% per unit of GDP by 2020 compared to 2005 levels; increasing the share of non-fossil fuels in primary energy consumption to around 15% by 2020; and increasing forest coverage by 40 million hectares and forest stock volume by 1.3 billion cubic meters by 2020 from 2005 levels. 96 State and Trends of the Carbon Market 2012 billion cubic meters over the 2011-2015 period. that five cities (Beijing, Tianjin, Shanghai, An “Energy Conservation Plan�280 and a “GHG Chongqing, and Shenzhen) and two provinces Control Plan�281 were subsequently released to (namely Guangdong and Hubei) establish Pilot support the enforcement of the nationwide en- Emissions Trading Schemes (ETS) on a vol- ergy- and carbon-intensity reduction targets at the untary basis.283 Local authorities were asked to provincial and municipal levels. determine overall targets, allocation rules, and governance systems, and to work on the devel- The 12th FYP sustains and scales up some of the ini- opment of market infrastructures. Although the tiatives that proved to be effective under the previ- notice gave no implementation timeline, some ous FYP. For example, the “Top-1000 Enterprises officials from the NDRC said on several occa- Energy Conservation Program� has been expand- sions that the plan is to have them up and run- ed to become a “Top-10,000 Enterprises Energy ning in 2013 to inform the development of a Conservation Program�; it actually covers more nationwide mechanism by 2015.284 This is, how- than 16,000 enterprises. Various efficiency stan- ever, by no means a formal commitment or firm dards have also been raised. Efforts to improve en- timetable. forcement and monitoring of central government policies at the local level have also been extended. 6.7.3 Building emissions trading in China: In addition, the plan calls for the establishment of who is involved? innovative tools, with explicit reference to carbon- trading mechanisms. In 2009, domestic carbon market mechanisms be- gan to emerge through voluntary initiatives. The The central government’s interest in market Panda Standard and the China Green Carbon mechanisms was first evident in July 2010, Foundation (CGCF) were established in 2009 when the National Development and Reform and 2010 respectively, to address emissions in the Commission (NDRC) launched “Low-carbon agriculture and forestry sectors.285 A voluntary Pilot Development Zones� in five provinces emission intensity-based market on heat suppliers and eight cities.282 This program called on lo- for residential buildings was also launched in the cal authorities to implement measurement and municipality of Tianjin in 2010. Despite the regu- reporting of GHG emissions data and to estab- latory uncertainties and the lack of voluntary de- lish low-carbon development plans. In addition, mand that have limited their size, these initiatives authorities were encouraged to explore comple- have provided valuable lessons learned. Indeed, the mentary policies, including market mechanisms. involvement of local experts, the collection of data, Explicit notice for implementation only came and the development of the market infrastructure in October 2011, with the NDRC proposing necessary to support early demonstration activities 280. Source: State Council of PRC, Comprehensive Working Plan for Energy Conservation and Emission Reduction under the 12th Five-Year-Plan, September 2011. 281. Source: State Council of PRC, Working Plan for GHG Control under the 12th Five-Year-Plan, January 2012. 282. Provinces of Guangdong, Hubei, Liaoning, Shaanxi and Yunnan, and cities of Baoding, Chongqing, Guiyang, Hangzhou, Nanchang, Shenzhen, Tianjin, and Xiamen. Source: National Development and Reform Commission, Notice on low-carbon pilot development zones at the province and city levels, 2010. 283. Source: National Development and Reform Commission notice on market mechanisms experimental work, 2011. It is important to note that this program does not prevent other local jurisdictions from establishing pilot market mechanisms. As a matter of fact, the province of Jiangsu and city of Qingdao (Shandong province) were reported to the authors as actively preparing their own pilot ETS plans, and the NDRC may call for a second batch of participants. In addition, the city of Yantai initiated an energy consumption cap-and- trade system involving the 14 counties within its administrative borders as participants. The first trade was announced between two of them in July 2011 for 50,000tce for a value of roughly US$1.5 million. Source: China Economic Net, Inter-regional energy consumption trading, November 2011. 284. Source: Sun Cuihua and Wang Shu, China Organizing Framework under the World Bank’s Partnership for Market Readiness, 2011. 285. The Panda Standard is a certification scheme for domestic and forestry offset projects initiated by the China Beijing Environment Exchange, BlueNext, Winrock International, and the Asian Development Bank. The China Green Carbon Foundation was launched in 2010 by China’s State Forestry Administration. Source: Wang Wen, Linking climate finance to the agriculture and forestry sectors in China, 2011, Climate Economics in Progress. Economica. State and Trends of the Carbon Market 2012 97 Figure 31: STEPS POLICY & GOVERNANCE TECHNICAL SUPPORT REGULATIONS Building pilot emissions trading • 12th Five-Year-Plan NDRC DOMESTIC INTERNATIONAL • Working Plan for schemes in China GHG Control under Climate Change Dpt. • Ministry of Science • World Bank CENTRAL the 12th FYP Social Development Dpt. and Technology POLICY • Low-carbon Provinces - Partnership for and Cities Price Dpt. • Energy Research Market Readiness • Pilot ETS in Provinces Institute of NDRC and Cities Ministry of Industry and • Asian • VER Regulation Information Technology • China Academy of Development Bank Social Sciences - Beijing Green • Pilot ETS Plan • Provincial/municipal • Nuclear and New Finance Strategy Government Energy Research - Tianjin Pilot ETS ETS Institute (Tsinghua Design MARKET - Approves Pilot ETS • ETS Trading Rules Plan University) DESIGN • UK Strategic • Guidelines on GHG • Local National Reform Programme Fund accounting and Commissions (DRC) MARKET submission - Guangdong Pilot INFRASTRUC- - Design Pilot ETS Plan ETS Design TURE • Third party verification - Submit approved DEVELOPMENT process Pilot ETS Plan to • European Union NDRC • Platform trading rules EU-China Low Carbon • Economic and and Environment Information Technol- • Market oversight ogy Commission Sustainability ETS Programme regulation IMPLEMENTATION - Economic activity data - Energy consumption data - Transfer to MIIT for MARKET centralization MONITORING & REGULATION • Trading platform - Market surveillance Source: World Bank. has laid a foundation to support the development schemes has begun to mobilize a range of central of domestic emissions trading. To illustrate, in and local authorities (see Figure 31). The NDRC’s 2011 a methodology to quantify carbon sequestra- Department of Climate Change, which directed tion in bamboo sinks in China - currently not eli- their establishment, stands at the center of these gible under the CDM – was approved by the Panda efforts and will oversee their development. Despite Standard.286 A few transactions engaging Chinese the flexibility given to local authorities in the de- companies were also reported, with the state- sign of the emissions trading schemes, they will owned Sinochem Group acquiring 16,800 Panda nonetheless have to accommodate the NDRC Standard credits at US$9.14/tCO2e in March Department of Climate Change’s requirements 2011, and some 148,000 credits from the CGCF and guidance on measuring, reporting, and veri- sold to a consortium of 10 companies in November fication (MRV) issues. In addition, other depart- 2011 at an undisclosed price. ments within the NDRC will be key to the scope and success of the pilot emission trading schemes While encouraged by Chinese authorities, these and their possible scale-up at a national level. voluntary market initiatives have seen very little The Department of Social Development and the involvement from these authorities. In contrast, Department of Industry will be in charge of im- the preparation of the pilot emissions trading pact assessments on the economy and industry 286. Source: Panda Standard. New Methodology Form for AFOLU Projects - Forestation of degraded land using bamboo and non� bamboo trees. 2011. 98 State and Trends of the Carbon Market 2012 respectively. If power generation falls under the implementation,� which will consist of devel- cap, the Department of Price will play a central oping market oversight supporting regulations; role in deciding how to manage the cost of carbon and (iii) in April 2014, the “operational phase� is and its fluctuations in the context of a regulated scheduled to commence. The sectors to be cov- power market. Beyond the NDRC, the Ministry ered once the ETS is in operation are not explic- of Industry and Information Technology will also itly listed, but entities that emitted above 10,000 come into play as it centralizes economic activity tCO2e per year over the 2009-2011 period are and energy consumption data received from its lo- to be covered under the cap. In addition, the in- cal counterpart, the Economic and Information dustrial sector, power and heat generators, and Technology Commission. Approval of the pilot public buildings are to provide historic emissions ETS plans and operational implementation will data to the municipal government. Allowances fall under provincial or municipal governments, are to be mostly allocated for free. Allocation is whose several bureaus will ultimately ensure effec- scheduled to start in December 2012 for 2013 tive operations and regulation of the pilot schemes. allowances, and in May of each following year based on the previous year’s emissions. Banking Several technical assistance programs have been is to be authorized, but not borrowing. In addi- launched to support Chinese authorities in mov- tion, the Beijing Municipal Government is per- ing forward with the study and in the formula- mitted to withdraw or auction additional allow- tion and implementation of market mechanisms ances for cost containment purposes. Similarly, it at both national and local levels.287,288,289,290 has authorized the surrender of Chinese Certified Emission Reductions (CCERs) that meet the re- 6.7.4 Current status: is it the journey or the quirements of the “National VER Regulation� is destination? currently being prepared by the NDRC. In March 2012, the Beijing Municipal Although Beijing is the first to publicly release Government became the first of China’s prov- details on its pilot ETS design, this does not inces and municipalities to publish a discussion necessarily mean it is the most advanced or that draft for a planned pilot ETS.291 The discussion it will be the first to implement an operational draft confirms that Beijing intends to set a cap on mechanism. It has been reported to the authors its absolute emissions as required by the NDRC. that progress has also been achieved in Shanghai, It also sets out a draft timetable for implemen- Guangdong province, Shenzhen, and Tianjin. tation which comprises three key phases: (i) by Details regarding ongoing efforts in the remain- end-2012, the Beijing Municipal Government ing provinces remain elusive at the time this re- aims to have the necessary market infrastruc- port was written (see Table 10). In this context, it ture and MRV regulations implemented; (ii) is not clear whether all of the seven jurisdictions in January 2013, it aims to move to “initial will have operating pilot markets. 287. The World Bank’s Partnership for Market Readiness (PMR) provided an initial US$350,000 grant for China’s central authorities to prepare a Market Readiness Proposal (MRP) with the purpose of helping the Country to identify suitable market instruments to scale up mitigation efforts in line with their climate change mitigation goals and development objectives. If deemed eligible, China may receive additional US$3-8 million in implementation funding. 288. Through the EU-China Low Carbon and Environmental Sustainability Programme, the European Union plans to allocate €5 million by June 2012 to the realization of ETS pilot models at a provincial level. Source: European Commission, Commission Implementing Decision of 6.12.2011 on the Annual Action Programme 2011 in favor of China to be financed under Article 19100101 of the general budget of the European Union December 2011 – Action Fiche II, December 2011. 289. The Asian Development Bank issued a US$750,000 tender in December 2011 to advise the Tianjin Municipal Government on its pilot ETS design and support the deployment of related registry and trading infrastructure. The study is expected to start in June 2012 after the selection of international and domestic experts. Source: Asian Development Bank, Technical Assistance Report People’s Republic of China: Developing Tianjin Emission Trading System, December 2011. 290. The UK Strategic Partnership Program (SPF). The program provides technical assistance to local institutes on ETS design for some pilots, notably in Guangdong Province. 291. Source: Beijing Development Reform Commission, Discussion Draft on Beijing Emissions Trading, March 2012. State and Trends of the Carbon Market 2012 99 Table 10: The five cities and two provinces called on to es- China: pilot tablish voluntary pilot emissions trading schemes jurisdictions and account for 18% of China’s population and 28% current ETS status of its national GDP. It is commonly believed that the NDRC has called for the establishment of these pilot schemes to test the use of emissions trading as a tool that could be expanded to a national scale. The implementation process has already triggered much discussion and involved Jurisdiction Population GDP YOY GDP YOY GDP by 2015 2015 ETS status 2010 2010 Change per Change sector I/ energy carbon (as of April 2012) (Mln) (Bln (%) capita (%) II/III 2010 int. int. US$)292 2010 (%) target target (% (US$) (% 2010) 2010) Beijing 20 208 +10.3 11.2 +7.8 0.9 / 24.0 17 18 -Pilot ETS Plan Municipality / 75.1 approved. -Release of the design discussion draft in March 2012. Tianjin 13 136 +17.4 10.8 +16.7 1.6 / 52.4 18 19 -Pilot ETS Plan Municipality / 46.0 approved. -Market design study to start in June 2012. Shanghai 23 254 +10.3 11.2 +10.0 0.7 / 42.1 18 19 Pilot ETS Plan Municipality / 57.2 approved. Hubei 57 236 +14.8 4.1 +23.1 13.4 / 16 17 Pilot ETS Plan Province 48.7 / 37.9 approved. Chongqing 29 117 +17.1 4.1 +20.4 8.6 / 55.0 16 17 Pilot ETS Plan Municipality / 36.4 approved. Guangdong 104 680 +12.4 6.6 +8.7 5.0 / 50.0 18 19.5 -Pilot ETS Plan Province / 45.0 approved -Kick-off meeting on market design held in September 2011. Shenzhen 9 141 +12.0 13.9 +7.60 0.1 / 47.5 19.5 21 Pilot ETS Plan Municipality293 / 52.4 approved. PRC’s central 1,341 5,926 +10.3 4.4 +9.90 10.1 / -16 -17 Early stage. NDRC government 46.8 / requested the 43.1 World Bank’s PMR to provide support to the design of the national ETS and carry out feasibility studies on some sectors. Source: World Bank, China Statistical Yearbook 2011, Statistical Yearbook of Guangdong Province. 292 Average US$/RMB exchange rate in 2010. Source: U.S. Federal Reserve. 293. Shenzhen is a municipality within Guangdong Province. 100 State and Trends of the Carbon Market 2012 “ the 12th Five-Year-Plan has opened large working fronts to build China’s substitution of conventional fuels with renewable energy as key milestones to achieving sustainable economic growth and climate change co-bene- readiness in carbon markets and fits.295 Two market-based mechanisms were intro- duced to address these goals: Renewable Energy addressed the several challenges to their � Certificate (REC) schemes and the Perform implementation Achieve and Trade (PAT). domestic and international expertise that may in- Renewable Energy Certificate (REC) Schemes: form parallel work being led by the NDRC at the In March 2011, India’s REC mechanism was national level. In addition, several other initiatives introduced to support the country’s Renewable could also facilitate and catalyze the implementa- Purchase Obligations (RPOs) targets under the tion of a national carbon market. For example, the NAPCC.296 The RPOs require that 5% of the “Top 1000 Enterprises� program, and its extension nationwide share of electricity be sourced from to 10,000 entities over the 12th FYP, may provide renewable energy in 2010, increasing at 1% per solid MRV foundations for a national scheme. year for ten years. In addition to taking actions, In addition, the drafting process for the “VER to meet the targets eligible participants may buy Regulation� that started in 2010 with the objec- or trade RECs, each equivalent to one megawatt tive of encouraging corporate social responsibility hour (MWh) of electricity generated. RECs are policies in China-based enterprises,294 could sup- issued to eligible renewable energy operators and port the establishment of common infrastructure purchased at monthly auctions by any obligated and rules for a national domestic offset program. entity not reaching its RPO requirements. The Moreover, as mentioned above, the Municipality of India Energy Exchange (IEX) and Power Exchange Beijing intends to use the offsets eligible under this India Ltd (PXIL) provide the auction platforms. regulation for its pilot ETS. The mechanism seeks to promote interstate REC transactions, thereby helping those regions with While primarily relying on command-and-con- high renewable energy potential overcome gen- trol policies, the 12th Five-Year-Plan has opened eration capital barriers while allowing regions with large working fronts to build China’s readiness in less potential to nonetheless assign more ambitious carbon markets and addressed the several chal- RPO targets to local obligated entities. lenges to their implementation, such as the de- regulation of the energy market, cross-provincial As of December 31, 2011, 341 renewable energy governance, and/or interactions with the CDM. generation projects had been accredited by State Nodal Agencies across India. This represents a combined 1,890 MW297 or 9.4% of the coun- 6.8 India try’s total renewable energy generation installed capacity, according to data from the Central In 2008, India announced a National Action Plan Electricity Regulatory Commission (CERC).298 on Climate Change (NAPCC). The plan pri- As shown in Figure 32, 546,808 RECs were is- oritizes energy efficiency gains and an increased sued in India’s registry in 2011, and 438,249 were 294. Source: China’s Expression of Interest and Questionnaire on Market Readiness Capacity, Partnership for Market Readiness, World Bank, January 2011. 295. At an annual economic growth rate of 8-9%, India anticipates it will need to increase its primary energy supply and electricity generation installed capacity by four and six times, respectively, over the next 20 years. Source: Expert Group on Low Carbon Strategies for inclusive growth, Planning Commission, Government of India, Low Carbon Strategies for Inclusive Growth, An Interim Report, 2011. 296. Source: Central Electricity Regulatory Commission Regulations, Terms and Conditions for Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation, 2010. 297. Breakdown by technology: 44.3% wind, 28.5% bio-fuel cogeneration, 22.6% biomass, 4.2% small hydro, and 0.4% solar. 298. As of December 31, 2011, renewable energy accounted for 10.8% of India’s total installed power generation capacity. Source: Central Electricity Authority, Ministry of Power, Government of India, Installed capacity of power utilities as of December 31, 2011, 2011. State and Trends of the Carbon Market 2012 101 160,000 100 Figure 32: 90 Renewable Energy 140,000 80 Certificates – Volume (number of RECs) 120,000 traded volumes 70 100,000 and clearing 60 Price (US$) prices 80,000 50 40 60,000 30 40,000 20 20,000 10 0 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 0 RECs issued RECs traded (IEX, PXIL) Clearing price USD Source: World Bank, data from IEX, PXIL, and India REC Registry. purchased on exchanges299 and subsequently re- their benchmarks are issued Energy Efficiency tired for compliance. The resulting 2011 market Certificates (ESCerts) to be traded bilaterally value was US$22.6 million.300 Since April 2012, or through the two national power exchanges. the CERC has fixed new floor and ceiling prices The Bureau of Energy Efficiency at India’s Power for non-solar and solar RECs which will remain Ministry has issued the rules and procedures per- valid for a period of five years.301 The floor and taining to measuring, reporting, and verification ceiling prices are intended to provide market par- (MRV).304 It is expected to announce the trading ticipants with longer-term visibility and a com- infrastructure rules in the near term, with trad- petitive alternative to the Clean Development ing of ESCerts to commence thereafter. For fur- Mechanism (CDM) given current weak prices.302 ther details on PAT please refer to Annex 7: India PAT: Market Design and Governance Elements. Perform Achieve and Trade (PAT): On April 1, 2012, the PAT was introduced, covering eight in- The PAT is projected to avoid 19,000 MW of ad- dustrial sectors out of the 15 energy-intensive sec- ditional generation capacity, save 6.6 million tons tors identified in the NAPCC’s National Mission oil equivalent (toe), and reduce GHG emissions on Enhanced Energy Efficiency (NNEEE). The by 26.21 MtCO2e by the end of the first compli- scheme mandates specific energy consump- ance period (March 31, 2015).305 Using support tion reduction targets to designated consumers provided through the World Bank’s Partnership (DCs) that collectively account for 25% of na- for Market Readiness, India has plans to expand tional GDP and about 45% of its commercial the PAT by deepening the scope of coverage in energy use.303 Those DCs that over-achieve on existing sectors and extending it to new sectors. 299. IEX accounts for 92% of traded volumes in 2011. 300. The average clearing price for Indian REC in 2011 was INR2575 per unit (US$55.2). 2011 exchange rate US$1=INR47. 301. Source: Central Electricity Regulatory Commission, 2011, Determination of Forbearance and Floor Price for the REC framework to be applicable from April 1, 2012. 302. Applying the 2012-2017 price floor for non-solar RECs (INR1500), and an emission factor in India’s grid of 0.93tCO2/MWh, the generation of renewable energy generates revenues of REC=US$32/MWh under the REC scheme and US$10.3/MWh under the CDM, according to our average 2011 price for primary CERs, and all things being equal. 303. Source: Bureau of Energy Efficiency, Government of India, 2011, www.bee-india.nic.in. 304. The rules and procedures pertaining to the MRV and trading aspects of the scheme are available at www.bee-india.nic.in. 305. Source: the Bureau of Energy Efficiency in Sengupta, A., Kumar, S., Roadmap for India in energy efficiency, The Atlantic Energy Efficiency Policy Briefs, 2011. 102 State and Trends of the Carbon Market 2012 6.9 Japan by Yuji Mizuno, PhD, Senior 2002 and FY 2007) in the first compliance pe- Planning Officer, Office of Market Mechanisms306 riod and a reduction of 17% (planned) in the second compliance period. This scheme also The Japanese carbon market can be broadly di- permits offsets to achieve these targets.307 vided into four parts. • Third, on the national level, the Japan Voluntary Emissions Trading Scheme • First, Japan commits to reduce greenhouse (JVETS) was launched in FY 2005 by the gas emissions by 6% compared with 1990 Ministry of the Environment. Under the levels during the first commitment period of JVETS, the participating organizations must the Kyoto Protocol. To achieve this target, the commit CO2 emission reduction targets, and Japanese government plans to acquire Kyoto they can reduce emissions by purchasing sub- credits by using the Kyoto mechanisms to cover sidized equipment as well as by undertaking the shortfall remaining after domestic reduc- emissions trading. Kyoto credits can be used tion efforts have been implemented. This is in the JVETS. A total of 389 organizations in accordance with the Kyoto Protocol Target have taken part as participants that have ad- Achievement Plan (formulated April 2005, re- opted targets, and so far reductions of 1.89 vised March 2008). Purchase agreements were million tons have been achieved.308 signed for 31 million tons in Financial Year (FY) • Fourth, two voluntary crediting schemes are 2008, 41.5 million tons in FY 2009, 4 million operating in parallel to the national level. The tons in FY 2010, and no purchase agreements first is a Domestic Credit Scheme introduced were signed in FY 2011. This brought the cu- in October 2008. In this scheme, major com- mulative total that was contracted to around panies provide technology, funding or other 98 million tons. In addition to that, the electric assistance to small and medium-sized com- power industry has announced plans to acquire panies, civil society (businesses and house- 260 million tons and the steel industry is to holds), transport, and other sectors, and au- acquire 53 million tons of Kyoto credits in the thorize greenhouse gas emission reductions Keidanren Voluntary Action Plan. achieved as credits. Major companies can use • Second, the Tokyo cap-and-trade scheme has those credits to meet the targets set by the been launched as a local emissions trading Keidanren Voluntary Action Plan.309 scheme. This covers major facilities and build- ings located within the Tokyo metropolitan In addition, the Japan Verified Emission Reduction area, with the first compliance period running (J-VER) Scheme was established by the Ministry from FY 2010 to FY 2014 and the second of the Environment of Japan in November 2008. from FY 2015 to FY 2019. Targets have been It is a verification scheme for credits generated set at a 6% reduction compared to base-year through the reduction/removal of greenhouse emissions levels (average emissions levels dur- gases carried out by domestic projects.310 ing any three consecutive years between FY 306. The Climate Change Policy Division of the Ministry of the Environment in Japan. 307. Eligible offsets are credits from small and medium-sized business within Tokyo, renewable energy (electricity or heat) credits, and credits from large business premises outside Tokyo; Kyoto credits are not included at this point. As of December 2011, 2,132 tons had been issued as renewable energy credits and 360 tons were traded. 308. Approximately 260,000 tons were traded from FY 2006 to FY 2010 at an average price of around ¥750–1,250 (US$9-16) per ton. This is the most active trading to have taken place in a domestic Japanese scheme to date. In addition to this scheme, an experimental ETS was launched in October 2008 (scheduled to run until FY 2012). A total of 152 companies had set targets for FY 2010, including absolute emissions targets and intensity targets. 309. This is a government-wide initiative, with a secretariat composed of the Ministry of Economy, Trade and Industry, the Ministry of the Environment, and the Ministry of Agriculture, Forestry and Fisheries. As of December 2011, a total of 574 projects for domestic credits had been authorized for around 313,000 tons. 310. As of the end of January 2012, 184 projects were registered, and the amount of total certified J-VER credit was around 161,000 tons. The median asking trading price for credits from the emissions reduction is around ¥4,000 (US$50) per ton; the price for those from forest sinks is around ¥10,000 (US$125) per ton. State and Trends of the Carbon Market 2012 103 Following the end of the first commitment period government’s Energy and Environment Council. of the Kyoto Protocol, it was decided to set a second The aim is to finalize a mid-term target for green- commitment period at the COP17 meeting held in house gas emission reductions by the summer. Durban. Japan will not participate in the second commitment period, but will continue its efforts to reduce GHG emissions in accordance with the 6.10 Switzerland Cancun agreements. Japan is proposing the bilat- eral offset credit mechanism (BOCM) as a practical In 1997, the Swiss administration (Federal new market mechanism to complement the CDM, Council) presented a federal law to reduce CO2 with the aim of contributing to global emissions re- emissions, proposing a 10% reduction target by ductions and carbon sinks. The BOCM is designed 2010 (midway through the period 2008 to 2012) to further promote low-carbon investment on a as compared to 1990 levels. The target was to be global scale by means of the appropriate evaluation achieved primarily through voluntary measures, of emission reductions through the introduction of with the introduction of a CO2 incentive tax if advanced low-carbon technology and products in the target could not be achieved on a voluntary developing countries.311 basis.112 The so-called CO2 Act was adopted by the Swiss parliament in 1999313 and entered into ef- The future of the Japanese carbon market will be fect on May 1, 2000; it represents the central pillar greatly affected by mid-term targets for green- of Swiss climate policy.314 The act also introduced house gas emission reductions. At this point, separate sectoral targets. In particular, emissions the conditional target is for a 25% reduction in from the burning of fossil fuels for heating and 2020 compared with 1990 levels. In response to transportation315 purposes were set to be reduced the changed situation, due to the earthquake and by 15% and 8% respectively, thus also contribut- the nuclear power plant accident in March 2011, ing toward Switzerland’s KP target of 8%.316 the government of Japan is aiming to present a number of options for a unified energy and envi- Forecasting a significant shortfall in achieving the ronmental strategy. This strategy will be presented targets for transportation fuel, the government to advisory councils to the government in the began to introduce a number of additional mea- spring, following the formulation of basic propos- sures. As such, on March 23, 2005, the Federal als on options for nuclear power policy, energy Council adopted the application of a CO2 tax strategy, and mitigating policy to climate change for heating fuels,317 which took effect on January based on the fundamental direction set out by the 1, 2008. It also introduced the “climate cent� 311. The intention to consider introducing the BOCM has already been stated in joint declarations with the heads of state of Vietnam and the countries of the Mekong region (October 2010). An intergovernmental document with Indonesia in November 2011 also states cooperation for the BOCM. In addition, a memorandum between the Ministry of Nature, Environment, and Tourism of Mongolia and the Japanese Ministry of the Environment regarding cooperation between the two countries, including the BOCM, was signed in December 2011. A feasibility study for the BOCM was carried out by the Ministry of Economy, Trade and Industry and the Ministry of the Environment, and 79 studies were adopted in FY 2011. The Ministry of the Environment commissioned experts to conduct capacity building for the implementation of the BOCM in 33 countries in Asia, Latin America, Africa, and elsewhere. 312. The CO2 law also envisioned separate targets for heating oils and motor fuels, respectively. Source: Swiss Federal Department of the Environment, Transport, Energy and Communications (DETEC), March 17, 1997. (http://www.uvek.admin.ch/ dokumentation/00474/00492/index.html?lang=en&msg-id=3156). 313. Loi fédérale sur la réduction des émissions de CO2, October 8, 1999 (http://www.admin.ch/ch/f/rs/6/641.71.fr.pdf). 314. The Swiss Federal Office for the Environment (FOEN) is responsible for the CO2 Act, which is being implemented jointly by the FOEN and the Swiss Federal Office of Energy (SFOE), with the aid of the Swiss Energy program. Source: DETEC (http://www.bfe. admin.ch/themen/00526/00531/index.html?lang=en). 315. Kerosene used for international flights is not included. 316. Switzerland ratified the Kyoto Protocol (KP) in 2003, thereby committing to reduce GHG emissions by 8% below 1990 levels for 2008-2012. 317. At a rate of 0.03 CHF/l for fuel oil and 0.025 CHFs/cubic meter for gas. 104 State and Trends of the Carbon Market 2012 for transportation fuels, which took effect on 6.11 Other initiatives January 1, 2006. The Climate Cent Foundation (CCF), funded by a tax on gasoline and diesel, Several other countries and regions have started invests in environmental measures.318 to develop the domestic capacity to establish market mechanisms relating to carbon, renew- On February 20, 2008, the Federal Council de- able energy, and energy efficiency. Table 11 pro- cided to revise its CO2 law after 2012. Switzerland vides an overview of these instruments as well as fixed targets comparable to those of the EU, some of the readiness programs designed to sup- namely a minimum GHG reduction target of port them. 20% below 1990 levels by 2020 (see Box 7). Box 7: The Swiss policy measures to reduce GHG emissions By Mr. Marco Berg, Managing Director of the Climate Cent Foundation (CCF) The Climate Cent Foundation (CCF) was founded in 2005 by four major Swiss business organiza- tions. Its purpose was to prevent a lawfully looming levy on transport fuels by making use of the flexible mechanisms of the Kyoto Protocol. To this end, CCF was committed to surrendering 17 million credits, at least 2 million domestic, to the Swiss government in 2013. To date, 14.5 million Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs), as well as 2.5 mil- lion domestic credits, have been purchased, or secured, to offset or reduce excess emissions in Switzerland in the 2008-12 period. The funds required for this (i.e., 700 million CHF) were gener- ated by a charge levied on petrol and diesel imports (at a rate of 0.015 CHF per liter). As the sole source of demand for domestic offsets and with no experiences to build on, CCF had to establish the rules and programs to define and procure domestic offsets. In one program, CCF gave direct financial support to owners of existing buildings who invested in a refurbishment of the building envelope beyond mandatory energy standards. Emission reductions were calculated compared to a standardized baseline. More than 8,000 projects were included in what worked like a Program of Activity under the Clean Development Mechanism (CDM), although that concept did not exist in 2005. A second program addressed renewable energy and energy efficiency projects that reduced fossil fuel use. The 150 projects under contract, generally small-scale, typically involve the use of wood, waste heat, or biofuels. They are credited along standard CDM rules by CCF, which took the risk that the government might deem them to be unacceptable upon examination. Project owners had to participate in one of ten rounds of auctions by making a bid stating volume of credits offered and price per credit. A given volume of funds in was auctioned in each round, which determined the cut-off for the highest bid considered. A third program addressed industrial emitters, who had voluntarily opted-in for the Swiss Emissions Trading Scheme (ETS) to get exempt from the levy on heating fuels, as well as small to medium enterprises (SMEs), who had committed to intensive emission reduction targets with the govern- ment. CCF conducted three rounds of auctions where companies were to offer different volumes of credits in a given range of prices per credit. Here the auctioned volume of funds determined the equilibrium price for each participant who made a bid at that price. On average, the price of the domestic credits was reduced at CHF100 /tCO2. 318. Source: Biofuels Platform (http://www.biofuels-platform.ch/en/infos/ch-lco2.php#note1). State and Trends of the Carbon Market 2012 105 Box 7: The Swiss policy measures to reduce GHG emissions (continued) Despite the fact that in December 2011 a national climate law for the period up to 2020 was passed,319 many uncertainties about future demand remain. Lawmakers want domestic emissions in 2020 to be at 80% of their 1990 level, seemingly without using international offsets. However, Switzerland starts with a surplus of of three million tons of emissions in 2012 – the amount of inter- national offsets used to comply with the KP. Therefore, the reduction path had Switzerland fulfilled its Kyoto target domestically is merely hypothetical. Realistically, the reduction path will need to be steeper (see Figure). One way of reducing the burden on the Swiss would be to allow for the triangle area between the two reduction paths, roughly 10.5 million tons, to be offset internationally. The government is expected to make a decision on this in 2012. 55 53 GHG Emissions (million tons) 51 49 47 45 43 41 39 37 35 1990 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Verified emissions Emission targets Adjusted emission 2008-2020 trajectory COUNTRY / DOMESTIC MARKET MECHANISMS ENVISAGED SUPPORTING PROGRAM(S)* Table 11: REGION AND SECTORS COVERED (IF KNOWN) Emerging Belarus Emissions Trading Scheme (ETS). European Union: “Clima East�320 domestic initiatives Chile Crediting mechanism and/or ETS: the energy, World Bank: Partnership for Market and supporting agriculture, forestry, and transport sectors are Readiness (PMR)321 readiness considered. programs Colombia Crediting mechanism in the transport sector. World Bank: PMR (non-exhaustive) Costa Rica Crediting mechanism: transport, energy, mining World Bank: PMR sectors are considered. East Asia Fuel security certificate market mechanism: Asian Development Bank: Pacific implementation of pilots in 2 or 3 cities yet to be Sustainable Transport Initiative 322 selected across the East Asia Pacific region. Indonesia Crediting mechanism. World Bank: PMR Jordan Crediting mechanism: energy and waste World Bank: PMR management sectors (considered). 319. Source: L’Assemblée fédérale de la Confédération suisse, Loi fédérale sur la réduction des émissions de CO2, December 23, 2011. 320. Source: European Union, Clima East: support to climate change mitigation and adaptation in Russia and eastern neighbourhood countries Eastern Partnership Integrated Border Management Programme: Strengthening Surveillance Capacity on the “Green� and “Blue� Border between the Republic of Belarus and Ukraine, 2011. 321. Source: PMR Implementing Country Participants’ Organizing Frameworks for Scoping of PMR Activities and updates (www. wbcarbonfinance.org/pmr). These proposed activities are tentative and may be modified. Some of the countries listed are yet to submit an organizing framework in 2012. 322. Source: Asian Development Bank, Beyond Carbon: Fuel Security as a New Market Mechanism, June 2011. 106 State and Trends of the Carbon Market 2012 Table 11: COUNTRY / DOMESTIC MARKET MECHANISMS ENVISAGED SUPPORTING PROGRAM(S)* Emerging domestic REGION AND SECTORS COVERED (IF KNOWN) initiatives and Kazakhstan ETS: implementation of a pilot over 2013-2015. European Bank for Reconstruction and Development (EBRD): supporting Preparedness for Emissions Trading in readiness the EBRD Region (PETER)323 programs Morocco Crediting mechanism: electricity, cement production, World Bank: PMR (non-exhaustive) phosphate extraction and processing (considered). (continued) South Africa Carbon tax to be possibly converted into a domestic World Bank: PMR ETS. Thailand Crediting mechanism and/or ETS: industry sector World Bank: PMR (urban areas). Turkey Infrastructure for market readiness. World Bank: PMR EBRD - Sustainable Energy Initiative III Ukraine ETS: energy and iron & steel sectors. World Bank: PMR EBRD: PETER European Union: “Clima East� Vietnam Crediting mechanism and/or ETS: steel, solid waste World Bank: PMR management, transport, power, and agricultural process sectors (considered). *Several bilateral programs also support capacity building in carbon markets in these countries. Source: World Bank. Box 8: Will there be demand for emission reductions after 2012? Despite the recent confirmation of several initiatives looking beyond 2012, the overall demand for international credits remains uncertain. Their key features such as import limits and eligible crediting mechanisms still require further rule making, and may likely be influenced by the outcomes of the ongoing international negotiations. Table 12: Country (group of) Assumptions Potential demand Scenario of (MtCO2e) potential demand Australia Carbon Price Mechanism, cap in line with target of 348 5% below 2000. for offsets in non- EU-27, Iceland, 20%below 1990, with differentiation EU ETS and 1,635† Annex I Countries Liechtenstein, and Norway effort sharing. 2013–20 Japan Between 25% and 0% below 1990. ≤539 (MtCO2e) New Zealand NZ ETS: 10% below 1990. 77 North America Western CIimate Initiative (WCI): limited to 94 California and Québec, with international offsets allowed in California only. Switzerland 20%below 1990, with ETS and other measures. 2.3 -12.8 TOTAL ≤2,706 Notes: For detailed assumptions see Annex 8: Assumptions for Estimates of Potential Demand for Offsets from non-Annex I Countries. †: Already accounts for an inflow in the EU ETS of 865 million CERs and ERUs during Phase II. 323. Source: European Bank for Reconstruction and Development, Regional (TCS 33506): Preparedness for Emissions Trading in the EBRD Region (PETER), December 2011. State and Trends of the Carbon Market 2012 107 Box 8: Will there be demand for emission reductions after 2012? (continued) We estimate that demand for emission reductions generated in developing countries could range from 2,156 to 2,706 billion tCO2e over 2013–2020 (see Table 12). Such demand may be met through offsets generated from CDM and JI projects, as well as new market approaches under the UNFCCC or agreements concluded outside of the multilateral process: • The EU Climate and Energy Package remains the main driver of post-2012 demand for interna- tional offsets, with a total of 1,635 MtCO2e over 2013-2020 absorbed by the EU ETS and EU in- ternal burden sharing (60-76% of the total). If the EU moved from 20% to 30% GHG emissions target below 1990 level by 2020, we estimate such demand will reach roughly 2,435 MtCO2e. • In addition, Australia’s Carbon Price Mechanism, which allows scheme participants to use inter- national offsets to meet up to 50% of their liability from 2015, is expected to import another 348 MtCO2e from overseas until 2020. • In North America, potential demand currently only comes from California, with 94 MtCO2e maxi- mum over 2013-2020 of sector-based offset credits. However, if Québec and the other three WCI partners adopted similar provisions, we estimate the collective demand for such credits could amount to roughly 200 MtCO2e. • Although Japan will not participate in the Kyoto Protocol’s Second Commitment period, it intends to remain in the Protocol and to rely on Kyoto Mechanisms to achieve its post-2012 target.324 Japan is also preparing a Bilateral Offsetting Credit Mechanism (BOCM) that is intended to complement its use of Kyoto Mechanisms.325 We estimate Japan may represent a maximum de- mand of 539 MtCO2e for both credits types by 2020. • Based on current targets, New Zealand could add 77 MtCO2e to the total demand. • Based on current targets, Switzerland could add 2.3 to 12.8 MtCO2e, depending on on-going policy ruling. As detailed in earlier in the Section, there are also several non-Annex I countries—such as Brazil, Chile, China, or the Republic of Korea—that already moved forward emissions trading, and which may, at some point, generate possible demand for domestic and international offsets. However, it is still impossible to provide any estimate of this demand and thus we do not consider it here. Estimates of supply for international offsets are forecasts for CDM and JI only (see Table 13). About 2.3 to 4.8 billion offsets could be generated post-2012. The lower end of this range does not ac- count for new projects possibly entering the CDM pipeline after April 2012 and for possible renewal of crediting period for already registered projects. The upper end of the range assumes full crediting renewal of the projects. We expect limited unused pre-2013 credits to come in addition to this sup- ply. One can conclude that the supply of existing current Kyoto mechanisms, i.e. CDM and JI, may be sufficient alone to serve global demand for international offsets over 2013-2020. Beyond 2012, the lack of demand for international offsets and uncertainties over their utilization in the current initiatives are the main constraints to the carbon market. This provides no further encouragement to build up a substantial and credible supply based on innovative mechanisms. For both developed and devel- oping countries, this could be a missed opportunity to benefit from market instruments to mobilize resources and engage the private sector in climate action. 324. Source: Japan’s Ministry of Foreign Affairs, Ministry of Economy, Trade and Industry, Ministry of the Environment, Japan’s initiatives on the Bilateral Offset Credit Mechanism (BOCM) and other activities for developing countries, April 14, 2012. 325. Over 2010-2011, 50 projects over more than 18 countries were selected by the Government, in order to perform feasibility studies. The mechanism is expected to start operations in 2013. 108 State and Trends of the Carbon Market 2012 Box 8: Will there be demand for emission reductions after 2012? (continued) Table 13: pre-2013 post-2012 Cummulative (up to 2020) Estimates of potential supply Point Carbon under the CDM CDM-EU ETS eligible 1,250 2,138 3,388 and JI up to 2020 CDM-other - 554 554 (MtCO2e) ERU 296 51 347 Total 1,546 2,743 4,289 Deutsche Bank* CDM-EU ETS eligible 1,301 1,847 3,149 CDM-other 2 468 470 ERU 250 - 250 Total 1,553 2,315 3,869 CDC Climat** CDM-EU ETS eligible 1,269 3,381 4,651 CDM-other 2 1,415 1,417 ERU 357 - 357 Total 1,628 4,797 6,425 * Secured supply from the first crediting period of projects registered of April 2012. ** Risk-adjusted issuance and full crediting renewal of projects in the CDM pipeline. State and Trends of the Carbon Market 2012 109 Annex 1: International reaction to aviation in the EU ETS On December 16, 2009, the Air Transport private lawsuit against the ETS, but urged the Association of America (currently called Airlines U.S. government “to accelerate its work to re- for America or A4A), together with American verse this unilateral tax.�330 Airlines, Continental Airlines, and United Airlines, filed a lawsuit contesting the measures. The International Air Transport Association They contended that the directive (i) infringes on (IATA), whose 230 members carry more than the Chicago Convention, the Kyoto Protocol,326 93% of scheduled international air traffic, has and the Open Skies Agreement327 because it im- claimed the ETS will cost airlines 1.2 billion poses a form of tax on fuel consumption; and Euros ($1.6 billion) this year, rising to an esti- (ii) infringes on certain principles of customary mated 9 billion Euros ($11.8 billion) in 2020; it international law in that it seeks to apply the al- has forecast a 29% drop in the industry’s profit lowance trading scheme beyond the EU’s territo- in 2012.331 Other analyses produced by the rial jurisdiction.328 European Commission332 and MIT333 differ. On October 6, 2011, the Advocate General of Studies show that while the inclusion of avia- the Court of Justice of the EU (ECJ) issued a tion in the EU ETS is being implemented in a preliminary opinion supporting the decision to way that limits distortion of competition, some include non-EU airlines in the EU ETS. On changes in competitiveness may occur. Hub air- December 21, 2011, the ECJ ruled that the ports just outside the EU, along with the non- EU decision to include the aviation sector in its EU airlines that serve these airports, may become Emission Trading Scheme (ETS) from 2012 is more competitive for some routes. Thus, some lawful under international law, thereby providing carbon leakage is likely to take place, meaning that all airlines – including those of third coun- that the reduction of aviation emissions within tries – will have to acquire and surrender emis- the EU is partly compensated for by an increase sion allowances for their flights departing from of emissions outside of the EU ETS. Still, the and arriving at European airports.329 On March impact of this shift in air traffic is deemed to be 27, 2012, A4A announced it was dropping its limited.334 326. Regarding the principle of common but differentiated responsibilities between Annex 1 and non Annex 1 countries enshrined in the Framework Convention. 327. Air Transport Agreement between the United States of America, of the one part, and the European Community and its Member States, of the other part, concluded on April 25-30, 2007. 328. Source: Court of Justice of the EU, Press Release No 139/11, Luxembourg, December 21, 2011, on Judgment in Case C-366/10: Air Transport Association of America and Others v Secretary of State for Energy and Climate Change. 329. Source: Judgment of the Court (Grand Chamber), December 21, 2011, reference for a preliminary ruling from the High Court of Justice of England and Wales, made by decision of July 8, 2010; InfoCuria. http://curia.europa.eu/juris/document/document.jsf?text=&do cid=117193&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=5925. 330. Source: Carbon Finance Online, EU aviation dispute to fade, as U.S. association drops lawsuit, March 28, 2012. 331. Source: Thomson Reuters Point Carbon, Carbon Market News, January 4, 2012. 332. Source: European Commission. Questions & Answers on the benchmark for free allocation to airlines and on the inclusion of aviation in the EU’s Emission Trading System (EU ETS), September, 2011. 333. Source: Journal of Air Transport Management. The impact of the European Union Emissions Trading Scheme on US aviation. December, 2011. 334. Source: Faber, J., Brinke, L., The Inclusion of Aviation in the EU Emissions Trading System, September 2011. 110 State and Trends of the Carbon Market 2012 A sequence of recent international reactions is later, in addition to the previously suspended provided below: purchase of 10 Airbus A380 super-jumbos and 35 A330s worth $12 billion, China delayed the • Reacting to the letters sent by major airlines purchase of an additional 10 Airbus long-haul to several government officials in Europe, jets. This brings to US$14 billion the value of including France, on March 22, 2012, the the purchases halted.339 French Prime Minister sent a letter to EC • On February 14, 2012, the U.S. enacted President Jose Manuel Barroso urging the the “FAA Modernization and Reform Act of Commission to “make all the necessary ef- 2012,� which includes a clear congressional forts� to find a solution acceptable to countries statement opposing the extraterritorial reach outside the region, as “this situation is caus- of the EU ETS and advising the government ing strong concerns among companies.�335 to use “all political, diplomatic, and legal • On March 22, 2012, Indian officials directed tools� at its disposal to ensure the scheme is its airlines not to report their emissions or not applied to U.S. registered aircraft or to submit emissions monitoring plan to the EU the operators of such aircraft.340 authorities. They also indicated that a “basket • On February 6, 2012, the Civil Aviation of measures� was available to the Indian gov- Administration of China reportedly ordered ernment to counter the scheme.336 Chinese airlines not to comply with the EU • Also on March 22, 2012, the South African ETS and prohibited companies from charging Tourism Minister urged the EU to suspend customers with the cost of reducing emissions the inclusion of aviation in the EU ETS for under the scheme. At the same time, China’s two years to allow time for a global agreement State Council, or cabinet, reportedly said that on carbon tax at the United Nations.337 all domestic airlines were banned from taking • On March 12, 2012, Airbus and other major part in the EU ETS unless given government airlines wrote to Europe’s leaders warning about approval. Following that news, on February the economic consequences of the ETS on the 7, the Chinese Foreign Ministry spokesman aviation sector. They called on governments confirmed: “China will consider taking nec- to find an unspecified “compromise solution� essary steps in accordance with the way things to the growing dispute over the extension of develop to protect the rights of our nationals the EU Emissions Trading System to the sec- and our companies …�; “we hope that the tor: claims have been made that US$12 billion EU ... can pay attention to China’s concerns worth of Airbus orders have been suspended and take a practical and constructive attitude in China. Airbus estimates this will jeopardize to increase communication and coordination more than 1,000 Airbus jobs in Europe and a with all sides to find an appropriate solution further 1,000 in the supply chain.338 A few days that all sides can accept.�341 335. Source: Thomson Reuters Point Carbon, France urges EU to solve airlines carbon payment row, Carbon Market Daily, April 5, 2012. 336. Source: Thomson Reuters Point Carbon, After China, India asks airlines to boycott EU carbon scheme, Carbon Market Daily, March 22, 2012. 337. This came from Pretoria’s tourism minister, Marthinus van Schalkwyk, at the Air Transport Action Group (ATAG) Aviation & Environment Summit 2012 in Geneva conference. Source: Climate Connect News, March 22, 2012. 338. In a letter to UK Prime Minister David Cameron and high-level members of the EC, the CEOs of British Airways (BA), Virgin Atlantic, and Airbus warned that threatened retaliatory measures over the extension of the EU ETS to aviation “are now becoming very real and are being translated into concrete action, which is starting to have serious consequences on the European aviation business.� Similar letters were sent to the leaders of France, Germany, and Spain by carriers Air France, Iberia, Air Berlin, and Lufthansa, and equipment manufacturers Safran and MTU Aero Engines. Source: Carbon Finance Online, Aviation industry urges compromise solution to EU ETS dispute, March 13, 2012. 339. Source: Thomson Reuters Point Carbon, Carbon Market Daily, March 15, 2012. 340. Source: Clifford Chance, Turbulence in the EU ETS – a practical overview of the EU ETS for aircraft lessors and lenders, Briefing Note, February, 2012. 341. Source: Thomson Reuters Point Carbon, Carbon Market Daily, February 7, 2012. State and Trends of the Carbon Market 2012 111 • On December 16, 2011 (i.e., 5 days prior • CATA, which represents China’s four major to the ECJ’s decision), in a letter sent by the airlines (flag-carrier Air China Ltd, China U.S. administration to EU officials, the U.S. Southern Airlines, China Eastern Airlines, Secretaries of State and Transportation wrote: and Hainan Airlines), refuses to accept the “we strongly urge the EU and its Member resolution and declared Chinese airlines States within their respective competences would consider legal action against the EU in to reconsider this current course; halt or, at response to its charges for carbon emissions. a minimum, delay or suspend application In addition, China has reportedly blocked a of this Directive,� also saying, “Absent such $3.8 billion aircraft purchase by Hong Kong willingness on the part of the EU, we will be Airlines from France-based Airbus at the Paris compelled to take appropriate action.� The air show in June.344 letter also included a list of 43 countries342 • Australia’s Qantas Airways has said it is also that publicly opposed the application of the considering legal action against the scheme. directive to non-European airlines.343 A reply • Facing a sluggish economy and weak cargo was sent on January 16, signed by Siim Kallas demand, Hong Kong-based Cathay Pacific (Vice President of European Commission) Airways, Ltd, and some other Asian airlines and Connie Hedegaard (Climate Action have said they might impose surcharges or in- Commissioner). crease airfares to counter the ETS impact. • On October 24, 2011, the House of • The director general of the Association of Representatives in the U.S. Congress passed Asia Pacific Airlines said: “The EU has paint- a bill (H.R. 2594) that would make it illegal ed itself into a corner, by stubbornly refusing for U.S. airlines to comply with their obliga- to recognize the legitimacy of the concerns tions under the EU ETS. In order to become repeatedly voiced by foreign governments on U.S. law, a similar bill would have to be ad- this issue….� “We urge the EU to scrap plans opted by the U.S. Senate; this is considered to include foreign airlines within the EU unlikely by market analysts. U.S. airlines are ETS, rethink its position and reengage with expected to continue to comply with their the international community.� EU ETS obligations. • In early 2012, low-budget Malaysian airline AirAsia X said it is withdrawing two services to Europe partly in response to the airline be- ing regulated under the EU ETS. 342. Countries include Brazil, Canada, China, India, Japan, Mexico, Republic of Korea, Russian Federation, South Africa, and the United States. 343. Source: http://images.politico.com/global/2011/12/scan_letter_hillary_clinton.pdf. 344. Source: Thomson Reuters Point Carbon, Carbon Market Daily, September 30, 2011. 112 State and Trends of the Carbon Market 2012 Annex 2: Land-use carbon Land-use greenhouse gas mitigation activities have Kyoto Protocol were issued in April 2012, gener- long remained on the fringe of global carbon mar- ated from a reforestation project in Brazil that was kets.345 Limited in scope for generating credits that granted 4 million temporary CERs (tCERs). are not eligible in the main compliance regimes, land-use carbon has been mostly restricted to the While mostly relying on public financing until much-smaller voluntary market.346 The latter has, recently, and despite lingering uncertainties on however, provided interesting ground for innova- the size and timeline for compliance demand, tion and helped project developers address new land-use carbon is gradually gaining traction types of land-use activities and develop specific from a more diversified set of investors. In 2011 carbon accounting tools.347 The on-the-ground and 2012, several funds emerged and joined the experience acquired, has informed and enhanced first few pioneers (see Table 14). Although far the discussion on land-use carbon, both domesti- from their full capitalization targets, these funds cally and internationally. The year 2011 saw long- are estimated to collectively raise about US$530- term land-use efforts begin to bear fruit and was 550 million (€402-417 million) by the end of therefore a transitional year for the market. First, 2012 for investment in land-use carbon off- the prospect of scaled-up demand for land-use as- sets.350 The funds that have emerged have a range sets materialized with the emergence of new carbon of investment strategies, markets, and scope of markets – such as in Australia and California.348 investors, as described below. These markets have set out plans to tap into domes- tic forest and soil sinks to generate compliance off- Most of the funds listed in Table 14 invest in sets. At an international level, Durban recognized carbon offsets through off-take agreements with that market-based approaches may be developed in project developers. Once the credits are issued, the coming years to finance REDD+ activities.349 the fund managers may directly monetize them It also opened the door for expanding the scope of in the secondary market and return the proceeds CDM land-use activities beyond reforestation and to their participants (yield-driven funds). The afforestation. The supply of land-use carbon offsets credits can also be delivered to participants who also became tangible with the issuance of the first either seek monetization or use them for their REDD voluntary credits in February 2011. These own compliance or voluntary offsetting. In the credits were generated from a Kenyan carbon proj- specific case of equity funds, investors seek re- ect. In addition, the first forestry credits under the turns from the dividends of their shareholdings 345. In this section, land-use carbon broadly refers to carbon offsets sourced from forestry and agricultural soil management activities that reduce and/or sequester greenhouse gases. 346. In 2011, the voluntary carbon market accounted for roughly 0.2% of global carbon markets volumes (see Executive summary). 347. Source: Guigon, P., Voluntary Carbon Market, How Can they Serve Climate Policies, 2011. OECD. 348. Carbon Farming Initiative (CFI) in Australia, and cap and trade program in California. 349. REDD-plus refers to incentives for reducing greenhouse gas emissions from deforestation and forest degradation and for promoting forest conservation, sustainable forest management, and enhancement of forest carbon stocks. 350. This figure is an estimate based on either public information (if available) or confidential information (bilateral interviews), and represents the financial commitments that the funds listed have collectively secured as of April 2012, and/or should have secured by the end of 2012. This estimate does not account for one fund, for which such information could not be obtained. Although these funds intend to primarily address land-use carbon, some may also source credits from rural energy use projects. The “targeted financial commitments� featured only derive from publicly accessible sources (e.g., presentation, advertisement support). Exchange rate used €1 = US$1.32. Source: European Central Bank, as at April 20, 2012. State and Trends of the Carbon Market 2012 113 in project enterprises earning income from the accounting methodologies. In California, for ex- sale of production outputs (e.g., carbon offsets, ample, the forestry protocols currently approved timber, or various agricultural commodities). under the compliance offset program involve tree planting and forest management activities Although some funds specifically address compli- in both rural and urban areas.351 A number of ance markets (e.g., Kyoto Protocol, California), methodologies approved under the Verified most of them still invest in voluntary assets. Carbon Standard (VCS) address both forest and However, those often bet on enhanced returns agricultural land (for the latter, the first meth- from potential grandfathering of their assets in odology was approved in December 2011) and future compliance markets, such as under an in- may ultimately supply the generation of future ternational or bilateral REDD+ agreement. compliance regimes.352 Although most of the funds invest in standalone land-use projects, The wide range of land-use activities covered by some are seeking scale through a more integrated the funds exemplifies the different markets that approach, using landscape accounting353 or even they address, as well as the availability of carbon crediting against national baselines. Table 14: Investment funds and land-use carbon Launch Targeted Manager Investors Investment Scope Targeted year commitment (non-exhaustive) strategy carbon (million market US$) Althelia 2011 325 Althelia Dutch Assets: Activities: Voluntary. Climate Ecosphere Development carbon credits, forest (REDD, Fund Finance sustainable landscape). Institution, indus- commodities , Scale: project, trial corporate(s), and Payments at scale. institutional for Ecosystem investor(s) Services. Yield-driven: credits mon- etization and delivery. BioCarbon 2011 25 BioCarbon Macquarie Group, Assets: carbon Activities: forest Voluntary. Group International credits. (REDD), soil Pre- Finance Yield-driven: Scale: project compliance: Corporation monetization. post-Kyoto, (World Bank), bilateral. Global Forest Partners. BioCarbon 2004 (I) 90 (closed) World Bank Spain, Japan Assets: credits. Activities: for- Compliance: Fund ( I ,II, 2007 (II) 60 (open) Petroleum Not yield- est (diverse), Kyoto III) 2012 (III) Exploration, driven: credits soil, landscape Voluntary. Tokyo Electric delivery. (rural energy also Power, Agence envisaged.) Française de Scale: Project, at Développement, scale Ireland.354 351. Source: California Air Resources Board, Compliance Offset Protocol for U.S. Forest Projects, 2011. 352. The methodologies approved under the VCS are available at http://www.v-c-s.org/methodologies/what-methodology. 353. Landscape carbon accounting is an integrated approach which consists of crediting for a variety of greenhouse gas emission reduction activities (e.g., land-use and rural energy activities) within a defined large-scale boundary. It therefore differs from classic silos where activities are addressed separately. Source: World Bank, BioCarbon Fund Tranche 3, Concept note, March 2012. 354. For the full list of participants, refer to the website of the Carbon Finance Unit of the World Bank. 114 State and Trends of the Carbon Market 2012 Table 14: Investment funds and land-use carbon (continued) Launch Targeted Manager Investors Investment Scope Targeted year commitment (non-exhaustive) strategy carbon (million market US$) Carbon 2011 132 CDC Climat CDC Climat, Assets: carbon Activities: forest Compliance: Fund for Asset Orbeo, institu- credits. (diverse) North America Forests Management tional investors. Yield-driven: Size: project. Voluntary. monetization. Pre- compliance: post-Kyoto, bilateral. EKO 2011 5-10 EKO Asset BP Alternative Assets: carbon Activities: forest Compliance: Green Management Energy, institu- credits. (diverse), soil North America Carbon Partners tional investors, Yield-driven: Scale: project. Fund family offices. monetization. FCPF 2011 215 World Bank Norway, Germany, Assets: emis- Activities: forest Voluntary. Carbon UK, Australia, sion reductions, (REDD) Pre- Fund USA, European with the poten- Scale: jurisdic- compliance: Commission, tial of becoming tion (subnation- post-Kyoto, CDC Climat, credits. . al, national). bilateral. BP Alternative Not yield- Energy, driven: delivery. The Nature Conservancy, Switzerland, Canada. Forest 2012 Not New Forests Not disclosed. Assets: carbon Activities: forest Compliance: Carbon disclosed credits. (diverse), soil. North Partners Yield-driven: Scale: project. America. monetization. Livelihoods 2011 40-66 Livelihood CDC Climat, Assets: carbon Activities: forest Voluntary. Fund Venture Credit Agricole, credits (100% (diverse), soil Danone, up-front finance (rural energy Schneider in exchange for also envisaged). Electric. carbon credits). Scale: project. Not yield- driven: delivery. Moringa 2012 132 Compagnie Development Assets: Activities: agro- Voluntary. Fund Benjamin de Finance equity (invest- forestry (out- Rothschild Institutions, , insti- ment in project puts: timber, soft (CBR), ONFI tutional investors, companies). commodities family offices. Yield-driven: carbon & other dividends based environmental on sales of externalities). timber & agro Scale: project. products with an upside com- ing from carbon credits. Terra Bella 2011 150 Terra Global The U.S. Assets: carbon Activities: Voluntary. Fund Investment Overseas Private credits, equity forest (REDD), Pre- Management Investment Yield-driven: agriculture. compliance: Corporation, insti- monetization, Scale: project. post-Kyoto, tutional investors. dividends. bilateral. State and Trends of the Carbon Market 2012 115 Annex 3: The state of the voluntary market By Forest Trends-Ecosystem Marketplace In 2011, activity in the voluntary carbon mar- Conference of Parties in Cancun – as well as ket (VCM) stabilized to contract 79 million tons project developer Wildlife Works’ fast-moving (Mt) for immediate or future delivery. Overall Kenyan REDD project that brought the first transaction volumes decreased 39% from 2010. verified VCS REDD credits to market. However, excluding one low-priced, high vol- ume outlier from the 2010 market, this repre- As the year progressed, however, only one other sents a 14% increase over 2010 levels. REDD project achieved verification, as project developers and third-party standards continued The value of the voluntary OTC marketplace in- to navigate REDD projects’ unique political and creased by 35% to US$573 million as the aver- technical challenges. REDD projects contracted age offset price jumped from US$6/ton in 2010 7.7 Mt representing 60 percent less volume than to US$7.3/ton in 2011. As always, prices were in 2010 – but nonetheless remained a popular highly stratified according to standard, location project type. and technology, ranging from a low US$0.1/ton to over US$100/ton. As a result of voluntary buyers’ renewed inter- est in clean energy projects, Asia emerged as the Renewable energy projects generated around 56 top location for offset supply – taking the lead Mt of all transacted reductions – roughly the size from the United States, which was the leading of the entire 2009 VCM OTC market. Of this credit source in 2009 and 2010. Demand for volume, wind projects blew away other technol- credits from Asian renewables was reflective of ogies to transact over 20 Mt. the CDM’s historic influence on the VCM. Last year, market players followed the CDM market For projects that reduce emissions from de- into Africa to transact the highest ever volume forestation and forest degradation (REDD), of credits from the region (7.4 Mt). Africa-based 2011 launched with optimism with progress projects benefited both from the CDM’s intensi- around REDD+ at the UNFCCC’s 2010 16th fied post-2012 focus on credits from LDC’s, as Market Average Price Volume Value (US$/tCO2e) (MtCO2e) (US$ million) 2010 2011 2010 2011 2010 2011 Voluntary OTC Market 6 6.5 69* 87 414 569 Of which Verified Carbon Standard 5 4.4 28 43 142 191 Of which Gold Standard 11.3 10.4 6.5 8 73 86 Of which Climate Action Reserve 6 7.3 13 9 79 65 Of which American Carbon Registry 1.6 5.7 1.5 4 2.5 24 *129Mt with single large CCX outlier transaction of 59Mt. 116 State and Trends of the Carbon Market 2012 well as innovative cook stove, forestry and water buyers were based in Europe. Buyers from the en- purification projects that emerged from the pipe- ergy, manufacturing and financial sectors picked line in 2011 after years of capacity building and up the lion’s share of purely voluntary offsets. methodology development. Purchases were motivated by the aim of meeting and communicating their corporate GHG targets The U.S. retained its standing as the largest sin- (59%). Another 6% of buyers worldwide pur- gle country supplier of offsets, however – and chased offsets to green their supply chains. also the largest buyer for both voluntary purpos- es and to prepare for regulation in the emerging Third party standards continued to launch new California cap-and-trade market. methodologies and in cases such as the Climate Action Reserve, are becoming increasingly rel- Worldwide, suppliers reported that 80% of credits evant to regulators. Overall, the Verified Carbon were transacted by voluntary buyers with the in- Standard (VCS) maintained its lead in contract- tent to retire credits – and over half of all voluntary ed volume. State and Trends of the Carbon Market 2012 117 Annex 4: California’s cap-and-trade design features Gases CH4, CO2, HFCs, NF3, N2O, PFCs, SF6. Sectoral scope -Coverage: 85% of California’s GHG emissions -From 2012: stationary facilities emitting at least 25,000 tCO2e per year, in industry and power generation (including imports). -From 2015: distribution (including imports) of fuels for combustion in the transportation and building sectors, whose combustion emits more than 25,000 tCO2e per year. Including threshold for power imports drops to 0tCO2e per year. Compliance periods -Three compliance periods: 2013-2014 (CP1), 2015-2017 (CP2) and 2018-2020 (CP3). -Annual compliance: 30% of the compliance obligations of a year is due no later than 1 November of the following calendar year. -Triennial compliance: the balance of compliance obligations for the whole compliance period is due no later than 1 November of the year following the end of the compliance period (i.e. 2015, 2018, and 2021). Cap -Target: -9% from 2005 levels, or 0% from 1990 levels. YEAR 2013 2014 2015 2016 2017 2018 2019 2020 Allowance budget 162.8 159.7 394.5 382.4 370.4 358.3 346.3 334.2 (million units) CAP (net PCR and VRE*) 160.4 157.3 337.7 366.1 354.7 332.3 321.2 310.0 *Under the Voluntary Renewable Electricity (VRE) program, ARB sets aside allowances (0.5% in CP1, and 0.25% in CP2 and CP3) to be retired on behalf of uncovered entities purchasing renewable electricity. Regulator California Air Resources Board (CARB). Compliance units -Emissions allowance issued by CARB. -Offset credit issued by CARB. -Early action offset credit issued by ARB following regulatory verification and review of an offset from an eligible program. -Compliance instrument issued by another GHG linked program. Allocation -Free allocation to eligible industrial facilities based on 1) a product-specific greenhouse gas emissions benchmark, and 2) an assistance factor based on exposure to leakage, which declines over time for some industries. -Free allocation to electricity distributors: Investor Owned Utilities (IOU) are required to auction all free allowances, Publicly Owned Utility (POU) can either auction free allowances or use them for compliance. Auctions -Quarterly auctions. First auction on November 14, 2012. -Uniform price, single round, sealed bids, and proportional allocation for tied bids. All bids converted to a single currency using the exchange rate by the Auction Administrator on the day of the auction prior to bidding window. -Market share limit: only applicable to auctions taking place until 2014. 15% of the offered allowances for a compliance participant (40% for an electrical distribution utility - removed in draft linked amended regulation), and 4% for a non compliance participant. -Reserve price set at US$10/unit in 2012, increasing 5% per year plus inflation rate to be specified. Reserve price in Canadian dollars (CN$) is that of the previous year increased by 5 percent plus as adjusted in Financial Administration Act of Québec. Auction Reserve Price is reset on day of auction as the higher of the California and Québec auction reserve price when converted to a single currency. -US$/CN$ exchange rate as specified by the Auction Administrator. 118 State and Trends of the Carbon Market 2012 Banking & borrowing -Unlimited banking (but subject to holding limit). -No borrowing stricto sensu, but advance auctions (on year N auctions of 10% of the allowances from future budget year N+3), and an allowance price containment reserve (see below). Offsets -Utilization Limit: 8% of compliance obligations for each compliance period (i.e. 218 MtCO2e maximum). -Unused offset capacity cannot be banked across CPs. -Four sources: 1) Compliance Offset Credits issued by CARB. 2) Early Action Offset Credits issued by CARB. 3) Compliance Offset Credits issued by a linked regulatory program (subject to further rule-making). 4) Sector-Based Offset Credits from crediting program (subject to further rule- making). Applicable sub-limit of 2% of compliance obligations in CP1, and 4% in CP2 and CP3 (i.e. 94 MtCO2e maximum). -Invalidation provision: CARB can remove from its holder’s account or require its replacement, within a timeframe of 8 years, or 3 years if the project has been reviewed by a second verifier within 3 years. Allowance Price -Share of total allowance budget feeding the reserve: 1% in 2013-2014, 4% in 2015- Containment 2017, 7% in 2018-2020. Reserve (PCR) -First sale on March 8, 2013, and six weeks after each auction for the following ones. -Sales only open to compliance participants. -Reserve divided in three equal-sized tiers according three fixed price categories: 40USD, 45USD, and US$50 per unit in 2013, increasing 5% per year plus inflation rate to be specified. -Draft linking amended regulation defines that entities from another GHG linked program are not eligible to purchase allowances from the reserve. Holding limit -Limit in the number of California allowances that any entity or group of affiliated entities can hold on its account. -Calculation formula: Holding Limit = 0.1 * base + 0.025 * (Compliance Period Budget – Base). E.g., 5.945 million allowances in 2013. -Draft linking amended regulation include allowances from other external linked programs in the calculation of the holding limit, and defines a holding limit for each allowance vintage year. Penalty for Four allowances for each missing one. non-compliance Source: World Bank, California Air Resources Board. The text in italic reflects some of the amendments to the cap-and-trade regulation proposed by CARB staff in a discussion draft published on March 30, 2012. Source: California Air Resources Board, Discussion Draft - March 30, 2012 Amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms to Allow for the Use of Compliance Instruments Issued by Linked Jurisdictions, March 2012. State and Trends of the Carbon Market 2012 119 Annex 5: Québec’s cap-and trade design features Gases CH4, CO2, HFCs, NF3, N2O, PFCs, SF6. Sectoral scope -From 2012: stationary facilities emitting at least 25,000 tCO2e per year, in industry and power generation (including imports, i.e. out-of-state generation). -From 2015: distribution (including imports) of fuels for combustion in the transportation (excluding aviation and shipping) and building sectors. Compliance -Three compliance periods: 2013-2014 (CP1), 2015-2017 (CP2) and 2018-2020 (CP3). periods -Compliance obligations no later than 1 October of the year following the end of the compliance period (triennial compliance). Cap YEAR 2013 2014 2015 2016 2017 2018 2019 2020 Allowance budget (million) 23.7 23.3 63.6 61 58.5 56 53.4 50.9 CAP (net PCR) 23.463 23.067 61.056 58.56 56.16 52.08 49.662 47.337 Regulator Ministry of Sustainable Development, Environment and Parks. Compliance -Emissions allowance issued by Québec. units -Early reduction credit issued by Québec. -Compliance instrument issued by a government under official agreement with Québec. -Offset credit issued by Québec. Allocation -Free allocation to eligible emitters, based on performance benchmarks. -75% of the free allowances allocated in January of each year. -Remaining 25% is put aside until September of the following for adjustment based on annual verified emissions. -Regulator to claim back surplus if any after adjustment. Auctions -Quarterly auctions (at most). -Uniform price, single round, sealed bids. -Market share limit: 15% for a compliance participant, and 4% for a non compliance participant for 2013 and 2014 units, and 25% for any bidder for 2015. -Reserve price set at CN$10/unit in 2012, increasing 5% per year plus as adjusted in Financial Administration Act of Québec. Holding limit -Limit in the number of allowances that any entity or group of affiliated entities can hold on its account. -Calculation formula: Holding Limit = 0.1 * base + 0.025 * (Compliance Period Budget – Base).(e.g., 0.875 million allowances in 2013). Banking & -Unlimited banking (subject to holding limit). borrowing -No borrowing stricto sensu, but an allowance price containment reserve (see below). Offsets -Issued by the Regulator. -Limit of 8% of compliance obligations (for each compliance period ): 34 MtCO2e maximum (4.1 MtCO2e in CP1, 15.9 MtCO2e in CP2, 13.9 in MtCO2e CP3) Allowance Price -Share of total allowance feeding the reserve: 1% in 2013-2014, 4% in 2015-2017, and 7% Containment in 2018-2020. Reserve (PCR) -Sales according to three price categories: CN$40, CN$45, and CN$50 per unit in 2013, increasing 5% per year plus as adjusted in Financial Administration Act of Québec. Early Reduction -Issued for reductions made by covered entities over 2008-2011 and measured against Credits 2005-2007 emissions. -Must be permanent, additional, and irreversible. Penalty for -Three allowances for each missing allowance. non-compliance -30-day notice before preemption over the next allocation. Source: World Bank, Government of Québec. 120 State and Trends of the Carbon Market 2012 Annex 6: China: targets and supporting measures under the Five-Year Plans 11th FYP (2006-2010) 12th FYP (2011-2015) Global goals Key 2010 targets Results Supporting 2015 target Additional sup- Existing indicators (from 2005 tools and (from 2010 porting tools pilot market levels) measures levels) and measures initiatives Energy -20% -19.06% -Elimination of 8.7 tce/thou- Market -Pilot en- consumption (-630 backward produc- sand yuan mechanisms: ergy efficiency intensity million tion capacity from 10.3 -Voluntary scheme in Tianjin tce, -�Ten Key Energy (-16%) market Municipality -1.46 Conservation -Pilot ETS -SO2 trading in billion Projects� -Low carbon city Jiangsu tCO2e) -�Top-1000 plans Emissions -10% SO2 -14.29% Enterprises -8% SO2 -Energy of major (15.49 from SO2 Energy -8% COD Management pollutants 22.95 million -12.45% Conservation -10% NOX Companies tons) COD Program� -10% NH3 (ESCOs) -10% COD -�Energy-efficient Decreasing products for the Existing (12.73 from emissions benefit of people� initiatives are 14.14 million of carbon -Installation of maintained or tons) and other flue-gas expanded in pollutants desulfurization scope (e.g., Top with energy systems on coal 1000 to 10,000 conservation plants Enterprises), and clean -Energy higher standards energy Management are set Companies (ESCOs) 355 CO2 emis- New to 12th FYP -17% sion intensity Share of Up at 10% 8.3% (up -Feed-in tariffs No official Continuation None non-fossil from 7.5% 3.1%) -Indicative tariffs. target to date of the same fuels in pri- -�Mandated mar- supporting mea- mary energy ket share� (similar sures (higher consumption to Renewable standards) Portfolio Standard) Forest cover Up to 20% 20.36% -Afforestation 21.66% Continuation -Panda standard from 18.2% (+25.29 programs (+12.5 mil- of the same (AFOLU offset million -Forest lion ha) supporting certification Increasing ha) conservation measures scheme) carbon -Restoration of -China Green sequestration desertified lands Carbon Fund Forest stock New to 12th FYP 14.3 from by the State 13.7 billion m³ Forestry Administration Source: World Bank, PRC State Council, NDRC. 355. Energy management companies, known as ESCOs, help industries identify and implement energy efficiency projects by bringing upfront finance for investments in new technologies or renovated equipment. Industries incur no net cash costs, as they reimburse ESCOs with regular payments from the cost savings made until their investment is recovered. State and Trends of the Carbon Market 2012 121 Annex 7: India PAT: market design and governance elements COMMENTS ESTABLISHING Energy Conservation Act 2001, modified by the Energy Conservation LEGISLATION Amendment Act 2010, Article 14 (August 2010). REGULATOR Bureau of Energy Efficiency (BEE) of India’s Ministry of Power, under supervisions of the Central Electricity Regulatory Commission. ADMINISTRATOR BEE. COVERAGE -Selected DCs in 8 energy intensive sectors (478 DCs): Thermal Power plants, Iron & Steel, Cement, Fertilizer, Aluminum, Textile, Pulp & Paper, Chlor alkali. -Possible sectoral extension in the second compliance periods. COMPLIANCE PERIOD -First PAT cycle going from April 1, 2012 to March 31, 2015. -Fulfillment of compliance obligations subsequent to first cycle termination. BASELINE -Defined as the average total energy input per production unit over 2007-2010. -All energy sources are considered and converted in metric ton of oil equivalent (MTOE). TARGET -Specific energy consumption (SEC) target assigned to each DC, in percentage of the baseline. -Overall reduction of 4.2%, equivalent to 6.6 million MTOE. -Revision in each subsequent PAT cycle. MONITORING AND -Based on a “Baseline Energy Audit� (BEA). VERIFICATION -Performed by “Designated Energy Auditors� (DENA) accredited by BEE. -First BEA at the end of the first PAT cycle (2014), possible annual BEA thereafter. ENFORCEMENT Penalty of 10 lakhs (US$20,000) in addition to the value of compliance. TRADING - ESCert issued to any DC exceeding own SEC target. -Bilateral transactions or cleared through the two national power exchanges, i.e. Power Exchange India, India Energy Exchange. -Market design elements (e.g., banking) under consideration. MARKET READINESS -Target setting by March 2012 (completed). -Rules and procedures completed.356 -Trading infrastructures and rules to be announced soon (ongoing). Source: World Bank, Bureau of Energy Efficiency. 356. Rules and procedures are available at www.bee-india.nic.in. 122 State and Trends of the Carbon Market 2012 Annex 8: Assumptions for estimates of potential demand for offsets from non- Annex I Countries EU: Under the EU Climate and Energy Package, 2012 or from a project based in an LDC if the EU commits to cut its GHG emissions by registered after 2013. 20 percent below 1990 levels, possibly tighten- ing to 30 percent depending on developments in For non-ETS covered sectors, the Climate and climate negotiations. For the EU ETS, this trans- Energy Package translates into cuts of 10 percent lates into further tightening of the cap from an (or more) below 2005 levels by 2020. Offsets can average 6 percent below 2005 levels over 2008– be used to cover about one-third of the effort in 20 to 21 percent by 2020 (or more in the 30 the 20 percent scenario, estimated to represent percent scenario), with a corresponding shortfall about 800 MtCO2e over 2013–20. In the 30 of about 2,500 MtCO2e over 2013–20 in the 20 percent scenario, offsets can in principle be used percent scenario (resp. 3,500 MtCO2e in the 30 to cover half of the additional effort, leading to percent scenario).357 a total demand of about 1,100 MtCO2e. No re- striction applies so far to the use of offsets. The total amount of offsets that can be used over 2008–20 is estimated at 1,700 MtCO2e in the New Zealand: The NZ ETS continues to expand 20 percent scenario (2,200 MtCO2e in the 30 its coverage, with synthetic gases and waste join- percent scenario). On aggregate, the amount of ing in 2013 and agriculture in 2015. The cap of offsets that can be surrendered during Phase III the scheme is set in line with the country inter- corresponds to the difference between the over- national commitment—to reduce emissions by all amount allowed over Phases II and III jointly 10 percent below 1990 levels by 2020 or, if a minus what has been already surrendered during comprehensive global agreement is reached, by Phase II. The following qualitative restrictions 20 percent. This could translate into a shortfall apply with regard to the use of CERs/ERUs of 75 to 105 million tons over 2013–20, ac- against Phase III obligations: counting for a limited uptake of forestry.358 • CERs from project activities targeting the de- Australia: Under Australia’s Carbon Price struction of HFC-23 and N2O from adipic Mechanism (CPM), operators will be able to acid production are banned from the EU ETS. meet up to 50% of their compliance obligations CP-1 offsets will still be allowed until the end with international offsets from 2015. If the cap is of April 2013 against Phase II obligations. set in line with Australia’s target of 5 percent be- • CP-1 offsets (including ERUs) from eligible low 2000 levels by 2020 (unconditional pledge project types can be banked and surrendered. under the Copenhagen Accord), the CPM par- • Offsets generated post-2012 must come ei- ticipants could therefore theoretically source ther from a project registered before end of almost 1 billion tCO2e overseas (maximum), 357. This includes also aviation. Source: Barclays Capital. Monthly Carbon Standard, April 11, 2011. 358. Source: own calculation based on New Zealand Fifth National Communication. State and Trends of the Carbon Market 2012 123 i.e. up to 50% of their cumulative liability un- international offsets (see Box 7). Last year, we ac- der the CPM over 2015-2020.359 However, this counted for a third source of demand for offsets figure disregards the costs of domestic abate- stems from the obligation for producers and im- ments in covered and non-covered sectors (i.e. porters of fossil fuels to offset 25–30 percent of Carbon Farming Initiative). Taking these into CO2 emissions in the 20 percent scenario (gearing account, the Australian Government models that up to 40-45 percent in the 30 percent scenario). Australian businesses would source 348 MtCO2e We estimated that this measure could generate of abatement overseas by 2020.360 a demand of 25 to 50 MtCO2e of international offsets.362 However, this measure was over-rules Japan: As plans for a mandatory ETS in Japan by the national law passed in December 2011, are delayed, one simply assumes here that off- and this demand is restricted to domestic offsets. sets could be used up to 50 percent to fill the gap to the -25% conditional pledge. Accounting Northern America: As of today, California is for sinks, this could correspond to a cumula- the only cap and trade program in Northern tive demand for offsets of 540 MtCO2e over America to accept international credits. These 2013–2020.361 are “Sector-Based Offset Credits� for which we estimate a demand of 94 MtCO2e maximum Switzerland: As its main additional climate poli- over 2013-2020 (see Section 6.3.2.1). Québec cies and measures, Switzerland implements an has yet to release its offset program as of the time ETS similar in design to the EU ETS. This could of writing the report. May all the other three result in a cumulative demand for offsets from WCI partners, i.e. British Columbia, Manitoba, covered entities over 2013–20 of 2.3 MtCO2e in and Ontario start operating their own cap and the 20 percent scenario, reaching 4 MtCO2e in trade in 2015, with similar international offsets the 30 percent scenario. In addition, a national provisions as California, a collective demand of law was passed in December 2011 and set for roughly 200 MtCO2e international credits could the country’s GHG emissions a 2020 target of be generated over 2013-2020 across the five 20% below their level of 1990. Although no de- WCI jurisdictions.363 Although RGGI is cur- cision was made as of the time of writing, law- rently under review process, we do not expect it makers may allow the use international offsets, will generate demand for international offsets. which would generate a demand of 10 million 359. Own calculation based on Department of Climate Change and Energy Efficiency, Australia’s emissions projections, 2010. 360. Source: Government of Australia, Treasury, Strong Growth, Low Pollution, Modeling a carbon price, update, 2011. 361. Assuming Japan’s emissions grow in line with projections by the U.S. DoE Energy Information Administration’s International Energy Outlook 2010 (High oil price case). Carbon sinks are maintained at 20 MtCO2e (that is, their planned use under the Kyoto Protocol), though they could decrease. Source: Ministry of the Environment, Japan, National Greenhouse Gas Inventory Report of JAPAN, April 2012. 362. Own calculation based on Switzerland Fifth National Communication. 363. Own calculation based on GHG emissions projections of British Columbia, California, Manitoba, Ontario, and Québec. 124 State and Trends of the Carbon Market 2012 Methodology In the State and Trends of the Carbon Market 80% of the difference. This year’s calculation also Report of 2011, the size of the global carbon resulted in a secondary CER market greater by market in 2010 derived from the growth rate US$2 billion in 2010 yoy. The remaining differ- between 2009 and 2010 of each market seg- ence is explained by the value of the post-2012 ment (for example, primary Certified Emission CER transactions, not reported last year, which Reduction (CER), other project-based markets, reached over US$1 billion in 2010. Assigned Amount Units (AAUs), European Union Allowances (EUAs), and other allow- Monitoring the activity of the primary project ance markets), drawing on information obtained market is a challenging task given the number of primarily from Thomson Reuters Point Carbon transactions and the diversity of participants. In and Bloomberg New Energy Finance. The value addition, prices and contract structures are con- of the voluntary transactions was obtained from fidential in an increasingly competitive market. data provided by Ecosystem Marketplace. Since the original information from Thomson Reuters The authors surveyed major carbon-industry Point Carbon and Bloomberg New Energy publications364 and conducted approximately Finance was provided in Euros, the impact of the 150 interviews with a broad range of market play- US$/Euro exchange rate in the same period was ers: analysts and intelligence providers, project eliminated and the US$ results were applied to developers and aggregators, exchanges and trad- the values of each market segment, as calculated ing platforms, financial institutions and brokers, by the World Bank in 2009. When applicable, regulators, managers of carbon purchasing funds the unweighted average from the sources was and facilities, including public procurement pro- used, although some adjustments were made as grams and carbon portfolios of companies fac- deemed appropriate. ing compliance obligations. This report focuses on regulatory compliance; therefore its coverage Instead of using external data, however, in 2012 of the voluntary market is not exhaustive. The the authors calculated the volumes and values for information on the voluntary market (includ- 2010 (following the methodology described be- ing pre-compliance activity in North America) low). The calculation resulted in higher volumes has been kindly provided by Forest Trends-New and values, particularly for EUA and secondary Energy Finance and Ecosystem Marketplace. CER transactions. Instead of the global carbon market of US$142 billion reported in 2010, the Only signed ERPAs are included in the project- revised calculations resulted in a global carbon based transaction database. Although they re- market that is greater by about US$17 billion ceived a high level of cooperation from market year on year (yoy). A higher value in the EUA players during their research, the authors were market accounted for about US$14 billion, or not able to obtain comprehensive information 364. Including online sources such as Carbon Finance (www.carbon-financeonline.com), Joint Implementation Quarterly (www.jiqweb. org), Thomson Reuters Point Carbon (www.pointcarbon.com) as well as Carbon Positive (www.carbonpositive.net), CDC Climat Research (www.cdcclimat.com), IISD Reporting Services (www.iisd.ca), IDEAcarbon (www.ideacarbon.com), Forest Trends-Ecosystem Marketplace (www.ecosystemmarketplace.com), and Thomson Reuters, the CDM and JI pipeline databases and analyses maintained by UNEP Risoe, and IGES, and Web sites of market players (DNAs, DOEs, project developers and aggregators, exchanges and trading platforms, financial institutions and brokers, regulators, carbon purchasing funds and facilities, public procurement programs, and companies facing compliance obligations). One should also mention other resources, including reports prepared by financial institutions, such as analyses by Barclays Capital, Deutsche Bank, Orbeo, and Société Générale, that have been kindly made available to the authors. State and Trends of the Carbon Market 2012 125 for all reported transactions. The authors are To estimate the volume of “pure� bilateral trans- relatively confident that the database captures actions of EUAs and CERs (i.e., those deals that most transactions entered into by governments are not closed through brokers or exchanges – and a representative proportion of the activity of including those cleared over the counter (OTC), private-sector buyers in the primary market. In the authors surveyed several market players. The between the periodic reports in this series, the answers varied depending on respondents (finan- authors have occasionally become aware of un- cials or naturals), with an average of 15% of vol- recorded transactions from previous years as well umes transacted or cleared through exchanges. as of the cancelation or postponement of previ- Taking into account all inputs, this coefficient is ously recorded transactions. Adjustments have applied to volumes and values of spot and for- been made in the database, explaining why data ward transactions to compute the entire value of for former years may be slightly different from the EUA and secondary CER markets in 2010. previous publications in this series. In 2011, inputs led the authors to increase the percentage to 25% applied to spot volumes Data for transactions on the so-called secondary transacted or cleared through exchanges, for Clean Development Mechanism (CDM) and both EUA and secondary CER markets. Joint Implementation (JI) market, including spot transactions365 and forward transactions with de- In consultation with several market players, the livery guarantees from a creditworthy seller (com- options market in this report was valued at to- monly financial institutions in Europe), were tal volumes times strike price, assuming that the obtained from exchanges, clearing houses, and bulk of transactions are at-the-money options brokers.366 This is also the case for transactions where the strike price is similar to prevailing of EUAs and derivatives.367 The authors have market prices. also obtained detailed information on transac- tions conducted under Alberta, British Columbia, Prices and values are primarily expressed in nomi- California, Chicago Climate Exchange (CCX), nal US$ per tCO2e, unless indicated otherwise.369 New Zealand Emissions Trading Scheme (NZ Average annual exchanges of €1 = US$1.327 for ETS), and the Regional Greenhouse Gas Initiative 2010 and €1 = US$1.392 for 2011 were applied, (RGGI), as well as aggregate information on trans- unless data were available with a finer granular- actions under the New South Wales Greenhouse ity, in which case an average exchange rate over Gas Reduction Scheme (NSW GGAS).368 With the period considered (e.g., Q1’11, June 2011) is regard to Removal Units (RMUs) and AAU applied. The cut-off date for information is April transactions, several sources have been used and 20, 2012. A ton (abbreviated as “t�) refers to a cross-checked: public announcements, interviews metric ton (1,000 kg). with some buyers and sellers, and examination of Kyoto Parties’ registries when possible. 365. Some of these spot transactions relate to sales of issued CERs directly by project sponsors, either those who have chosen to develop their projects unilaterally or those who have been issued more CERs than they had sold through forward transactions. These spot transactions could arguably be considered to be primary transactions, although commercial conditions, including prices, are aligned with the secondary market. It is not possible, however, to extract those from the broader secondary market activity. 366. For 2010 and 2011, such exchanges, clearinghouses, and brokers were: BlueNext, Climex, Chicago Climate Futures Exchanges (CCFE), Energy Exchange Austria (EXAA), European Energy Exchange (EEX), Gestore del Mercato Elettrico (GME). Green Exchange, Green Market, LCH Clearnet, IntercontinentalExchange (ICE), London Energy Brokers Association (LEBA), and Nordpool. 367. Data on EUA transactions in 2010 and 2011 (spot, futures, and options) were obtained from the following sources: BlueNext, Climex, Energy Exchange Austria (EXAA), European Energy Exchange (EEX), Gestore del Mercato Elettrico (GME). Green Exchange, Green Market, LCH Clearnet, IntercontinentalExchange (ICE), London Energy Brokers Association (LEBA), and Nordpool. 378. For Alberta, sources are Government of Alberta (volumes) and Karbone (prices). For British Columbia, the source is the Pacific Carbon Trust. For California, sources are ICE and Green Exchange (exchange-based volumes et prices), and Thomson Reuters Point Carbon (offset volumes and prices). For Chicago Climate Exchange (CCX), sources are CCX, CCFE, and ICE. For NZ ETS, sources are New Zealand Emission Unit Register (volumes of internal transfers) and Westpac (prices). For RGGI, data come from RGGI Inc., RGGI CO2 Allowance Tracking System, CCFE, ICE, Green Exchange. For NSW GGAS, data come from the Registry (volumes) as well as from Nextgen (prices). 369. Exchange rates from European Central Bank (www.ecb.int), and U.S Federal Reserve (www.federalreserve.gov). 126 State and Trends of the Carbon Market 2012 The report has written contributions kindly pro- Based on the UNEP Risoe CDM Pipeline, the vided by Forest Trends-Ecosystem Marketplace nominal volume of 2,17 billion CERs from reg- (voluntary and pre-compliance activities), Air istered projects should deliver about 1,13 billion France (Aviation), Ministry of the Environment tons by the end of 2012,370 or a 52% risk-ad- in Japan (Japan), Orbeo (EU ETS), Reed Smith justed rate. On the other hand, a much lower (EU ETS), and Climate Cent (Switzerland). success rate of 6% is seen for projects at an earlier stage in the regulatory process.371 To date, the cu- In order to estimate the likely supply of pre-2013 mulative nominal volume of credits contracted credits in the section 5, the authors applied a de- has reached 2.58 billion tons. Applying the 6% livery cut to the nominal volumes contracted (i.e., risk-adjusted delivery over the 0.42 billion tons a risk-adjusted supply). The delivery cut aims to newly contracted and in early stage of develop- reflect underdelivery caused by both regulatory ment (i.e., the difference between 2.58 billion and operational issues. In order to refine the es- and 2.17 billion), early-stage projects shall de- timate, the authors also adopted two different liver 25 million tons. All in all, 1.15 billion tons delivery cuts according to a project’s regulatory shall become available for buyers until the end of status, as projects in a more advanced stage of de- 2012 (i.e., 1.13 + 0.025). velopment in the regulatory process have higher chances to have their credits issued before 2013. 370. To date, 895 MtCO2e have been issued. 371. As of April 2012. State and Trends of the Carbon Market 2012 127 Acknowledgments We would like to acknowledge our colleagues in Figueiredo de Simoni, Michael Fleming, James the carbon market who provided their written Foster, Javier Freire Coloma, Sandeep Garg, contributions and perspectives during the elab- Gary Gero, Michael Gibbs, Jay Gillette, Sylvain oration of this report, ensuring its quality and Goupille, Matthew Gray, Christoph Grobbel, clarity: Pierre Albano, Philippe Ambrosi, Cesar Isabel Hagbrink, Kate Hamilton, Anthea Harris, Adrian Arreola Croda, Valentin Bellassen, Marco Kristian Havskov Sørensen, Johannes Heister, Berg, Ana Bucher, Isabelle Curien, Charles Di Renat Heuberger, Richard Hobbs, Robert M. Leva, Carine Hemery, Benoît Leguet, Manuel Hunt, Shigeru Inaba Maeda, Keisuke Iyadomi, Luengo, Yuji Mizuno, Sidney Nakao Nakahodo, Sara Jellie, Sam Johnson-Hill, Francois Joubert, Maria Netto de A. C. Schneider, Molly Peters- Monica Julissa, Abyd Karmali, Jiang Kejun, Stanley, Simone Ruiz, Guido Schmidt-Traub, John Kilani, Taehee Kim, Elif Kiratli, Sigurd Xueman Wang, and Peter Zaman. Klakeg, Daigo Koga, Miyuki Konuma, Robyn Kuhn, Charles Lapierre, Fabrice Le Sache, We wish to extend our gratitude to those who Mark C. Lewis, Ludovino Lopes, Thomas offered their cooperation and insights during Marcello, Alexandre Marty, Ajay Mathur, Taisei the development of this report: Andrew Ager, Matsuki, Stephen McComb, Mike McKensey, Imtiaz Ahmad, Hanna-Mari Ahonen, Manelle Brookly McLaughlin, Damien Meadows, Ait-Sahlia, Emilie Alberola, Ivan Albino, Jan Meuleman, Mark Meyrick, Yuji Mizuno, Hervé Allègre, Andreas Arvanitakis, Ismael Arantzazu Mojarrieta Sanz, Nadine Mueller, Aznar Cano, Kai-Uwe Barani Schmidt, Ellysar Thomas Myhrvold-Hanssen, Sidney Nakao Baroudi, Ricardo Bayon, Bridget Beals, Francois Nakahodo, Dimitar Nikov, Akiko Nishimae, Beaurain, Luca Bertali, Benoit Bosquet, Bengt Robert Noel De Tilly, John O’Brien, Moe Moe Boström, Guillaume Bouculat, Franka Braun, Oo, Hyoung Kun Leo Park, Cecile Petit, Leila Kevin Brennan, Jean-Philippe Brisson, Urs Pourarkin, Neeraj Prasad, Brice J. M. Quesnel, Brodmann, Nigel Brunel, Jonathan Burnston, Olivier Raevel, David Rapin, Tuomas Rautanen, Michel Buron, Luis Cañete, Giorgia Caropreso, Juha Ruokonen, Owen Ryan, Rajinder Sahota, Marcos Castro, Philippe Chauvancy, Clément Alexander Sarac, Denise Seabra, Ash Sharma, Chenost, Olga Chistyakova, Annika Christell, Chandra Shekhar Sinha, Brian Shillinglaw, Margaret Chu, Benjamin Coleman, David Trevor Sikorski, Nicole Singh, Teresa Solana Costa-D’sa, Matt Cowie, Anthony D’Agostino, Mendez de Vigo, Jean-Francois Steels, Nicolas Richard De Ferranti, Lennard de Klerk, Christian Stephan, Niclas Svenningsen, John-Paul Taylor, De Perthuis, François Dejean, Anais Delbosc, Michiel ten Hoopen, Sarah Underwood, Antonio Giuseppe Deodati, Michel DiCapua, Wolfgang Valcovich, Jan-Willem van de Ven, Lloyd Vas, Diernhofer, Eduardo Dopazo, Claire Dufour, Jari Vayrynen, Fabio Vaz, Ronald Velghe, James V.K. Duggal, Laura Dzelzyte, Johannes Ebeling, Vener, Daniele Violetti, George Waldburg, Wen Bodo Einicke, Alana Ellis, Sandra Enteiriço, Wang, Martijn Wilder, Miguel Winkels, Raoul Amaral Eufran, Emmanuel Fages, Guillaume Wirtz, Yevgen Yesyrkenov, Peter Zapfel, Richard Ferragu, Fabiana Ferreira Candiano, Walter Zehter, Elizabeth Zelljadt, and Kelly Ziegler. 128 State and Trends of the Carbon Market 2012 Glossary Accredited Independent Entity (AIE): Accredited One AAU represents the right to emit one metric independent entities (AIEs) are independent audi- ton of carbon dioxide equivalent. tors that assess whether a potential project meets Backwardation: A downward sloping forward all the eligibility requirements of the JI (deter- curve (i.e., the price of the future is less than the mination) and whether the project has achieved spot price of underlying commodity). Antonym: greenhouse gas emission reductions (verification). contango. Additionality: A project activity is additional if Banking or carry over: Compliance units under anthropogenic GHG emissions are lower than the various schemes to manage GHG emissions those that would have occurred in the absence of in existence may or may not be carried over from the project activity. one commitment period to the next. Banking Afforestation: The process of establishing and may encourage early action by mandated enti- growing forests on bare or cultivated land that ties depending on their current situation and has not been forested in recent history. their anticipations of future carbon constraints. Annex I (Parties): The industrialized countries list- In addition, banking brings market continuity. ed in Annex I to the UNFCCC were committed Banking between Phase I and Phase II of the EU to return their greenhouse gas emissions to 1990 ETS is not allowed; it is allowed between Phase levels by 2000. They currently include Australia, II and further Phases. Some restrictions on the Austria, Belarus, Belgium, Bulgaria, Canada, amount of units that can be carried over may ap- Croatia, Czech Republic, Denmark, Estonia, ply; for instance, EUAs may be banked with no Finland, France, Germany, Greece, Hungary, restriction, while the amount of CERs that can Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, be carried over by a Kyoto Party is limited to 2.5 Lithuania, Luxembourg, Monaco, the Netherlands, percent of the assigned amount of each party. New Zealand, Norway, Poland, Portugal, Romania, Baseline: The emission of greenhouse gases that Russian Federation, Slovakia, Slovenia, Spain, would occur without the policy intervention or Sweden, Switzerland, Turkey, Ukraine, the United project activity under consideration. Kingdom, and the United States, as well as the Biomass Fuel: Combustible fuel composed of a European Economic Community. All but Turkey biological material (for example, wood or wood are listed in Annex B. by-products, rice husks, or cow dung). Annex B (Parties): The 39 industrialized California Global Warming Solution Act countries (including the European Economic AB32 (AB32): The passage of Assembly Bill 32 Community) listed in Annex B to the Kyoto (California Global Warming Solution Act AB32) Protocol have committed to country-specific in August 2006 sets economy-wide GHG emis- targets that collectively reduce their GHG emis- sions targets as follows: Bring down emissions to sions by at least 5.2 percent below 1990 levels on 1990 levels by 2020 (considered to be at least a 25 average over 2008–12. percent reduction below business-as-usual) and to Assigned Amount Unit (AAU): Annex I Parties 80 percent of 1990 levels by 2050. Covering about are issued AAUs up to the level of their assigned 85 percent of GHG emissions, a cap-and-trade amount, corresponding to the quantity of green- scheme (still under design) would be a major in- house gases they can release in accordance with strument, along with renewable energy standards, the Kyoto Protocol (Article 3), during the first energy efficiency standards for buildings and ap- commitment period of that protocol (2008–12). pliances as well as vehicle emissions standards. State and Trends of the Carbon Market 2012 129 Cap and Trade: Cap-and-trade schemes set a de- the U.S., membership in the CCX grew from sired maximum ceiling for emissions (or cap) and 127 members in January 2006 to 237 mem- let the market determine the price for keeping bers by the end of the year; new participants ex- emissions within that cap. To comply with their pressed their interest in familiarizing themselves emission targets at least cost, regulated entities with emissions trading. can either opt for internal abatement measures or Clean Development Mechanism (CDM): The acquire allowances or emission reductions in the mechanism provided by Article 12 of the Kyoto carbon market, depending on the relative costs Protocol, designed to assist developing countries of these options. in achieving sustainable development by allow- Carbon Asset: The potential of greenhouse gas ing entities from Annex I Parties to participate in emission reductions that a project is able to gen- low-carbon projects and obtain CERs in return. erate and sell. Climate Action Reserve (CAR): The Climate Carbon Finance: Resources provided to activities Action Reserve is a U.S.-based offsets program generating (or expected to generate) greenhouse that establishes regulatory quality standards for gas (or carbon) emission reductions through the the development, quantification, and verifica- transaction of such emission reductions. tion of greenhouse gas (GHG) emission reduc- Carbon Dioxide Equivalent (CO2e): The uni- tion projects in North America; issues carbon versal unit of measurement used to indicate offset credits known as Climate Reserve Tons the global warming potential of each of the six (CRT) generated from such projects; and tracks greenhouse gases regulated under the Kyoto the transaction of credits over time in a transpar- Protocol. Carbon dioxide – a naturally occurring ent, publicly accessible system. gas that is a by-product of burning fossil fuels Community Independent Transaction Log and biomass, land-use changes, and other indus- (CITL): The Community Independent trial processes – is the reference gas against which Transaction Log (CITL) conducts “supplemen- the other greenhouse gases are measured, using tary checks� to those done by the ITL for trans- their global warming potential. actions involving registries of at least one EU Certified Emission Reductions (CERs): A unit member state, such as the issuance, transfer, can- of greenhouse gas emission reductions issued cellation, retirement, and banking of EUAs. pursuant to the Clean Development Mechanism Conference of Parties (COP): The supreme of the Kyoto Protocol and measured in metric body of the Convention. It currently meets once tons of carbon dioxide equivalent. One CER rep- a year to review the Convention’s progress. The resents a reduction in greenhouse gas emissions word “conference� is not used here in the sense of one metric ton of carbon dioxide equivalent. of “meeting� but rather of “association,� which Chicago Climate Exchange (CCX): Members to explains the seemingly redundant expression the Chicago Climate Exchange make a voluntary “fourth session of the Conference of the Parties.� but legally binding commitment to reduce GHG Conference of the Parties serving as the Meeting emissions. By the end of Phase I (December of the Parties (CMP): The Convention’s supreme 2006), all members will have reduced direct body is the COP, which serves as the meeting of emissions four percent below a baseline period the parties to the Kyoto Protocol. The sessions of of 1998-2001. Phase II, which extends the CCX the COP and the CMP are held during the same reduction program through 2010, will require all period to reduce costs and improve coordination members to ultimately reduce GHG emissions between the Convention and the Protocol. six percent below baseline. Among the members Contango: A term used in the futures market to are companies from North America as well as describe an upward sloping forward curve (i.e., municipalities, U.S. states, and universities. As futures prices are above spot prices). Antonym: new regional initiatives began to take shape in backwardation. 130 State and Trends of the Carbon Market 2012 Crediting period: The crediting period is the lose its eligibility if the Enforcement Branch duration of time during which a registered, de- of the Compliance Committee has determined termined, or approved project can generate emis- the party is noncompliant with the eligibility sion reductions. For CDM projects, the credit- requirements. ing period can be either seven years (renewable Emission Reductions (ERs): The measurable re- twice) or ten years (non-renewable). duction of release of greenhouse gases into the Designated Focal Point (DFP): Parties partici- atmosphere from a specified activity, and a speci- pating in the Joint Implementation (JI) mecha- fied period of time. nism are required to nominate a Designated Emission Reductions Purchase Agreement Focal Point (DFP) for approving projects. (ERPA): Agreement which governs the transac- Designated National Authority (DNA): An of- tion of emission reductions. fice, ministry, or other official entity appointed Emission Reduction Units (ERUs): A unit of by a party to the Kyoto Protocol to review and emission reductions issued pursuant to Joint give national approval to projects proposed un- Implementation. One ERU represents the der the Clean Development Mechanism. right to emit one metric ton of carbon dioxide Designated Operational Entities (DOEs): equivalent. Designated operational entities are independent Emissions Trading Scheme (ETS): See Cap and auditors that assess whether a potential proj- Trade. ect meets all the eligibility requirements of the EU-10: Bulgaria, Czech Republic, Estonia, CDM (validation) and whether the project has Hungary, Latvia, Lithuania, Poland, Romania, achieved greenhouse gas emission reductions Slovakia, and Slovenia. (verification and certification). EU-15: Austria, Belgium, Denmark, Finland, Determination: Determination is the process of France, Germany, Greece, Ireland, Italy, evaluation by an independent entity accredited Luxembourg, Netherlands, Portugal, Spain, by the host country (JI Track 1) or by the Joint Sweden, and the United Kingdom. Implementation Supervisory Committee (JI European Union Allowances (EUAs): The al- Track 2) of whether a project and the ensuing re- lowances in use under the EU ETS. An EUA ductions of anthropogenic emissions by sources unit is equal to one metric ton of carbon dioxide or enhancements of anthropogenic removals by equivalent. sinks meet all applicable requirements of Article European Union Emission Trading Scheme (EU 6 of the Kyoto Protocol and the JI guidelines. ETS): The EU ETS was launched on January Eligibility Requirements: There are six Eligibility 1, 2005, as a cornerstone of EU climate policy Requirements for Participating in Emissions toward its Kyoto commitment and beyond. Trading (Article 17) for Annex I Parties. These Through the EU ETS, member states allocate are: (i) being a party to the Kyoto Protocol; (ii) part of the efforts toward their Kyoto targets to having calculated and recorded one’s Assigned domestic emission sources (mostly utilities). Over Amount; (iii) having in place a national system 2008–2012, emissions from mandated instal- for inventory; (iv) having in place a national lations (about 40 percent of EU emissions) are registry; (v) having submitted an annual inven- capped on average at 6 percent below 2005 levels. tory and; and (vi) having submitted supplemen- Participants can internally reduce emissions, pur- tary information on one’s Assigned Amount. An chase EUAs, or acquire CERs and ERUs (within Annex I party will automatically become eligible a 13.4 percent average limit of their allocation after 16 months have elapsed since the submis- over 2008–12). The EU ETS will continue be- sion of its report on calculation of its assigned yond 2012, with further cuts in emissions (by amount. Then, this party and any entity having 21 percent below 2005 levels in 2020 or more, opened an account in the registry can participate depending on progress in reaching an ambitious in emissions trading. However, a party could international agreement on climate change). State and Trends of the Carbon Market 2012 131 First Commitment Period: The five-year period, Japan-Voluntary Emissions Trading Scheme from 2008 to 2012, during which industrialized (J-VETS): Under the J-VETS, companies re- countries have committed to collectively reduce ceive subsidies to implement mitigation activi- their greenhouse gas (or “carbon�) emissions by ties in line with voluntary commitments and can an average of 5.2 percent compared with 1990 resort to emissions trading (including offsets) to emissions under the Kyoto Protocol. meet their commitments with more flexibility. Green Investment Scheme (GIS): A voluntary Though growing, its impact remains limited: mechanism through which proceeds from AAU over the first three years of the scheme, partici- transactions will contribute to contractually pants (288 companies) reduced their emissions agreed environment- and climate-friendly proj- by about one million tCO2e. The J-VETS has ects and programs both by 2012 and beyond. contributed to the development of an MRV sys- Greenhouse Gases (GHGs): Both natural and tem, third-party verification system, and the reg- anthropogenic, greenhouse gases trap heat in the istry system. The J-VETS has been incorporated Earth’s atmosphere, causing the greenhouse ef- into the Experimental Integrated ETS as one of fect. Water vapor (H2O), carbon dioxide (CO2), the participating options. nitrous oxide (N2O), methane (CH4), and Joint Implementation (JI): Mechanism provid- ozone (O3) are the primary greenhouse gases. ed by Article 6 of the Kyoto Protocol whereby The emission of greenhouse gases through hu- entities from Annex I Parties may participate in man activities (such as fossil fuel combustion low-carbon projects hosted in Annex I countries or deforestation) and their accumulation in the and obtain Emission Reduction Units in return. atmosphere is responsible for an additional forc- Kyoto Mechanisms (KMs): The three flexibil- ing, contributing to climate change. The Kyoto ity mechanisms that may be used by Annex I Protocol regulates six GHGs: carbon dioxide Parties to the Kyoto Protocol to fulfill their com- (CO2), methane (CH4), and nitrous oxide (N20), mitments. These are the Joint Implementation hydrofluorocarbons (HFCs), perfluorocarbons (JI, Article 6), Clean Development Mechanism (PFCs), and sulfur hexafluoride (SF6). (CDM, Article 12), and International Emissions Global Warming Potential (GWP): An index Trading (Article 17). representing the combined effect of the differing Kyoto Protocol: Adopted at the Third times greenhouse gases remain in the atmosphere Conference of the Parties to the United Nations and their relative effectiveness in absorbing out- Convention on Climate Change held in Kyoto, going infrared radiation. Japan, in December 1997, the Kyoto Protocol Internal rate of return: The annual return that commits industrialized country signatories to would make the present value of future cash flows collectively reduce their greenhouse gas emis- from an investment (including its residual market sions by at least 5.2 percent below 1990 levels on value) equal the current market price of the invest- average over 2008–2012 while developing coun- ment. In other words, the discount rate at which tries can take no-regret actions and participate an investment has zero net present value. voluntarily in emission reductions and removal International Transaction Log (ITL): The ITL activities through the CDM. The Kyoto Protocol links together the national registries and the entered into force in February 2005. CDM registry and is in charge of verifying the Monitoring Plan: A set of requirements for validity of transactions (issuance, transfer, and monitoring and verification of emission reduc- acquisition between registries, cancellation, ex- tions achieved by a project. piration, and replacement, retirement and car- ryover). It is the central piece of the emissions trading under the Kyoto Protocol. 132 State and Trends of the Carbon Market 2012 Nationally Appropriate Mitigation Actions New Zealand Emissions Trading Scheme (NZ (NAMAs): Refers to a set of mitigation poli- ETS): The NZ ETS will progressively regulate cies and/or actions a developing country un- emissions of the six Kyoto gases in all sectors of dertakes aiming at reducing its GHG emissions the economy by 2015. Forestry has been covered and reports to UNFCCC on a voluntary basis. since 2008; by July 1, 2010, stationary energy, The concept of NAMAs emerged in 2007 un- industrial process, and liquid fossil fuel were der the UNFCCC Bali Action Plan, which phased in. The government recently announced, called for “[the implementation of ] Nationally however, that full implementation could be de- Appropriate Mitigation Actions by developing layed if adequate progress is not made in estab- country parties in the context of sustainable de- lishing similar regulations in other developed velopment, supported and enabled by technolo- countries. gy, financing and capacity building, in a measur- Offsets: Offsets designate the emission reduc- able, reportable and verifiable manner.� Through tions from project-based activities that can be international negotiations within the UNFCCC, used to meet compliance or corporate citizenship NAMAs have been steadily refined. The Cancun objectives vis-à-vis greenhouse gas mitigation. Agreement of last December achieved significant Primary transaction: A transaction between the progress in the concept of NAMAs and, inter original owner (or issuer) of the carbon asset and alia, set milestones for the development of a cen- a buyer. tral registry of NAMAs (including NAMAs seek- Project Design Document (PDD): A central ing international funding support) and guide- document of project-based mechanisms, the lines for measuring, reporting, and verification. PDD notably describes the project activity (in- Definitions on these elements are expected by cluding environmental impacts and stakeholders the end of this year. consultations), the baseline methodology and National Allocation Plans (NAPs): The docu- how the project is additional, and the monitor- ments, established by each member state and ing plan. reviewed by the European Commission, that Project Idea Note (PIN): A note prepared by a specify the list of installations under the EU ETS project proponent presenting briefly the project and their absolute emissions caps, the amount of activity (for example, sector, location, financials, CERs and ERUs that may be used by these in- estimated amount of ERs, and so forth). stallations, as well as other features, such as the REDD plus (REDD+): All activities that reduce size of the new entrants reserve, the treatment of emissions from deforestation and forest degrada- exiting installations, and the process of allocation tion and contribute to conservation, sustainable (free allocation or auctioning). management of forests, and enhancement of for- New South Wales Greenhouse Gas Reduction est carbon stocks. Scheme (NSW GGAS): Operational since Regional Greenhouse Gas Initiative (RGGI): January 1, 2003 (to last at least until 2012), the Under RGGI, 10 Northeast and Mid-Atlantic NSW Greenhouse Gas Abatement Scheme aims states aim to reduce power sector CO2 emissions at reducing GHG emissions from the power sec- by 10% below 2009 levels in 2019. Within this tor. NSW and ACT (since January 1, 2005) re- ten-year phase, there are three shorter compli- tailers and large electricity customers have thus ance periods. During the first and second com- to comply with mandatory (intensity) targets pliance periods (2009–2011 and 2012–2014) for reducing or offsetting the emissions of GHG the cap on about 225 installations is set at 171 that arise from the production of electricity MtCO2e (or 188 M short ton CO2e). This is fol- they supply or use. They can meet their targets lowed by a 2.5% per year decrease in the cap dur- by purchasing certificates (NSW Greenhouse ing the third compliance period (2015–18). Abatement Certificates or NGACs) that are gen- erated through project activities. State and Trends of the Carbon Market 2012 133 Reforestation: This process increases the capac- Validation: Validation is the process of inde- ity of the land to sequester carbon by replanting pendent evaluation of a project activity by a forest biomass in areas where forests have been Designated Operational Entity (DOE) against previously harvested. the requirements of the CDM. The CDM re- Registration: The formal acceptance by the quirements include the CDM modalities and CDM Executive Board of a validated project as a procedures and subsequent decisions by the CDM project activity. CMP and documents released by the CDM Removal Unit (RMU): RMUs are issued by par- Executive Board. ties to the Kyoto Protocol in respect of net re- Verified Emission Reductions (VERs): A unit movals by sinks from activities covered by Article of greenhouse gas emission reductions that has 3(3) and Article 3(4) of the Kyoto Protocol. been verified by an independent auditor. Most Secondary transaction: A transaction where the often, this designates emission reductions units seller is not the original owner (or issuer) of the that are traded on the voluntary market. carbon asset. Verification: Verification is the review and ex- Supplementarity: Following the Marrakesh post determination by an independent third Accords, the use of the Kyoto mechanisms shall party of the monitored reductions in emissions be supplemental to domestic action, which shall generated by a registered CDM project, a deter- thus constitute a significant element of the effort mined JI project (or a project approved under made by each party to meet its commitment un- another standard) during the verification period. der the Kyoto Protocol. There is no quantitative Voluntary market: The voluntary market caters limit, however, to the utilization of such mecha- to the needs of those entities that voluntarily de- nisms. While assessing the NAPs, the European cide to reduce their carbon footprint using off- Commission considered that the use of CDM sets. The regulatory vacuum in some countries and JI offsets could not exceeded 50% of the ef- and the anticipation of imminent legislation on fort by each member state to achieve its com- GHG emissions also motivates some pre-com- mitment. Supplementarity limits may thus affect pliance activity. demand for some categories of offsets. Western Climate Initiative (WCI): The WCI United Nations Framework Convention on covers a group of seven U.S. states (Arizona, Climate Change (UNFCCC): The international California, Montana, New Mexico, Oregon, legal framework adopted in June 1992 at the Rio Utah, and Washington) and four Canadian prov- Earth Summit to address climate change. It com- inces (British Columbia, Manitoba, Ontario, mits the parties to the UNFCCC to stabilize hu- and Quebec), with an aggregate emissions target man induced greenhouse gas emissions at levels of 15% below 2005 levels by 2020. Other U.S. that would prevent dangerous manmade inter- and Mexican states and Canadian provinces have ference with the climate system, following “com- joined as observers. mon but differentiated responsibilities� based on “respective capabilities.� Notes www.carbonfinance.org 1818 H Street, NW Washington, DC 20433 USA