Presentation to Cheung Kong Graduate School

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The Origins of Carbon Emissions Trading

• Presentation to Cheung Kong Graduate School
• of Business, Beijing, P. R. China
• 18 February 2009
• Frank Joshua

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Contents

• State of the carbon market
• The origins of carbon emissions trading
• Inside Kyoto Protocol negotiations
• Lessons for Copenhagen

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• State of the Carbon Market

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State of the Carbon Market

• Value of all carbon transactions (Allowances and
  Credits)
• 2005 EUR 9.4 bn.
• 2006 EUR 22.5 bn.
• 2007 EUR 40.0 bn.
• 2008 EUR 96.0 bn. (approx. US125.0 bn.)
• Value of Allowance trading under the European
  Union Emissions Trading Scheme (EU ETS)
• 2005 EUR 7.2 bn.
• 2006 EUR 18.1 bn.
• 2007 EUR 35.0 bn.
• 2008 EUR 72.0 bn.
• Value of project-based CDM carbon credits
  trading
• 2005 EUR 2.0 bn.
• 2006 EUR 3.9 bn.
• 2007 EUR 5.0 bn.
• 2008 EUR 24.0 bn.

Sources World Bank/IETA Point Carbon
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CDM Track Record

• January 2006
• Total projects registered 68
• Estimated CERs to 2012 N/A
• Total CERs issued 0
• January 2007
• Total projects registered 477
• Estimated CERs to 2012 731 million
• Total CERs issued 28 million
• January 2008
• Total projects registered 909
• Estimated CERs to 2012 1.2 bn.
• Total CERs issued 114 million
• February 2009
• Total projects registered 1,370
• Estimated CERs to 2012 1.4 bn.
• Total CERs issued 250 million

Source UNEP Risoe Center
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• The Origins of Carbon Emissions Trading

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Carbon Trading Points of Departure

• Is there an historical starting point for carbon
  trading?
• 1988 UN General Assembly Decision to convene a
  Conference on Environment and Development (dubbed
  the Earth Summit), June 1992, Rio de Janeiro,
  Brazil
• In preparations for the Earth Summit, the GA
  established the Intergovernmental Negotiating
  Committee (INC) on a Framework Convention on
  Climate Change
• 1989 Michael Grubb (Royal Institute of
  International Affairs, London) publishes a
  pamphlet entitled The Greenhouse Effect -
  Negotiating Targets
• Grubbs ideas for CO2 trading borrowed from
  proposals for US SO2 trading (1990 US Clean Air
  Act (Amendments))
• 1990 UNCTAD establishes Greenhouse Gas Emissions
  Trading Research Program, headed by Frank Joshua
• Expert Team Michael Grubb, Richard Sandor, Tom
  Tietenberg, Dan Dudek, Scott Barrett, and others
  
• United Nations Framework Convention on Climate
  Change (UNFCCC)
• Agreed at Rio de Janeiro, Brazil, June 1992
• Non-binding commitment by developed countries
  (Annex 1 Parties) to reduce GHG emissions to 1990
  level by 2000
• Policies and measures
• Joint Implementation (without crediting!) among
  Annex 1 Parties

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The Road to Kyoto

• COP 1 Berlin, April 1995
• Assessment
• Annex 1 Parties would fail to meet their UNFCCC
  commitment to reduce GHG emissions to 1990 level
  by 2000
• Response The Berlin Mandate
• Launched negotiations on a Protocol or another
  legal instrument
• The Ad-hoc Group on the Berlin Mandate (AGBM)
• Aim To set quantified emission limitation and
  reduction objectives within specified
  time-frames for GHG emissions by sources and
  removals by sinks
• COP 3 Kyoto, December 1997
• Main themes in the Draft Kyoto Protocol
• Legally-binding quantitative GHG emissions
  targets and timetables
• Policies and Measures
• Flexible Mechanisms
• Joint Implementation (for Annex 1 countries), and
• Emissions Trading (for Annex 1 countries)

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• Inside Kyoto Protocol Negotiations

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Birth of the Clean Development Mechanism

• Brazils role in the Kyoto negotiations
• Brazils proposal for a Clean Development Fund
  (CDF)
• Future emission reduction objectives should be
  established in terms of global mean surface
  temperature change
• Relate Annex 1 Parties emissions targets to
  their contributions to climate change, as a
  mechanism for apportioning the burden
• Apply a financial penalty in case of failure to
  meet agreed national emission limitation or
  reduction targets
• Use resources collected to invest in climate
  change mitigation and adaptation projects in
  developing countries
• How the CDF became the CDM
• Anecdote Trading Badges
• CDM encounters no resistance
• The CDM Accident or Strategy?

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Saving Emissions Trading

• Emissions Trading?
• How the Players lined up
• Supporters USA
• Opposition EU, Group of 77 China, many NGOs
• Result Deadlock!
• How Emissions Trading was saved
• 11th hour walk-out by the US Delegation
• COP 3 on the brink of failure
• The EU brokers a Deal
• Smoke Mirrors

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Emissions Trading The Deal (1)

• Emissions Trading text deleted (from Art. 3)
• The Parties included in Annex B may participate
  in emissions trading for the purposes of
  fulfilling their commitments under Article 3. The
  Conference of the Parties shall define the
  relevant principles, modalities, rules and
  guidelines, in particular for verification,
  reporting and accountability for emissions
  trading. Any such trading shall be supplemental
  to domestic actions for the purpose of meeting
  quantified emission limitation and reduction
  commitments under that Article.

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Emissions Trading The Deal (2)

• Emissions Trading text approved (Art. 17)
• The Conference of the Parties shall define the
  relevant principles, modalities, rules and
  guidelines, in particular for verification,
  reporting and accountability for emissions
  trading. The Parties included in Annex B may
  participate in emissions trading for the purposes
  of fulfilling their commitments under Article 3.
  Any such trading shall be supplemental to
  domestic actions for the purpose of meeting
  quantified emission limitation and reduction
  commitments under that Article.

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The Deal Comparing Texts

• Text deleted (from Art. 3)
• The Parties included in Annex B may participate
  in emissions trading for the purposes of
  fulfilling their commitments under Article 3. The
  Conference of the Parties shall define the
  relevant principles, modalities, rules and
  guidelines, in particular for verification,
  reporting and accountability for emissions
  trading. Any such trading shall be supplemental
  to domestic actions for the purpose of meeting
  quantified emission limitation and reduction
  commitments under that Article.
• Text approved (Art. 17)
• The Conference of the Parties shall define the
  relevant principles, modalities, rules and
  guidelines, in particular for verification,
  reporting and accountability for emissions
  trading. The Parties included in Annex B may
  participate in emissions trading for the purposes
  of fulfilling their commitments under Article 3.
  Any such trading shall be supplemental to
  domestic actions for the purpose of meeting
  quantified emission limitation and reduction
  commitments under that Article.

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The Kyoto Outcome

• Legally binding quantitative commitments on Annex
  1 Parties to limit or reduce GHG emissions by an
  average of 5.2 below 1990 levels in the period
  2008 2012
• Main policy instruments
• Policies Measures
• Flexible Mechanisms
• Joint Implementation (among Annex 1 Parties)
• Clean Development Mechanism (between Annex 1 and
  non-Annex 1)
• Emissions Trading (among Annex 1 Parties)
• Fallout from the Kyoto negotiations
• CDM The Kyoto Surprise!
• Initial confusion over emissions trading (in or
  out!?)

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Recap From Zero to Hero?

• The early years
• Emissions trading was not always popular!
• Anecdotes
• Trading Pollution Article in Tribune de Geneve
  (May 1992)
• Side Events at Rio Earth Summit
• Carbon Trading empty!
• Carbon Taxes sold out!!
• Widespread ignorance and open hostility of
  emissions trading among Kyoto negotiators
• In 1997 there were few countries with relevant ET
  experience
• US (Emissions Offsets, and SO2 allowance trading)
  
• Australia (New South Wales Emissions Trading
  Scheme)
• New Zealand (Fisheries permits)

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• Lessons for Copenhagen

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Lessons for Copenhagen

• Some Indicators of Success (or Failure)
• Decisive Leadership
• Some key players at Kyoto
• Michael Zammit Cutajar, UNFCCC Executive
  Secretary
• Ambassador Raul Estrada (Argentina), Chairman,
  AGBM, and Committee of the Whole (COW)
• Ambassador Luis Gylvan Meira Filho (Brazil),
  (Father of the CDM)
• John Prescott, Deputy Prime Minister (UK), (EU-US
  deal-broker)
• Likely Leadership at Copenhagen
• Yvo De Boer, UNFCCC Executive Secretary (was key
  aide to Yan Pronk, Chairman of COP 6)
• Michael Zammit Cutajar, Former UNFCCC Executive
  Secretary at Kyoto, now Coordinator of Copenhagen
  Negotiations
• Danish Chairmanship
• Will Copenhagen produce parallels with COP 3
  (Kyoto), or COP 6 (The Hague)?
• Success at COP 6 was regarded by many observers
  as a foregone conclusion (a no-brainer), yet it
  ended in failure
• Issues US proposals on agricultural credits
  Dutch Chairmanship etc
• Smaller countries tend to act out of an abundance
  of sensitivity for preserving the democratic
  process

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Frank Joshua China Carbon Corporation 2-16-1,
Tayuan Diplomatic Office Building Chaoyang
District Beijing 100600 P. R. China Mobile 86
139 1168 4452 Email frankj_at_chinacarboncorp.com
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