Introduction to Carbon Finance market instruments to mitigate climate change

1
Introduction to Carbon Financemarket
instruments to mitigate climate change

• Martina Bosi
• Carbon Finance Unit, The World Bank
• November 8 , 2006
• Washington DC

2
Global Energy-Related CO2 Emissions
In 2030, Alternative Scenarios CO2 emissions are
16 lower than in the Reference Scenario, but
are still more than 50 higher than 1990
Source International Energy Agency, World Energy
Outlook 2004
3
Climate Change Whose problem is it?
4
The Kyoto Protocol key features

• Entry into force February 16, 2005
• US and Australia did not ratify
• Differentiated commitments
• Developed countries and countries with economies
  in transition agree to quantified legally-binding
  targets (overall objective leads to a 5
  reduction from 1990 levels by 2008-2012)
• Six gases, sources and forestry sinks, 5-year
  period (2008-2012)
• Target should be achieved through
• Domestic Reductions
• Carbon Sinks direct human-induced land use
  change and forestry activities
• International Credits (Kyoto Mechanisms)
• International Emissions Trading
• Project Based Joint Implementation (in
  industrialized countries)
• Project Based Clean Development Mechanism (in
  developing countries)
• Negotiations on next period (post-2012) to start
  in 2005

5
Market Mechanisms to Mitigate Greenhouse Gas
Emissions

• Emissions Trading and Project-Based Mechanisms
• Key feature of the Kyoto Protocol
• Provide flexibility as to the location of
  emission reductions
• Rationale
• Impact of CO2 emissions and/or reductions
  insensitive to location
• Cost and opportunities to reduce CO2 vary between
  companies, sectors, and countries
• Market instruments enable meeting GHG targets
  cost-effectively
• Taking advantage of differences in marginal
  abatement costs across different emission sources

6
Example of emissions trading
Emission allowance
Country A
Country B

Emissions target prior to trading
tCO2
Allowances to buy
Allowances to sell
New targets after transaction
2012
2008
2012
2008
7
How the Clean Development Mechanism Works

• Emission reductions bring additional revenue
  stream to CDM projects
• No single price but currently in the range of
  8-10 (per tCO2)

8
Structure of the Carbon Market 2006(worth close
to 22 billion in 2006)
CredibleC-asset
Project-Based Transactions
Allowance Markets

EU Emission Trading Scheme
Primary JI CDM
226 MtCO2e
764 MtCO2e
Voluntary Retail
Other Compliance
New South Wales Certificates
UK ETS
Chicago Climate Exchange
8 MtCO2e
8 MtCO2e
2 MtCO2e
16 MtCO2e
8 MtCO2e
9
World Bank Carbon Finance Approach

• Ensure that carbon finance contributes to
  sustainable development, beyond its contribution
  to global environmental efforts
• Assist in building, sustaining and expanding the
  market for GHG emission reductions
• Strengthen the capacity of developing countries
  to benefit from the market for GHG emission
  reductions
• CF-Assist

10
World Bank Carbon Funds Facilities
Total funds pledged US 1.93 billion (13
governments, 62 companies)
Prototype Carbon Fund. 180 million.
Multi-shareholder. Netherlands Clean
Development Mechanism Facility. 267.8 million
Netherlands Ministry of Environment. Community
Development Carbon Fund. 128.6 million.
Multi-shareholder. BioCarbon Fund. 53.8
million. Multi-shareholder. Italian Carbon Fund.
109.4 million Multi-shareholder (from Italy
only). Netherlands European Carbon Facility.
40.4 million. Netherlands Ministry of Economic
affairs. Spanish Carbon Fund. 281.9 million.
Multi-shareholder (for from Spain only). Danish
Carbon Fund. 69.3 million. Multi-shareholder
(for from Denmark only). Umbrella Carbon
Facility. 727.5 million. 2 HFC-23 projects in
China.
11
How the Funds Work
12
Longer Term Challenge for Carbon Market

• Carbon Trade could confer large flow of funds to
  developing countries tens of billion of dollars
  per year
• But requires a long-term, stable and predictable
  framework and accompanying regulatory system.
• Most energy-sector projects, need 10 years of
  secure carbon revenues for projects to reach
  financial closure
• Long-term viability of carbon market is not
  assured
• Carbon finance needs regulatory visibility
  post-2012
• Longer-term regulatory signal for carbon finance
  could come from
• International U.N. Framework Convention on
  Climate Change and Kyoto Protocol
• National/multi-national e.g. EU Trading Scheme
• Sub-national e.g. US States

13
Conclusions

• Market mechanisms allow meeting GHG targets most
  cost-effectively
• Sale of emission reduction creates revenue stream
  for climate-friendly activities (carbon finance)
• Carbon Market is real
• Carbon finance is an important source of new and
  additional development finance
• World Bank is a player in the carbon market
• Long-term signal (post-2012) is biggest challenge
  for continuation of carbon market

14
Thank you!

• For more information, visit
• http//www.carbonfinance.org