State and Trends of the Carbon Markets. Alexandre Kossoy Climate Policy and Finance Department World Bank

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1 State and Trends of the Carbon Markets Alexandre Kossoy Climate Policy and Finance Department World Bank Aviation and Climate Change Seminar, ICAO Headquarters, Montréal, Canada, October

2 Steady increase of global market value (in Billion US$) 176 $180 Other project-based Other allowances Secondary CER Primary CER post-2012 $120 Primary CER pre-2013 EU Allowances 63 $ $

3 EU and other markets increasing value (in Billion US$) post-2012 CDM % New Zealand % N. America % +12% Secondary CDM + JI 23.1 pre-2013 CDM 1.0 JI AAU EU ETS Allowances % -36% -49% +11%

4 EU ETS: how to deal with oversupply EUA, secondary CER & primary CER prices ( per tco 2 e) EUA Secondary CER Primary CER Oversupplied Phases II + III reflected in historic low prices Increasing trading volumes as demand shrinks: financially-driven trades 6 1 Policy intervention under discussion to deal with the imbalance: supply set-aside

5 An emerging post-2012 CDM market 8,000 Pre-2013 and post-2012 market values (US$ million) Pre-2013 market closing and a post-2012 market emerging 6,000 4,000 2,000 0 Pre-2013 CER Post-2012 CER EU ETS oversupply and uncertain non-eu eligibility criteria and volumes lead to weak contractual obligations Provisional safety clauses Quasi-options More prominent Africa as buyers seek risk management and portfolio diversification

6 f(price) = macro-economic scenario & asset risk profile Daily prices ( ) Peak of demand in "sellers market" EUA Secondary CER Primary CER Primary CER post y of relatively low volatility & stable prices EU debt crisis & oversupply post-2012 (CERs & EUAs decouple) Financial crisis and economic downturn 1.00

7 annual volume of CDM&JI transactions (MtCO 2 e) CDM & JI Buyers (pre-2013) 600 Other & Unsp. 500 Other Europe UK Switzerland UK 40% Other Europe 4% Other & Unsp. 7% Denmark, Finland, Norway, and Sweden France, Germany, Italy, Netherlands, Portugal, and Spain Japan Switzerland 23% Denmark, Finland, Norway, and Sweden 6% Japan 1% France, Germany, Italy, Netherlands, Portugal, and Spain 19% Other Europe includes Ireland, Austria, Belgium, Luxembourg, Iceland and Greece. Other and Unsp. include s USA, Australia, Canada, New Zealand, Rep. of Korea, and others unspecified.

8 Pre-2013 volumes transacted (MtCO2e) Who s selling Pre Other & Unsp. Others Asia 7% Africa Latin America Others Asia China China 87% Africa 4% Latam 2% India 5% Post-2012 Vietnam 7% Others Asia 13% China 43% Others Africa 13% Latam 11% DRC 5% Nigeria 2% South Africa 1%

9 pre-2013 volumes transacted (MtCO2e) CDM Sectors pre Other & Unsp LFG + waste mng't E.E. + Fuel switch Renewables Industrial gas CMM and other fugitive 9% LFG and other waste mg't 11% N 2 O 1% HFC 3% Others 6% Hydro 26% E.E. + Fuel switch 7% Other Renewables 2% Biomass energy 5% Wind 30%

10 Virtual demand until GtCO 2 e Demand: 1.64 billion tco 2 e AAU 0.28 Gt 2.6 Gt 1.43 GtCO 2 e 0.28 Gt 290 MtCO 2 e, mostly from EU governments AAU 1.64 GtCO 2 e Supply: 2.6 billion CERs & ERUs million AAUs = 2.86 GtCO 2 e (nominal) = 1.43 GtCO 2 e (riskadjusted) CDM & JI 1.2 Gt CDM & JI Aggregate picture; not all buyers purchased the volume they need Contracted (nominal) Contracted (riskadjusted) Demand for Kyoto Assets Residual demand: 290 MtCO 2 e (136 Mt in 2011)

11 MtCO 2 e Market projections indicate constrained demand over Other Annex B** Japan Australia CDM others CDM ETS-eligible EU gov* EU ETS GtCO 2 e 2000 New CER sublimit in the EU- AU link proposal Maximum demand (conservative scenario) *Including Iceland, Liechtenstein, and Norway ** Including New Zealand, North America, and Switzerland Supply

12 Regulatory improvements & new markets popping up worldwide Durban decisions increased the regulatory clarity on existing market and advanced on new market instruments Several jurisdictions passed climate bills, including market initiatives Australia, California, Quebec, Republic of Korea, Mexico AU EU linkage no later than 2018 New initiatives signal that solutions to climate challenge will emerge.

13 What has been done so far Cumulative pcers transacted equals 2.4 bln CERs in which is larger than the annual EU ETS emissions and 80% of Kyoto s total targets (~3 bln tco2e over ) ERPAs reach US$28 bln (and will support about US$150 bln in low-carbon investments, mostly from private sector) vs. all clean energy investments to developing countries of about US$80 bln annually in 2010 and 2011 at long-term average price of $10-$15 per ton which is much lower than the marginal abatement cost for developed countries (reduce emissions through domestic measures)

14 Where Next for Carbon Markets? degrees 39 per tco 2 e ($150 billion p.a.) Copenhage n high per tco 2 e ($31-43 billion p.a.) Copenhage n low per tco 2 e ($5-9 billion p.a.) OVERVIEW OF CARBON FINANCE VEHICLES

15 A Growing Menu of Climate Finance Instruments to Catalyze and Leverage OVERVIEW OF CARBON FINANCE VEHICLES 15 15

16 WB: Climate co-benefits in IBRD/IDA lending Adaptation Mitigation $7.0 bln $7.1 bln $4.6 bln $2.3 bln OVERVIEW OF CARBON FINANCE VEHICLES FY11 FY12 FY11 FY12

17 A Growing Menu of Climate Finance Instruments to Catalyze and Leverage OVERVIEW OF CARBON FINANCE VEHICLES 17 17

18 The Unit s first generation of carbon funds April 2000 May 2002 March 2003 March 2004 May 2004 Prototype Carbon Fund Netherlands Clean Development Mechanism Facility Community Development Carbon Fund Italian Carbon Fund BioCarbon Fund Tranches I & II World s First Global Carbon Fund $220,000,000 Pioneer purchaser of CDM ** Poorest country focused $128,600,000 Government & private sector $155,600,000 Afforestation, Reforestation, REDD+ & soil carbon $90,400,000 August 2004 January 2005 March 2005 August 2006 March 2007 Netherlands European Carbon Facility Danish Carbon Fund Spanish Carbon Fund Umbrella Carbon Facility Tranches I & II Carbon Fund for Europe Purchasing JI Government & private sector Government & private sector Adding liquidity to market at key moments Governments & private sector ** 90,000, ,000, ,100,000 50,000,000 ** Unpublished OVERVIEW OF CARBON FINANCE VEHICLES 18

19 Others Industrials Utilities Oil & Gas Financials Private Sector Partners OVERVIEW OF CARBON FINANCE VEHICLES

20 Public Sector Partners AUSTRIA FINLAND JAPAN SPAIN AUSTRALIA AGENCE FRANÇAISE DE DÉVELOPPEMENT JAPAN INTERNATIONAL COOPERATION AGENCY SWEDEN REGIONAL GOVERNMENTS OF BRUSSELS-CAPITAL, FLEMISH AND WALLOON REGIONS GERMANY LUXEMBOURG SWITZERLAND NETHERLANDS DENMARK IRELAND NORWAY THE UNITED KINGDOM THE EUROPEAN COMMISSION ITALY PORTUGAL THE UNITED STATES OVERVIEW OF CARBON FINANCE VEHICLES

21 Responding to the challenges in the market (1 of 2) preparing for the future with market readiness support WB Facility Focus Resources Partners Program Partnership for Market Readiness Capacity building to support market based tools for GHG reduction $100 million* 25 country participants including 10 donor governments Supporting countries development of readiness component for market instruments Helping developing countries explore, pilot and test emissions trading Building on country priorities for low-carbon growth FCPF Readiness Fund National & sub-national REDD+ pioneer $240 million 36 country participants including 13 donor governments Guiding readiness and carbon finance for REDD+ Forging partnerships between developed and developing countries Enhancing capacity building and technical assistance OVERVIEW OF CARBON FINANCE VEHICLES *Target, current $90 million raised 21

22 Responding to the challenges in the market (2 of 2) pairing readiness with action: carbon credit purchases WB Facility Focus Resources Partners Program Scaling-up carbon finance $147 million^ 6 selling country, 3 buying country and 2 donor participants Pioneer of PoAs innovate to broaden reach of CDM Utilize carbon finance to scale up systematic approaches to low carbon growth Testing ground for new mechanism purchases FCPF Carbon Fund Testing purchase of REDD+ credits $220 million 7 public and 2 private and 1 non-profit participants Guiding readiness and carbon finance for REDD+ Forging partnerships between developed and developing countries BioCarbon Fund Tranche 3 Scale up of afforestation & reforestation and soil carbon $90 million in tranches 1&2, $75 million target for Tranche 3 Anticipating mix of public and private participants Scaling up afforestation and reforestation Piloting soil carbon sequestration including rice paddies, wetlands, grasslands and pastureland mgt. Exploring landscape accounting approach and valuation of ecosystem services OVERVIEW OF CARBON FINANCE VEHICLES ^All components 22

23 Thank you