Global Warming.Carbon banki.Kyoto protocol.ii.Mechanisms under Kyoto Protocol.iii.World bank Carbon finance Funds.iv.Emission Trading.v.Carbon Market Mechanisms.vi.Carbon tradingvii.State and Trends of Carbon Markets.

Global Warming Greenhouse gases: CO2 , methane, and nitrous

oxideAlready heat world to average 60° F, rather than

0° F without an atmosphereHow greenhouse gases workIncreased CO2

has raised temperature 1.2° FThe present radiation imbalance will cause

another 1° F heating by 2050, even without more greenhouse gas emissions.

Recent cleaning of air is causing the earth’s surface to be hotter and brighter.

Stabilizing the amount of CO2 would require a reduction to only 5% to 10% of present CO2 emissions

Definitive Evidence of Rapid 1.2° F Temperature Rise over the Last Century

Carbon Dioxide Concentrations are low in glacial periods and higher in warmer interglacial periods

However, concentrations now are higher than at any time in the last 450,000 years.

In the insert is the dramatic growth over the last 50 years.

The last 160,000 years (from ice cores) and the next 100 years:temperature (red) tracks CO2 (green).

Time (thousands of years)160160 120120 8080 4040 NoNo

ww

––1010

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1010

100100

200200

300300

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500500

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COCO22 in 2100 in 2100(with business as (with business as

usual)usual)Double pre-industrial Double pre-industrial

COCO22

Lowest possible COLowest possible CO22

stabilisation level by stabilisation level by 21002100

COCO22 now now

TemperatTemperature ure

difference difference

from now from now °C°C

CO

CO

22 c

on

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)

Adding Climate Model Projections for the next hundred years:

Global Warming EffectsPredicted Global Warming of 5°F will affect everyone in

most structural aspects of society and in their costs.We don’t realize how our present housing, business, and

supply nets are closely adapted to our current climates. The major increase in temperature and climate effects such

as rainfall, drought, floods, storms, and water supply, will affect farming, year round water supplies, household and business heating and cooling energy. These may require large and costly modifications.

Some cold areas may benefit, and some hot areas will become unfarmable and costly to inhabit.

Recent projection: US agriculture would go up 4%, CA down 15%.

Methane production seems to have stabilized (UCI result) It is very misleading to portray the problem as a purely

environmentalist issue which affects only polar bears, a few Pacific islanders, and butterflies.

World Greenhouse Gas Emissions

Kyoto

The Kyoto Protocol In 1990 the UN's Intergovernmental Panel on

Climate Change (IPCC) (of which the USA is the largest funder) reported on the problem of global warming, which is by far the most important and serious environmental issue. It was once considered a long-term problem.

"In 1997 a protocol was adopted at Kyoto under which countries formally undertook to reduce the emission of greenhouse gases by specific percentages of the 1990 levels. Bill Clinton hailed the Protocol as a historic agreement and signed it in November 1998. [But President Bush from 2001 opposed it and acted to, the USA rejected it, arguing that its economic interests would be threatened, and it provoked widespread international criticism]

GHG Emissions related to Climate Change

Six gaseous compounds have been found to be significant relative to their capability to capture thermal radiation in the upper atmosphere:Carbon Dioxide (CO2) – 60 % of GHG thermal

capture Methane (CH4) Nitrous Oxide (N2O) Chloro-, Hydro- , Hydrochloro- (CFCs/HFCs/HCFCs), and Perfluorocarbons

(PFCs)Sulfur Hexafluoride (SF6)Water Vapor (H2O)

Kyoto Protocol GHG Emissions Reduction Targets

The reduction targets for CO2 range from -8% to +10% of the country’s individual 1990 emissions levels “with a view to reducing their overall emissions of such gases by at lease 5% below existing 1990 levels in the commitment period 2008 to 2012.

These limits call for significant reduction in currently projected emissions.

Future emissions mandatory targets are expected to be established for “commitment periods” after 2012 and will be negotiated well in advance of the periods concerned.

Kyoto Protocol GHG Emissions Reduction Targets

Marrakesh Accords are rules adopted with instructions regarding how to implement the Kyoto Protocol. These rules specify the Protocol’s emissions-trading system implementation procedures.

Countries actual emissions have to be monitored

and guaranteed to be what they are reported to be, and precise records have to be kept of the trades carried out. Accordingly, “registries” – like bank accounts of a nation’s emissions units – are being set up, along with “accounting procedures”, an “international transactions log”, and “expert review teams” to verify compliance.

Kyoto Protocol Commitments for GHG Emission Reductions

Commitments under the Protocol vary:An overall 5% target for developed countries is to be met

through cuts (from 1990 levels)European Union – 8% (member states vary from 28%

reduction by Luxembourg to 27% increase by Portugal)Switzerland – 8%Most Central and East European states – 8%Canada – 6%United States – 7% (US has since withdrawn its support)Hungray – 6%Japan – 6%Poland – 6%New Zeland, Russia, and Ukraine – stabilize (0%)Norway – Increase by 1%Australia – Increase by up to 8% (Australia has since

withdrawn its support)Iceland – Increase by 10%

Mechanisms for Carbon Trading under the Kyoto Protocol

Three Mechanisms were established for Carbon Trading under the Kyoto Protocol:

1. International Emissions Trading (IET)

2. Clean Development Mechanism (CDM) (credits earned by sponsoring greenhouse-gas-reducing projects in developing countries).

3. Joint Implementation Projects (JI)

Carbon Credits Under the Kyoto Protocol

Under the Kyoto Protocol agreement, countries have flexibility in how they will meet the targets (i.e., they may increase “sinks” such as forests at home or abroad or pay for foreign projects that result in carbon emission reductions or greenhouse gas cuts.)

It is assumed that greenhouse-gas emissions damage the atmosphere equally wherever they occur, and emission cuts help equally wherever they are made.

Carbon Credits Under the Kyoto Protocol

Countries will get credit for reducing greenhouse–gas totals by planting or expanding forests (“removal units”); for carrying out “joint implementation projects” with other developed countries, usually countries with “transition economies”; and for projects under the Protocol’s Clean Development Mechanism, which involves funding activities to reduce emission by developing nations. Credits earned this way may be bought and sold in the emissions market or “banked” for future use.

International Emissions Trading (IET)

Article 17 of the Kyoto Protocol

Countries with commitments under the Kyoto Protocol can acquire emission units from other countries with commitments under the Protocol and use them towards meeting a part of their targets.

An international transaction log, a software-based accounting system, ensures secure transfer of emission reduction units between countries.

Clean Development Mechanism (CDM)

Article 12 of the Kyoto ProtocolBecause the atmosphere is equally damaged by

greenhouse-gas emissions wherever they occur and equally helped by emissions cuts wherever they are made, the Protocol includes an arrangement for reductions to be “sponsored” in countries not bound by emissions targets.

Emission-reduction (or emission removal) projects in developing countries are allowed to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2.

These CERs can be traded and sold, and used by industrialized countries to meet a part of their emission reduction targets under the Kyoto Protocol.

Projects must qualify through a rigorous public registration and issuance process designed to ensure real, measurable and verifiable emission reductions that are additional to what would have occurred without the project. To be certified by the Clean Development Mechanism Executive Board, a project must be approved by all involved parties, demonstrate a measurable and long-term ability to reduce emissions, and provide reductions that would be additional to any that would otherwise occur.

• Options to the program are also being considered. Less red tape, for example, may be required for small-scale projects, such as small renewable energy facilities. Another proposal is to allow afforestation and reforestation projects to be included.

Clean Development Mechanism Clean Development Mechanism (CDM)(CDM)

Joint Implementation (JI)

Article 6 of the Kyoto Protocol

A country with an emission-reduction limitation commitment under the Kyoto Protocol may take part in an emission reduction (or emission removal) projects in any other country with a commitment under the Protocol, and count the resulting emission units towards meeting its Kyoto target. It allows industrialized countries to meet part of their required cuts in greenhouse-gas emissions by paying for projects that reduce emissions in other industrialized countries.

JI projects earn emission reduction units (ERUs), each equivalent to one tonne of CO2,

As with CDM, all emission reductions must be real, measurable, verifiable, and additional to what would have occurred without the project. To be approved for a joint implementation project, industrialized countries must meet requirements under the Protocol for accurate inventories of greenhouse-gas emissions and for detailed registries of emissions “units” and “credits”. Projects may start and receive credits during 2008. Sponsoring governments will receive credits that may be applied to their emissions targets’ the recipient nations will gain foreign investment and advanced technology (but not credit toward meeting their own emissions caps; they have to do that themselves).

Joint Implementation (JI)Joint Implementation (JI)

Under the JI there are two “tracks” by which projects can apply for approval: 1) third-party verification and 2) international independent body verification.

National Approval

Before a project will be recognized as a CDM or JI project, the project participants must receive a letter of approval from the host country. Likewise, project participants require a letter of authorization.

Joint Implementation (JI)Joint Implementation (JI)

Third Party Oversight Required by the Kyoto Protocol

Third-party oversight is required by the Kyoto Protocol

Independent, third-party validation or determination of project design documents and verification and certification of GHG emission reductions is a key feature of the CDM and JI.

How to meet Phase II(2008-2012) in the Kyoto Protocol ?

In order to deliver on Kyoto Protocol emission reduction targets and national climate change commitments, governments must set caps in line with achieving these goals. in order to be environmentally acceptable, the level of the national caps for Phase 2 ought to be below the level of the caps for Phase 1, so that the phases of the ETS lead to a continuous downward trend in emissions.

AFTER 2012 : The Montreal Action Plan (MAP) is the key outcome of last December’s international climate change conference in Montreal, Canada. The MAP sets out how the 155 countries, having ratified the Kyoto Protocol, will negotiate deeper emission cuts for the second phase of the Kyoto Protocol after 2012.

The Bank’s Mission and Climate Change

Bank’s Mission: Poverty reduction and sustainable development

Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impactsPoor countries will be worse off and poorest people

have the least capacity to adapt, especially the rural poor

Private Capital and Technology Transfer:Kyoto’s flexible mechanisms and lower marginal

cost of abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies

CF

Carbon Finance Products of the World Bank

New FundsDevelopment

BioCarbon Fund

How the Funds Work

Industrialized Countries

and Companies

Host Countries

and Communities

$ Finance $Technology

Finance

CO Equivalent2

Emission Reductions

PCF

Other project fundingPayment on

delivery

Development + Carbon = Carbon with a human face

CDCF Portfolio Criteria Small projects (UNFCCC definition: less than

15MW or equivalent) CDM countries only No more than 10% of capital in one country Minimum of 25% of capital in LDCs and other

poor smaller developing countries Limit of 10% of capital in small-scale

afforestation, reforestation Measurable, certifiable community benefit from

ER project

CDCF Potential Early Deal Flow

22 project proposals/ ideas in hand:Africa: 5Asia: 9Latin America: 8

More than half of proposals are from IDA countriesTogo, Ghana, Kenya, Sri Lanka,

Bangladesh, Nepal, Vietnam, Honduras, Nicaragua.

CDCF Potential Early Deal Flow

Wide variety of technologies represented:

Hydro power: 6

Energy efficiency: 5

Bagasse/ Sawmill Cogeneration: 2

Biomass: 4;

Wind: 2;

Solar: 1; Geothermal: 1

Fuel-switching in transport sector: 1

All fit CDM definition of “small-scale projects”

Capacity ranges from 0.1 MW – 15 MW

Harnessing the carbon market to sustain ecosystems and alleviate poverty

BioCarbon Fund Rationale Demonstrate technical and policy issues of Land

use, land-use change and forestry (LULUCF) activities: learn by doing prototype

Extend carbon finance to agriculture and forestry sectors – particularly in countries with limited opportunities for energy projects

Multiple goals: Atmospheric benefit, local environmental benefits, social benefits and, where possible, explore adaptation options

Meet demand for cost-effective ERs from mandatory and voluntary markets (buy at $3-6/ton/CO2e)

CDM and JI

BioCF Kyoto-Eligible Examples

Afforestration/ Reforestration

CDM & JI CountriesSustainable Forest

Management

JI onlyJI only

Reduced tillage

BioCF - Biofuels Projects where

new trees or crops are established to provide biofuels as part of a wider social and landscape management goal.

BioCF

Landscape Management

CDM Host countriesRevegetation Soil Carbon

Management

Benefits

Private capital flows for projects that help reduce poverty

Investment in cleaner technologies and best practices Ongoing partnerships Capacity building for communities and intermediaries

Host Countries and ProjectsHost Countries and Projects

Benefits

Acquire high value ERs for compliance, trading, insurance

Cheaper transaction costs: expertise of World Bank carbon finance team

Risk mitigation via diversification, hedge future costs

Knowledge of carbon asset creation, market intelligence:

internships, training, advice

Demonstrate social responsibility

Access to additional CO2e in each deal

Leverage private investment for sustainable development

Influence future regulations

Participants Participants (Companies & Governments)(Companies & Governments)

What is Emissions Trading ?

Emission Trading is an idea presented in response to the Kyoto Protocol (An international agreement that assigns mandatory targets for emissions reductions to industrialized countries), that involves the trading of greenhouse gas (GHG) emission rights between nations.

For example, if Country A exceeds its capacity of GHG and Country B has a surplus of capacity, a monetary agreement could be made that would see Country A pay Country B for the right to use its surplus capacity.

Intention : Reduce emissions from industry overall

Companies in certain energyintensive industries are issued with permits for the amount of carbon dioxide they may produce each year. Companies wanting to produce more must buy permits from cleaner businesses with spares.Sometimes businesses are given fewer permits than they ”actually” need, they are thereby forced to either reduce their carbon output or buy spare permits from ”cleaner”businesses.

A new asset, a new world

The man who built the markets for Emission Trading, Richard Sandor.

The story really started in 1991. Richard Sandor, chairman of Climate Exchange, attended the Earth Summit at Rio. Scientists and environmentalists laid out the issue of climate change.

After a lot of effort Richard Sandor managed to collect money and to convince and get the Chicago Climate Exchange (CCX) off ground as a platform for trading voluntary emissions reductions. This was a part of an libertarian experiment to test the ability of market forces to drive down emissions without government intervention

Chicago climate exchange i. launched in 2003ii. Has 131 institutes.iii. Traded 1.45 million tCO2e worth 2.7 million$

European carbon exchange(ECX) is joint venture of CCX is currently largest exchange trading carbon units in EU Emission Trading Exchange.

Six greenhouse gases emitted from industrial, agricultural and consumer sources;

methane (CH4), carbon dioxide (CO2), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6)

will be traded in the brokerage houses and trading floors of the world markets.

Market of Opportunity

EUR18 billion market for CO2

Market opportunity has been estimated at EUR3 trillion over 20 year horizon and may be EUR100 billion by 2010

Six European exchanges are about to trade carbon emission and weather derivatives;

One US exchange : Chicago Climate Exchange

Market of Opportunity

UBS is trying to change weather investing by launching the first Global Warming Index (GWI), which provides a simple way to take a view on a wide range of weather variables.

Weather derivatives traded on the Chicago Mercantile Ex change jumped from $9.7bn in 2004-5 to more than $45bn in 2005-6.

Market of Opportunity

The ‘polluters’ in the Kyoto Protocol are individual countries that have agreed to a specific reduction target which are currently set at an average of 5.2 per cent below 1990 levels of emissions.

Energy Emission market

In most respects, emissions markets are no different from current financial markets.

They are subject to the same pressures of capital markets, such as price volatility, boom and bust cycles, speculative bubbles...

Energy Emission market

It’s a market-based solution to environmental problems which refers specifically to air pollution.

Each polluters are assigned targets for reducing their emissions of gases in a pre-defined time period.

Market Mechanism

The polluters are then given a number of ‘emissions credits’ for the amount they are allowed to pollute, which is the level of their emissions minus their agreed target.

Market Mechanism

There are several things that can happen:

Scenario 1:

The polluter uses up the whole allowance in the allocated time period, but still pollute more. In order to do remain in compliance, spare credits must be bought from another polluter which has not used up the whole allotment.

Market Mechanism

Scenario 2:

The polluter does not use the whole allowance and can either save the remaining credits for the next time period (bank them), or sell the credits to another polluter on the open market.

Market Mechanism

Scenario 3:

The polluter can invest in numerous pollution reduction schemes in other countries or regions and ‘earn’ credits from these projects which can then be sold, banked or used to make up shortfalls in the original allowance.

Market Mechanism

56

Carbon Trading has potential to reduce carbon emissions at cheapest cost.

Companies are given a free allowance which may be reduction on historic trends, an increase on historic trends, or at a constant level.

Carbon Trading takes place between companies.If a company exceeds it allowance it can reduce its carbon

emissions, or it can purchase allowances from someone who has a surplus.

However, there is an ultimate buy out penalty if there are too few allowances.

Currently this penalty 40 € a tonne in EU-ETS

Carbon Trading

Buyer’s side

Base

line e

missio

ns

Baseline Scenario

Seller’s side (Host Country)

EmissionReductions (ERs)

Pro

ject e

missio

ns

Project Scenario

How Carbon Trading Operates

Emissions target

Purchase of allowances

Host country benefits

from technology and financial flows

$$

ER

Purchase of ERs

Domestic action

Purchase of ERs is

supplemental to domestic

action

What is a Carbon Unit?International trading unit

One metric tonne of carbon dioxide equivalent CO2e

Gas Type Chemical Symbol

Global warming potential over 100 years

Carbon dioxide CO2 1

Methane CH4 21

Nitrous oxide N2O 310

Sulphur hexafluoride SF6 23,900

Hydro fluorocarbons HFCs 140-11,700

Per fluorocarbons PFCs 6,500-9,200

Source IPCC 1996

Growth of the Carbon Market

Mil. USD 2006 2007 2008

Compliance Markets 31,165 63,770 117,084

Voluntary Markets 70 265 499

State and trends of the Carbon Market in 2006

The overall value of the global aggregated carbon markets was over US$10 billion in 2005. In the first quarter of 2006, overall transactions worth US$7.5 billion had led some to predict that this new financial market would be valued at between US$2530 billion in 2006

These values had been driven by soaring prices in the European Union Emissions Trading Scheme (EU ETS) market for Phase I European Union Allowances (EUAs).

Developing countries began to participate meaningfully in the market and brought real emission reductions to the table.

THIRD PHASE of the emmission trading scheme, the need for clarity for investment decisions long time ahead.

Markets now price carbon and this has created the opportunity for the private sector to efficiently support investments to reduce emissions.”If companies are going to be able to make accurate decisions on investments in cleaner, but more expensive generation in future, the key element is a stable and transparent European carbon price well beyond 2012” , Sam Laidlaw chief executive of UK based (electricity)generator Centrica.

State and trends of the Carbon Market in 2006

Do not underestimate a few degrees change because just “8 degrees Celsius separates today's average temperatures from that of the last ice age”

Steven Chu, Physics Nobel Prize winner

Conclusion