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Early stage of the carbon market 1997-2001

State and trends of the carbon market Updated September 20, 2001 Franck Lecocq – DECRG / PCF plus Research. Early stage of the carbon market 1997-2001. Greenhouse gases emission reductions an unusual commodity. ERs become a commodity after certification.

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Early stage of the carbon market 1997-2001

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  1. State and trends of the carbon marketUpdated September 20, 2001Franck Lecocq – DECRG / PCFplus Research

  2. Early stage of the carbon market 1997-2001

  3. Greenhouse gases emission reductions an unusual commodity • ERs become a commodity after certification. • Before certification ERs are very heterogeneous depending on the plausibility of their baseline. Emission Reduction=Hypothetical baseline emissions - effective emissions

  4. Carbon prices on past transactions

  5. Motivations of early participants Sellers • a new source of revenue. Buyers • Belief that ultimately there will be constraints on GHG emissions • Hedge against those compliance costs Buyers (large utilities, oil companies) also want to • Learn about the market • Strategic positioning

  6. Early developments of the market 1997 to 2001 • Partial information available. • Within OECD and EITs: 40-60 MtCO2e have been transacted. • In developing countries: Less activity but growing. Mostly government funded, but private activity growing. • General trend towards sophistication: buyers clubs (PCF), traders, financial derivatives (options), integrated marketplaces, etc.

  7. Which future for the carbon market?

  8. Two storylines > Kyoto or Kyoto “light” • Kyoto is the existing framework, but its future is uncertain. • One possible outcome is Kyoto without the US. No agreement, at least for the next few years • Does it mean the market will collapse?

  9. The Kyoto Protocol (1997) • The Kyoto Protocol assigns greenhouse gases emission targets to Annex B countries between 2008 and 2012… • …And defines three flexibility mechanisms to take profit of differences in marginal abatement costs: • Emission Trading • Joint Implementation • Clean Development Mechanism

  10. Demand and supply under Kyoto scenarios Domestic carbon sinks Total Annex B demand for ERs Hot Air financial flow to Russia and EE  Action within OECD Remainder  Russia and EE (trading and JI)  Developing countries (CDM)

  11. Volumes with “full” Kyoto Gross annual demand for ERs 2800 – 4800 MtCO2e between 2008 and 2012 - Credits for hot air 950 – 2150 - Credits for Annex B Sinks 400 – 800 (?) = Net demand 0 – 3000 MtCO2e (assuming large Annex B sinks)

  12. Volumes in Kyoto w/o the US Gross annual demand for ERs 1400 – 2400 MtCO2e between 2008 and 2012 - Credits for hot air 950 – 2150 - Credits for Annex B Sinks 100 – 400 = Net demand 0 – 1700 MtCO2e (assuming limited Annex B sinks)

  13. Prices • Very difficult to anticipate (uncertainties on abatement costs and rules governing mechanisms). • Running CERT with the preceding volume assumptions yields prices in the range of: • $0 - $10/ tCO2e for “full” Kyoto. • $0 - $2 / tCO2e w/o the US.

  14. Consequences for Economies in Transition and non-Annex B countries Economies in Transition: Key element = hot air Net benefit of about $5b per year [2.9-6.3] at $3/tCO2e. Developing countries: Model shows $2b – $4b transfers per year. But the demand for CDM is more uncertain. In particular, there is a very low demand for CDM if Kyoto w/o US.

  15. Two storylines Kyoto or Kyoto “light” • Kyoto is the existing framework, but its future is uncertain. • One possible outcome is Kyoto without the US. No agreement, at least for the next few years • Does it mean the market will collapse? >

  16. Is Kyoto still relevant?Emerging market drivers • Regulations constraining carbon emissions are being developed • National policies (UK, The Netherlands, etc.) • Subnational regulations (e.g. some US States) • Regional initiatives (EU-wide trading) • Some firms are taking voluntary emission commitments (BP, Shell, Dupont, etc.)

  17. Current or projected national policies Trading? Start-up Project-based mechanism? EUYes2005At least from 2008 UKYes. 2001 Yes France Yes 2003? Yes Norway Yes 2005 or earlier Yes Germany No Later Denmark Yes 2001 Yes Sweden Yes 2005 or later Yes NetherlandsOngoing work  Yes Finland Ongoing work  Yes Ireland Ongoing work  Ongoing work Australia Yes US dependent Yes USA Yes ? Yes Canada Yes US dependent  Japan Ongoing work  Yes New Zealand Yes Not decided Yes RussiaNo  Yes `

  18. Regional regulations in the US • Oregon: CO2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms. • Washington: New plants must demonstrate the use of best available techniques for CO2 emissions control. • Massachusetts: CO2 emissions cap for energy utilities effective in 2005. Utilities can offset excess emissions using project-based mechanisms. • Near future: New York?

  19. Voluntary corporate commitments • Rapid survey indicates 52 major companies representing1 billion tCO2e emissions in 1999 have pledged to reduce GHG emissions by 2010. • Resulting demand depends on the baseline. If we set baseline at 1999 emissions, we obtain a total demand of 500 MtCO2e over the next decade. • At least eight have said they would use project based mechanisms.

  20. Corporate voluntary commitments Internal Trading 1999 Emissions Commitment CDM/JI Alcoa -- 25% below 1990 in 2010 BP Amoco 79.8 Cumulative 2%/year below 1990   Chubu EPCo. 51.3 0.410 kgCo2/kWh in 2005 Dupont 44.4 65% below 1990 in 2010 Kodak -- 20% below 1990 in 2004 Fortum 9 0.5 MtCo2e below baseline in 2010  IBM 4.1 Cumulative 4%/year below 1998 until 2004 Intel 3.3 10% below 1995 in 2010 (PFCs) Johns. & John, 1.5 7% below 1990 in 2010 Motorola -- 50% below 1995 in 2010 (PFCs) Ontario Pow.Gen. 26 6% below 1990 in 2010  PEMEX 177 -1% per year until 2010   Shell 99 103 MtCo2e in 2002   Statoil 8.3 1.5 MtCo2e below baseline in 2010  Suncor 5 -1.5%/year until 2002 (-1%/year for 2003-2008)  Transalta 38.5 ----- 

  21. In addition, Canada and Australia have voluntary ER programs with very good coverage of key emitting sectors.

  22. Chicago Climate Exchange • 25 Midwestern firms will agree on emission targets by the end of 2001 and start trading in 2002. • -2% below 1998 level in 2002, additional –1% period year between 2003 and 2005. • Allows for offsets through project-based mechanisms.

  23. Emerging carbon funds Prototype Carbon Fund +… • About 5 private sector funds to capture JI/CDM Carbon credits in all investments. • Handful of private equity funds also seeking carbon credit investors to raise IRR in deals. • Major forestry funds thinking about C credits. • New energy private equity and mutual funds might seek C credit deals if demand rises. • Social funds use C as screening indicator.

  24. Conclusion • The carbon market exists, and is developing rapidly. • It is likely to keep growing up even if Kyoto fails (the question will then be to coordinate the emerging regulations and initiatives). • It brings opportunities for EITs and non-Annex B countries

  25. Annex B countries >

  26. 2008-2012 GHG Emission targets (100 = 1990) Australia 108 Austria 92 (87) Belgium 92 (92.5) Bulgaria 92 Canada 94 Croatia 95 Czech Republic 92 Denmark 92 (79) Estonia 92 Finland 92 (100) France 92 (100) Germany 92 (79) Greece 92 (125) Hungary 94 Iceland 110 Ireland 92 (113) Italy 92 (93.5) Japan 94 Latvia 92 Liechtenstein 92 Lithuania 92 Luxembourg 92 (72) Monaco 92 Netherlands 92 (94) New Zealand 100 Norway 101 Poland 94 Portugal 92 (127) Romania 92 Russian Federation 100 Slovakia 92 Slovenia 92 Spain 92 (115) Sweden 92 (104) Switzerland 92 Ukraine 100 UK 92 (94) USA 93

  27. Discussion on the prices we obtain for Kyoto scenarios There are higher price estimates in the literature. The difference stems from: • Higher sinks • Volume of hot air has been revised upwards • We assume a smooth market (e.g. limited transaction costs, full hot air accessibility) • We only use a limited set of projections about abatement costs. >

  28. The Netherlands • Government funded Emission Reduction Unit Procurement Tender (ERU-PT). • Buys ERs in Eastern Europe • 2000 tender (completed): $19 M • Average price for first tender: $7/tCO2e • Next tender expected in October, 2001 >

  29. United Kingdom • Climate Change Levy (April 2001) • Tax on energy use • Rebates in exchange for voluntary commitments • Benefits recycled in other corporate tax rebates • Emission Trading (end of 2001) • Concerns selected companies, on a voluntary basis • Projects outside UK are considered for 2002. >

  30. Hot Air >

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