Challenges and Opportunities for Addressing Global Climate Change

1. Challenges and Opportunities for Addressing Global Climate Change February 2006

2. Slide 1 – Outline • Global Energy Outlook • Status and Trends of the Carbon Market • Short Term Challenge: is there enough supply to meet Kyoto commitments? • Long-Term Challenge: market continuity given post 2012 uncertainty • Scaling Up

3. Slide 2 - Historical GHG Emissions

4. Slide 3 - Global Energy Outlook (IEA 2004) 80 % of global emissions are from burning of fossil fuels; energy sector largest contributor to GHG With no significant change in current energy policies: • world energy needs will be 60 % higher in 2030; two thirds of increase from developing countries • Global CO2e emissions on course to increase by 1.7 % per year until 2030; 70 % of which from developing countries • Fossil fuels will continue to dominate the global energy mix, accounting for 85 % of increase in overall energy use until 2030 Renewable Energy: share of renewable energy will decrease slightly from 20 % in 2002 to 18 % in 2030 • renewable energy consumption (including large hydro) could increase by 60 % • share of non-hydro renewable energy in electricity generation could triple from 2 % in 2002 to 6 % in 2030 Markets have to be part of solution

5. Slide 4 - Current Demand Trends in Carbon Market • Market driven by Kyoto entry into force: • Requires developed countries to reduce emissions by 5.2% below 1990 levels in 2008-2012 • Total demand about 5.5 billion tons of CO2e • Much of the obligation devolved to private firms, in particular in Europe with coming into force of European Emissions Trading Scheme in January 2006 • Demand for international credits in the order of 3 billion tons • Japan short by 1 billion tons • Canada short by 1.2 – 1.5 billion tons • Europe short by 800 million tons -1.3 billion tons • Modest demand by European private sector in 2005-2007

6. Project-Based Transactions Allowance Markets EU Emission Trading Scheme JI and CDM UK ETS Voluntary New South Wales Certificates Other Compliance Chicago Climate Exchange Retail Slide 5 - Structure of the Carbon Market

7. Slide 6 - Eligibility Issues • Eligibility Demonstrated through: • Barrier analysis: project faces barriers that prevent its implementation • Investment analysis: project is economically or financially less attractive than other alternatives • Relatively simple for project which generate no financial or economic benefit other than the sale of emission reductions • For other projects, use financial indicator such as IRR, NPV, etc. to compare alternatives • Common Practice: project is likely eligible if project is not common practice

8. Slide 7 - Total Value of Contracts over 1 b$ (data in million U.S.$, nominal) (Jan-Apr)

9. Slide 8 -Main Buyers: European Governments & FirmsIn percent of volume purchased From Jan.04 to Apr.05

10. Slide 9 - Supply Concentrated in Middle-Income CountriesIn percent of volume sold from January 2004 to April 2005

11. Slide 10 – Non-CO2 Gases DominateIn percent of volume purchased from Jan.04 to Apr.05

12. Technology DIRR financial Hydro, Wind, Geothermal 0.5-2.5% 2- 4 % Crop/Forest Residues 3-7% Municipal Solid Waste 5-15+% Slide 11 - Carbon Economics Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e Gas Flaring

13. Slide 12 - Short Term Challenge: Is there enough supply in the carbon market? • Domestic efforts: at least 50 percent of effort will come from domestic efforts (2.5 to 3 billion tons) • Clean Development Mechanism:reduction of CO2 and CH4 assets (from energy, waste management and agro-forestry): not likely to be much more than 400 Mt for 2012 delivery • Clean Development Mechanism: reduction of industrial gases such as HFC23 and N20 (primarily from China) could supply 1 billion tons • Joint Implementation will be small, no more than 50 Mt • Remainder must come from Emissions Trading with Economies in Transition, but greening will be required – implies about $30 billion of new investment over the next 4-5 years

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15. Slide 14 – Longer Term Challenge • Long-term viability of carbon market is not assured • Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure; Bank Carbon Funds uniquely purchases beyond 2012 • Without a commitment of governments to limit GHG emissions beyond 2012, the carbon market will remain soft and the private sector is unlikely to enter in a meaningful manner • The real challenge is set a long-term stabilization target for atmospheric concentrations of GHGs, which would equate to an emissions target – the challenge would be to agree on intermediate emissions targets, allocations of emissions rights, and long term stable market mechanisms to ensure economic efficiency and resource transfers to support low-carbon growth paths

16. Slide 15 - Scaling Up • Opportunity: Carbon Market has potential to be larger than ODA flows between 2013 - 2050 • Potential to use the carbon market as a mechanism to catalyze high volumes of transactions and investments • However, we need to move from current project-by-project approach to programmatic and sectoral approaches > Need to lower regulatory risk to monetize carbon revenues and cover the incremental cost and risk of lower carbon development

17. Slide 16 - Standardization of Carbon Assets in Energy Sector • Some technologies are amenable to global tests of eligibility: off-grid renewable power (diesel standard), composting and recycling of solid waste • Other technologies will require national standards: on-grid renewable power, use of efficient equipment depending on national common practice • Public-incentive schemes / regulations should be eligible for carbon finance

18. Challenges and Opportunities for Addressing Global Climate Change February 2006