Carbon Trading and the Kyoto Protocol

Antonio LimSustainable Development Department

Europe and Central Asia RegionWorld Bank

Sarajevo, Bosnia-HerzegovinaApril 16, 2009

Overview

• Kyoto Protocol and the Carbon Market

• Features of a Carbon Finance Project

• Mitigation Project Examples

Climate Change and Global Warming

Earth’s climate is warming and human activities are primarily responsible (>90% certainty)

280 to 430ppm concentration between 1850 and 2000 (0.5-0.8oC increase)

550ppm likely by 2035 with

77-99% chance of 2oC increase

50% chance of 5oC increase

Global Warming Potential (GWP)

• Measure the impact that particular GHG on ‘radiative forcing’ – the additional heat/energy retained in the earth’s ecosystem through the addition of this gas to the atmosphere

Unit of Measure: ton of CO2equivalent (tCO2e)

Global Warming Potential (GWP)

• Carbon Dioxide (CO2) 1• Methane (CH4) 21• Nitrous Oxide (N2O) 310• Perflurocarbons (PFC) 6500• Hydroflurocarbons (HFC) 11700• Sulfur Fluoride (SF6) 23900

Potential Impacts

38 Developed Countries and Economies in Transition (Annex I) agreed in 1997 to

• Reduce GHG emissions by 5.2% below 1990 levels in the commitment period 2008-2012

• Total demand created for GHG Reductions: ~5 billion tCO2e, including the US

• Marrakech Accord: agreed on the rules of implementation in November 2001

• KP came into force in 2005 February with Russia ratifying the Protocol

The Kyoto Protocol

Global Market Created by the Kyoto Protocol

• Most OECD countries have a reduction target, on average 5.2% below 1990

• Targets to be achieved through: – Reductions at home

– Purchasing emission reductions credits and international emission allowances

• Credits from projects in developing countries (Clean Development Mechanism – CDM)

• Credits from projects in economies in transition (Joint Implementation – JI)

• International Emissions Trading of allowances

Carbon Market

Buyer’s side

Baselin

e em

issions

Baseline Scenario

Seller’s side (Host Country)

EmissionReductions (ERs)

Project em

issions

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

Mobilizing Resources for Climate Change Mitigation

• Emission reduction projects located in “Kyoto” countries: →Clean Development Mechanism (CDM) and Joint Implementation (JI)– Traded Unit: Certified Emission Reductions (CERs)

• Emission reduction projects in Non-Kyoto” countries: →Voluntary Market– Traded Unit: Verified Emission Reductions (VERs)

→ Dynamic rules and conditions involving continuous change in standards, requirements, demand profile, supply, etc.

Growth of the Carbon Market

Mil. USD 2006 2007 2008

Compliance Markets 31,165 63,770 117,084

Voluntary Markets 70 265 499

Critical Operational Concepts in Carbon Finance Projects

• Baseline– Which GHG emissions will be reduced?– Business-as-Usual (BAU) Scenario

• What is the future without the proposed project?• How many years will the emission reductions last?

– What are the project boundaries?

• Additionality

Concept of Additionality

• Investment Barrier– A more financially viable alternative can lead to higher

emissions

• Technological Barrier– Less advanced technology leads to higher emission

• Common Practice Analysis– Prevailing practice, existing regulatory or policy

requirements

• Benefits Analysis– A more viable strategic alternative can lead to higher

emissions

Baseline/Additionality

time

emis

sion

s

Project emissions

Emission Baseline

Certified emissionReductions (CER)

The difference between the actual project emissions and the emission baseline constitute the volume of CERs

If project emission = baseline emission → no CERs

75.0%

12.5%1.9%

2.6%5.9%

0.0%0.8%

1.3%

Wall insulation Roof insulation

New windows and doors Termostatic radiator valves and VSD pumps

Three-way valves and VSD pumps Pipe & exchanger insulation, new heat exchanger

New heat substation or boilers (fuel switch) Boiler reconstruction (with fuel switch)

Investment in Schools Heat Saving Structures in Serbia

• Total number of schools : 16 / 54,035 м2

• Heat for space heating (MWhe/y)– before 11,168 -> after 6,321 (-43.4%)

• Average specific heat consumption for space heating– before 207 кWh/ m2/y -> after 117 кWh/ м2/y

• CO2 emission reduction

– before 3,303 t/y -> after 1,844 t/y (-44.2%)• Specific investments

– Average € 38.8/m2 in range € 18.1 to € 97.4 /m2

Mitigation Impact for the Schools

16.1%

55.7%

7.8%

1.4%0.8%3.0%

10.4%4.9%

Wall insulation Roof insulation

New windows and doors Termostatic radiator valves and VSD pumps

Three-way valves and VSD pumps Pipe & exchanger insulation, new heat exchanger

New heat substation or boilers (fuel switch) Boiler reconstruction (with fuel switch)

Investments in Hospitals Heat Saving Structures in Serbia

Impact of the Investment in the Hospitals in Serbia

• Total number of hospital buildings: 11 / 50,934 m2

• Annual heat for space heating (MWhe/y)– before 16,747 -> after 10,673 = reduction of 36.3%

• Specific heat consumption– Before 329 кWh/ m2,y -> after 210 кWh/ m2,y (-36.3%)

• CO2 emission

– Before 4,668 t/y -> after 3,101 t/year (-33.6%)• Specific investments

– Average € 29.23/m2 ; range € 19 to € 58.8/m2

The Road Ahead for B-H

• EU 20-20-20 Vision

• US renewed engagement in international negotiations

• Post 2012 International Agreement (post Kyoto Protocol) – December 2009 Copenhagen COP 15 Final Negotiations

• Transformative Approach in Mitigation – programmatic and sectoral approaches

Secondary CDM

25,600

EU EmissionsTrading Scheme

100,000

(twice over 2007)

New South Wales Certificates

180

CDM6,000

JI700+

Allowance markets(US$ million)

Source: WB State and Trends of the Carbon Market 2009, forthcoming, Point Carbon, Reuters

Project-based transactions(US$ million)

Voluntary market in 2008 Voluntary market in 2008 – niche segments (– niche segments (US$ million)US$ million)

Voluntary & retail500 ?

Chicago Climate Exchange310

Carbon markets surpassed US$130billion in 2008Carbon markets surpassed US$130billion in 2008

Regional GHG Initiative

240

Assigned Amount Units180

Opportunity for B-H

Future w/ EU

Thank You

• www.carbonfinance.org

• www.unfccc.int

Overview of CDM and Voluntary Standards

Standard DescriptionEligible Project

Types

CDM Certification of Offset Projects and carbon creditsExcluding Nuclear,

new HFC and REDD

Gold Standard Certification of Offset Projects and carbon creditsOnly Renewables and

Energy Efficiency

VCS Certification of Offset Projects and carbon credits New HFc excl.

VER+Certification of Offset Projects and carbon neutral products

Nuclear, HFC and large hydro excl.

CCX Certification of CCX Offset Projects and credits New HFC excl.

CCB Standards Certification of Offset Projects Only LULUCF

ISO 14064Certification of carbon credits, offsetting and emissions

No restriction

Comparison of CDM and GSCriteria CDM Gold Standard

Organization UN-backed Backed by 60 NGOs & charities

Supervising Body UNFCCC EB GS TAC

Registration Process Rigorous & Bureaucratic CDM-like with strong sustainable development focus & community consultation component

Project Types Almost all types eligible Only renewables and Energy Efficiency

Additionality CDM additionality tool Same as CDM

Sustainability Assessment

Host country criteria apply

additional sustainability criteria (SD matrix)

Stakeholder Consultation

1-step consultation 2-step consultation (also at project design)

Prices Roughly standard prices Project dependent

Crediting Period 10 / 21 years (*LULUCF) Same as CDM

Methodology CDM methodologies CDM methodologies + additional methodologies

Issuance of Credits By EB By GS, into the “GS Registry” account