CD4CDM National Workshop, Accra, Ghana February 2006 Glenn S. Hodes UNEP Risø Center CARBON FINANCE.
....innovating clean energy solutions…. Glenn S. Hodes UNEP Risø Center CARBON FINANCE.
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Transcript of ....innovating clean energy solutions…. Glenn S. Hodes UNEP Risø Center CARBON FINANCE.
![Page 1: ....innovating clean energy solutions…. Glenn S. Hodes UNEP Risø Center CARBON FINANCE.](https://reader035.fdocuments.us/reader035/viewer/2022062409/56649e975503460f94b9a74f/html5/thumbnails/1.jpg)
KITEKITE....innovating clean energy solutions….
Glenn S. HodesUNEP Risø Center
CARBON FINANCE
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KITEKITE....innovating clean energy solutions….
Why a Carbon Market?
• Regulations, present or anticipated, create constraints on greenhouse gas (GHG) emissions of governments, firms (e.g. Kyoto Protocol obligates industrial Parties to reduce emissions by avg 5 % below their 1990 emissions over 2008-12.
• Since GHGs mix in the atmosphere, it does not matter where emissions are reduced
• Compliance with regulation can be achieved through in-house (“make”) or flexibly through purchase (“buy”) “GHG commodities”. The market has responded to the entry into force of Kyoto and the EU ETS – and is now a real compliance market.
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KITEKITE....innovating clean energy solutions….
Benefits of Carbon Finance
• As a new source of private investment for development + public goods, carbon finance offers an unique opportunity to increase private and public investment in clean technologies in developing countries.
• Between 10-50% of revenue for waste management + renewable energy projects can come from CF.
• Powerful leverage effect on other FDI.• Payment on regular schedule and in hard currency
smoothes cash flow and can securitize critical up-front capital for project construction (e.g. bridge loans).
• Help increase sustainability and extend the social and community impacts/benefits of typical energy projects
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KITEKITE....innovating clean energy solutions….
Structure of the Carbon Market
Allowance Markets
UK ETS
EU Emission Trading Scheme
Chicago Climate Exchange
New South Wales Certificates
Project-Based Transactions
JI and CDM
Voluntary
RetailOther
Compliance
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KITEKITE....innovating clean energy solutions….
Annex BNon-Annex B The Kyoto Protocol
• Assigns GHG emission targets to Annex B countries between 2008 and 2012
• 3 Flexibility Mechanisms
- Joint Imple-
mentation
- Emission
s Allowance Market
- Clean Development
Mechanism
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KITEKITE....innovating clean energy solutions….EU Emissions Trading Scheme
• Caps over 40% of EU CO2 emissions• 2 phases : 05-07 and 08-12
• JI and CDM authorized…• But NOT LULUCF (review in 2006)
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KITEKITE....innovating clean energy solutions….
Canada
• Sectoral covenants under negotiation• Domestic carbon market
• Strategy calls for some use of CDM; could be largest bilateral buyer program
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KITEKITE....innovating clean energy solutions….
Japan
• National Policies still in the making
• Firms and government active on CDM market
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KITEKITE....innovating clean energy solutions….
USA
• Policies constraining GHG emissions in various States (e.g., Oregon, Mass., etc.)
• Chicago Climate Exchange (CCX), private allowance market
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KITEKITE....innovating clean energy solutions….
Kyoto Compliance Gap
• CERs from CDM projects are in high demand – OECD almost 6.0 Billion tCO2 below KP target.– Assuming 50% met from domestic measures,
projected gap of 3 Billion tons. Less than 20% booked for delivery by 2012.
• But supply market is highly competitive • And CDM competes with domestic/internal
measures!! – Gains from trade fundamental to carbon market:
country mitigation cost curves matter.
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KITEKITE....innovating clean energy solutions….
Growing Voluntary Market• A large and growing number of companies have engaged in
programs to reduce their GHG ‘footprint’ absent regulations– Various motivations: corporate responsibility, public
relations, strategic positioning, competitive advantage, learning-by-doing, etc.
– These firms have large-scale emissions (2002 survey: 18 firms with more CO2 emissions than France had voluntary targets for 2010)
• Individuals and Firms have engaged in purchases of carbon credits to be “carbon neutral” (event, corporation, or product)– Example: World Cup, G8 Summit, BA travel
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KITEKITE....innovating clean energy solutions….
2005 State and Trends of the Carbon Market Report
• Funded by World Bank CF-Assist Program. • Based on material provided by
Evolution Markets LLC, Natsource LLC, and on interviews with many market players. Limited public information on transactions.
• Database of 487 project-based transactions (signed or advanced stage of negotiation) + aggregated data on allowance markets
Report downloadable from: www.carbonfinance.org
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KITEKITE....innovating clean energy solutions….
0
100
200
300
400
500
600
1998 1999 2000 2001 2002 2003 2004 2005
Known Estimated
Total Value of Contracts over 1 b$ (data
in million U.S.$, nominal)
(Jan-Apr)
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KITEKITE....innovating clean energy solutions….
Buyers: European Governments and Firms In percent of volume purchased From Jan.04 to Apr.05
Other EU32%
UK12%
Gov. Netherlands16%
Japan21%
New Zealand7%
Canada5%
Australia3%
USA4%
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KITEKITE....innovating clean energy solutions….
Supply Concentrated In percent of volume sold from January 2004 to April 2005
OECD14%
TransitionEconomies
6%
Africa0%
India31%
Rest of Asia14%
Brazil13%
Rest of Latin America22%
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KITEKITE....innovating clean energy solutions….
Number (%) of CDM projects in each sectorBiomass energy
Hydro
EE Industry
Wind
Agriculture
Landfill gas
Fossil fuel sw itch
Biogas
Cement
HFCs
Fugitive
Solar
Geothermal
EE Households
N2O
EE Service
Tidal
Transport
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KITEKITE....innovating clean energy solutions….
Prices Depend on Risks(weighted average prices from Jan. 2004 to April 2005 in U.S.$ per metric tonne of
CO2e)
$0.00
$2.00
$4.00
$6.00
$8.00
ER VER CER ERU
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KITEKITE....innovating clean energy solutions….
Key Price Determinants
• Guarantee of delivery of registered ERs• Creditworthiness of project sponsor• Viability of underlying project, and liabilities of seller
in case it under-performs• ER vintage: pre- or post-2012• Cost of validation and potential certification• Host country support or barriers• Additional environment and social benefits
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KITEKITE....innovating clean energy solutions….
Allowance Markets Exploding (in million tCO2e)
(Jan.-March)
0
5
10
15
20
25
30
35
40
2002 2003 2004 2005
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KITEKITE....innovating clean energy solutions….
Insights on Price Differential• Large price differential:
– EU Allowances: 7 up to 25 euros / tCO2e (spot and forward contracts)
– Project-based: 3 to 7+ dollars / tCO2e (forward contracts on expected CERs)
• Allowances and project-based contracts have very different risk profiles:– Project and country risks: high in CDM, none in
allowances– Compliance/regulatory risks: high in CDM, none
in allowance– Delivery risks: higher in CDM
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KITEKITE....innovating clean energy solutions….
Intermediation - a key to success
• Identify project opportunities at lower cost• Get equity and debt financing when the
intermediary is a financial institution• More effectively design and/or evaluate projects• Reduce transaction costs
– Example of Infrastructure Development Finance Corporation (IDFC), India, one of the most successful intermediaries agreement with over a dozen opportunities identified/ evaluated
– Development Bank of Southern Africa
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KITEKITE....innovating clean energy solutions….
Conclusions and Caveats• Volumes should increase rapidly for CERs … • Almost 600 CDM projects already registered or in
process of validation.• Uncertainties still need to be addressed.
– How many allowances will Russia and Ukraine bring to market?
– How much volume will CDM deliver? Issue of projects lead-time
– Will UN and EU emission registries be fully operational and compatible by 2008 (i.e. extent of arbitrage)?