State and Trends of the Carbon Market 2010 - …

1 State and Trends of the Carbon Market 2010 Alexandre Kossoy Philippe Ambrosi Senior Financial Specialist Environmental Economist Carbon Finance Unit Climate Change TeamEnvironment Departmentthe findings and opinions expressed in this report are the sole responsibility of the authors and should not be cited without permission. they do not necessarily reflect the views of the World Bank Group, its executive directors, the countries they represent or of any of the participants in the Carbon funds or facilities managed by the World Bank. this report is not in-tended to form the basis of an investment decision. All photo credits: Shutterstock Images LLC, except page 4 by (c) George hammerstein/CorbisCover design: Patricia hord Graphik designLayout and typesetting: the Word express, : Westland Printers iiiWe, the authors, would like to acknowledge our editor, Andy Stone, whose countless insightful contri-butions ensured the quality and clarity of this are also grateful to our many colleagues in the Carbon Market who provided their written contribu-tions and perspectives.

2 Imtiaz Ahmad, Claudia Barrera, Benoit Bosquet, Rodney Boyd, Lance Coogan, Lex de Jonge, John Kilani, Werner Kornexl, Aditi Maheshwari, Taisei Matsuki, Grzegorz Peszko, Alex-andrina Platonova-Oquab, Monali Ranade, Milo Sjardin, and Jari , we also wish to extend our thanks to those who offered their cooperation and insights during the elaboration of this report: Luz Abusaid, Agnes Biscaglia, Veronique Bishop, Eron Bloomgarden, Anna-Maria Bogdanova, Martina Bosi, Jean-Christophe Bougle, Alban Brindle, John Buckman, Scott Cantor, James Cantrell, Marcos Castro, Dougal Corden, Isabelle Curien, Karen Degouve de Nuncques, Eduardo Dopazo, Nadine Dulac, Patricia Ephraim, Emmanuel Fages, Justin Felt, Francisco Fernandez Asin, Sonia Medina Gomez, Pierre Guigon, Isabel Hagbrink, Takashi Hongo, Lenny Hochschild, Pedro Huarte-Mendicoa, Robert Hunt, Carollyne Hutter, Masaya Inamuro, Friso de Jong, Yvan Keckeis, Ted Kennedy, Solvita Klapare, Daigo Koga, Anita L.

3 Kossoy, Benoit Leguet, Martin Lawless, Mark Lewis, Gautier Le Maux, Vincent Monteux, Lucy Mortimer, Ken Newcombe, Shahyar Niakan, Akiko Nishi-mae, John O Brien, Ian O Donohue, Roon Osman, Christian de Perthuis, Neeraj Prasad, Saima Qadir, Brice Quesnel, David Rapin, Frank Rasmussen, Pontus Ripstrand, Fabrice Le Sache, Geoff Sinclair, Chandra Shekhar Sinha, Laurent Segalen, Ash Sharma, Trevor Sikorski, Sara Stahl, Barry Sterland, Charlotte Streck, Endre Tvinnereim, Laurent Valiergue, Jan-Willem van de Ven, Ariane Verbeeck, Ales-sandro Vitelli, Emilio Weldon, Yevgen Yesyrkenov, Bernhard Zander, Elizabeth Zelljadt, and Susann Zimmer. State and Trends of the Carbon Market 2010 received financial support from the CF-Assist Program, managed by the World Bank Institute (WBI)

4 , as well as from the Carbon Finance Unit of the World Assigned Amount UnitAAUPA AAU Purchase AgreementACR American Carbon RegistryAWG-KP Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto ProtocolAWG-LCA Ad Hoc Working Group on Long-term Collaborative ActionCAPEX Capital ExpenditureCAR Climate Action ReserveCCS Carbon Capture and StorageCCX Chicago Climate ExchangeCDM Clean Development MechanismCER Certified Emission ReductionCFL Compact Fluorescent LampCH4 MethaneCMM Coal Mine MethaneCMP Conference of the Parties serving as the Meeting of the PartiesCO2 Carbon Dioxide CO2e Carbon Dioxide EquivalentCOP Conference of the PartiesCPA CDM Programme ActivitiesCPRS Carbon Pollution Reduction SchemeCP1 First Commitment Period under the Kyoto Protocol CRT Climate Reserve TonneDNA Designated National AuthorityDOE Designated Operational EntityEB Executive BoardEC European CommissionECX European Climate ExchangeEE Energy EfficiencyESS Energy Savings SchemeEIT Economy in TransitionEITE Emission-intensive.

5 Trade-exposed ER Emission Reduction ERPA Emission Reduction Purchase AgreementERU Emission Reduction UnitESC Energy Savings CertificateETS Emissions Trading Scheme EU European UnionEUA European Union AllowanceEU ETS European Union Emissions Trading SchemeEURIBOR Euro Interbank Offered RateGDP Gross Domestic ProductGHG Greenhouse GasGIS Green Investment SchemeHFC HydrochlorofluorocarbonIEA International Energy AgencyIMF International Monetary FundIRR Internal Rate of ReturnJ-VETS Japan-Voluntary Emissions Trading SchemeJI Joint ImplementationJISC Joint Implementation Supervisory CommitteeKM Kyoto MechanismLDC Least Developed CountrylCER Long-term Certified Emission ReductionLFG Landfill GasLoA Letter of ApprovalLULUCF Land Use, Land Use Change and ForestryMOP Meeting of the Parties MRET Mandatory Renewable Energy TargetMRV Monitoring, Reporting.

6 And VerificationN2O Nitrous OxideNAP National Allocation PlanNPV Net Present ValueNSW GGAS New South Wales Greenhouse Gas Reduction SchemeNZ ETS New Zealand Emissions Trading SchemeNZU New Zealand UnitOECD Organisation for Economic Co-operation and DevelopmentOTC Over-the-CounterLISt of aCronymS and aBBrevIatIonSState and Trends of the Carbon Market 2010vipCER Primary Certified Emission ReductionPDD Project Design DocumentPFC PerfluorocarbonPIN Project Idea NotePoA Programme of Activities PP Project ParticipantRE Renewable EnergyREC Renewable Energy CertificateREDD Reduced Emissions from Deforestation and Forest DegradationRET Renewable Energy TargetRGGI Regional Greenhouse Gas InitiativeRMU Removal UnitsCER Secondary Certified Emission ReductionSF6 Sulfur hexafluorideSME Small and Medium-size EnterprisetCO2e Ton of Carbon Dioxide EquivalenttCER Temporary Certified Emission ReductionUN United NationsUNEP United Nations Environment ProgrammeUNFCCC United Nations Framework Convention on Climate Change VAT Value-added TaxVCS Voluntary Carbon StandardVER Verified Emission ReductionWB World BankWTI West Texas Intermediatevii1 EXECUTIVE SUMMARY.

7 12 EU ETS ..52 .1 At a glance ..52 .2 Successes of the EU ETS ..62 .3 EUAs: growing volumes, changing patterns .. EUA resiliency faces its greatest test since the inception of the ETS .. Carbon prices vis- -vis other energy commodities .. The many curves of the EUA Market .. D j -vu in the EUA pricing pattern ..112 .4 Spot and secondary CERs .. Secondary Market volume increases, prices fall .. Rising liquidity causes offset price segregation to widen .. A shortage of CERs forces Market players to adjust ..152 .5 The options Market : rising volume and sophistication .. Sellers turn to call options to manage risk .. A broader perspective on the options Market .. Structures proliferate as players look to manage risk ..172 .6 What lies ahead for the EU ETS? .. Rules governing the use of CERs and ERUs in Phase III: still uncertain.

8 Auctions and benchmarking ..193 EMISSIONS TRADING IN OTHER ANNEX B REGIONS AND BEYOND ..233 .1 New Zealand: at last! .. Progressive extension of ETS scope to cover the entire economy .. No emissions cap .. Allocation rules and transition assistance .. Cost control: full supplementarity for Kyoto-compliant offsets .. Interest in the forestry Market takes root ..253 .2 Australia: on hold ..263 .3 Japan: considering Market mechanisms ..273 .4 North America: waiting for K-G-L and getting K-L .. The Waxman-Markey Bill raised ..but momentum is at risk ..313 .5 Emerging alternative Market instruments and exchanges beyond Annex B countries ..314 KYOTO FLEXIBILITY MECHANISMS ..374 .1 At a glance ..374 .2 pCERs: another tough year .. Pre-2013 ERPAs: layering, syndicating, and much more.

9 Who, how, and what in 2009? ..39taBLe of ContentSState and Trends of the Carbon Market Projects wanted .. A close-up on issuance time ..424 .3 The relevance of Carbon finance in the transition to a low- Carbon economy .. Investment barriers can be disproportionately large.. CDM cannot overcome all investment barriers .. Frontloading future Carbon revenues remains a challenge .. Leveraging Carbon finance..454 .4 Post-2012 Market : EU ETS CERs surge as a new asset .. A silver lining ..464 .5 Scaling up with Programmes of Activities .. Evolution of PoAs .. Status and analysis .. And finally ..474 .6 Moving ahead with CDM ..474 .7 JI: A Market moved by one auction and one tender ..504 .8 AAUs: some gains as offsets sour ..515 OUTLOOK ..555 .1 Demand and supply balance .. Government demand for Kyoto assets falls.

10 And so does private sector compliance demand .. Supply through the three Kyoto mechanisms: CDM & JI down, AAU up .. A residual demand of 230 million tons ..595 .2 Markets and a post-2012 international regime ..60 ANNEX I: SUPPLEMENTARITY UNDER THE EU CLIMATE AND ENERGY PACKAGE ..63 ANNEX II: AUSTRALIA S DIVISIVE CPRS ..65 METHODOLOGY ..69 GLOSSARY ..71 Figure 1 Carbon prices, 2008 09 ..5 Figure 2 Monthly volumes for each contract modality since 2005 ..8 Figure 3 Transactions on exchanges versus OTC since 2005 ..9 Figure 4 Comparison of Carbon , oil, and coal prices, Sept. 06 Dec. 09 ..11 Figure 5 EUA and CER forward curves and fair value ..13 Figure 6 EUA average prices ..14 Figure 7 CER options volumes, Oct. 08 Dec. 09 ..16 Figure 8 Quarterly average prices of CER strike options, Oct. 08 Dec.