CARBON POLICYCARBON POLICYOpportunities and Risks in Carbon MarketsOpportunities and Risks in Carbon Markets

By Murray WardBy Murray Ward

for ABENGOA ZEROEMISSIONS for ABENGOA ZEROEMISSIONS

CARBON TRAININGMadrid, SpainMadrid, Spain

3 February 20103 February 2010GtripleC

www.GtripleC.co.nz

OK, it’s easy to feel a bit glum about the carbon market

Copenhagen Accord Copenhagen Accord …….(what accord?).(what accord?)Weak and nonWeak and non--binding targets by developed countries binding targets by developed countries ––and unclear legal status of the Accordand unclear legal status of the Accord

Two years of technical effort on REDD, CDM reform, Two years of technical effort on REDD, CDM reform, enhanced mechanisms, treatment of CP1 surplus buried enhanced mechanisms, treatment of CP1 surplus buried in [ in [ ……] in ] in ““L documentsL documents””, with unclear process ahead, with unclear process ahead

Domestic ETS schemes falteringDomestic ETS schemes falteringUS cap and trade bill may not go ahead in 2010US cap and trade bill may not go ahead in 2010

High politics in Australia High politics in Australia

Compliance demand weakened by recessionCompliance demand weakened by recession

BUT STEP BACK!

THE ULTIMATE DRIVER FOR CARBON MARKETS ISN’T WHAT

GOVERNMENTS DO (OR NOT)

IT’S CLIMATE CHANGE … AND HOW CARBON MARKETS CAN INFLUENCE

THE INVESTMENTS NEEDED TO DEAL WITH IT

“BIG PICTURE” CONTEXT…which key Heads of State do seem to

agree on (the 2oC version, anyway)

To avoid the worst effects of climate changeTo avoid the worst effects of climate change

Global emissions need to peak within 2 decadesGlobal emissions need to peak within 2 decades

And be halved by 2050And be halved by 2050

Means average global per capita of 2T COMeans average global per capita of 2T CO22ee

““A matter of simple arithmeticA matter of simple arithmetic”” (Lord Stern)(Lord Stern)

Massive global reductions needed in just four Massive global reductions needed in just four decadesdecades

Investment is critical to 2oCIn the coming decade we need to shift trillions of dollars of investment from a (6oC) business-as-usual path to a 450 path. IEA call this “a revolution”....but say it is possible.

Source: IEA WEO2009

Energy “green path” versus “brown”

Source: IEA WEO2009

World energy‐related CO2 emissions

Trillions of dollars of investments

Source: IEA WEO2009

Total global investment for power generation in the 450 Scenario

Supply side and demand side

Source: IEA WEO2009

World energy‐related CO2 emission savings by policy measure in the 450 Scenario

Incremental cf Reference

In China, for example

Source: IEA WEO2009

Energy‐related CO2 emission savings by policy measure in the 450 Scenario

Incremental cf Reference

...and in power generation in China

Source: IEA WEO2009

Power generation capacity in the 450 Scenario, GW

What does a 1 GW increase mean?Noting increase from 2007 in “wind and other renewables ”:• in China, ~ 170 GW by 2020, 375 GW by 2030• In India, ~ 30 GW by 2020, 55 GW by 2030

Size, MW # Plants for 1 GW

Coal 1000 1 Gas 500 2Nuclear 1000 1Hydro - Small scale 10 100Wind - on shore 50 20 Wind - off shore 300 3Biomass-large 200 5Biomass-small 10 100 Solar without thermal storage 50 20Solar with thermal storage 15 67

The 2T per person challenge

THE POINT OF THESE “CHALLENGE”SLIDES IN THE CONTEXT OF A TALK

ON CARBON MARKETS … IS

HOW CAN CARBON MARKETS INFLUENCE THE CHANGE FROM

BUSINESS AS USUAL INVESTMENTS NEEDED … BETTER THAN OTHER

INTERVENTIONS TO CHANGE BAU?

HOW ARE WE DOING?

HOW FAR HAVE WE COME?

FIRST, SOME HISTORYAND FOUNDING THEORY

Carbon trading started with the Kyoto Protocol mechanismsArticle 17: International Emissions TradingArticle 17: International Emissions TradingArticle 6: Joint ImplementationArticle 6: Joint ImplementationArticle 12: The Clean Development MechanismArticle 12: The Clean Development Mechanism

But US SOBut US SO22 Trading Scheme was the modelTrading Scheme was the model

JI and CDM were innovations (and offsets), JI and CDM were innovations (and offsets), but relied on demand created in IET (initially) but relied on demand created in IET (initially)

Why was Emissions Trading Why was Emissions Trading needed?needed?

TradingTrading…….put simply.put simply

LULUCF and the CDM add LULUCF and the CDM add ‘‘creditscredits’’

The mechanics of emissions tradingThe mechanics of emissions tradingWhat are What are ‘‘allowancesallowances’’ and how do they relate to the cap?and how do they relate to the cap?

The mechanics of emissions tradingThe mechanics of emissions tradingEmission Unit Registries and Emission Unit Registries and ““RetiringRetiring”” Units to ComplyUnits to Comply

Domestic implementation of Domestic implementation of international emissions tradinginternational emissions trading

…………in principle anywayin principle anyway

The importance and role of Domestic The importance and role of Domestic Emissions Trading Schemes (DETS)Emissions Trading Schemes (DETS)It is firms and individuals who know their mitigation It is firms and individuals who know their mitigation opportunities and costs opportunities and costs

THAT WAS THE THEORY ANYWAY

DETS as intended and in practice DETS as intended and in practice The The ““architectsarchitects”” of Kyoto expected relatively of Kyoto expected relatively open links between DETS and IETopen links between DETS and IET……and a and a fungible carbon commodityfungible carbon commodityIt mostly hasnIt mostly hasn’’t worked out that wayt worked out that way

Instead different countries are developing their Instead different countries are developing their own units own units …….and are building carbon currency .and are building carbon currency ““wallswalls”” around their DETS jurisdictionsaround their DETS jurisdictions

EU ETS is a key exampleEU ETS is a key exampleBut walls were necessary when US pulled out of But walls were necessary when US pulled out of Kyoto and fundamentally disturbed the demandKyoto and fundamentally disturbed the demand--supply balance in the Kyoto first periodsupply balance in the Kyoto first period

DETS DETS ““walled citieswalled cities””

CDM bridge between different DETS CDM bridge between different DETS

An open international carbon market An open international carbon market

Carbon trading in a postCarbon trading in a post--2012 agreement 2012 agreement

Source: “Architecture of a Global Climate Change Agreement” ( A Briefing Paper of the Breaking the Climate Deadlock initiative)

QUANTITATIVE ELEMENTS that manage emissions and set the basis for a 

GLOBAL CARBON MARKET 

‘THE BIGGER PICTURE’ ELEMENTS 

Unconstrained

FBTs in ICs  SNLTs for DCs 

IBFCs

Legend: FBTs in ICs Fixed and Binding Targets  in Industrialised Countries  IBFCs International Bunker Fuel commitments  SNLTs in DCs some Sector No‐Lose Targets in some Developing Countries – example sectors:  • Electricity Generation • Electricity Transmission & Distribution • Emissions intensive commodities: 

(cement, iron and steel, aluminium) • Oil and gas production (gas flaring) • Other? 

 REDD Reducing Emissions from Deforestation andforest Degradation 

IBFCs

OR   ? 

EXAMPLES OF POSSIBLE ELEMENTS

1) Sectoral ‘policy’ agreements, e.g. • IBFCs (if not under main quantitative ‘deal’) • Electricity sector (e.g. % renewables, 

    % CCS‐ready coal power plants, etc) • Vehicles sector (e.g. vehicle emissions 

     intensity standards) • Performance agreements in key emissions 

intensive commodity sectors  • Commitment to SD‐PAMS in DCs (with 

technology and financial support from ICs) • Sustainable Forestry measures , e.g. 

REDD, with financial support from ICs (if not under main quantitative ‘deal’) 

• Technology R&D cooperation agreements • Cooperative technology diffusion agreements 

2) Measures to facilitate adaptation planning and      implementation, especially for the most vulnerable      populations and ecosystems 

3) Financial mechanisms to provide support for      adaptation, capacity building and technology      deployment 

4) Enabling environments • Creating conditions that attract investment • Advancing ‘helpful’ measures in bilateral and 

multilateral trade agreements 

REDD  REDD 

OR ? 

Enhanced CDM‐type mechanism acts in balance of ‘unconstrained’ space 

LOOMING RISKS FOR ETS COMPLIANCE DRIVEN CARBON MARKETS !

MOSTLY ON THE DEMAND SIDE

GAINS cost curves for pre- and post-crisis projectionsAnnex I, 2020 (excl. LULUCF)

-20

0

20

40

60

80

100

120

-35%

-30%

-25%

-20%

-15%

-10%

-5%0%5%

GHG emissions in 2020 relative to 1990(excl. LULUCF)

Mar

gin

al a

bat

emen

t co

sts

[€/t

CO

2eq

]

WEO 2009

WEO 2008

Marginal abatement costs(Carbon price)

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

-35%-30%-25%-20%-15%-10%-5%0%5%

GHG emissions in 2020 relative to 1990 (excl. LULUCF)

Annual

mitgat

ion c

ost

s [%

of 2020 G

DP] WEO 2008

WEO 2009

Total abatement costs

Current pledges Current pledges

CAN’T BASE INSIGHTS AND POLICY DIRECTIONS ON JUST ONE SET OF

MODEL RESULTS… BUT

WEAK TARGETS AND SLOWER ECONOMIES (AND CARRIED OVER SURPLUSES FROM CP1) MEANS

VERY LITTLE DEMAND, AND NEED FOR CONSTRAINTS ON SUPPLY TO MAINTAIN A PRICE FOR CARBON

MOREOVER, APART FROM THE EU ETS (WHICH MAY HAVE LIMITED

DEMAND AND WHERE THERE WILL BE NEW CONSTRAINTS ON THE

SUPPLY OF OFFSETS) WHAT OTHER COMPLIANCE DEMAND WILL EXIST?

WILL AN IET MECHANISM SURVIVE?So sovereign demand, not just entity demand in DETS

WILL DETS HAPPEN IN THE US, CANADA, JAPAN, AUSTRALIA … AND CREATE DEMAND?

WHERE TO NOW?

HOW CAN CARBON MARKETS INFLUENCE THE CHANGE FROM BUSINESS AS USUAL NEEDED …

BETTER THAN OTHER INTERVENTIONS

AN OPPORTUNITY FOR INNOVATION …. SO OPTIMISM

NEED “EVERY SECTOR” AND “EVERY TOOL IN THE POLICY TOOLKIT”

CARBON MARKETS CAN PLAY A FUNDAMENTAL ROLE

Carbon Markets can be created by different Carbon Markets can be created by different policy tools:policy tools:–– Cap and Trade emissions trading schemesCap and Trade emissions trading schemes–– Carbon Carbon ‘‘OffsetsOffsets’’–– Contestable Carbon FundsContestable Carbon Funds

MARKETS EXIST WHERE SOMEBODY NEEDS A PRODUCT (OR SERVICE),

SOMEBODY CAN CREATE THIS PRODUCT (OR SERVICE) AND

INTERMEDIARIES EXIST TO HELP CONNECT THE TWO PARTIES.

THERE CAN BE MANY CARBON MARKETS, EACH DEPENDING ON

PROGRAMS OF DEMAND AND SUPPLY. THEY MAY CONNECT, OR NOT.

WHO MIGHT SOME OF THE MARKET DEMAND SIDE SOMEBODIES BE?

SUB-NATIONAL LEVELS OF GOVERNMENTStates and provinces may enact DETS in their regions, and perhaps connect these with others

CARBON NEUTRAL OR LOW CARBON FOOTPRINT PROGRAMS … WITH TRADING/OFFSET MECHANISMS

Local governments and community groups

Corporates, citizens groups, individuals

A “BUNKERS CARBON FUND” FOR THE INTERNATIONAL AVIATION AND MARINE SECTORS

YES THERE CAN BE POTENTIAL OVERLAPS AND CONFLICTS ….WHICH

NEED TO BE ADDRESSED WITHOUT “MISSING THE FOREST FOR THE TREES”

ADDRESSING CLIMATE CHANGE IS NO LONGER AN INCREMENTAL OR

EVOLUTIONARY GAME. THE IEA CHOSE THE WORD “REVOLUTION”.

WHAT ROLE FOR CARBON MARKETS IN THE REVOLUTION?

THANK YOU

Further Information:Further Information:

murray.ward@gtriplec.co.nzmurray.ward@gtriplec.co.nz

www.GtripleC.co.nzwww.GtripleC.co.nz

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