Carbon Market

The Global Carbon Market: Status & UNDP’s Strategy Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa [email protected]

Presentation 1, Addis Ababa, May 8th, 2008

Agenda

The big picture Misconceptions about the CDM UNDP’s carbon strategy A final thought

1 1

There are over 45 carbon markets – but 3 principal regimes Kyoto Mandatory Regime

Non-Kyoto Mandatory Regimes

UNFCCC UNFCCC

New New South South Wales Wales (Australia) (Australia)

Kyoto Kyoto Protocol Protocol CDM CDM Non-Annex Non-Annex 11 Countries Countries (Developing (Developing Countries) Countries)

Joint Joint Implementation Implementation

Voluntary Regimes

Linking Directive

Individual Individual US US States States (East (East Coast, Coast, California, California, Oregon) Oregon)

Chicago Chicago Climate Climate Exchange Exchange (CCX) (CCX)

Retail Retail Market Market

European European Union Union Trading Trading Scheme Scheme (EU-ETS) (EU-ETS)

Annex Annex 11 Countries Countries

2 2

The EU Emissions Trading Scheme dominates the market New New South South Wales Wales $225 $225 million million

Joint Joint Implementation Implementation $141 $141 million million

Chicago Chicago Climate Climate Exchange Exchange $38 $38 million million

Clean Clean Development Development Mechanism Mechanism (CDM) (CDM) $5.3 billion $5.3 billion EU EU Emissions Emissions Trading Trading Scheme Scheme $24.4 $24.4 billion billion

EU-ETS EU-ETS & & NSW NSW markets markets trade trade allowances. allowances. CDM, CDM, JI JI & & CCX CCX are are project-based. project-based. 3 3

What is the voluntary carbon market? •

Companies practising corporate social responsibility, seeking positive public relations and ‘testing the waters’

•

Green-minded consumers – ‘carbon neutrality’

•

NGOs – circumventing CDM restrictions and costs

•

Some voluntary markets (notably the Chicago Climate Exchange) do have project guidelines and rules

•

But many voluntary-sector project designs are unique – agreed by buyer and seller 4 4

Why use the voluntary carbon market? •

More flexible – greater range of project-types and methodologies permitted

•

Lower-cost – less onerous project design and monitoring requirements

•

Less bureaucratic – typically lacks the paperwork and delays associated with CDM

•

Less rigorous – ‘additionality’ and carbon benefits may be more questionable

5 5

US$ per tCO2e

What’s the catch? 28 26 24 22 20 18

Carbon Credit Prices, 2006

16 14 12 10 8 6 4 2 0

Voluntary (VER)

CDM (CER)

JI (ERU)

Secondary CER 6 6

The voluntary market is much more receptive to ‘bio-carbon’ Projects In The Voluntary Market

Methane Methane 3% 3%

Other Other 3% 3%

Energy Energy efficiency efficiency 5% 5% Industrial Industrial gas gas 20% 20%

Forestry Forestry 36% 36%

Renewable Renewable energy energy 33% 33% 7 7

The Kyoto Protocol provides the basis for the CDM market Kyoto Protocol The Protocol creates legally binding obligations for 38 industrialized countries to return their emissions of greenhouse gases to an average of 5% below their 1990 levels by 2012

Marrakech Accords Define the principles of the Kyoto Protocol’s flexible mechanisms: the Clean Development Mechanism (CDM), Joint Implementation (JI) and Emissions Trading (ET)

8 8

The role of the Clean Development Mechanism (CDM)

Advantages for developed countries: Developed countries can reduce emissions anywhere in the world They can count these reductions towards their own targets

CDM allows developed countries to generate ‘carbon credits’ (Certified Emission Reductions, CERs) in developing countries

relatively low-cost & politically acceptable

Advantages for developing countries: inward investment, environmental & technology benefits

9 9

How a CDM project generates carbon credits

Greenhouse gas emissions

Carbon Carbon credits credits (CERs) (CERs) represent the difference represent the difference between between the the baseline baseline and and actual actual emissions emissions

Project Project start start

Historical Trend

Time 1010

Agenda

Carbon trading – what, why and how Misconceptions about the carbon market UNDP’s carbon strategy A final thought

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Four misconceptions…

1

The CDM is all about climate change

1212

Actually, the CDM is ‘climate neutral’ Annex 1 country buys CERs

CERs generated by CDM projects

Acquired CERs are added and national emissions cap increases

Actual greenhouse gas emissions

‘Business as usual’ emissions 1313

The CDM is all about development

ODA

Technology Transfer

GEF

Sustainable Development

Poverty Reduction

PES

Environmental Benefits

CARBON

Carbon finance represents a supplementary source of funding for some projects – and a means of catalysing development 1414

Four misconceptions…

1

The CDM is all about climate change

2

The CDM is too difficult

1515

In 3 years, the CDM has sparked a $5 billion/year market Number of Projects in the CDM Pipeline, January 2005 – March 2008

3,265 3,035 2,838 2,593

Compound Compound Monthly Monthly Growth Growth Rate Rate == 11% 11%

2,285 1,759

Approximately Approximately 33 billion billion CERs CERs by by 2012 2012

1,885

1,495 1,311 1,141

440 67 Jan 05

83

118

171

Mar May Jul 05 05 05

554

647

749

883

275

Sep Nov Jan 05 05 06

Mar May Jul Sep Nov Jan Mar May July Sep Nov Jan Mar 06 06 06 06 06 07 07 07 07 07 07 08 08 1616

But sub-Saharan Africa is struggling… Number of CDM Projects In Selected Countries (March 2008) (Registered projects & those at validation) 7

• 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012 2 • Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012 • 88 non-Annex 1 countries have yet to benefit from any registered CDM project activity

1

Kenya

Tanzania

Mozambique

0

0

Ethiopia

Zambia

1717

Four misconceptions…

1

The CDM is all about climate change

2

The CDM is too difficult

3

Sub-Saharan Africa offers few CDM opportunities

1818

The CDM is about more than just heavy industry… Clean energy •

Use of renewables (e.g. hydro power) to supply electricity to the grid, to local communities and to commercial facilities

•

Use of biomass residues for energy generation / cogeneration – e.g. bagasse from the sugar industry, coffee husks from the coffee industry, etc.

Wind power

Run-of-river hydro

Bagasse

Timber residues 1919

The CDM is about more than just heavy industry… Waste management •

Capturing the methane from animal waste, human waste (sewage), agricultural waste (biomass) and urban landfills

•

Can be combined with electricity generation to produce a second stream of carbon credits

Animal waste

Sewage / wastewater

Landfill

2020

The CDM is about more than just heavy industry… Bio-carbon •

Forestry plantations – e.g. restoration of mangrove forests

•

Agro-forestry – e.g. shade crops, nitrogen capture in soils

•

Bio-fuels – e.g. bio-ethanol from molasses, bio-diesel from palm oil

Forestry

Agro-forestry

Bio-fuels

Transport 2121

China’s registered CDM projects Coal Mine Methane, 5% Biomass Energy, 5%

Other, 3%

Industrial Gas (HFCs), 6%

Wind Power 37%

Landfill Gas, 6% Energy Efficiency, 7%

152 152registered registeredCDM CDM projects projects

Hydro Power 31%

Approximately Approximately$915 $915 million millionin incarbon carbon revenue revenueper peryear year 2222

Four misconceptions…

1

The CDM is all about climate change

2

The CDM is too difficult

3

Sub-Saharan Africa offers few CDM opportunities

4

CDM capacity development = lots of workshops

2323

Kelly’s Law of CDM Capacity Development

CDM capacity development = lots of workshops

2424

Violating Kelly’s Law

Workshops are necessary…but they are a means to an end

Virtuous Circle of Project Development

Capacity Capacity Development Development

+

Enhanced Enhanced capability capability to to develop develop projects projects

+

CDM CDM carbon carbon projects projects

+ Learning By Doing & Replication Effect

2525

Agenda

Carbon trading – what, why and how Misconceptions about the carbon market UNDP’s carbon strategy A final thought

2626

MDG Impact of Carbon Projects

UNDP’s objective

Objective for UNDP

Current CDM Market

Geographical & Sectoral Diversity of Carbon Projects

2727

UNDP’s two-pronged carbon strategy Capacity Development Creating an ‘operational’ CDM framework in participating countries – an environment in which functioning public institutions are able to effectively interact with the private sector to jointly develop carbon projects.

MDG Carbon Facility Provides support to project developers – through provision of a comprehensive package of services to assist private-sector project developers with the preparation and implementation of carbon projects.

2828

CDM capacity development in southern / eastern Africa •

6 participating countries: – – – – – –

Ethiopia Tanzania Kenya Zambia Mauritius Mozambique

•

Regional coordination, with in-country activities devolved to National Project Coordinators

•

Co-implementation arrangement with UNEP

•

The project will be aligned with Government strategy and fully ‘joined up’: cross-Ministry participation 2929

How do we build national capacity to engage with the CDM? Workshops, tutorials, technical support, awareness-raising, PIN & PDD development, scoping studies… …for the DNA, government ministries & agencies, consultants, trade bodies, academics, project developers, etc.

Constant in-country presence – not fly in, fly out Dual agency implementation – mutual strengths Regional-level assistance and resources

3030

MDG Carbon Facility

UNDP

MDG Carbon Facility CDM Activities

Project Development Services

Fortis

Carbon Banking Services

Project Proponents www.mdgcarbonfacility.org 3131

Agenda

Carbon trading – what, why and how Misconceptions about the carbon market UNDP’s carbon strategy A final thought

3232

A final thought…

The Kyoto Protocol mandates a 5% reduction in greenhouse gas emissions from developed countries • In the space of 3 years, this has led to the creation of a CDM market worth $5 billion per year A post-Kyoto agreement (post-2012) will have to mandate a global reduction in greenhouse gases of approximately 50% • The economic challenges – and opportunities – will be enormous

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End

Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa [email protected] 3434