Carbon markets face challenges from weak emission reduction targets, economic recession reducing demand, and surplus allowances from the first commitment period. However, carbon markets can still influence the investments needed to transition to a low-carbon economy. Sub-national governments, corporations seeking carbon neutrality, and sectors like aviation and shipping present opportunities for new carbon markets through cap and trade, offsets, and carbon funds. Addressing climate change requires not incremental change but "revolution," and carbon markets may play a role in this transition.

1. CARBON POLICY
Opportunities and Risks in Carbon Markets
By Murray Ward
for ABENGOA ZEROEMISSIONS
CARBON TRAINING
Madrid, Spain
3 February 2010
GtripleC
www.GtripleC.co.nz

3. OK, it’s easy to feel a bit glum
about the carbon market
Copenhagen Accord ….(what accord?)
Weak and non-binding targets by developed countries –
and unclear legal status of the Accord
Two years of technical effort on REDD, CDM reform,
enhanced mechanisms, treatment of CP1 surplus buried
in [ …] in “L documents”, with unclear process ahead
Domestic ETS schemes faltering
US cap and trade bill may not go ahead in 2010
High politics in Australia
Compliance demand weakened by recession

4. 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

5. “BIG PICTURE” CONTEXT
…which key Heads of State do seem to
agree on (the 2oC version, anyway)
To avoid the worst effects of climate change
Global emissions need to peak within 2 decades
And be halved by 2050
Means average global per capita of 2T CO2e
“A matter of simple arithmetic” (Lord Stern)
Massive global reductions needed in just four
decades

6. Investment is critical to 2oC
In 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

7. Energy “green path” versus “brown”
World energy‐related CO2 emissions
Source: IEA WEO2009

8. Trillions of dollars of investments
Total global investment for power generation in the 450 Scenario
Source: IEA WEO2009

9. Supply side and demand side
World energy‐related CO2 emission savings by policy measure
in the 450 Scenario
Incremental
cf Reference
Source: IEA WEO2009

10. In China, for example
Energy‐related CO2 emission savings by policy measure in the
450 Scenario
Incremental
cf Reference
Source: IEA WEO2009

11. ...and in power generation in China
Power generation capacity in the 450 Scenario, GW
Source: IEA WEO2009

12. 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 2
Nuclear 1000 1
Hydro - Small scale 10 100
Wind - on shore 50 20
Wind - off shore 300 3
Biomass-large 200 5
Biomass-small 10 100
Solar without thermal storage 50 20
Solar with thermal storage 15 67

13. The 2T per person challenge

14. 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?

15. HOW FAR HAVE WE COME?
FIRST, SOME HISTORY
AND FOUNDING THEORY

16. Carbon trading started with the
Kyoto Protocol mechanisms
Article 17: International Emissions Trading
Article 6: Joint Implementation
Article 12: The Clean Development Mechanism
But US SO2 Trading Scheme was the model
JI and CDM were innovations (and offsets),
but relied on demand created in IET (initially)

17. Why was Emissions Trading
needed?

18. Trading….put simply

20. LULUCF and the CDM add ‘credits’

21. The mechanics of emissions trading
What are ‘allowances’ and how do they relate to the cap?

22. The mechanics of emissions trading
Emission Unit Registries and “Retiring” Units to Comply

23. Domestic implementation of
international emissions trading
……in principle anyway

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

25. THAT WAS THE THEORY ANYWAY

26. DETS as intended and in practice
The “architects” of Kyoto expected relatively
open links between DETS and IET…and a
fungible carbon commodity
It mostly hasn’t worked out that way
Instead different countries are developing their
own units ….and are building carbon currency
“walls” around their DETS jurisdictions
EU ETS is a key example
But walls were necessary when US pulled out of
Kyoto and fundamentally disturbed the demand-
supply balance in the Kyoto first period

27. DETS “walled cities”

28. CDM bridge between different DETS

29. An open international carbon market

31. Carbon trading in a post-2012 agreement
QUANTITATIVE ELEMENTS ‘THE BIGGER PICTURE’ ELEMENTS
that manage emissions and set the basis for a
GLOBAL CARBON MARKET EXAMPLES OF POSSIBLE ELEMENTS
1) Sectoral ‘policy’ agreements, e.g.
Legend: Unconstrained • IBFCs (if not under main quantitative ‘deal’)
FBTs in ICs OR • Electricity sector (e.g. % renewables,
Fixed and Binding Targets IBFCs ? IBFCs % CCS‐ready coal power plants, etc)
in Industrialised Countries • Vehicles sector (e.g. vehicle emissions
intensity standards)
IBFCs • Performance agreements in key emissions
International Bunker FBTs in ICs SNLTs intensive commodity sectors
Fuel commitments for DCs • Commitment to SD‐PAMS in DCs (with
technology and financial support from ICs)
SNLTs in DCs
REDD REDD
• Sustainable Forestry measures , e.g.
some Sector No‐Lose Targets REDD, with financial support from ICs (if not
in some Developing Countries OR ?
under main quantitative ‘deal’)
– example sectors: • Technology R&D cooperation agreements
• Electricity Generation Enhanced CDM‐ • Cooperative technology diffusion agreements
• Electricity Transmission & Distribution type mechanism
acts in balance of 2) Measures to facilitate adaptation planning and
• Emissions intensive commodities:
‘unconstrained’ implementation, especially for the most vulnerable
(cement, iron and steel, aluminium)
space populations and ecosystems
• Oil and gas production (gas flaring)
• Other? 3) Financial mechanisms to provide support for
adaptation, capacity building and technology
REDD deployment
Reducing Emissions from Deforestation and 4) Enabling environments
forest Degradation • Creating conditions that attract investment
• Advancing ‘helpful’ measures in bilateral and
multilateral trade agreements
Source: “Architecture of a Global Climate Change Agreement” ( A Briefing Paper of the Breaking the Climate Deadlock initiative)

32. LOOMING RISKS FOR ETS
COMPLIANCE DRIVEN
CARBON MARKETS !
MOSTLY ON THE DEMAND SIDE

33. GAINS cost curves for pre- and post-crisis projections
Annex I, 2020 (excl. LULUCF)
Marginal abatement costs Total abatement costs
(Carbon price)
120 0.5%
WEO 2009
100 WEO 2008
WEO 2008
Annual mitgation costs [% of 2020 GDP]
0.4%
Marginal abatement costs [€/tCO2eq]
WEO 2009
80
0.3%
Current pledges Current pledges
60
0.2%
40
0.1%
20
0 0.0%
-20 -0.1%
5% 0% -5% -10 -15 -20 -25 -30 -35 5% 0% -5% -10% -15% -20% -25% -30% -35%
% % % % % %
GHG emissions in 2020 relative to 1990 GHG emissions in 2020 relative to 1990
(excl. LULUCF) (excl. LULUCF)

34. 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

35. 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?

37. 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

38. NEED “EVERY SECTOR” AND “EVERY
TOOL IN THE POLICY TOOLKIT”
CARBON MARKETS CAN PLAY A
FUNDAMENTAL ROLE
Carbon Markets can be created by different
policy tools:
– Cap and Trade emissions trading schemes
– Carbon ‘Offsets’
– Contestable Carbon Funds

39. 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.

40. WHO MIGHT SOME OF THE MARKET
DEMAND SIDE SOMEBODIES BE?
SUB-NATIONAL LEVELS OF GOVERNMENT
States 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

41. 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?

42. THANK YOU
Further Information:
murray.ward@gtriplec.co.nz
www.GtripleC.co.nz
GtripleC