Dynamics of Global Emissions Mitigation Market

1
Dynamics of Global Emissions Mitigation Market
P.R. Shukla
2
Origin of Carbon Market

• Greenhouse Gas Emissions ? Global Warming ?
  Global Climate Change
• UN Framework Convention on Climate Change
  (UNFCCC)
• Kyoto Protocol

3
Kyoto Protocol Mechanisms

• Article 6 Joint Implementation
• Annex I parties
• Article 12 Clean Development Mechanisms
• Non-Annex and Annex parties
• Article 17 Emissions Trading
• Global

4
Value of atmospheric carbon
The price of carbon is the scarcity value
(marginal cost) of emissions mitigation caused by
the limitations commitments

• The Phenomenon
• GHG Emissions ? Concentrations
• ? Warming ? Climate Change
• UNFCCC
• Kyoto Protocol
• Emissions Limitations on Annex I

5
Global Carbon Market under Original Kyoto
Protocol What will be the size of the
market?What will be the price of carbon?
6
Original Kyoto Protocol Carbon Mitigation
Targets (in 2010)
Mitigation Target
800
600
400
Target (MTCE)
200
FSU
0
USA
-200
Japan
Canada
Australia
E. Europe
W. Europe
-400
7
Original Kyoto Protocol Mitigation Cost of
Domestic Action (in 2010)
Domestic Marginal Carbon Mitigation Cost
600
400
MC (/TC)
200
0
FSU
USA
Japan
Canada
Australia
E. Europe
W. Europe
8
Old Kyoto Protocol and Carbon MarketSize and
Price
Marginal Mitigation Cost (in Year 2010)
OECD Annual Mitigation Target (2008-20120) 1.1
Billion Tons Hot Air 300 Million Tons

• Domestic Action US /TC
• US Alone 168
• Japan Alone 458
• W. Europe Alone 130

• Annex I Trading 73

• An I Trade CDM 26

9
Global Carbon Market under New Kyoto Protocol
(minus USA plus Sinks) What will be the size
of the market?What will be the price of carbon?
10
New Kyoto Protocol Carbon Mitigation Targets
(in 2010)
Mitigation Target
800
600
400
Target (MTCE)
200
FSU
0
USA
-200
Japan
Canada
Australia
E. Europe
W. Europe
-400
11
New Kyoto Protocol Mitigation Cost of Domestic
Action (in 2010)
Domestic Marginal Carbon Mitigation Cost
600
400
MC (/TC)
200
0
FSU
USA
Japan
Canada
Australia
E. Europe
W. Europe
12
New Kyoto Protocol and Carbon MarketSize and
Price
Marginal Mitigation Cost (in Year 2010)
OECD Annual Mitigation Target (2008-20120) 0.5
Billion Tons Hot Air 300 Million Tons

• Domestic Action US /TC
• Japan Alone 458
• W. Europe Alone 130

• Annex I Trading 20

• An I Trade CDM 10

13
Global Carbon Market Summary

• Size 0.5 Billion ton / year (in 2010)
• Enlarging demand
• Global supply (no transport cost)
• No silver bullet
• Market price (Minus US Kyoto Regime )
• 10/ tC (with global flexibility)
• 70 - 100 / tC (no fungibility)
• upto 450 / tC (no supplementarity)

14
Carbon Market and Developing Countries (DCs)

• 1. DCs are potentially cheap producers of
• Low Cost GHG Mitigation
• 2. Climate Change Policies shall alter
• Energy System (away from coal/ fossil)
• Technologies
• Competitiveness (esp. energy intensive
  industries)
• 3. CC Policies can reduce cost of transition to
• Low Emissions Future
• Compliance to environmental standards and laws

15
Flexibility
16
Why flexibility?
Flexibility helps toa) equalize marginal
costsb) minimize transaction costs Flexibility
? Economic Efficiency (Cost effectivenessArticle
3.3 UNFCCC)
17
What types of flexibility?

• Where Flexibility? (Supplementarity)
• When Flexibility? (delayed commitments)
• Gas Flexibility? (six gases)
• Across Mechanisms (Fungibility)
• Sector Flexibility (e.g. LULUCF)
• Technology Flexibility (e.g. Nuclear)

18
Why Global Carbon Market matters to Developing
Countries?
19
Carbon Market and Developing Countries

• 1. DCs are a potentially cheap producer of
• Low Cost GHG Mitigation
• 2. Climate Change Policies shall alter
• Energy System (away from coal/ fossil)
• Technologies
• Competitiveness (esp. energy intensive
  industries)
• 3. CC Policies can reduce cost of transition to
• Low Emissions Future
• Compliance to environmental standards and laws

20
India CO2 Emissions (1995)
212 Million Tons of Carbon 62 contribution to
GWP
Share of Industry Sectors
Brick
6
Chemical Fertilizer
paper
3
7
51
28
Power sector
Industry
Others
Cement
37
12
Road
14
Steel
35
Other transport
5
Other sectors
2
21
India Future Carbon
1200

• Rise in Emissions
• 1995-2035
• BAU 360
• High Growth 470

1000
800
Million Tons
600
400
200
0
1995
2005
2015
2025
2035
High Growth
Medium Growth
Low Growth
22
India Marginal Cost of Carbon Mitigation(1995-20
35)
60

• 6 billion tons of mitigation below 25/ ton of
  carbon

50
40
Cost (/Ton of Carbon)
30
20
10
0
1
2
3
4
5
6
7
Carbon abatement (billion ton)
23
Co-operative and Flexibility Mechanisms
24
Co-operative/ Flexibility Mechanisms

• Global Environmental Facility (GEF)
• Incremental Cost
• Prototype Carbon Fund (World Bank)
• Finance for Mitigation
• Activities Implemented Jointly (AIJ)
• Bilateral/ No Credit for GHG Saving
• Clean Development Mechanism(CDM)
• Kyoto Protocol (Article 12)
• Emissions Trading
• Kyoto Protocol (Article 17)

25
Global Environment FacilityGEF
26
The Focal Areas of the GEF

• Biodiversity
• Climate Change
• International Waters
• Ozone Depletion (only countries in transition)
• And Land Degradation as it relates to the above
  focal areas.

27
Climate Change Operational Programmes (OPs)

• 5. Removing barriers to energy conservation and
  energy efficiency
• 6. Promoting the adoption of renewable energy by
  removing barriers and reducing implementation
  costs
• 7. Reducing the long-term costs of low greenhouse
  gas emitting energy technologies
• 11. Promoting environmentally sustainable
  transport

28
Scope of OP 5 (par. 5.8)

• Electricity production distribution
• Industrial energy consumption
• Manufacturing processes
• Effective use of energy-intensive materials
• Combined heat and power technologies
• Manufacture of energy-efficient equipment
• Rural and agro-processing industries
• Passive heating and cooling commercial
  buildings district heating cooling

29
Scope of OP 6 (par. 6.10)

• Mechanical wind pumps
• Low-temperature solar thermal heat
• Biomass and geothermal heat
• wind, biomass, PV, small-hydro (rural electricity
  supply)
• grid-connected renewable energy
• storage systems
• biogas digesters

30
Scope of OP 7 (par. 7.7)

• Grid-connected PV
• Biomass Gasifiers and gas turbines
• Solar Thermal (Parabolic Troughs)
• Large-scale grid-connected Wind power
• Fuel Cells for distributed combined heat power
  applications

31
Scope of OP 11 (Sustainable Transport)

• Modal Shifts to more efficient and less polluting
  forms of public and freight transport
• Non-motorized transport
• Fuel-cell or battery operated 2- and 3- wheelers
• Fuel-cell or battery operated vehicles for public
  transport and goods delivery
• IC-engine-electric hybrid buses
• Advanced Biomass to Liquid Fuels Conversion

32
(No Transcript)
33
Prototype Carbon FundPCF
34
What is the Prototype Carbon Fund?
OECD governments/ companies buy offsets
WB manages PCF
Client countries (EITs/ developing
countries) originate offsets






CO2

• Benefits
• risk diversification
• reduced transaction costs

35
Purpose of the Prototype Carbon Fund

• To help create a market for carbon offsets within
  the framework of the Kyoto Protocol through
• demonstrating how CDM and JI trade can contribute
  to sustainable development
• providing learning by doing experience for
  Parties to the Protocol on key policy issues (for
  example, defining and validating baselines)
• building confidence that the trade can benefit
  both sellers and buyers

36
Activities Implemented Jointly AIJ
37
Activities Implemented Jointly

• Kick Start Mechanism
• Voluntary / Bilateral
• No carbon credit
• Limited success (till date)

38
Clean Development MechanismCDM
39
CDM Criteria

• Sustainability
• Climate Change Effectiveness
• Additionality
• Cost Effectiveness
• Partnership

40
AdditionalityThe Qualifying Condition for CDM
Projects
Kyoto Protocol - Article 12.5 Emissions
reductions resulting from each project activity
shall be certified on the basis of ... (c)
Reductions in emissions that are additional to
any that would occur in the absence of the
certified project activity
41
Additionality and Benchmark

• Financial Additionality
• Project would not have been financially viable in
  absence of CDM
• Establish Financial Benchmark (Baseline)
• Emissions Additionality
• Emissions reduction would not have happened in
  absence of Project Activity
• Establish Emissions Benchmark (Baseline)

42
Baseline Taxonomy

• Macroeconomic Baseline
• Emissions at Sector or Economy Level
• Useful for National Policy Makers
• Project Related Baseline
• Emissions at Project Level
• Useful for Project Developers/ Firms
• Standardized Baseline
• Default Benchmark for industry/ region
• Reduces Transaction Cost

43
AdditionalityThe Qualifying Condition for CDM
Projects
Kyoto Protocol - Article 12.5 Emissions
reductions resulting from each project activity
shall be certified on the basis of ... (c)
Reductions in emissions that are additional to
any that would occur in the absence of the
certified project activity
44
Additionality and Benchmark

• Financial Additionality
• Project would not have been financially viable in
  absence of CDM
• Establish Financial Benchmark (Baseline)
• Emissions Additionality
• Emissions reduction would not have happened in
  absence of Project Activity
• Establish Emissions Benchmark (Baseline)

45
Benefits from CDM projects

• Sustainable Development
• GHG Mitigation (CERUs)

46
Typical CDM Projects
47
Generic Project Areas Carbon Mitigation
1. Energy System 2. Production Technologies 3.
Recycling/ Substitution 4. Recovery (Capture) of
Gases 5. Sequestration (Sinks)
48
Energy Projects for Carbon Mitigation

• 1. Energy Efficiency Improvements
• 2. Fuel Switching
• No-Carbon Energy (Renewable, Nuclear)
• Low Carbon Energy (Gas for Coal)
• 3. Reduce Fuel Leakage/ Waste
• 4. Low Carbon Waste Fuels
• Methane from Landfill and Waste Water
• Biomass Waste in Agro-process Industry

49
Energy Efficiency in Industry

• Paper
• Possible investment could be in Cogeneration in
  medium-sized plants
• Target segment capacity 1 million tonnes
• Estimated Investment Rs. 4.5 bn (US 0.1 bn)
• Steel
• Efficiency improvement possible in small scale
  re-rollers of HR wire and rod mills
• Estimated Investment Rs. 4.5 bn (US 0.1 bn)

50
Mitigation Projects in Sinks, Capture and
Recovery of GHGs

• CO2 Sink Projects
• Energy Plantations
• Biomass Power
• Methane (Recover and Burn)
• Coal Bed
• Sewage Water
• Landfills
• CO2 (Capture and Storage)

51
Coal to Gas Switch for Power Plant
Coal Power
Gas Power
Units
150 2.5 160 0 0
80 2.2 290 6 240
Fuel Price Generation Cost Carbon
Emission Sulfur Emission Ash
Rs./ GJ Rs./ Kwh kg/ Mwh kg/ Mwh kg/ Mwh
Mitigation
Carbon Sulfur Ash
kg/Mwh 130 6 240

• _at_ 6000 Hrs per year Operation
• 780 Tons of Carbon CERUs/ MW

• _at_ Rs 1000/ TC
• Rs. 0.13/ Kwh

52
CDM Project Renovation of Coal Power Plant
Old Plant
New Plant
Units
38 2 267 5.5 220
35 - 290 6 240
Efficiency Renovation Cost Carbon Emission Sulfur
Emission Ash
Mill. Rs./ Mw kg/ Mwh kg/ Mwh kg/ Mwh

• _at_ 6000 Hrs per year Operation
• 138 Tons of Carbon CERUs/ MW

Carbon Sulfur Ash
kg/Mwh 23 0.5 20

• _at_ Rs 1000/ TC
• Rs. 138,000 per Year/ MW

• _at_ Rs. 80/GJ Coal Price
• Fuel Saving of Rs. 420,000/ MW

53
Prospects in Mitigation of Other than Carbon GHGs
Other than Carbon Gases in Kyoto Protocol 1.
Methane (CH4) 2. Nitrous Oxide (N2O) 3.
Hydrofluorocarbons (HFCs) 4. Perfluorocarbons
(PFCs) 5. Sulfur hexafluoride (SF6)
54
Emissions TradingET
55
What would trade?

• Emissions Right of Annex I
• ERUs (from article 6)
• CERUs from DCs (from article 12)

56
Issues in Emissions Trading

• Rights Regime
• Global/ National Registries
• Carbon Equivalence Price
• Restrictions (e.g. Supplementarity in KP)
• Transaction Costs

57
What key national policies and measures shall
help Developing Countries to compete in the
global carbon market?
58
NORTH-SOUTH EQUITY UNFCCC

• Equity Article 3.1
• common but differentiated responsibilities
• Efficiency Article 3.3
• policies and measures to deal with climate
  change should be cost-effective so as to ensure
  global benefits at the lowest possible cost

59
Key Policy Question 1
Efficiency How to generate effective market
signals to match global carbon market signals?
60
Key Policies

• 1. Link with Global Market Signals
• Carbon Price (Trading)
• 2. Clear National Benchmarks
• Sectoral Baselines (Additionality)
• 3. National Targets
• (e.g. X MtC mitigation/year in Kyoto Period)
• 4. National Project Portfolio

61
Key Policy Question 2
Sustainable Development How to make Climate
Change mitigation consistent with National
Sustainable Development policies?
62
Key Policies
1. Sustainability Indicators 2. Benchmarks for
Ancillary Benefits 3. Fast-Track Clearance for
Generic Classes of Projects (Technologies) 4.
Decentralized Implementation
63
Key Policy Question 3
Environmental Integrity How to ensure that
credits (e.g. CERs) represent good tons?
64
Key Policies
1. Credible Certification Process 2. Dynamic
Baselines
65
Conclusions

• 1. Flexibility for Market Efficiency
• Effective use of global financing mechanisms
• 2. National Mitigation Targets
• 3. Fast-track Clearances
• 4. High Credibility of CERUs