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Carbon Market Survey 2016

WILL ParIS be a CataLySt For More eMISSIon traDInG?

TO THE POINT

Paris injects optimism in carbon markets. Nearly half of the survey participants believe emission markets will become more important in the years up to 2030, following the mention of “International transfers of Mitigation outcome” in the Paris agreement. one third expect emission trading to stay at current levels, the rest foresee markets to recede.

This relatively optimistic appraisal of the Paris effect contrasts with actual market trends after world leaders left the climate summit in December: since early 2016 carbon prices have fallen significantly in europe, north america and China.

Strong belief that cap-and-trade will be in place in 2020. Some 71% of respondents believe their country will be using emission trading as a climate policy instrument. 73% expect to see subsidies, 54% green taxes.

Cap-and-trade seen as most cost-effective way to reduce emissions. 51% of european respondents see the eu emission trading system (eu etS) as the most cost-effective way to reduce emissions. two-thirds believe it will “continue to be the main instrument of eu climate policy”.

Carbon price matters for investment decisions. One third of European compliance entities (companies whose emission are covered by the eu etS) see the cost of carbon emissions as a “decisive factor” for investment decisions, 55% say it is “part of the calculations”.

CONTENTS

3 executive summary 6 Introduction 8 General perceptions of cap and

trade and Paris agreement 11 Impact of carbon trading on

compliance entities14 europe 18 north america 20 China22 South korea24 CDM27 aviation 29 appendix: Methodological

considerations 30 Colophon

Lead authors:

anders nordeng Senior analyst [email protected]

Maria kolos analyst [email protected]

mailto:anders.nordeng%40thomsonreuters.com?subject=

Carbon Market Survey 2015 6 May 2016

thomson reuters Commodities research and Forecasts is a world-leading provider of independent news and analysis for international power, gas and carbon markets. We monitor fundamental data, key market players and business and policy development in order to provide professionals with market-moving information.

our carbon team (previously Point Carbon) provides an unrivalled knowledge of emission trading dynamics that positions us as the number one supplier of in-depth market intelligence. our staff includes experts in international and regional cli-mate policy, mathematical and economic modelling, forecasting methodologies, risk management and market reporting.

thomson reuters Commodities research and Forecasts (trCrF) has more than 30,000 clients, including the world’s ma-jor energy companies, financial institutions, organisations and governments, in over 150 countries. reports are translated from english into Japanese, Chinese, Portuguese, French and Spanish.

the carbon team is located in oslo (Head office), Houston, Washington, beijing, Seoul and kiev.

tHoMSon reuterS CoMMoDItIeSProviding critical insights into energy and environmental markets

Carbon Market Surveythe Carbon Market Survey 2016 ran from 24 February to 21 March, and garnered replies from 908 respondents all over the world. the survey, including this report, is the result of co-operation between thomson reuters staff in oslo, London, Houston, beijing, Seoul and kiev. Questions were drafted and answers interpreted by a team of analysts including Stig Schjølset, Marcus Ferdinand, emil Dimantchev, tom Marcello, Hongliang Chai, Gayoung Lee and Maria kolos. Figures and layout by Maria kolos. Lead analyst and responsible editor was anders nordeng.

For citations please refer to: “thomson reuters Carbon Market Survey 2016”, nordeng, a. et al., 30 pages.

carbon market survey 2016

6 May 2016 3

Paris seen as a catalyst for carbon trading the Carbon Market Survey 2016 shows that support of emission trading as a climate policy instrument inched up compared to 2015. among those who shared their opinion on this, 69% agree with the statement that “cap-and-trade is the best we can agree on nationally and internationally”. Some 23% prefer the statement that it is “the best way in theory and in practice”.

In 2015 the shares were 71% and 21% respectively, mean-ing that 2% changed from a pragmatist to a more ideal assessment. the remaining 8% agree with the statement that it “does more harm than good” (same share in 2015 and 2016).

If we compare attitudes across locations, we see that american and Chinese respondents voice relatively strong support to cap-and-trade (close to 40% seeing it as the best way). the u.k. on the other hand shows a significant share of sceptics, with 16% seeing it as harmful.

We also asked respondents which climate instruments they think will be in place in their jurisdictions in 2020. among those who ticked one or more of the offered alternatives cap-and-trade got a response rate of 71%. this was slightly behind subsidies (expected by 73%), and ahead of taxes (54%) and regulations (27%).

overall, respondents seem to be relatively pleased with the Paris agreement struck last December. Some 47% express satisfaction (either somewhat or very), 33% take a neutral stance, and the remaining 21% give a negative verdict.

a very similar distribution can be seen on the question whether the Paris agreement will spur market expansion (Some 48% believe it will). among government respon-dents and international organisation respondents, close to 70% believe markets will expand/link.

one conclusion of the survey is that it points to a relatively high degree of optimism, especially when compared to market developments after the agreement was reached in Paris in December. Since January, carbon prices have fallen significantly in all major markets.

eu ets seen to have impact

one of the main objectives of the Carbon Market Survey is to assess how the compliance companies (those whose output of Co2 is capped by an emission trading system) feel its effects. Does it lead them to reduce emissions? Does it affect competitiveness and investment decisions?

For europe, the 2016 edition shows an increase in the share saying that the european emission trading system (eu etS) “caused reductions in the early years, but has little impact today”. Some 26% of the respondents chose this statement in 2016, compared to 19% in 2015. Some 35% say it “has

caused and continues to cause reductions”, up from 32% last year. the share of “not likely to cause any reductions by 2030” dropped from 29% to 23%.

two thirds of european compliance respondents say that carbon cost is “somewhat important” for their competitive-ness. only 16% see it as “detrimental”, a significant drop from 27% the previous year. at the same time, the share of “little or no effect” fell from 21% to 14%.

only very few european companies (no american ones) signal readiness to move production to avoid carbon cost. For investment on the other hand, 33% of the european respondents see long term carbon prices as a “decisive fac-tor”. another 55% see it as “part of the calculations”.

From the general section of the survey (not limited to com-pliance companies) we see that 51% of respondents agree with the statement that the eu etS is “the most cost-effec-tive way to reduce emissions. Some 23% disagree, and 26% take a neutral stance.

mixed views in asian markets

With regard to emerging carbon markets we see that 31% of respondents expect the Chinese national emission trading scheme to become operational as scheduled in 2017, the highest share (33%) believe it will start in 2019 or 2020.

Close to half of the China section respondents believe some of the current pilot schemes will continue to exist in paral-lel to the national system (44%). a majority thinks pilot emission allowances will be converted into new national allowance units.

South korea respondents take cautious views on the pros-pect of the korean emission trading system (ketS) after a first year of very feeble trading and worries about insuf-ficient allocation. Most respondents prefer not to give an opinion on the questions of a possible change in the bau forecast and a possible adjustment of the allowance alloca-tion. Some 43% believe the market will be short in the first trading period (2015-2017).

International trading of emission rights between different jurisdictions has long suffered from falling demand, most notably in the CDM market. a key event to watch out for this year is the September assembly of the International Civil aviation organization (ICao). If the world’s countries agree to curb emissions from airlines, and if they agree on a system of emission credits, this could spur demand both for CDM and for new credit units.

the survey results show that 27% expect a concrete call for aviation emission to peak in 2020. Some 34% expect a statement without firm obligations or a fixed timeline, and another 20% expect the decision will be delayed altogether.

executive summary


6 May 2016 4

List of figures1.1. Survey population by market interest

1.2. Survey population by role

1.3. Survey population by location

2.1. Cap and trade as climate policy instrument. Selected roles.

2.2. Cap and trade as climate policy instrument. Selected locations.

2.3. Paris satisfaction. Selected roles.

2.4. the 2 degrees target. Selected roles.

2.5. Will Paris support markets? Selected roles.

2.6. Perceptions of cap-and-trade. year-on-year.

3.1. reduction effect

3.2. reduction effect. europe. year-on-year.

3.3. reduction effect. Selected segments.

3.4. Competitiveness effect

3.5. Competitiveness effect. europe. year-on-year.

3.6. offshoring effect

3.7. Investment effect.

3.8. Investment effect. Selected segments.

4.1. Perceptions of eu etS

4.2. Perception trend

4.3. January price drop

4.4. Impact of phase 4 regulation

4.5. Impact of benchmark calculations

4.6. Surplus holdings

4.7. Selling horizon

4.8. Carbon inventory horizon

4.9. annual allocation and selling


6 May 2016 5

5.1. WCI expansion

5.2. Drivers of trading

5.3. Compliance strategy

5.4. Will new Jersey rejoin rGGI?

5.5. Legal challenge of Clean Power Plan

6.1. Chinese emission peak expected next decade

6.2. national etS expected - but not on schedule

6.3. Pilot schemes expected to continue

6.4. Pilot allowance units in the national scheme

6.5. Cautiously optimistic offset market

7.1. allocation sufficiency

7.2. expected trading volume in 2016

7.3. kaus price expectations

7.4. Change of bau forecast in 2017?

7.5. upward adjustment of allocation?

7.6. Linking to other carbon markets

8.1. CDM respondents by role

8.2. CDM demand expectations

8.3. new sources of demand

8.4. Credit use for Paris commitments

8.5. verification cost

8.6. De-registering CDM

9.1. Decision to curb aviation emissions?

9.2. eligible credits

9.3. Project type restrictions

9.4. Purchasing timeline


6 May 2016 6

the 2016 Carbon Market Survey confirms the slight uptick in confi-dence over the last couple of years, after sentiments ebbed in 2013. on key questions such as whether emis-sion trading is seen as a cost-efficient instrument for greenhouse gas abate-ment responses this year reveal a slightly more positive attitude than in 2015.

the climate summit in Paris was the defining event in the world of carbon in 2015. as it turned out, most observ-ers and stakeholders seemed to take comfort from the fact that world lead-ers reached an agreement, whereby nearly all countries take on some kind of commitment to curb emissions. the deal will not by itself put us on track to limit global warming to 2 degrees, but it established a framework that should ensure increasing ambition over time. to everyone’s surprise, pro-market supporters even succeeded in insert-ing a clause on “transfer of mitigation outcomes” (code for trading) in the final text.

Generally speaking the sentiment seems to fit well with the observed trends in the carbon markets in 2015. We assess transacted volumes to have fallen to 6.2 Gt in 2015 (from 7.7 Gt the previous year), but because of strengthening prices in europe, the value of those transactions increased from €44 billion euros to € 48 billion.

nevertheless, both in europe and north america, the December opti-mism was followed by falling prices in the beginning of 2016. In the eu etS the reference contract lost more than a quarter of its value over the course of January, dropping from €8.29/t to €6.07/t, taking market participants and observers by surprise.

about the carbon survey

against this backdrop, we release our eleventh annual survey report of the world’s carbon markets, covering the following markets: eu etS, WCI, rGGI, the Chinese pilot markets, South korea, CDM and aviation emissions. It

1. Introduction

Source: Thomson Reuters Carbon Market Survey 2016

Figure 1.1. Survey population by market interest ”Which emission market(s) are you involved in or following?” 802 respondents ticked one or more of the following, for a total number of 1,518 entries.

89

79

48

47

16

134

Joint Implementation

Aviation emissions

South Korea ETS

New Zealand ETS

Kazakhstan ETS

Other

501

286

127

96

95

89

EU ETS

Clean Development Mechanism

WCI (California and Quebec)

RGGI (North-East U.S.)

Chinese pilot ETSs

Joint Implementation

also includes views on the recent Paris agreement, and expectations for how this might affect emission trading go-ing forward.

the survey ran from 24 February to 21 March, using Qualtrics, a web-based questionnaire tool. We reached out by e-mail to three main groups of recipi-ents all over the world: respondents from previous surveys, regular users of the carbon section of eikon (thomson reuters’ desktop market data solu-tion), and to other contacts: traders, emitting companies, government/ administration, international organ-isations, and industry federations.

In total, we garnered views from 908 respondents on 103 different ques-tions. Some general questions were asked to all survey participants. Most were related to specific markets and/or roles, and were only asked to those who ticked the corresponding boxes. this naturally led to wide differences in the number of collected responses for the various markets.

Participants were first invited to indi-cate the market(s) in which they are involved (they could tick more than one). unsurprisingly, the oldest mar-kets still attract the highest number of respondents, with 501 ticking the eu etS and 286 indicating interest in CDM. California’s Western Climate

Initiative (WCI) came third with 127 respondents, before rGGI and the Chinese pilots, with 96 and 95 respec-tively. See Fig. 1.1.

at the lower end were kazakhstan (16), new Zealand (48) and South korea (69). a new addition this year was a separate section on aviation emis-sions, which garnered responses from 79 participants.

Furthermore, 134 respondents indicated interest in other emission or climate-related markets, naming among others: reDD+, Mexico, tokyo and alberta.

overall, the number of respondents dropped by some 300 compared to the 2015 edition, a fact that probably reflects downscaling in several market segments, most notably certification companies leaving the CDM.

many roles represented

Some 756 respondents chose to define their role in the carbon mar-kets. the category drawing the most responses was “company with emis-sions covered by an etS” (compliance entities) at 137, these are really the key stakeholders in any cap-and-trade scheme. See Fig. 1.2.

next was “other services” (113), which includes market analysis. the third largest group was “project devel-


6 May 2016 7

oper” (93), followed by “university” (63), “government” (62) and “carbon trader” (51).

In terms of geographical location, we see that the u.S. has the highest num-ber of respondents - 90 – followed by the uk at 55 and a number of other european countries. If we look at the level of continents rather than specific countries, europe is clearly home to the largest group of survey partici-pants. See Fig. 1.3.

structure oF this report

the first part of the survey contained general questions asked to all respon-dents: how they perceive cap-and-trade as an instrument for emission reduction, what other instruments they believe will be in place in 2020, and how they see the Paris agreement and its effects on carbon trading. this is summarized in Chapter 2.

Chapter 3 presents what compliance entities report on the impact of being subject to an emission trading system: has it led them to reduce their emis-sions? Is it important for their invest-ment decisions? Do they consider moving production to a less stringent jurisdiction?

We then proceed market by market, from the established systems in eu-rope and north america, via China’s and South korea’s ones, followed by CDM and ending with the potentially promising market in offsets for avia-tion emissions.

Figure 1.2. Survey population by role “What is your organisation’s role in the emission markets?” N=756.

Figure 1.3. Survey population by location“In which country/region/continent are you located?” N=731.



137

113

93

63

62

51

41

41

31

30

21

20

7

6

40

Compliance company

Other services

Offset project developer

University/non-commercial

Government/administration

Carbon trader

Trader in other commodities

Technical consultancy

Interest group

Trading services

Financial services

International organisation

Media

Legal services

Other

5560

44

2921 21

2516

27

16 18

62

90

41

2024

2028

21 19 1812

8

36

UK

Nor

dics

Ger

man

y

Ben

elux

Fran

ce

Italy

Iber

ia

Pola

nd

Mitt

eleu

ropa

Switz

erla

nd

Bal

kans

Euro

pe, u

nspe

cifd

.

USA

Cana

da

Bra

zil

Am

eric

as, u

nspe

cifd

.

Afr

ica

Aus

tral

ia

Indi

a

Chin

a

New

Zea

land

Japa

n

Sout

h Ko

rea

Asi

a un

spec

ifd.

Some emission trading schemes are not covered in this report: kazakhstan (trading was recently put on hold), australia (the Carbon Pricing Mecha-nism as such is defunct, although there is an element of credit trading in the emission reduction Fund) and new Zealand, whose emission trading system is operational but limited, and for practical purposes no longer con-nected to other systems (new Zealand cannot import credits from CDM).

this report does not present all the 103 questions included in the survey. For the sake of offering an accessible format we have selected the find-ings we deem the most interesting and relevant. the selection is clearly weighted in favour of the eu etS, which, being the biggest market,

received the most responses and is likely to be of interest to many carbon market stakeholders.

Given the many topics we want to shed light on, the questionnaire can appear long and time consuming. In appreciation of this we informed participants that they would compete for the prize of an iPad, to be drawn randomly among the respondents completing the questionnaire. the lucky winner was Marnix vink, position manager at energy company essent, in s’Hertogenbosch, the netherlands.


6 May 2016 8

2. General perceptions on cap and trade and Paristhe questions in this section were asked to all participants, irrespec-tive of geography and role. they were asked to choose reply options for vari-ous statements.

climate policy instrument

the first findings, shown in Figure 2.1, tell us that a majority of 69% sees cap-and-trade as “not perfect but the best we can agree on”. Some 23% consider it an ideal instrument and 8% are of the opinion that it does more harm than good.

We see that international organisa-tions, government and technical consultancies are the most positive. the two first groups are most directly involved in policy making, so they might be biased in favour of their own importance.

For all groups except international organisations, the majority opts for the pragmatic assessment (the best we can agree on given the political conditions).

Few see etS as directly harmful, but 3 of the 21 lobby/nGo respondents do so, most likely organisations that oppose emission trading as a matter of principle. Interestingly 15 of the 112 compliance respondents also have a very negative view on cap-and-trade, they are probably worried about carbon leakage. they might very well be unhappy about any climate policy measures; from the wording of the question we can only infer that they are not happy with etS, not whether they would prefer another instrument.

If we break down by country (Fig. 2.2), we see that americans and Chinese are clearly the most enthusiastic (close to 40% saying that cap-and-trade is the best way).

the american results might reflect an inherent preference of market based solutions over direct regulation. How-ever, the u.S. does actually have more command-and-control measures than most other regions at the moment, with their numerous fuel standards and emission limits. the Clean Power

Figure 2.1. Cap and trade as climate policy instrument. Selected roles. ”Chose the statement that best expresse your view on cap-and-trade as a policy instrument for emission abatement. N=610 (not counting “other” and “no opinion”.

Figure 2.2. Cap and trade as climate policy instrument. Selected locations.



0% 20% 40% 60% 80% 100%

Compliance company (112)

Project developer (83)

Carbon trader (45)

Technical consultancy (38)

Lobby/NGO (21)

Govnment/ admin (47)

Internatl orgsation (12)

University (53)

Total (610)

Does more harm than good Best we can agree on The best way in theory and in practice

0% 20% 40% 60% 80% 100%

UK (43)

Nordics (40)

Poland (9)

USA (75)

Brazil (20)

Africa (14)

China (16)

India (19)

Does more harm than good Best we can agree on The best way in theory and in practice

Plan is also based on command and control, although it gives some flex-ibility to states in the implementation.

Hence, the complexity in the current framework could be a reason why american respondents want a simple cap and trade system. the Chinese position can probably be seen as an indication of great expectations for the upcoming national etS.

the share of sceptics is highest in bra-zil and in the uk, two countries with explicitly pro market governments, but where civil society takes a more mixed view. again, the pragmatic view prevails in all countries.

We also asked respondents which climate instruments they think will be in place in their jurisdictions in 2020. among those who ticked one or more of the offered alternatives cap-and-trade got a response rate at 71%. this was slightly less than subsidies (expected by 73%), and ahead of taxes (54%) and regulations (27%).

the paris agreement

this question was asked as a scaling from 1 to 5 where 1 was very dissatis-fied and 5 very satisfied. We have merged 1 and 2 into “unsatisfied”, 4 and 5 into “satisfied” and left 3 to be considered “neutral”.


6 May 2016 9

Fig 2.3 shows that the two groups most directly involved in negotia-tions – government and international organisations – are the most happy. also among projects developers and interest groups more than 50% opt for satisfied. universities, carbon traders and technical consultancies have the highest share of unsatisfied.

In terms of geography, australian respondents are the most happy with the outcome, followed by the nor-dics and the americans. the nordics however also show the highest share of unsatisfied, pointing to a polarized view in these countries. In India, China, africa and Poland, most respondents opted for a neutral assessment.

on track For 2 degrees?

overall, only a minority of respon-dents believe the Paris agreement will set the world on track to reach the 2 degrees target (Fig. 2.4). Most chose option 2 or 3 on a scale from 1 to 5. In terms of roles we find the highest share of optimists among international organisations (close to 50%). this comes across as a little surprising, since as privileged insid-ers they should be well aware that we are not on track. again, they may be subconsciously discarding the possi-bility that what they have produced is insufficient.

“other services” and universities are the most sceptical. on this ques-tion we could assume university respondents to be relatively unbiased since they are not directly involved in negotiations, nor do they have a direct commercial interest. However, as providers of the scientific data feeding into the negotiations, they could be seen as interested in defending their data/forecasts.

If we look at countries we see that scepticism is strongest in the u.S., Poland and France.

We cannot infer from the wording of the question to what extent re-spondents would have preferred the agreement to contain more ambitious emission reduction targets.

Many are undoubtedly of this opinion, i.e. they want to reach the 2 degrees

Figure 2.4. the 2 degrees target. selected roles.”Do you think the Paris Agreement will set the world on course to reach the 2 degrees target? N=635.

Figure 2.5. Will Paris support markets? Selected roles.”How do you see the role of markets in the period up to 2030, in light of the mention of “International Transfers of Mitigation Outcome” in the Paris Agreement?” N=570.



0% 20% 40% 60% 80% 100%



Carbon trader (42)


Lobby/NGO (30)



University (59)

Total (635)

Unlikely Neutral Likely

0% 20% 40% 60% 80% 100%



Carbon trader (39)


Lobby/NGO (25)

Govnment/admin (40)


University (55)

Total (570)

Expand/link Stay at current levels Recede

Figure 2.3. Paris satisfaction. Selected roles. “How satisfied are you with the international climate agreement in Paris?” N=617.


0% 20% 40% 60% 80% 100%



Carbon trader (37)


Lobby/NGO (29)



University (59)

Total (617)

Unsatisfied Neutral Satisfied


6 May 2016 10

target, and would like the Paris agree-ment help achieve that. However, it is also possible to interpret the selec-tion of a low score as a way to signal discontent with the agreement as such. In this case the logic would be “I do not like the agreement, hence I do not think it will it will deliver on its promises”.

the largest share of optimists is found in China, where close to half of the respondents believe Paris puts us on track. also brazil, africa, australia and the nordic countries have relatively high shares of optimists (approxi-mately one in four).

support From paris?

We asked respondents how they ex-pect international emission markets to develop in the years to come, against a mixed backdrop of struggling CDM and unexpectedly positive signals from Paris. International organisations and governments are the most opti-mistic, with close to 70% expressing belief in expansion/linking between now and 2030 (Fig. 2.5).

technical consultancies have a low share of optimists and the highest share of pessimists. this probably reflects the fact that many of these respondents are CDM verifiers (there is no salvation for CDM in the Paris agreement).

at a country level, australia and the u.S. are the most optimistic, with more than 50% expecting markets to expand. India and african countries show the highest share of pessimisms, with 30-40% expecting markets to diminish. Poland is an outlier, with little expectation either for growth or decrease (most believe trading will stay at present levels).

Figure 2.6. perceptions of cap-and-trade. year-on-year.”Please chose the statement that best expresse your view on cap-and-trade as a policy instrument for emission abatement.


12% 8% 8%

67% 71% 69%

21% 21% 23%

2014 (N=831) 2015 (N=794) 2016 (N=610)

Does more harm than good Best we can agree on The best way – in theory and in practice

historical trend line

the support for cap-and-trade has not changed dramatically since we started asking about this in the survey. the current wording of this question was introduced in 2014, and Fig. 2.6 shows developments since then. We see that the share of sceptics dropped from 12% in 2014 to 8% the following year. In 2016 the share of those that see cap-and-trade as an ideal solution increased from 21% to 23%.


6 May 2016 11

3. Impact of carbon trading on compliance entitiesFor each cap-and-trade system we included subsections for compliance company respondents, i.e. those who represent entities that have to report emissions and to hand in allow-ances to cover them. We consider the feedback from these key stakeholders as particularly interesting, and this chapter presents their opinions on being part of an etS: whether it has actually led to emissions reductions, if it damages competitiveness, if it af-fects investment decisions, etc.

up to 75 participants answered the questions to european compliance en-tities (not everyone answered all ques-tions), whereas the similar questions for WCI (California and Quebec) and rGGI (north-eastern u.S.) garnered up to 9 and 7 responses. only a handful answered the questions on compli-ance in new Zealand, China and South korea, making these samples insufficient for statistical analysis.

does it spur cuts?

the most important question for as-sessing the merits of a cap-and-trade system is whether it actually triggers emission reductions. In europe (74 re-spondents), some 35% chose the op-tion “it continues to cause reductions”, followed by 26% who ticked “it led to reductions in the early years, but has little impact today” (Fig. 3.1). another 23% agreed with the statement “has not and is not likely to cause any cuts between now and 2030”.

In WCI (9 respondents), the most popular option was “has not and is not likely to cause any cuts”, followed by “don’t know”. those two options were the only ones chosen by the seven rGGI respondents. apart from in europe, the compliance companies do not tend to see the cap-and-trade as drivers for emission reductions.

If we look at the historical trend in europe (Fig 3.2), we see a relatively stable picture, although the share say-ing “the only impact was in the past” increased from 19% to 26% in 2016. at the same time the share saying “not likely to cause reductions by 2030” dropped from 29% to 23%.

Figure 3.1. Reduction effect “To what extent has the EU ETS/WCI/RGGI caused your company to reduce emissions?”

Figure 3.2. reduction effect. europe. year-on-year.



0% 20% 40% 60% 80% 100%

EU ETS (N=74)

WCI (N=9)

RGGI (N=7)

Caused reductions in the early years, little impact today [option for EU]Continues to cause emission reductions [EU] / is already causing reductions [WCI, RGGI]Has caused reductions to be planned, but not yet startedNot likely to cause any emission reductions (by 2030)Not yet, but will likely cause reductions by 2030 [WCI, RGGI]Don't know

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 (N=131) 2015 (N=77) 2016 (N=74)

Caused reductions in the early years, little impact todayContinues to cause emission reductionsHas caused reductions to be planned, but not yet startedNot likely to cause any emission reductions (by 2030)Don't know

If we break down by type of industry (Fig 3.3) we see that power/heat and cement show the highest share of “continues to cause reductions”. Metals respondents are more of the opinion that it “had effect in the early years, but not anymore”. Paper and pulp show little belief in the future effect of the eu etS.

In terms of reported size of emissions, half of the big emitters say the eu etS led to emission reductions in the early years, but has little effect today. among the medium size emitters the

largest share opted for “continues to cause reductions”, whereas many small emitters say it is not likely to cause any reductions in their compa-nies by 2030.

competitiveness

In europe, we see that two-thirds agree that being subject to a cap-and-trade scheme “is somewhat important, but not the main cause for worry”. Some 16% see it as a very detrimental factor (Fig 3.4). In WCI opinions are evenly split between


6 May 2016 12

“somewhat important”, “has little effect” and “no opinion”. In rGGI, half of the respondents hold no opinion on the matter, an indication that they probably hold positions not directly related to business operations.

In sum only a relatively low share sees emission trading as a major challenge. this is interesting as many businesses lobbied hard against the creation of trading schemes, and continue to ask for more generous allocations of emis-sion allowances.

In europe, we observe a drop in the share saying “detrimental”, down from 27% in 2015 to 16% this year. at the same time, we see fewer opting for “little effect”, from 21% to 14%. (Fig 3.5).

If we look at industries, aviation stands out as particularly alarmed, although the statistical value of this feedback is clearly limited given the small number of respondents (2 persons, both of whom ticked “detrimental”). also met-als and cement are worried, with 40% and 28% choosing the most pessi-mistic assessment. oil and gas on the other hand stands out with a relatively high share seeing only a limited effect.

When comparing emission levels we see that more small than large emit-ters opt for “limited effect”.

oFF shoring

very few reply in the affirmative to the question if their company has moved production to avoid carbon costs. the vast majority of europeans say “no”, although one in ten say they are considering, and one in twenty confirm having already done so (Fig 3.6). rGGI again shows a high share of don’t know, as do WCI.

If we compare industries, we see that aviation stands out, with one of three respondent companies saying it has moved. Cement, oil/gas and metals all show 20% or more who have or are considering moving. Still, the overall trend is clearly that most respondents intend to remain where they are. the same goes for all levels of emissions.

Figure 3.3. Reduction effect. Selected segments.

Figure 3.4. Competitiveness effect”Cap-and-trade of CO2 emissions can in some cases increase compliance companies’ production costs. How do you perceive the impact of carbon cost against other factors such as energy prices, taxes, availability and cost of qualified labour?”

Figure 3.5. Competitiveness effect. Europe. Year-on-year.




0% 20% 40% 60% 80% 100%

Power, heat (N=21)

Metals (N=4)

Oil, gas (N=8)

Cement (N=8)

Paper, pulp (N=6)

Chemicals (N=6)

Aviation (N=3)

Caused reductions in the early years, little impact todayContinues to cause emission reductionsHas caused reductions to be planned, but not yet startedNot likely to cause any emission reductions (by 2030)

16%

14%

66%

33%

29%

4%

33%

57%

14%

33%

0% 20% 40% 60% 80% 100%

EU ETS (N=73)

WCI (N=9)

RGGI (N=7)

Detrimental Somewhat important Little or no effect No opinion

26% 27%16%

61%48% 66%

6%21%

14%

7% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 (N=135) 2015 (N=75) 2016 (N=73)

Detrimental Somewhat important Little or no effect No opinion


6 May 2016 13

investment

In europe and WCI, where respon-dents generally seem to be well-informed, a clear majority (55%) agree with the statement that “it does influence business decisions, but not decisively”. one third sees it as a deci-sive factor (Fig 3.7).

a key question in the ongoing policy discussions in europe is whether the low carbon price over the recent years is still contributing to green invest-ments such as renewable energy gen-eration. In this respect, the fact that one third of european respondents do see it as a decisive factor (despite the low price) is both a little surprising and encouraging. Policy makers would no doubt prefer to see this opinion be-coming more widespread, but it does suggest that the expectations about future prices might be more important than the short-term outlook.

the historical trend in europe shows only limited variation between 2007 (when we started asking this question) and now, although the share saying “decisive” did drop from 47% in 2015 to 33% this year.

among the industry segments, we see that oil/gas, power/heat and met-als see carbon pricing as relatively important when making investment decisions (40% or more saying it is a “decisive” factor). two of the three aviation respondents say it is of no importance (Fig 3.8).

If we break down by size of emissions we see that big emitters see it as much more decisive than small ones (56% and 18% respectively).

Figure 3.6. Offshoring effect”Has your company moved production outside the EU ETS/WCI/RGGI because of carbon costs?”


Figure 3.7. Investment effect.”How important is long-term carbon price for your company’s investment decisions?”


81%

67%

57%

4%

33%

43%

11%4%

0% 20% 40% 60% 80% 100%

EU ETS (N=74)

WCI (N=9)

RGGI (N=7)

Yes Not yet, but considering No Don't know

55%

56%

14%

33%

33%

43%

4%

11%

43%

8%

0% 20% 40% 60% 80% 100%

EU ETS (N=73)

WCI (N=9)

RGGI (N=7)

No importance Part of calculations Decisive factor Don't know

Figure 3.8. investment effect. selected segments.


0% 20% 40% 60% 80% 100%

Power, heat (N=22)

Metals (N=5)

Oil, gas (N=9)

Cement (N=7)

Paper, pulp (N=6)

Chemicals (N=6)

Aviation (N=3)

No importance Part of calculations Decisive factor


6 May 2016 14

4. europe all respondents who ticked interest in the eu etS were taken to this section of the survey. the general questions, such as whether cap-and-trade is a good way to fight climate change, what are the perceived reasons for the recent price drop, etc., garnered some 250 to 340 responses.

Compliance entity respondents were asked a series of additional questions on how they perceive the impact of cap and trade on their own business operations, as how this affects their trading behaviour.

perceptions oF eu ets

We first asked respondents to what extent (on a scale from 1 to 5) they agree with some statements about the eu etS. We divided the responses into three categories, and Figure 4.1 shows that 51% of the respondents find it to be the most cost-efficient way to reduce emissions. Slightly less than a quarter disagrees with the statement. Some 65% believe the eu etS will (continue to) be the main instrument of eu climate policy up to 2030.

the historical trend line (Fig. 4.2) shows that support is slightly higher than last year (up from 49% to 51%), and very close to the peak year of 2014. Some 40% see the eu etS as a mature market, a higher share than ever before. as can be seen in the graph, the maturity confidence suf-fered a dip in 2013 and 2014, prob-ably as a result of falling prices, and a series of unsuccessful attempts to intervene in the market.

the defining event so far in 2016 has been the sharp drop in prices trig-gered by huge sell-offs in early Janu-ary. Starting the year at €8.29/t, the reference eua Dec-16 contract is now (late april) hovering around €6. Fig-ure 4.3 shows that most respondents attribute the price drop to one of two factors. either to delayed contagion from downward trends in other energy markets (oil, gas, coal and power prices all fell in 2015, whereas car-bon rose), or to a realization among market participants that the surplus of emission allowances will not disap-

Figure 4.1. Perceptions of EU ETS”Indicate the degree to which you agree with the following statements. Asked to all who ticked interest in the EU ETS. N=337.

Figure 4.2. Perception trendTrends since 2006. N varies from year to year (337 in 2016).

Figure 4.3. January price dropThe European reference carbon contract lost 27% in January, from €8.29/t to €6.07/t. What caused the sharp drop?” N=307.




14%

23%

25%

21%

26%

35%

65%

51%

40%

Will be main climate policy instrument up to 2030 (N=347)

The most cost-effective way to reduce emissions (N=337)

It is a mature market (N=336)

Disagree Neutral Agree

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The most cost-efficient way to reduce emissions It is a mature market

37%

39%

14%

10%

New reading of fundamentals/market long at least to 2030

Delayed contagion from downward trends in other energy markets

Speculative trading (short-selling)

Other


6 May 2016 15

pear before 2030 at the earliest. Some 14% attribute the drop to speculative short-trading.

price expectations

respondents were asked to forecast prices in 2016 and 2020 by pinpoint-ing prices on a range going from 0 to 30 euros. Predictions varied widely, with average forecasts of €6.8/t for 2016 and €11.4/t for 2020. In compari-son, our current price forecast is €6/t for 2016 and €8.7/t for 2020.

the survey participants are divided in their expectations for the ongoing phase 4 review. Some 40% believe it will lead to a tightening of supply (and help reduce the surplus), 42% believe it will not. the remaining 18% pre-ferred the option “don’t know” (Fig. 4.4).

one of the core elements of the review is the question of benchmark calcula-tions for free allocation of emission allowances (Fig. 4.5). Some 48% believe the proposed changes will make it more expensive for european industry companies in general to comply with the eu etS. Some 46% expect a limited effect, and 6% believe the changes will make it cheaper to comply.

compliance companies

the first part of the europe section was about general perception from across the range of different stake-holders. the second part sought to es-tablish in more detail how compliance entity respondents feel the impact on their own companies, and how this shapes trading behaviour.

Most findings on the eu etS’ impact on business operations are presented in Chapter 3, alongside the responses from compliance entities in other jurisdictions. We also asked spe-cifically about the perceived effect of the Market Stability reserve (MSr). More than three quarters of the 55 compliance respondents say that the decision to launch the MSr in 2019 has not provided greater certainty for investment decisions. this is likely one of the reasons why we see attempts by policy-makers to discuss the set-up of the MSr even before the mechanism

Figure 4.4. Impact of phase 4 regulation”How do you expect the outcome of the phase 4 review will affect the supply-demand balance in the European carbon market?” N=335

Figure 4.5. Impact of benchmark calculations “How do you see the effect of a change in benchmark calculations for European industry on average?” N=271



40%

42%

18%

Likely lead to a tightening of supply, and help reduce the surplus

Will have little impact

Don't know

48%

46%

6%

It will make it more expensive/challenging to comply with the EU ETS

Limited effect

It will make it less expensive/challenging to comply

has started to withdraw the first al-lowances.

one important aim of the survey is to shed some light on the aggregate size and trend of carbon inventories. How many allowances are companies keeping on their accounts? Figure 4.6 shows a clear trend over the last three years: whereas 43% reported to hold a surplus in 2014, this share is down to 29% in 2016.

We also asked european compli-ance entities a series of questions on trading behaviour, as we aimed to detect patterns among utilities (power generators) and industry.

hedging

We asked utility respondents which factors they see as most important for their power forward hedging strat-egy. they indicated that changes in the commodity forward curves, the development of power plan margins and company-internal strategies were of highest importance. Mid- to long-term energy policies rank fourth, fol-lowed by changing weather patterns.

We followed up with a question on how utility respondents could deviate from their baseline internal strategy. respondents indicated that such deviation was possible with 55 % on a monthly basis and around 61 % on a


6 May 2016 16

quarterly and annual timeframe. this result confirms to some extent our previous finding that hedging pat-terns do vary considerably from year to year. this is especially related to the preceding question, indicating that changes in power, fuel and carbon prices have a significant impact on how power producers act in the car-bon market.

industry

after utilities we turned our attention to industry participants. the findings for these compliance entities indicate that many have a short-term time horizon when deciding to get active in the market. almost one third of the 67 respondents answered that they looked only one year ahead when making eu etS related trading deci-sions. the options two, three, four and more than four years ahead each received around 10% (Fig. 4.7).

We further asked how much inventory industry respondents have on their accounts compared to their annual allocation. one third of the 65 re-spondents did not want to reveal that figure. Just short of 30% claim to keep one year’s worth of allowances (in principle enough to cover one year’s needs). Some 18 % keep only for six months or less. the remaining 20% are split between 18 and 24 or more months (Fig. 4.8).

Industrials were asked how flexible they are to adjust to changing market conditions. It looks as if the majority of the 67 industrial respondents are able to adjust trading strategy at least on a quarterly basis. Some 18 % are able to react on daily developments, while 6 % can only adjust once a year.

every year around 28 February the market tends to await nervously the arrival of free allocation. traders often anticipate a bearish price reaction in case industrials receiving free al-location want to offload these euas on the market. the answers to our question highlight that from the 70 respondents only 6% would use the opportunity to sell euas based on the annual allocation, while 59% do not sell, with a relatively large number of respondents (36%) not revealing their strategy (Fig. 4.9).

Figure 4.7. Selling horizon”How far ahead do you look when deciding your strategy for selling/keeping/buying EUAs?” N=67

Figure 4.8. Carbon inventory horizon“How much inventory do you normally hold compared to your annual allocation?” N=65.



30%

10%12%

9%12%

27%

1 year ahead 2 y ahead 3 y ahead 4 y ahead More than 4 years

Don't know/can't

say

18%

29%

9%11%

32%

6 months or less 12 m 18 m 24 m or more Don't know/can't say

Figure 4.6. Surplus holdings“Does your company currently hold a surplus of EUAs?”


43%

38%

29%

37% 38%

52%

20%24%

19%

2014 2015 (N=74) 2016 (N=73)

Yes No Don’t know/cannot answer


6 May 2016 17

timid trading in Q3

We asked industrial participants when, over the course of the year, they sell the most. the answers reveal a tendency to sell more of the annual volume in the first and fourth quarter, while the third quarter tends to see the smallest volumes coming to mar-ket from industrial accounts.

respondents see eua price levels as well as the need of income for the company’s cash-flow as the most important drivers (50% and 45% respectively). Some 20% state that they diversify the price risk by selling a fixed amount of euas per defined timeframe, while others indicate that a production stop might cause sales.

With regard to the carbon leakage debate we wanted industry companies to indicate at what eua price level their production becomes unprofitable in europe. the answers range from €5/t to €50/t and more, with no clear trend. In combination with the high number of “don’t know” replies (more than 50%) we can conclude that the pain-level differs largely from sector to sector.

In light of the current eu etS review process stakeholders debate the best way of allocating free allowances to compliance operators. In the impact assessment by the european Commis-sion carbon cost pass-through rates have been mentioned as a potential differentiator. We asked our survey participants what cost level of freely allocated euas they pass on to their customers. the median answer was 22%, aggregated from 38 answers.

Figure 4.9. Annual allocation and selling”Does the reception of annual allocation in February every year trigger you to sell EUAs?” N=70.


6%

36%

59%Yes

Don't know/cannot say

No


6 May 2016 18

5. north america this section covers responses to our survey specific to the Western Climate Initiative (WCI) and regional Green-house Gas Initiative (rGGI) as well as expectations regarding the ePa’s Clean Power Plan.

wci

one issue addressed in the survey is whether respondents expect other Canadian provinces to follow ontario’s lead and join the WCI alongside Que-bec and California (Fig. 5.1). among the 107 who answered this question some 64 % expect more provinces to join by 2020. although, this survey was conducted prior to Manitoba’s provincial elections, the results of which indicate that the province will abandon its plans to join the WCI and instead adopt other climate change policy measures. this is because the new Democratic Party (nDP), which is favourable to cap-and-trade, lost the election to the Progressive Conserva-tives, which opposes it.

even though the survey question regarding the expansion of the WCI before 2020 is somewhat outdated because of Manitoba’s election results, one interesting takeaway is that 18% of respondents expect other jurisdic-tions to join the WCI after 2020. this suggests the market expects the WCI to expand in short- to medium-term, as well as over the long-term.

drivers oF trading

an overwhelming majority of survey respondents expect compliance trad-ing, speculative trading, or a combina-tion of both to dominate secondary trading in 2016. this might suggest that market participants will procure allowances in the secondary market more than at quarterly auctions.

Some 30% expect compliance entities will dominate secondary trading (Fig. 5.2). this comes to no surprise given the thin margins the WCI market of-fers speculators to capture. Despite this, some 12% of respondents still ex-pect speculators to dominate second-ary trading. even though the amount of allowances in circulation is poised

Figure 5.1. WCI expansion ”Ontario is set to join Qubec and California in WCI. Do you expect other Canadian provinces or US states to join the WCI?” N=107.

Figure 5.2. Drivers of trading “In your opinion, what will dominate secondary WCI allowance trading this year?” N=107.



18%

12%

7%

64%

18%

Yes, by 2020 Yes, after 2020 No opinion No one else likely to join

30%

11%41%

15%

3%

Compliance trading

Speculative trading

Both compliance and speculative

Will be little or no secondary trading in 2016

Other

to increase in 2016, 16 % of respon-dents expect little to no secondary allowance trading in 2016. this could be attributed to expectations that market participants will opt to procure the majority of allowances at quarterly auctions (primary trading) and avoid secondary market trading altogether.

Figure 5.3 shows company prepara-tions for WCI compliance. Given that a full 30% of compliance respondents (three of ten) replied in a preceding question that they do not even have a compliance obligation in the second compliance period, it is no surprise that 43% went on to say that they either haven’t started preparing to meet compliance or they don’t know

what their company is doing to comply with the WCI program – an indication that there could be confusion among respondents about whether or not their company is even subject to WCI compliance. the reason why offset credit procurement is favoured among respondents relative to reducing emissions internally is because using offsets to meet compliance is almost always more cost-effective (cheaper) than reducing emissions internally.

rggi

Most survey respondents do not ex-pect new Jersey to rejoin rGGI in the next two years (Fig. 5.4), though only by 2 percentage points (36% vs. 34%).


6 May 2016 19

the remaining 30% offered no opinion on the matter. Current Governor Chris Christie is leaving office by the end of 2017 so that opens the door for the state to rejoin rGGI provided a Demo-crat is elected to the Governor’s office or a republican that is willing to work with Democrats on reinstating rGGI as part of the state’s overall climate change policy. State lawmakers have continuously introduced and passed legislation for the state to rejoin rGGI and they will likely continue to do so after Gov. Christie leaves office.

Federal climate policy

In the survey we also asked respon-dents what their expectations about the impact that the recent Supreme Court ruling has on state plans to pre-pare to comply with the ePa’s Clean Power Plan (CPP). the Supreme Court recently issued a stay on states’ imple-mentation of the CPP, meaning that the federal government does not have the legal standing to coerce states to prepare for CPP compliance.

Interestingly, most respondents (48%) noted that they think implementation of CPP will resume anyway (Fig. 5.5). Some 36% of respondents replied that implementation could ‘maybe’ continue despite the Supreme Court’s decision. only 7% replied that they think the court’s decision will stop state implementation of the CPP – this response indicates that there is a high degree of optimism regarding state implementation of the CPP.

Figure 5.3. compliance strategy ”What is your company doing to comply with the WCI program?” N=14.

Figure 5.4. Will New Jersey rejoin RGGI?”Do you think New Jersey will rejoin RGGI within the next two years?” N=77.

Figure 5.5. Legal challenge of Clean Power Plan”Do you think the implementation of the Clean Power Plan will continue despite the recent Supreme Court ruling in favour of the states resisting implementation?” N=103.




43%

36%

21%

Don't know/ haven't started preparing

Investing in projects/buying offset credits

Reducing our own emissions

34%

36%

30%

Yes No No opinion

48%

36%

7%

9%

Yes Maybe No No opinion


6 May 2016 20

6. ChinaChina has pledged to reach its emissions peak around 2030 in its contributions to Paris agreement. Meanwhile it is reported by some international observers that the country’s emissions may have ready peaked in 2015 with drop in coal use and sluggish industrial outputs. this statement was rebutted by Chinese of-ficials, though the country has not yet released emission data for 2015.

against this backdrop, we asked relevant respondents to estimate emissions peak year of China. to our surprise, only 14 % of the participants expect China’s carbon emissions to peak by 2020 (Fig. 6.1). the most popular answer is the range 2026-2030. Judging from the survey, it seems the slower economy growth and recent climate change progress have not altered public consensus of the country’s emission path.

Meanwhile, confidence is growing that a national Chinese carbon market will start. In last year’s survey a few respondents believed this would never see the day, but it now goes without question that a nationwide carbon market will emerge in the near future. During the last 12 months, Chinese officials have re-iterated 2017 as the start date of the Chinese national scheme.

delay expected

Still, over two-thirds of the partici-pants expected the much-publicized schedule to be delayed (Fig. 6.2). there is a clear discrepancy be-tween the official announced target and market reception, and for good reason. the carbon regulation has seen little progress; in fact the latest announcement from the State Council indicated that the carbon law would very likely not be released this year. In the absence of final legislation, the progress of market setup is feared to be hindered by local interests and industrial lobbying.

uncertainties also abound over the fate of the seven pilot trading schemes that have been running over the last

Figure 6.1. Chinese emission peak expected next decade “As part of the Paris Agreement China has pledged to peak emissions by 2030 at the latest. When do you think the peak will actually occur?” N=69.

Figure 6.2. National ETS expected - but not on schedule“The Chinese government is preparing a nation-wide emission trading scheme. When do you think the scheme will become operational?” N=72.

Figure 6.3. Pilot schemes expected to continue “Will the existing seven pilot schemes continue once the national market becomes operational?” N=73.




6%

14%

14%

9%

Emissions have already peaked

Before 2020

2020 to 2025

2026 to 2030

25%

32%

2026 to 2030

After 2030

No opinion

25%

44%

16%

15%

No, pilots will cease to exist

Some pilots will continue, for sectors not included in the national scheme

All pilots will continue, for sectors not included in the national scheme

No opinion

31%

22%

33%

7%

7%

2017 (official schedule)

2018

2019-2020

Later

No opinion


6 May 2016 21

few years. according to the official announcement, the national scheme will cover 8 sectors. It means some companies covered under the pilots may not be included in the national scheme. this can explain results of the next question. When asked about the fate of the current seven pilot schemes once the national scheme is up and running, most believed that the pilots will continue to cover companies not covered under the national scheme (Fig. 6.3).

Whether pilots will continue or cease to exist, the market is concerned about the value of unused pilot allowances in the national scheme. Fig 6.4 shows that a majority expects the allowances will be converted into national units, but only 14% believe this swapping will be done on a basis of 1 to 1. Some 16% believe the pilot allowances will be inconvertible, while 23% have no opinion.

among all the uncertainties and speculations about the upcoming national scheme, one thing is clear: offset demand will jump as the potential buyers will be multipled in the national scheme. Fig 6.5 shows market confidence in CCers. Similar to the result of last year, most of the respondents expected credit issuance will rise slowly going forward. We think both the segmented pilot mar-kets and the ongoing uncertainties of rules change have prevented market participants to be more optimistic.

Figure 6.4. Pilot allowance units in the national scheme“The existing pilot schemes each use their own allowance units (non-interchangeable). The national system will most likely create a new common unit. What do you think will happen to the existing pilot units?” N=73.


Figure 6.5. Cautiously optimistic offset market”How do you expect monthly issuance of CCERs to develop in 2016 and 2017?” N=72 for 2016. *In the 2015 survey, we did not include “Decrease” as an option.


14%

47%

16%

23%Converted into national units on a 1 to 1 basis

Converted into national units using a different calculation

Will likely be inconvertible (can only be used locally or become worthless)

No opinion

13% 13%

57%47%

30%

29%

11%

2015 (N=55*) 2016 (N=72)

Decrease*

Remain at current level

Slow but steady rise

Pick up significantly


6 May 2016 22

7. South koreaJust short of 40 participants answered the general questions on the korean emission trading Scheme (ketS). the in-depth questions aimed at korean compliance entities garnered only 4 to 5 responses, in other words insuf-ficient for statistical analysis.

respondents were first asked whether they expect the allocation for the period 2015-2017 to be sufficient. their views are distributed relatively evenly between the two options ‘both power and industry will have enough kaus’ and ‘overall insufficient’ (Fig. 7.1). the share of those who ticked the option ‘overall sufficient but power will be short’ was smaller than what we observed in last year’s survey.

they were also invited to share their views on how much korean allowance units (kaus) are likely to be traded in 2016, what prices they expect to see and whether they believe the ketS will actually lead to emission reduc-tions.

In 2015, the first year of ketS, only 321,380 kaus traded on krX. From 1 January to 18 april 2016, some 111,400 kaus changed hands in the korean spot market (on krX). respondents expect the traded volumes to remain modest throughout the rest of this year (Fig. 7.2). Some 32% believe the 2016 volume will be between 300,000 kaus and 1 million kaus. only 5% expect more than 5 million kaus to be traded this year.

With regards to price expectations, 38% expect the average price in 2016 to be in the range 10,000 – 20,000 krW in 2016 (Fig. 7.3). no one expect prices to climb above 30,000 krW. Close to half of the respondents signal no opinion, indicating that they either a) are not active in trading or b) simply find it impossible to predict prices. Currently (since 15 March 2016), the kau price at krX has remained flat at 18,450 krW.

no opinion

the high number of respondents showing no opinion on the trad-ing volume and prices show that with only one year of experience the korean carbon market is still far from

Figure 7.1. Allocation sufficiency“Do you expect the 2015-2017 allocation to be sufficient to cover the companies’ emissions?” N=39

Figure 7.2. Expected trading volume in 2016 ”How much trading of Korean allowances (KAUs) do you think will take place in 2016?” N=38

Figure 7.3. KAUs price expectations”What do you think will be the average price for KAUs in 2016 ?” N=39




15%

28%

Overall sufficient, but power sector will be short

Both power and industry will have enough KAUs

31%

26%

No opinion

Overall insufficient

8%

32%

13%5%

42%

Less than 300,000 allowances

Between 300,000 and 1 m

Between 1 and 5 m

More than 5 m

No opinion

0% 20% 40% 60%

Less than ₩10,000 (approx $10)

₩10,000 to ₩20,000 ($10-20)

₩20,000 to ₩30,000 ($20-30)

No opinion


6 May 2016 23

reaching maturity. yet, almost half of the respondents believe ketS has a positive effect on emission reductions. this puts South korea more in line with the perception in europe, than in the north american emission trading schemes.

We asked respondents what level of emissions they would expect in 2020 in the absence of specific abatement measures (a business-as-usual sce-nario). this is potentially important, as the emission cap under ketS is not defined as an absolute target, but as a portion of projected bau emissions. the current government forecast sets economy wide 2020 bau emissions at 776 Mt, giving a target for the sectors covered by ketS at 573 Mt in 2015, 562 Mt in 2016, and 551 Mt in 2017. If the Government were to revise its bau projection upwards, the ketS target would also increase (become easier to reach).

one in three expects 2020 emissions to be around the level foreseen by the Government. Some 16% believe 2020 emissions will be less than 750 Mt (if so, the Government forecast will be proven too high/the ketS cap too lenient). Some 18% expect emissions above 800 Mt (if so, the Government forecast will be proven too low/ the ketS cap too tight.

the respondents were also asked whether the business-as-usual (bau) forecast will be changed in 2017 for the next trading period starting from 2018 (Fig. 7.4). Most respondents ticked either “no opinion” or “maybe”, a clear indication that this hypo-thetical question goes beyond their involvement in the ketS.

the same can be said about expecta-tions for a possible upwards readjust-ment of the planned allocation (Fig. 7.5). a full 58% voice no opinion on this, 26% believe this will occur in 2018 or later, and only 5% expect it to happen within the current trading period that ends in 2017.

only very few respondents expect to see ketS linking up with other carbon markets in the coming years, but many do believe this will happen eventually after 2020 (Fig. 7.6). the upcoming Chinese etS and (the existing) eu etS are seen as the most likely candidates.

Figure 7.4. Change of BAU forecast in 2017?”Do you think the government will change its business-as-usual emission forecast in 2017, before the start of the second compliance period (2018)?” N=38


Figure 7.5. Upward adjustment of allocation?”Independently of whether the BAU projection is changed or not, do you expect the planned allocation to be adjusted upwards?” N=38


Figure 7.6. Linking to other carbon markets”Do you expect the Korean ETS to link up with other carbon markets?”


8%

13%

79%

Yes

No

Maybe/no opinion

11%

5%

26%58%

No

Yes, taking effect already in 2017

Yes, taking effect in 2018 or later

Don't know

0% 20% 40% 60% 80% 100%

Others (VCS, GS, ...) (N=5)

WCI (Calif.-Quebec) (N=17)

New Zealand ETS (N=19)

EU ETS (N=22)

Planned Chinese ETS (N=25)

Before 2020 2020 or later Never


6 May 2016 24

8. CDMafter years of falling demand and plummeting prices, one could expect to see market participants leave the CDM, and we have indeed witnessed a small exodus of western verifica-tion companies from the once lucra-tive Chinese market. Furthermore, most trading houses have scaled down Cer transactions significantly. yet the Carbon Market Survey shows that there are still more than a few carbon stakeholders with an interest in CDM. a total of 273 respondents ticked interest in CDM. as can be seen in Figure 8.1 they represent many different roles, such as project de-velopers, administration, traders and compliance companies (those who are subject to a cap-and-trade system).

over the last few years, one of the key goals of the CDM governing body – the CDM executive board (the CDM eb) has been to amend the mechanism in a way to make it more attractive for potential buyers, going outside of the regulated market and reaching to the voluntary buyers or buyers in the emerging domestic trad-ing schemes. We therefore focused the Cer section on the topic of new de-mand, to get market players’ opinions on this important aspect.

little appetite in europe

Historically the eu etS has been by far the dominant taker of Cers, but this is no longer the case due to qualita-tive and quantitative restrictions put in place in 2013. Some european govern-ments, most notably norway and Ger-many, showed considerable interest in Cers last year, especially supporting the most vulnerable projects. at the same time, the World bank held its first Cers auction last year, preparing for a new one in May 2016. australian landfill owners purchased 22 million units in 2015 and surrendered them to the government who will use them to meet the country’s kyoto targets.

a particular goal for our survey was to map stakeholders’ views on the future demand from various groups of potential Cer buyers up to 2020. We find that expectations are fairly mixed,

Figure 8.1. CDM respondents by role273 respondents ticked interest in CDM and were taken to this section in the questionnaire. This table shows breakdown by chosen role.

Figure 8.2. CDM demand expectations “How do you see annual demand from CER buyers up to 2020?”. N varies from 19 to 200. N relates to the number of respondents sharing their view on demand from the different groups (does not indicate belonging to groups).



16

20

22

22

26

45

62

Compliance company

University

Carbon trader

Government/administration

Technical consultancy

Other services

Project developer

8

4

7

8

9

12

12

Other

Legal services

Trader in other commodities

Financial services

Trading services

International organisation

Lobby/NGO

0% 20% 40% 60% 80% 100%

European governments (N=199)

EU ETS compliance companies (N=200)

World Bank/internatl insttions (N=196)

Australian landfill owners (N=170)

From other buyers (N=19)

Less than in 2015 About same level More than in 2015

although the respondents who foresee falling demand clearly outnumber those who expect it to rise. the excep-tion is for World bank demand, where 72 out of 196 respondents believe demand will rise, against 45 who think it will drop (Fig. 8.2).

new sources oF demand?

We also asked respondents their opin-ion about possible new sources of de-mand between now and 2020; some 208 ticked one or more of the options. voluntary buyers and international aviation drew the highest scores (139

and 133), followed by international shipping at 90 (Fig. 8.3).

Shipping and aviation are exempt from the Paris agreement, and the responsibility for cutting emissions from these sectors lies upon the International Maritime organization (IMo) and the International Civil avia-tion organization (ICao). While ICao is largely expected to decide on some kind of market-based measures that will allow the use of emission offsets, (potentially including Cers), IMo has fallen under criticism for failing to


6 May 2016 25

propose an emissions reduction target for the shipping industry.

up to now, close to 10 million Cers have been voluntarily cancelled form the CDM registry. Some part of them has been used for voluntary offset-ting purposes, while major part of the cancelled Cers target korean domes-tic market.

hope in paris?

Delving deeper into demand ex-pectations, we asked respondents about more distant perspectives and potential use of Cers and new credit’ types (ItMos) as a way for countries to achieve their commitments in the period up to 2030 under the Paris agreement. this question offered the possibility to tick several options, and we see that a major part (152 of 217) considers eu as a potential offsets user (Fig. 8.4). next on the list are Japan and Switzerland.

according to the submitted Internal nationally Determined Contributions (InDC) only the following countries have indicated they will/might use international market mechanisms to meet their climate targets: Canada, Japan, new Zealand, South korea, Switzerland and possibly norway. So, under current conditions potential offsets buyers will be limited to five or six countries. that number could in-crease through the review of countries climate ambitions, as some might opt to use international offset to up their targets. It is worth mentioning that similar to last year’s survey, a sig-nificant number of respondents keep considering eu countries as potential offsets users after 2020, although their InDCs clearly rule out this pos-sibility.

over the last year, Cers issuance volumes remained low with some 9 million units brought to market per month on average. the price per tonne worth of Cers was down to 40 euro-cents, equal to the average issuance cost. Figure 8.5 shows respondents’ replies on the approximate verifica-tion cost in 2015. about 30% of our respondents paid below 20 eurocents for verification services (on average), and a similar number paid between 20 and 40 eurocents. the rest were

Figure 8.3. new sources of demand”What do you see as potentially important sources of demand for CERs between now and 2020?” (N=208)

Figure 8.4. Credit use for Paris commitments “Which countries/regions do you think will use international emission offset credits such as CERs or ITMOs as a way to achieve their international climate commitments in the period up to 2030 under the Paris Agreement?” (217 respondents for a total of 802 entries).




Figure 8.5. Verification cost “What was the approximate verification cost per CER in the projects you have been directly involved in in 2015? This includes payment for monitoring reports and fees to Designated Operational Entites (DOEs). Does not include issuance fees to the UN administration.” (N=52).

20

57

77

83

91

94

100

128

152

Other

Mexico

U.S. (federal)

China

Canada

South Korea

Switzerland

Japan

EU

12

90

133

139

Other

International shipping

International aviation

Vountary markets

19%

19%

31%

31%More than 60 eurocent

Between 40 and 60 eurocent

Between 20 and 40 eurocent

Less than 20 eurocent


6 May 2016 26

evenly split between the range 40 to 60 eurocents and above 60 eurocents. the upper ranges are significantly higher than the average price fetched in the market. this seems to imply that some project developers have sold at loss, and we certainly assume that the unfavourable margin has discouraged many project hosts from starting the process of requesting Cer issuance.

switching standards

as a result of the low demand, a num-ber of project owners are considering re-classifying their projects, i.e. to re-register or incorporate them under another type of mechanism. Figure 8.6 shows that 30% of respondents would be willing to incorporate their CDM projects into some national (non-trading) initiative, e.g. a “nation-ally appropriate mitigation action” (naMa). In comparison, last year only 13% of our respondents were ready for such re-classification.

Some 11% signal interest in supply-ing their credits for use in the local trading schemes, which is a significant decrease compared to 32% in last year survey. as China is expected to tighten its local offset eligibilities, we believe Chinese CDM projects will not be able to switch to CCer. at the same time, the number of Cers cancelled for korean etS is growing constantly, due to the lack of domestically developed projects.

Some 28% did not share an opinion on this question, and finally, 30% of the respondents continue to be devoted to CDM, almost the same rate as last year. that a relatively high percentage of the respondents are un-willing to abandon CDM may indicate that some project hosts still haven’t lost hope finding new demand sources for their credits, such as for example aircraft operators under the emerging ICao MbM scheme.

Figure 8.6. De-registering CDM “Do you consider re-classifying CDM projects in the years 2016-2017? (By this we mean re-register the project as another type of instrument).” (N=53).


11%

30%

30%

28% Yes, to issue credits for local emission trading systems

Yes, to incorporate into a national initiative

No

Don't know/Other


6 May 2016 27

aviation emissions appear for the first time as a separate section in this year’s edition of the Carbon Market Survey (we included some questions on aviation in the european section in 2012 and 2013 when the european union was encountering strong inter-national opposition to its attempts to makes airlines account for all emis-sions taking place in european air-space). We dedicate more space to the sector this year, because of important ongoing and upcoming events. Close to 60 respondents answered one or more questions in this section.

background

Following a resolution adopted at its 38th assembly in 2013, the Inter-national Civil aviation organization (ICao) is working on a series of actions aimed to address the sector’s emis-sions of greenhouse gases. the orga-nization gathers experts and govern-ments officials from most countries, to regulate international aviation. a basket of possible actions has been proposed to curb the rapidly growing emissions from commercial airlines, including technological, operational and market-based measures (MbM).

Last March, just before a round of so-called Global aviation Dialogues, ICao presented a revised draft pro-posal on MbM that contains detailed information on terms and conditions of participation. However, several influential emerging economies have voiced strong concern that the draft still contains provisions running counter to their growth strategies. We therefore expect it to be amended further before a final version can be approved. as the survey responses show, many market players do indeed expect provisions to be “watered down”, weakening the obligations for aircraft operators.

Findings

In the survey we asked our respon-dents if they consider it likely that the upcoming ICao assembly (September – october 2016) will agree on a reso-lution to implement MbMs from 2020.

9. aviation

Figure 9.1. Decision to curb aviation emissions?On the agenda for the ICAO assembly thus autumn is a proposal to curb emissions at 2020 level, and start reducing them in 2050. What decision do you expect from the upcoming assembly? (N=59).


Figure 9.2. Eligible credits”If ICAO agrees on a Market Based Measure, what kind(s) of credits do you think will be eligible?” N=55, for a total 143 entries (41 of the 55 think CERs will be eligible).


18%

34%

Don't know/other

Decision to be further delayed

Decision calling for aviation emissions to peak in 2020

20%

27%

peak in 2020

Statement in support of emission mitigation, but without firm obligations or a fixed timeline

2%

18%

20%

38%

53%

55%

75%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Others

Japanese bilateral scheme units

Domestic units (China and SK)

REDD units

Paris Agreement units (ITMOs)

Voluntary credit units

CERs

one third expects that there will be a statement in support of emission mitigation, but without firm obliga-tions or a fixed timeline (Fig. 9.1). Some 27% think there will be a deci-sion calling for aviation emissions to peak in 2020, meaning that airlines, aircraft manufacturers, airports and other stakeholders would have to start preparing for emissions to stay flat or drop from 2020 onwards. one in five respondents believes the decision will be delayed altogether.

the draft proposal envisages MbM to build on a number of offsetting mechanisms, some existing and some yet to emerge. We expect more clarity

on eligible standards may come dur-ing mid-May negotiations on MbM. although, according to the current timeline, the final definition of emis-sions unit Criteria (euC) will not be decided before 2018.

eligibility

We asked stakeholders which stan-dards they think will be eligible to sup-ply offsets under the MbM (they could tick more than one option). three out of four expect the final framework to accept Cers (Fig. 9.2), well ahead of voluntary credit units and new credits under the Paris agreement (55% and 53% respectively). Some 38% think reDD units will be eligible.


6 May 2016 28

In the CDM market some project types have been seen as controversial because their climate impact is said to be non-existing or very modest. Some methodologies have been banned from use in the eu etS. We there-fore asked respondents whether they expect to see similar restrictions in a MbM for aviation. It turned out that over 60% believe HFC23 and adipic acid projects will be excluded (Fig. 9.3). Some 50% and 48% believe that credit units stemming from coal power plants and large hydropower projects will be ineligible. and finally, 22% think that there will be no restrictions.

the draft proposal does not mention explicitly any particular project type that will not be welcomed into the scheme. but since ICao is to assure the environmental integrity of the offsets they will let into the MbM it is quite likely that some dubious project types may not be accepted under the scheme.

Finally we asked about the potential timelines for when aircraft operator will start pre-compliance purchases. Some 38% of the respondents believe operators could start purchasing activity by 2020 (Fig. 9.4), some 34% believe trading would start earlier, i.e. by 2018. and finally 27% expect purchasing to start only after the MbM starts in 2020. as mentioned above, the rules on unit criteria will most likely not be finalized before 2018, meaning operators may prefer to wait until then.

Figure 9.4. Purchasing timeline”If ICAO agrees this year on a mechanism from 2020, when do you expect airlines to start buying credits to prepare for compliance?” (N=56).


34%

38%

27%

2%

By 2018 2019 to 2020 After 2020 No opinion

Figure 9.3. Project type restrictions ”Do you think ICAO is likely to ban any of the project types below from a Market Based Measure for aviation?” (N=54, for a total of 99 entries).


22%

2%

48%

50%

61%

0% 10% 20% 30% 40% 50% 60% 70%

No restrictions

Other

Large hydro

Coal power plants

HFC and/or adipic acid


6 May 2016 29

appendix: Methodological considerationsthe Carbon Market Survey is the most encompassing market sentiment poll in its field, and has come to be seen as a reference in the world of carbon. nevertheless, like all surveys, it needs to be read with certain caveats.

the most general methodological challenges are the risk of ambiguity (does the respondents understand the question the same way as us?) and bias (can the question or the response options appear leading and/or one-sided?). We have been conscious of this since we launched the first survey in 2006, and we strive to phrase each question in a precise and neutral way. If you would like to consult the full questionnaire, please see contact details overleaf.

Some companies are naturally reluc-tant to touch on business sensitive areas such as threshold prices for buy-ing/selling and holdings of allowances units. this is perfectly normal and does not change much from year to year. In most such cases we provide an option “Don’t know/cannot answer”.

Potentially more challenging are the questions of price expectations. Many respondents are themselves market participants, and as such they might have an interest in influencing other traders’ behaviour by giving a very high or a very low estimate. We cau-tion not to take the prices for anything more than they are: an aggregate of interested respondents’ (best) guesses.

an altogether different question is whether the population of respon-dents is truly representative of the global carbon market, both with re-gard to the geographical scope (where the respondents are located) and what kind of role they have.

In terms of respondents’ locations, the majority lives in europe and north america. this is natural given the well established emission markets in these parts of the world. nevertheless we are glad to see increasing number of respondents in the emerging markets of China and South korea.

In terms of roles, Figure 2.1 shows a wide range of stakeholders, including many groups than could at first glance appear to be peripheral compared to the three core groups of compli-ance companies, project developers and traders. What this figure shows is the plethora of different services active in the carbon markets (lenders, brokers, auditors…) and the presence of non-commercial stakeholders such as universities and non-governmental organisations.

a more practical challenge in a survey that aims as broadly as ours, is how to analyse the results in a concise way, how to get from many fragmentary bouts of insight to an overall under-standing of underlying trends. We have chosen to tackle this by way of comparison: by geographical loca-tion, by type of stakeholder, and by comparing to previous years. that is the advantage of having eleven years of data.

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