Carbon Markets: Changing Dynamics in Asia Pacific
Presented atCarbon Markets Asia22-23 June 2010
Presented byRavi KrishnaswamyDirector - Energy PracticeFrost & Sullivan, Asia Pacific
22-23 June 2010Singapore
Focus Points
• Global Carbon Market Trends
• Project Based Carbon Market
• National carbon market policies in Asia Pacific
Changing dynamics
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• Changing dynamics
Global Carbon Market Trends
3
Global Carbon Market Trends
Copenhagen – Expectations and Outcome
Key Points
Global WarmingGlobal Warming
ResponsibilityResponsibility
GHG ReductionGHG
Reduction
Expectations from Copenhagen Outcome of Copenhagen
• Commitment to limit global warming to +2 Deg Celsius
• Commitment to limit global warming to +2 Deg Celsius
• Accord recognizes scientific view, but does not provide target
• Accord recognizes scientific view, but does not provide target
• Common but differentiated • Common but differentiated • Distinctions within ‘developing’ • Distinctions within ‘developing’
• Global GHG reduction of 50% by 2020
• Global GHG reduction of 50% by 2020
• Countries asked to submit their own quantified emission reduction taragets
• Countries asked to submit their own quantified emission reduction taragets
4
ResponsibilityResponsibility
Financial Aid Financial Aid
Binding ProtocolBinding Protocol
VerificationVerification
• Common but differentiated responsibilities
• Common but differentiated responsibilities
• Distinctions within ‘developing’ countries
• Distinctions within ‘developing’ countries
• To most disadvantaged countries
• To most disadvantaged countries
• “Promise” - US$30 billion for 2010-2012, US$100 billion/year from 2020
• “Promise” - US$30 billion for 2010-2012, US$100 billion/year from 2020
• Come up with a binding agreement to replace Kyoto
• Come up with a binding agreement to replace Kyoto
• No mention of extension of Kyoto or legally ‘binding’ replacement
• No mention of extension of Kyoto or legally ‘binding’ replacement
• Independent body to verify GHG emissions
• Independent body to verify GHG emissions
• Work in Progress• Work in Progress
State of Carbon Market - World
Project based transactions down 54%
to US$3.4 billion
Total market value of US$144 billion in 2009
Growth in Challenging Times
5
Carbon Market in 2009
CDM declined by 59% to US$2.7 billion
AAU market increased 7 fold to US$2 billion
Average transaction price of US$12.7 per
CER
EU ETS strong growth engine with US$118
billion value
Source: World Bank, ‘The State and Trends of Carbon Market ’ report
Carbon Markets 2009 – Compliance and Voluntary
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Voluntary Carbon Markets
Reasons to buy Voluntary offsets...Reasons to buy
Voluntary offsets...
The global voluntary carbon markets transacted $387.4 million in 2009, about 47% less than 2008. The volumes were down 26% to 93.7 MtCO2e
Asia Pacific region’s global domiance of supplier of voluntary offsests was lost to
US Leading the Way, Asia Stepping in…
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•Investment•Pre-compliance
•CSR/PR•Less expenisve than internal abatement
•
•Investment•Pre-compliance
•CSR/PR•Less expenisve than internal abatement
•
Asia Pacific region’s global domiance of supplier of voluntary offsests was lost to
USA and Latin America in 2009. Asia’s contribution declined 77% in 2009
Small Hydro and Wind sector dominated the voluntary offset supply from Asia,
while energy efficieny and fuel switch projects, started gaining ground. REED
fails to take off in Indonesia, despite vast potential
US and Europe dominated the buying side with 49% and 41%, with ANZ at 4%
and rest of Asia at 2% lagging behind
Data Source: Bloomberg New Energy Finance and Ecosystem Market Place
After Copenhagen – Developments So Far..
• Gulf of Mexico oil spill - A turning point for American public opinion in favor of mandated emission reductions and clean energy leadership?
• Possibility of emission cut increase? Some EU countries may opt for 30% reduction by 2020
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• Unanimous in priciple agreement that nations should be paid not to cut trees. So REED is live and kicking!
• Bonn Climate Talks held earlier this month attempts to bridge the gap between scale of commitments by developed and developing countries
Source: Frost & Sullivan
Sector Based Approach
Industry-Led
Sectoral Initiatives
Bottom-up
developing
country
commitments
Three Types
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commitments
Sectoral CDM
Source: CEPS Report
Depends on national and regional policies in short and medium term
Establishment of cap-and-trade systems in Japan, NZ, Australia, Korea, USA is crucial
Investors need assurance that national policies are
Carbon Finance – Critical Pointers
Looking over and above Carbon Markets and CDM
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Investors need assurance that national policies are long term and linked to international framework
Good climate for attracting FDI is crucial for attracting climate investments from private sector in developed countries
Using public funds to catalyze private sector investment
Carbon
Finance
Project Based Carbon Market
11
Project Based Carbon Market
Per-capita Emissions – Global overview
12
CDM – Regional Trends
13
CDM - Regional Trends
14
Global CDM Pipeline – Inventory of Projects
Afforestation, 0.11 Agriculture, 0.02
Biomass Energy, 14.29
Cement, 0.63
CO2 Capture, 0.06
Coal Bed Methane, 1.45
EE Households, 0.45
EE Industry, 3.13
EE Own Generation, 9.78Methane Avoidance, 11.34
N2O, 1.45
PFCs and SF6, 0.3
Reforestation, 0.95
Solar, 0.78
Tidal, 0.02
Transport,
0.26
Wind, 16.56
15
EE Service, 0.37
EE Supply
Side, 1.32
Energy Distribution,
0.19
Fossil Fuel Switch, 2.33
Fugitive Gas, 0.5
Geothermal, 0.32
HFCs, 0.48
Hydro, 26.97
Landfill gas, 5.94
Source: UNEP CDM/JI Pipeline
Analysis & Database , Sept 1, 2009Total number of projects: 4,631
Global CDM Pipeline – Annual CERs (2008-2012)
Afforestation, 0.01
Agriculture,
0.01
Biomass Energy,
7.02
Cement,
1.13
CO2
Capture,
0.01Coal Bed Methane, 4.62
EE Households, 0.14
EE Industry, 0.78
EE Own Generation, 9.27
EE Service,
0.03
EE Supply
Side, 1.39
Fossil Fuel Switch, 6.37Landfill gas, 7.58
Methane Avoidance, 4.25
N2O, 8.95
PFCs and SF6, 0.46
Reforestation, 0.49Solar, 0.08
Tidal, 0.04
Transport, 0.18
Wind, 10
16
Energy
Distribution,
0.35
Fossil Fuel Switch, 6.37
Fugitive
Gas,
1.92
Geothermal, 0.6
HFCs, 17.1Hydro, 17.23
Landfill gas, 7.58
Source: UNEP CDM/JI Pipeline
Analysis & Database , Sept 1, 2009Total CERs: 2.78 billion
Global CDM Pipeline – Annual CERs (2008-2020)
Afforestation, 0.18
Agriculture, 0.01
Biomass Energy, 6.49
Cement, 0.79
CO2 Capture, 0.01
Coal Bed Methane, 4.71
EE Households, 0.14
EE Industry, 0.61
EE Own Generation, 8.68 EE Service, 0.03
EE Supply
Side, 2.7
Energy
Fossil Fuel Switch, 6.13Landfill gas, 6.78
Methane Avoidance, 3.73
N2O, 8.44
PFCs and SF6, 0.54
Reforestation, 0.81Solar, 0.1
Tidal, 0.05
Transport, 0.18
Wind, 10.75
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Energy
Distribution,
0.34
Fugitive Gas,
1.66
Geothermal,
0.58
HFCs, 14.83Hydro, 20.75
Source: UNEP CDM/JI Pipeline
Analysis & Database , Sept 1, 2009Total CERs: 7.42 billion
APAC - Estimated CER Issuance by Sector (2012)
Renewable energy
26.0%
Afforestation &
Reforestation
0.01%
HFC & N2O reduction
36.1%
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Methane avoidance
21.9%
Landfill gas
11.5%
Fuel switch
1.8%
Supply-side EE
2.0%
Demand-side EE
0.7%
Source: Frost & Sullivan
Carbon credits – carbon cuts across all areas in renewables!
Cellulosic
Biofuels
Carbon Market
Tidal
Hydrogen
Clean Coal
???????
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Geothermal
Long TermImmediate Mid Term
Energy
Efficiency
Small Hydro
Wind Biomass
Biogas
Solar
CDM - Key Success Factors
Documentation•CDM documentation stands on four pillars - baseline,
additionality, emission reduction calculations and monitoring
•Start early; CDM cannot be an after thought
•Transparent and detailed explanation of how and why the
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Monitoring•Gruelling process to monitor tons of emissions
•Need to be done deligently to get issuance of CERs
Additionalityproject is additional
•Show the proposed project is not financially attractive
without CDM
CDM - Key Success Factors
• Very important for biomass and waste to energy projects
Bundling
• Size of most of the renewable energy CDM projects is
small, which generates less CER
•Many project developers can bundle similar projects to
gain advantage of scale
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Feedstock
Equipment Supplier
•Reliable and efficient equipment
•Previous track record and project references
• Very important for biomass and waste to energy projects
•Consistent quality and quantity critical
•Logistics and pricing determine project viability
Asia Pacific – Carbon Market Policies & Changing Dynamics
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Changing Dynamics
Japan Carbon Policy
Domestic regulatory environment uncertain; failure to establish domestic
emissions trading scheme
Climate bill approved by Japan’s lower house, pending approval by the upper
house
Will the Sun Rise?
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Japan expanded beyond being big buyers of CDM carbon credits to active
interest in governmental AAU
Strong support for ‘bilateral credit’ arrangement from government and
corporate sector
Industry push to export clean energy technologies and receive carbon
credits and cash in return
Climate bill, if passed, would mandate emission cuts, 25% below 1990 levels
by 2020
New Zealand Carbon Policy
First Emissions Trading Scheme outside of European Union
Forest owners are likely to be major
•Stationary energy, industrial processes and liquid fossil fuels enter
on 1st July 2010•Agriculture sector comes in on
1st January 2015
Off the Ground
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Energy-intensive sectors to be eligible for compensation for the expected increased costs from the ETS
Only the forestry sector will be able to convert the NZUs (freely allocated to them) to Kyoto units for trading
overseas
After the transition phase (Dec 2012) all sectors eligible to convert NZUs to
Kyoto units to trade overseas
Forest owners are likely to be major sellers of offsets (NZUs) to industry, receiving millions of the permits as
credit
New Zealand Carbon Policy
• No emission cap
• No limit on free carbon permits for energy intensive industries
• Companies have to surrender 1 Unit for
Pros & Cons
• Broad sector coverage, in a phased manner
• Large polluters, covered under point of obligation
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surrender 1 Unit for every 2 units of emissions
• Small size of the NZ market
• Price cap of NZ$25
• Ripple effect on retail electricity prices
point of obligation
• Linked to international markets
• Majority of offset suppliers are forest owners, who receive free NZUs
Australia Carbon Policy
Policy stalemate in Australia with the climate change bill failed in Senate
vote in Dec’09
Planned to cover 75% of Australia’s
The Australian PM has announced CPRS will not be re-introduced until 2012 and till there is greater clarity on
actions by US, China & India
Carbon Pollution Reduction Scheme (CPRS) delayed
26
Establish a ‘cap-and-trade’ market for Australian emission units (AEU). Price
cap was to be set
Medium term commitment of reducing GHG emissions by at least 5% below 2000 levels by 2020.
Renewable Energy Target (RET) of 20% power by 2020 and
accompanying Renewable Energy Certificates only market mechanism
Planned to cover 75% of Australia’s emissions through mandatory
obligations for 1,000 most polluting companies
South Korea Carbon Policy
Target of reducing emissions by 30% by 2020 relative to a “business as
usual” baseline
Targets to be set for 600 large polluting companies responsible for 70% of
national emissions
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Plan to establish emissions trading market by 2012; part of ‘green growth’
legislation
Public institutions will be the first to reduce emissions in line with targets. The difference between their actual emissions and targets will be traded
Establish a system of tradeable offsets likely to be created under a domestic version of a U.N. scheme promoting clean energy investments.
Possibility of linking the ETS with larger markets like China
China Carbon Policy
Plans to reduce its carbon intensity by 45 per cent by 2020, from 2005 levels.
Domestic market for emissions trading possible by 2014, initially involving only Chinese companies
Aim Big
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China world’s largest supplier of carbon credits, rather than buyer
Carbon cap may be linked to profit –reduce amount of carbon for each
Yuan of profit
Penalty mechanisms – Suspension of approvals for industries missing
targets, banks withholding credit and cutting off utilities for projects not
meeting emission targets
Domestic carbon trade negligible -Total 10,000 tonnes, compared with
global total of 93 million tonnes in 2009
India Carbon Policy
Plan to achieve 20-25% reduction in emissions per unit of GDP below 2005
levels by 2020.
The Perform Achieve and Trade (PAT)
Aim for sharp increase renewable energy from current 8% to 20% by 2020, and increase in forest cover
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The Perform Achieve and Trade (PAT) mechanism for trading energy efficiency certificates to become operational in 2011
The Renewable Energy Certificate (REC) system to be operational in 2011
Rs. 50 tax per ton of domestic and importe coal, akin to a carbon tax
India is the world's fifth biggest emitter after China, the US, Europe and
Russia.
Timeline for National ETS
South KoreaChina
India
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2010 2011 20122009 2013 2014 2015 2016 2017 2018 2019
Source: Frost & Sullivan.
New Zealand
Japan Australia
Failure to pass climate legislation in US before end
A transparent and global carbon price essential to boost investments
The sectoral approaches
Conclusions
Key Take-aways
Outlook for offset trading volumes look bright, but prices likely to be damp
National climate policies and integration with development plans a good first step
Financing has to move beyond public sources alone
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Conclusion
legislation in US before end of the year could become a stumbling block for any binding agreement in Cancun
The sectoral approaches can be seriously viewed as a part of a transition towards a global carbon market
Increasing uncertainty around the role that CDM/CERs will play in the international offset market.
Increasing realization that private sector cannot be neglated in any climate deal
Carbon price required to limit warming to 2ºC not likely to emerge in the mid term
Market mechanisms need stable policy direction to be successful
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