Washington DC, May 2012 - World Bank 4/22/2013 ¢  State and Trends of the Carbon Market...

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  • state and trends of the

    2012Washington DC, May 2012

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    wb350881 Typewritten Text 76837

  • Lead authors Alexandre Kossoy, Team leader Pierre Guigon

    This World Bank report benefited greatly from contributions of Bianca Ingrid Sylvester. Other insightful perspectives were provided by Martina Bosi, Klaus Oppermann, and Felicity Spors.

    state and trends of the

    2012Washington DC, May 2012

  • The findings and opinions expressed in this report are the sole responsibility of the authors and should not be cited without permission. They do not necessarily reflect the views of the World Bank group, its Executive Directors, the countries they represent, or of any of the participants in the carbon funds or facilities managed by the World Bank. The World Bank does not guarantee the accuracy of the data included in this work and accepts no responsibility whatsoever for any consequence of their use. This report is not intended to form the basis of an investment decision. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

    The State and Trends of the Carbon Market 2012 received financial support from the CF-Assist Program, managed by the World Bank Institute (WBI).

    Photo credits: page 72 flickr/longhorndave, all others: istockphoto.com Editing: Steigman Communications Design: Studio Grafik Printing: Westland Printers

  • State and Trends of the Carbon Market 2012 1

    List of abbreviations and acronyms

    ACCU Australian Carbon Credit Unit

    AAU Assigned Amount Unit

    AAUPA AAU Purchase Agreement

    AB 32 Global Warming Solutions Act of

    2006 Assembly Bill 32

    ACR American Carbon Registry

    ADB Asian Development Bank

    aEUA Aviation European Union Allowance

    AfDB African Development Bank

    AWG-KP Ad Hoc Working Group on Further

    Commitments for Annex I Parties

    under the Kyoto Protocol

    AWG-LCA Ad Hoc Working Group on Long-

    term Collaborative Action

    BC British Columbia

    BOCM Bilateral Offset Credit Mechanism

    CAPEX Capital Expenditures

    CARB California Air Resources Board

    CAR Climate Action Reserve

    CCA California Carbon Allowance

    CCFE Chicago Climate Futures Exchange

    CCS Carbon Capture and Storage

    CCX Chicago Climate Exchange

    CDM Clean Development Mechanism

    CER Certified Emission Reduction

    CFI Carbon Farming Initiative

    CH4 Methane

    CME Coordinating Managing Entity

    CMM Coal Mine Methane

    CMP Conference of the Parties serving

    as the Meeting of the Parties to the

    Kyoto Protocol

    CO2 Carbon Dioxide

    CO2e Carbon Dioxide Equivalent

    COD Chemical Oxygen Demand

    COP Conference of the Parties

    CPA CDM Programme Activity

    CPF Carbon Partnership Facility

    CPM Carbon Price Mechanism

    CPUC California Public Utilities

    Commission

    CP-1 First Commitment Period under the

    Kyoto Protocol

    CRT Climate Reserve Ton

    CU Carbon Unit

    DC Designated Consumer

    DNA Designated National Authority

    DOE Designated Operational Entity

    EB Executive Board of the CDM

    EBRD European Bank for Reconstruction

    and Development

    EC European Commission

    ECJ Court of Justice of the European

    Union

    ECX European Climate Exchange

    EE Energy Efficiency

    ER Emission Reduction

    ERPA Emission Reduction Purchase

    Agreement

    ERU Emission Reduction Unit

    ETS Emissions Trading Scheme

    EU European Union

    EUA European Union Allowance

    EU ETS European Union Emissions Trading

    Scheme

    EUTL European Union Transaction Log

    FY Fiscal Year

    FYP Five-Year Plan

    GCF Green Climate Fund

    GDP Gross Domestic Product

    GGAS New South Wales Greenhouse Gas

    Reduction Scheme

    GHG Greenhouse Gas

    GIS Green Investment Scheme

    GW Gigawatt

    HFC Hydrochlorofluorocarbon

    ICE IntercontinentalExchange

    IFC International Finance Corporation

    IEA International Energy Agency

    IFI International Financial Institution

    IFRS International Financial Reporting

    Standard

    IMF International Monetary Fund

  • 2 State and Trends of the Carbon Market 2012

    IOU Investor-Owned Utility IRR Internal Rate of Return J-VER Japan Verified Emission Reduction J-VETS Japan-Voluntary Emissions Trading

    Scheme JI Joint Implementation JISC Joint Implementation Supervisory

    Committee KM Kyoto Mechanism KP Kyoto Protocol LDC Least Developed Country lCER Long-term Certified Emission

    Reduction LFG Landfill Gas LoA Letter of Approval LULUCF Land Use, Land Use Change and

    Forestry MAD Market Abuse Directive MDB Multilateral Development Bank MiFiD Markets in Financial Instruments

    Directive MOP Meeting of the Parties MRV Measurement, Reporting and

    Verification MW Megawatt MWh Megawatt hour NAMA Nationally Appropriate Mitigation

    Action NAP National Allocation Plan NAPCC National Action Plan on Climate

    Change NDRC National Development and Reform

    Commission N2O Nitrous Oxide NMM New Market Mechanism NPV Net Present Value NZ ETS New Zealand Emissions Trading

    Scheme NZU New Zealand Unit OECD Organisation for Economic Co-

    operation and Development OTC Over-the-Counter

    PAT Perform Achieve and Trade pCER Primary Certified Emission Reduction PDD Project Design Document PFC Perfluorocarbon PIN Project Idea Note PMR Partnership for Market Readiness PoA CDM Programme of Activities RE Renewable Energy REC Renewable Energy Certificate REDD Reducing Emissions from

    Deforestation and Forest Degradation

    REDD+ Extends REDD by including sustain- able forest management, conserva- tion of forests, and enhancement of carbon sinks.

    RET Renewable Energy Target RGGI Regional Greenhouse Gas Initiative RMU Removal Unit sCER Secondary Certified Emission

    Reduction SCF Strategic Climate Fund SF6 Sulfur Hexafluoride SME Small and Medium-size Enterprise tce Tons of Coal Equivalent tCER Temporary Certified Emission

    Reduction tCO2 Ton of Carbon Dioxide tCO2e Ton of Carbon Dioxide Equivalent TMS Target Management System UN United Nations UNEP United Nations Environment

    Programme UNFCCC United Nations Framework

    Convention on Climate Change VAT Value-added Tax VCS Voluntary Carbon Standard VCU Verified Carbon Units VER Verified Emission Reduction WB World Bank WCI Western Climate Initiative YOY Year on Year

  • State and Trends of the Carbon Market 2012 3

    Contents

    List of abbreviations and acronyms 1 Contents 3

    1. Executive summary 9

    2. Introduction: a changing climate 13

    3. European Union Emissions Trading Scheme (EU ETS) 17 3.1 At a glance 17 3.2 An expanded scope for the emissions cap in the EU starting in 2012 18 3.2.1 New gases and assets are integrated into the Scheme 18 3.2.2 Many fewer allowances will be allocated for free 19 3.3 A quick review of the supplementarity limit for offsets in the European Scheme 21 3.4 Did the Durban outcomes change anything for the Kyoto offsets in the EU ETS? 21 3.5 Ensuring the relevance of the EU ETS in the EU’s objectives to curb emissions 22 3.5.1 Many low-carbon initiatives; too many? 22 3.5.2 And then comes a set-aside and its arduous decision process 23 3.6 Infrastructure and market integrity: the importance of being secure 26 3.6.1 Market response: a spot market in dormancy 26 3.6.2 Regulatory response: enhanced registry infrastructure 29 3.6.3 Market oversight review: toward classifying carbon as a financial instrument 30 3.7 EU Allowances: the numbers behind the growing trading volumes 31 3.7.1 The primary EU Allowance market 32 3.7.2 A Shrinking spot market 32 3.7.3 Increasing bilateral trades 32 3.7.4 Who is trading, how, and why they trade 34 3.8 Secondary offsets: smaller figures, similar patterns 37 3.8.1 Myths and facts 37 3.8.2 Futures market with the lion’s share 38 3.8.3 What spreads can tell 38 3.9 Aviation: the polemic new kid on the block 39 3.9.1 Background: 39 3.9.2 Rules and participants: 40 3.9.3 How representative is aviation within the EU ETS? 41

    4. Market instruments under the UNFCCC 45 4.1 Durban climate negotiations and policy evolution 45 4.2 Kyoto flexibility instruments 48 4.2.1 The Clean Development Mechanism 48 4.2.2 Joint Implementation 58 4.2.3 Assigned Amount Units 61 4.2.4 Removal Units 62

  • 4.3 New market instr