Operation of carbon markets cap and trade system Clean Development Mechanism

CHE 543: Green Catalysis Prepared by: Cansu Yass Merve Ayvaz

Submitted to: Prof. Dr. Erhan Aksoylu

Contents

Introduction International Progress Kyoto Protocol Global Carbon Market

Regulatory Carbon Market Voluntary Carbon Market Carbon tax Advantages of Emission Trading Conclusion
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Introduction

Earth System Research Laboratory

Introduction

Putting a price on greenhouse gas emissions is a cornerstone policy in climate change mitigation. It is widely accepted that without price measures, it will be more difficult to meet the Copenhagen Accord goal of limiting temperature rise to 2 C (OECD, 2009). IEA modelling shows global emissions need to be over 50% lower in 2030 than baseline trends (IEA, 2009).
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Internatonal Energy Agency

Introduction

Industrial Revolution

Global Warming Art

Introduction

Energy sector carbon dioxide (CO2) emissions account for two thirds of the worlds total anthropogenic GHG emissions, so are a critical target for reductions.

To meet the goal will require clear, strong and sustained policies so many countries have implemented emissions trading systems (ETS).
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Internatonal Energy Agency

International Progress
The United Nations Conference on the Human Environment (June 516, 1972)
- in Stockholm (Sweden), was the UN's first major conference on international environmental issues. - marked a turning point in the development of international environmental politics.

The United Nations Conference on Environment and Development (UNCED) (June 3 -14, 1992)
- was a major UNs conference held in Rio de Janeiro. - the United Nations Framework Convention on Climate Change(UNFCCC ) is an international environmental treaty produced at the UNCED with the goal of achieving the stabilization of GHG concentrations in the atmosphere at a level that would prevent the climate system.

The Kyoto Protocol (December 11, 1997, .....)

- is a protocol comes after UNFCCC aimed at fighting global warming. The Protocol was initially adopted on 11 December 1997 in Kyoto, Japan, and entered into force on 16 February 2005. -as of September 2011, 191 states have signed the protocol. The only remaining signatory not to have ratified the protocol is the United States.

Kyoto Protocol

The basic requirement of Kyoto protocol is that countries limit or reduce their greenhouse gas emissions. Emission reductions took on economic value by setting such targets. To help countries meet their emission targets, and to encourage the private sector and developing countries to contribute to emission reduction efforts, negotiators of the Protocol included three market-based method thereby creating what is now known as the carbon market. Kyoto mechanisms are:
ETS CDM JI

Emissions Trading System The Clean Development Mechanism Joint Implementation.

KYOTO

United Nations Framework Convention on Climate Change

Global Carbon Market

The worldwide carbon markets can be divided into two segments: the voluntary markets and the regulatory (compliance) markets.
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What is Carbon Market?

The regulated carbon markets, which are regulated by international rules defined in the Kyoto Protocol and includes Clean Development Mechanism (CDM) carbon projects. The voluntary carbon markets, which are unregulated and includes a range of different trading relationships and voluntary project standards. The commodity which is traded in carbon markets is tonnes of carbon dioxide equivalent (tCO2e). Each tonne of carbon dioxide emitted (or another GHG) has an incremental impact on atmospheric GHG concentrations and therefore climate change. One tCO2e is often called a carbon credit and carbon credits are bought and sold in carbon markets in a similar way to other commodities.
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Overseas Development Institute

What are the common features?

The CDM and voluntary carbon markets have a number of common features: Types of actors in markets and projects include:

1. End users/buyers: those that need credits to offset emissions for regulatory or voluntary purposes 2. Suppliers/originators: those that generate and sell credits 3. Intermediaries: those that intervene between originators and end users providing specialist technical skills and familiarity with country contexts (including carbon funds and facilities, traders, brokers, aggregators, and exchanges).

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Overseas Development Institute

Transaction Volumes and Values Global Carbon Market

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Ecosystem Marketplace, New Carbon Finance

Market Volume

The global carbon market grew by 3 percent to 50 billion euros ($70 billion) in the first six months of 2011, 2.7 billion EUA*s exchanged in the first half of the year.

*: European Union Allowance Unit of one tonne of CO2

Thomson Reuters Point Carbon

Regulatory Carbon Market, Clean Development Mechanism

The CDM is one of the flexible market mechanisms regulated under the Kyoto Protocol, which allows Annex 1 (developed) countries to meet their emissions targets by implementing reduction projects in non-Annex 1 (developing) countries

Credits which are generated from CDM projects are referred to as Certified Emission Reductions (CERs). The CDM has a standard seven-stage project cycle for all projects in order to ensure high standards and reduce investment risks.
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Overseas Development Institute

CDM Cycle
in order to ensure high standards and reduce investment risks

1. Identifying a promising project activity according to an approved methodology 2. Obtaining host country approval from a Designated National Authority (DNA) 3. Validation by a third party Designated Operational Entity (DOE) 4. Registration by the CDM Executive Board under the UNFCCC 5. Implementation and beginning the operational phase with periodic monitoring 6. Monitoring results are verified by an independent third party 7. Carbon credits issued by the United Nation

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Overseas Development Institute

Joint Implementation

Joint implementation (JI) is a project-based mechanism by which one Annex I Party can invest in a project that reduces emissions in another Annex I Party, and receive credit for the emission reductions or removals achieved through that project. The unit associated with JI is called an emission reduction unit (ERU). The emission reductions or removals resulting from the project must also be verified by an accredited independent entity in order for the Party concerned to issue ERUs.

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United Nations Framework Convention on Climate Change

The European Unions Emissions Trading System (EU ETS)

The EU ETS is a classic cap-and-trade system. However, it also contains some significant design differences from those reflected in cap-and-trade systems for other emissions that have been implemented in the U.S.

The common features are that: 1) An absolute quantity limit (or cap) on CO2 emissions has been placed on some 12,000 emitting facilities located in the European Union, 2) Tradable allowances have been distributed to these facilities (typically for free) in an amount equal to the cap, and 3) These facilities must measure and report their CO2 emissions and subsequently surrender an allowance for every ton of CO2 they emit during annual compliance periods.
The primary differences from U.S. experience with cap-and-trade mechanisms relate to how the cap is set, the process for allocating emission allowances, banking and borrowing provisions, the monitoring, reporting, and verification procedures, and the linking or 17 Massachusetts Insttute of off-system provisions.

Trading Volumes in the Trail Period

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Point Carbon

Voluntary Carbon Market

As the name implies, the voluntary carbon markets include all carbon offset trades that are not required by regulation.

The voluntary carbon markets themselves have two distinct components: the Chicago Climate Exchange (CCX) , which is a voluntary but legally binding cap-andtrade system, and the broader, non-binding Over-theCounter (OTC) offset market.

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Ecosystem Marketplace, New Carbon Finance

Standards in the Voluntary Carbon Markets

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Ecosystem Marketplace, New Carbon Finance

The Chicago Climate Exchange (CCX)

The CCX defines itself as the worlds first and North Americas only voluntary, legally binding, rules-based greenhouse gas emission reduction and trading system. It is driven by a membership-based cap-and-trade system.
Members voluntarily join the CCX and sign up to its legallybinding reductions policy. Like the Kyoto markets, the CCX trades six different types of greenhouse gas (GHG) emissions converted into one common unit denominated in tonnes of carbon dioxide equivalent (tCO2e).
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Ecosystem Marketplace, New Carbon Finance

The Chicago Climate Exchange (CCX)

Traded products; Regional Greenhouse Gas Initiative (RGGI) allowances Kyoto Clean Development Mechanism Certified Emission Reduction (CER) credits Climate Action Registry (CAR) Climate Reserve Tons (CRTs) The CCX is owned by the Climate Exchange Plc group of companies, which also includes the European Climate Exchange (ECX), the Montreal Climate Exchange, and the Tianjin Climate Exchange.

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Ecosystem Marketplace, New Carbon Finance

The Voluntary Over-the-Counter (OTC) Market

Almost all carbon credits purchased in this voluntary market originate from emissions reduction projects and are thus offsets. Because this mass of transactions does not occur on a formal exchange, we have labeled it the voluntary Over-the-Counter (OTC) market. The OTC market is driven by pure voluntary and precompliance buyers.

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Pure voluntary buyers purchase credits to offset their own emissions and thus retire their credits immediately upon purchase. Pre-compliance buyers purchase VERs
Ecosystem Marketplace, New Carbon Finance

Historic Values for the Voluntary Carbon Markets

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Ecosystem Marketplace, New Carbon Finance

Credit Price Ranges and Averages by Project Type, OTC 2008

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Ecosystem Marketplace, New Carbon Finance

Transaction Volume by Project Location, OTC 2008

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Ecosystem Marketplace, New Carbon Finance

Credit Price Ranges and Averages by Project Type, OTC 2010

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Carbon Investments.co.uk

How to Access The Market

Companies can access the market to buy allowances to meet their compliance requirements or to sell surplus allowances in several ways:

Trading directly with other companies covered by the system Buying or selling from intermediaries (such as banks and specialist traders) Using the services of a broker to find other buyers and sellers of allowances Joining one of the several exchanges that list carbon allowance products
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Department for Environment, Food and Rural Affairs

Carbon Tax?
Mechanisms to price emissions come in two forms:

Emissions trading; in which the quantity of emissions is fixed, but the price is determined by the market and is therefore uncertain. Carbon taxes; in which the price is fixed but the quantity of emissions reductions is uncertain.

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International Energy Agency

Advantages of Emission Trading

Carbon taxes are potentially simpler and easier to administer and provide clear longterm investment signals, but may be more difficult to set at an appropriate price. Emissions trading have some practical advantages:

The overall cap on emissions ensures environmental objective is achieved Rewards innovation and investment in new technology Trading schemes can be politically more achievable. In both Europe and New Zealand, carbon taxes were proposed and failed before trading schemes were implemented. International alignment of trading schemes rules will be easier than harmonising tax laws.
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International Energy Agency / International Institute for Sustainable

Conclusion

It needs to be acknowledged that emissions trading alone will not solve the climate problem supplementary and complementary policies will be needed.

Emission trading may result in increased local concentrations of emissions.

Development of lowcarbon technologies that will be needed in the coming decades.

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