Global Carbon Quarterly Q3 2009

September 2009 Global Carbon Quarterly Q3 2009
Contents Executive Summary

Executive Summary 1 With the worst of the financial crisis now firmly in the past, politicians may
1. Global developments 2 be forgiven for believing that life will get a little easier. Many however are
1.1. Climate science and finding that managing an economy out of recession was less taxing than the
events 2 decisions they now face on how to tackle climate change – commitments to
1.2. Policy 4 reduce emissions made in the next year will have profound and long lasting
1.3. Outlook for effects on their economies. In spite of the difficulties, governments are
international
negotiations 6
showing some signs of wanting to come to an agreement, but with such
1.4. Long Term Outlook 8
high stakes they are being very cautious and taking their time.
2. Markets 9 Two pre-sessional meetings remain before the Copenhagen negotiations on 7-18 December, but
much work is still to be done on key sections of the draft text. There will certainly be reform of the
2.1. International Market 9
CDM, but the emission targets remain open. These can best be inferred from parties’ unilateral
2.2. Europe 12 actions and statements which taken together would be meaningful. They may not be enough to hit
0
2.3. North America 16 the 2 C temperature increase scientists say we need, but they would certainly lead to a significant
need for new investment and firm carbon prices in Europe, the US, Japan and Australia. Overall
2.4. Australia 19 we see the early signs of a consensus, although it may not fully emerge until sometime in 2010.
2.5. Developing
For this to happen the US has to be in the game and pass its cap and trade bill – or an equivalent
Countries 21
piece of legislation. It is highly unlikely that other developed countries, perhaps with the exception
of Europe, will agree to meaningful reductions in emissions without the US involved a second
time. With health reforms taking up much of the Senate timetable a decision on the bill is now
unlikely this side of Copenhagen. This means that commitments from the other major parties at
Copenhagen are still likely to be conditional with the real hard talking happening in 2010.
India has joined China as a developing country that acknowledges it has a role to play in
combating climate change. Hard emissions targets for these countries are still very unlikely but
increasing emphasis is being placed on sectoral crediting as a means of encouraging them to
invest more in reducing the energy intensity of their economies.
Meanwhile, the existing carbon markets have been remarkably buoyant in the face of the
recession – so much so that we see material risk of a price decline towards the end of 2009.
Figure 1: Carbon price projections from fundamentals

€/tCO2
CERs EUAs US Federal Scheme: Base Case
60
50
40
30
20
10
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
How to subscribe
Source: New Energy Finance
+44 20 7092 8800
1. Global developments
1.1. Climate science and events
This section on climate is a new addition to our GCQ report. We have included it because we
believe it is important for company strategists to understand the scientific information which is
driving climate change policy. Changes in the science, or the way in which it is presented or
perceived could be early indicators of changes in policy direction. We also cover some recent
extreme weather events as we are mindful that politicians also make decisions based on recent
experiences, no matter how irrelevant they may be in the big scheme of things.
There is a growing consensus in the scientific community around the reality of climate change, and
new findings continue to influence the policy debate. The latest developments in climate science and
the public perception of climate change may have a disproportionate impact on policy in the medium
and long term owing to the potential significance of this year’s Copenhagen negotiations.
Awareness in the US was awoken by the Hurricane Katrina disaster in 2005. Whether or not this was
partly caused by climate change, Katrina brought a realisation in the US that dangerous climate
events can be hugely costly even to modern developed countries. In 2006 the Stern Review in the
UK, through its combined review of the science and economics of climate change, substantially raised
the profile of this issue adding momentum to the policy debate.
The past year has been relatively quiet in terms of headline-grabbing climate news, while the global
financial and economic crisis has been a more immediate concern. However, climate developments
have remained sufficiently prominent that the Copenhagen negotiations should retain an urgency that
will be crucial if the negotiating parties are to craft a satisfactory global agreement.
Extreme weather events

Figure 2: Californian forest fires capture media and
Forest and bush fires in 2009 have
public attention
devastated vast tracts of land in Australia,
with some 200 casualties, California and
Greece. A causal link between climate
change and recent years’ fires is tenuous, but
the combination of high temperatures, low
humidity and drought conditions does in
general increase the risk of fires starting up.
Scientists expect the amount of land
destroyed and the frequency of these events
to rise in the years to come.
Climate science
Two conferences in September probed the
latest findings in climate science. The most
widely discussed consequences of climate
change surround the direct effects of rising temperatures, but earth scientists raised the alarm
regarding the potential effects on geology at Climate Forcing of Geological and Geomorpholoical
Hazards in London – increased torrential rainfall may accelerate erosion in countries such as the UK
and the disappearance of ice sheets at the poles causes underwater landslides.
Random fluctuations in At the World Climate Conference in September scientists discussed how decadal variability inherent
world’s climate could mask to the climate system (e.g. the “North-Atlantic oscillation”) could imply a temporary cooling phase
long term climate trends. Will which may take place over the next decade. If observations confirm this hypothesis, support for
politicians be swayed by stringent carbon policy may weaken as politicians respond to present days’ experiences rather than
recent experiences or listen scientific forecasts.
to the scientific forecasters? Figure 3 illustrates the degree of medium-term climate variability that appears to occur in the global
1
climate. This shows that for much of the time the global average temperature may fall over multiple
years, even if global warming is set to force a 4°C rise in the global average temperature by 2100. For
example, the historical temperature record shows that the period from 1975-2008 was subject to an
unprecedented level of rapid warming, but across some long periods the globe actually got slightly
1
The curve marked Typical Climate Variability was generated by an autoregressive model suggested by Mojib Latif, Leibniz Institute of
Marine Sciences, Kiel University, Germany, in his presentation titled “Advancing Climate Prediction Science – Decadal Prediction”.
Strictly no copying, forwarding, shared passwords or redistribution allowed without prior written
permission of New Energy Finance. For more information on terms of use, please contact
© new energy finance 2004-2009 sales@newenergyfinance.com. Copyright and Disclaimer notice on page 23 applies throughout. Page 2 of 23
cooler (1977-1985, 1981-1989, 1998-2008).2 Brokering a global agreement to tackle global warming
is recognised as a huge challenge. The issue of decadal climate variability could make it all the more
difficult if the media and public perceptions latch onto medium-term phenomena that suggest an end
to the long-term warming trend.
Figure 3: Medium-term climate phenomena could mask the long-term trend

Realistic global average temperature variability (°C)
5
Typical climate variability
4
Trend
3
-1
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Geoengineering
Geo-engineering research Also in September the Royal Society released a report examining technical solutions that may be
continues but supporters available if governments fail to muster sufficient emissions reductions to keep the increase in
admit it is no substitute for temperature below 2ºC. The report highlights geoengineering approaches to counteracting the effects
reducing emissions at source of climate change.
Most of the scientific community has tended to view geoengineering with scepticism, but this report
signals a constructive attitude towards the field and a desire from the Royal Society to be fully
involved in the assessment and development of realistic options. A distinction is made between
solutions aiming at reducing the incoming solar radiation through reflection techniques (Solar
Radiation Management) as opposed to Carbon Dioxide Removal (see Figure 4). The two approaches
could both be applied to reduce global temperatures, but they act on different time scales and would
interact differently with other aspects of the environment.
The techniques for Solar Radiation Management include injecting small reflective particles into the
upper layers of the atmosphere and mirrors in space. These would involves large risks of adverse
interactions with other parts of the climate system and the environment, although they have the
advantages of potentially rapid implementation and should affect temperatures in a short time.
On the other hand, Carbon Dioxide Removal aims at lowering the concentration of carbon dioxide in
the atmosphere to tackle the cause of climate change directly. This has yet to be demonstrated at
scale, would affect climate change more slowly than Solar Radiation Management and none of the
new approaches to Carbon Dioxide Removal competes on a per-tCO2 cost basis with abatement
measures usually discussed on the mitigation side. However, in principle Carbon Dioxide Removal
techniques could be funded by a carbon price if technical advances made them preferable to reducing
emissions.
The report’s main conclusion is that geoengineering is no substitute for emissions reductions at the
current time, although government policy should directly fund further geoengineering research
because these techniques could be valuable in the future. “Parties to the UNFCCC should make
increased efforts towards mitigating and adapting to climate change and, in particular to agreeing to
global emissions reductions of at least 50% of 1990 levels by 2050 and more thereafter. Nothing now
known about geoengineering options gives any reason to diminish these efforts.”
2
See D. R. Easterling and M. F. Wehner, “Is the climate warming or cooling?”, Geophysical Letters, vol. 36, L08706.
Figure 4: Geoengineering to avoid large temperature changes

(a) Carbon dioxide removal (b) Solar radiation management
Increase radiation reflected
Afforestation biomass / (space-based SRM)
CO2 capture biomass fuel with carbon
from ambient air sequestration / Increase radiation reflected
enhanced weathering Incoming (cloud albedo SRM)
solar
radiation
soil
Atmosphere
Iron fertilisation /
Increase radiation
enhanced weathering reflected
Carbon (surface-based SRM)
storage EARTH
sea bed
Carbon dioxide removal Solar radiation management (SRM)

Source: New Energy Finance, Royal Society
1.2. Policy
Some form of agreement in International negotiations at Copenhagen in December may produce a global agreement that
Copenhagen is likely but it significantly shapes international policies to tackle climate change through to 2020 and beyond. At
will be nowhere as robust this stage in the negotiations our view is that some form agreement will be reached outlining a
and as stringent as the framework for binding caps on developed countries’ emissions. However, the route to agreement will
scientists would like not be smooth and the level of 2020 reductions will be less ambitious than the levels that scientists
have been calling for.
Developed countries converge
Developed countries have The outlook for a global agreement looked bleak following limited progress at last year’s December
much to gain from a stable talks, but there have been positive signs throughout 2009. Despite the global financial crisis, and in
international policy some cases as a direct consequence of it, developed country governments have made clear
background. statements of intent on climate change mitigation including substantial shares of their stimulus
packages being directed at the “green” sector. Proposals for legislation on new domestic climate
change initiatives are being debated in parliaments including the USA, Japan, Australia and South
Korea. Convergence in developed countries’ positions on the issue partly reflects their aims to
compete in green technology leadership over the coming decades. Assuming that material emissions
reductions are finally mandated internationally, those showing early ambition are likely to benefit
disproportionately in the long run from the business opportunities associated with this transition.
With the US likely to be the most influential negotiating party, the Democrats’ drive towards domestic
climate legislation should sit easily alongside international targets. However, Obama’s health bill has
delayed developments in Congress, while the relative absence of a dramatic weather event the US in
2009 has contributed to a reduced sense of urgency on this issue in political circles and some parts of
the press. Domestic US legislation may not be passed before Copenhagen, so a degree of
uncertainty will hang over Obama’s team’s approach in December. Nevertheless, the latest amended
form of the Waxman-Markey bill should be the blueprint for the US position at Copenhagen.
Similarly the legislation for Australia’s Carbon Pollution Reduction Scheme (CPRS) has been beset
by delays as the governing Labour Party struggles with a less than dominant position in the Australian
upper house. However, it still seems likely that the CPRS bill will pass in November, removing
ambiguity from Australia’s negotiating position just in time for Copenhagen (see Section 2.4).
Political change is now also underway in Japan where the newly elected government of the
Democratic Party of Japan (DPJ) will strengthen Japanese emission reduction efforts compared to
the currently stated 2020 target of an 8% reduction on 1990 levels. The DPJ ran on a manifesto of
ambitious green policies including a commitment to a potential 25% reduction on 1990 levels by 2020
(30% on a 2005 baseline) The election pledge would put Japanese ambition on a par with the
demands of developing countries. The full 25% target may not necessarily be adopted, It is likely that
international credit purchasing would satisfy a large proportion of the 25% target as it otherwise
requires Japan to reduce emissions by a third in eleven years in an efficient industrial economy which
has exhausted the majority of cheap abatement options. In any event, Japanese commitment to the
25% target (or other ambitious targets) will be contingent upon agreement at Copenhagen. This may
be similar to conditions attached to the EU’s moving to a 30% target on 1990 levels and Australia
moving to 25% on 2005 levels by 2020.
Developing countries demand stiff targets for others
There is still a perception There remains no prospect of developing countries accepting quantitative caps on emissions in the
among developing countries near or medium term. The dominant perspective among their representatives is that net reductions
that they could be the losers should occur at the global level by means of ambitious cuts from developed countries while
at international climate if they developing countries’ emissions continue to grow.
fail to secure recognition of Bridging the gap between the positions of China and the US may be the key to a broader global
their needs for further agreement. At the current time there is a material difference between them, although a Memorandum
economic development. of Understanding signed on 28 July stated the desire for cooperation on support for clean energy
technologies and a redoubling of efforts to find common ground for a deal at Copenhagen. The US is
unlikely to be able to compromise on its own emissions reduction targets; a repeat of the Kyoto
debacle where Congress failed to ratify the treaty would be a major embarrassment. However, it
seems more probable that China’s initially extreme position has been chosen as a platform for
bargaining to gain on other issues. China may compromise on the absolute level of caps.
Developing countries are reluctant to adopt specific targets themselves
The good news is that The acknowledgment that some form of coordinated action is required marks a change in the stance
developed and developing of India and chimes with other statements from China that developing countries have a responsible
countries alike agreed to the role to play in negotiations. This change in developing country attitudes is reflected in recent
principle of limiting global statement by India’s Prime Minister: “We are not able to undertake quantified emission reduction
warming to 2°C or less at a targets but we are also quite clear that as citizens of the global economy we have an obligation to do
meeting of the Major our bit to control emissions and therefore all countries have an obligation to be prepared to depart
Economies Forum (MEF) in from business as usual.
July... South Korea is the first country considered as developing under the Kyoto Protocol to announce a
quantified emission reduction target for the second commitment period. On 4 August President Lee
Myung-bak outlined three possible emission reduction targets, allowing for a 21%, 27% or 30%
departure from projected BAU growth in 2020.
Targets are not the only issue
Developing countries may be brought to the table by clauses of an international agreement that
promise large capital flows from developed to developing economies. The existing Clean
Development Mechanism (CDM) is one such initiative, where emission reduction projects in
developing countries can qualify for Certified Emission Reductions (CERs) that are then bought by
developed country actors as contributions to their own emission reduction targets. Multiple aspects of
the CDM are up for discussion.
The Copenhagen negotiations will include talks around new sectors that may be included under the
CDM. There is broad support for CER crediting for Carbon Capture and Storage (CCS) projects in
developing countries. More contentious topics will be whether or not to include forestry projects and
new nuclear power. While parties are divided on these points (see Figure 5) they are of relatively low
importance with respect to whether or not a global agreement can be secured.
Figure 5: Support for inclusion of new sectors under the CDM

Japan
USA
EU
India
China
Forestry CCS Nuclear
The larger question around international crediting is the absolute volume of credits that may be
purchased by developed countries and the levels of other financial aid to support climate change
mitigation and adaption flowing from developed to developing countries.
In a position paper released in May, China demanded between 0.5-1% of developed country GDP to
finance adaptation, mitigation and technology transfer in developing countries. More recently the
People’s University of Beijing published a study that material abatement in China could cost as much
as $438bn/yr by 2030 or 7.5% of GDP. India is yet to apply a specific value to the financial assistance
required but is adamant that funds should be publically provided and not reliant on the revenue
generated through the carbon market as is advocated by developed economies. Similarly, African
leaders agreed in August to ask for a substantial level of aid at Copenhagen in consideration of costs
to Africa incurred by global warming, for which Africa itself has almost no responsibility. The African
negotiating position will demand a net $67 billion in annual payments from developed countries.
Figure 6: Financial assistance
% of developed countries’ GDP
Japan
USA
EU
China
India
Private 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
funding
1.3. Outlook for international negotiations

Across OECD countries the Considering the similar levels of emissions reductions relative to the recent 2005 baseline, this looks
past year has seen a shift an increasingly promising basis for agreement at Copenhagen among developed countries. That said,
towards unilateral actions to negotiating parties are leaving it late to find common ground. The UN led climate talks in Bonn on 14
impose stringent caps on August focussed on identifying areas of convergence and divergence rather than securing
domestic emissions. agreement. Parties have yet to enter “negotiating mode” despite the looming deadline at
Copenhagen. If material progress is not made starting with the next round of talks in Bangkok, the
likelihood of a meaningful agreement in Copenhagen will fall to a critical level.
Table 1: Upcoming talks and meetings

Date Meeting Location Host Overview Projected outcomes
th
28 Sep-9 4 UN-led Bangkok, UNFCCC In these pre-sessional Parties could make methodological
Oct climate talks Thailand meetings, negotiators aim and administrative headway on CDM
for AWG-LCA to produce and approve as reform, new technologies and new
and AWG-KP much draft text as possible sectors (aviation and shipping).
ahead of COP15 in Discussions will touch on the core
th
2-6 Nov 5 UN-led Barcelona, UNFCCC Copenhagen. These components of a post 2012
climate talks Spain meetings are likely to agreement, though movement on
for AWG-LCA focus develop lay out targets and financial assistance is
and AWG-KP possible proposals and unlikely ahead of Copenhagen.
options, but little material
decision making is
expected.
7-18 Dec COP15 and Copenhagen UNFCCC The official deadline for Success at Copenhagen is largely
meetings for , Denmark agreeing a post-2012 dependent on what the US can offer
all subsidiary agreement to replace and whether China agrees. If the US
bodies Kyoto is unsuccessful in passing any
domestic legislation before
Copenhagen, parties may just sign a
watered down agreement with
numbers to be negotiated later
Source: New Energy Finance, various
Figure 7 illustrates key parties’ current negotiating positions on axes of targets and volumes: The
points for developed countries indicate their own reduction targets and their positions on the volume
of additional reduction credits that should be allowed in an international scheme. Points for
developing countries’ indicate their demands for reductions from developed countries. The circles are
sized based on country GDPs, indicating the relative weight that each negotiating party brings to the
table, with the red circle (“Copenhagen”) showing the weighted average position. Directions of
expected movement ahead of Copenhagen are indicated with dotted arrows.
Figure 7: Major party positions Developed country target (% on 2005 baseline)
48%
Carbon price (€/t)
44%
100 -120
40%
IN CHN BR MX
36% 80 -100
32% 60 -80
28% 40 -60
24%
Copenhagen 20 -40
20%
0 -20
US JPN 16%
EU
(14%) (15%) (14%)
12%
AU
8%
4%
RU
0%
Large volume of Low volume of
cheap credits International supply of credits expensive credits
1) The stand-off on reduction targets between developed and developing countries is most likely to
be resolved by concessions on other issues.
The most important feature of a post 2012 agreement will be the developed country emission
reduction targets. Figure 7 shows the range proposed by major negotiating parties. Developing
country positions have shown signs of softening, while developed countries have relatively little room
for manoeuvre. Concessions on other issues may buy the support of developing countries.
2) The 2020 targets of developed countries’ from a 2005 baseline appear to be converging.
There appears to be a growing agreement on the part of developed countries on reduction targets to
2020 in the 13-17% range on 2005 emissions, while targets for Europe, Australia and Japan could be
even higher if a more comprehensive agreement involving developing countries is reached.
3) Financial support for developing countries may be the key area for concessions.
The main area for concessions appears to be financial assistance for developing countries, on which
point the parties’ negotiating positions are currently widely distributed. The amount and source of
financial assistance will prove critical particularly in terms of softening China’s position in negotiations.
Indeed, China’s initially extreme position on targets may have been taken to allow for “compromise” in
future rounds. Financial assistance sourced from public funds is the area where developed countries
can give ground. EU finance experts maintain that developing nations will need €100billion/year to
fund mitigation activity and a further €20-50billion to fund adaption. However, they are yet to confirm
the role that the EU will play in providing said funding.
4) The main determinant of the carbon price post-2012 is the supply of international offsets ..
A high volume of international credits at low prices would clearly reduce costs by reducing the volume
of abatement that is actually undertaken locally in developed countries. The other implication of a high
volume of international credits would be relatively lax domestic policies in the developing world,
because emissions reductions may only qualify as offsets if they are additional to projects stimulated
by other policies.
5) … with no-lose sectoral targets to become the preferred mechanism, perhaps from 2015.
The additionality requirements of CDM continue to pose problems for developing countries (see
Section 2.5) where domestic initiatives risk reducing revenue from international carbon crediting.
Equally, representatives of developed countries are concerned that to date some “certified reductions”
under the CDM may not in fact have been genuine. Therefore sectoral targets appear the preferred
mechanism for both developed and developing countries in the medium to long term. However,
dealing with the details on this complex topic means that sectoral targets are still unlikely to be in
place ahead of 2015, even if agreement on this issue is reached at Copenhagen.
1.4. Long Term Outlook

Carbon market mechanisms New Energy Finance’s Global Carbon Strategy Report presents four scenarios for carbon market
seem central to future development, demand for abatement, carbon prices and economic impacts around the world on a
mitigation efforts as the timescale running to 2050. The four scenarios considered of strategic interest are:
global economy recovers 1) Global Greenery – A world in which governments focus on climate change mitigation taking
along with a general mood of action coordinated at the global level.
internationalism
2) Coal Rules – A world in which energy concerns are focused more on security of supply than on
climate change, although what action still occurs is coordinated at the global level, with support
for clean coal being a particular feature.
3) Clean Tech – Governments are motivated to tackle climate change but globally coordinated
action proves difficult to broker. Instead there is a focus on support for technology transfer and
maximising the generation of “green collar jobs”.
4) Energy Autarky – Energy is used as a political weapon in a more nationalistic fractured world with
pressures on security of supply, as the need to reduce emissions moves down the political
agenda.
Detailed descriptions and analysis of these scenarios is provided in the Global Carbon Strategy
Report. In terms of the volume of abatement forced on by carbon markets, the highest demand for
abatement arises under Global Greenery, followed by Coal Rules, Clean Tech and Energy Autarky in
that order. Looking forward from Q3 2009, we have identified a set of signposts that indicate the
scenario towards which the real world seems headed (see Table 2).
Table 2: Scenario signposts

Global Greenery Coal Rules Clean Tech Energy Autarky
Meaningful agreement in Security of supply issues No deal in Copenhagen Surface temperature rise
Copenhagen (Middle East unsettled due to disengagement of not driven by GHG levels
Modest oil and gas supply of fuel) USA and China from the Loss of faith in climate
prices (stability in the International agreement process change
Middle East) Commodity boom No focus on forestry Middle East unrest
America joins global China massive boom Desire for local green Supply shock /
agreement jobs is strong commodities bubble
Developing world willing
Renewable energy costs to participate Increase in local adverse Weak economy
don’t fall very rapidly effects – issue with local
Acknowledgement that SOX and NOX pollution Concerns about
Significant environmental climate change is a competitiveness vs Asia
events to spur public global issue
support Primary focus on
economy and Jobs
Strong US leadership
International default on
Fast economic recovery emissions reduction
Developing countries on
sectoral targets
A meaningful agreement seems likely at present, either at Copenhagen in 2009 or in 2010 (already
shaped by the Copenhagen negotiations). Hence scenarios based on globally coordinated action
(Global Greenery and Coal Rules) seem most relevant.
Differentiating between these two scenarios, the wider states of the economy in general and energy
commodity markets in particular will be important. The economic recovery now looks to be
progressing at a rate that would have been considered optimistic 3-6 months earlier. This may push
the world towards the relatively healthy conditions of the Global Greenery scenario, especially if the
US takes a strong line on climate legislation and provides global leadership. However, a fast early
recovery could yet lead to a repeat of the commodities boom of 2008. If this combines with security of
supply concerns the expected direction of movement would be towards Coal Rules, in which coal
emerges as the most important source of energy for the twenty-first century.
2. Markets
2.1. International Market
The Kyoto Protocol, agreed in 1997 and entering into force in 2005, established an international
system for trading carbon emissions. To meet targets, countries that over-emit can either buy
emission permits known as Assigned Amount Units (AAUs) from surplus countries, most notably
Russia and Ukraine, or purchase project-based offset credits known as Certified Emission Reductions
(CERs) and Emission Reduction Units (ERUs).
Market update
The CDM has continued to There continues to be a robust stream of investment into the Clean Development Mechanism (CDM)
grow in 2009 for projects to generate CERs. This comes despite the relatively bearish market at present and the
potentially even more bearish fundamentals. 101 new projects were submitted to the UNFCCC in
August. This signals optimism in the market countering this year’s decline in demand associated with
the recession and rising uncertainty over the future eligibility of CERs in the post-2012 period.
With regard to the pre-2012 period, new project submissions are unlikely to affect the supply of CERs
for the Kyoto compliance period significantly. This is because the project approval process has been
characterised by extremely long delays (see Table 3). Few new projects will be processed quickly
enough to begin issuing CERs before 2012.
Table 3: Average time delays to the CDM project approval process, by year (days)
2005 2006 2007 2008 2009
Validation to registration request 194 210 260 358 374
Registration request to registration 54 75 103 171 196
Registration to first issuance 151 166 319 509 612
As of 1 August a total of 319 MtCO2e of CERs had been issued by the EB to 535 currently issuing
projects. Figure 8 shows issuances to date split by technology, where high global warming potential
projects of HFC, N2O and PFCs continue to dominate, accounting for 77% of issuance to date.
Figure 8: Cumulative CER issuances to date by technology (up to 1 August 2009)

MtCO2e
350
300
250
200
150
100
50
0
2005 2006 2007 2008 2009
Agriculture & Waste Fugitive High GWP Industry Renewable Energy
Limited UNFCCC capacity for processing verification requests delays the entry of projects to the CER
market. In general, there is widespread demand for streamlining of this system. As the delivery
deadline for Dec ’09 CERs draws nearer market participants will become increasingly apprehensive
over delays as they could affect contracted guarantees and credit delivery obligations.
There are also ongoing concerns regarding determining the additionality of CDM projects that are
progressing through the verification process. In the long-run this is more significant than the issue of
delays. Officially, project developers must demonstrate that the emission reductions from their CDM
projects would not have been achieved in the absence of revenue from selling CERs. The challenges
in this area are highlighted by the recent suspension of SGS UK for non-compliance with CDM
procedures, echoing the temporary suspension of the Det Norske Veritas in 2008.
Such temporary suspensions do not materially change the flow of projects into the CDM in the
medium term once the verifiers are reinstated, but applying the theory of additionality has been
recognised as a weakness of the CDM. This continues to affect CDM investments in developing
countries and remains a regular discussion point at international talks. Indeed, projections of the
supply of CERs have lately been revised downwards due to new domestic initiatives, such as feed-in
tariffs in developing countries, which mean that fewer projects are deemed to be additional (see
Section 2.5).
The August climate talks in Bonn included discussions of country and technology ranking schemes for
CERs, which, once elaborated, may provide a basis for project developers to rank project types
according to their post-2012 eligibility risk.
In general, aside from the question of eligibility and the type of projects that are awarded credits, the
other main factor in the development of the international market is the level of demand that will
emerge. Optimistic signals in this regard came lately from New Zealand and South Korea both
announcing 2020 reduction targets which boost likely demand for emissions reductions in this period.
Alongside the CDM, the Joint Implementation (JI) continues to see far lower activity than the CDM.
Developers can engage with JI to generate Emission Reduction Units (ERUs) from activities within
Annex I countries, which have similar value to CERs. However, we project the total number of ERUs
that may be issued by 2012 at around 213 MtCO2e, considerably below the number of issuances that
have already occurred in CDM.
Prices and volumes
The Dec-09 CER market moved sideways from the close of July into the first three weeks of August,
trading at an average of €12.6/t, although it gained some ground from 17 August to hit a 7 month high
of €13.4/t on 24 August. Gains in the CER market have largely tracked EUAs.
Figure 9: Historic CER prices and volumes

€/tCO2 MtCO2
30 Daily total CER volume CER (Dec09) 10
9
25
8
20 7
6
15 5
4
10 3
5 2
1
0 0
Nov
Jun
Jun
Jul
Jul
May
Jan
May
Aug
Aug
Oct
Apr
Mar
Apr
Sep
Dec
Feb
2008 2009
Source: ECX
Outlook to 2012
CER prices may have further 1) Thus far carbon markets have been fairly resilient in the face of recession, but the bears are still
to fall in the near-term growling in the background.
Fundamentals remain bearish for the Kyoto period as the recession has slashed emissions in the EU
ETS, which is the main demand centre for CERs (see Section 2.2). Although CER prices are far
below their 2008 levels, we continue to see substantial downside risk in the next couple of years.
Government interventions such as the Chinese price floor may be insufficient to stabilise prices in the
event of short-term downward run.3
3
China’s National Development and Reform Commission has sought to provide a floor for CER prices by withholding approval from
projects where a primary CER purchase agreement is not secured at a price of at least €8/tCO2e.
2) In the immediate future, CERs are vulnerable to the market for “hot air”.
Those nations holding long AAU positions, primarily in Central and Eastern Europe are facing
extremely challenging fiscal conditions, which has increased their desire to raise funds through the
sale of these surplus credits. AAU trades or “hot air” are not viewed favourably since they mostly arise
due to over-allocation of emissions for the Kyoto period rather than due to additional emissions
reductions. However, there are likely to be further AAU deals following those reported in our Q2
Global Carbon Quarterly, which restricts the likely extent of sovereign demand for CERs.
3) Increasingly the international carbon market is a space for strategic investors with a medium or
long term outlook.
Our near-term bearishness reflects the likely delay to much known demand to the post 2012 period.
However, developments over the past year still point at the international market playing a larger role
in the future with new demand centres likely to emerge. Recognition of this situation is demonstrated
in the healthy flow of ongoing CDM investment as the market continues to grow, albeit at a slower
pace than in the last couple of years.
Outlook beyond 2012
In the long term international 1) There will be many reforms to international carbon credits, probably including no-lose sectoral
crediting will remain important targets for developing countries.
All sides want reform of international crediting. CDM project developers seek clarity on project risk
and shortening the delay between operations and issuance of credits. At the same time politicians
and many buyers seek more direct assurances that the credits they pay for represent real
contributions to reducing global emissions. Thirdly, parties in developing countries seek a system in
which they are not penalised for introducing domestic policies. No-lose sectoral targets involve
issuance of credits via developing country governments to companies in sectors where targets for
emissions reductions have been exceeded. The targets are “no-lose” since missing the target incurs
no penalty. No-lose sectoral targets seem address concerns on all sides of the negotiations, so we
expect some form of no-lose sectoral targets mechanism to be introduced for the post-2012 period.
2) US policy is a mixed bag for the international carbon market.

The most likely scenarios for the US now all involve wide coverage of cap-and-trade schemes. These
will allow substantial volumes of offset credits because scheme designers seek to avoid high prices
while introducing targets that are ambitious in view of the relative lack of US effort since 1990.
Alongside international credits the US will allow large volumes of domestic credits, mostly from
agriculture and forestry schemes. The US should therefore ensure that the international market
remains viable, but it will not drive sufficient prices to go beyond the low-hanging-fruit of abatement in
developing countries.
Outlook for international carbon prices
In the near term the outlook This bearish outlook is because data revealing the full extent of the decline in industrial output and
for prices has become slightly consequent falls in emissions have emerged gradually throughout the year, even while there are now
more bearish since Q2. signs that economic recovery may already be underway in some countries. Additionally, Japanese
domestic policies seem to be reducing emissions demand as they work towards their 15% domestic
reduction target. Alongside the EU ETS, the Japanese government is one of the main sources of CER
demand in the near term.
In the longer term demand from US cap-and-trade schemes – whether federal or regional – is likely to
be by far the largest source of demand volume towards 2020. However, the US government is
preoccupied with minimising the cost of compliance for participants in order to gain sufficient support
to pass their proposal (see Section 2.3). Hence prices are unlikely to rise dramatically as the US
favours relatively large volumes of cheap domestic offsets or forestry credits (both domestic and
international). Therefore, in our base case view of the CER market we project a gradual rise in prices
to roughly €16/tCO2e in 2020.
Figure 10: Projected CER prices and supply

€/tCO2 MtCO2
18 Projected CER supply CER price projections 500
16 450
14 400
350
12
300
10
250
8
200
6
150
4 100
2 50
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: ECX
2.2. Europe
The EU Emissions Trading Scheme (EU ETS) commenced in 2005 covering power stations and large
industrial installations in Europe including almost 50% of GHG emissions in the EU. Currently the EU
ETS covers around 2.1bn tonnes of emissions annually. Participants must submit allowances
matching their emissions. Mostly EU Allowance Units (EUAs) are used, although a small volume of
CERs can also be submitted for compliance. Due to the size of the scheme, the EU ETS is currently
the main source of demand for CERs. Phase I from 2005 to 2007 laid the groundwork by showing that
emissions could be accurately measured and recorded, although it did not drive material emission
reductions. Phase II of the EU ETS from 2008 to 2012 could drive larger emissions reductions,
because the caps are below the trend in emissions based on accurate historic data.
Market update
The market for EUAs has With the key features of the EU ETS already set for the 2012-2020 period, developments in this
recovered surprisingly market in 2009 have been less focused on policy and more on basic supply and demand
strongly fundamentals. However, the EUA market continues to be dominated by uncertainty. Since February
the market price has recovered to a level higher than most analysts believe is supported by
fundamentals. There are various stories in the market aiming to justify the current level.
One theory is that the market could be supported by forward hedging of carbon allowances by utilities
to back up forward power sales. According to the theory, utilities may be purchasing large volumes of
EUAs that have already been issued to fully hedge power trades for later periods where there is a
shortage of counter-parties for the corresponding EUA vintages. In theory, this could lead to an
artificial shortage of EUAs. However, analysis of this theory suggests that utilities’ normal hedging
activities are insufficient to push market prices much above fundamentals. Indeed, forward auctioning
of post-2012 EUAs begins in 2011 and should be sufficient to eliminate any material effect that might
otherwise have occurred.
Another observation is the greater correlation between EUA movements and equities during H1 2009,
as the EUA-gas correlation collapsed. The recovery in EUAs resembled a similar recovery in equities,
reflecting generally optimistic sentiment. However, gas has not risen in line with other markets and
throughout 2009 evidence of the scale of emissions reductions caused by the recession has
continued to grow, so arguably the extent of the recovery in EUA prices may not be rational.
The application of EU ETS policy on New Entrant Reserves (NER) has also provided some support to
the EUA market in the near term, as NER that is not allocated could in principle reduce the supply of
EUAs. However, the withheld allowances are extremely unlikely to change the fundamentals,
because member state governments are expected to auction any remainder for revenue. In fact, the
latest CITL data show that 187 MtCO2 of NER has already been allocated. New Energy Finance
analysis suggests that most of the NER will be allocated by 2012; this area of uncertainty should
shrink over the next 18 months (see Figure 11). However, this would still leave a substantial volume
(some 243 MtCO2) being auctioned towards the end of Phase II, which might produce a downward
price shock if market participants have not anticipated this supply being made available.
Figure 11: Cumulative issuance of NER if allocation continues at current rate

MtCO2
Total Phase II NER = 573
+243
22 330
44
66
110 88
2008 2009 2010 2011 2012 Total Phase II
Source: CITL, New Energy Finance
It will be critical for EUA prices throughout Phase II to understand to what extent EU ETS participants
will bank EUAs into Phase III. In particular, the action of industrial companies that may not actively
engage with the scheme is a source of uncertainty. The majority of industrials are long EUAs (their
BAU emissions are in many cases far below their allocations). If they horde allowances far into Phase
III towards 2020 this could have the effect of withholding from the market a substantial fraction of the
entire EU ETS cap (see Figure 12).
Figure 12: Total industrial sector BAU emissions (excluding aviation)

MtCO2e
1,200 BAU emissions Phase II allocation Phase III allocation
1,000
800
600
400
200
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
We expect steel to be the first major industry sector to emerge from the economic recession, albeit at
a slow pace until 2010. Steel production from European works was on an upward trend throughout
June-August according to the World Steel Association. The recovery in steel production may soon be
boosted by the large government spending programmes put forward at the beginning of 2009 to
tackle the economic recession. The cement sector, by contrast, is likely to remain sluggish in the
remainder of 2009 and 2010 because of the weak state of some of Europe’s biggest construction
markets. This includes Spain, where a housing bubble in residential buildings burst in late 2007, and
the UK, where house prices appear even now (i.e. September) to have barely stabilised. We estimate
that cement and lime production will decrease by 25% in 2009, not recovering to its 2008 levels until
2012 at the earliest.
Prices and volumes
In early June EUAs dipped on rumours that the recovery in prices had gone too far. The rumours of
over-valuation have remained but EUAs recovered in the summer months, hitting €15.4/tCO2 on 21
August, the highest closing price since 11 May 2009.
Figure 13: Historic EUA prices and volumes

€/tCO2 MtCO2
35 Daily total EUA volume EUA (Dec09) 40
30 35
30
25
25
20
20
15
15
10
10
5 5
0 0
Nov
Jun
Jun
Jul
Jul
May
May
Jan
Aug
Jan
Aug
Oct
Mar
Apr
Mar
Apr
Dec
Feb
Sep
Feb
2008 2009
Source: ECX
Outlook to 2012
1) Phase II of the EU ETS is a more resilient market than Phase I …
Following the successful emissions measurement and verification exercise in Phase I from 2005 to
2007, the Phase II caps were carefully calibrated to levels that under “normal” circumstances would
have begun to force emissions reductions within the EU ETS. Unlike in Phase I, the rebound in prices
from February 2009 was able to occur partly because current EUAs are bankable into later periods so
there is a good chance that they will eventually be needed at some time in the future. Indeed, the
market has survived the worst financial crisis in a generation, one of the outcomes of which may
actually have been to increase industrial engagement with the market – and hence boost liquidity – as
some industrials traded EUAs for the first time in spring to ease their cash-flow situations.
2) … but the market, characterised by chaotic trading activity, is by no means mature.
Since February the EUA market has been infected with optimism emanating from equities. However,
for most of this period developments in EUA fundamentals have been bearish. Several benchmark
coal-gas fuel-switching prices, which were far above EUAs throughout 2008, have dipped below the
EUA price at times in the past quarter. Throughout 2008, European gas contracts had the highest
correlations with EUAs, but this year the correlation with gas has collapsed.
Apparently, traders are searching for patterns to latch on to, with little confidence in whether the
market is under- or over-priced. This reflects the relatively complex dynamics of the EU ETS –
especially the price elasticity of emissions.4 It is to be expected that, with time, experience will
eventually move the EUA price to a level at which traders have greater confidence in the key drivers.
For now, traders’ gut instincts may be just as important as any analytical drivers.
3) The dynamics of banking into Phase III of the EU ETS are key to pre-2012 fundamentals.
A key lesson from Phase I was that there is no need for a carbon price unless emissions would
otherwise be above the cap. However, the current carbon price depends on the expectation of rising
above the cap several years into the future in Phase III.
The 2009 price of EUAs reflects the opportunity cost of taking emissions allowances away from a
war-chest of hoarded allowances that will be of greater value in later years. In other words, the
current price depends on the level of banking into Phase III.
Participants differ in the rationale behind their banking strategies, with some actively banking while
others passively fail to sell their free allocations in Phase II. In both cases, the temptation to improve
cash flow today rather than wait for uncertain returns in several years’ time means that EUA prices
pre-2012 are likely to remain muted.
Outlook beyond 2012
The EU ETS should continue 1) The EU ETS remains a beacon of long-term policy certainty against a chaotic background of
and expand as the EU global developments.
remains the pioneer of In both previous Global Carbon Quarterly reports we highlighted the unparalleled degree of certainty
emissions trading in European regulations. Following the Climate and Energy Package in December 2008, the EU ETS
4
Depending on one’s perspective, this can be described as the “abatement supply curve” or the “emissions allowance demand curve”.
should continue to exist whatever may occur at international talks. The targets are more likely to
tighten than to loosen in what may remain the world’s largest emissions trading block by value all the
way through to 2020.
2) Across Europe momentum continues to build in support of carbon pricing and possible expansion
of the EU ETS.
The EU is set to remain a leader in the implementation of carbon pricing mechanisms. The French
government appears set to impose a new carbon tax on transport and fuel, beginning at a modest
level similar to current market EUA prices and rising to €100/t in 2030 and €200/t in 2050 (if advice of
an independent government committee is followed). The carbon tax should cover sectors not
currently within the EU ETS, most notably road transport. This indicates the technical possibility of
including a wider range of sectors within the EU ETS itself. The French tax would be similar to
Sweden’s carbon tax, which has demonstrated the potential for material emissions reductions while
maintaining healthy economic growth (10% emissions reductions with 50% net economic growth
since 1990). Indeed, it is apt that the Swedish presidency of the EU coincides with Copenhagen; this
may contribute to a relatively ambitious approach at the forthcoming negotiations.
Outlook for European carbon prices
New Energy Finance has a proprietary European Carbon Model for assessing the fundamental price
level for EUAs. In general, we currently see substantial downside risk on EUA prices for the pre-2012
period. Key uncontentious factors in our bearish view are the fall in European emissions due to the
recession and the persistent decline in gas prices from the historic highs of 2008.
However, the level at which we see the fundamental price does also depend on more complicated
assumptions regarding the level of banking and borrowing that may be realistic. Our model is able to
project prices similar to the current market if we assume that the market undertakes sufficient banking
of EUAs to smooth over all of the differences in supply and demand between now and 2020. In this
projection we see some 1.9 GtCO2 of EUAs being banked from Phase II into Phase III, with a total
value in 2012 of some €35 billion.
Our base case view on fundamental EUA prices is more bearish than above, because we do not
believe that the market will produce such a large volume of banking. We see a significant volume of
EUAs, almost 1.0 GtCO2, to be banked from Phase II into Phase III, with a 2012 market value of
around €9 billion. We believe this is a more realistic projection as it makes more sense from a risk
management perspective that such large banking positions are unlikely to be taken on in a market
where the long-term payback is fraught with uncertainty.
Figure 14 shows our base case view on EUA fundamentals. Although we see minimal fundamental
support for material carbon prices before 2013, we do nonetheless expect prices to rise substantially
after that, especially in the second half of the decade.
The current market price is well above our near-term fundamental forecast. It may be that market
sentiment imposes a price floor for practical purposes around the level of €10/tCO2. However, it is
likely that industrial participants may instigate further waves of surplus credit sales in the months
ahead, as many still face tough times with installations either mothballed or running at low output
levels. This is the most likely mechanism by which a downward price correction might occur at some
point in the next couple of years.
Figure 14: Projected EUA prices and EU ETS abatement

€/tCO2 MtCO2
60 900
Projected EU ETS abatement
EUA price projections 800
50
700
40 600
500
30
400
20 300
200
10
100
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2.3. North America

The election of President Obama and a Congress dominated by Democrats heralded sizable shifts in
US policy on many fronts including climate change. With climate change legislation moving at all
levels of government and the US again actively engaging in international climate talks, 2009 could
have seen clarification on the US commitment to reducing emissions including federal cap-and-trade
legislation. Confirmation of the new US position with the passage of federal domestic climate
legislation is now likely to be delayed until early 2010.
Market update
Obama will probably go to The inability of Congress to pass health care reform set back the legislative timeline for passing
Copenhagen without a federal cap-and-trade as the Senate moved its mark-up deadline from 28 September to indefinite.
federal cap-and-trade bill Behind closed doors the Senate is also discussing what is known as “Plan B”, which shelves cap-and-
trade and pursues the energy portion of the bill in light of the November 2010 mid-term elections. The
political window for passing cap-and-trade is narrowing but an early 2010 Senate passage should
leave enough time for a joint Senate and House conference agreement on the final terms of the bill,
after which it must pass both houses again.
The politics of cap-and-trade are more challenging in the Senate than in the House of
Representatives. Gathering the 60 votes necessary for the smooth passage of the bill will be a
challenge. The view of New Energy Finance is that a bill is more likely than not to be passed, but this
will require further softening of the scheme beyond the concessions already agreed in the House: As
many of the Senate swing-voters are key members in relevant Senate committees, we anticipate that
the mark-up will be a good guide to the final bill and it may already be possible to anticipate how the
voting situation will develop. The emission reduction target provided for under Waxman Markey will
probably be softened from a 17% reduction on 2005 levels by 2020 to around 14%.
Most of the swing voters are “Blue Dog Democrats” (i.e. Democratic Senators from traditionally
Republican states) who therefore hold significant clout for the federal cap-and-trade debate – regional
interests override party allegiances for many Senators on this issue. The chief objectives of Blue
Dogs are: i) to maintain agriculture concessions struck in the House; ii) to reduce overall programme
costs; iii) to protect manufacturing and industry from international competition; iv) to improve
allocation apportionment to ensure equitable impacts on states; and v) to increase Carbon Capture
and Storage (CCS) incentives and allocation to coal dependent states.
60 out of 100 Senate votes would be a filibuster-proof majority, without which passage of the bill will
be extremely difficult. Only 43 Senators have so far indicated clear support for the bill. Concessions
on agriculture struck in the House enable the sector to supply offsets while not being subject to
mandatory targets. These concessions evidently need to be maintained by the Senate, and further
concessions across a range of other issues are required if Waxman-Markey is to have any chance of
gaining another 17 Senators to pass the bill within 2009 or even early 2010. 19 Senators (15
Democrats and 4 Republicans) could vote either way depending on concessions. We expect
amendments in five areas may secure smooth passage of the bill (see Figure 15).
Figure 15: How to collect 60 votes in the US Senate

# of Senate Votes
70
+2 60
60 3 +2
3
7
50
43
40
30
20
10
0
expected costs intl. market coal oil & gas 60 votes
competition oversight
1) Costs – Most of the options to reduce scheme costs, such as offset programmes, have already
been exploited to the maximum extent that seems realistic. The remaining options are weakening the
near-term target and increasing free allocations; a price cap is also not out of the question. Many
Senators are concerned that the existing bill has insufficient price controls.
2) International competition – Democratic Senators from rust belt states support a carbon tariff to
protect trade-exposed industry from international competitors not subject to emission caps, e.g. China
and India. A delicate balance must be struck on this matter to avoid international criticism.
3) Market oversight – The Commodity Futures Trade Commission (CFTC) may be charged with
regulating all carbon markets. On the other hand, we expect the Senate to reject the most extreme
proposals to ban all derivatives trading in a federal carbon market.
4) Coal – Most Senators on the fence represent coal dependent states so more CCS funding, in
addition to what is included in the existing bill, is likely to further bolster support for the bill.
5) Oil & Gas – Benefits and incentives to extract recently discovered shale gas deposits may become
essential to gain support from Senators representing states with untapped shale gas reserves.
However, we do not expect concessions on the issue of Arctic National Wildlife Refuge drilling, which
would ensure support from both Alaskan Senators.
Regional programmes
At the federal level, Canada continues to play wait-and-see. However, at the province level, Quebec
passed legislation to implement cap-and-trade by 2012. The legislation enables linkages with other
provinces and regional cap-and-trade programmes under development. Similar legislation in Ontario
is likely to pass in the next few months.
Representatives from the three North American regional programmes met on 23 June to discuss
potential linkages. Together the Regional Greenhouse Gas Initiative (RGGI), Western Climate
Initiative (WCI) and Midwestern Greenhouse Gas Reduction Accord (MGGRA) should cover most of
the economy across 21 US states and four Canadian provinces, representing roughly one third of US
and Canadian emissions. Figure 16 indicates the sectoral coverage and targets of these schemes
and the possible form of a linked programme.
Figure 16: Regional programmes and possible unified programme

Reduction from 2005 levels by 2018 (RGGI) or 2020 (other programmes)
25%
20% Linked
programme
15% RGGI
10% WCI
5% MGGRA
0%
Power + Industry + Res / Com + Transport Sector coverage
There are technical hurdles if these initially distinct schemes are to be linked, but linkage may be
relatively straightforward to achieve politically compared to passing a federal cap-and-trade bill. The
main result of linkage talks is a display of support for cap-and-trade, which lends momentum to the
federal bill passing through Congress. The secondary implication of the talks is that, even if a federal
bill fails, a substantial portion of North America may still be covered by cap-and-trade.
Prices and volumes
The only programme already in operation is the RGGI, in which the cap is higher than expected
emissions for the entire duration of the scheme through to 2018 – a situation which is widely
acknowledged. There are two main reasons for the non-zero price in this market. Many allowances
are auctioned with a reserve price of $1.86/t, and there is an expectation that RGGI allowances may
be eligible for compliance in a future federal scheme. Nevertheless, prices have gradually declined
towards the reserve price since the first trades in August 2008 (see Figure 17).
Figure 17: Historic RGGI prices and volumes

$/tCO2 MtCO2
7 Daily total RGGI volume RGGI (Dec09) 20
18
6
16
5 14
4 12
10
3 8
2 6
4
1
2
0 0
Nov
Jun
Jul
May
Aug
Jan
Oct
Mar
Apr
Dec
Sep
Feb
2008 2009
Source: Chicago Climate Futures Exchange
Outlook to 2012
1) RGGI is likely to remain the only active scheme through until 2012.
RGGI continues to be an interesting learning exercise although the dip in emissions brought by the
recession has reduced the relevance of what was already an over-allocated programme. It would be
highly surprising if material carbon prices were to emerge at any time under the existing framework.
2) The pre-compliance market continues to grow.
US-based landfill gas offsets verified to the Climate Action Reserve (CAR) dominate the pre-
compliance market. Over the summer months New Energy Finance tracked over 2.7MtCO2e of US-
based landfill gas CAR offsets traded on the OTC market for an average of $6.7/tCO2e, 19% higher
than the average voluntary offset price over the same period. Also emerging as a strong pre-
compliance play are North American-based forestry offsets as 0.6MtCO2e traded over the summer
months at $6.8/tCO2e. We anticipate trading activity of US-based methane and forestry related
offsets to continue and any significant movement in prices and volumes is predicated on the
perceived likelihood of Congress passing US cap-and-trade.
Outlook beyond 2012
Despite the chaotic political process, the long-term term outlook for North American carbon policy is
less uncertain than it seems considering the likely medium-term outcomes for business.
1) A federal US cap-and-trade bill is unlikely to be passed this year …

The scope of amendments that are required to garner support for a quick implementation of cap-and-
trade are probably just to broad for a bill to pass this year, especially given the delays that have
already occurred.
2) … but there are indications of the shape a final bill may take ...
Should a federal cap-and-trade bill be passed, we expect a programme starting in 2013 targeting
emission reductions of 14% below 2005 levels by 2020 and 80% by 2050. We project demand for
emission reductions in the region of 612MtCO2e per year by 2020 and 1,706MtCO2e by 2030.
3) … and we expect that it will be passed in 2010, with the main features clear by end-2009.
The Waxman-Markey floor debate should still get underway before the end of 2009, and many of the
necessary amendments may be in place by the end of the year. This is a core piece of Democratic
legislation which will be pushed hard and so should still pass in 2010, though there is plenty of horse-
trading to come.
4) Even if a federal bill fails, we still expect most of North America to be covered by cap-and-trade.
The regional schemes look set to go ahead if Waxman-Markey and all subsequent federal bills fail to
pass. In this case we still expect roughly a third of US states and six Canadian provinces to be
covered by regional schemes soon after 2012, and these are highly likely to be linked. A linkage of
multiple programmes will foster market inefficiencies as state and province emission regulations vary
in application and stringency, and EPA point source regulation will only further complicate regulatory
compliance.
Outlook for North American carbon prices
In our base case for North American carbon prices we continue to model a US federal scheme. The
slight softening of likely scheme design in view of political developments leads us to downwardly
revise our price view, though we still expect a range of €15-20/tCO2 towards 2020 (see Figure 18).
Figure 18: Federal base case: projected prices and domestic abatement
$/tCO2 MtCO2e
25 Abatement projections Price projections 700
600
20
500
15
400
10 300
200
5
100
0 0
2013 2014 2015 2016 2017 2018 2019 2020
2.4. Australia
The Australian Carbon Pollution Reduction Scheme (CPRS) is a cap-and-trade scheme due to
commence in July 2011. The latest proposals involve medium-term emissions targets in the range of
5%, 15% or 25% below 2000 levels by 2020. Compliance participants will need to submit permits
covering their recorded emissions consisting of Australian Emissions Units (AEUs) and/or
international credits. Participants will have unrestricted access to international credits imported from
the CDM and JI, so the upside price risk is less than in other compliance markets, while the CPRS
may be an important demand centre for the international market.
Market update
At the end of the day, On 13 August the Senate voted to block the government’s CPRS bill by a majority of 42 votes to 30.
Australia will implement an This was unsurprising as the Rudd Government holds just 32 of the 76 seats, while both the Greens
emissions trading scheme and the opposition Coalition consisting of the National and Liberal parties had beforehand stated their
intentions to vote the bill down.
Malcolm Turnbull, leader of the Coalition, appears to be in a no-win situation and is struggling to
negotiate safe passage for himself and his party through the government’s climate change agenda.
On the one hand defeat of the CPRS legislation in August means that he cannot oppose the bill again
in the Senate in November without enabling Rudd to dissolve both houses of parliament and call an
5
early general election. Recent polls show the government ahead 57% to 43% on a two-party
preferred basis and Prime Minister Kevin Rudd commanding a 66% approval rating which suggest
6
that an early election could prove painful for the opposition.
On the other hand, Turnbull cannot support the CPRS without risking a challenge to his leadership or
putting the unity of the Coalition in jeopardy which remains divided between those who support
emissions trading in principle and those who are highly cynical of anthropogenic climate change and
the government’s policies to address it.
5
The government can dissolve both houses of parliament and call a general election in an act called a ‘double dissolution’, if the senate
rejects legislation in two sittings at least three months apart.
6
Newspoll 2009, http://www.newspoll.com.au/cgi-bin/polling/display_poll_data.pl, 28 July
Turnbull tried to resolve the situation by appeasing the sceptics while supporting the bill. He declared
his conditional support subject to the following concessions:
 Trade exposed industries to receive full compensation for higher energy costs and a mechanism
to ensure that increases in electricity prices are no greater than comparable countries
 Exclusion agriculture from the scheme and the inclusion of agricultural offsets
 Exclusion of coal mining from the scheme
 Better incentives to encourage voluntary action
 Better incentives to realise the potential of increased energy efficiency
 Implementation of a regular review by an expert independent body, to ensure that the CPRS does
not disadvantage Australian industries and workers relative to America
Since no amendments reflecting these conditions were tabled in the Senate, these points could not
be included in the debate. However, the Coalition is now preparing amendments for the government
to consider when this issue is revisited again in November and we believe that a compromise can be
reached which would see the CPRS enacted before the end of this year.
Rudd has stated that he does not want to call an election, but if Tunbull fails to deliver a united
Coalition in support of an amended CPRS then the government will have little option.
Outlook to 2012
1) An amended CPRS bill will eventually pass and may be in place before Copenhagen.
The question is no-longer if there will be an emissions trading scheme in Australia, but when will the
legislation pass and what will it look like? The Rudd government is willing to compromise further to
get its scheme through, so it is possible that we will see a resolution before the end of the year. This
is likely to mean more free allocations to industry and possibly the inclusion of domestic offsets from
agriculture.
2) Australian power companies are already preparing for the realities of the CPRS.
Initially the CPRS is set for a soft start with a fixed price in 2011/2012. However, power companies
would ideally like to hedge their exposure to carbon price variability in 2012/13 and beyond by
purchasing around 250MtCO2e of allowances forward. However, our analysis suggests that only
approximately 60MtCO2e will be made available through government auction in this period. To
manage this shortfall, power companies wil start to look to acquire allowances from other sources.
The most viable credits are Kyoto period CERs, which are currently available in large quantities, and
offsets from domestic forestry projects.
Outlook beyond 2012
The CPRS outlook beyond 2012 depends substantially on developments in the international market.
CPRS participants are likely to be heavily active in the CDM and other future forms of international
projects beyond 2012 (see Section 2.1.
Outlook for Australian carbon prices
Since market participants can import CERs into the CPRS without limit, the AEU price will be strongly
influenced by the international market. This is particularly potent considering the low cost coal that
drives Australia’s economy. Our current projections suggest that CERs will be such an attractive
abatement option for Australian firms that over 50% of the emission reductions required under the
CPRS cap will be satisfied in this way. This picture could however still shift if large volumes of cheap
domestic forestry credits are mobilised and sold into the market below the CER price point.
Figure 19: Projected CPRS prices and abatement

A$/tCO2e MtCO2e
30 CPRS projected abatement AEU price projections 25
25
20
20
15
15
10
10
5 5
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2.5. Developing Countries

The role of developing countries in carbon markets has primarily been as suppliers of credits through
the CDM on the basis of emission reduction projects that satisfy additionality criteria. Aside from
these projects, representation of developing countries at climate change negotiations continues to be
led by the largest nations, especially by China and India, which are resistant to adopting binding GHG
emissions targets. However, some major steps are being taken by other countries at national level to
implement carbon market instruments. Most notable are the developments in Mexico and Brazil,
where domestic cap-and-trade schemes have been proposed.
Market update
Over the past quarter a further 42 MtCO2e of CERs have been issued, some 54% coming from China
where issuance rates have accelerated, while India, South Korea and Brazil each accounted for 12-
15% of new issuances.
Additionality is a complex Despite the healthy rate at which CERs are being issued for Chinese projects, H1 2009 saw an
issue for developing increased rate of new renewable energy projects in China being rejected by the Executive Board (EB)
countries of the CDM. Various aspects in the assessment of additionality for Chinese renewable energy
projects have been tightened in this time. Firstly, project proposals are being rejected increasingly
where they state fractions of generated power going to the grid for consumption that seem
unrealistically low. For example, for hydro projects the EB seems now to reject any project that claims
to supply less than 85% of generated energy to the grid. Quoting an underestimate can be a way of
downplaying likely revenues, thereby making schemes seem less viable and hence more additional.
Furthermore, in July the National Development and Reform Commission lowered the average grid
emissions factor for 2009 by 11% compared to the 2008 value. Electrical generation volumes from
renewable energy projects are multiplied by the average grid emissions factor to calculate the
resultant CER volumes. The drop is for three main reasons: a change in the emissions factor
assumed for coal plant, an increase in renewables capacity, and the decommissioning of old coal-
fired facilities. This reduces our projection of CER supply from new Chinese CDM projects in power-
generation sectors by 80MtCO2 through to 2020.
Figure 20: Geographical split of CER issuances to date

Others
Mexico 7%
2%
Brazil
11%
China
S Korea 45%
13%
328 MtCO2e
India
22%
Source: UNFCCC
Another factor that may inhibit growth in Chinese CDM from renewable energy is domestic
government support, although one sector unlikely to be penalised is small hydro. China is aiming to
implement small hydro projects at 2GW per year to hit a 75GW target for 2020. Small hydro is
unusually well suited to the CDM as it is easy to find new project opportunities. Domestic feed-in
tariffs improve the economics, but they may be too low for China to keep pace with its targets.
Additional revenue from CDM is therefore a vital revenue stream in this sector.
Generally, China has continued to develop its domestic policies, which will interact with the operations
of Chinese-based projects in the CDM or other future international crediting schemes. Following the
inclusion of sectoral crediting in the international negotiation text, China has accepted that it is likely
to take a greater role in mitigation post-2012 and is willing to consider taking on sectoral targets for
certain sectors. In July it was stated that the government may include carbon intensity targets in the
12th Five Year Plan.
China has passed a climate change resolution which aims to provide a legal basis for fighting climate
change in the country, although a timeline for the resolution becoming law is not yet known. An NDRC
report to the Congress stated that a system for measuring carbon intensity will be established and
exploration of a formal carbon trading exchange for certain industries and regions will begin. We also
expect revisions to the medium to long term development plan for renewable energy to be released
by the end of 2009. These revisions will include more ambitious 2020 capacity targets for wind (100-
150 GW) and solar power (20 GW).
India’s National Action Plan on Climate Change, announced in 2008, consists of eight national
“missions” on sustainability themes. This is a demonstration of action which should help India’s cause
at Copenhagen, but has ongoing implications for its involvement in the CDM.
On 24 August 2009 India’s Council on Climate Change gave “in principle” approval to the National
Mission on Enhanced Energy Efficiency, which could form the basis of a Nationally Appropriate
Mitigation Action (NAMA) under a post-2012 agreement – India could agree to international
monitoring of projects done through technology transfer and international funding in this area. The
energy efficiency mission aims to establish a “cap-and-trade” mechanism based on energy intensity
targets for nine energy intensive sectors including power generation, iron and steel, cement,
aluminium and textiles. This will probably come online in 2010.
However, Indian energy efficiency projects form over 25% of the India CDM project pipeline and
between 70-90% of the installations that have undertaken CDM projects so far in India have energy
consumptions large enough to force them to participate in the energy efficiency trading scheme.
Additional revenues from sales of Energy Saving Certificates could undermine additionality
arguments in the future as we project that 46% of current CDM projects in this class would have
returns higher than the benchmark for additionality prior to CDM revenues. The returns from
participating in an internal market might be lower than returns from CDM. On the other hand, an
internal market could present lower operational risks compared to CDM. Furthermore, the energy
efficiency market may be compatible with no-lose sectoral targets. Potentially, energy efficiency may
help Indian companies to access multiple revenue streams if they gain both Energy Saving
Certificates revenues and also share in profits from sectoral crediting.
The Indian government’s plans for the National Solar Mission have also been leaked to the media.
The official, highly ambitious aim is for 20 GW of installed solar by 2020 compared with 2.1 MW grid
connected solar at present 1-3% penetration of solar power should be mandated for all states as part
of the earlier proposed 5% national renewable energy portfolio standard.
About Us
Subscription Details Carbon Markets sales@newenergyfinance.com
Contact Details Guy Turner guy.turner@newenergyfinance.com

Director, Carbon Markets +44 20 7092 8829
Joel Lindop joel.lindop@newenergyfinance.com
Associate, Carbon Markets +44 20 7092 8878
Copyright © New Energy Finance Ltd, 2009. This publication is the copyright of New Energy Finance. No
portion of this document may be photocopied, reproduced, scanned into an electronic system or
transmitted, forwarded or distributed in any way without prior consent of New Energy Finance.
Disclaimer The information contained in this publication is derived from carefully selected public sources we
believe are reasonable. We do not guarantee its accuracy or completeness and nothing in this
document shall be construed to be a representation of such a guarantee. Any opinions expressed
reflect the current judgment of the author of the relevant article or features, and does not necessarily
reflect the opinion of New Energy Finance Ltd. The opinions presented are subject to change
without notice. New Energy Finance Ltd accepts no responsibility for any liability arising from use of
this document or its contents. New Energy Finance Ltd does not consider itself to undertake
Regulated Activities as defined in Section 22 of the Financial Services and Markets Act 2000 and is
not registered with the Financial Services Authority of the UK.

Global Carbon Quarterly Q3 2009

Cargado por

Información del documento

Descripción original:

Derechos de autor

Formatos disponibles

Compartir este documento

Compartir o incrustar documentos

Opciones para compartir

¿Le pareció útil este documento?

¿Este contenido es inapropiado?

Copyright:

Formatos disponibles

Global Carbon Quarterly Q3 2009

Cargado por

Copyright:

Formatos disponibles

September 2009 Global Carbon Quarterly Q3 2009

Contents Executive Summary

Figure 1: Carbon price projections from fundamentals

Extreme weather events

Figure 3: Medium-term climate phenomena could mask the long-term trend

Figure 4: Geoengineering to avoid large temperature changes

Carbon dioxide removal Solar radiation management (SRM)

Figure 5: Support for inclusion of new sectors under the CDM

Forestry CCS Nuclear

Source: New Energy Finance

Source: New Energy Finance

1.3. Outlook for international negotiations

Table 1: Upcoming talks and meetings

Figure 7: Major party positions Developed country target (% on 2005 baseline)

Source: New Energy Finance

1.4. Long Term Outlook

Table 2: Scenario signposts

Source: New Energy Finance

Figure 8: Cumulative CER issuances to date by technology (up to 1 August 2009)

Agriculture & Waste Fugitive High GWP Industry Renewable Energy

Source: New Energy Finance

Figure 9: Historic CER prices and volumes

2) US policy is a mixed bag for the international carbon market.

Figure 10: Projected CER prices and supply

Figure 11: Cumulative issuance of NER if allocation continues at current rate

2008 2009 2010 2011 2012 Total Phase II

Source: CITL, New Energy Finance

Figure 12: Total industrial sector BAU emissions (excluding aviation)

Source: New Energy Finance

Figure 13: Historic EUA prices and volumes

Figure 14: Projected EUA prices and EU ETS abatement

Source: New Energy Finance

2.3. North America

Figure 15: How to collect 60 votes in the US Senate

Figure 16: Regional programmes and possible unified programme

Source: New Energy Finance

Figure 17: Historic RGGI prices and volumes

1) A federal US cap-and-trade bill is unlikely to be passed this year …

Source: New Energy Finance

Figure 19: Projected CPRS prices and abatement

Source: New Energy Finance

2.5. Developing Countries

Figure 20: Geographical split of CER issuances to date

Contact Details Guy Turner guy.turner@newenergyfinance.com

También podría gustarte