Carbon 2008: Post-2012 Is Now

Carbon 2008
Post-2012 is now
11 March 2008
TO THE POINT
Global carbon markets worth €40 billion in 2007, up by 80 percent from 2006. The total traded
volume increased by 64 percent from 1.6 Gt (1.6 billion tonnes) in 2006 to 2.7 Gt in
2007.
The EU emissions trading scheme saw a traded volume in 2007 of 1.6 Gt and a value of €28
billion. This represents a volume growth of 62 percent and a value growth of 55 percent
from 2006. The EU ETS now holds 62 percent of the physical global carbon market and
70 percent of the financial market.
The CDM market increased to 947 Mt and €12bn in 2007. This is an increase of 68 percent in
volume terms, and a staggering 200 percent in value terms from 2006, constituting 35
percent of the physical market and 29 percent of the financial market.
The market for secondary trading of CDM credits is the fastest growing segment. From limited
activity at the start of the year, over 2007 the market saw around 300 Mt of sCER
trades, much of this related to EUA-sCER swaps.
Two-thirds of survey respondents say EU ETS will result in internal abatement. Taken together,
our surveys in January and April 2007 and January-February 2008 indicate that at least
two-thirds of EU ETS companies are involved in or are planning emission reductions of
some kind.
Carbon prices important for investment decisions. 73 per cent of EU ETS survey respondents
agree that the carbon price is relevant to investment decisions. Only 6 percent say the
carbon price has no impact on new investments.
Survey respondents expect a carbon price of €24 in 2010, and €35/t in 2020.This is up €6 for the
2010 price and €10 for the 2020 price, compared to last year.
A federal US ETS likely, according to respondents. They expect it to be less strict than the
EU ETS Phase 2, however, despite the ambitious bills now before the US Congress.
Borrowing could be widely used. Nearly half of the survey respondents could borrow from
2009 allocation to use for compliance in 2008.
Voluntary market is small and non-transparent. Only 10 percent of the respondents consider
the voluntary market to be transparent, yet 50 percent think it is more mature now than
one year ago.
Integrated global market by 2020? Seventy-three percent of our sample think that there
will be a global reference carbon price in 2020.
This report was published at Point Carbon’s 5th annual conference, Carbon Market Insights 2008 in
Copenhagen 11 - 13 March 2008. For more information, see www.pointcarbon.com
All rights reserved © 2008 Point Carbon

Carbon 2008
About Point Carbon

Providing critical insights into energy and environmental markets
Point Carbon is a world-leading provider of independent news, analysis and consulting services
for European and global power, gas and carbon markets. Point Carbon’s comprehensive services
provide professionals with market-moving information through monitoring fundamental
information, key market players and business and policy developments.
Point Carbon’s in-depth knowledge of power, gas and CO2 emissions market dynamics
positions us as the number one supplier of unrivalled market intelligence on these markets.
Our staff includes experts in international and regional climate policy, mathematical and
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Point Carbon now has more than 15,000 clients, including the world’s major energy companies,
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runs a number of high-level networking events, workshops and training courses.
About the report:

This report was written and edited by Kjetil Røine, Endre Tvinnereim and Henrik Hasselknippe.
For citations, please refer to: Point Carbon (2008): ”Carbon 2008 - Post-2012 is now” Røine, K., E.
Tvinnereim and H. Hasselknippe (eds.) 60 pages.
ii All rights reserved © 2008 Point Carbon

11 March 2008
Executive Summary
This report presents an overview of the carbon market Mt in 2007. Higher prices in 2007 compared to 2006
in 2007, our outlook for 2008, and expectations for meant that the value of the JI segment more than
the remainder of first Kyoto period and beyond. It tripled, from €95m in 2006 to €326m in 2007.
is based on the results of the largest survey ever
The direct market participants were not, however, left
conducted into the carbon market. We received 3
by themselves last year and there were significant
703 responses to our web-based questionnaire and 1
activities in the political arena. The climate change
462 of the respondents trade or own European Union
challenge was at the top of the political agenda, and
Allowances (EUAs) or Certified Emission Reductions
the UNFCCC summit in Bali in December succeeded
(CERs). The survey results are complemented by
in starting negotiations on a post-2012 agreement,
analysis undertaken by Point Carbon.
with the aim of signing the agreement at the COP
The global carbon market is consolidating at a time meeting in Copenhagen in 2009.
of ever-increasing attention to climate change. Last
In our survey, we asked whether a global post-2012
year was another record one in the market, with an
climate agreement will be reached before 2012.
increase from 1.6 bn tonnes in 2006 to 2.7 Gt in 2007.
Around 70 percent of the respondents think there
The total traded volume increased by 64 percent. As
will be an agreement. Of these, 80 percent think
global temperatures and media coverage increase,
there will be a post-2012 agreement, regardless of
so does the volume of emission allowances and
whether the US participates and around 60 percent
credits.
of the respondents (N=3013) think that the US will
In value term, the growth was even steeper in 2007. join an international agreement. Interestingly, more
The global carbon markets were worth more than than 75 percent believe that Canada is also likely to
€40 billion in 2007, up by 80 percent from 2006. join the agreement, despite currently being a long
way from meeting its Kyoto target.
The EU Emissions Trading Scheme (EU ETS) is still
dominating the global carbon market. EU ETS saw Second, the European Commission (EC) ruled on
a traded volume in 2007 of 1.6 Gt and a value of the National Allocation Plans (NAPs) for Phase 2. The
€28 billion. This represents a volume growth of 62 overall impression was that the EC had learnt from
percent and a value growth of 55 percent from 2006. Phase 1 and was sufficiently tight on the EUA cap,
The EU ETS now holds 62 percent of the physical but that it was more generous when it came to the
global carbon market and 70 percent of the financial credit limit. Hence, taking into account the amount
market. The higher share of the value of EU ETS of carbon credits allowed to be used for compliance
compared to the volume is due to the high prices in in Phase 2, it seemed that no emission reductions
EU ETS compared to other markets. were needed within the EU over the period.
The CDM market comes second, both in volume This was to a large extent corrected in January 2008
and value terms. It increased to 947 Mt and €12bn when the EC proposed its revision of the EU ETS
in 2007. This is an increase of 68 percent in volume Directive. If a “satisfactory” international agreement
terms, and an astonishing 199 percent in value terms is not reached, the EC proposes that the credit limit
from 2006, constituting 35 percent of the physical for Phase 2 (2008-20012) should be valid for both
market and 29 percent of the financial market. Phase 2 and Phase 3 combined (2008-2020). If,
however, a satisfactory international agreement is
The market for secondary trading of CDM credits is
reached, the credit limit would be increased by half
the fastest growing segment. From limited activity
of the additional reduction efforts going from the
at the start of the year, the market saw around 300
20 percent reduction scenario up to, at most, a 30
Mt of sCER trades over the course of 2007, much of
percent reduction from the 1990 level.
this related to EUA-sCER swaps. This emphasises
the dominant position of EU ETS in the global carbon A third crucial development in the political arena in
market last year. 2007, which indeed will continue to develop in 2008
and beyond, was the emission trading initiatives
Traded volumes in the Joint Implementation (JI)
that are being taken on at both state and federal
market almost doubled from 21 Mt in 2006 to 38
level in the US. RGGI will start on 1 January 2009
iii All rights reserved © 2008 Point Carbon

Carbon 2008
(with some early auctions in 2008), while initiatives The importance of the carbon market for its
in the West and Mid-West will take a few more participants is clearly seen from the long-term
years to materialise. Most important, however, is investment perspective. 73 per cent of EU ETS survey
the Lieberman-Warner Bill now going through the respondents agree that the carbon price is relevant
Senate. The bill suggests establishing an emission to investment decisions. Only 6 percent say the
trading scheme covering around 75 percent of GHG carbon price has no impact on new investments.
emissions in the US, with a cap more than 2.5 times
Besides the compliance markets, primarily connected
higher than in EU ETS Phase 2. This will decrease by
to the Kyoto Protocol, a voluntary carbon market has
around 100 Mt a year towards 2050. If it becomes
emerged. Although it is still limited in size, only 10
a reality, this will be the largest emission trading
percent of the respondents to our survey find the
scheme in the world.
voluntary market to be transparent.
Moreover, the bill suggests allowing international
Moreover, less than 30 percent think the voluntary
credits to be employed for compliance purposes,
carbon market produces real emissions reductions,
primarily EUAs and Kyoto credits. This indicates
while more than 40 percent believe that the voluntary
that there will be a close bond between upcoming
carbon market poses a risk to the reputation of the
regional emissions trading schemes and existing
compliance markets. Having said that, a majority of
schemes, primarily the EU ETS.
the respondents think that the voluntary market is
The carbon market is still, and will remain, a politically more mature now than it was a year ago.
driven market, as supply and demand for credits
It is fair to say that the main activities and trades
are determined to a significant degree by political
in the carbon markets years ahead will be in
decisions
connection with compliance schemes - either
The proposal for a federal US ETS indicates a tighter determined through an international agreement or
scheme than we see in the EU ETS. It is interesting national or regional schems independent on an post-
then, that most of our survey respondents do 2012 agreement.
not think that a federal US ETS will be particularly
Given the development of an increasingly interlinked
ambitious.
global carbon market, we asked our survey
Two-thirds of our survey respondents say that EU recipients the following question: “Will there be a
ETS will result in internal abatement. Taken together, global reference price for CO2 emissions in the year
our surveys in January and April 2007 and January- 2020? The existence of such a price (regardless
February 2008 indicate that at least two-thirds of of its level) would be a reliable indicator of policy
EU ETS companies are involved in or are planning success. Seventy-three percent of our sample think
emission reductions of some kind. These efforts are that there will be a global reference carbon price in
yet to be seen in the verified emission data. 2020.
The respondents expect the EUA prices to rise
towards 2020. In Carbon Market Survey 2007, the
respondents estimated that the EUA price in 2010
would be around €18/tonne. This year, the average
EUA price forecast for 2010 has increased by €6 to
€24/tonne.
Going further, the average EUA price in 2020 was
estimated by last year’s respondents to be €25/
tonne, while the 2020 price estimate given this year
has increased to €35/tonne. Thus, there is a bullish
impression of carbon market development in the
last year, both from a short term (2010) and a long
term perspective (2020).
iv All rights reserved © 2008 Point Carbon

11 March 2008
Foreword
Developments witnessed over the past year, as upon before the end of the Kyoto period. In our view,
well as developments so far in 2008, signal a new getting the United States on board will be vital for a
era for the carbon markets. We have now entered new agreement. Interestingly, survey respondents
the first year of the first commitment period under do not necessarily agree, with about 77 per cent
the Kyoto protocol, and also the first year of the expecting an agreement to be reached regardless of
second phase of the EU emissions trading scheme. whether or not the U.S. participates. However, more
Companies operating in the European carbon market than half of the respondents expect the U.S. to take
now (at least in most cases) know their compliance on reduction commitments and to participate in a
requirements until 2012, and can base their trading new agreement.
and investment decisions both on day-to-day changes
Finally, the results from our survey confirm that carbon
in fundamentals and expectations about the future.
prices are now seen as an important factor in the
The recent proposal from the European Commission
operating and investment decisions of companies.
also provides greater insight into the development
Over two-thirds of survey respondents claim that
of the market until 2020, although the uncertainties
the EU ETS has caused emission reductions of
will remain for still some time.
some kind, either already implemented or at the
When we published the previous version of this planning stage. While this might be good news for
report, in March 2007, we noted that climate change the development of greenhouse gas emissions in
and carbon markets were the subject of “record Europe, we expect to see similar developments in
high public interest”. Little did we know that the rest other places around the world in the years to come.
of 2007 would bring with it even greater interest Over 72 per cent of the survey respondents expect
from media, decision makers, and the general there to be a global reference price for carbon by
public. Particular mention should be given to the 2020. As the world increasingly takes into account
Nobel Peace Prize being awarded jointly to the the cost of emissions, and the value of reductions,
Intergovernmental Panel on Climate Change and Al the carbon market will continue to incentivise
Gore, our keynote speaker at last year’s conference. investments in cleaner technology and emission
We are both honoured and privileged to have reductions. And in the end, that is what this market
chairman of Nobel laureate IPCC, Dr. R. K. Pachauri, is supposed to lead to.
with us for this year’s conference.
You can read more about these findings, and a lot
The results from our annual survey, and presented in more, in this report. We believe that this report
this report, highlight three things in particular. First, presents the most up-to-date and comprehensive
there seems to be a generally bullish sentiment on analysis for the carbon market as a whole. It certainly
carbon, not necessarily reflected in current market represents the global analysis work that takes place
prices. Survey respondents now on average expect in Point Carbon every day, and we hope you will find
the 2010 price to be €6 higher than they did a year it both interesting as well as inspirational.
ago. The expectation for a 2020 price has increased
even more, and now stands €10 higher than it did
last year. In our view, this demonstrates that market
participants now realise that the EU ETS will face
a real and considerable shortage, and that much of Per-Otto Wold
this will have to be met through reductions taking CEO
place in Europe. Point Carbon
Secondly, once again the survey respondents

seem optimistic that we are moving towards a
global carbon market and that the international
community will be able to agree on a new climate
agreement from 2013 onwards. More than 70 per
cent of respondents see it as likely that a climate
agreement for the post-2012 period will be agreed
v All rights reserved © 2008 Point Carbon

Carbon 2008
Table of contents
1 Introduction 1
2 Carbon markets and policies in 2007 3
2.1 Overview 3
2.2 EU ETS 6
2.3 CDM 17
2.4 JI 19
2.5. Voluntary markets 20
23
3 Carbon markets towards 2012
3.1 Expectations for global 2008 volumes
23
and trends
24
3.2 EU ETS
3.3 CDM market in the Kyoto period 33
3.4 JI - existing market, deliveries now?

36
3.5 AAU - large potential, limited supply? 37
3.6 Regional Greenhouse Gas Initiative

39
(RGGI)
4 Carbon markets beyond 2012 41
4.1 Towards a new global climate 41
agreement
4.2 Carbon markets in North America 44
4.3 Other upcoming markets 46
4.4 Towards a global market? 47
vi All rights reserved © 2008 Point Carbon

11 March 2008
1. Introduction At the federal level, a comprehensive and ambitious

cap-and-trade is awaiting a Senate floor vote this
The initial year of the first Kyoto commitment period year, while all the 2008 presidential candidates
(2008-2012) has now begun. Starting this year, the with a reasonable chance of winning are in support
countries listed in Annex B of the Kyoto Protocol of emissions trading as part of an active climate
(apart from the US) will have to measure, estimate agenda.
and account for their greenhouse gas (GHG)
emissions. Annex B comprises those countries
that were considered industrialised in 1992, when 1406 respondents buy, sell or hold
the UN Framework Convention on Climate Change EUAs or project credits
(UNFCCC) was negotiated.
Phase 2 of the EU Emissions Trading Scheme (EU
ETS) also commenced this year, and is scheduled This report is our third annual presentation of the
to run alongside the first Kyoto period. Moreover, status of the carbon market. We aim to provide a
January saw the release of the EC’s proposal for the comprehensive overview of all compliance markets
structure of Phase 3, extending the EU ETS horizon currently in operation, as well as other markets that
to 2020. With new financial products and trading we believe are imminent. Given the wealth of data
strategies, the EU market is about to come of age. available for the Kyoto markets — in particular the
EU ETS and Clean Development Mechanism (CDM)
3703 participants in our web-survey — these will be discussed in the greatest detail.
However, we will also consider the developments
this year, up from 2250 in 2007 that have been made in Japan, Russia, Ukraine,
Australia and — of course — the US.
And yet 2008 is not only the year of Kyoto. This year Our report includes information derived from a
we expect important developments in US carbon number of sources. The primary source is Point
markets in particular. At the state level, we have just Carbon’s annual Carbon Market Survey, which
seen the first ever GHG compliance trade under the ran from 18 January to 6 February 2008, using a
ten-state Regional Greenhouse Gas Initiative (RGGI), web-based survey tool. In total there were 3 703
and expect much more to come. respondents, compared to 2 250 last year and 800
Figure 1.1: Trading EUAs and CERs

N=1462. Respondents saying they buy/sell/hold EUAs and/or CERs
CER project developer/aggregator
Company with emissions regulated

under the EU ETS
Financial institution/bank
Other
Government
Company covered by CO2 regulation

other than EU ETS
0% 5% 10% 15% 20% 25% 30% 35% 40%
Source: Point Carbon
1 All rights reserved © 2008 Point Carbon

Carbon 2008
Figure 1.2: Most of the respondents come from...

Top 15 countries (out of 101 with responses). N=2291.
United States 12.7%

United Kingdom 12.3%
India 6.2%
Germany 4.7%
France 4.1%
Australia 3.8%
Canada 3.8%
Brazil 3.2%
Japan 2.8%
Netherlands 2.8%
Norway 2.7%
Italy 2.7%
Spain 2.4%
China 2.2%
Belgium 2.1%
0 50 100 150 200 250 300 350

in 2006. Of this year’s respondents, 1 462 (~40 three-digit response totals are the UK (281), India
percent) stated that they are involved in European (142) and Germany (107). In total, 101 countries
Union Allowance (EUA) or Certified Emission are represented and almost 50 percent of the
Reduction (CER) trading, or own EUAs/CERs. Figure respondents are located in Europe.
1.1 below shows the distribution of respondents
among this subset.
Carbon Market Survey 2008 is the
Of the 1 462 respondents holding or trading EUAs/ main source of information
CERs, 473 work for companies with emissions
regulated under the EU ETS, with about the same
number for CDM project developers/aggregators. In addition to the Carbon Market Survey 2008, this
Some 220 respondents represent financial report is based on Point Carbon’s in-depth analyses
institutions. of international climate policy and the carbon market
in our publication series: Carbon Market Analyst
(CMA), Carbon Market Monitor (CMM), Carbon
Almost 50 % of respondents located Market Brief (CMB) and Carbon Policy Update (CPU)
in Europe, down from 55 % last year in particular; as well as on Point Carbon’s proprietary
databases, models and applications: Carbon Market
Trader (CMT) and Carbon Project Manager (CPM).
Our typical respondent has a degree in either
engineering or finance/economics, while 13 percent The outline of this report is as follows:
hold a PhD. Two-thirds are between the ages of 25 Chapter 2 provides a review of carbon market
and 44. The largest number of respondents is found developments in 2007. We report traded volumes
in the US — a total of 292; the other countries with and values, price drivers and evaluations of the EU

11 March 2008
ETS, CDM and Joint Implementation (JI) markets. 2. Carbon markets and policies in
We also provide statistics on buyers, sellers and
project types in the CDM. The chapter ends with 2007
a discussion of recent developments in voluntary
carbon markets, emphasising the US position. 2.1 Overview
Chapter 3 presents our expectations for the global Climate change was at the top of the global agenda
carbon market in the Kyoto period and for 2008 in in 2007, most notably following publication of the
particular. We discuss the policies providing the Intergovernmental Panel on Climate Change’s (IPCC)
framework for the EU ETS and much of the CDM and fourth assessment report (4AR). The report stated
JI markets, with a focus on decisions and proposals that climate change was “unequivocal” and made
by the European Commission (EC). We also suggest it extremely difficult for anyone to remain a climate
what to expect from the RGGI market in 2009, and sceptic.
discuss the likelihood that Assigned Amount Units
(AAUs) will start trading in 2008. Moreover, former Vice President Al Gore’s
documentary film, An Inconvenient Truth, brought
Chapter 4 looks at the emerging landscape of the the climate issue to the masses worldwide.
carbon world after 2012. We begin by presenting Governments across the world have been forced to
our analysis of the events of the Bali conference take action as a result of the change in public opinion
in December 2007. Recognising that US action is on climate change and increased media coverage.
a sine qua non for serious international action on
climate change, we then outline domestic proposals 2.1.1 The carbon markets
for emissions trading in the US, both at the federal
and state level. In the carbon market, equally important events have
taken place. The total traded volume in the global
We also assess the likelihood of domestic emissions carbon market grew from 1.6 Gt (1.6 billion tonnes) in
trading in other countries, notably Japan. Finally, we 2006, to 2.7 Gt in 2007 — an increase of 64 percent
ask whether a global carbon market will exist in (see Figure 2.1). The value of the carbon traded grew
2020, and if so, what the price of carbon might be even more, by 80 percent in the same period, from
12 years from now. €22bn ($33bn) to €40bn ($60bn).
Figure 2.1: Stairway to ‘07

Annual contract volumes 2005-07 in billion tonnes (Gt) CO2 equivalen
Other
4
JI 56%
Annual volume (Gt)
3 CDM total
EU ETS total
64%
2
104%
1
0
2005 2006 2007

Carbon 2008
The EU ETS is still by far the largest carbon market ERU volumes almost doubled in the Joint
worldwide, with 62 percent of the physical market Implementation (JI) market, from 21 Mt in 2006
and 70 percent of the financial market (Figure 2.2). to 38 Mt in 2007. Furthermore, higher ERU prices
The EU ETS grew over the course of 2007, with a meant that the value of the JI segment more than
traded volume of 1.6 Gt and a value of €28m. This tripled, from €95m in 2006 to €326 in 2007.
represents a volume growth of 62 percent and a
Financial players joined the carbon market in force in
value growth of 55 percent from 2006.
2007. We have seen US hedge funds take positions
in the market, especially in options and long CER
EU ETS still by far the largest carbon
market worldwide
CDM market increased to 947 Mt
and €12bn in 2007
Activity within Kyoto’s flexible mechanisms —
specifically the Clean Development Mechanism
(CDM) — grew more than expected in 2007. In positions. Towards the end of the year, NYMEX,
total, the CDM market increased from 563 Mt and the world’s largest physical commodities futures
€3.9bn in 2006 to 947 Mt and €12bn in 2007. This and options exchange, announced that it would
is an increase of 68 percent in volume terms, and join the market by launching its own CO2 emission
a staggering 199 percent in value terms from 2006, products. This move by NYMEX indicates at least
and in total constituting 35 percent of the physical two things: First, carbon trading is about to enter
market and 29 percent of the financial market. the mainstream in the US. Second, major market
Within the CDM, the growth of the secondary players are confident that GHG emission trading is
CER (sCER) market has been the most impressive, about to take off in the US, whether at the state
starting in the first months of 2007 and growing to level (RGGI, the West and Midwest), at the federal
around 300 Mt over the whole year. This represents level, or both.
a remarkable increase from 2006, much of which is That being said, current activity in existing Australian
related to EUA-CER swaps. With the growth in sCER and US carbon markets did in fact decrease from
trading, the total CER market could well overtake 2006 to 2007. Most significantly, total traded value is
the EUA traded volume in 2009 or 2010. down 63 percent, to €186m in the mandatory New
Figure 2.2: Still dominated by the EU ETS

Distribution of 2007 traded volume (left) and financial value (right) across the main market
segments.
Total volume: 2.7 Gt Total financial value: €40bn
JI Other JI Other
1% 2% 1% 0.5%
CDM secondary
CDM secondary 14%
13%
CDM primary
15%
CDM primary
22%
EU ETS
62%
EU ETS
70%

11 March 2008
South Wales market and on the voluntary Chicago agreement will be accepted in the EU ETS up to a
Climate Exchange. With total volume almost limit.
unchanged, this fall is largely due to carbon price
In general, 2007 has been a good year for the
drops in both markets and the fall of the US dollar.
EC. Having had to endure criticisms over its initial
handling of the EU ETS, the Commission showed
2.1.2 Carbon policies determination in cutting allocations and credit
Although we are just at the start of EU ETS Phase 2, limits in Phase 2 NAPs, as well as in pushing for
the ongoing review process for Phase 3 has already the inclusion of the aviation sector in the trading
produced a number of concrete suggestions from scheme.
the European Commission (EC). For example, it
already seems clear that the cap will be considerably
tighter than in Phase 2, as the overall emissions in No additional import of credits permit-
the EU ETS in 2020 are expected to be capped at ted unless satisfactory agreement
around 21 percent below the 2005 level.
At the beginning of 2008, the EC also finally seemed
EC suggest EU ETS emissions to be much more likely to succeed in harmonising the
21 percent below 2005 level total EU cap and auction a much greater share of
allowances in Phase 3 – an agenda it has been
In addition, the EC suggests reducing the level of promoting for years.
free allocation linearly towards zero in 2020. All
allowances allocated to the power and heat sector Outside the Kyoto markets, important progress
will be auctioned as early as 2013. Moreover, before was made towards domestic emission trading, in
a new international agreement is finalised, the the US in particular. At the state level this is due
credit limit for the 2008-2012 period is effectively to the Regional Greenhouse Gas Initiative (RGGI),
extended to also cover the 2013-2020 period, and the 10-state scheme due for launch in 2009, and in
no additional import of credits is permitted. Once the Western region led by California. A federal cap-
a future international climate agreement has been and-trade bill sponsored by Senators Lieberman and
reached, CERs from countries that have ratified the Warner moved through both subcommittee and
committee in November and December.
Figure 2.3: Ups and downs in 2007

Quarterly volumes and values in the EU ETS 2007, million tonnes and € million
450 3% 8,000
400 17% -12% 14%

7,000
8%
350
6,000
300 80%
5,000
250
Mt CO2
€ mill
4,000
200
3,000
150
2,000
100
50 1,000
0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Carbon 2008
Crowning the events of the year, the Bali climate 2.2 EU ETS
summit produced a mandate to launch negotiations
for a global post-2012 framework. At the summit, The EU ETS was the main driving force of the
all UNFCCC member countries — including the US global carbon market in 2007. This dominance was
— agreed to negotiate a successor to the Kyoto underlined by the trades in sCERs — estimated at
protocol. around 17 percent of the market in 2007 — as this
market is propelled by EUA – sCER swaps. Although
the excitement of Phase 1 was long gone by 2007, it
Australia and the US turned towards was still an important year for the EU ETS.
climate regime in 2007
This feat was made possible by a change in the Secondary CERs took around 17
US position earlier in the year. The turnaround was percent of the market in 2007
first evidenced at the G-8 summit in June, when
the Bush administration announced its intention to
return to the negotiating table. The final rulings of the National Allocation Plans
(NAPs) were made, and the EU ETS review crucial
While this decision may not be rooted in a heartfelt for the shape of Phase 3 was finalised. Hence, much
desire to take decisive action on climate issues, it of the uncertainty for the future phases of the EU
is certainly a positive step towards kick-starting the ETS was removed, although the final agreement on
international process under Bush. the Directive review is still at least 1 year away.
If nothing else, laying the groundwork in this way will
make progress faster under the next administration 2.2.1 Volumes and values
and progress with the Lieberman-Warner bill will 2007 saw healthy growth in the OTC market and on
facilitate this. The new Australian Government is also the exchanges, with a daily average traded volume
planning to speed up the introduction of a national of around 5.6 Mt. As shown in Figure 2.1, volumes
ETS. have increased annually since 2005. The total volume
traded in the 2007 EU market, excluding exclusive
direct bilateral trades (company-to-company) , was 1
443m EUAs. Of this, around 1 Gt (~70 percent) was
Figure 2.4: No changes on the exchanges

Monthly EUA volumes transacted on exchanges. Last year’s figures in parentheses.
50 ECX 86.7% (75.6%)

Powernext 5.5% (13.3%)
45 Nord Pool 6.3% (7.4%)
EEX 1.4% (3.1%)
40 EXAA 0.0% (0.1%)
35
30
Mt CO2
25
20
15
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Point Carbon ECX Powernext Nord Pool EEX

11 March 2008
Figure 2.5: Volumes and prices in the EU ETS 2004-07

Daily OTC prices using Point Carbon’s bid/offer methodology.
35 Volume EUA 2007 20
30 EUA 2008 sCER08
Million EUAs traded

25
€ / tonne
20
10
15
10
0 0
1/12/04 6/9/05 14/6/06 21/3/07 28/12/07
Source: Point Carbon's Carbon Market Trader
traded in the brokered over-the-counter (OTC) market 2007 also marked the end of Phase 1 of the EU ETS,
and the remainder was traded on the exchanges. falling from a €4 level at the beginning of the year
to €0.03 in December. As seen from Figure 2.5, the
Quarterly volumes were relatively stable, with a peak
fate of the EUA Phase 1 allowances was sealed as
in Q3, while the value of transactions increased as
early as April 2006 and reconfirmed through the
Phase 2 contracts took over and prices increased
verification of 2006 emissions in April 2007.
— see Figure 2.3.
Since October 2006, Phase 2 contracts have been
the only ones that have deserved any attention. Over
European Climate Exchange (ECX) the course of 2007, Dec 08 EUAs traded in a range
accounted for 87 percent of market between €12.25 and €25.28. The contract closed
at €17.55 on the first trading day of the year, then
declined to the year’s lowest point on 20 February.
Of the exchanged volume, the London-based
The Dec 08 EUA then grew rapidly, at over €4 per
European Climate Exchange (ECX) accounted for
month, until the high of €25.28 was reached on 29
377 Mt, or 87 percent. This was up from 76 percent
May. Subsequently it fell below €19 twice, in July
in 2006, thus cementing its dominance in this market
and August, before remaining largely within the
– see Figure 2.4. The other exchanges consequently
€20-24 range for the rest of the year and closing at
show lower volumes, but Oslo-based Nord Pool (6.3
€22.43 on 31 December.
percent) was the second largest in 2007, with the
French Powernext third, with 5.5 percent.
Around 1 650 Mt traded in EU ETS
The share of the exchanges has increased in recent in 2007, sCER excluded
years, with 20 percent of the market in 2005 and 30
percent in 2007. In addition to OTC transactions and
The decline in the EUA price early in the year was
trades on the exchanges, there still is a significant
caused by falling power and gas prices, which
volume traded bilaterally (company-to-company),
produced lower coal-to-gas switching levels, as well
and the combined total of all transactions in 2007
as by a mild (or even absent) winter that depressed
was around 1 650 Mt.
both Phase 1 and Phase 2 contracts.

Carbon 2008
Figure 2.6: UK carbon-adjusted dark and spark spreads in 2007

Forward prices for delivery in Q2 and Q3, 2008. The chart shows the theoretical profits from
standard coal and gas power plants, based on fuel, power and carbon prices.
20 30
25
15
20
€ / tonne
 / MWh
10 15
10
5
5
0 0
2-Jan-07 7-Mar-07 15-May-07 20-Jul-07 25-Sep-07 28-Nov-07
Dark spread summer 08 Spark spread summer 08 EUA Dec 08

Figure 2.7: German carbon-adjusted dark spread

Forward prices for delivery in 2008. Dates: 11 Dec 2006 -- 20 Dec 2007
25 30
25
20
20
15
€ / tonne
€ / MWh
15
10
10
5
5
0 0
11-Dec-06 14-Mar-07 20-Jun-07 19-Sep-07 19-Dec-07
Clean dark spread Cal 08 EUA Dec 08


11 March 2008
Figure 2.8: EUA price correlation with fuel and power

Correlations with the EUA December 2008 contract
0.8
0.6
0.4
0.2
0
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07
-0.2
-0.4
-0.6 German cal 08

Correlations: NBP summer 08
-0.8 Cal08: 0.78
NBP: 0.42 Crude oil front
-1 Crude oil: 0.26 month
As can be seen from Figure 2.6, gas was in the money oil and power prices balanced each other in keeping
against coal for most of 2007, and particularly in the the EUA stable.
April-October period. Carbon-adjusted profits for coal
generation (dark spreads) and gas generation (spark Forward prices for delivery in Q2 and Q3, 2008. The
spreads) for UK power delivered in the summer of chart shows the theoretical profits from standard
2008, traded mainly inside a band of £5-10/MWh coal and gas power plants, based on fuel, power and
until mid-November, when both shot upwards. carbon prices.
The German carbon-adjusted dark spread for the
Cal08 and Dec08 EUA correlated 2008 calendar year saw a different development,
declining steadily through the year, see Figure 2.7.
fairly well in 2007
The highest price of the year – €19.10/MWh – was
seen on 11 January. On 27 November, however,
The subsequent bull-run came on the back of a the profit made by German generators of coal-fired
lingering hot summer scare, pushing up German power was down by more than two-thirds at €7.21/
power for Q3 2007 and Cal 08 delivery, and Dec 08 MWh, the year’s lowest price.
EUAs along with it. A strict ruling by the EC on the The vast majority of EUA trading activities in 2007
Italian NAP, as well as other NAP cuts, boosted the were forward contracts for Phase 2. Figure 2.8
bullish sentiment as Phase 2 looked progressively shows the correlations between fuel and Dec 08
more likely to be short. In addition, there were EUA contracts. The Cal 08 contracts correlated quite
fears of a possible CER crunch in 2008, including well with the Dec 08 EUA contracts, being 0.78
but not limited to worries about delivery through the on average in 2007. Gas and oil correlations were
international transaction log (ITL). considerably lower at 0.42 and 0.26, respectively.
After the peak in May, the trading range narrowed Correlation to Dec 07 contracts were absent as the
for the rest of the year, as the NAP process had price for these was marginal throughout the year.
established the Phase 2 allocation while coal, gas,

Carbon 2008
Figure 2.9 Assessing the EU ETS

Share of respondents agreeing with the given statements (options 4 and 5). The number of
respondents is between 800 (in 2006) and 3,479 (in 2008).
2008
EU ETS is a mature market
2007
2006
EU ETS is the most cost-
efficient way to reduce
emissions [in the EU]
EU ETS facilitates
emissions reductions [in
the EU]
EU ETS is a success
0% 20% 40% 60%

The Dec 08 sCER closed at €15.70 on 21 May, when ready for this and do we see any signs of internal
our records began. It traded at a discount of more abatement due to EU ETS?
than €7 to the Dec 08 EUA for most of June, with
the spread going as high as €7.98 on 4 June. A series of questions that Point Carbon has been
asking annually since 2006 could prove instructive.
The average Dec 08 sCER price in 2007 was Respondents are asked to choose one alternative
€16.37. The other OTC sCER contract tracked by on a scale from 1 (“completely disagree”) to 5
Point Carbon, the “Kyoto strip” for delivery each (“completely agree”). We count options 4 and 5
December of the 2008-2012 period, traded at an as agreement, options 1 and 2 as disagreement,
average €16.50 during our seven months of records and the middle option 3 as neither agreement nor
in 2007. This indicates a real backwardation in the disagreement — see Figure 2.9.
sCER market, as the spread between the Dec 08 and
the Kyoto strip is much less than the cost of carry.
Indeed, the backwardation was absolute throughout Respondents: EU ETS significant
most of August, as the Dec 08 sCER was valued more mature now than one year ago
above the Kyoto strip. The most general explanation
for this phenomenon is concerns for a CER supply
crunch in 2008 and 2009, and good supply in later The results are almost the same in 2008 as in 2006
years. and 2007. The only exception is the statement
“EU ETS is a mature market”, which has gained a
somewhat higher score this year (although it is still
2.2.2 Does the EU ETS work?
fairly low).
The launch of the EC’s proposal for a climate-
energy package clearly showed that in the future The answers to the question on emissions reductions
more emission reductions will take place in the have not changed markedly in the last three years.
EU, particularly if a “satisfactory” international Obviously, in the case of the statement “EU ETS
agreement is reached following the Kyoto Protocol. facilitates emissions reductions”, the question is
This begs the following questions: are companies where – within the EU or in CDM/JI countries. This

11 March 2008
Figure 2.10 Sector emissions-to-cap (E-t-C) in 2006 compared to 2005

E-t-C calculated using verified emission data and aggregate installation-level caps in each sector.
Positive numbers signify greater emissions than allowance allocation.
 
 













 

 


         
 
Figure 2.11: Changes in EU ETS emissions at country level, 2005-2006

Top five increases and decreases in absolute terms.
 
  


  
 
 
 
 

  

 
 
     
 

Carbon 2008
year we made the question more specific, asking whereas an additional 10 Mt were emitted by the
whether “EU ETS facilitates emissions reductions industry sectors.
in the EU”. The answers were rather similar to
The metal and cement/lime/glass sectors emitted
2006 and 2007, with more than 50 percent of the
7.5 Mt and 6 Mt more in 2006, respectively.
respondents agreeing with this statement. But can
Installations in the oil and gas sector emitted 1.5 Mt
these emission reductions also be seen from the
less, “others” emitted 1.4 Mt less and the pulp and
verified data from 2006?
paper sector emitted just 50 kt more in 2006 than in
2005. Despite the higher emissions, there was still a
comfortable surplus of allowances in 2006.
What do the verification data tell us?
The verified 2006 emissions increased to 2 028, up
22 Mt (1.1 percent) from 2005. At the sector level,
Verified emissions increased 1.1
2006 saw the same picture as in 2005: a short
percent from 2005 to 2006
power sector and long industry sectors. The higher
emissions can be explained mainly by production Most countries that had surpluses in 2005 also
growth, but fuel prices and weather also contributed. had surpluses in 2006, with Denmark as a notable
Lower hydro production meant higher emissions exception. Figure 2.11 shows the countries with the
in the Nordic region, but the opposite situation in greatest changes in emissions from 2005 to 2006.
Iberia. More than half of the countries included in the first
phase — 13 in total — saw small changes that fell
20 percent of respondents use tra- between a reduction of 2 Mt and an increase of 3
ding as primary compliance strategy Mt.
The increased emissions in Finland and Denmark
Figure 2.10 compares 2005-2006 emissions in particular, were due to low hydro levels in the
aggregated by sector for EU-23. Of the 22 Mt Nordic region in the first three quarters of the year,
emissions growth from 2005 to 2006, 12 Mt were and consequently lower hydroelectric production.
accounted for by the sector comprising public In the UK, coal consumption for power generation
electricity and heat production (power and heat),
Figure 2.12: Compliance strategies in the EU ETS

N=451. Companies with emissions covered by the EU ETS.
Reducing our own

emissions (internal
abatement)
Trading
Developing CDM/JI
projects
A combination of the
above
Other
0% 10% 20% 30% 40% 50%

11 March 2008
was 11 percent higher in 2006 than in 2005, growing On the surplus side, improved hydrology in Iberia
from 33 to 37 percent of total electricity production. and France, combined with a mild winter as well
Conversely, gas-fired generation, which produces as a temperate summer in continental Europe,
less than half the amount of emissions than coal, account for the falling emissions in Portugal, Spain
was down by 8 percent. and France. Spain in particular saw hydroelectric
generation increase by 32 percent and combined
Fuel price changes alone would explain only a small
cycle gas-fired generation go up by 30 percent,
part of the increase in emissions. NBP gas prices for
while coal-fired fell by 15 percent.
spot delivery went up four percent from an average
40.27 pence per therm in 2005 to 41.94 pence per
therm in 2006. At the same time, API2 coal for Do we see any signes of internal
spot delivery in Europe was up five percent from abatement?
US$ 60.72 on average in 2005, to US$ 63.77. These
changes are more or less in line with inflation.
So far, we have seen the role of fundamentals —
fuel prices, demand and weather — in influencing
Fundamentals can to a large extent emission levels in 2006. However, emissions are
explain the increase in 2006 emissions also a function of company behaviour, notably of
efforts to reduce emissions. Such efforts need to be
ramped up in Phase 2 and Phase 3 of the scheme to
Unlike in 2005, when gas-fired generation in the
achieve tougher overall reduction targets. How will
UK was slightly more profitable than coal-fired
this be done? How much of this has already begun
generation during the entire summer season, coal
in Phase 1? What did companies do to comply in
was consistently in the money against gas throughout
2007?
2006 in the UK. Coal-fired generation was helped in
part by a reduction in the average summer carbon Generally speaking, compliance will be a result of
price (Q2 and Q3) from €21.04 in 2005 to €17.91 the internal abatement, trading, offsets development
following year. Given the relatively small changes in and changes in production patterns. In Figure 2.12
fuel prices, the lower carbon prices are likely to have we display the responses to our question asking for
played a substantial part in this role reversal. a company’s main compliance strategy. Aside from
Figure 2.13: Has the EU ETS caused your company to reduce its own emissions?
N=420 (2008) and 447 (2007). Companies covered by EU ETS (2008) or CO2 regulation in general
(2007)
50%
2007
2008
40%
30%
20%
10%
0%
The EU ETS has not The EU ETS has The EU ETS has Don't know (2008) /
caused any emission caused reductions to already caused not relevant (2007)
reductions in our be planned but not yet emission reductions in
company started my company

Carbon 2008
Figure 2.14: The EU ETS and current investments at company level

“Has the price of carbon influenced the degree of new investments in your company?”
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
Yes
To some extent
No
0% 10% 20% 30% 40% 50%
Source: Point Carbon 2008 2007
the combination and “other” strategies, the most introduced some measures to reduce emissions
frequent is internal abatement. We will return to this (Table 2.1). These measures were found particularly
strategy below. in the form of fuel switching or energy efficiency.
Abatement We also asked about abatement in our 2007 and
2008 carbon market surveys. The results of these
The verified emissions do not show indications of
surveys are given in Figure 2.13. Compared to last
large-scale abatement in the EU ETS. Emissions are
year’s survey, there is very little change in the share
up in all sectors except for oil and gas. Nevertheless,
of companies that report reducing or planning to
71 percent of the companies represented in a Point
reduce emissions because of the EU ETS. Last year,
Carbon survey conducted in April 2007 had already
Table 2.1: Reported reduction activities by sector in the EU ETS

Reported emission reduction efforts by sector, weighted by 2005 emissions. The percentages indicate the share of companies
that have done something to reduce emissions in 2006, not the level of such reductions. Total volume represents the 2005
emissions of respondents’ installations.
Sector Energy saving Fuel switch Process Output red.

Power&heat 31% 34% 23% 12%
Metals 19% 2% 54% 25%
Oil/gas 42% 10% 5% 42%
Cement/lime/glass 22% 37% 35% 5%
Pulp/paper 47% 21% 14% 17%
Other 38% 19% 13% 30%
Total 31% 27% 25% 17%

11 March 2008
Figure 2.15: The role of long-term carbon prices at industry level

“Has the price of carbon influenced the degree of new investments in your company?”
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
Decisive factor
Influencing
calculation, but not
decisive
No importance
0% 10% 20% 30% 40% 50% 60%
Figure 2.16: You can run…

“Has your company considered moving production outside the EU ETS area because of carbon
costs?” N=380. Companies covered by the EU ETS.
No
Yes, are considering

moving production
Yes, have planned

to move production
Yes, have already

moved production
0% 20% 40% 60% 80% 100%

Carbon 2008
65 percent of companies said they had done so; this unchanged from last year. Again, only companies
year the figure is 62 percent. with obligations under the EU ETS are included in
the sample.
Taken together, our surveys in January and April
2007 and January-February 2008 indicate that at When it comes to moving production, 83 percent
least two-thirds of EU ETS companies are involved of our respondents’ companies had not considered
in or are planning emission reductions of some kind. doing so (Figure 2.16). However, the sample
The larger question, of course, is how much these here includes all EU ETS compliance companies,
will deliver. including power companies that cannot move easily.
Consequently, the number for industrials could be
Production improvements and investments higher than the 17 percent that have, plan or are
To gauge the impact of the carbon price on company considering moving production outside the EU ETS
behaviour, we asked three questions in Carbon area.
Market Survey 2008 relating to:
1. the current effect of the carbon price on the
73 percent consider cost of carbon
respondent’s company’s investment;
in investment decisions
2. the long-term effect on investments in the
Aside from internal abatement, trading and changes
respondent’s industry; and
to production location or volumes, a compliance
3. relocation as a possible effect of a carbon price. strategy mentioned by a small proportion in Figure
In the companies of individual respondents, the 2.12 is the development of CDM and JI projects. This
carbon price is relevant to the investment decisions is a strategy that is typically pursued by large power
of 73 percent of the EU ETS companies, unchanged companies among those with EU ETS compliance
from 2007 (Figure 2.14). Here we asked whether obligations. Just as importantly, dedicated project
the price of carbon has influenced the degree of developers provide the carbon market with credits
new investments. at a lower cost than EUAs.
In a similar vein, only six percent of our 385 How has the project market fared in our survey?
respondents said that the long-term carbon price What is the view of the CDM and JI today, and their
(to 2020) had no impact on new investment in prospects for the future? This will be the topic of
their industry (Figure 2.15). This is also virtually the next section.
Figure 2.17: Who are they and what do they want?

The relative share of categories of CDM buyers (left) and project types (right) in 2007
Waste
Fund 10% Energy efficiency
18% 20%
Government Fuel switching

Renewable energy
4% 1%
29%
Fugitive emissions
10%
Private HFC-23
Unknown/other 14%
Source: Point Carbon 78%
7% LULUCF N2O
1% 8%

11 March 2008
2.3 CDM on project stage, project type and counterparty.

Registered projects fetched around €12, while
Activity within Kyoto’s flexible mechanisms — issued CER attracted prices between €14 and €17.
specifically the CDM — grew significantly in 2007, Moreover, hydro projects traded at a slight discount
to 947 Mt and €12bn. Given that sCER prices are due to uncertainty over to what extent CERs from
much higher than in the primary market (€16 vs. large hydro projects will be usable in EU ETS. Wind
€10 in our calculations), the increased sCER volume projects, on the other hand, fetched a slight premium
has significantly boosted the total value of the CDM due to a good and stable performance combined
market segment in 2007. with a high score on sustainability.
2.3.1 Primary CDM market

Still a squeeze of expected CER is-
Some of the increased activity in the CDM market suance in 2008 and 2009
is due to a tripling of issuance rates compared to
2006, with 76.6 m CERs having been issued in 2007.
Gold Standard CERs traded at a premium of about
Although 2007 saw a significant increase in inflow
€1-2 per tonne. One reason for this was healthy
of new CDM projects, especially within renewables,
demand combined with low supply, since only four
there is still a squeeze in terms of expected issuance
CDM projects have qualified under the standard so
for the first two years of the Kyoto commitment
far.
period (2008-2009).
Supply grew healthily over the year. The UNFCCC`s
Significant increase in inflow of new pipeline of projects surpassed 2 800 projects in 2007,
CDM projects in 2007 compared to approximately 1 500 a year earlier.
However, two notable features were the constant
decline in size of projects and the increased influx of
In early spring, the primary CER market prices for
small-scale renewable energy projects. Renewable
immature projects sprung to about €9-11, but since
energy was the largest transacted project category
then the price has been stable, perhaps increasing
in 2007, accounting for 29 percent of total confirmed
slightly. The price movement was probably due to
transaction volume. Furthermore, energy efficiency
a sustained demand for primary CERs. In general,
almost tripled its market share to 20 percent.
prices in the primary CER market still depend
Figure 2.18: China in your hand

The relative share of CDM country sellers (left) and buyers (right) in 2007
Chile Other
Other
2% 7%
Uzbekistan Austria
10%
2% 3%
Mexico
4%
India Germany
5% 7%
United Kingdom
46%
Brazil
8% France
8%
China
62%
Indonesia
10% Luxembourg
11%
Source: Point Carbon Japan

15%

Carbon 2008
The losers were projects reducing industrial gas both of which have seen their relative market share
emissions. HFC-23 and N2O destruction projects cut in half.
fell from a combined 54 percent of 2006 volume to On the supply side, China is still bigger than all the
only 22 percent in 2007. This development should rest, although it has inched down from 70 percent in
be taken to heart by those who have previously 2006 to 62 percent of transaction volume last year
criticised the CDM for channelling money into low- — see Figure 2.18. Brazil’s volume is somewhat up
cost industrial gas projects rather than renewables. on our last update, whereas India’s volume is down.
There was a lot of talk about the market facing a Interesting newcomers in this league of top seller
significant bottleneck due to the EB process when countries are Indonesia and Mexico.
several developers blamed the down-writing of their
portfolios on the rigorous approval process. There China still by far the largest CDM
may be some truth to this, but it is certainly not selling country
the only factor. Low performance rates for certain
project types combined with general project delays The UK reigns supreme among buyer countries,
have also contributed to the slow issuance rate. which indicates that a sizeable share of buyers
in 2007 were financial institutions rather than
HFC-23 and N2O projects were con- compliance buyers. Luxembourg’s 11 percent
siderably fewer in 2007 than in 2006 supports this inference. Japan is second on the list
at 15 percent — up from a surprisingly low 3 percent
That being said, without reform of the approval last year — suggesting continued compliance
process, the market could see yet another year with buying by the country’s government, power sector
a low issuance volume. The year did, however, end and heavy industry.
on a promising note, with a deal in Bali for a thorough
review of the CDM process. Private buyers solidify 2.3.2 Secondary CDM market
their dominance, with 78 percent of confirmed CDM The gold rush for primary CERs continued throughout
transaction volume in 2007 — see Figure 2.17. This the year as numerous new participants entered the
is up from 58 percent in 2006. These buyers eat into market and started competing for market share.
the shares of carbon funds and governments alike,
Figure 2.19: Evaluations of the CDM market, 2006-2008

Share of respondents agreeing with given statements. Note: 2007 and 2006 surveys ask about the
CDM/JI market as a whole. N= 3176/2016/777.
The CDM market

facilitates emissions
reductions
The CDM market is the

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

success
2008
The CDM market is 2007

mature 2006
0% 20% 40% 60%

11 March 2008
But unsurprisingly it was the sCER market that Moreover, the UNFCCC secretariat received greater
attracted most attention. Secondary CER trading resources and took on more people to help the EB
was established as a significant market segment of in 2007. This gave the EB more time and capacity
its own in the course of 2007, albeit one still lacking to scrutinise projects and the request for review
the liquidity of the EUA market. at both registration and issuance stage increased
significantly, with a total of 100 projects put on review
The sCER market has changed almost beyond
throughout the year, compared to 23 in 2006. Also,
recognition over the past year, with an estimated
the additionality criteria have been interpreted more
total traded volume of 350 Mt compared to 40 Mt
strictly by the EB than in previous years. Throughout
in 2006. The Dec 08 sCER contract began the year
the year, a total of 43 projects were rejected.
at €14 but fell throughout the winter months with
a declining EUA-price to an all-time low €10.70 in How well does the CDM market work? For the
February. By the end of May the price had recovered, third time, we asked our respondents to provide a
peaking at €17.45. general evaluation of the project market — this year
with specific questions about the CDM (and JI).
The results show continuity above all. Respondents
sCERs traded 350 Mt in 2007, up see some more maturity in the CDM market, but
from 40 Mt in 2006 the level is still low, with only 12 percent agreeing
(Figure 2.19). Half the sample still disagrees with the
Looking at the EUA-sCER spread, sCERs were trading
notion that the CDM market is mature.
at 90 percent of the EUA price in the early months of
2007. Back then, many assumed that the two prices
would converge. However, recent volatility in the 2.4 JI
EUA market saw only moderate reaction in the price During 2007, 16 Emission Reduction Purchase
of issued CERs in the secondary market. On 31 Agreements (ERPAs) with a total volume of 12.7
December, Dec 08 sCERs were worth 76 percent of Mt were confirmed by market players. The ERUs
the EUA price (around €17.13) while the 08-12 strip for these contracts are generated by projects
spread was at 73 percent of the EUA price. represented by renewables, nitrous oxide, biomass,
The market also saw the first CERs traded on an energy efficiency and fugitive emissions types. It is
exchange, when Nord Pool launched a CER contract notable that the N2O projects account for one-third
in June. of total volume, followed by renewables and landfill
projects (19 and 13 percent respectively). Early-stage
Last year saw some major milestones in the CDM negotiations have been reported by market players
market. The moment we all had been waiting for in energy efficiency and landfill gas projects.
finally arrived when the international transaction log
(ITL) went online and linked the Japanese national On average, ERU price ranges have increased
registry with the CDM registry. Immediately compared to the previous year, with the price range
following this, the first CER spot trade took place. across contracts becoming narrower. While cited
The event removed some of the uncertainty in the ERU prices for standard off-take contracts varied
CDM market, as the lack of a delivery path had from €6 to €10 depending on project risk, sellers’
been one reason cited for the CER price discount expectations for the ERU price were higher due to
compared to EUA prices. the significant increase of CER prices throughout
the past year.
The CDM Executive Board (EB) made some important
decisions last year, the most notable of which was
the decision in June to finally approve the guidelines N2O projects account for 1/3 of total
and procedures for Programmes of Activities (PoAs), JI volume in 2007
and their surprising decision in September to approve
the “supercritical coal methodology” for using less
GHG intensive technologies for energy production In 2007, the numbers and volumes of projects
based on fossil fuels. Both decisions sent positive submitted to the JI supervisory committee (JISC)
supply signals to the market. On the other hand, the for verification were boosted. Overall, 84 projects
EB’s lack of agreement on several proposed biofuel with a total volume of 117m ERUs were submitted
methodologies constituted signals in the opposite to the JI Supervisory Committee (JISC) for public
direction. comment during 2007, taking the pipeline to a total

Carbon 2008
Moreover, the Phase 2 allocation cuts have led to

Figure 2.20: A question of implementation? strong opposition and subsequent lawsuits by the
Evaluation of JI in 2008. Share of respondents agreeing Czech Republic, Estonia, Hungary, Latvia, Lithuania,
with given statements. N=2965 Poland, Slovakia, and Romania. Bulgaria may also
join the case. While the allocation cuts will lead to
The JI market is more mature now than one
year ago
reductions in JI reserves and set-asides, the most
important consequence is that the JI potential in
The JI market facilitates emissions reductions these countries is likely to weaken.
The JI market is the most cost-efficient way
to reduce emissions
As a result, the main JI host countries remain the
non-EU members Russia and Ukraine. However,
The JI market is a success due to the formation of a new Ukrainian government
in mid-December, governmental structures such
The JI market is mature
as the National Environmental Investment Agency
0% 10% 20% 30% 40%
might see some changes. This could significantly
Source: Point Carbon impact JI and GIS development in Ukraine.
Respondents to our Carbon Market Survey 2008
of 107 projects that are capable of generating up to
think the JI market neither is a success (12 percent)
34.5m ERUs annually during 2008 – 2012.
nor mature (6 percent), but one-third of respondents
The projects submitted to the JISC in 2007 are mainly considers the market more mature now than last
hosted by Russia and Ukraine, representing 42 and year (Figure 2.20).
39 percent of total volume, respectively. The Russian
pipeline of 42 projects clearly shows the prevalence
of natural gas pipeline leakage abatement projects.
2.5 Voluntary markets
Taking into account the methodological ambiguities How big was the voluntary carbon market in 2007?
for the measurement of gas leakage emission This market includes the generation and transaction
reduction, potential buyers have to consider the risk of carbon credits in non-compliance markets. The
of non-approval under Track 2 for a large share of the generation of non-compliance credits — which we
existing Russian JI pipeline. will refer to as voluntary offset credit supply —
comprises the reduction of GHG emissions for the
purpose of selling them to voluntary end users and
Russia and Ukraine still dominating not to compliance buyers.
the JI market
2.5.1 Conceptualising the voluntary market
Gas leakage abatement projects account for almost The voluntary market reflects the sum of all
34 percent of JI volume in Russia, while nitric transactions of carbon credits and allowances, where
acid, landfill and fuel switching projects add up to the final purpose of cancelling or retiring the carbon
40 percent. The Ukrainian pipeline of 16 projects credit is not to comply with legislation or to fulfil
is represented mainly by the large-scale coal- agreements between companies and governments.
mine methane and energy efficiency projects. The This definition includes individual and corporate
Lithuanian and Polish project pipelines with shares purchases of carbon credits for the purposes of
of seven and six percent, respectively, are made up “carbon neutrality” or offsetting particular GHG-
mainly by large N2O projects. emitting activities, such as air travel and industrial
processes. This also covers activities on voluntary
While the JISC formally started Track 2 in 2007, only exchanges such as the Chicago Climate Exchange
one project reached the stage of final determination (CCX).
(corresponding to registration under the CDM). The
second project submitted for final determination The definition of the voluntary carbon market, as
was refused for review on additionality grounds. seen from a transaction point of view, is illustrated
in Figure 2.21. The compliance market consists of
The JI potential in the new EU member states was companies and governments that by law must
seriously limited by the EU ETS double-counting surrender emission allowances or credits. The types
rules, which leaves room basically only for non- of credits and allowances that compliance buyers
CO2 projects, e.g. N2O and landfill methane.

11 March 2008
Figure 2.21: Much that separates, a little in common?

The range of carbon credits available for purchase by voluntary market participants. Note that carbon credits
originally generated for compliance purposes could also end up in the voluntary market. NGAC = New South Wales
Greenhouse Gas Abatement Certificates.
 



 
 
 
 


may use is more constrained than in the voluntary from the voluntary Chicago Climate Exchange (CCX),
market, which is largely unregulated. The voluntary we find that the voluntary market traded around 55
market, on the other hand, permits the use of credits
Mt CO2e in the first three quarters of 2007. The total
such as verified emission reductions (VERs), non-
2007 volume was an estimated 75 Mt compared to
verified emission reductions (ERs) and prospective
less than 20 Mt in 2006.
emission reductions (PERs), as well as CERs, ERUs,
EUAs and other credits and allowances generated Our market size assessment indicates strong growth
for the compliance market. in the voluntary carbon market. Furthermore, in our
survey, 45 percent thought that the voluntary market
Total voluntary volume in 2007 esti- had grown more mature over the past year (see
mated to 75 Mt figure 2.22). On the negative side, only ten percent
thought of the voluntary market as transparent.
Our definition excludes trades between project A majority of the transaction volume takes place in
developers and financial institutions, where the final the US, where more than 30 Mt have traded this year
purpose of trading is to supply compliance carbon to date, or about 60 percent of the total. The CCX
credits to compliance buyers. It also excludes accounts for half this volume, with the remainder
trades intended to fulfil agreements between the made up by the corporate voluntary market and
Japanese government and major companies to the consumer retail market. Carbon credit prices
reduce their GHG emission intensity, even though in the US vary between $2/tonne and $15/tonne,
these are termed “voluntary.” This is because these depending on project type.
agreements represent industry-wide commitments
intended as a strong alternative to binding targets in Prices range from $2/tonne to $15/
reaching Japan’s Kyoto goals, with a view to making tonne for voluntary project credits
legislation unnecessary.
2007 was the year in which North American market
2.5.2 Volumes and values players announced ambitious carbon strategies,
Combining data from brokers and voluntary offset from calculating footprints to developing internal
credit providers in the US and Europe, as well as abatement opportunities, or buying, building or

Carbon 2008
Figure 2.22: Voluntary carbon: Prospect or peril?

Share of respondents agreeing with given statements. N=2998
The voluntary carbon market is more mature

now than one year ago
The voluntary carbon market poses a risk for

the reputation of the compliance markets
The voluntary carbon market fosters

innovation in emission reduction methods
The voluntary carbon market produces real

emissions reductions
The voluntary carbon market is transparent
0% 10% 20% 30% 40% 50%

partnering in developing offset projects. Estimated The voluntary US supply pipeline totals 140 Mt,
transactions involving new projects quadrupled in counting all projects for which we have data. Waste
2007. Subsequently, a fourfold increase is expected methane and energy efficiency projects dominate
for offset credits registered in 2008, while the number the US pipeline in volume terms. Looking at Kyoto
of projects from new contractual agreements could projects, potential VER supply from CDM projects
slow down or even decline. has a current maximum volume of 100 Mt to the
Outside the US, the voluntary market is strongly end of 2007.
influenced by the Kyoto market, with CDM and JI Voluntary markets have an impact on compliance
project developers supplying VERs to voluntary markets not only by trading the same or similar
buyers. Some offset credit providers also offer CERs credits, but also by providing models for emerging
for non-compliance purposes. compliance markets. In particular, the current
We estimate that voluntary CER transactions will pipeline of US voluntary offset supply will influence
total only 1-3 Mt in 2007, which means that there the volume, type and quality of offsets available to
will be no effect on CER prices. On the other hand, the 10-state RGGI.
if transparency and standards in the voluntary Current offset providers to the voluntary US market
market do not improve over time, CER demand from also have a voice in the development of a future US
voluntary buyers could increase significantly in the cap-and-trade scheme. We may, for example, see a
coming years. greater emphasis placed on agricultural projects and
carbon capture and storage (CCS) in the US than is
2.5.3 Supply currently the case in the CDM or EU ETS.
To satisfy demand, developers are now scrambling Finally, the quality of voluntary offset credits
to create new projects that meet standards worldwide will influence public opinion and the
complementing or supplementing the CCX Carbon reputation not just of the voluntary market, but of
Financial Instrument. Credits may not be available emission trading in general. Forty percent of those
yet, but the quality of the pipeline, in terms of taking our 2008 survey share this concern, as
expected certification through the Voluntary Carbon indicated in figure 2.18. Conversely, 28 percent think
Standard, Gold Standard, CCB standard, etc, is there is no significant reputational risk.
responding to market demand for offsets from
specific project types linked to established standards
and methodologies.

11 March 2008
3. Carbon markets towards 2012 becomes more mature and sophisticated. An increase
in contract types, more players and markets and
The first Kyoto commitment period, which ends greater competition between market players (such
on 31 December 2012, is set to be dominated as exchanges and brokers) will together generate
by the EU ETS and CDM on the market side. The momentum for higher volumes. As a consequence,
interlinked EU ETS and CDM markets will see the liquidity providers will be attracted to this market.
greatest cumulative volume and value, as they are On the other hand, turbulence in global financial
consolidating and getting more sophisticated. In markets may contribute to less vigorous growth in
addition, the next five years will see the JI market transacted volumes.
deliver its first credits and possibly an emerging
market in national Kyoto allowances or AAUs. Carbon market expected to grow 56
Beyond Kyoto, the ten-state RGGI has already percent in 2008
produced the first US compliance trade, and more
is expected.
We expect that the 2008 carbon market will differ
from 2007 in several ways. First, the EU ETS Phase
3.1 Expectations for global 2008 volumes 2 is considerably tighter than Phase 1. Moreover,
and trends the start of short-term prompt trading for Phase 2,
where only forward trading was seen previously,
The total traded volume in global carbon markets
is expected to contribute to increased traded
in 2007 was 2.7 Gt, valued at just over €40 bn. We
volumes.
expect this to grow to 4.2 billion tonnes CO2e in
2008, up 56 percent from 2007 – see Figure 3.1. Second, the EU climate and energy package,
The EU ETS maintains its position as the largest launched on 23 January this year, has sent a
market. Traded volume in the EU ETS is expected potentially bearish long-term signal to the project
to be 2.6 Gt in 2008. At current prices, this would markets by placing uncertainty on the future of
be equivalent to €63bn (US$ 92bn). the Clean Development Mechanism (CDM). More
immediately, the reduced average credit limits on
We expect that the general trend of increasing CER/ERU and the tight Phase 3 are expected to
traded volumes will continue as the global market dampen EUA-sCER swaps.
Figure 3.1: Stairway to the first Kyoto period, take 2

Reported and estimated contracts 2005-07; forecast for 2008, Gt CO2e
5
Other
JI
4
CDM total 56%
Annual volume (Gt)
3 EU ETS total
64%
2
104%
0
2005 2006 2007 2008 (forecast)

Carbon 2008
Figure 3.2: Long on shorts.

EU ETS company allowances and credit limits compared to expected emissions in Phase 2. N=433.
Companies covered by EU ETS.
Allocation is sufficient for compliance. We will have

surplus EUAs to sell.
Allocation is sufficient for compliance. We have no

surplus EUAs.
Allocation + some of the credit limit needed for

compliance.
Allocation + full credit limit needed for compliance.
Allocation + full credit limit needed. We also need to

buy EUAs.
Allocation + full credit limit needed. We also need to

buy EUAs. We will have surplus CERs to sell/swap.
Don't know
0% 10% 20% 30%
Third, new policies in key countries such as the US There are several reasons why we expect this
and Australia imply that we will see trading in new growth. First, the tightness of the Phase 2 cap is
markets. This will be accelerated by the ongoing expected to increase the traded volume compared
negotiations under the Bali action plan. to 2007, simply because more players are short of
allowances. Industrials that were long in Phase 1
3.2 EUA market are in general balanced or slightly in Phase 2, while
power and heat installations that were short in
In the EU ETS, which covers about 2.1bn tonnes Phase 2 have now become even shorter.
CO2e annually of underlying assets, new financial
instruments are developing and their use is EU ETS to trade seven times power
spreading. What are the main developments in and heat shortage in 2008
the EU ETS market from a trading perspective?
What effects does the EU ETS have on company
behaviour when it comes to abatement, investment, Figure 3.2 displays the shortness of companies
production and other ways of managing emissions? covered by the EU ETS, as reported in our 2008
And beyond current bid/offer spreads, what prices survey. Only 15 percent of the respondents expect
do compliance and financial players foresee for the to be long in Phase 2, that is, to have an allocation
period? that is sufficient for compliance and surplus EUAs to
sell. About one-third – expected to be in the power
sector – will need their full allocation, credit limit and
3.2.1 EU ETS in 2008 extra EUAs. Shortness will mean more trading since
The 2007 volume in the OTC market and on the fewer can ignore the EU ETS. As a consequence,
exchanges corresponds to almost five times the Phase 2 volume will go up compared to Phase 1.
annual Phase 2 shortage of about 300 Mt in the
power and heat sector. This gap needs to be filled Second, a tighter cap gives higher volatility because
every year. We estimate that in 2008 this volume prices become more sensitive to changes in
will increase to about seven times the power and fundamentals. This will be attractive to financial
heat gap. players as well as compliance traders, consequently
increasing the traded volume. As seen in Figure 3.3,

11 March 2008
Figure 3.3: Gearing up for a volatile 2008?

EUA volatility and moving-average daily volume (OTC and exchanges) in 2007 and 2008 to date.
10 70%
9
60%
8
Daily EUA volume (Mt).
7 50%
6
40%
Volatility
5
30%
4
3 20%
2
10%
1
0 0%
2/1/07
3/5/07
8/8/07
25/1/07
19/2/07
14/3/07
10/4/07
29/5/07
21/6/07
16/7/07
31/8/07
25/9/07
18/10/07
12/11/07
2/1/08
5/12/07
25/1/08
19/2/08
30-day MA volume EUA 40-day volatility
Figure 3.4: Rapid growth in options

Options volume (notional) on the ECX, January 2007 - January 2008. The volume includes options
traded on the exchange and options traded elsewhere but cleared on the exchange.
50
45
Notional options volume in EUA million
40
35
30
25
20
15
10
0
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Source: ECX

Carbon 2008
wind, precipitation and power outages will have an

Figure 3.5: Options in the EUA and CER markets immediate impact on EUA prices.
“Have you bought/sold or will you buy/sell EUA or CER
Fourth, Phase 2 will involve significantly more
options?” N=1,254. Respondents in the EUA/CER market.
auctions than Phase 1, which will contribute directly
to increased transaction volume.
Yes, have bought/sold
Options trading expected to grow

options
significantly in 2008
Yes, will buy/sell
options
Finally, option trading has increased rapidly in the
EUA market in the last few months, especially in
January 2008 – see Figure 3.4. The EUA options
market took off in 2007, with the ECX reporting a
Have not/will not
buy/sell options
notional volume of 58m EUA options (see Figure
0% 10% 20% 30% 40% 50%
3.3). This growth continued into January 2008, which
saw 45m EUA options traded on the exchange.
Our survey results reflect the penetration of options

the 30-day moving average on daily volume in 2007 in the carbon market. Figure 3.5 demonstrates
remained quite stable despite lower volatility in the how 55 percent of our respondents in the EU ETS
second half of 2007, while it has increased in 2008 and CDM markets have either entered or plan to
so far, along with higher volatility. enter the options market. CER project developers
Third, the fact that Phase 2 has now begun implies and aggregators are the most active in the options
that there will be compliance buying on the prompt, market – almost two-thirds of this group state that
and fundamentals such as fuel prices and weather they have traded options or plan to do so. In the
will contribute to increased volatility. This, in turn, will EU ETS, this was the case for around half of the
lead to higher volumes. Factors such as temperature, respondents.
Figure 3.6: The final cut

Comparable caps in Phase 1 and Phase 2. Includes EU27 and Norway
2,500
2,300
2,100
Mt/year
1,900
1,700
1,500
Phase 1 cap Phase 2 Submitted EC Cuts Final phase 2 cap BAU Emissions

11 March 2008
Financials or companies with an EUA allocation may 3.2.2 Towards 2012 – and beyond
either hedge their EUA positions directly through In its rulings on Phase 2 national allocation plans,
options, or as part of structured EUA-sCER swap which took place from November 2006 to October
deals. Options are attractive for liquidity providers, 2007, the EC was unquestionably tough. As a
as they do not require the provider to take a position consequence, the caps in 2008-2012 are much
in the underlying commodity. tighter than in Phase 1.
Option trading is expected to increase as volatility The initial shortage in the 2008-2012 period creates
grows, and the hedging and re-hedging of options a demand for real emission reductions, either at
also produces significant trading volume of EUA home or in non-Annex 1 countries.
forwards.
The overall cap for Phase 2 for EU-28 (EU-27+Norway)
Despite the growth momentum in the EU ETS, is currently at 2 103.5 Mt/year. In total, the EC has
there are also factors pulling against the volume. For cut the allocation by 245 Mt/year – or 10.4 percent
instance, industrials are likely to reduce their EUA- – compared to the allocation suggested in the NAPs
sCER swap trades due to the stricter credit limit (see Figure 3.7).
proposed by the EC. Viewed in isolation, this will
reduce the transacted volume. The largest cuts in volume terms have been
requested in Poland (76 Mt), Germany (29 Mt) and
On the other hand, less swap trading could mean a Bulgaria (25 Mt). The largest cuts in relative terms
higher EUA price, as fewer credits will be available in have been requested in countries located in Eastern
the market. This could cause growth in volume that Europe, with the three Baltic States (about half) and
outweighs the relative decline in EUA-sCER swaps. Bulgaria (37 percent) at the top of the list.
Our 2008 forecast for the EU ETS is comparable to The credit limits, defined as the maximum CDM/JI
the underlying assets, i.e. the total 2008 allocation. volumes that can be used for compliance purposes
In comparison, the turnover in mature markets, such in Phase 2, were set quite generously, as every
as the Nordic power market and the oil market, is 6- country was guaranteed a minimum 10 percent.
700 percent. In this context the carbon market is still Table 3.1 shows the suggested caps by member
a young market with a considerable upside.
Figure 3.7: Willingness to buy/sell EUAs at various prices

100%
80%
Share of respondents
60%
would buy at max
40% would sell at min
20%
0%
0-10
10-15
15-20
20-25
25-30
30-35
35-50
50-100
> 100
€/tonne

Carbon 2008
Table 1: The decided and undecided ones..

The table shows the status for the Member States on whose NAPs the European Commission has
made a decision and for those countries where the EC has not yet made a decision. All in Mt/year.
COUNTRY NAP EC decision Reduction [Mt/%] Credit limit

AUT 32.8 30.7 2.1 (6 %) 10.0 %
BEL 63.3 58.5 4.8 (8%) 8.4 %
BGR 67.6 42.3 25.3 (37%) 12.6 %
CYP 7.1 5.5 1.6 (23%) 10.0 %
CZE 101.9 86.8 15.1 (15 %) 10.0 %
DEU 482.0 453.1 28.9 (6%) 22.0 %
DNK 24.5 24.5 0.0 (o%) 17.0 %
ESP 152.7 152.3 0.4 (0.3%) 20.0 %
EST 24.6 12.7 11.7 (48%) 0.0 %
FIN 39.6 37.6 2.0 (5%) 10.0 %
FRA 132.8 132.8 0.0 (0%) 13.5 %
GBR 246.2 246.2 0.0 (0%) 8.0 %
GRC 75.5 69.1 6.4 (8%) 9.0 %
HUN 30.7 26.9 3.8 (12%) 10.0 %
IRL 22.6 22.3 0.3 (1.3%) 10.0 %
ITA 215.2 201.6 13.6 (6%) 15.0 %
LTU 16.6 8.8 7.8 (47%) 20.0 %
LUX 4.0 2.5 1.5 (38%) 10.0 %
LVA 7.7 3.4 4.3 (56%) 10.0 %
MAL 3.0 2.1 0.9 (30%) -
NLD 90.4 85.8 4.6 (5%) 10.0 %
NOR 15 15 0.0 (0%) 20.0 %
POL 284.6 208.5 76.1 (27%) 10.0 %
PRT 35.9 34.8 1.1 (3%) 10.0 %
ROM 97.6 75.9 21.7 (22%) 10.0 %
SVK 41.3 32.6 8.7 (21%) 7.0 %
SVN 8.3 8.3 0.0 (0%) 15.8 %
SWE 25.2 22.8 2.4 (10 %) 10.0 %
TOTAL (EU28) 2348.4 2103.4 245 (10.4 %) n.a.

11 March 2008
Figures 3.8-3.11: Should I buy, sell, bank or reduce emissions?

35% 35% I/we would sell EUAs today at a minimum price of ...
I/we would buy EUAs today at a maximum price of ...
30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
€0-10 €10-15 €15-20 €20-25 €25-30 €30-35 €35-50 €50-100 above €0-10 €10-15 €15-20 €20-25 €25-30 €30-35 €35-50 €50-100 above
€100 €100
35%
35% We would seek to reduce our own emissions and start to sell EUAs
I/we would bank any surplus EUAs into Phase 3 rather than sell them,
at prices below ... if the EUA price were to stay above ...
30% 30%
25% 25%
20% 20%
15%
15%
10%
10%
5%
5%
0%
€0-10 €10-15 €15-20 €20-25 €25-30 €30-35 €35-50 €50-100 above 0%
€100 €0-10 €10-15 €15-20 €20-25 €25-30 €30-35 €35-50 €50-100 above
€100
state, the EC decision and the credit limit as percent increase in energy efficiency. All targets
originally set before the launch of the EC proposal would be achieved by 2020.
on 23 January this year.
The commission’s climate and energy package
It is generally accepted that the EC did a good job in comprises a number of elements:
setting the caps, but was more generous in setting
1. amendments to the EU ETS;
the credit limit. Consequently, Phase 2 could in
theory produce no emissions reductions in Europe, 2. a proposed burden-sharing among EU countries
just credit imports from CDM and JI countries. for emissions not covered by the EU ETS;
3. promotion of renewable energy in the EU,
including national targets;
Supply-demand curve in survey
around current EUA 08 level 4. promotion of carbon capture and storage;
5. improvement in energy efficiency; and
6. changes to state aid rules to facilitate emission
reductions (already adopted).
The Commission corrected this through the EU
ETS review – and the Phase 3 proposal – in January Under the EC proposal, the future allocation in the
this year. The fundamental balance of the EU ETS EU ETS would be reduced by 1.74 percent per year
in Phase 2 is now merged with that of Phase 3 compared to the allocation in the “mid-point” of
(2013-2020). This is because EUAs can be banked Phase 2 (2010). This gives a maximum amount of
without limits from one year to the next. Higher allowances to be issued in 2020 of 1 720 Mt. On
Phase 3 prices should thus also translate into higher average, the annual allocation in Phase 3 will be 1
Phase 2 prices. 846 Mt. Compared to the reported 2005 emissions,
the average Phase 3 allocation implies a 14 percent
All the proposals in the EC energy and climate reduction, while the annual allocation in 2020 is
package are to some extent related to the overall equivalent to a 21 percent cut from the 2005 level.
EU climate and energy targets, i.e. a 20 percent
reduction in GHG emissions, a 20 percent share of The Commission has not yet concluded on distribution
renewables in final energy consumption and a 20 of allowances at the sector and installation levels. At

Carbon 2008
this stage, the Commission states that no installation In the event of a “satisfactory” international
will receive a free allocation in 2013 that is higher agreement, the EU might increase the overall
than its average emissions in the 2005-2007 period. reduction target from 20 percent to up to 30 percent.
On auctioning, however, the rules are pretty clear. For The additional reductions required by a 30 percent
the power sector, refineries and carbon capture and target would be split between the EU ETS and the
storage plants, all allowances would be auctioned non-trading sectors. The EU ETS would take on an
from 2013. Installations in other sectors (including additional reduction corresponding to its relative
aviation and refineries) will receive 80 percent of reduction effort in the 20 percent scenario.
the allowances for free in 2013 decreasing to zero
If the EU should aim for a 30 percent reduction
in 2020.
target, the cap in 2020 would be set just below 1 400
Mt, while the average allocation in Phase 3 would
Phase 3 considerably tighter in a 30 be set at about 1 630 Mt/year. Not surprisingly, a
percent reduction scenario “satisfactory” international agreement would thus
imply a significantly tighter allocation in the EU ETS.
Under current EU legislation, the overall credit

limit for the 2008-2012 period is set at around 1 How does the EC define what is
400 Mt (about 280 Mt/year). However, unless a satisfactory?
“satisfactory” global climate deal is reached and the
EU commits to an overall reduction target beyond 20
At the same time, a 30 percent reduction target will
percent, the Phase 2 credit limit would effectively be
also lead to increased use of CERs/ERUs in Phase
extended to also cover Phase 3.
3. Half of the additional effort could be covered by
This implies that the 1 400 Mt limit now in place import of credits, under the proposal.
for Phase 2 would apply for the period 2008-2020,
Until now, Phase 2 and Phase 3 have been linked
giving an average import potential of just above 100
through the possibility of banking allowances
Mt per year. This corresponds to a credit limit of
into Phase 3. However, by extending the Phase 2
nearly 6 percent for the 2008-2020 period for the
credit limit to 2020, the Commission has effectively
installations included in the scheme in Phase 2.
merged Phases 2 and 3 of the scheme. Thus, the EC
Figure 3.12: To sell or not to sell – the spread

Spread demanded for selling the EUA-CER swap. N=187. EU ETS compliance companies with
surplus CER/ERU limit only.
40%
Before 23 Jan From 23 Jan
Trading range
30%
Responses
20%
10%
0%
€ 0-2 € 2-4 € 4-6 € 6-8 € 8-10 € 10 + Don't Would
know never
Source: Point sell
Carbon

11 March 2008
Figure 3.13: Expectations for EUA prices: 2010 and 2020

N=3262 (2008) and 1893 (2007)
40% 40%
2007 responses Price in 2010 2007 responses Price in 2020
2008 responses 2008 responses
35% 35%
30% Mean 2007: €18 30% Mean 2007: €25

Mean 2008: €24 Mean 2008: €35
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
< €5 €5 - €10 €10 - €15 €15 - €20 €20 - €25 €25 - €35 €35 - €50 > €50 < €5 €5 - €10 €10 - €15 €15 - €20 €20 - €25 €25 - €35 €35 - €50 > €50
proposal will have a significant impact on the market 17 percent said they would not pay more than €10
balance in the 2008-2012 period. for an EUA. Conversely, 21 percent said they were
willing to sell below the €20-25 level, while three
3.2.3 Prices in the EU ETS percent would not sell EUAs below €100.
The current price of an EUA for delivery in We can also look at the question of price in another
December 2008 is around €21. While the market way, by asking how many of our respondents would
sets the prices at which EUAs and CERs are traded, buy, sell, bank and/or reduce own emissions at
compliance buyers and sellers have natural positions various carbon prices. Figures 3.8-3.11 display the
that make it rational to also buy and sell at prices answers.
other than the prevailing market price. For example,
an industrial company may initiate reductions at a
certain threshold price and sell surplus EUAs, or Three percent of respondents would
start an emission intensive production process and not sell EUAs below €100/tonne
buy EUAs if the price falls below a certain level.
In the following, we use our survey to try to gauge As we see from Figure 3.11, around 75 percent of
these underlying factors that would determine respondents would require carbon prices above
supply and demand under other conditions than the €20-25 to start reducing their own emissions in
present market. In other words, we have tried to Phase 2 and selling their excess EUAs. A majority
estimate a simple marginal abatement cost (MAC) would bank their excess EUAs even at prices below
curve. €20-25. Finally, as also indicated in the previous
chart, the minimum price for selling appears to be
EUA price in 2020 expected at €35/ about €25 for roughly half the sample, whereas the
tonne, €10 up from last year €15-20 is the median buying range.
Among financial institutions, more than 40 percent
Figure 3.7 shows the number of respondents of the respondents reported that they would buy
willing to sell or buy EUAs at various prices. Not or sell EUAs in the €20-25 range. More than three-
surprisingly, the two cumulative curves cross at quarters were found in the ranges from €15 to €30.
around €20-25, the price level during the survey The difference from the compliance players is the
period. About 30 percent of respondents (although focus on the current price, as financials have no
not necessarily the same individuals) chose this natural exposure. There were 175 responses in this
level for the maximum buy/minimum sell amount. category.
Only 13 percent would buy above this level, while

Carbon 2008
Figure 3.14: Reported marginal abatement costs (MAC) in the EU ETS

70%
60%
50%
40%
30%
20%
10%
0%
€ 0-10 € 10-15 € 15-20 € 20-25 € 25-30 € 35-50 € 50-100 above € don't
100 know
Roughly speaking, in the compliance category, the “What premium (spread) would you demand to give
median respondent would sell an EUA at €25 or up an EUA and receive an issued CER in 2008?”
above, but would bank it to Phase 3 at prices below Figure 3.12 demonstrates the responses. The
€20, rather than sell it. average swap price was €6.33/tonne.
EUA-CER swaps Respondents’ average swap price is

In the course of 2007, it became clear that the EUA €6.33/tonne
price would be strongly linked to the CDM market,
and notably to the market in sCERs. The sCER Our survey straddled the 23 January release of
market comprises transactions taking place after the the EU climate and energy package, which allows
initial ERPA, and the CERs that are traded may come us to check if there was any effect of the news
from any project. of a potentially tighter credit limit for the average
2008-2020 period. What we see is that the share
EUA-sCER spreads for December 08 delivery have
of respondents who did not know at what price to
moved within a range from €2.41 to €7.98 since last
sell increased from 29 to 37 percent. Other changes
May. However, in 2008 so far, the range has been
were more ambiguous. There may thus have been
confined to €4.28 - €6.18. Is there a greater potential
a small effect of the publication of the EU package,
for EUA-CER swaps if the price increases? Or is
but besides the increase in potential spread sellers
the current price level sufficient to lure the industrial
that “don’t know” their preferred price, we cannot
companies with surplus credit limits to do the swap?
conclude with certainty that this has affected our
In short, how much do our respondents demand to
survey respondents directly.
sell an EUA and receive a guaranteed-delivery CER
in return? Long-term prices
To get a general sense of where respondents think
EUA-sCER swap deals at €4.28- the EUA price will go in the medium term, we asked
€6.18/t so far in 2008 all our respondents to give their best guess of the
level of the EUA price in 2010 and 2020. The results
To probe the swap market, we asked the following are given in Figure 3.13. The trend from last year is an
question to all EU ETS companies that did not say increase in expected prices by about €5-10 for both
they needed their full credit limit for compliance:

11 March 2008
Figure 3.15: Expectations for CER volume by end of 2012

N=3149/1750 (“Don’t know”/”No opinion” excluded from total). Note that the 2007 number includes
both CER and ERU volume.
35%
Mean 2008: 2.4 Gt 2008
30%
Mean 2007: 1.9 Gt 2007
25%
20%
15%
10%
5%
0%
<1.5 Gt 1.5 - 2 Gt 2 - 2.5 Gt 2.5 - 3 Gt 3 - 3.5 Gt > 3.5 Gt
2010 and 2020. Specifically, the median response

for the 2010 price went up from the €15-20 range in
3.3 CDM market in the Kyoto period
2007 to €20-25 in 2008, increasing the average price The CDM market consists of the primary,
from €18/tonne to €24/tonne. Likewise, the median secondary, and options markets. The primary CER
expectation for the 2020 price was €20-25 in 2007, market involves the first buying and selling of the
rising to €25-35 in 2008, and the average price from emission reductions from specific CDM projects,
€25/tonne to €35/tonne. whereby trades are conducted through ERPAs. In
contrast, the sCER market involves trades in CERs
In our survey, we defined the marginal abatement that have already been traded once through primary
cost as how much it would cost the company to transactions. There is also a small but growing
reduce emissions by the last 1 tonne CO2 to be in market in CER options, and a budding post-2012
compliance. An ordered set of MACs for all covered CER market.
entities – a MAC curve – should in principle give the
fundamental EUA price as a function of the cap. 3.3.1 Primary CDM
Based on Point Carbon’s transaction database,
Expected CER volume by end of project database, and current estimate of inflow of
2012 up 0.5 Gt since last year new projects in 2008, we project that primary CDM
transactions in 2007 will decrease to near the 2006
primary CDM transaction volume. The main reasons
However, this MAC is difficult to estimate. When for the expected reverse development are:
asking survey participants in the EU ETS to report
their MAC, more than half could not or would not do 1. reduced demand from EU ETS due to the new credit
so. The result is given in Figure 3.14. Among those limit;
that did report a price range, the most frequent 2. no more inflow of large HFC and N2O adipic
response category is €20-25, i.e. the price at the projects in China; and
time of the survey. However, an average price of 3. many installations in the EU ETS are closer
approximately €40 means that there is a greater to completing their acquisition of credits for
upside than downside. This average, for what it is compliance purposes
worth, is higher than the cost displayed in Figure
Demand conditions may change significantly if the
3.11.

Carbon 2008
EC’s proposal remains unchanged. Specifically, Although we expect China to remain the dominating
if there is no “satisfactory” post-2012 deal, the CDM host country in 2008 (see Figure 2.18), we
average credit limit for 2008-2012 is set to decline may start to see increased activity in countries
from 280 Mt/year to 107 Mt/year. This level would perceived to be in line for mandatory caps. For
remain until 2020. instance, countries such as South Korea, Mexico
and Argentina may be able to convert CDM into JI
This potentially bearish long-term demand signal
projects and thus sell credits into U.S. and EU carbon
is considered to have some, if still limited, effect
markets in the post-2012 period more easily, making
on the inflow of new projects in 2008, given that
these more attractive for investors. As explained
developing a CDM project takes years. Most of the
in “American Climate Policy: A Tale of Two Bills”
reduced inflow will be felt only at the end of the
(CMA 12 February 2008), the Lieberman-Warner bill
2008-2012 period.
suggests allowing some ERUs, but not CERs, for
compliance.
Respondents find CER demand after
2012 very likely As the Kyoto period is finally here and 2012 is
approaching, compliance players, mainly in the
private sector, may already have contracted a
The major EU ETS review effect, however, is
considerable amount of the volume of credits
expected to be seen on the widening of the bid-offer
required to meet their Kyoto targets. Demand from
spread on primary CERs. Buyers may be willing to
compliance buyers is therefore expected to be
pay less due to a potential over-supply of credits,
somewhat reduced compared to previous years. On
while sellers prefer to sit on the fence, accumulating
the other hand, more than 1 500 Mt were traded
credits and waiting for higher prices. This is expected
in the primary CDM market in 2005-2007, and
to lead to lower transacted volumes in 2008.
according to Point Carbon supply estimates, there
The last big CDM projects involving industrial gases are still more than 1 000 Mt of existing projects to
(HFC and N2O from adipic acid production) entered be contracted.
the pipeline and were transacted in 2007, exhausting A major question regarding the CDM is what volume
this source of CERs with low marginal abatement of emission reductions from developing countries,
costs. In their absence, renewable energy projects in the form of issued CERs, will be produced by the
in hydro and wind have come to the rescue, most end of the first Kyoto commitment period. To this
notably in China.
Figure 3.16: CER demand after 2012

N=3153/1851. Note that the 2007 number is based on a question including both CER and ERU demand.
Very likely
Likely
Not sure
Unlikely
Very unlikely
0% 10% 20% 30% 40% 50%

11 March 2008
Figure 3.17: Profit from borrowing?

Question: “Does your company allow for borrowing from the company’s 2009 allocation to use for
compliance in 2008? N=414. Companies covered by the EU ETS.
Yes, may borrow

without any limit
Yes, may borrow up to

a certain limit
No
0% 5% 10% 15% 20% 25% 30%
question, the most frequent response was that 2.5- 2007, meaning that neither one can be understood
3.0 Gt of reductions would produce issued CERs by without understanding the other.
the end of 2012, see Figure 3.15. While we did not We assume that three fundamental factors will
ask exactly the same question last year, the most influence 2008 volume:
comparable result from the 2007 survey indicated an
expectation of 1.5-2.0 Gt from CDM and JI together. 1. We expect issuance to almost double from 2007 to
Thus, supply expectations appear somewhat higher 2008, leading to a greater number of sCERs in the
than last year. market.
2. Spot trading of CERs will then become more
commonplace, thus making trading easier for
CER issuance level decides traded parties without the credit lines to engage in
volumes of sCER forward trading. This may also move part of the
sCER volume from bilateral to OTC trading and
How secure is the future of the CDM? We asked the exchanges.
our respondents – this year and last year – to assess 3. We may see a reduction in swap volume as
the likelihood that there would be demand for CERs industrials become more wary of taking on CERs
and ERUs post-2012. The answer for the CDM is in return for EUAs.
unchanged or slightly better than last year. Figure We expect the sCER volume to increase
3.16 shows that 80 percent consider it likely or very proportionally to issuance; with other positive and
likely that there will be CER demand after the first negative effects cancelling each other out.
commitment period of the Kyoto Protocol.
Prices
3.3.2 Secondary CER market As shown in the previous chapter, the sCER market
2007 saw strong activity in the EUA-sCER swap is backwardated in part due to an expected CER
market. While some expected the spread to supply crunch in the early years of Phase 2, and/or
converge on zero, the swaps have shown their own good supply further out in the period. Ample CER
price dynamics. Regardless, the EUA and sCER supply expected further out on the curve contributes
markets have been closely linked in the course of to this effect. One way to reduce this backwardation

Carbon 2008
would be for compliance companies to borrow from eligibility and the ITL-CITL link is up and running, it
next year’s allocation for current year compliance. A will be possible to trade CERs much more smoothly.
company could do this, for example, by using some Consequently, the options volume in 2008 will, to a
of next year’s allowances for this year’s compliance, large extent, depend on the timing of registry linking
and then save some of its credit limit for later years, and eligibility.
when sCERs are cheaper.
The design of the EU ETS permits companies to CER option trading expected to in-
do this, since the Directive stipulates that EUAs crease significantly in 2008
for each year should be issued every 28 February,
whereas EUAs for last year’s compliance do not have
to be handed in until April. Yet will companies allow There is also some evidence that market participants
themselves to take this opportunity, given internal are looking further ahead in their trading strategies,
risk management regulations? Our data show that a some even to beyond 2012. CER forwards for
surprising number actually will. delivery post-2012 have been traded by 8 percent
of companies with obligations under the EU ETS,
As Figure 3.18 shows, more than 40 percent of the
as shown in Figure 3.19. CER options for after 2012
respondents – all from companies covered by the
are used by half that number, while post-2012 EUA
EU ETS – reported that they could borrow at least
instruments are less frequently used.
some of next year’s allocation. There thus seems to
be room for reducing the backwardation in the sCER
market if some of this potential is utilised. 3.4 JI – existing market, deliveries now?
CER options The market created by the JI mechanism has been
active for years, but no ERUs have so far been
CER options were traded in 2007, but market issued. Most of the JI projects submitted to the
participants predict a higher volume this year. One JISC in 2007 appear to be in the final stages of
problem with CER options stems from the manner ERPA negotiations. The process is being spurred on
in which they are issued; financials should be able to by the fact that the crediting period (2008-2012) has
hedge them in the market. Since the sCER market already started and project participants want faster
is not particularly liquid, it is quite difficult to trade negotiation processes. The pace is slow in Russia,
options. However, once more countries attain Kyoto
Figure 3.18: Soaring sCER

Comparison of changes in the EUA and primary/secondary CER market segments, 2005-07 and
forecast for 2008
3
EUA total
Primary CER
Secondary CER
2
Annual volume (Gt)
0
2005 2006 2007 2008 (forecast)

11 March 2008
however, despite recent improvements. At the same would be delivered from Russia. As may have been
time, the rules for JI in new EU ETS member states expected, almost half of the sample did not state
are increasingly restrictive, potentially reducing any opinion on this question, either replying “don’t
supply. know” or simply recording no answer.
It is possible that the contracted volume in 2008 Among the substantive replies, the most frequent
could be boosted by some positive changes in and median (middle) response was the year 2010
Russian procedures and by progress towards (Figure 3.20). One-third of the respondents (not
eligibility status in Ukraine (expected in April this counting the “don’t know” responses) chose this
year). We expect 250 Mt will be issued from Russia option. That being said, 17 percent thought that
over the next five years. Thus far, there are only 11 Russia would not deliver any ERUs during 2008-
Mt contracted with Russian companies. This means 2012. (On the other hand, our sample included 18
that we should expect large bundle contracts to be respondents located in Russia; of these, fifteen
reported in the market. A similar situation has also thought that ERUs would be delivered no later than
emerged in Ukraine. 2009.)
First AAU trade expected in 2008, 3.5 AAU – large potential, limited supply?
likely to involve Ukraine The Kyoto Protocol permits countries with
commitments – written into the Protocol’s Annex B
What the JI market is waiting for now, of course, is – to buy and sell parts of their permitted emission
delivery of ERUs. Unlike the CDM market, where volumes, or assigned amounts (AA), as assigned
credits (CERs) have been issued since 2005, amount units (AAUs). The market is potentially
ERUs cannot be created or transferred until the very large – in the order of several billion tonnes
host country has gained eligibility under the Kyoto CO2e – but no known trades have yet taken place.
Protocol’s Article 17, and in any event not until the Nonetheless, with the first Kyoto commitment
beginning of 2008. period now underway, and Annex B countries
A major question is whether, when and how gaining eligibility for international emission trading,
many ERUs will come from Russia. We asked all it is becoming increasingly likely that an AAU trade
our respondents when they thought the first ERU will take place.
Figure 3.19: Post-2012 EUA and CER market activity

Yes, CER forwards
Yes, CER options
Yes, EUA forwards
Yes, EUA options
No
Don't know
0% 10% 20% 30% 40% 50% 60% 70% 80%

Carbon 2008
Figure 3.20: When will the first ERU be delivered from Russia?
N=3041 (“Don’t know”/”No opinion” excluded from total in the chart).
35%
30%
25%
20%
15%
10%
5%
0%
2008 2009 2010 2011 2012 Not in the
2008-12
Source: Point Carbon period
Figure 3.21: An AAU trade in 2008?

N=3027
Yes
No
Don't know
0% 5% 10% 15% 20% 25% 30% 35% 40%

11 March 2008
Countries often mentioned as potential AAU sellers 3.6 Regional Greenhouse Gas Initiative
are Latvia, Hungary and Ukraine. In February,
Ukraine’s National Environment Investment Agency
(RGGI)
revealed plans to carry out a pilot AAU transaction, The RGGI, the United States’ first foray into cap-and-
of a size 10-20 Mt, by April or May. The country has trade programmes for GHGs, will begin in 2009. The
developed a green investment scheme (GIS) under RGGI system will cap CO2 emissions from power
which it will earmark revenues from AAU sales for plants throughout the region. The first compliance
investments in projects that will contribute to further period of the ten-state scheme begins on 1 January
emission reductions. 2009. However, most states are expected to start
auctioning allowances this year.
We asked whether survey respondents thought they
would see an AAU trade in 2008, and further how From 2009 to 2014, the overall emissions cap is set
much the volume would be from the main potential at 188 million short tons (m s/t). This is approximately
seller countries – Russia and Ukraine. The results are 8 million s/t above 2000-2002 historical emissions.
displayed in Figure 3.21 and 3.22. RGGI authorities have set the budget high enough
to allow room for economic growth, but did they
If AAU trading takes place, how much will we see?
set it too high? The answer could mirror the single
Here, the most favoured reply was 500 Mt – 1 Gt.
most important lesson from the first phase of the
Furthermore, two-thirds of the substantive responses
European Union Emissions Trading Scheme (EU
are seen in the “less than 500 Mt” and “500 Mt-1
ETS): Do not over-allocate allowances.
Gt” categories. A rough weighted mean came out
at just under 1 Gt. This number is well below the While official RGGI numbers were last published for
total AAU supply potential, and the potential upside the year 2004, we have used US EPA and DOE data
is thus substantial. to estimate emissions for 2005 and 2006. 2005 will
be remembered as a year with a hot summer and
In this chapter, we have discussed the Kyoto markets,
high electricity usage. Estimated emissions were
some of which have already reached fairly advanced
around 185 m s/t, close to the RGGI cap of 188 m
stages and almost maturity, according to our survey.
s/t. However, between 2005 and 2006, the use of
On the other side, potential markets such as that
petroleum fuels for electricity generation dropped
concerning AAUs may come into existence through
dramatically. This drop in oil-fired generation is
trades and deliveries this year or next.
Figure 3.22: From Russia and Ukraine with AAUs?

N=3 027 (“Don’t know” excluded from total in the chart).
35%
30%
25%
20%
15%
10%
5%
0%
None Less than 500 Mt - 1 Gt 1 - 2 Gt 2 - 3 Gt More than
500 Mt 3 Gt

Carbon 2008
compensated by an increase in gas-fired and non- required to auction their allowances before the end
emitting generation sources. of the year.
This led to an equally dramatic drop in emissions In addition, we expect a “secondary” market to
of 21 m s/t between 2005 and 2006, leaving the emerge, in which allowances are traded between
scheme long by 13 percent. As displayed in Figure compliance buyers, financials, and others, after the
3.23, emissions are estimated to be 185 m s/t in auctions.
2005 and 164 m s/t in 2006. The hashed area in
the figure illustrates the gap between historical Finally, in 2008 we expect some pre-compliance
emissions and the 2009-2014 cap level. Emissions activity in anticipation of mandatory federal
had been remarkably stable between 2000 and schemes in the US, Australia and possibly Canada.
2004, before climbing slightly in 2005 and dropping A pre-compliance transaction is one in which a
dramatically in 2006. future participant in a planned mandatory ETS buys
credits with the expressed purpose of using them
for compliance. Examples of pre-compliance buying
RGGI expected to be long the first were seen in the US in the mid-1990s in anticipation
years of operation of Kyoto trading.
While fuel-switching, driven by the relative price One argument for pre-compliance trading in the US
of petroleum based fuels and natural gas, played a in 2008 is the fact that NYMEX will start offering
significant role in this steep fall, two other factors carbon trading on 17 March this year. Being the
help explain the emissions drop: weather-driven world’s largest physical commodities futures and
electricity demand and environmental programmes options exchange, the traded volumes of the
covering other air pollutants. contracts offered (e.g. EUAs, CERs, voluntary
carbon emission reductions) have the potential to
Traded RGGI volume will be the sum of auctioned attract both compliance and financial actors.
volume and spot or forward trades in the secondary
market. The auctioned volume is set to be by far the Establishing a clear line between voluntary and pre-
largest, as most states have pledged full or close compliance transactions is methodologically difficult,
to full auctioning. The greatest source of uncertainty as our definition is based on the motivations of the
is not knowing how many states will be able to buyer. Some voluntary carbon buyers also mention
complete the legislative and administrative work pre-compliance positioning as one of several reasons
for entering the carbon market.
Figure 3.23: Mind the gap

State by state RGGI historical emissions for 2000-2006, in million short tons. The hashed area
represents the difference between the RGGI cap and the sum of statewide emissions
SPREAD BETWEEN
CAP AND TOTAL
EMISSIONS
200
cap-total
MD
150
Million short tons of CO2
RI
MA
VT
NY
100
NJ
NH
ME
DE
50
CT
0
2000 2001 2002 2003 2004 2005 2006

11 March 2008
4. The carbon markets beyond 2012 developing countries should take on commitments;
whether they should have obligations to monitor
The first Kyoto period ends in 2012 and it is still not and report the effects of national climate policies;
clear whether a new international climate agreement and whether and how the mandate should make
will be reached or not. What seems evident, however, reference to the IPCC scientific findings.
is that the momentum in regional carbon markets
is reasonably strong and that they will continue The principal disagreeing parties were the US,
to operate independently of a new international Canada, Australia and Japan on one side, and the
agreement beyond 2012. The EU ETS Phase 3, EU and developing countries on the other. A line of
which will run from 2013-2020, is an example of this. conflict was also drawn between developing and
The market is now also paying particular attention developed countries.
to developments in the US. Recent advances made
by federal emission trading bills will encourage Bali: Agreed to negotiate towards
developments such as US-EU carbon market linkage 2009 signing
in the not too distant future.
All parties, including the US, maintained their desire
4.1 Towards a new global climate to produce a mandate, both before and during the
conference. However, the US resisted any reference
agreement to quantified emission reductions, saying it did not
want to “prejudge” the conclusions of negotiations.
4.1.1 The Bali Mandate The US was also generally negative towards
The December 2007 COP/MOP meeting in Bali was financing and technology transfer provisions. Japan
the last realistic chance to kick start the negotiations supported the US in not wanting to quantify emission
necessary for a new ratified agreement to be in reductions for Kyoto Annex B countries, except in
place at the beginning of 2013. Despite not being a context where all major emitters would take on
reached until the last minute (on 15 December), the comprehensive emission reductions or limitations.
Bali mandate was agreed on by all participants and
thus creates strong momentum — and commitment The EU was strongly in favour of a 25-40 percent
— for continuous negotiations towards a final post- emission reduction range for all developed countries
2012 agreement. It is hoped that the agreement will by 2020, pointing to the recommendations by the
be signed at the UNFCCC Conference of Parties IPCC that global emissions have to peak in the next
(COP) in Copenhagen in 2009. 10-15 years and that developed countries need to
adopt this 2020 target in order to reach this goal.
The main outcome of the Bali meeting was an The EU also sided with the developing countries and
agreement on a mandate that commits all the demanded a clear distinction between what should
members of the UNFCCC to engage in a process to be required of Annex 1 countries and non-Annex 1
produce a comprehensive climate deal over the next countries.
two years. Specifically, the Bali mandate consists
of a decision in the Convention, or “dialogue” track, The Group of 77 (G-77) and China — a diverse
and two decisions under the Kyoto track. developing country bloc consisting of 130 members
— insisted on maintaining a clear division between
The mandate contains no quantified emission Annex 1 and non-Annex 1 countries in the reference
reduction goals. This, however, is not necessarily a to commitments and actions. They also wanted
weakness, as the important point is for all parties support in the form of adaptation, technology
to meet at the negotiation table, not to agree on transfer, capacity building, general financial
targets in the mandate. That being said, the mandate assistance and action on avoided deforestation.
acknowledges the scientific findings of the IPPC, Developed countries had trouble seeing exactly how
and states that “deep cuts in global emissions will such actions (notably technology transfer) could be
be required”. implemented in a meaningful way.
Several developing countries, including China and
4.1.2 The Bali positions
South Africa, were strongly in favour of a new
The Bali negotiations were tough. The main areas deal and offered to reduce the growth of their own
of contention were whether quantified emission emissions, provided that Annex 1 countries make a
reduction targets should be included; to what extent commitment to emission reductions.

Carbon 2008
4.1.3 The forthcoming negotiations programme by 22 February 2008 and will hold its
The forthcoming negotiations will follow two parallel first meeting in March or April 2008. The mandate
tracks. The Convention track will be the principal has therefore created a momentum for continuous
one, as the US has not ratified the Kyoto Protocol. negotiations in the run up to Copenhagen.
The Kyoto track is a “back-up” solution and also A key question in the negotiations is whether
constitutes a solid foundation for the content of the developing countries will take on commitments in
new agreement. a new agreement. As it stands now, the distinction
The Convention track produced the “Bali action between developing and developed countries
plan” (BAP). The Kyoto track produced a decision in remains, and the forthcoming negotiations will
the Ad-hoc Working Group on New Commitments consider mitigation “actions” by all countries and
for Annex 1 Parties (AWG), as well as a decision mitigation “commitments” by developed countries.
to conduct a second review of the Kyoto protocol Developing countries secured strong promises from
under its Article 9. Of the two tracks, the Convention developed countries on adaptation, technology
track will be the most important because it involves transfer, capacity building and tropical deforestation
the US, whereas the Kyoto track will continue in and degradation.
order to reassure developing countries, as well as
for legal reasons. The Kyoto track also constitutes a 4.1.4 Towards an agreement?
significant foundation and starting point for a new Will negotiators be successful over the next two
protocol to be negotiated towards and during the years and produce a global climate regime for the
COP in Copenhagen in 2009. post-2012 period? In our survey, 71 percent think
agreement will be reached (Figure 4.1). This is exactly
Under the Bali action plan, a formal negotiation
the same response as last year. While the positive
committee will be set up for the Convention track.
answers were relatively evenly distributed, Japan
It will be called the Ad-hoc Working Group on Long-
and Germany were the most optimistic of the major
term Cooperative Action under the Convention. Note
countries, each with more than 80 percent expecting
that this AWG is separate from the existing AWG for
a positive outcome. Respondents from India, China
new commitments under the Kyoto track. This new
and the US also scored well above average, with 75-
working group has been tasked with presenting
78 percent giving positive answers.
its work for adoption by the COP in Copenhagen
in 2009. It asked for initial submissions to its work
71 percent think international agre-
ement reached by 2012
Figure 4.1: Copenhagen, here we come
Will a global post-2012 climate agreement to be reached
before 2012. [N=3060] What if the US in the end decides not to “join the
consensus,” even though it went along with the
Not sure international community in Bali. In fact, even if the
US were somehow not part of it, our respondents
think that a post-2012 agreement would still be
reached. Figure 4.2 shows the aggregate result.
Such an outcome might be a continuation of
negotiations of new caps for Annex B countries under
No the ad-hoc working group set up for this purpose.
But given the increasingly hard-nosed positions of
several developed countries in this group —including
the EU — it is not clear how this could succeed. It
is particularly instructive to see that only 58 percent
of Japanese respondents answered “Yes” to this
Yes particular question.
Given that our survey shows an expectation of a
post-2012 deal, which of the countries will take on
“commitments”? Although a rather ambiguous

11 March 2008
word, we anticipate “commitments” will be

Figure 4.2: Could it happen without the US? something akin to emission targets or Kyoto caps.
Question: “Will there be a post-2012 agreement, Figure 4.3 shows the opinions of our survey
regardless of whether the US participates?” N=3036. participants.
These results illustrate interesting points in a number
of groups:
Yes, a post-
• Europe, Japan and Australia: More than 80
2012
agreement will percent think that these countries will participate
be reached with commitments. Kyoto latecomer Australia is
regardless just ahead of Canada. Could this be due to the Rudd
effect, given the new prime minister’s emphasis on
climate policy?
• The highlights of the next group are the US and
No, a post- Russia. Just over half of our sample thinks that
2012 these two giants will participate with commitments.
agreement
requires US
In the Carbon Market Survey last year, more than
participation 60 percent of the respondents thought that the US
would participate in a post-2012 agreement with
commitments, compared to around 50 percent
0% 20% 40% 60% 80% this year. This is a rather interesting result, as
developments in US climate policy have been
substantial in the past year, both at federal and state
levels.
Figure 4.3: Who will participate with commitments?

Likely participants in a post-2012 scheme. N=3013/1910
Europe
Japan
Australia
Canada
New Zealand
Russia
USA
Ukraine
South-Korea
Some developing countries
China
India
2008
Mexico 2007
Sectors in developing countries
0% 20% 40% 60% 80% 100%


Carbon 2008
• Despite the fact that Canada has significant In November 2007, six Midwestern US states and
difficulties in meeting its Kyoto target, the survey the Canadian province of Manitoba signed the
respondents are confident of Canada’s participation Midwestern Greenhouse Gas Accord, aiming at
in a new global climate agreement. Nearly 75 reducing their regional GHG emissions by 60 to
percent think Canada will join, just slightly less than 80 per cent of current levels by 2050, through a
in the Carbon Market Survey last year. cap-and-trade system. The six participating states
(Wisconsin, Minnesota, Illinois, Iowa, Michigan and
• Finally, there are the rapidly industrialising
Kansas), three observer states (Ohio, Indiana and
countries: China and India, at 35 percent. Although
South Dakota) and Canadian province Manitoba
not mentioned as an alternative, numerous
intend to have targets for reducing emissions from
respondents mentioned Brazil as another likely
all six GHGs in place by November 2008.
candidate.
Within one year, they will also finalise a multi-sector
• It is also worth noting that South Korea
cap-and-trade programme and create a model rule
seems a likely candidate for post-2012 agreement,
for implementing the carbon market in state laws.
gaining a positive response from 45 percent of
The accord states that a cap-and-trade programme
our respondents. This now-industrialised country
should start within 30 months of the document
illustrates the problems of continuing a strong
being signed.
bifurcation between developing and developed
countries, as laid down in 1992 when the UNFCCC
Annex 1 was written. 4.2.2 Federal level
Pre-compliance trading in the US in 2008 is expected
simply because it appears increasingly likely that
4.2 Carbon markets in North America the US will enact federal cap-and-trade legislation
As described in Chapter 3.6, the RGGI will start to manage the nation’s GHG emissions. The US
in 2009, but the first auctions will in fact be held Senate’s Lieberman – Warner Climate Security Act
before this, in 2008. Besides RGGI, there are a (CSA), introduced in October 2007, is expected to
number of initiatives in North America, both at be the basis for a future federal US emission trading
federal and state level, that may be implemented in scheme (US ETS). As the CSA progressed through
a few years. In Canada, both the federal government the legislative process, a revised version of the
and the provinces have launched climate plans and original bill was developed. The initial bill places most
strategies, with the provinces being the most pro- of the regulatory burden on the actual emitters. The
active. As uncertainty is still significant when it newer version shifts more of this burden upstream
comes to Canadian climate policy in general, we to fossil fuel producers, processors and importers.
will leave that for now and instead concentrate our
discussions on its great neighbour to the south. A US ETS could be the largest car-
bon trading scheme in the world
4.2.1 US State initiatives
Regional initiatives are at the forefront of climate The cap in the original version of the bill is set at 5.2
policy in North America. In February 2007, the bn tonnes CO2e in 2012. The cap decreases by 96
Western Climate Initiative (WCI) emerged as a Mt CO2e annually until 2050 when the cap is 1.56
regional, coordinated attempt to address climate
bn tonnes CO2e, a 70 percent decrease from 2005
change by reducing GHG emissions in the western
levels. The CSA covers emissions from 73 percent
part of North America. In August 2007, six Western
of the US economy; from the power, industrial and
states (Arizona, California, New Mexico, Oregon,
transportation sectors.
Washington and Utah) and two Canadian provinces
(British Columbia and Manitoba) announced a joint Eighteen percent of the allowances would be
target of 15 per cent below 2005 GHG emission auctioned in 2012. This percentage increases on
levels by 2020, and are currently developing an an annual basis to 70.5 in 2036, and then remains
emission trading system whose design will be made unchanged until the end of the programme in 2050.
public in August 2008. The WCI target was not the Installations in electric power and industrial sectors
result of a negotiation process but a compilation of are initially grandfathered 20 percent each, but this
state targets into an aggregate reduction target. allocation percentage decreases linearly to zero by
2036. The transportation sector, having emissions of

11 March 2008
just above 2 bn tonnes CO2e in 2012, is not allocated typical plant characteristics. Beyond fuel switching,
any allowances over the period. The original CSA carbon capture and storage technologies kick in at a
proposal would begin with an estimated difference carbon cost of between $25 to 100/tonne CO2e.
between business-as-usual and cap (‘EBAU-t-C’) of
The relative US fuel prices and the domestic offset
420 million allowances (8 percent of cap).
supply will be significant factors influencing US ETS
demand for international allowances, primarily EUAs
L-W bill permits 30 percent offset, and ERUs. As CERs are not accepted in a US ETS,
half from abroad this will to a certain extent provide an incentive for
the US to contribute to a new international post-2012
To ensure a cost-effective trading scheme, regulated agreement in order to have international cap-and-
facilities would be permitted to cover up to 30 trade programmes to generate foreign allowances
percent, or 1.56 bn tonnes CO2 in 2012, of their for compliance in the US.
compliance obligation, with offsets: 15 percent from The market created by the proposed CSA would be
domestic sources and 15 percent from international the largest cap-and-trade emissions trading system
emissions allowances or credits purchased from a in the world. It would dwarf the size of the EU ETS
foreign emissions trading market, amounting to 750 with a cap of 5.2-5.7 Gt against the EU’s 2.1 Gt.
Mt international credit import in 2012.
In the revised approach, the cap is set at 5.7 bn
tonnes CO2e in 2012, which is roughly equivalent
Will a US ETS put pressure on EU
to the 2005 emissions from the covered facilities.
ETS?
Given the BAU emissions projections and the
emissions cap specified in the revised CSA bill, the To gauge expectations for GHG emissions trading
regulatory scheme would begin with an estimated in the US, we asked the following question to all
582 Mt allowance shortage in 2012 (420 Mt in the our survey recipients: “Do you think the US will
original). To meet this shortage, domestic offsets are introduce a federal mandatory cap-and-trade scheme
the cheapest, but supply is likely to be limited. The for greenhouse gases before 2015?” As Figure 4.4
coal to gas switching price is approximately $50 - 60/ shows, over 70 percent of the respondents think
tonne on average, assuming current fuel prices and that one will be introduced, while only 15 percent
think it will not.
Of course, this result is subject to potentially strong
Figure 4.4: US ETS by 2015? bias, given that the survey is mainly taken by people
N=3004 who have strong interests in GHG emissions
trading. Nevertheless, these same people think
that the future US ETS will not be particularly
Don't know strict. As Figure 4.5 shows, only one-tenth of the
respondents expect a US ETS stricter than the EU
ETS Phase 2, despite the strong ambitions of the
Lieberman-Warner bill. There is little difference if we
look separately at the 256 answers to this question
from respondents located in the US itself (in total,
No the survey had 292 US respondents).
Only ten percent expect US ETS to

be tighter than EU ETS Phase 2
Yes The result in Figure 4.5 is somewhat surprising. As

we have outlined above, the CSA is stricter than the
EU ETS Phase 2 in terms of reductions, coverage and
degree of auctioning. It would be more interesting
Source: Point Carbon to liken it to EU ETS Phase 3. One explanation for

Carbon 2008
Figure 4.5: How strict will the reduction requirements be in a US GHG?

Comparison with the EU ETS Phase 2. N=2117. Only respondents expecting a US ETS by 2015.
Less strict than the EU

ETS
About as strict as the

EU ETS
Stricter than the EU

ETS
No opinion
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
this result might be that a future US ETS is seen not reduce emissions from the electricity and industry
in terms of any specific proposal currently available, sectors?” Our results show that only 34 percent
but rather in light of a recent history of US climate expect the introduction of mandatory GHG emissions
inaction. Developments over the next year, with a trading in the 2008-2012 period (Figure 4.6). Note
presidential election and negotiations under the Bali that Japanese respondents are more pessimistic
mandate, should give us a better idea of what to about a domestic ETS than the respondents as
expect from a federal US scheme. a whole, with 28 percent saying that it will never
happen.
4.3 Other upcoming markets
Following the example of the EU ETS, a number
4.3.2 New Zealand and Australia
of other initiatives for regional emissions trading In September 2007, the New Zealand Government
schemes are emerging. These are still at the idea and announced the world’s first cap-and-trade scheme
planning stage, but might very well be operational to cover all six GHGs covered by the Kyoto protocol.
within a few years. Forestry will be covered from 2008; liquid fossil
fuels from 2009; stationary energy sources, such as
4.3.1 Japan power plants and industrial installations, from 2010;
and agriculture, which is responsible for 50 percent
Domestic emissions trading is still very controversial of the country’s emissions, will be covered from
in Japan. Whereas the opposition Democratic 2013.
Party of Japan has proposed a domestic ETS,
industry, power producers and the governing Liberal
Democratic Party appear to be staunchly opposed. It New Zealand and Australia planning
is thus unclear when a Japanese mandatory ETS will for emissions trading
be established, if ever.
To assess expectations for a domestic ETS in While the government will allocate freely to the
Japan, we asked the following question: “Will Japan forestry sector, unlike the EU carbon scheme,
introduce a mandatory cap-and-trade scheme to the electricity sector will receive no allowances

11 March 2008
Figure 4.6: Domestic ETS in Japan? Don’t hold your breath...

Will Japan introduce a mandatory cap-and-trade scheme to reduce emissions from the electricity
and industry sectors? N=3005. Responses from Japan: 65.
Yes, after 2012
Yes, during the 2008-

2012 period
No Japanese responses
Total responses
0% 10% 20% 30% 40% 50% 60%

according to the plan. This is because the sector has been the key player in the global carbon market
can pass all of its costs on to the end consumer. thus far, with the EU ETS as the main driver for
Moreover, industry will be allocated carbon credits emission reductions, both at home and in developing
equal to 90 percent of their 2005 emissions. countries.
In addition to these, we may expect that current The release of the EC’s new proposal for a
CDM countries like South Korea and Mexico, which comprehensive climate-energy package in January
are likely to take on commitments in a new post- this year, confirmed Europe’s intention to combat
2012 agreement, will also begin to develop regional climate change, with or without similar contributions
emissions trading schemes. from other countries. These new proposals, if
adopted, will effectively extend the current EU ETS
Details on the design of an Australian emission
trading period up to 2020.
trading scheme have not yet been settled. The aim
is to launch the plan by the end of 2008. So far,
however, it seems that the schemes will start in Post-2012 issues crucial for current
2010 with the intention of having a wide coverage, emissions trading schemes
indicatively more than 70 percent of Australia’s GHG
emissions. It is also likely that the scheme will allow
international offsets, preferably from the Kyoto Second, climate policy gained considerable
project markets. Linking to the New Zealand trading momentum in the US in 2007, and initiatives at both
scheme has also been discussed. state and federal levels mean that the country is
now moving closer to implementation of emission
4.4 Towards a global market? trading schemes. RGGI will start on 1 January 2009
(and in fact, some early auctions are planned in
Although we have just entered the first Kyoto 2008), while initiatives in the West and Mid-West
period, this report clearly shows that we must pay will take a few more years to materialise.
very close attention to what will happen when this
period comes to an end in December 2012. There Most importantly, however, is the Lieberman-
are three principal reasons for this. First, Europe Warner Bill now going though the Senate. This bill

Carbon 2008
Figure 4.7: What will be the cost of carbon in 2020?

Currency of choice. N=2591 (2157 respones in EUR; 967 in USD)
45%
Price in € (average = 38)
40%
Price in $ (average = 46)
35%
30%
25%
20%
15%
10%
5%
0%
0-10 10-20 20-30 30-50 50-100 above 100
is expected to become the foundation for a federal is expected, but only a minority believes that China
emissions trading scheme in the US and may be and India will take on commitments post-2012.
implemented as early as 2012.
Given the development of an increasingly interlinked
These US plans are, like the EU ETS, taking global carbon market, we asked our survey recipients
shape independently of the negotiations for a the following question: “Will there be a global
new international agreement on climate change. reference price for CO2 emissions in the year 2020?
However, all US initiatives so far include provisions The existence of such a price (regardless of its level)
for employing international credits for compliance would be a reliable indicator of policy success.
purposes (primarily EUAs and Kyoto credits). This
indicates that there will be a close bond between
upcoming regional emissions trading schemes Will China and India take on commit-
and existing schemes, primarily the EU ETS. The ments post-2012?
carbon market is still, and will remain, a politically
driven market, as supply and demand for credits Seventy-three percent of our sample think that there
are determined to a significant degree by political will be a global reference carbon price in 2020 (see
decisions. Figure 4.7). This result fits well with our general
findings in this chapter (ca. 70 percent optimistic
Finally, the importance of post-2012 issues is also survey sample).
connected to the ongoing negotiations for a new
international climate agreement which will replace – We then asked our survey recipients what this global
or modify - the existing Kyoto Protocol. In particular, carbon price was likely to be. The most frequently
this involves discussion on how and to what extent chosen reply, and the median, was 30-50 Euros or
large-emitting developing countries such as China US dollars. Interestingly, the global carbon prices for
and India will be involved in a new international 2020 given in this question are much higher than the
agreement. The key question is: Will these countries average prediction for the 2020 EUA price shown
take on commitments in a new international in the previous chapter. Could this be because a
agreement? The results from our survey clearly global market is expected to accommodate a higher
demonstrate that a new international agreement price?

11 March 2008

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Carbon Glossary
A Someone who thinks market prices will rise.

Business As Usual Scenario (BAU)
A business as usual scenario is a policy neutral
AA and AAU, see Assigned Amount and Assigned reference case of future emissions, i.e. projections
Amount Units. of future emission levels in the absence of changes
Additionality in current policies, economics and technology.
Under the Kyoto Protocol, certificates from JI and
the CDM (see explanations below) will be awarded
only to project-based activities where emissions C
reductions are “additional to those that otherwise
would occur”. The issue has to be elaborated further Cap and Trade
by the Parties to the Kyoto Protocol, and on the basis A Cap and Trade system is an emissions trading
of practical experiences. system, where total emissions are limited or
Annex B Countries ‘capped’. The Kyoto Protocol is a cap and trade
Annex B countries are the 39 emissions-capped system in the sense that emissions from Annex
countries listed in Annex B of the Kyoto Protocol. B countries are capped and that excess permits
Annex I Countries might be traded. However, normally cap and trade
Annex I countries are the 36 countries and economies systems will not include mechanisms such as the
in transition listed in Annex I of the UNFCCC. Belarus CDM, which will allow for more permits to enter the
and Turkey are listed in Annex I but not Annex B; system, i.e. beyond the cap.
and Croatia, Liechtenstein, Monaco and Slovenia Carbon Dioxide Equivalent (CO2e)
are listed in Annex B but not Annex I. In practice, This is a measurement unit used to indicate the
however, Annex I of the UNFCCC and Annex B of global warming potential (GWP) of greenhouse
the Kyoto Protocol are often used interchangeably. gases. Carbon dioxide is the reference gas against
Annex II Countries which other greenhouse gases are measured.
Annex II of the UNFCCC includes all original OECD CDM, see Clean Development Mechanism.
member countries plus the European Union. CDM EB, see Clean Development Mechanism
Assigned Amount (AA) and Assigned Amount Units Executive Board.
(AAUs) CERs, see Certified Emission Reductions.
The assigned amount is the total amount of Certification
greenhouse gas that each Annex B country is The certification process is the phase of a CDM or
allowed to emit during the first commitment period JI project when permits are issued on the basis of
(see explanation below) of the Kyoto Protocol. An calculated emissions reductions and verification,
Assigned Amount Unit (AAU) is a tradable unit of 1 possibly by a third party.
tCO2e. Certified Emission Reductions (CERs)
CERs are permits generated through the CDM.
Clean Development Mechanism (CDM)
B The CDM is a mechanism for project-based emission
reduction activities in developing countries.
Backwardation Certificates will be generated through the CDM from
A market condition in which a futures price is lower in projects that lead to certifiable emissions reductions
the distant delivery months than in the near delivery that would otherwise not occur.
months. The opposite of contango (see below). Clean Development Mechanism (CDM) Executive Board
Baseline and Baseline Scenario (EB)
The baseline represents forecasted emissions The CDM EB is accountable to the Conference of the
under a business-as-usual (BAU) scenario, often Parties to the Kyoto Protocol (see below). It registers
referred to as the ‘baseline scenario’ i.e. expected validated project activities as CDM projects.
emissions if the emission reduction activities were Commitment Period
not implemented. The five-year Kyoto Protocol Commitment Period
BAU, see Business As Usual Scenario. is scheduled to run from calendar year 2008 to
Bear calendar
Someone who thinks market prices will decline.
Bull

Carbon Glossary
year-end 2012. not be financed by official development aid, but that

Contango additional funding is to be made available for such
A condition in which distant delivery prices for projects.
futures exceed spot prices, often due to the costs of
storing and insuring the underlying commodity. The
opposite of backwardation.
G
COP, see Conference of the Parties.
Grandfathering
Conference of Parties (COP)
Method for allocation of emissions, where permits
The COP is the supreme body of the United
are allocated, usually free of charge, to emitters and
Nations Framework Convention on Climate Change
firms on the basis of historical emissions.
(UNFCCC). The last conference (COP-11/MOP1) was
Greenhouse gases (GHGs)
held in Montreal, Canada in November/December
Greenhouse gases (GHGs) are trace gases that
2005.
control energy flows in the Earth’s atmosphere by
Countries with Economies in Transition (EIT)
absorbing infra-red radiation. Some GHGs occur
Countries that are in the transition from a planned
naturally in the atmosphere, while others result from
economy to a market-based economy, i.e. the
human activities. There are six GHGs covered under
Central and East European countries, Russia, and
the Kyoto Protocol - carbon dioxide (CO2), methane
the former republics of the Soviet Union.
(CH4), nitrous oxide (N2O), hydrofluorocarbons
(HFCs), perfluorocarbons (PFCs) and sulphur
E hexafluoride (SF6). CO2 is the most important GHG
released by human activities.
EIT, see Countries with Economies in Transition.

Emission Reduction Unit (ERU) H
Permits achieved through a Joint Implementation
project.
Host Country
Emissions to Cap (E-t-C):
A host country is the country where a JI or CDM
Emissions-to-cap (E-t-C) is calculated by subtracting
project is physically located.
the seasonally adjusted cap from emissions (actual
Hot Air
or forecasted). This metric gives an indication
Excess permits that have occurred due to economic
of whether the market (for a specific period) is
collapse or declined production for reasons not
producing more or less than the seasonally adjusted
directly related to intentional efforts to curb
cap for that same period. More specifically, if not
emissions.
taking CERs into account, a positive (negative) E-C
means that the market is fundamentally short (long),
suggesting a buy (sell) signal.
Emissions Trading
J
Emissions Trading allows for transfer of allowances
or credits across international borders. However, JI, see Joint Implementation.
it is a general term often used for the three Kyoto Joint Implementation (JI)
mechanisms: JI, CDM and emissions trading. Joint Implementation is a mechanism for transfer
ERU, see Emission Reduction Unit. of emissions permits from one Annex B country to
EU ETS, European Union Emissions Trading System. another. JI generates ERUs on the basis of emission
reduction projects leading to quantifiable emissions
reductions.
F
Financial additionality
K
CDM projects have to be financially additional, which
means that the projects that Annex I countries Kyoto Protocol
support within the framework of the CDM should The Kyoto Protocol originated at COP-3 to the
UNFCCC in Kyoto, Japan, December 1997. It specifies
emission obligations for the Annex B countries and

Carbon Glossary
defines the three so-called Kyoto mechanisms: JI,

CDM and emissions trading. It entered into force on
S
16 February 2006
Supplementarity
A requirement in the Kyoto Protocol stating that
M emissions trading should be a supplement to
domestic action. It reflects the request of the
European Union to limit the use of the Kyoto Protocol
MAC, see Marginal Abatement Cost.
flexibility mechanisms. It is still not determined how
Marginal Abatement Cost (MAC)
supplementarity should be interpreted.
The marginal abatement cost is the cost of reducing
emissions with one additional unit. Aggregated
marginal costs over a number of projects or activities U
define the marginal abatement cost curve.
Memorandum of Understanding (MoU)
A MoU is an agreement between two parties that United Nations Framework Convention on Climate
aims to formally recognise a joint desire to ultimately Change (UNFCCC)
conclude an agreement or to achieve goals jointly. The UNFCCC was established 1992 at the Rio Earth
It may or may not have legal backing of sanction, Summit. It is the overall framework guiding the
depending upon how it is constructed. MoUs are international climate negotiations. Its main objective
often used as a basis for CDM/JI projects. is “stabilisation of greenhouse gas concentrations
in the atmosphere at a level that would prevent
dangerous anthropogenic (man-made) interference
N with the climate system”.
National Authorities and Designated National

Authorities V
The national authority is the official body representing
the Government which takes part in the arrangement Verification
of CDM/JI projects. For JI host countries, the national In order for AIJ, CDM and JI projects to have a
authority approves the projects and issues the formalised validation of an emission reduction
emission reduction units. For CDM host countries, stream, a recognised independent third party must
the designated national authority issues a non- confirm that claimed emissions reduction activity
objection letter necessary for the project approval. has occurred.
Non-Annex I countries
Annex I is an Annex in the UNFCCC listing those
countries that are signatories to the Convention and
committed to emission reductions. The Non-Annex
I countries are developing countries, and they have
no emission reduction targets.
P
Permit
Permits are often used for denoting the tradable
units under the Kyoto Protocol, i.e. AAUs, ERU or
CERs.
Project Design Document (PDD)
Document completed by project developers in order
to register their project under the CDM.

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Carbon 2008: Post-2012 Is Now

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Carbon 2008: Post-2012 Is Now

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Carbon 2008

All rights reserved © 2008 Point Carbon

About Point Carbon

About the report:

ii All rights reserved © 2008 Point Carbon

iii All rights reserved © 2008 Point Carbon

iv All rights reserved © 2008 Point Carbon

Secondly, once again the survey respondents

v All rights reserved © 2008 Point Carbon

2 Carbon markets and policies in 2007 3

2.5. Voluntary markets 20

3.4 JI - existing market, deliveries now?

3.5 AAU - large potential, limited supply? 37

3.6 Regional Greenhouse Gas Initiative

4 Carbon markets beyond 2012 41

4.1 Towards a new global climate 41

4.3 Other upcoming markets 46

4.4 Towards a global market? 47

vi All rights reserved © 2008 Point Carbon

1. Introduction At the federal level, a comprehensive and ambitious

Figure 1.1: Trading EUAs and CERs

CER project developer/aggregator

Company with emissions regulated

Company covered by CO2 regulation

0% 5% 10% 15% 20% 25% 30% 35% 40%

Source: Point Carbon

1 All rights reserved © 2008 Point Carbon

Figure 1.2: Most of the respondents come from...

United States 12.7%

0 50 100 150 200 250 300 350

2 All rights reserved © 2008 Point Carbon

Figure 2.1: Stairway to ‘07

Source: Point Carbon

3 All rights reserved © 2008 Point Carbon

Figure 2.2: Still dominated by the EU ETS

Total volume: 2.7 Gt Total financial value: €40bn

4 All rights reserved © 2008 Point Carbon

Figure 2.3: Ups and downs in 2007

400 17% -12% 14%

5 All rights reserved © 2008 Point Carbon

Figure 2.4: No changes on the exchanges

50 ECX 86.7% (75.6%)

Source: Point Carbon ECX Powernext Nord Pool EEX

6 All rights reserved © 2008 Point Carbon

Figure 2.5: Volumes and prices in the EU ETS 2004-07

35 Volume EUA 2007 20

30 EUA 2008 sCER08

Million EUAs traded

Source: Point Carbon's Carbon Market Trader

7 All rights reserved © 2008 Point Carbon

Figure 2.6: UK carbon-adjusted dark and spark spreads in 2007

Dark spread summer 08 Spark spread summer 08 EUA Dec 08

Figure 2.7: German carbon-adjusted dark spread

Clean dark spread Cal 08 EUA Dec 08

8 All rights reserved © 2008 Point Carbon

Figure 2.8: EUA price correlation with fuel and power

-0.6 German cal 08

9 All rights reserved © 2008 Point Carbon

Figure 2.9 Assessing the EU ETS

0% 20% 40% 60%

10 All rights reserved © 2008 Point Carbon

Figure 2.10 Sector emissions-to-cap (E-t-C) in 2006 compared to 2005