The

World
Bank

State and Trends of the

Carbon Market 2008
Karan Capoor, Philippe Ambrosi
World Bank

CARBON EXPO
Cologne (Germany)
May 7, 2008
Methodology
This study is based on the following:
– Analysis of the World Bank’s confidential project database;
– Interviews with market players (natural buyers (Europe & Japan), fund
managers, developers, project sponsors, DNAs, private equity funds,
hedge funds, banks, traders & brokers);
– A comprehensive review of published literature, incl. access to
preliminary reports by Ecosystem Marketplace and Caisse des
Dépôts;
– Assisted by Evolution Markets and Natsource.

Project database includes:

– More than 1,500 project-based transactions (ERPAs signed)
– Completeness of information >80% in all fields except on
exact terms and price of transaction >50%.

Aggregate data on allowance markets and secondary market:

– From major exchanges and OTC sources.
The Growth of the Carbon Market
 Market Volume Growth 2007
(in MtCO2e)

Project-Based Allowance Markets

Transactions x 2.5

x 1.0 JI
41
EU Emission
x 10
CDM Trading Scheme
Secondary
551 CDM 2,061
240
x2
Voluntary
New South Wales
& Retail
Certificates Chicago Climate
42 25
x3 Exchange
x 1.3 23 x2
 Market Value Growth 2007
(in MUS$)

Project-Based Allowance Markets

Transactions x 3.5

xx1.3
1.3 JI
500
EU Emission
x 12
CDM Trading Scheme
Secondary
7,400 CDM 50,100
5,500
x2
Voluntary
New South Wales
& Retail
Certificates Chicago Climate
270 220
x4 Exchange
x1 70 x2
EU ETS
Good design, strong results
Price signal triggers abatement:
at home, 50-100MtCO2e reduced in 2005-06 (MIT-IEA analysis)
and abroad, through CDM&JI projects (1,040 mlln CERs+ERUs contracted)

EU-ETS learns from Phase I review and better aligns incentives

Ph III
Ph II Ph III
(with agreement)
Timeframe 2012 2020 2020
- 6% below - 21% below - 30% below
Effort
2005 2005 2005
Germany&UK Gradual, Gradual,
Auctioning
(4-5% globally) to 100% to 100%
CDM&JI Limits (MtCO2e)
EU ETS 1,400 0 1,200 ?
non ETS 540 800 ? 1,200 ?

European Commission proposal strong, but limits potential of CDM & JI

When two elephants fight…

…it is the grass that gets hurt

China consolidates lead,
Africa emerges (share of volumes)

Location of CDM projects Primary CDM&JI Buyers

Other Europe
6%
Other & Unsp.
India 2%
6%
Japan
R. of Asia 11%
5% UK
China Africa 59%
73% 5%

ECA
Europe-Baltic
1%
Sea
12%
Brazil Austria
6% 2%
Spain
R. of Latin
Italy 4%
America
4%
5%

Jan. 2007 to Dec. 2007 Jan. 2007 to Dec. 2007

 CDM Delivers on Clean Energy
(share of volumes)  US$1 of carbon
Clean energy: 64% leverages US$9 financing
Other
of renewable energy
N2O Fugitive
9% 1%
3%
HFC Hydro
8% 12%  US$33 billion (€24
CMM
5%
Wind
billion) clean energy
Waste mng't
4%
7%
leveraged in 2007
Biomass
LFG 5%
5%
Other
Agro-forestry
0,1%
Renewables
0%
 Cumulative (02-07)
leverage US$52 billion
EE+Fuel s.
40%
(€39 billion) expected
Jan. 2007 to Dec. 2007
CDM at a Crossroads
Success masks challenges
DOE at validation or req. reg. registered issuance 2-year
180 days 325 days 276 days delay
2,210 projects er
ot h st ria
l 978 projects 319 projects r
st
indu 4
ria
l
he
ot

CH
u EE
ind RE

1,302 MCERs 1,225 MCERs 133 MCERs

4
CH
EE
RE

75% to high yield

projects (ind. gas)

Two-thirds of projects
(half of volumes) have
not reached registration
ot
he tri a
ind 4

RE and EE stuck
r

CH
us

EE
l

RE

somewhere in the
pipeline
Source: World Bank based on Data from UNEP RISOE
Market tiers widen
Avg CER price: €10, avg ERU price: €9
ER CER CER CER CER EUA
ERU
voluntary pre-reg. reg. issued secondary (PhII)
€ 26 Larger projects
€ 24 Experienced sponsors
€ 22
Financing in place
€ 20
€ 18 Later in pipeline
€ 16
€ 14
€ 12
€ 10 Smaller projects
€8 Weaker sponsors
€6
Financing risk high
€4
€2 Early in pipeline
€0
more risk €3: registration €3: volume €3-5: fungibility less risk
to Buyer to Buyer
Risk premium
SMART CDM
for required scale up
Streamline approval process to reduce
transaction costs
Monitoring through new tools
Additionality demonstrated using simple,
conservative benchmarks
Reach new potential and scale up through
programs and innovative methodologies
Trends important, not exact Tons
 Sources of demand
Contracted so far Residual demand
Estimated demand Contracted so far Residual demand
risk-adj when risk-adjusted

(MtCO2e) (MtCO2e) (MtCO2e) (MtCO2e) (MtCO2e)

EU 1940 1217 1043 723 897

gov't 28% 15% 13% 50% 45%
private sector 72% 85% 87% 50% 55%
Japan 450 320 284 130 166

GoJ 22% 9% 10% 54% 42%

private sector 78% 91% 90% 46% 58%
RoEurope & NZealand 45 17 13 28 32
gov't 44% 76% 76% 25% 31%
private sector 56% 24% 24% 75% 69%
Australia 0 0 0 0 0

TOTAL 2435 1554 1340 881 1095

 Right direction?
contracted so far likely future demand
800
US&Canada
Volume (MtCO 2e)

700 Voluntary
CDM+JI - Kyoto
600

500

400
? ? ?
300

200

100

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Policy vacuum
Concluding thoughts
 Right direction?
contracted so far likely future demand
800 US&Canada
Volume (MtCO 2e)

EU gov'ts
700
Voluntary
600 CDM+JI - Kyoto

500
? ? ?
400

300

200
? ?
100

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Frontload gov’t
demand ?
 Thank you

Full report available at

www.carbonfinance.org