Carbon 2008 (Analysis of CC Price)

All rights reserved 2008 Point Carbon
Carbon 2008
Post-2012 is now
11 March 2008
TO THE POINT
This report was published at Point Carbons 5th annual conference, Carbon Market Insights 2008 in
Copenhagen 11 - 13 March 2008. For more information, see www.pointcarbon.com
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 fnancial 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 fnancial 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.
ii
Carbon 2008
ii
About the report:
This report was written and edited by Kjetil Rine, Endre Tvinnereim and Henrik Hasselknippe.
For citations, please refer to: Point Carbon (2008): Carbon 2008 - Post-2012 is now Rine, K., E.
Tvinnereim and H. Hasselknippe (eds.) 60 pages.
About Point Carbon
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2
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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Every year, Point Carbons Carbon Market Insights conferences gather thousands of key
players for the carbon communitys most important annual conferences. Point Carbon also
runs a number of high-level networking events, workshops and training courses.
iii
Executive Summary
11 March 2008
This report presents an overview of the carbon market
in 2007, our outlook for 2008, and expectations for
the remainder of frst Kyoto period and beyond. It
is based on the results of the largest survey ever
conducted into the carbon market. We received 3
703 responses to our web-based questionnaire and 1
462 of the respondents trade or own European Union
Allowances (EUAs) or Certifed Emission Reductions
(CERs). The survey results are complemented by
analysis undertaken by Point Carbon.
The global carbon market is consolidating at a time
of ever-increasing attention to climate change. Last
year was another record one in the market, with an
increase from 1.6 bn tonnes in 2006 to 2.7 Gt in 2007.
The total traded volume increased by 64 percent. As
global temperatures and media coverage increase,
so does the volume of emission allowances and
credits.
In value term, the growth was even steeper in 2007.
The global carbon markets were worth more than
40 billion in 2007, up by 80 percent from 2006.
The EU Emissions Trading Scheme (EU ETS) is still
dominating the global carbon market. EU ETS 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 fnancial
market. The higher share of the value of EU ETS
compared to the volume is due to the high prices in
EU ETS compared to other markets.
The CDM market comes second, both in volume
and value terms. It increased to 947 Mt and 12bn
in 2007. This is an increase of 68 percent in volume
terms, and an astonishing 199 percent in value terms
from 2006, constituting 35 percent of the physical
market and 29 percent of the fnancial market.
The market for secondary trading of CDM credits is
the fastest growing segment. From limited activity
at the start of the year, the market saw around 300
Mt of sCER trades over the course of 2007, much of
this related to EUA-sCER swaps. This emphasises
the dominant position of EU ETS in the global carbon
market last year.
Traded volumes in the Joint Implementation (JI)
market almost doubled from 21 Mt in 2006 to 38
Mt in 2007. Higher prices in 2007 compared to 2006
meant that the value of the JI segment more than
tripled, from 95m in 2006 to 326m in 2007.
The direct market participants were not, however, left
by themselves last year and there were signifcant
activities in the political arena. The climate change
challenge was at the top of the political agenda, and
the UNFCCC summit in Bali in December succeeded
in starting negotiations on a post-2012 agreement,
with the aim of signing the agreement at the COP
meeting in Copenhagen in 2009.
In our survey, we asked whether a global post-2012
climate agreement will be reached before 2012.
Around 70 percent of the respondents think there
will be an agreement. Of these, 80 percent think
there will be a post-2012 agreement, regardless of
whether the US participates and around 60 percent
of the respondents (N=3013) think that the US will
join an international agreement. Interestingly, more
than 75 percent believe that Canada is also likely to
join the agreement, despite currently being a long
way from meeting its Kyoto target.
Second, the European Commission (EC) ruled on
the National Allocation Plans (NAPs) for Phase 2. The
overall impression was that the EC had learnt from
Phase 1 and was suffciently tight on the EUA cap,
but that it was more generous when it came to the
credit limit. Hence, taking into account the amount
of carbon credits allowed to be used for compliance
in Phase 2, it seemed that no emission reductions
were needed within the EU over the period.
This was to a large extent corrected in January 2008
when the EC proposed its revision of the EU ETS
Directive. If a satisfactory international agreement
is not reached, the EC proposes that the credit limit
for Phase 2 (2008-20012) should be valid for both
Phase 2 and Phase 3 combined (2008-2020). If,
however, a satisfactory international agreement is
reached, the credit limit would be increased by half
of the additional reduction efforts going from the
20 percent reduction scenario up to, at most, a 30
percent reduction from the 1990 level.
A third crucial development in the political arena in
2007, which indeed will continue to develop in 2008
and beyond, was the emission trading initiatives
that are being taken on at both state and federal
level in the US. RGGI will start on 1 January 2009
iv
Carbon 2008
(with some early auctions in 2008), while initiatives
in the West and Mid-West will take a few more
years to materialise. Most important, however, is
the Lieberman-Warner Bill now going through the
Senate. The bill suggests establishing an emission
trading scheme covering around 75 percent of GHG
emissions in the US, with a cap more than 2.5 times
higher than in EU ETS Phase 2. This will decrease by
around 100 Mt a year towards 2050. If it becomes
a reality, this will be the largest emission trading
scheme in the world.
Moreover, the bill suggests allowing international
credits to be employed for compliance purposes,
primarily EUAs and Kyoto credits. This indicates
that there will be a close bond between upcoming
regional emissions trading schemes and existing
schemes, primarily the EU ETS.
The carbon market is still, and will remain, a politically
driven market, as supply and demand for credits
are determined to a signifcant degree by political
decisions
The proposal for a federal US ETS indicates a tighter
scheme than we see in the EU ETS. It is interesting
then, that most of our survey respondents do
not think that a federal US ETS will be particularly
ambitious.
Two-thirds of our survey respondents say that 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. These efforts are
yet to be seen in the verifed emission data.
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 years 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).
The importance of the carbon market for its
participants is clearly seen from the long-term
investment perspective. 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.
Besides the compliance markets, primarily connected
to the Kyoto Protocol, a voluntary carbon market has
emerged. Although it is still limited in size, only 10
percent of the respondents to our survey fnd the
voluntary market to be transparent.
Moreover, less than 30 percent think the voluntary
carbon market produces real emissions reductions,
while more than 40 percent believe that the voluntary
carbon market poses a risk to the reputation of the
compliance markets. Having said that, a majority of
the respondents think that the voluntary market is
more mature now than it was a year ago.
It is fair to say that the main activities and trades
in the carbon markets years ahead will be in
connection with compliance schemes - either
determined through an international agreement or
national or regional schems independent on an post-
2012 agreement.
Given the development of an increasingly interlinked
global carbon market, we asked our survey
recipients the following question: Will there be a
global reference price for CO
2
emissions in the year
2020? The existence of such a price (regardless
of its level) would be a reliable indicator of policy
success. Seventy-three percent of our sample think
that there will be a global reference carbon price in
2020.
v
11 March 2008
Foreword
Developments witnessed over the past year, as
well as developments so far in 2008, signal a new
era for the carbon markets. We have now entered
the frst year of the frst commitment period under
the Kyoto protocol, and also the frst year of the
second phase of the EU emissions trading scheme.
Companies operating in the European carbon market
now (at least in most cases) know their compliance
requirements until 2012, and can base their trading
and investment decisions both on day-to-day changes
in fundamentals and expectations about the future.
The recent proposal from the European Commission
also provides greater insight into the development
of the market until 2020, although the uncertainties
will remain for still some time.
When we published the previous version of this
report, in March 2007, we noted that climate change
and carbon markets were the subject of record
high public interest. Little did we know that the rest
of 2007 would bring with it even greater interest
from media, decision makers, and the general
public. Particular mention should be given to the
Nobel Peace Prize being awarded jointly to the
Intergovernmental Panel on Climate Change and Al
Gore, our keynote speaker at last years conference.
We are both honoured and privileged to have
chairman of Nobel laureate IPCC, Dr. R. K. Pachauri,
with us for this years conference.
The results from our annual survey, and presented in
this report, highlight three things in particular. First,
there seems to be a generally bullish sentiment on
carbon, not necessarily refected in current market
prices. Survey respondents now on average expect
the 2010 price to be 6 higher than they did a year
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
this will have to be met through reductions taking
place in Europe.
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
upon before the end of the Kyoto period. In our view,
getting the United States on board will be vital for a
new agreement. Interestingly, survey respondents
do not necessarily agree, with about 77 per cent
expecting an agreement to be reached regardless of
whether or not the U.S. participates. However, more
than half of the respondents expect the U.S. to take
on reduction commitments and to participate in a
new agreement.
Finally, the results from our survey confrm that carbon
prices are now seen as an important factor in the
operating and investment decisions of companies.
Over two-thirds of survey respondents claim that
the EU ETS has caused emission reductions of
some kind, either already implemented or at the
planning stage. While this might be good news for
the development of greenhouse gas emissions in
Europe, we expect to see similar developments in
other places around the world in the years to come.
Over 72 per cent of the survey respondents expect
there to be a global reference price for carbon by
2020. As the world increasingly takes into account
the cost of emissions, and the value of reductions,
the carbon market will continue to incentivise
investments in cleaner technology and emission
reductions. And in the end, that is what this market
is supposed to lead to.
You can read more about these fndings, and a lot
more, in this report. We believe that this report
presents the most up-to-date and comprehensive
analysis for the carbon market as a whole. It certainly
represents the global analysis work that takes place
in Point Carbon every day, and we hope you will fnd
it both interesting as well as inspirational.

Per-Otto Wold
CEO
Point Carbon
vi
Carbon 2008
1 Introduction
2 Carbon markets and policies in 2007
2.1 Overview
2.2 EU ETS
2.3 CDM
2.4 JI
2.5. Voluntary markets
3 Carbon markets towards 2012
3.1 Expectations for global 2008 volumes
and trends
3.2 EU ETS
3.3 CDM market in the Kyoto period
3.4 JI - existing market, deliveries now?
3.5 AAU - large potential, limited supply?
3.6 Regional Greenhouse Gas Initiative
(RGGI)
4 Carbon markets beyond 2012
4.1 Towards a new global climate
agreement
4.2 Carbon markets in North America
4.3 Other upcoming markets
4.4 Towards a global market?
1
3
3
6
17
19
20
23
23
24
33
36
37
39
41
41
44
46
47
Table of contents
1
11 March 2008
1. Introduction
The initial year of the frst Kyoto commitment period
(2008-2012) has now begun. Starting this year, the
countries listed in Annex B of the Kyoto Protocol
(apart from the US) will have to measure, estimate
and account for their greenhouse gas (GHG)
emissions. Annex B comprises those countries
that were considered industrialised in 1992, when
the UN Framework Convention on Climate Change
(UNFCCC) was negotiated.
Phase 2 of the EU Emissions Trading Scheme (EU
ETS) also commenced this year, and is scheduled
to run alongside the frst Kyoto period. Moreover,
January saw the release of the ECs proposal for the
structure of Phase 3, extending the EU ETS horizon
to 2020. With new fnancial products and trading
strategies, the EU market is about to come of age.
And yet 2008 is not only the year of Kyoto. This year
we expect important developments in US carbon
markets in particular. At the state level, we have just
seen the frst ever GHG compliance trade under the
ten-state Regional Greenhouse Gas Initiative (RGGI),
and expect much more to come.
At the federal level, a comprehensive and ambitious
cap-and-trade is awaiting a Senate foor vote this
year, while all the 2008 presidential candidates
with a reasonable chance of winning are in support
of emissions trading as part of an active climate
agenda.
This report is our third annual presentation of the
status of the carbon market. We aim to provide a
comprehensive overview of all compliance markets
currently in operation, as well as other markets that
we believe are imminent. Given the wealth of data
available for the Kyoto markets in particular the
EU ETS and Clean Development Mechanism (CDM)
these will be discussed in the greatest detail.
However, we will also consider the developments
that have been made in Japan, Russia, Ukraine,
Australia and of course the US.
Our report includes information derived from a
number of sources. The primary source is Point
Carbons annual Carbon Market Survey, which
ran from 18 January to 6 February 2008, using a
web-based survey tool. In total there were 3 703
respondents, compared to 2 250 last year and 800
0% 5% 10% 15% 20% 25% 30% 35% 40%
Company covered by CO2 regulation
other than EU ETS
Government
Other
Financial institution/bank
Company with emissions regulated
under the EU ETS
CER project developer/aggregator
Source: Point Carbon
Figure 1.1: Trading EUAs and CERs
N=1462. Respondents saying they buy/sell/hold EUAs and/or CERs
1406 respondents buy, sell or hold
EUAs or project credits
11 March 2008
3703 participants in our web-survey
this year, up from 2250 in 2007
2
Carbon 2008
in 2006. Of this years respondents, 1 462 (~40
percent) stated that they are involved in European
Union Allowance (EUA) or Certifed Emission
Reduction (CER) trading, or own EUAs/CERs. Figure
1.1 below shows the distribution of respondents
among this subset.
Of the 1 462 respondents holding or trading EUAs/
CERs, 473 work for companies with emissions
regulated under the EU ETS, with about the same
number for CDM project developers/aggregators.
Some 220 respondents represent fnancial
institutions.
Our typical respondent has a degree in either
engineering or fnance/economics, while 13 percent
hold a PhD. Two-thirds are between the ages of 25
and 44. The largest number of respondents is found
in the US a total of 292; the other countries with
three-digit response totals are the UK (281), India
(142) and Germany (107). In total, 101 countries
are represented and almost 50 percent of the
respondents are located in Europe.
In addition to the Carbon Market Survey 2008, this
report is based on Point Carbons in-depth analyses
of international climate policy and the carbon market
in our publication series: Carbon Market Analyst
(CMA), Carbon Market Monitor (CMM), Carbon
Market Brief (CMB) and Carbon Policy Update (CPU)
in particular; as well as on Point Carbons proprietary
databases, models and applications: Carbon Market
Trader (CMT) and Carbon Project Manager (CPM).
The outline of this report is as follows:
Chapter 2 provides a review of carbon market
developments in 2007. We report traded volumes
and values, price drivers and evaluations of the EU
Almost 50 % of respondents located
in Europe, down from 55 % last year
Figure 1.2: Most of the respondents come from...
Top 15 countries (out of 101 with responses). N=2291.
12.7%
12.3%
6.2%
4.7%
4.1%
3.8%
3.8%
3.2%
2.8%
2.8%
2.7%
2.7%
2.4%
2.2%
2.1%
0 50 100 150 200 250 300 350
United States
United Kingdom
India
Germany
France
Australia
Canada
Brazil
Japan
Netherlands
Norway
Italy
Spain
China
Belgium
Carbon Market Survey 2008 is the
main source of information
3
11 March 2008
ETS, CDM and Joint Implementation (JI) markets.
We also provide statistics on buyers, sellers and
project types in the CDM. The chapter ends with
a discussion of recent developments in voluntary
carbon markets, emphasising the US position.
Chapter 3 presents our expectations for the global
carbon market in the Kyoto period and for 2008 in
particular. We discuss the policies providing the
framework for the EU ETS and much of the CDM and
JI markets, with a focus on decisions and proposals
by the European Commission (EC). We also suggest
what to expect from the RGGI market in 2009, and
discuss the likelihood that Assigned Amount Units
(AAUs) will start trading in 2008.
Chapter 4 looks at the emerging landscape of the
carbon world after 2012. We begin by presenting
our analysis of the events of the Bali conference
in December 2007. Recognising that US action is
a sine qua non for serious international action on
climate change, we then outline domestic proposals
for emissions trading in the US, both at the federal
and state level.
We also assess the likelihood of domestic emissions
trading in other countries, notably Japan. Finally, we
ask whether a global carbon market will exist in
2020, and if so, what the price of carbon might be
12 years from now.
2. Carbon markets and policies in
2007
2.1 Overview
Climate change was at the top of the global agenda
in 2007, most notably following publication of the
Intergovernmental Panel on Climate Changes (IPCC)
fourth assessment report (4AR). The report stated
that climate change was unequivocal and made
it extremely diffcult for anyone to remain a climate
sceptic.
Moreover, former Vice President Al Gores
documentary flm, An Inconvenient Truth, brought
the climate issue to the masses worldwide.
Governments across the world have been forced to
take action as a result of the change in public opinion
on climate change and increased media coverage.
2.1.1 The carbon markets
In the carbon market, equally important events have
taken place. The total traded volume in the global
carbon market grew from 1.6 Gt (1.6 billion tonnes) in
2006, to 2.7 Gt in 2007 an increase of 64 percent
(see Figure 2.1). The value of the carbon traded grew
even more, by 80 percent in the same period, from
22bn ($33bn) to 40bn ($60bn).
Figure 2.1: Stairway to 07
Annual contract volumes 2005-07 in billion tonnes (Gt) CO
2
equivalen
0
1
2
3
4
5
2005 2006 2007
A
n
n
u
a
l

v
o
l
u
m
e

(
G
t
)
Other
JI
CDM total
EU ETS total
64%
104%
56%
4
Carbon 2008
ERU volumes almost doubled in the Joint
Implementation (JI) market, from 21 Mt in 2006
to 38 Mt in 2007. Furthermore, higher ERU prices
meant that the value of the JI segment more than
tripled, from 95m in 2006 to 326 in 2007.
Financial players joined the carbon market in force in
2007. We have seen US hedge funds take positions
in the market, especially in options and long CER
positions. Towards the end of the year, NYMEX,
the worlds largest physical commodities futures
and options exchange, announced that it would
join the market by launching its own CO
2
emission
products. This move by NYMEX indicates at least
two things: First, carbon trading is about to enter
the mainstream in the US. Second, major market
players are confdent that GHG emission trading is
about to take off in the US, whether at the state
level (RGGI, the West and Midwest), at the federal
level, or both.
That being said, current activity in existing Australian
and US carbon markets did in fact decrease from
2006 to 2007. Most signifcantly, total traded value is
down 63 percent, to 186m in the mandatory New
The EU ETS is still by far the largest carbon market
worldwide, with 62 percent of the physical market
and 70 percent of the fnancial market (Figure 2.2).
The EU ETS grew over the course of 2007, with a
traded volume of 1.6 Gt and a value of 28m. This
represents a volume growth of 62 percent and a
value growth of 55 percent from 2006.
Activity within Kyotos fexible mechanisms
specifcally the Clean Development Mechanism
(CDM) grew more than expected in 2007. In
total, the CDM market increased from 563 Mt and
3.9bn in 2006 to 947 Mt and 12bn in 2007. This
is an increase of 68 percent in volume terms, and
a staggering 199 percent in value terms from 2006,
and in total constituting 35 percent of the physical
market and 29 percent of the fnancial market.
Within the CDM, the growth of the secondary
CER (sCER) market has been the most impressive,
starting in the frst months of 2007 and growing to
around 300 Mt over the whole year. This represents
a remarkable increase from 2006, much of which is
related to EUA-CER swaps. With the growth in sCER
trading, the total CER market could well overtake
the EUA traded volume in 2009 or 2010.
CDM market increased to 947 Mt
and 12bn in 2007
EU ETS still by far the largest carbon
market worldwide
Figure 2.2: Still dominated by the EU ETS
Distribution of 2007 traded volume (left) and fnancial value (right) across the main market
segments.
EU ETS
62%
CDM primary
22%
CDM secondary
13%
JI
1%
Other
2%
Total volume: 2.7 Gt
EU ETS
70%
CDM primary
15%
CDM secondary
14%
JI
1%
Other
0.5%
Total financial value: 40bn
5
11 March 2008
agreement will be accepted in the EU ETS up to a
limit.
In general, 2007 has been a good year for the
EC. Having had to endure criticisms over its initial
handling of the EU ETS, the Commission showed
determination in cutting allocations and credit
limits in Phase 2 NAPs, as well as in pushing for
the inclusion of the aviation sector in the trading
scheme.
At the beginning of 2008, the EC also fnally seemed
much more likely to succeed in harmonising the
total EU cap and auction a much greater share of
allowances in Phase 3 an agenda it has been
promoting for years.
Outside the Kyoto markets, important progress
was made towards domestic emission trading, in
the US in particular. At the state level this is due
to the Regional Greenhouse Gas Initiative (RGGI),
the 10-state scheme due for launch in 2009, and in
the Western region led by California. A federal cap-
and-trade bill sponsored by Senators Lieberman and
Warner moved through both subcommittee and
committee in November and December.
South Wales market and on the voluntary Chicago
Climate Exchange. With total volume almost
unchanged, this fall is largely due to carbon price
drops in both markets and the fall of the US dollar.
2.1.2 Carbon policies
Although we are just at the start of EU ETS Phase 2,
the ongoing review process for Phase 3 has already
produced a number of concrete suggestions from
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
the EU ETS in 2020 are expected to be capped at
around 21 percent below the 2005 level.
In addition, the EC suggests reducing the level of
free allocation linearly towards zero in 2020. All
allowances allocated to the power and heat sector
will be auctioned as early as 2013. Moreover, before
a new international agreement is fnalised, the
credit limit for the 2008-2012 period is effectively
extended to also cover the 2013-2020 period, and
no additional import of credits is permitted. Once
a future international climate agreement has been
reached, CERs from countries that have ratifed the
EC suggest EU ETS emissions to be
21 percent below 2005 level
No additional import of credits permit-
ted unless satisfactory agreement
Figure 2.3: Ups and downs in 2007
Quarterly volumes and values in the EU ETS 2007, million tonnes and million
0
50
100
150
200
250
300
350
400
450
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
M
t

C
O
2
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000

m
i
l
l
8%
17% -12%
80%
14%
3%
6
Carbon 2008
Crowning the events of the year, the Bali climate
summit produced a mandate to launch negotiations
for a global post-2012 framework. At the summit,
all UNFCCC member countries including the US
agreed to negotiate a successor to the Kyoto
protocol.
This feat was made possible by a change in the
US position earlier in the year. The turnaround was
frst evidenced at the G-8 summit in June, when
the Bush administration announced its intention to
return to the negotiating table.
While this decision may not be rooted in a heartfelt
desire to take decisive action on climate issues, it
is certainly a positive step towards kick-starting the
international process under Bush.
If nothing else, laying the groundwork in this way will
make progress faster under the next administration
and progress with the Lieberman-Warner bill will
facilitate this. The new Australian Government is also
planning to speed up the introduction of a national
ETS.
2.2 EU ETS
The EU ETS was the main driving force of the
global carbon market in 2007. This dominance was
underlined by the trades in sCERs estimated at
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
was still an important year for the EU ETS.
The fnal rulings of the National Allocation Plans
(NAPs) were made, and the EU ETS review crucial
for the shape of Phase 3 was fnalised. Hence, much
of the uncertainty for the future phases of the EU
ETS was removed, although the fnal agreement on
the Directive review is still at least 1 year away.
2.2.1 Volumes and values
2007 saw healthy growth in the OTC market and on
the exchanges, with a daily average traded volume
of around 5.6 Mt. As shown in Figure 2.1, volumes
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
Australia and the US turned towards
climate regime in 2007
Figure 2.4: No changes on the exchanges
Monthly EUA volumes transacted on exchanges. Last years fgures in parentheses.
0
5
10
15
20
25
30
35
40
45
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
M
t

C
O
2
ECX Powernext Nord Pool EEX
ECX 86.7% (75.6%)
Powernext 5.5% (13.3%)
Nord Pool 6.3% (7.4%)
EEX 1.4% (3.1%)
EXAA 0.0% (0.1%)
Secondary CERs took around 17
percent of the market in 2007
7
11 March 2008
traded in the brokered over-the-counter (OTC) market
and the remainder was traded on the exchanges.
Quarterly volumes were relatively stable, with a peak
in Q3, while the value of transactions increased as
Phase 2 contracts took over and prices increased
see Figure 2.3.
Of the exchanged volume, the London-based
European Climate Exchange (ECX) accounted for
377 Mt, or 87 percent. This was up from 76 percent
in 2006, thus cementing its dominance in this market
see Figure 2.4. The other exchanges consequently
show lower volumes, but Oslo-based Nord Pool (6.3
percent) was the second largest in 2007, with the
French Powernext third, with 5.5 percent.
The share of the exchanges has increased in recent
years, with 20 percent of the market in 2005 and 30
percent in 2007. In addition to OTC transactions and
trades on the exchanges, there still is a signifcant
volume traded bilaterally (company-to-company),
and the combined total of all transactions in 2007
was around 1 650 Mt.
2007 also marked the end of Phase 1 of the EU ETS,
falling from a 4 level at the beginning of the year
to 0.03 in December. As seen from Figure 2.5, the
fate of the EUA Phase 1 allowances was sealed as
early as April 2006 and reconfrmed through the
verifcation of 2006 emissions in April 2007.
Since October 2006, Phase 2 contracts have been
the only ones that have deserved any attention. Over
the course of 2007, Dec 08 EUAs traded in a range
between 12.25 and 25.28. The contract closed
at 17.55 on the frst trading day of the year, then
declined to the years lowest point on 20 February.
The Dec 08 EUA then grew rapidly, at over 4 per
month, until the high of 25.28 was reached on 29
May. Subsequently it fell below 19 twice, in July
and August, before remaining largely within the
20-24 range for the rest of the year and closing at
22.43 on 31 December.
The decline in the EUA price early in the year was
caused by falling power and gas prices, which
produced lower coal-to-gas switching levels, as well
as by a mild (or even absent) winter that depressed
both Phase 1 and Phase 2 contracts.
European Climate Exchange (ECX)
accounted for 87 percent of market
Figure 2.5: Volumes and prices in the EU ETS 2004-07
Daily OTC prices using Point Carbons bid/offer methodology.
0
5
10
15
20
25
30
35
1/12/04 6/9/05 14/6/06 21/3/07 28/12/07

/

t
o
n
n
e
0
10
20
M
i
l
l
i
o
n

E
U
A
s

t
r
a
d
e
d

Volume EUA 2007
EUA 2008 sCER08
Source: Point Carbon's Carbon Market Trader
Around 1 650 Mt traded in EU ETS
in 2007, sCER excluded
8
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 profts from
standard coal and gas power plants, based on fuel, power and carbon prices.
0
5
10
15
20
2-Jan-07 7-Mar-07 15-May-07 20-Jul-07 25-Sep-07 28-Nov-07

/

M
W
h
0
5
10
15
20
25
30

/

t
o
n
n
e
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
0
5
10
15
20
25
11-Dec-06 14-Mar-07 20-Jun-07 19-Sep-07 19-Dec-07

/

M
W
h
0
5
10
15
20
25
30

/

t
o
n
n
e
Clean dark spread Cal 08 EUA Dec 08
9
11 March 2008
As can be seen from Figure 2.6, gas was in the money
against coal for most of 2007, and particularly in the
April-October period. Carbon-adjusted profts for coal
generation (dark spreads) and gas generation (spark
spreads) for UK power delivered in the summer of
2008, traded mainly inside a band of 5-10/MWh
until mid-November, when both shot upwards.
The subsequent bull-run came on the back of a
lingering hot summer scare, pushing up German
power for Q3 2007 and Cal 08 delivery, and Dec 08
EUAs along with it. A strict ruling by the EC on the
Italian NAP, as well as other NAP cuts, boosted the
bullish sentiment as Phase 2 looked progressively
more likely to be short. In addition, there were
fears of a possible CER crunch in 2008, including
but not limited to worries about delivery through the
international transaction log (ITL).
After the peak in May, the trading range narrowed
for the rest of the year, as the NAP process had
established the Phase 2 allocation while coal, gas,
oil and power prices balanced each other in keeping
the EUA stable.
Forward prices for delivery in Q2 and Q3, 2008. The
chart shows the theoretical profts from standard
coal and gas power plants, based on fuel, power and
carbon prices.
The German carbon-adjusted dark spread for the
2008 calendar year saw a different development,
declining steadily through the year, see Figure 2.7.
The highest price of the year 19.10/MWh was
seen on 11 January. On 27 November, however,
the proft made by German generators of coal-fred
power was down by more than two-thirds at 7.21/
MWh, the years lowest price.
The vast majority of EUA trading activities in 2007
were forward contracts for Phase 2. Figure 2.8
shows the correlations between fuel and Dec 08
EUA contracts. The Cal 08 contracts correlated quite
well with the Dec 08 EUA contracts, being 0.78
on average in 2007. Gas and oil correlations were
considerably lower at 0.42 and 0.26, respectively.
Correlation to Dec 07 contracts were absent as the
price for these was marginal throughout the year.

Cal08 and Dec08 EUA correlated
fairly well in 2007
Figure 2.8: EUA price correlation with fuel and power
Correlations with the EUA December 2008 contract
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07
German cal 08
NBP summer 08
Crude oil front
month
Correlations:
Cal08: 0.78
NBP: 0.42
Crude oil: 0.26
10
Carbon 2008
The Dec 08 sCER closed at 15.70 on 21 May, when
our records began. It traded at a discount of more
than 7 to the Dec 08 EUA for most of June, with
the spread going as high as 7.98 on 4 June.
The average Dec 08 sCER price in 2007 was
16.37. The other OTC sCER contract tracked by
Point Carbon, the Kyoto strip for delivery each
December of the 2008-2012 period, traded at an
average 16.50 during our seven months of records
in 2007. This indicates a real backwardation in the
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
most of August, as the Dec 08 sCER was valued
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
years.
2.2.2 Does the EU ETS work?
The launch of the ECs proposal for a climate-
energy package clearly showed that in the future
more emission reductions will take place in the
EU, particularly if a satisfactory international
agreement is reached following the Kyoto Protocol.
This begs the following questions: are companies
ready for this and do we see any signs of internal
abatement due to EU ETS?
A series of questions that Point Carbon has been
asking annually since 2006 could prove instructive.
Respondents are asked to choose one alternative
on a scale from 1 (completely disagree) to 5
(completely agree). We count options 4 and 5
as agreement, options 1 and 2 as disagreement,
and the middle option 3 as neither agreement nor
disagreement see Figure 2.9.
The results are almost the same in 2008 as in 2006
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
fairly low).
The answers to the question on emissions reductions
have not changed markedly in the last three years.
Obviously, in the case of the statement EU ETS
facilitates emissions reductions, the question is
where within the EU or in CDM/JI countries. This
Respondents: EU ETS signifcant
more mature now than one year ago
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).
0% 20% 40% 60%
EU ETS is a success
EU ETS facilitates
emissions reductions [in
the EU]
EU ETS is the most cost-
efficient way to reduce
emissions [in the EU]
EU ETS is a mature market
2008
2007
2006
11
11 March 2008
Figure 2.10 Sector emissions-to-cap (E-t-C) in 2006 compared to 2005
E-t-C calculated using verifed emission data and aggregate installation-level caps in each sector.
Positive numbers signify greater emissions than allowance allocation.
-96
-45
-29
-21
-13
-10
22
-61
-39
-32
-16
-15
-10
50
-120 -100 -30 -60 -40 -20 0 20 40 60
Tolal
elals
Olher
Cenenl, Line, Class
Oil and Cas
Pulp and Paper
Public Pover and
Heal
illion lonnes CO
2
2006
2005
Source: CTL and Poinl Carbon
Figure 2.11: Changes in EU ETS emissions at country level, 2005-2006
Top fve increases and decreases in absolute terms.
-4.9
-4.0
-3.7
-1.3
3.3
6.5
7.7
3.3
11.5
-3.3
-10 -5 0 5 10 15
ESP
FFA
LD
PFT
CFC
DEU
POL
DK
CBF
F
illion lonnes CO
2
Crealesl
enission
increases
Crealesl
enission
reduclions
Source: CTL and Poinl Carbon
12
Carbon 2008
Figure 2.12: Compliance strategies in the EU ETS
N=451. Companies with emissions covered by the EU ETS.
0% 10% 20% 30% 40% 50%
Other
A combination of the
above
Developing CDM/JI
projects
Trading
Reducing our own
emissions (internal
abatement)
year we made the question more specifc, asking
whether EU ETS facilitates emissions reductions
in the EU. The answers were rather similar to
2006 and 2007, with more than 50 percent of the
respondents agreeing with this statement. But can
these emission reductions also be seen from the
verifed data from 2006?
What do the verifcation data tell us?
The verifed 2006 emissions increased to 2 028, up
22 Mt (1.1 percent) from 2005. At the sector level,
2006 saw the same picture as in 2005: a short
power sector and long industry sectors. The higher
emissions can be explained mainly by production
growth, but fuel prices and weather also contributed.
Lower hydro production meant higher emissions
in the Nordic region, but the opposite situation in
Iberia.
Figure 2.10 compares 2005-2006 emissions
aggregated by sector for EU-23. Of the 22 Mt
emissions growth from 2005 to 2006, 12 Mt were
accounted for by the sector comprising public
electricity and heat production (power and heat),
whereas an additional 10 Mt were emitted by the
industry sectors.
The metal and cement/lime/glass sectors emitted
7.5 Mt and 6 Mt more in 2006, respectively.
Installations in the oil and gas sector emitted 1.5 Mt
less, others emitted 1.4 Mt less and the pulp and
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.
Most countries that had surpluses in 2005 also
had surpluses in 2006, with Denmark as a notable
exception. Figure 2.11 shows the countries with the
greatest changes in emissions from 2005 to 2006.
More than half of the countries included in the frst
phase 13 in total saw small changes that fell
between a reduction of 2 Mt and an increase of 3
Mt.
The increased emissions in Finland and Denmark
in particular, were due to low hydro levels in the
Nordic region in the frst three quarters of the year,
and consequently lower hydroelectric production.
In the UK, coal consumption for power generation
20 percent of respondents use tra-
ding as primary compliance strategy
Verifed emissions increased 1.1
percent from 2005 to 2006
13
11 March 2008
was 11 percent higher in 2006 than in 2005, growing
from 33 to 37 percent of total electricity production.
Conversely, gas-fred generation, which produces
less than half the amount of emissions than coal,
was down by 8 percent.
Fuel price changes alone would explain only a small
part of the increase in emissions. NBP gas prices for
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
spot delivery in Europe was up fve percent from
US$ 60.72 on average in 2005, to US$ 63.77. These
changes are more or less in line with infation.
Unlike in 2005, when gas-fred generation in the
UK was slightly more proftable than coal-fred
generation during the entire summer season, coal
was consistently in the money against gas throughout
2006 in the UK. Coal-fred generation was helped in
part by a reduction in the average summer carbon
price (Q2 and Q3) from 21.04 in 2005 to 17.91 the
following year. Given the relatively small changes in
fuel prices, the lower carbon prices are likely to have
played a substantial part in this role reversal.
On the surplus side, improved hydrology in Iberia
and France, combined with a mild winter as well
as a temperate summer in continental Europe,
account for the falling emissions in Portugal, Spain
and France. Spain in particular saw hydroelectric
generation increase by 32 percent and combined
cycle gas-fred generation go up by 30 percent,
while coal-fred fell by 15 percent.
So far, we have seen the role of fundamentals
fuel prices, demand and weather in infuencing
emission levels in 2006. However, emissions are
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
achieve tougher overall reduction targets. How will
this be done? How much of this has already begun
in Phase 1? What did companies do to comply in
2007?
Generally speaking, compliance will be a result of
internal abatement, trading, offsets development
and changes in production patterns. In Figure 2.12
we display the responses to our question asking for
a companys 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)
0%
10%
20%
30%
40%
50%
The EU ETS has not
caused any emission
reductions in our
company
The EU ETS has
caused reductions to
be planned but not yet
started
The EU ETS has
already caused
emission reductions in
my company
Don't know (2008) /
not relevant (2007)
2007
2008
Fundamentals can to a large extent
explain the increase in 2006 emissions
Do we see any signes of internal
abatement?
14
Carbon 2008
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.
the combination and other strategies, the most
frequent is internal abatement. We will return to this
strategy below.
Abatement
The verifed emissions do not show indications of
large-scale abatement in the EU ETS. Emissions are
up in all sectors except for oil and gas. Nevertheless,
71 percent of the companies represented in a Point
Carbon survey conducted in April 2007 had already
introduced some measures to reduce emissions
(Table 2.1). These measures were found particularly
in the form of fuel switching or energy effciency.
We also asked about abatement in our 2007 and
2008 carbon market surveys. The results of these
surveys are given in Figure 2.13. Compared to last
years survey, there is very little change in the share
of companies that report reducing or planning to
reduce emissions because of the EU ETS. Last year,
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%
Figure 2.14: The EU ETS and current investments at company level
Has the price of carbon infuenced the degree of new investments in your company?
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
0% 10% 20% 30% 40% 50%
No
To some extent
Yes
2008 2007
15
11 March 2008
Figure 2.15: The role of long-term carbon prices at industry level
Has the price of carbon infuenced the degree of new investments in your company?
N=385/312. Companies covered by EU ETS (2008) or CO2 regulation in general (2007)
0% 10% 20% 30% 40% 50% 60%
No importance
Influencing
calculation, but not
decisive
Decisive factor
2007 2008
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.
0% 20% 40% 60% 80% 100%
Yes, have already
moved production
Yes, have planned
to move production
Yes, are considering
moving production
No
16
Carbon 2008
65 percent of companies said they had done so; this
year the fgure is 62 percent.
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.
The larger question, of course, is how much these
will deliver.
Production improvements and investments
To gauge the impact of the carbon price on company
behaviour, we asked three questions in Carbon
Market Survey 2008 relating to:
the current effect of the carbon price on the 1.
respondents companys investment;
the long-term effect on investments in the 2.
respondents industry; and
relocation as a possible effect of a carbon price. 3.
In the companies of individual respondents, the
carbon price is relevant to the investment decisions
of 73 percent of the EU ETS companies, unchanged
from 2007 (Figure 2.14). Here we asked whether
the price of carbon has infuenced the degree of
new investments.
In a similar vein, only six percent of our 385
respondents said that the long-term carbon price
(to 2020) had no impact on new investment in
their industry (Figure 2.15). This is also virtually
unchanged from last year. Again, only companies
with obligations under the EU ETS are included in
the sample.
When it comes to moving production, 83 percent
of our respondents companies had not considered
doing so (Figure 2.16). However, the sample
here includes all EU ETS compliance companies,
including power companies that cannot move easily.
Consequently, the number for industrials could be
higher than the 17 percent that have, plan or are
considering moving production outside the EU ETS
area.
Aside from internal abatement, trading and changes
to production location or volumes, a compliance
strategy mentioned by a small proportion in Figure
2.12 is the development of CDM and JI projects. This
is a strategy that is typically pursued by large power
companies among those with EU ETS compliance
obligations. Just as importantly, dedicated project
developers provide the carbon market with credits
at a lower cost than EUAs.
How has the project market fared in our survey?
What is the view of the CDM and JI today, and their
prospects for the future? This will be the topic of
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
Private
78%
Fund
18%
Government
4%
Energy efficiency
20%
Waste
10%
Unknown/other
7%
Renewable energy
29%
N2O
8%
HFC-23
14%
LULUCF
1%
Fugitive emissions
10%
Fuel switching
1%
73 percent consider cost of carbon
in investment decisions
17
11 March 2008
2.3 CDM
Activity within Kyotos fexible mechanisms
specifcally the CDM grew signifcantly in 2007,
to 947 Mt and 12bn. Given that sCER prices are
much higher than in the primary market (16 vs.
10 in our calculations), the increased sCER volume
has signifcantly boosted the total value of the CDM
market segment in 2007.
2.3.1 Primary CDM market
Some of the increased activity in the CDM market
is due to a tripling of issuance rates compared to
2006, with 76.6 m CERs having been issued in 2007.
Although 2007 saw a signifcant increase in infow
of new CDM projects, especially within renewables,
there is still a squeeze in terms of expected issuance
for the frst two years of the Kyoto commitment
period (2008-2009).
In early spring, the primary CER market prices for
immature projects sprung to about 9-11, but since
then the price has been stable, perhaps increasing
slightly. The price movement was probably due to
a sustained demand for primary CERs. In general,
prices in the primary CER market still depend
on project stage, project type and counterparty.
Registered projects fetched around 12, while
issued CER attracted prices between 14 and 17.
Moreover, hydro projects traded at a slight discount
due to uncertainty over to what extent CERs from
large hydro projects will be usable in EU ETS. Wind
projects, on the other hand, fetched a slight premium
due to a good and stable performance combined
with a high score on sustainability.
Gold Standard CERs traded at a premium of about
1-2 per tonne. One reason for this was healthy
demand combined with low supply, since only four
CDM projects have qualifed under the standard so
far.
Supply grew healthily over the year. The UNFCCC`s
pipeline of projects surpassed 2 800 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 infux of
small-scale renewable energy projects. Renewable
energy was the largest transacted project category
in 2007, accounting for 29 percent of total confrmed
transaction volume. Furthermore, energy effciency
almost tripled its market share to 20 percent.
Figure 2.18: China in your hand
The relative share of CDM country sellers (left) and buyers (right) in 2007
United Kingdom
46%
Japan
15%
Luxembourg
11%
Austria
3%
France
8%
Germany
7%
Other
10%
China
62%
Uzbekistan
2%
Other
7%
Mexico
4%
India
5%
Chile
2%
Brazil
8%
Indonesia
10%
Signifcant increase in infow of new
CDM projects in 2007
Still a squeeze of expected CER is-
suance in 2008 and 2009
18
Carbon 2008
The losers were projects reducing industrial gas
emissions. HFC-23 and N
2
O destruction projects
fell from a combined 54 percent of 2006 volume to
only 22 percent in 2007. This development should
be taken to heart by those who have previously
criticised the CDM for channelling money into low-
cost industrial gas projects rather than renewables.
There was a lot of talk about the market facing a
signifcant bottleneck due to the EB process when
several developers blamed the down-writing of their
portfolios on the rigorous approval process. There
may be some truth to this, but it is certainly not
the only factor. Low performance rates for certain
project types combined with general project delays
have also contributed to the slow issuance rate.
That being said, without reform of the approval
process, the market could see yet another year with
a low issuance volume. The year did, however, end
on a promising note, with a deal in Bali for a thorough
review of the CDM process. Private buyers solidify
their dominance, with 78 percent of confrmed CDM
transaction volume in 2007 see Figure 2.17. This
is up from 58 percent in 2006. These buyers eat into
the shares of carbon funds and governments alike,
both of which have seen their relative market share
cut in half.
On the supply side, China is still bigger than all the
rest, although it has inched down from 70 percent in
2006 to 62 percent of transaction volume last year
see Figure 2.18. Brazils volume is somewhat up
on our last update, whereas Indias volume is down.
Interesting newcomers in this league of top seller
countries are Indonesia and Mexico.
The UK reigns supreme among buyer countries,
which indicates that a sizeable share of buyers
in 2007 were fnancial institutions rather than
compliance buyers. Luxembourgs 11 percent
supports this inference. Japan is second on the list
at 15 percent up from a surprisingly low 3 percent
last year suggesting continued compliance
buying by the countrys government, power sector
and heavy industry.
2.3.2 Secondary CDM market
The gold rush for primary CERs continued throughout
the year as numerous new participants entered the
market and started competing for market share.
HFC-23 and N2O projects were con-
siderably fewer in 2007 than in 2006
China still by far the largest CDM
selling country
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.
0% 20% 40% 60%
The CDM market is
mature
The CDM market is a
success
The CDM market is the
most cost-efficient way
to reduce emissions
The CDM market
facilitates emissions
reductions
2008
2007
2006
19
11 March 2008
But unsurprisingly it was the sCER market that
attracted most attention. Secondary CER trading
was established as a signifcant market segment of
its own in the course of 2007, albeit one still lacking
the liquidity of the EUA market.
The sCER market has changed almost beyond
recognition over the past year, with an estimated
total traded volume of 350 Mt compared to 40 Mt
in 2006. The Dec 08 sCER contract began the year
at 14 but fell throughout the winter months with
a declining EUA-price to an all-time low 10.70 in
February. By the end of May the price had recovered,
peaking at 17.45.
Looking at the EUA-sCER spread, sCERs were trading
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
EUA market saw only moderate reaction in the price
of issued CERs in the secondary market. On 31
December, Dec 08 sCERs were worth 76 percent of
the EUA price (around 17.13) while the 08-12 strip
spread was at 73 percent of the EUA price.
The market also saw the frst CERs traded on an
exchange, when Nord Pool launched a CER contract
in June.
Last year saw some major milestones in the CDM
market. The moment we all had been waiting for
fnally arrived when the international transaction log
(ITL) went online and linked the Japanese national
registry with the CDM registry. Immediately
following this, the frst CER spot trade took place.
The event removed some of the uncertainty in the
CDM market, as the lack of a delivery path had
been one reason cited for the CER price discount
compared to EUA prices.
The CDM Executive Board (EB) made some important
decisions last year, the most notable of which was
the decision in June to fnally approve the guidelines
and procedures for Programmes of Activities (PoAs),
and their surprising decision in September to approve
the supercritical coal methodology for using less
GHG intensive technologies for energy production
based on fossil fuels. Both decisions sent positive
supply signals to the market. On the other hand, the
EBs lack of agreement on several proposed biofuel
methodologies constituted signals in the opposite
direction.
Moreover, the UNFCCC secretariat received greater
resources and took on more people to help the EB
in 2007. This gave the EB more time and capacity
to scrutinise projects and the request for review
at both registration and issuance stage increased
signifcantly, with a total of 100 projects put on review
throughout the year, compared to 23 in 2006. Also,
the additionality criteria have been interpreted more
strictly by the EB than in previous years. Throughout
the year, a total of 43 projects were rejected.
How well does the CDM market work? For the
third time, we asked our respondents to provide a
general evaluation of the project market this year
with specifc questions about the CDM (and JI).
The results show continuity above all. Respondents
see some more maturity in the CDM market, but
the level is still low, with only 12 percent agreeing
(Figure 2.19). Half the sample still disagrees with the
notion that the CDM market is mature.
2.4 JI
During 2007, 16 Emission Reduction Purchase
Agreements (ERPAs) with a total volume of 12.7
Mt were confrmed by market players. The ERUs
for these contracts are generated by projects
represented by renewables, nitrous oxide, biomass,
energy effciency and fugitive emissions types. It is
notable that the N
2
O projects account for one-third
of total volume, followed by renewables and landfll
projects (19 and 13 percent respectively). Early-stage
negotiations have been reported by market players
in energy effciency and landfll gas projects.
On average, ERU price ranges have increased
compared to the previous year, with the price range
across contracts becoming narrower. While cited
ERU prices for standard off-take contracts varied
from 6 to 10 depending on project risk, sellers
expectations for the ERU price were higher due to
the signifcant increase of CER prices throughout
the past year.
In 2007, the numbers and volumes of projects
submitted to the JI supervisory committee (JISC)
for verifcation were boosted. Overall, 84 projects
with a total volume of 117m ERUs were submitted
to the JI Supervisory Committee (JISC) for public
comment during 2007, taking the pipeline to a total
sCERs traded 350 Mt in 2007, up
from 40 Mt in 2006
N2O projects account for 1/3 of total
JI volume in 2007
20
Carbon 2008
of 107 projects that are capable of generating up to
34.5m ERUs annually during 2008 2012.
The projects submitted to the JISC in 2007 are mainly
hosted by Russia and Ukraine, representing 42 and
39 percent of total volume, respectively. The Russian
pipeline of 42 projects clearly shows the prevalence
of natural gas pipeline leakage abatement projects.
Taking into account the methodological ambiguities
for the measurement of gas leakage emission
reduction, potential buyers have to consider the risk
of non-approval under Track 2 for a large share of the
existing Russian JI pipeline.
Gas leakage abatement projects account for almost
34 percent of JI volume in Russia, while nitric
acid, landfll and fuel switching projects add up to
40 percent. The Ukrainian pipeline of 16 projects
is represented mainly by the large-scale coal-
mine methane and energy effciency projects. The
Lithuanian and Polish project pipelines with shares
of seven and six percent, respectively, are made up
mainly by large N
2
O projects.
While the JISC formally started Track 2 in 2007, only
one project reached the stage of fnal determination
(corresponding to registration under the CDM). The
second project submitted for fnal determination
was refused for review on additionality grounds.
The JI potential in the new EU member states was
seriously limited by the EU ETS double-counting
rules, which leaves room basically only for non-
CO
2
projects, e.g. N
2
O and landfll methane.
Moreover, the Phase 2 allocation cuts have led to
strong opposition and subsequent lawsuits by the
Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovakia, and Romania. Bulgaria may also
join the case. While the allocation cuts will lead to
reductions in JI reserves and set-asides, the most
important consequence is that the JI potential in
these countries is likely to weaken.
As a result, the main JI host countries remain the
non-EU members Russia and Ukraine. However,
due to the formation of a new Ukrainian government
in mid-December, governmental structures such
as the National Environmental Investment Agency
might see some changes. This could signifcantly
impact JI and GIS development in Ukraine.
Respondents to our Carbon Market Survey 2008
think the JI market neither is a success (12 percent)
nor mature (6 percent), but one-third of respondents
considers the market more mature now than last
year (Figure 2.20).
2.5 Voluntary markets
How big was the voluntary carbon market in 2007?
This market includes the generation and transaction
of carbon credits in non-compliance markets. The
generation of non-compliance credits which we
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
not to compliance buyers.
2.5.1 Conceptualising the voluntary market
The voluntary market refects the sum of all
transactions of carbon credits and allowances, where
the fnal purpose of cancelling or retiring the carbon
credit is not to comply with legislation or to fulfl
agreements between companies and governments.
This defnition includes individual and corporate
purchases of carbon credits for the purposes of
carbon neutrality or offsetting particular GHG-
emitting activities, such as air travel and industrial
processes. This also covers activities on voluntary
exchanges such as the Chicago Climate Exchange
(CCX).
The defnition of the voluntary carbon market, as
seen from a transaction point of view, is illustrated
in Figure 2.21. The compliance market consists of
companies and governments that by law must
surrender emission allowances or credits. The types
of credits and allowances that compliance buyers
Russia and Ukraine still dominating
the JI market
Figure 2.20: A question of implementation?
Evaluation of JI in 2008. Share of respondents agreeing
with given statements. N=2965
0% 10% 20% 30% 40%
The JI market is mature
The JI market is a success
The JI market is the most cost-efficient way
to reduce emissions
The JI market facilitates emissions reductions
The JI market is more mature now than one
year ago
21
11 March 2008
may use is more constrained than in the voluntary
market, which is largely unregulated. The voluntary
market, on the other hand, permits the use of credits
such as verifed emission reductions (VERs), non-
verifed emission reductions (ERs) and prospective
emission reductions (PERs), as well as CERs, ERUs,
EUAs and other credits and allowances generated
for the compliance market.
Our defnition excludes trades between project
developers and fnancial institutions, where the fnal
purpose of trading is to supply compliance carbon
credits to compliance buyers. It also excludes
trades intended to fulfl agreements between the
Japanese government and major companies to
reduce their GHG emission intensity, even though
these are termed voluntary. This is because these
agreements represent industry-wide commitments
intended as a strong alternative to binding targets in
reaching Japans Kyoto goals, with a view to making
legislation unnecessary.
2.5.2 Volumes and values
Combining data from brokers and voluntary offset
credit providers in the US and Europe, as well as
from the voluntary Chicago Climate Exchange (CCX),
we fnd that the voluntary market traded around 55
Mt CO
2
e in the frst three quarters of 2007. The total
2007 volume was an estimated 75 Mt compared to
less than 20 Mt in 2006.
Our market size assessment indicates strong growth
in the voluntary carbon market. Furthermore, in our
survey, 45 percent thought that the voluntary market
had grown more mature over the past year (see
fgure 2.22). On the negative side, only ten percent
thought of the voluntary market as transparent.
A majority of the transaction volume takes place in
the US, where more than 30 Mt have traded this year
to date, or about 60 percent of the total. The CCX
accounts for half this volume, with the remainder
made up by the corporate voluntary market and
the consumer retail market. Carbon credit prices
in the US vary between $2/tonne and $15/tonne,
depending on project type.
2007 was the year in which North American market
players announced ambitious carbon strategies,
from calculating footprints to developing internal
abatement opportunities, or buying, building or
Total voluntary volume in 2007 esti-
mated to 75 Mt
Prices range from $2/tonne to $15/
tonne for voluntary project credits
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 Certifcates.
Conpliance narkel Volunlary narkel
CEFs
EFUs
EUAs
FCC
allovances
CACs
VEFs
EFs
PEFs
olher
V
o
l
u
n
l
a
r
y

p
u
r
c
h
a
s
e
s

o

c
o
n
p
l
i
a
n
c
e

c
r
e
d
i
l
s
Source: Poinl Carbon
22
Carbon 2008
partnering in developing offset projects. Estimated
transactions involving new projects quadrupled in
2007. Subsequently, a fourfold increase is expected
for offset credits registered in 2008, while the number
of projects from new contractual agreements could
slow down or even decline.
Outside the US, the voluntary market is strongly
infuenced by the Kyoto market, with CDM and JI
project developers supplying VERs to voluntary
buyers. Some offset credit providers also offer CERs
for non-compliance purposes.
We estimate that voluntary CER transactions will
total only 1-3 Mt in 2007, which means that there
will be no effect on CER prices. On the other hand,
if transparency and standards in the voluntary
market do not improve over time, CER demand from
voluntary buyers could increase signifcantly in the
coming years.
2.5.3 Supply
To satisfy demand, developers are now scrambling
to create new projects that meet standards
complementing or supplementing the CCX Carbon
Financial Instrument. Credits may not be available
yet, but the quality of the pipeline, in terms of
expected certifcation through the Voluntary Carbon
Standard, Gold Standard, CCB standard, etc, is
responding to market demand for offsets from
specifc project types linked to established standards
and methodologies.
The voluntary US supply pipeline totals 140 Mt,
counting all projects for which we have data. Waste
methane and energy effciency projects dominate
the US pipeline in volume terms. Looking at Kyoto
projects, potential VER supply from CDM projects
has a current maximum volume of 100 Mt to the
end of 2007.
Voluntary markets have an impact on compliance
markets not only by trading the same or similar
credits, but also by providing models for emerging
compliance markets. In particular, the current
pipeline of US voluntary offset supply will infuence
the volume, type and quality of offsets available to
the 10-state RGGI.
Current offset providers to the voluntary US market
also have a voice in the development of a future US
cap-and-trade scheme. We may, for example, see a
greater emphasis placed on agricultural projects and
carbon capture and storage (CCS) in the US than is
currently the case in the CDM or EU ETS.
Finally, the quality of voluntary offset credits
worldwide will infuence public opinion and the
reputation not just of the voluntary market, but of
emission trading in general. Forty percent of those
taking our 2008 survey share this concern, as
indicated in fgure 2.18. Conversely, 28 percent think
there is no signifcant reputational risk.
Figure 2.22: Voluntary carbon: Prospect or peril?
Share of respondents agreeing with given statements. N=2998
0% 10% 20% 30% 40% 50%
The voluntary carbon market is transparent
The voluntary carbon market produces real
emissions reductions
The voluntary carbon market fosters
innovation in emission reduction methods
The voluntary carbon market poses a risk for
the reputation of the compliance markets
The voluntary carbon market is more mature
now than one year ago
23
11 March 2008
3. Carbon markets towards 2012
The frst Kyoto commitment period, which ends
on 31 December 2012, is set to be dominated
by the EU ETS and CDM on the market side. The
interlinked EU ETS and CDM markets will see the
greatest cumulative volume and value, as they are
consolidating and getting more sophisticated. In
addition, the next fve years will see the JI market
deliver its frst credits and possibly an emerging
market in national Kyoto allowances or AAUs.
Beyond Kyoto, the ten-state RGGI has already
produced the frst US compliance trade, and more
is expected.
3.1 Expectations for global 2008 volumes
and trends
The total traded volume in global carbon markets
in 2007 was 2.7 Gt, valued at just over 40 bn. We
expect this to grow to 4.2 billion tonnes CO
2
e in
2008, up 56 percent from 2007 see Figure 3.1.
The EU ETS maintains its position as the largest
market. Traded volume in the EU ETS is expected
to be 2.6 Gt in 2008. At current prices, this would
be equivalent to 63bn (US$ 92bn).
We expect that the general trend of increasing
traded volumes will continue as the global market
becomes more mature and sophisticated. An increase
in contract types, more players and markets and
greater competition between market players (such
as exchanges and brokers) will together generate
momentum for higher volumes. As a consequence,
liquidity providers will be attracted to this market.
On the other hand, turbulence in global fnancial
markets may contribute to less vigorous growth in
transacted volumes.
We expect that the 2008 carbon market will differ
from 2007 in several ways. First, the EU ETS Phase
2 is considerably tighter than Phase 1. Moreover,
the start of short-term prompt trading for Phase 2,
where only forward trading was seen previously,
is expected to contribute to increased traded
volumes.
Second, the EU climate and energy package,
launched on 23 January this year, has sent a
potentially bearish long-term signal to the project
markets by placing uncertainty on the future of
the Clean Development Mechanism (CDM). More
immediately, the reduced average credit limits on
CER/ERU and the tight Phase 3 are expected to
dampen EUA-sCER swaps.
Carbon market expected to grow 56
percent in 2008
Figure 3.1: Stairway to the frst Kyoto period, take 2
Reported and estimated contracts 2005-07; forecast for 2008, Gt CO2e
0
1
2
3
4
5
2005 2006 2007 2008 (forecast)
A
n
n
u
a
l

v
o
l
u
m
e

(
G
t
)
Other
JI
CDM total
EU ETS total
64%
104%
56%
24
Carbon 2008
Third, new policies in key countries such as the US
and Australia imply that we will see trading in new
markets. This will be accelerated by the ongoing
negotiations under the Bali action plan.
3.2 EUA market
In the EU ETS, which covers about 2.1bn tonnes
CO
2
e annually of underlying assets, new fnancial
instruments are developing and their use is
spreading. What are the main developments in
the EU ETS market from a trading perspective?
What effects does the EU ETS have on company
behaviour when it comes to abatement, investment,
production and other ways of managing emissions?
And beyond current bid/offer spreads, what prices
do compliance and fnancial players foresee for the
period?
3.2.1 EU ETS in 2008
The 2007 volume in the OTC market and on the
exchanges corresponds to almost fve times the
annual Phase 2 shortage of about 300 Mt in the
power and heat sector. This gap needs to be flled
every year. We estimate that in 2008 this volume
will increase to about seven times the power and
heat gap.
There are several reasons why we expect this
growth. First, the tightness of the Phase 2 cap is
expected to increase the traded volume compared
to 2007, simply because more players are short of
allowances. Industrials that were long in Phase 1
are in general balanced or slightly in Phase 2, while
power and heat installations that were short in
Phase 2 have now become even shorter.
Figure 3.2 displays the shortness of companies
covered by the EU ETS, as reported in our 2008
survey. Only 15 percent of the respondents expect
to be long in Phase 2, that is, to have an allocation
that is suffcient 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
extra EUAs. Shortness will mean more trading since
fewer can ignore the EU ETS. As a consequence,
Phase 2 volume will go up compared to Phase 1.
Second, a tighter cap gives higher volatility because
prices become more sensitive to changes in
fundamentals. This will be attractive to fnancial
players as well as compliance traders, consequently
increasing the traded volume. As seen in Figure 3.3,
EU ETS to trade seven times power
and heat shortage in 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.
0% 10% 20% 30%
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
25
11 March 2008
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.
0
5
10
15
20
25
30
35
40
45
50
J
a
n
-
0
7
F
e
b
-
0
7
M
a
r
-
0
7
A
p
r
-
0
7
M
a
y
-
0
7
J
u
n
-
0
7
J
u
l
-
0
7
A
u
g
-
0
7
S
e
p
-
0
7
O
c
t
-
0
7
N
o
v
-
0
7
D
e
c
-
0
7
J
a
n
-
0
8
N
o
t
i
o
n
a
l

o
p
t
i
o
n
s

v
o
l
u
m
e

i
n

E
U
A

m
i
l
l
i
o
n
Source: ECX
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.
0
1
2
3
4
5
6
7
8
9
10
2
/
1
/
0
7
2
5
/
1
/
0
7
1
9
/
2
/
0
7
1
4
/
3
/
0
7
1
0
/
4
/
0
7
3
/
5
/
0
7
2
9
/
5
/
0
7
2
1
/
6
/
0
7
1
6
/
7
/
0
7
8
/
8
/
0
7
3
1
/
8
/
0
7
2
5
/
9
/
0
7
1
8
/
1
0
/
0
7
1
2
/
1
1
/
0
7
5
/
1
2
/
0
7
2
/
1
/
0
8
2
5
/
1
/
0
8
1
9
/
2
/
0
8
D
a
i
l
y

E
U
A

v
o
l
u
m
e

(
M
t
)
.

0%
10%
20%
30%
40%
50%
60%
70%
V
o
l
a
t
i
l
i
t
y
30-day MA volume EUA 40-day volatility
26
Carbon 2008
the 30-day moving average on daily volume in 2007
remained quite stable despite lower volatility in the
second half of 2007, while it has increased in 2008
so far, along with higher volatility.
Third, the fact that Phase 2 has now begun implies
that there will be compliance buying on the prompt,
and fundamentals such as fuel prices and weather
will contribute to increased volatility. This, in turn, will
lead to higher volumes. Factors such as temperature,
wind, precipitation and power outages will have an
immediate impact on EUA prices.
Fourth, Phase 2 will involve signifcantly more
auctions than Phase 1, which will contribute directly
to increased transaction volume.
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
notional volume of 58m EUA options (see Figure
3.3). This growth continued into January 2008, which
saw 45m EUA options traded on the exchange.
Our survey results refect the penetration of options
in the carbon market. Figure 3.5 demonstrates
how 55 percent of our respondents in the EU ETS
and CDM markets have either entered or plan to
enter the options market. CER project developers
and aggregators are the most active in the options
market almost two-thirds of this group state that
they have traded options or plan to do so. In the
EU ETS, this was the case for around half of the
respondents.
Options trading expected to grow
signifcantly in 2008
Figure 3.5: Options in the EUA and CER markets
Have you bought/sold or will you buy/sell EUA or CER
options? N=1,254. Respondents in the EUA/CER market.
0% 10% 20% 30% 40% 50%
Have not/will not
buy/sell options
Yes, will buy/sell
options
Yes, have bought/sold
options
Figure 3.6: The fnal cut
Comparable caps in Phase 1 and Phase 2. Includes EU27 and Norway
1,500
1,700
1,900
2,100
2,300
2,500
Phase 1 cap Phase 2 Submitted EC Cuts Final phase 2 cap BAU Emissions
M
t
/
y
e
a
r
27
11 March 2008
Figure 3.7: Willingness to buy/sell EUAs at various prices
0%
20%
40%
60%
80%
100%
0
-
1
0
1
0
-
1
5
1
5
-
2
0
2
0
-
2
5
2
5
-
3
0
3
0
-
3
5
3
5
-
5
0
5
0
-
1
0
0
>

1
0
0
/tonne
S
h
a
r
e

o
f

r
e
s
p
o
n
d
e
n
t
s
would buy at max
would sell at min
Financials or companies with an EUA allocation may
either hedge their EUA positions directly through
options, or as part of structured EUA-sCER swap
deals. Options are attractive for liquidity providers,
as they do not require the provider to take a position
in the underlying commodity.
Option trading is expected to increase as volatility
grows, and the hedging and re-hedging of options
also produces signifcant trading volume of EUA
forwards.
Despite the growth momentum in the EU ETS,
there are also factors pulling against the volume. For
instance, industrials are likely to reduce their EUA-
sCER swap trades due to the stricter credit limit
proposed by the EC. Viewed in isolation, this will
reduce the transacted volume.
On the other hand, less swap trading could mean a
higher EUA price, as fewer credits will be available in
the market. This could cause growth in volume that
outweighs the relative decline in EUA-sCER swaps.
Our 2008 forecast for the EU ETS is comparable to
the underlying assets, i.e. the total 2008 allocation.
In comparison, the turnover in mature markets, such
as the Nordic power market and the oil market, is 6-
700 percent. In this context the carbon market is still
a young market with a considerable upside.
3.2.2 Towards 2012 and beyond
In its rulings on Phase 2 national allocation plans,
which took place from November 2006 to October
2007, the EC was unquestionably tough. As a
consequence, the caps in 2008-2012 are much
tighter than in Phase 1.
The initial shortage in the 2008-2012 period creates
a demand for real emission reductions, either at
home or in non-Annex 1 countries.
The overall cap for Phase 2 for EU-28 (EU-27+Norway)
is currently at 2 103.5 Mt/year. In total, the EC has
cut the allocation by 245 Mt/year or 10.4 percent
compared to the allocation suggested in the NAPs
(see Figure 3.7).
The largest cuts in volume terms have been
requested in Poland (76 Mt), Germany (29 Mt) and
Bulgaria (25 Mt). The largest cuts in relative terms
have been requested in countries located in Eastern
Europe, with the three Baltic States (about half) and
Bulgaria (37 percent) at the top of the list.
The credit limits, defned as the maximum CDM/JI
volumes that can be used for compliance purposes
in Phase 2, were set quite generously, as every
country was guaranteed a minimum 10 percent.
Table 3.1 shows the suggested caps by member
28
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.
29
11 March 2008
The impact of CO
2
price on UK po-
wer has been 100 % pass-through
state, the EC decision and the credit limit as
originally set before the launch of the EC proposal
on 23 January this year.
It is generally accepted that the EC did a good job in
setting the caps, but was more generous in setting
the credit limit. Consequently, Phase 2 could in
theory produce no emissions reductions in Europe,
just credit imports from CDM and JI countries.
The Commission corrected this through the EU
ETS review and the Phase 3 proposal in January
this year. The fundamental balance of the EU ETS
in Phase 2 is now merged with that of Phase 3
(2013-2020). This is because EUAs can be banked
without limits from one year to the next. Higher
Phase 3 prices should thus also translate into higher
Phase 2 prices.
All the proposals in the EC energy and climate
package are to some extent related to the overall
EU climate and energy targets, i.e. a 20 percent
reduction in GHG emissions, a 20 percent share of
renewables in fnal energy consumption and a 20
percent increase in energy effciency. All targets
would be achieved by 2020.
The commissions climate and energy package
comprises a number of elements:
amendments to the EU ETS; 1.
a proposed burden-sharing among EU countries 2.
for emissions not covered by the EU ETS;
promotion of renewable energy in the EU, 3.
including national targets;
promotion of carbon capture and storage; 4.
improvement in energy effciency; and 5.
changes to state aid rules to facilitate emission 6.
reductions (already adopted).
Under the EC proposal, the future allocation in the
EU ETS would be reduced by 1.74 percent per year
compared to the allocation in the mid-point of
Phase 2 (2010). This gives a maximum amount of
allowances to be issued in 2020 of 1 720 Mt. On
average, the annual allocation in Phase 3 will be 1
846 Mt. Compared to the reported 2005 emissions,
the average Phase 3 allocation implies a 14 percent
reduction, while the annual allocation in 2020 is
equivalent to a 21 percent cut from the 2005 level.
The Commission has not yet concluded on distribution
of allowances at the sector and installation levels. At
Supply-demand curve in survey
around current EUA 08 level
Figures 3.8-3.11: Should I buy, sell, bank or reduce emissions?
I/we would buy EUAs today at a maximum price of ...
0%
5%
10%
15%
20%
25%
30%
35%
0-10 10-15 15-20 20-25 25-30 30-35 35-50 50-100 above
100
We would seek to reduce our own emissions and start to sell EUAs
if the EUA price were to stay above ...
0%
5%
10%
15%
20%
25%
30%
35%
0-10 10-15 15-20 20-25 25-30 30-35 35-50 50-100 above
100
I/we would bank any surplus EUAs into Phase 3 rather than sell them,
at prices below ...
0%
5%
10%
15%
20%
25%
30%
35%
0-10 10-15 15-20 20-25 25-30 30-35 35-50 50-100 above
100
I/we would sell EUAs today at a minimum price of ...
0%
5%
10%
15%
20%
25%
30%
35%
0-10 10-15 15-20 20-25 25-30 30-35 35-50 50-100 above
100
30
Carbon 2008
this stage, the Commission states that no installation
will receive a free allocation in 2013 that is higher
than its average emissions in the 2005-2007 period.
On auctioning, however, the rules are pretty clear. For
the power sector, refneries and carbon capture and
storage plants, all allowances would be auctioned
from 2013. Installations in other sectors (including
aviation and refneries) will receive 80 percent of
the allowances for free in 2013 decreasing to zero
in 2020.
Under current EU legislation, the overall credit
limit for the 2008-2012 period is set at around 1
400 Mt (about 280 Mt/year). However, unless a
satisfactory global climate deal is reached and the
EU commits to an overall reduction target beyond 20
percent, the Phase 2 credit limit would effectively be
extended to also cover Phase 3.
This implies that the 1 400 Mt limit now in place
for Phase 2 would apply for the period 2008-2020,
giving an average import potential of just above 100
Mt per year. This corresponds to a credit limit of
nearly 6 percent for the 2008-2020 period for the
installations included in the scheme in Phase 2.
In the event of a satisfactory international
agreement, the EU might increase the overall
reduction target from 20 percent to up to 30 percent.
The additional reductions required by a 30 percent
target would be split between the EU ETS and the
non-trading sectors. The EU ETS would take on an
additional reduction corresponding to its relative
reduction effort in the 20 percent scenario.
If the EU should aim for a 30 percent reduction
target, the cap in 2020 would be set just below 1 400
Mt, while the average allocation in Phase 3 would
be set at about 1 630 Mt/year. Not surprisingly, a
satisfactory international agreement would thus
imply a signifcantly tighter allocation in the EU ETS.
At the same time, a 30 percent reduction target will
also lead to increased use of CERs/ERUs in Phase
3. Half of the additional effort could be covered by
import of credits, under the proposal.
Until now, Phase 2 and Phase 3 have been linked
through the possibility of banking allowances
into Phase 3. However, by extending the Phase 2
credit limit to 2020, the Commission has effectively
merged Phases 2 and 3 of the scheme. Thus, the EC
Phase 3 considerably tighter in a 30
percent reduction scenario
How does the EC defne what is
satisfactory?
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.
0%
10%
20%
30%
40%
0-2 2-4 4-6 6-8 8-10 10 + Don't
know
Would
never
sell
R
e
s
p
o
n
s
e
s
Before 23 Jan From 23 Jan
Source: Point
Carbon
Trading range
31
11 March 2008
proposal will have a signifcant impact on the market
balance in the 2008-2012 period.
3.2.3 Prices in the EU ETS
The current price of an EUA for delivery in
December 2008 is around 21. While the market
sets the prices at which EUAs and CERs are traded,
compliance buyers and sellers have natural positions
that make it rational to also buy and sell at prices
other than the prevailing market price. For example,
an industrial company may initiate reductions at a
certain threshold price and sell surplus EUAs, or
start an emission intensive production process and
buy EUAs if the price falls below a certain level.
In the following, we use our survey to try to gauge
these underlying factors that would determine
supply and demand under other conditions than the
present market. In other words, we have tried to
estimate a simple marginal abatement cost (MAC)
curve.

Figure 3.7 shows the number of respondents
willing to sell or buy EUAs at various prices. Not
surprisingly, the two cumulative curves cross at
around 20-25, the price level during the survey
period. About 30 percent of respondents (although
not necessarily the same individuals) chose this
level for the maximum buy/minimum sell amount.
Only 13 percent would buy above this level, while
17 percent said they would not pay more than 10
for an EUA. Conversely, 21 percent said they were
willing to sell below the 20-25 level, while three
percent would not sell EUAs below 100.
We can also look at the question of price in another
way, by asking how many of our respondents would
buy, sell, bank and/or reduce own emissions at
various carbon prices. Figures 3.8-3.11 display the
answers.
As we see from Figure 3.11, around 75 percent of
respondents would require carbon prices above
20-25 to start reducing their own emissions in
Phase 2 and selling their excess EUAs. A majority
would bank their excess EUAs even at prices below
20-25. Finally, as also indicated in the previous
chart, the minimum price for selling appears to be
about 25 for roughly half the sample, whereas the
15-20 is the median buying range.
Among fnancial institutions, more than 40 percent
of the respondents reported that they would buy
or sell EUAs in the 20-25 range. More than three-
quarters were found in the ranges from 15 to 30.
The difference from the compliance players is the
focus on the current price, as fnancials have no
natural exposure. There were 175 responses in this
category.
EUA price in 2020 expected at 35/
tonne, 10 up from last year
Figure 3.13: Expectations for EUA prices: 2010 and 2020
N=3262 (2008) and 1893 (2007)
Price in 2010
0%
5%
10%
15%
20%
25%
30%
35%
40%
< 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 35 35 - 50 > 50
2007 responses
2008 responses
Mean 2007: 18
Mean 2008: 24
Price in 2020
0%
5%
10%
15%
20%
25%
30%
35%
40%
< 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 35 35 - 50 > 50
2007 responses
2008 responses
Mean 2007: 25
Mean 2008: 35
Three percent of respondents would
not sell EUAs below 100/tonne
32
Carbon 2008
Roughly speaking, in the compliance category, the
median respondent would sell an EUA at 25 or
above, but would bank it to Phase 3 at prices below
20, rather than sell it.
EUA-CER swaps
In the course of 2007, it became clear that the EUA
price would be strongly linked to the CDM market,
and notably to the market in sCERs. The sCER
market comprises transactions taking place after the
initial ERPA, and the CERs that are traded may come
from any project.
EUA-sCER spreads for December 08 delivery have
moved within a range from 2.41 to 7.98 since last
May. However, in 2008 so far, the range has been
confned to 4.28 - 6.18. Is there a greater potential
for EUA-CER swaps if the price increases? Or is
the current price level suffcient to lure the industrial
companies with surplus credit limits to do the swap?
In short, how much do our respondents demand to
sell an EUA and receive a guaranteed-delivery CER
in return?
To probe the swap market, we asked the following
question to all EU ETS companies that did not say
they needed their full credit limit for compliance:
What premium (spread) would you demand to give
up an EUA and receive an issued CER in 2008?
Figure 3.12 demonstrates the responses. The
average swap price was 6.33/tonne.
Our survey straddled the 23 January release of
the EU climate and energy package, which allows
us to check if there was any effect of the news
of a potentially tighter credit limit for the average
2008-2020 period. What we see is that the share
of respondents who did not know at what price to
sell increased from 29 to 37 percent. Other changes
were more ambiguous. There may thus have been
a small effect of the publication of the EU package,
but besides the increase in potential spread sellers
that dont know their preferred price, we cannot
conclude with certainty that this has affected our
survey respondents directly.
Long-term prices
To get a general sense of where respondents think
the EUA price will go in the medium term, we asked
all our respondents to give their best guess of the
level of the EUA price in 2010 and 2020. The results
are given in Figure 3.13. The trend from last year is an
increase in expected prices by about 5-10 for both
EUA-sCER swap deals at 4.28-
6.18/t so far in 2008
Respondents average swap price is
6.33/tonne
Figure 3.14: Reported marginal abatement costs (MAC) in the EU ETS
0%
10%
20%
30%
40%
50%
60%
70%
0-10 10-15 15-20 20-25 25-30 35-50 50-100 above
100
don't
know
33
11 March 2008
2010 and 2020. Specifcally, the median response
for the 2010 price went up from the 15-20 range in
2007 to 20-25 in 2008, increasing the average price
from 18/tonne to 24/tonne. Likewise, the median
expectation for the 2020 price was 20-25 in 2007,
rising to 25-35 in 2008, and the average price from
25/tonne to 35/tonne.
In our survey, we defned the marginal abatement
cost as how much it would cost the company to
reduce emissions by the last 1 tonne CO
2
to be in
compliance. An ordered set of MACs for all covered
entities a MAC curve should in principle give the
fundamental EUA price as a function of the cap.
However, this MAC is diffcult to estimate. When
asking survey participants in the EU ETS to report
their MAC, more than half could not or would not do
so. The result is given in Figure 3.14. Among those
that did report a price range, the most frequent
response category is 20-25, i.e. the price at the
time of the survey. However, an average price of
approximately 40 means that there is a greater
upside than downside. This average, for what it is
worth, is higher than the cost displayed in Figure
3.11.
3.3 CDM market in the Kyoto period
The CDM market consists of the primary,
secondary, and options markets. The primary CER
market involves the frst buying and selling of the
emission reductions from specifc CDM projects,
whereby trades are conducted through ERPAs. In
contrast, the sCER market involves trades in CERs
that have already been traded once through primary
transactions. There is also a small but growing
market in CER options, and a budding post-2012
CER market.
3.3.1 Primary CDM
Based on Point Carbons transaction database,
project database, and current estimate of infow of
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
for the expected reverse development are:
reduced demand from EU ETS due to the new credit 1.
limit;
no more infow of large HFC and N 2.
2
O adipic
projects in China; and
many installations in the EU ETS are closer 3.
to completing their acquisition of credits for
compliance purposes
Demand conditions may change signifcantly if the
Expected CER volume by end of
2012 up 0.5 Gt since last year
Figure 3.15: Expectations for CER volume by end of 2012
N=3149/1750 (Dont know/No opinion excluded from total). Note that the 2007 number includes
both CER and ERU volume.
0%
5%
10%
15%
20%
25%
30%
35%
<1.5 Gt 1.5 - 2 Gt 2 - 2.5 Gt 2.5 - 3 Gt 3 - 3.5 Gt > 3.5 Gt
2008
2007
Mean 2008: 2.4 Gt
Mean 2007: 1.9 Gt
34
Carbon 2008
ECs proposal remains unchanged. Specifcally,
if there is no satisfactory post-2012 deal, the
average credit limit for 2008-2012 is set to decline
from 280 Mt/year to 107 Mt/year. This level would
remain until 2020.
This potentially bearish long-term demand signal
is considered to have some, if still limited, effect
on the infow of new projects in 2008, given that
developing a CDM project takes years. Most of the
reduced infow will be felt only at the end of the
2008-2012 period.
The major EU ETS review effect, however, is
expected to be seen on the widening of the bid-offer
spread on primary CERs. Buyers may be willing to
pay less due to a potential over-supply of credits,
while sellers prefer to sit on the fence, accumulating
credits and waiting for higher prices. This is expected
to lead to lower transacted volumes in 2008.
The last big CDM projects involving industrial gases
(HFC and N
2
O from adipic acid production) entered
the pipeline and were transacted in 2007, exhausting
this source of CERs with low marginal abatement
costs. In their absence, renewable energy projects
in hydro and wind have come to the rescue, most
notably in China.
Although we expect China to remain the dominating
CDM host country in 2008 (see Figure 2.18), we
may start to see increased activity in countries
perceived to be in line for mandatory caps. For
instance, countries such as South Korea, Mexico
and Argentina may be able to convert CDM into JI
projects and thus sell credits into U.S. and EU carbon
markets in the post-2012 period more easily, making
these more attractive for investors. As explained
in American Climate Policy: A Tale of Two Bills
(CMA 12 February 2008), the Lieberman-Warner bill
suggests allowing some ERUs, but not CERs, for
compliance.
As the Kyoto period is fnally here and 2012 is
approaching, compliance players, mainly in the
private sector, may already have contracted a
considerable amount of the volume of credits
required to meet their Kyoto targets. Demand from
compliance buyers is therefore expected to be
somewhat reduced compared to previous years. On
the other hand, more than 1 500 Mt were traded
in the primary CDM market in 2005-2007, and
according to Point Carbon supply estimates, there
are still more than 1 000 Mt of existing projects to
be contracted.
A major question regarding the CDM is what volume
of emission reductions from developing countries,
in the form of issued CERs, will be produced by the
end of the frst Kyoto commitment period. To this
Respondents fnd CER demand after
2012 very likely
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.
0% 10% 20% 30% 40% 50%
Very unlikely
Unlikely
Not sure
Likely
Very likely
2007 2008
35
11 March 2008
question, the most frequent response was that 2.5-
3.0 Gt of reductions would produce issued CERs by
the end of 2012, see Figure 3.15. While we did not
ask exactly the same question last year, the most
comparable result from the 2007 survey indicated an
expectation of 1.5-2.0 Gt from CDM and JI together.
Thus, supply expectations appear somewhat higher
than last year.
How secure is the future of the CDM? We asked
our respondents this year and last year to assess
the likelihood that there would be demand for CERs
and ERUs post-2012. The answer for the CDM is
unchanged or slightly better than last year. Figure
3.16 shows that 80 percent consider it likely or very
likely that there will be CER demand after the frst
commitment period of the Kyoto Protocol.
3.3.2 Secondary CER market
2007 saw strong activity in the EUA-sCER swap
market. While some expected the spread to
converge on zero, the swaps have shown their own
price dynamics. Regardless, the EUA and sCER
markets have been closely linked in the course of
2007, meaning that neither one can be understood
without understanding the other.
We assume that three fundamental factors will
infuence 2008 volume:
We expect issuance to almost double from 2007 to 1.
2008, leading to a greater number of sCERs in the
market.
Spot trading of CERs will then become more 2.
commonplace, thus making trading easier for
parties without the credit lines to engage in
forward trading. This may also move part of the
sCER volume from bilateral to OTC trading and
the exchanges.
We may see a reduction in swap volume as 3.
industrials become more wary of taking on CERs
in return for EUAs.
We expect the sCER volume to increase
proportionally to issuance; with other positive and
negative effects cancelling each other out.
Prices
As shown in the previous chapter, the sCER market
is backwardated in part due to an expected CER
supply crunch in the early years of Phase 2, and/or
good supply further out in the period. Ample CER
supply expected further out on the curve contributes
to this effect. One way to reduce this backwardation
CER issuance level decides traded
volumes of sCER
Figure 3.17: Proft from borrowing?
Question: Does your company allow for borrowing from the companys 2009 allocation to use for
compliance in 2008? N=414. Companies covered by the EU ETS.
0% 5% 10% 15% 20% 25% 30%
Yes, may borrow
without any limit
Yes, may borrow up to
a certain limit
No
36
Carbon 2008
would be for compliance companies to borrow from
next years allocation for current year compliance. A
company could do this, for example, by using some
of next years allowances for this years compliance,
and then save some of its credit limit for later years,
when sCERs are cheaper.
The design of the EU ETS permits companies to
do this, since the Directive stipulates that EUAs
for each year should be issued every 28 February,
whereas EUAs for last years compliance do not have
to be handed in until April. Yet will companies allow
themselves to take this opportunity, given internal
risk management regulations? Our data show that a
surprising number actually will.
As Figure 3.18 shows, more than 40 percent of the
respondents all from companies covered by the
EU ETS reported that they could borrow at least
some of next years allocation. There thus seems to
be room for reducing the backwardation in the sCER
market if some of this potential is utilised.
CER options
CER options were traded in 2007, but market
participants predict a higher volume this year. One
problem with CER options stems from the manner
in which they are issued; fnancials should be able to
hedge them in the market. Since the sCER market
is not particularly liquid, it is quite diffcult to trade
options. However, once more countries attain Kyoto
eligibility and the ITL-CITL link is up and running, it
will be possible to trade CERs much more smoothly.
Consequently, the options volume in 2008 will, to a
large extent, depend on the timing of registry linking
and eligibility.
There is also some evidence that market participants
are looking further ahead in their trading strategies,
some even to beyond 2012. CER forwards for
delivery post-2012 have been traded by 8 percent
of companies with obligations under the EU ETS,
as shown in Figure 3.19. CER options for after 2012
are used by half that number, while post-2012 EUA
instruments are less frequently used.
3.4 JI existing market, deliveries now?
The market created by the JI mechanism has been
active for years, but no ERUs have so far been
issued. Most of the JI projects submitted to the
JISC in 2007 appear to be in the fnal stages of
ERPA negotiations. The process is being spurred on
by the fact that the crediting period (2008-2012) has
already started and project participants want faster
negotiation processes. The pace is slow in Russia,
CER option trading expected to in-
crease signifcantly in 2008
Figure 3.18: Soaring sCER
Comparison of changes in the EUA and primary/secondary CER market segments, 2005-07 and
forecast for 2008
0
1
2
3
2005 2006 2007 2008 (forecast)
A
n
n
u
a
l

v
o
l
u
m
e

(
G
t
)
EUA total
Primary CER
Secondary CER
37
11 March 2008
however, despite recent improvements. At the same
time, the rules for JI in new EU ETS member states
are increasingly restrictive, potentially reducing
supply.
It is possible that the contracted volume in 2008
could be boosted by some positive changes in
Russian procedures and by progress towards
eligibility status in Ukraine (expected in April this
year). We expect 250 Mt will be issued from Russia
over the next fve years. Thus far, there are only 11
Mt contracted with Russian companies. This means
that we should expect large bundle contracts to be
reported in the market. A similar situation has also
emerged in Ukraine.
What the JI market is waiting for now, of course, is
delivery of ERUs. Unlike the CDM market, where
credits (CERs) have been issued since 2005,
ERUs cannot be created or transferred until the
host country has gained eligibility under the Kyoto
Protocols Article 17, and in any event not until the
beginning of 2008.
A major question is whether, when and how
many ERUs will come from Russia. We asked all
our respondents when they thought the frst ERU
would be delivered from Russia. As may have been
expected, almost half of the sample did not state
any opinion on this question, either replying dont
know or simply recording no answer.
Among the substantive replies, the most frequent
and median (middle) response was the year 2010
(Figure 3.20). One-third of the respondents (not
counting the dont know responses) chose this
option. That being said, 17 percent thought that
Russia would not deliver any ERUs during 2008-
2012. (On the other hand, our sample included 18
respondents located in Russia; of these, ffteen
thought that ERUs would be delivered no later than
2009.)
3.5 AAU large potential, limited supply?
The Kyoto Protocol permits countries with
commitments written into the Protocols Annex B
to buy and sell parts of their permitted emission
volumes, or assigned amounts (AA), as assigned
amount units (AAUs). The market is potentially
very large in the order of several billion tonnes
CO2e but no known trades have yet taken place.
Nonetheless, with the frst Kyoto commitment
period now underway, and Annex B countries
gaining eligibility for international emission trading,
it is becoming increasingly likely that an AAU trade
will take place.
Figure 3.19: Post-2012 EUA and CER market activity
0% 10% 20% 30% 40% 50% 60% 70% 80%
Yes, CER forwards
Yes, CER options
Yes, EUA forwards
Yes, EUA options
No
Don't know
First AAU trade expected in 2008,
likely to involve Ukraine
38
Carbon 2008
Figure 3.20: When will the frst ERU be delivered from Russia?
N=3041 (Dont know/No opinion excluded from total in the chart).
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012 Not in the
2008-12
period
Figure 3.21: An AAU trade in 2008?
N=3027
0% 5% 10% 15% 20% 25% 30% 35% 40%
Yes
No
Don't know
39
11 March 2008
Countries often mentioned as potential AAU sellers
are Latvia, Hungary and Ukraine. In February,
Ukraines National Environment Investment Agency
revealed plans to carry out a pilot AAU transaction,
of a size 10-20 Mt, by April or May. The country has
developed a green investment scheme (GIS) under
which it will earmark revenues from AAU sales for
investments in projects that will contribute to further
emission reductions.
We asked whether survey respondents thought they
would see an AAU trade in 2008, and further how
much the volume would be from the main potential
seller countries Russia and Ukraine. The results are
displayed in Figure 3.21 and 3.22.
If AAU trading takes place, how much will we see?
Here, the most favoured reply was 500 Mt 1 Gt.
Furthermore, two-thirds of the substantive responses
are seen in the less than 500 Mt and 500 Mt-1
Gt categories. A rough weighted mean came out
at just under 1 Gt. This number is well below the
total AAU supply potential, and the potential upside
is thus substantial.
In this chapter, we have discussed the Kyoto markets,
some of which have already reached fairly advanced
stages and almost maturity, according to our survey.
On the other side, potential markets such as that
concerning AAUs may come into existence through
trades and deliveries this year or next.
3.6 Regional Greenhouse Gas Initiative
(RGGI)
The RGGI, the United States frst foray into cap-and-
trade programmes for GHGs, will begin in 2009. The
RGGI system will cap CO
2
emissions from power
plants throughout the region. The frst compliance
period of the ten-state scheme begins on 1 January
2009. However, most states are expected to start
auctioning allowances this year.
From 2009 to 2014, the overall emissions cap is set
at 188 million short tons (m s/t). This is approximately
8 million s/t above 2000-2002 historical emissions.
RGGI authorities have set the budget high enough
to allow room for economic growth, but did they
set it too high? The answer could mirror the single
most important lesson from the frst phase of the
European Union Emissions Trading Scheme (EU
ETS): Do not over-allocate allowances.
While offcial RGGI numbers were last published for
the year 2004, we have used US EPA and DOE data
to estimate emissions for 2005 and 2006. 2005 will
be remembered as a year with a hot summer and
high electricity usage. Estimated emissions were
around 185 m s/t, close to the RGGI cap of 188 m
s/t. However, between 2005 and 2006, the use of
petroleum fuels for electricity generation dropped
dramatically. This drop in oil-fred generation is
Figure 3.22: From Russia and Ukraine with AAUs?
N=3 027 (Dont know excluded from total in the chart).
0%
5%
10%
15%
20%
25%
30%
35%
None Less than
500 Mt
500 Mt - 1 Gt 1 - 2 Gt 2 - 3 Gt More than
3 Gt
40
Carbon 2008
compensated by an increase in gas-fred and non-
emitting generation sources.
This led to an equally dramatic drop in emissions
of 21 m s/t between 2005 and 2006, leaving the
scheme long by 13 percent. As displayed in Figure
3.23, emissions are estimated to be 185 m s/t in
2005 and 164 m s/t in 2006. The hashed area in
the fgure illustrates the gap between historical
emissions and the 2009-2014 cap level. Emissions
had been remarkably stable between 2000 and
2004, before climbing slightly in 2005 and dropping
dramatically in 2006.
While fuel-switching, driven by the relative price
of petroleum based fuels and natural gas, played a
signifcant role in this steep fall, two other factors
help explain the emissions drop: weather-driven
electricity demand and environmental programmes
covering other air pollutants.
Traded RGGI volume will be the sum of auctioned
volume and spot or forward trades in the secondary
market. The auctioned volume is set to be by far the
largest, as most states have pledged full or close
to full auctioning. The greatest source of uncertainty
is not knowing how many states will be able to
complete the legislative and administrative work
required to auction their allowances before the end
of the year.
In addition, we expect a secondary market to
emerge, in which allowances are traded between
compliance buyers, fnancials, and others, after the
auctions.
Finally, in 2008 we expect some pre-compliance
activity in anticipation of mandatory federal
schemes in the US, Australia and possibly Canada.
A pre-compliance transaction is one in which a
future participant in a planned mandatory ETS buys
credits with the expressed purpose of using them
for compliance. Examples of pre-compliance buying
were seen in the US in the mid-1990s in anticipation
of Kyoto trading.
One argument for pre-compliance trading in the US
in 2008 is the fact that NYMEX will start offering
carbon trading on 17 March this year. Being the
worlds largest physical commodities futures and
options exchange, the traded volumes of the
contracts offered (e.g. EUAs, CERs, voluntary
carbon emission reductions) have the potential to
attract both compliance and fnancial actors.
Establishing a clear line between voluntary and pre-
compliance transactions is methodologically diffcult,
as our defnition is based on the motivations of the
buyer. Some voluntary carbon buyers also mention
pre-compliance positioning as one of several reasons
for entering the carbon market.
RGGI expected to be long the frst
years of operation
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
0
50
100
150
200
2000 2001 2002 2003 2004 2005 2006
M
i
l
l
i
o
n

s
h
o
r
t

t
o
n
s

o
f

C
O
2
cap-total
MD
RI
MA
VT
NY
NJ
NH
ME
DE
CT
41
11 March 2008
4. The carbon markets beyond 2012
The frst Kyoto period ends in 2012 and it is still not
clear whether a new international climate agreement
will be reached or not. What seems evident, however,
is that the momentum in regional carbon markets
is reasonably strong and that they will continue
to operate independently of a new international
agreement beyond 2012. The EU ETS Phase 3,
which will run from 2013-2020, is an example of this.
The market is now also paying particular attention
to developments in the US. Recent advances made
by federal emission trading bills will encourage
developments such as US-EU carbon market linkage
in the not too distant future.
4.1 Towards a new global climate
agreement
4.1.1 The Bali Mandate
The December 2007 COP/MOP meeting in Bali was
the last realistic chance to kick start the negotiations
necessary for a new ratifed agreement to be in
place at the beginning of 2013. Despite not being
reached until the last minute (on 15 December), the
Bali mandate was agreed on by all participants and
thus creates strong momentum and commitment
for continuous negotiations towards a fnal post-
2012 agreement. It is hoped that the agreement will
be signed at the UNFCCC Conference of Parties
(COP) in Copenhagen in 2009.
The main outcome of the Bali meeting was an
agreement on a mandate that commits all the
members of the UNFCCC to engage in a process to
produce a comprehensive climate deal over the next
two years. Specifcally, the Bali mandate consists
of a decision in the Convention, or dialogue track,
and two decisions under the Kyoto track.
The mandate contains no quantifed emission
reduction goals. This, however, is not necessarily a
weakness, as the important point is for all parties
to meet at the negotiation table, not to agree on
targets in the mandate. That being said, the mandate
acknowledges the scientifc fndings of the IPPC,
and states that deep cuts in global emissions will
be required.
4.1.2 The Bali positions
The Bali negotiations were tough. The main areas
of contention were whether quantifed emission
reduction targets should be included; to what extent
developing countries should take on commitments;
whether they should have obligations to monitor
and report the effects of national climate policies;
and whether and how the mandate should make
reference to the IPCC scientifc fndings.
The principal disagreeing parties were the US,
Canada, Australia and Japan on one side, and the
EU and developing countries on the other. A line of
confict was also drawn between developing and
developed countries.
All parties, including the US, maintained their desire
to produce a mandate, both before and during the
conference. However, the US resisted any reference
to quantifed emission reductions, saying it did not
want to prejudge the conclusions of negotiations.
The US was also generally negative towards
fnancing and technology transfer provisions. Japan
supported the US in not wanting to quantify emission
reductions for Kyoto Annex B countries, except in
a context where all major emitters would take on
comprehensive emission reductions or limitations.
The EU was strongly in favour of a 25-40 percent
emission reduction range for all developed countries
by 2020, pointing to the recommendations by the
IPCC that global emissions have to peak in the next
10-15 years and that developed countries need to
adopt this 2020 target in order to reach this goal.
The EU also sided with the developing countries and
demanded a clear distinction between what should
be required of Annex 1 countries and non-Annex 1
countries.
The Group of 77 (G-77) and China a diverse
developing country bloc consisting of 130 members
insisted on maintaining a clear division between
Annex 1 and non-Annex 1 countries in the reference
to commitments and actions. They also wanted
support in the form of adaptation, technology
transfer, capacity building, general fnancial
assistance and action on avoided deforestation.
Developed countries had trouble seeing exactly how
such actions (notably technology transfer) could be
implemented in a meaningful way.
Several developing countries, including China and
South Africa, were strongly in favour of a new
deal and offered to reduce the growth of their own
emissions, provided that Annex 1 countries make a
commitment to emission reductions.
Bali: Agreed to negotiate towards
2009 signing
42
Carbon 2008
4.1.3 The forthcoming negotiations
The forthcoming negotiations will follow two parallel
tracks. The Convention track will be the principal
one, as the US has not ratifed the Kyoto Protocol.
The Kyoto track is a back-up solution and also
constitutes a solid foundation for the content of the
new agreement.
The Convention track produced the Bali action
plan (BAP). The Kyoto track produced a decision in
the Ad-hoc Working Group on New Commitments
for Annex 1 Parties (AWG), as well as a decision
to conduct a second review of the Kyoto protocol
under its Article 9. Of the two tracks, the Convention
track will be the most important because it involves
the US, whereas the Kyoto track will continue in
order to reassure developing countries, as well as
for legal reasons. The Kyoto track also constitutes a
signifcant foundation and starting point for a new
protocol to be negotiated towards and during the
COP in Copenhagen in 2009.
Under the Bali action plan, a formal negotiation
committee will be set up for the Convention track.
It will be called the Ad-hoc Working Group on Long-
term Cooperative Action under the Convention. Note
that this AWG is separate from the existing AWG for
new commitments under the Kyoto track. This new
working group has been tasked with presenting
its work for adoption by the COP in Copenhagen
in 2009. It asked for initial submissions to its work
programme by 22 February 2008 and will hold its
frst meeting in March or April 2008. The mandate
has therefore created a momentum for continuous
negotiations in the run up to Copenhagen.
A key question in the negotiations is whether
developing countries will take on commitments in
a new agreement. As it stands now, the distinction
between developing and developed countries
remains, and the forthcoming negotiations will
consider mitigation actions by all countries and
mitigation commitments by developed countries.
Developing countries secured strong promises from
developed countries on adaptation, technology
transfer, capacity building and tropical deforestation
and degradation.
4.1.4 Towards an agreement?
Will negotiators be successful over the next two
years and produce a global climate regime for the
post-2012 period? In our survey, 71 percent think
agreement will be reached (Figure 4.1). This is exactly
the same response as last year. While the positive
answers were relatively evenly distributed, Japan
and Germany were the most optimistic of the major
countries, each with more than 80 percent expecting
a positive outcome. Respondents from India, China
and the US also scored well above average, with 75-
78 percent giving positive answers.
What if the US in the end decides not to join the
consensus, even though it went along with the
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
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
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
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]
Yes
No
Not sure
43
11 March 2008
word, we anticipate commitments will be
something akin to emission targets or Kyoto caps.
Figure 4.3 shows the opinions of our survey
participants.
These results illustrate interesting points in a number
of groups:
Europe, Japan and Australia: More than 80
percent think that these countries will participate
with commitments. Kyoto latecomer Australia is
just ahead of Canada. Could this be due to the Rudd
effect, given the new prime ministers emphasis on
climate policy?
The highlights of the next group are the US and
Russia. Just over half of our sample thinks that
these two giants will participate with commitments.
In the Carbon Market Survey last year, more than
60 percent of the respondents thought that the US
would participate in a post-2012 agreement with
commitments, compared to around 50 percent
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 4.2: Could it happen without the US?
Question: Will there be a post-2012 agreement,
regardless of whether the US participates? N=3036.
0% 20% 40% 60% 80%
Yes, a post-
2012
agreement will
be reached
regardless
No, a post-
2012
agreement
requires US
participation
Figure 4.3: Who will participate with commitments?
Likely participants in a post-2012 scheme. N=3013/1910
0% 20% 40% 60% 80% 100%
Europe
Japan
Australia
Canada
New Zealand
Russia
USA
Ukraine
South-Korea
Some developing countries
China
India
Mexico
Sectors in developing countries
2008
2007
44
Carbon 2008
Despite the fact that Canada has signifcant
diffculties in meeting its Kyoto target, the survey
respondents are confdent of Canadas participation
in a new global climate agreement. Nearly 75
percent think Canada will join, just slightly less than
in the Carbon Market Survey last year.
Finally, there are the rapidly industrialising
countries: China and India, at 35 percent. Although
not mentioned as an alternative, numerous
respondents mentioned Brazil as another likely
candidate.
It is also worth noting that South Korea
seems a likely candidate for post-2012 agreement,
gaining a positive response from 45 percent of
our respondents. This now-industrialised country
illustrates the problems of continuing a strong
bifurcation between developing and developed
countries, as laid down in 1992 when the UNFCCC
Annex 1 was written.
4.2 Carbon markets in North America
As described in Chapter 3.6, the RGGI will start
in 2009, but the frst auctions will in fact be held
before this, in 2008. Besides RGGI, there are a
number of initiatives in North America, both at
federal and state level, that may be implemented in
a few years. In Canada, both the federal government
and the provinces have launched climate plans and
strategies, with the provinces being the most pro-
active. As uncertainty is still signifcant when it
comes to Canadian climate policy in general, we
will leave that for now and instead concentrate our
discussions on its great neighbour to the south.
4.2.1 US State initiatives
Regional initiatives are at the forefront of climate
policy in North America. In February 2007, the
Western Climate Initiative (WCI) emerged as a
regional, coordinated attempt to address climate
change by reducing GHG emissions in the western
part of North America. In August 2007, six Western
states (Arizona, California, New Mexico, Oregon,
Washington and Utah) and two Canadian provinces
(British Columbia and Manitoba) announced a joint
target of 15 per cent below 2005 GHG emission
levels by 2020, and are currently developing an
emission trading system whose design will be made
public in August 2008. The WCI target was not the
result of a negotiation process but a compilation of
state targets into an aggregate reduction target.
In November 2007, six Midwestern US states and
the Canadian province of Manitoba signed the
Midwestern Greenhouse Gas Accord, aiming at
reducing their regional GHG emissions by 60 to
80 per cent of current levels by 2050, through a
cap-and-trade system. The six participating states
(Wisconsin, Minnesota, Illinois, Iowa, Michigan and
Kansas), three observer states (Ohio, Indiana and
South Dakota) and Canadian province Manitoba
intend to have targets for reducing emissions from
all six GHGs in place by November 2008.
Within one year, they will also fnalise a multi-sector
cap-and-trade programme and create a model rule
for implementing the carbon market in state laws.
The accord states that a cap-and-trade programme
should start within 30 months of the document
being signed.
4.2.2 Federal level
Pre-compliance trading in the US in 2008 is expected
simply because it appears increasingly likely that
the US will enact federal cap-and-trade legislation
to manage the nations GHG emissions. The US
Senates Lieberman Warner Climate Security Act
(CSA), introduced in October 2007, is expected to
be the basis for a future federal US emission trading
scheme (US ETS). As the CSA progressed through
the legislative process, a revised version of the
original bill was developed. The initial bill places most
of the regulatory burden on the actual emitters. The
newer version shifts more of this burden upstream
to fossil fuel producers, processors and importers.
The cap in the original version of the bill is set at 5.2
bn tonnes CO
2
e in 2012. The cap decreases by 96
Mt CO
2
e annually until 2050 when the cap is 1.56
bn tonnes CO
2
e, a 70 percent decrease from 2005
levels. The CSA covers emissions from 73 percent
of the US economy; from the power, industrial and
transportation sectors.
Eighteen percent of the allowances would be
auctioned in 2012. This percentage increases on
an annual basis to 70.5 in 2036, and then remains
unchanged until the end of the programme in 2050.
Installations in electric power and industrial sectors
are initially grandfathered 20 percent each, but this
allocation percentage decreases linearly to zero by
2036. The transportation sector, having emissions of
A US ETS could be the largest car-
bon trading scheme in the world
45
11 March 2008
just above 2 bn tonnes CO
2
e in 2012, is not allocated
any allowances over the period. The original CSA
proposal would begin with an estimated difference
between business-as-usual and cap (E
BAU
-t-C) of
420 million allowances (8 percent of cap).
To ensure a cost-effective trading scheme, regulated
facilities would be permitted to cover up to 30
percent, or 1.56 bn tonnes CO
2
in 2012, of their
compliance obligation, with offsets: 15 percent from
domestic sources and 15 percent from international
emissions allowances or credits purchased from a
foreign emissions trading market, amounting to 750
Mt international credit import in 2012.
In the revised approach, the cap is set at 5.7 bn
tonnes CO
2
e in 2012, which is roughly equivalent
to the 2005 emissions from the covered facilities.
Given the BAU emissions projections and the
emissions cap specifed in the revised CSA bill, the
regulatory scheme would begin with an estimated
582 Mt allowance shortage in 2012 (420 Mt in the
original). To meet this shortage, domestic offsets are
the cheapest, but supply is likely to be limited. The
coal to gas switching price is approximately $50 - 60/
tonne on average, assuming current fuel prices and
typical plant characteristics. Beyond fuel switching,
carbon capture and storage technologies kick in at a
carbon cost of between $25 to 100/tonne CO
2
e.
The relative US fuel prices and the domestic offset
supply will be signifcant factors infuencing US ETS
demand for international allowances, primarily EUAs
and ERUs. As CERs are not accepted in a US ETS,
this will to a certain extent provide an incentive for
the US to contribute to a new international post-2012
agreement in order to have international cap-and-
trade programmes to generate foreign allowances
for compliance in the US.
The market created by the proposed CSA would be
the largest cap-and-trade emissions trading system
in the world. It would dwarf the size of the EU ETS
with a cap of 5.2-5.7 Gt against the EUs 2.1 Gt.
To gauge expectations for GHG emissions trading
in the US, we asked the following question to all
our survey recipients: Do you think the US will
introduce a federal mandatory cap-and-trade scheme
for greenhouse gases before 2015? As Figure 4.4
shows, over 70 percent of the respondents think
that one will be introduced, while only 15 percent
think it will not.
Of course, this result is subject to potentially strong
bias, given that the survey is mainly taken by people
who have strong interests in GHG emissions
trading. Nevertheless, these same people think
that the future US ETS will not be particularly
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,
the survey had 292 US respondents).
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
to liken it to EU ETS Phase 3. One explanation for
L-W bill permits 30 percent offset,
half from abroad
Figure 4.4: US ETS by 2015?
N=3004
Yes
No
Don't know
Will a US ETS put pressure on EU
ETS?
Only ten percent expect US ETS to
be tighter than EU ETS Phase 2
46
Carbon 2008
this result might be that a future US ETS is seen not
in terms of any specifc proposal currently available,
but rather in light of a recent history of US climate
inaction. Developments over the next year, with a
presidential election and negotiations under the Bali
mandate, should give us a better idea of what to
expect from a federal US scheme.
4.3 Other upcoming markets
Following the example of the EU ETS, a number
of other initiatives for regional emissions trading
schemes are emerging. These are still at the idea and
planning stage, but might very well be operational
within a few years.
4.3.1 Japan
Domestic emissions trading is still very controversial
in Japan. Whereas the opposition Democratic
Party of Japan has proposed a domestic ETS,
industry, power producers and the governing Liberal
Democratic Party appear to be staunchly opposed. It
is thus unclear when a Japanese mandatory ETS will
be established, if ever.
To assess expectations for a domestic ETS in
Japan, we asked the following question: Will Japan
introduce a mandatory cap-and-trade scheme to
reduce emissions from the electricity and industry
sectors? Our results show that only 34 percent
expect the introduction of mandatory GHG emissions
trading in the 2008-2012 period (Figure 4.6). Note
that Japanese respondents are more pessimistic
about a domestic ETS than the respondents as
a whole, with 28 percent saying that it will never
happen.
4.3.2 New Zealand and Australia
In September 2007, the New Zealand Government
announced the worlds frst cap-and-trade scheme
to cover all six GHGs covered by the Kyoto protocol.
Forestry will be covered from 2008; liquid fossil
fuels from 2009; stationary energy sources, such as
power plants and industrial installations, from 2010;
and agriculture, which is responsible for 50 percent
of the countrys emissions, will be covered from
2013.
While the government will allocate freely to the
forestry sector, unlike the EU carbon scheme,
the electricity sector will receive no allowances
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.
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Less strict than the EU
ETS
About as strict as the
EU ETS
Stricter than the EU
ETS
No opinion
New Zealand and Australia planning
for emissions trading
47
11 March 2008
according to the plan. This is because the sector
can pass all of its costs on to the end consumer.
Moreover, industry will be allocated carbon credits
equal to 90 percent of their 2005 emissions.
In addition to these, we may expect that current
CDM countries like South Korea and Mexico, which
are likely to take on commitments in a new post-
2012 agreement, will also begin to develop regional
emissions trading schemes.
Details on the design of an Australian emission
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
2010 with the intention of having a wide coverage,
indicatively more than 70 percent of Australias GHG
emissions. It is also likely that the scheme will allow
international offsets, preferably from the Kyoto
project markets. Linking to the New Zealand trading
scheme has also been discussed.
4.4 Towards a global market?
Although we have just entered the frst Kyoto
period, this report clearly shows that we must pay
very close attention to what will happen when this
period comes to an end in December 2012. There
are three principal reasons for this. First, Europe
has been the key player in the global carbon market
thus far, with the EU ETS as the main driver for
emission reductions, both at home and in developing
countries.
The release of the ECs new proposal for a
comprehensive climate-energy package in January
this year, confrmed Europes intention to combat
climate change, with or without similar contributions
from other countries. These new proposals, if
adopted, will effectively extend the current EU ETS
trading period up to 2020.
Second, climate policy gained considerable
momentum in the US in 2007, and initiatives at both
state and federal levels mean that the country is
now moving closer to implementation of emission
trading schemes. RGGI will start on 1 January 2009
(and in fact, some early auctions are planned in
2008), while initiatives in the West and Mid-West
will take a few more years to materialise.
Most importantly, however, is the Lieberman-
Warner Bill now going though the Senate. This bill
Figure 4.6: Domestic ETS in Japan? Dont 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.
0% 10% 20% 30% 40% 50% 60%
No
Yes, during the 2008-
2012 period
Yes, after 2012
Japanese responses
Total responses
Post-2012 issues crucial for current
emissions trading schemes
48
Carbon 2008
is expected to become the foundation for a federal
emissions trading scheme in the US and may be
implemented as early as 2012.
These US plans are, like the EU ETS, taking
shape independently of the negotiations for a
new international agreement on climate change.
However, all US initiatives so far include provisions
for employing international credits for compliance
purposes (primarily EUAs and Kyoto credits). This
indicates that there will be a close bond between
upcoming regional emissions trading schemes
and existing schemes, primarily the EU ETS. The
carbon market is still, and will remain, a politically
driven market, as supply and demand for credits
are determined to a signifcant degree by political
decisions.
Finally, the importance of post-2012 issues is also
connected to the ongoing negotiations for a new
international climate agreement which will replace
or modify - the existing Kyoto Protocol. In particular,
this involves discussion on how and to what extent
large-emitting developing countries such as China
and India will be involved in a new international
agreement. The key question is: Will these countries
take on commitments in a new international
agreement? The results from our survey clearly
demonstrate that a new international agreement
is expected, but only a minority believes that China
and India will take on commitments post-2012.
Given the development of an increasingly interlinked
global carbon market, we asked our survey recipients
the following question: Will there be a global
reference price for CO
2
emissions in the year 2020?
The existence of such a price (regardless of its level)
would be a reliable indicator of policy success.
Seventy-three percent of our sample think that there
will be a global reference carbon price in 2020 (see
Figure 4.7). This result fts well with our general
fndings in this chapter (ca. 70 percent optimistic
survey sample).
We then asked our survey recipients what this global
carbon price was likely to be. The most frequently
chosen reply, and the median, was 30-50 Euros or
US dollars. Interestingly, the global carbon prices for
2020 given in this question are much higher than the
average prediction for the 2020 EUA price shown
in the previous chapter. Could this be because a
global market is expected to accommodate a higher
price?
Figure 4.7: What will be the cost of carbon in 2020?
Currency of choice. N=2591 (2157 respones in EUR; 967 in USD)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0-10 10-20 20-30 30-50 50-100 above 100
Price in (average = 38)
Price in $ (average = 46)
Will China and India take on commit-
ments post-2012?
49
11 March 2008

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Colophon
A
AA and AAU, see Assigned Amount and Assigned
Amount Units.
Additionality
Under the Kyoto Protocol, certifcates from JI and
the CDM (see explanations below) will be awarded
only to project-based activities where emissions
reductions are additional to those that otherwise
would occur. The issue has to be elaborated further
by the Parties to the Kyoto Protocol, and on the basis
of practical experiences.
Annex B Countries
Annex B countries are the 39 emissions-capped
countries listed in Annex B of the Kyoto Protocol.
Annex I Countries
Annex I countries are the 36 countries and economies
in transition listed in Annex I of the UNFCCC. Belarus
and Turkey are listed in Annex I but not Annex B;
and Croatia, Liechtenstein, Monaco and Slovenia
are listed in Annex B but not Annex I. In practice,
however, Annex I of the UNFCCC and Annex B of
the Kyoto Protocol are often used interchangeably.
Annex II Countries
Annex II of the UNFCCC includes all original OECD
member countries plus the European Union.
Assigned Amount (AA) and Assigned Amount Units
(AAUs)
The assigned amount is the total amount of
greenhouse gas that each Annex B country is
allowed to emit during the frst commitment period
(see explanation below) of the Kyoto Protocol. An
Assigned Amount Unit (AAU) is a tradable unit of 1
tCO2e.
B
Backwardation
A market condition in which a futures price is lower in
the distant delivery months than in the near delivery
months. The opposite of contango (see below).
Baseline and Baseline Scenario
The baseline represents forecasted emissions
under a business-as-usual (BAU) scenario, often
referred to as the baseline scenario i.e. expected
emissions if the emission reduction activities were
not implemented.
BAU, see Business As Usual Scenario.
Bear
Someone who thinks market prices will decline.
Bull
Someone who thinks market prices will rise.
Business As Usual Scenario (BAU)
A business as usual scenario is a policy neutral
reference case of future emissions, i.e. projections
of future emission levels in the absence of changes
in current policies, economics and technology.
C
Cap and Trade
A Cap and Trade system is an emissions trading
system, where total emissions are limited or
capped. The Kyoto Protocol is a cap and trade
system in the sense that emissions from Annex
B countries are capped and that excess permits
might be traded. However, normally cap and trade
systems will not include mechanisms such as the
CDM, which will allow for more permits to enter the
system, i.e. beyond the cap.
Carbon Dioxide Equivalent (CO2e)
This is a measurement unit used to indicate the
global warming potential (GWP) of greenhouse
gases. Carbon dioxide is the reference gas against
which other greenhouse gases are measured.
CDM, see Clean Development Mechanism.
CDM EB, see Clean Development Mechanism
Executive Board.
CERs, see Certifed Emission Reductions.
Certifcation
The certifcation process is the phase of a CDM or
JI project when permits are issued on the basis of
calculated emissions reductions and verifcation,
possibly by a third party.
Certifed Emission Reductions (CERs)
CERs are permits generated through the CDM.
Clean Development Mechanism (CDM)
The CDM is a mechanism for project-based emission
reduction activities in developing countries.
Certifcates will be generated through the CDM from
projects that lead to certifable emissions reductions
that would otherwise not occur.
Clean Development Mechanism (CDM) Executive Board
(EB)
The CDM EB is accountable to the Conference of the
Parties to the Kyoto Protocol (see below). It registers
validated project activities as CDM projects.
Commitment Period
The fve-year Kyoto Protocol Commitment Period
is scheduled to run from calendar year 2008 to
calendar
Carbon Glossary
Carbon Glossary
year-end 2012.
Contango
A condition in which distant delivery prices for
futures exceed spot prices, often due to the costs of
storing and insuring the underlying commodity. The
opposite of backwardation.
COP, see Conference of the Parties.
Conference of Parties (COP)
The COP is the supreme body of the United
Nations Framework Convention on Climate Change
(UNFCCC). The last conference (COP-11/MOP1) was
held in Montreal, Canada in November/December
2005.
Countries with Economies in Transition (EIT)
Countries that are in the transition from a planned
economy to a market-based economy, i.e. the
Central and East European countries, Russia, and
the former republics of the Soviet Union.
E
EIT, see Countries with Economies in Transition.
Emission Reduction Unit (ERU)
Permits achieved through a Joint Implementation
project.
Emissions to Cap (E-t-C):
Emissions-to-cap (E-t-C) is calculated by subtracting
the seasonally adjusted cap from emissions (actual
or forecasted). This metric gives an indication
of whether the market (for a specifc period) is
producing more or less than the seasonally adjusted
cap for that same period. More specifcally, if not
taking CERs into account, a positive (negative) E-C
means that the market is fundamentally short (long),
suggesting a buy (sell) signal.
Emissions Trading
Emissions Trading allows for transfer of allowances
or credits across international borders. However,
it is a general term often used for the three Kyoto
mechanisms: JI, CDM and emissions trading.
ERU, see Emission Reduction Unit.
EU ETS, European Union Emissions Trading System.
F
Financial additionality
CDM projects have to be fnancially additional, which
means that the projects that Annex I countries
support within the framework of the CDM should
not be fnanced by offcial development aid, but that
additional funding is to be made available for such
projects.
G
Grandfathering
Method for allocation of emissions, where permits
are allocated, usually free of charge, to emitters and
frms on the basis of historical emissions.
Greenhouse gases (GHGs)
Greenhouse gases (GHGs) are trace gases that
control energy fows in the Earths atmosphere by
absorbing infra-red radiation. Some GHGs occur
naturally in the atmosphere, while others result from
human activities. There are six GHGs covered under
the Kyoto Protocol - carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), hydrofuorocarbons
(HFCs), perfuorocarbons (PFCs) and sulphur
hexafuoride (SF6). CO2 is the most important GHG
released by human activities.
H
Host Country
A host country is the country where a JI or CDM
project is physically located.
Hot Air
Excess permits that have occurred due to economic
collapse or declined production for reasons not
directly related to intentional efforts to curb
emissions.
J
JI, see Joint Implementation.
Joint Implementation (JI)
Joint Implementation is a mechanism for transfer
of emissions permits from one Annex B country to
another. JI generates ERUs on the basis of emission
reduction projects leading to quantifable emissions
reductions.
K
Kyoto Protocol
The Kyoto Protocol originated at COP-3 to the
UNFCCC in Kyoto, Japan, December 1997. It specifes
emission obligations for the Annex B countries and
Carbon Glossary
defnes the three so-called Kyoto mechanisms: JI,
CDM and emissions trading. It entered into force on
16 February 2006
M
MAC, see Marginal Abatement Cost.
Marginal Abatement Cost (MAC)
The marginal abatement cost is the cost of reducing
emissions with one additional unit. Aggregated
marginal costs over a number of projects or activities
defne the marginal abatement cost curve.
Memorandum of Understanding (MoU)
A MoU is an agreement between two parties that
aims to formally recognise a joint desire to ultimately
conclude an agreement or to achieve goals jointly.
It may or may not have legal backing of sanction,
depending upon how it is constructed. MoUs are
often used as a basis for CDM/JI projects.
N
National Authorities and Designated National
Authorities
The national authority is the offcial body representing
the Government which takes part in the arrangement
of CDM/JI projects. For JI host countries, the national
authority approves the projects and issues the
emission reduction units. For CDM host countries,
the designated national authority issues a non-
objection letter necessary for the project approval.
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.
S
Supplementarity
A requirement in the Kyoto Protocol stating that
emissions trading should be a supplement to
domestic action. It refects the request of the
European Union to limit the use of the Kyoto Protocol
fexibility mechanisms. It is still not determined how
supplementarity should be interpreted.
U
United Nations Framework Convention on Climate
Change (UNFCCC)
The UNFCCC was established 1992 at the Rio Earth
Summit. It is the overall framework guiding the
international climate negotiations. Its main objective
is stabilisation of greenhouse gas concentrations
in the atmosphere at a level that would prevent
dangerous anthropogenic (man-made) interference
with the climate system.
V
Verifcation
In order for AIJ, CDM and JI projects to have a
formalised validation of an emission reduction
stream, a recognised independent third party must
confrm that claimed emissions reduction activity
has occurred.

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