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The Carbon Markets & Investors Association (CMIA) is an international trade association representing financial institutions and other service providers to the global carbon market as well as investors in low-carbon technologies. Formed to represent businesses working to reduce carbon emissions through the market mechanisms of the United Nations Framework Convention on Climate Change (UNFCCC), CMIA member companies include organizations that have been involved in an estimated 75 per cent of the value transacted in the global carbon market, worth roughly $100 billion in 2008.

CMIA Response to the Sandbag Report July 23, 2009
Greenhouse gas emissions have, thus far, been a free externality of economic development and this has resulted in the creation of colossal fossil fuel-dependent economies. This dependence, coupled with the scientific evidence that if we do not change our emissions trajectory we risk irreversible climate change, has created a worldwide impetus to act. When European policy makers created the EU ETS, the first ever carbon market, foremost in their minds was to construct a mechanism – to supplement other measures – that would allow for an economically viable transition to a low-carbon economy. Moreover, in creating a carbon market, policy makers ensured that the progress toward specified emissions reduction targets is measurable at every juncture. The targets set by the EU for Phase II and Phase III were not designed to be easy to achieve, yet no policy maker could have foreseen the events of 2007-2008. The recession, as it descended, proved deeper and longer than many had predicted. The contagion effect of over-leverage on both the household and corporate levels resulted in a 40 per cent drop in industrial output, as unemployment rose and consumer demand plummeted. CMIA does not take issue with those calling for tighter emissions caps. We strongly believe that, indeed, an ambitious target resulting in a strong price signal is needed to spur investment and encourage behavioural change. However, we strongly disagree with claims that the integrity and purpose of the carbon market, and the EU ETS in particular, has been compromised. The vestige of the recession has, in fact, brought to the fore one of the key benefits of instituting a market-based mechanism: price sensitivity. Yes – liable entities under the EU ETS discovered that as industrial output halved, they were in possession of surplus emission allowances. Yes – emissions-intensive industry sold these surplus allowances, and this injection of supply without corresponding demand led to market depreciation. No – the events of the last six months do not indicate that the EU ETS is not performing its function as a key mechanism to achieving emissions reductions. Firstly, we stress that the transition to a low-carbon economy was designed to be gradual. That is, the emissions allowance allocation decreases every year in order to achieve a specified reduction target by a specified year. The argument as to whether or not the emissions caps are overly lax ignores the basic premise of the ETS design – one way or another the EU is on target to achieve the emissions reductions it has set. Secondly, if liable entities under the EU ETS used the capital generated by the sale of surplus allowances, they did so in the most critical of circumstances. A capital injection into a firm that is struggling to retain its workforce and maintain operations is vital, but became close to impossible as financial institutions closed their lending facilities in the wake of the credit crunch. The industries that have profited from the EUA monetization may not have behaved rationally if one considers the long term: that is, emissions caps will continue to narrow, and if fuel-substitution and carbon supply-chain management is not managed, firms will be required to put the capital forward at a later date, when prices are likely to be much higher. While it may appear contradictory, that the EU ETS likely saved from effective bankruptcy the very industries it seeks to reform, it is dangerously short-sighted to judge the EU ETS on the events of the last six months. Indeed, if the EU ETS had decreased emissions caps and forced large-scale allowance purchases, liable entities, if not industries, could have very well collapsed under the added financial liability. This outcome is in no citizen or state's interest. Moreover, the type of ex-post facto intervention proposed is equally detrimental to market integrity. Narrowing and expanding caps in response to economic circumstances rather than letting the markets respond organically would create Promoting efficient market solutions to combat climate change. Page 1 of 2


a kind of 'carbon casino', in which participants merely bet capital on the next unpredictable change of rules by regulators. The carbon market is nascent, but it is growing, and currently worth USD125 billion. Arbitrary and capricious rule-changes are an anathema to its development as an efficient and effective mechanism for emissions reductions. As analysts have unanimously noted, even in the midst of the current recession, the EU ETS was still short of allowances in 2008. Since caps will continue to narrow, the prices of allowances are poised to rise substantially from the lows of early 2009. Liable entities are very well aware of this fact, and are, no doubt, preparing. Finally, it is important to note that the EU-directive supporting Kyoto offset mechanisms sets the supplementarity limit for Phases II an III to a maximum 50 per cent of the aggregate EU ETS effort. Moreover, while we agree that procedural and structural difficulties do exist in the Clean Development Mechanism (CDM), we would point to its multiple benefits, as well as to the proposals for its reform currently under consideration. Not only does the CDM provide an effective cost-containment measure, but the benefits to developing countries are equally important. The CDM opened doors for technology transfer and foreign direct investment, as well as provided the capital to begin the sustainable and environmentally-conscious development of emerging economies – and in particular, the economies that are on track to becoming the highest emitters in the world. We have a direct interest in their mitigation efforts; it is critical to the future of our atmosphere. Those who argue that by "exporting emissions" developed countries make no progress ignore that emissions reductions are a global issue. Where and how carbon is emitted is irrelevant to the atmospheric concentration of CO2, and supplementarity limits are set in place to allow developed countries to reduce global emissions at a lower cost. It does not preclude entities liable under an emissions trading scheme, once the prices of either CERs or EUAs rise to a level necessitating fuel-switching and CCS, to reduce them at home. Copenhagen is a critical juncture for both policy makers and carbon markets. We are still refining the architecture of both offset mechanisms and market mechanisms. It is important not to view markets through a short-term lens, but rather look toward its functionality in achieving a long-term goal. Patience, however, is a difficult concept to sell. We would not argue against more ambitious targets. We would only clarify that even with those targets that the EU has set the carbon market is poised to bring Europe the emissions reductions in a measurable and cost-effective manner. The recession may have made it easier, but only until the inevitable recovery. Most importantly, carbon markets will serve the same function, and as effectively, in other nations that provide the regulatory impetus for their creation. ENDS Alexandra Galin Manager, Policy and Working Groups

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