1 Andrei Marcu

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CDM Functioning & Meeting Expectations What are Prospects for the Future? Saudi Arabia 19-21 September 2006 Andrei Marcu President and CEO International Emissions Trading Association

Introduction of IETA: 

Introduction of IETA Business organization established in June 1999 Emerged from UNCTAD policy forums in 1999, and started through the cooperation of UNCTAD and WBCSD. IETA has offices in Geneva, Brussels, Ottawa IETA membership: 134 companies 50% represent project developers, intermediaries, financial institutions, brokers, verifiers, legal firms, emerged in a new economic activity as a result of GHG market. 50% represent industrial organizations which wants to use CERs to meet regulatory constraints. IETA works for the development of an active, global GHG market, consistent across national boundaries and involving CDM, JI and emission trading.

IETA Members by Sectors: 

IETA Members by Sectors

IETA Members by Regions: 

IETA Members by Regions

Elements of Response to Increased GHG Emissions: 

Elements of Response to Increased GHG Emissions Technology Only technology evolution/revolution will enable economic betterment + climate response Must accelerate pace of technological advancement Global diffusion of technology Economic vitality Global trade interconnects An Essential Element: Cost-Effective Use of Capital

Markets are Key: 

Markets are Key Market-stimulated change Must have global system encouraging innovation and cost-effective climate action Must have strong market linkages to ensure global diffusion of beneficial technologies Must develop, identify and act on least-cost opportunities to minimize impact of that growth Globally-linked emissions trading Do markets work for GHGs : ST vs LT ?

GHG Trading: 

GHG Trading Critical element of any response… But only response - Not a silver bullet Only a means for cost effective way to manage GHG constraints Can and must adapt to local circumstances But … trading puts a price on GHG Source EC

Kyoto’s fundamental architecture: 

Kyoto’s fundamental architecture National emissions caps, from countries according to stage of development and responsibilities Countries allocated AAUs to 1990 baseline Efficiency and incentives through international market mechanism International Emissions Trading: trading of allocated instruments AAUs Global reach & creation of additional credits through project offsets e.g. CDM & JI (CER & ERU)

Compliance: 

Compliance Sovereign compliance : e.g. countries to meet KP caps Corporate compliance: to meet corporate caps under ETS Voluntary CCX Mandatory e.g. EU ETS helps EU meet KP targets by countries

Project Mechanisms: CDM: 

Project Mechanisms: CDM Help developed countries to meet compliance cheaper Help developing countries to develop in a sustainable way for a future when they can take caps Global UN regulatory body: CDM EB Complex system, being finalized Project by project approach Projects validated for CDM compliance Results yearly third-party verified CER s certified by CDM EB

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Projects, CDM/JI European Allowances EU25+X Australia, USA Kyoto Units Specific targets ? Japan ? ? Kyoto Party-Level Entity-Level Non-Kyoto Party Global GHG Market Green Credits? Russia ? ? Canada

Carbon Market: 

Carbon Market Global carbon market (2005) over US$10 billion. The first quarter of 2006 worth US$7.5 billion EU ETS EUAs market (2005) worth US$8.2 billion, 322 million tCO2e CERs market (2005) worth US$2.7 billion, 374 million tCO2e with strong demand from EU & Japan. More capital moving in to the carbon market

State of the CDM: 

State of the CDM Important progress has been accomplished, we are moving in the right direction, but problems remain that if un-addressed could discourage broad participation anderode the progress that has been made

1.1 State of the CDM: 

1.1 State of the CDM Increasing business interest in CDM More experienced regulator, more effective Secretariat, available resources EB goal: 2006 goals of registered projectsattained or surpassed Rapid growth in CERs issued:14.45 million. The expected number of CERs generated from the registered projects are 322 million CERs, 2.7 billion US Dollars. 16 DOEs, 3 DOEs are from Non-Annex I countries. Positive movement since Montreal

State of the CDM: 

State of the CDM The contract for the ITL to make sure the GHG market function properly, has been awarded. Improvemnet in UNFCCC website First DNA Forum to be held Plan for the catalogue of decisions by the EB

Current Issues of CDM: 

Current Issues of CDM Governance +High Workload of EB, MP and WG +Lack of sufficient communication & transparency in reporting and decision making process +Lack of technical capacity of MP and WG result more workload and a delay for proponents. Methodology +Methodology approval time becoming a bottleneck and discouraging new types of project activities +Methodologies submitted for the extended deadline of retroactive crediting Prompt start projects needs to meet the extended deadline of retroactive crediting.

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+Non-renewable biomass Exclusion of Non-renewable biomass projects limits opportunities. +Removal of simplified procedures for SSP Removal of simplified procedures for SSP could cause increased transaction costs. Validation/Project registration process & request for Review +Request for Registration Registration processes delay in the submission to the UNFCCC secretariat and the actual publication on its website. +Request for Review Increase of Requests for Review leads to an increased workload at the EB meetings.

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+Rejection of projects EB rejected 4 CDM projects and its decision lacks transparency on the reasons. Issuance/Verification/Certification & Request for Review +Request for Issuance Significant delays in the actual submission of CER issuance requests to the UNFCCC secretariat and the actual publication on website. +Request for Review The review of issuance could result into the reduction of CERs. Registries & ITL Delay of the announcement of ITL development

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Regional & Sectoral Distribution of the CDM Unequal distribution of projects by regions and sectors.

Market Share: across Asset Classes: 

Jan. 2005 to Dec. 2005 Market Share: across Asset Classes Share in volume Share in number of projects Jan. 2005 to Dec. 2005

Market Share: BuyersPrivate firms (Japan and EU): 

Market Share: Buyers Private firms (Japan and EU) Jan. 2004 to Dec. 2004 Jan. 2005 to Dec. 2005 110.0 MtCO2e 374.3 MtCO2e (share in volume)

Market Share: SellersChina-Brazil-India (BrIC): 

Market Share: Sellers China-Brazil-India (BrIC) (share in volume) Jan. 2004 to Dec. 2004 Jan. 2005 to Dec. 2005

Recommendations: 

Recommendations Better communication and transparency with MP Improve technical capacity of EB, MP, WG Improve transparency of EB, MP, WG Extend retroactive crediting period Justification for rejection of CDM projects Consolidation of Methodologies Extend grace period for methodology use Prioritisation of EB, MP No cap for type III small-scale projects Accelerate the methodology approval process as well as registration and issuance processes. No delay for registration and issuance Consider non-renewable biomass project as CDM

Is the CDM Delievering as expected and needed? : 

Is the CDM Delievering as expected and needed? Case: Asia Significant increase in energy use – IEA 2006 Energy Outlook China 2030 demand will be 6 times 1990 Most of it from fossil Significant increase in GHG Asia – large share of CDM projects, but small compared to what what needs to be addressed Can it address this magnitude wit a project by project basis End of pipe projects – Urgent need for production process and energy efficiency methodologies over a much wider range of potential project areas.

3.2 Future of the CDM : 

3.2 Future of the CDM The current issues of CDM to be solved for the further success of CDM Implemenation of more varieties of projects in terms of methodologeis and sectors Open for new project categories such as carbon capture & storage More flexible finanical instruments for project developers Increased demand for CERs and ERUs Prospects for EU Phase II and Post-2012 certainty Move away from project by project

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International Emissions Trading Association www.ieta.org Andrei Marcu marcu@ieta.org For more information www.carbonexpo.com CARBON EXPO ASIA 2006 October 26-27 CARBON EXPO 2007 May 2-4 www.carbonexpoasia.com