“State Of The Carbon Market 2005"

Cologne, GERMANY, May 11, 2005 –   The fifth annual World Bank carbon market intelligence study, co-sponsored by the International Emissions Trading Association, IETA, released today at CARBON EXPO – Global Carbon Market Fair & Conference (May 11 – 13, 2005) - shows that the carbon finance market is expanding steadily.  107 million metric tons of carbon dioxide equivalents (tCO₂e) were exchanged through projects in 2004, a 38% increase compared with 2003 (78 million). The report estimates that the volume exchanged so far in 2005 is 43 million tCO₂e. 

The report is based on data both from transactions completed under the Kyoto Protocol’s flexible mechanisms—Joint Implementation (JI) and the Clean Development Mechanism (CDM) that allow rich countries to purchase greenhouse gas emission reductions in developing countries and in countries with economies in transition and the operations developed under the European Unions Trading Scheme (EU-ETS) and other greenhouse gas trading systems, including allowance markets. (See annex).   The report stresses that the carbon market is witnessing the growth of a new asset, the EU-ETS.

According to the report“volumes exchanged on these allowance markets has increased dramatically compared with last year, and is now comparable to the volumes exchanged through project-based transactions. The total amount exchanged on all the allowance markets from January 2004 to March 2005 was about 56 million tCO₂e.

      This is mostly driven by the entry into force of the EU-ETS in January 2005. Volumes traded from January to March are already 3.5 times higher as the total volumes of European Union allowances exchanged in the whole year 2004.

“Taken together, these developments suggest that the carbon market is responding to the ratification of the Kyoto Protocol and to the beginning of operation of the EU ETS. Increased activity, both on project- and on allowance-based markets is extremely likely in the coming years” says World Bank economist Franck Lecocq who authored the report with Karan Capoor of the Bank’s Africa Region

According to the 2005 report major uncertainties remain “notably the absence of any price signal for emission reductions beyond 2012, which limits the impact of carbon finance on CDM in projects with regular lead times.”

"We are enormously encouraged by the growth of the greenhouse gas market, especially the beginnings of the EU trading scheme," said Andrei Marcu, president of the International Emissions Trading Association. (IETA). "The entry into the market of the private sector through privately managed carbon funds as well as new players in the EU-ETS can only be positive for the future of this market.  IETA will continue to work to ensure a balance of supply and demand of emission reductions, especially through the CDM, giving special attention to Africa."

  Geographic distribution of projects

The supply of emission reductions has remained heavily concentrated in a few countries: notably India, Brazil and Chile. Apart from a few small-scale deals, poorer or smaller countries have seen limited activity in the past 12 months, raising the concern that the poorest countries are being left out of the carbon market.

Africa, in particular, has seen just one new large transaction.  However, the market analysis identified a number of upcoming transactions in that region, at least 10 of those in World Bank managed carbon funds. These are expected to come into the market over the next several months—in Ghana, Nigeria, Sierra Leone, Senegal, South Africa, Tanzania, Uganda, and Zambia—in sectors such as hydropower and landfill gas recovery.  Capacity building efforts on carbon finance in Africa are being supported by Japanese grants (about US$2.5 million) as well as by a US$1 million program between the Community Development Carbon Fund’s capacity building arm, CDCFplus and the United Nations Environment Program (UNEP).

Price gap raises concerns

The 2005 report shows that prices for project-based emission reductions increased by 20-25% over the last year.   Verified Emission Reductions now trade at a weighted average price of $4.22, while Certified Emission Reductions are now purchased at a weighted average price of $5.22/tCO₂e. The decline of the dollar relative to the euro explains only part of this difference. Prices on the early trades of the EU ETS have been between €7 and €9 in 2004, but have increased substantially to €17 in March and April 2005.

The increasing spread between prices of carbon in JI / CDM and in the EU ETS points to a disconnect between these markets that is raising concerns from project sponsors and host countries. However the report confirms that these two commodities are so different that they can not be compared. The report emphasizes that “this spread could be explained by a number of factors including thin volumes traded in allowances resulting in high price volatility; and the price differential could reflect the risk inherent in project-based transactions, among other things.”

According to the report “The number of buyers of emission reductions have increased and new buyers have emerged.  Private and public entities in Europe now represent 60% of the volume of emission reductions purchased through project-based transactions (Jan. 2004 to April 2005), against 21% for private and public entities in Japan and 4% for private entities in Canada”

“We are pleased to have contributed to the World Bank’s fifth analysis of the carbon market,” said Jack Cogen, President of Natsource. “The market for both project-based reductions and emissions allowances continues to grow. As rules governing the creation of supply become more certain, it will provide great cost-saving opportunities for entities that must comply with emission reduction requirements and create an additional source of revenue for the development of projects that reduce emissions”.     

This 2005 market study reviews the state and trends of the carbon market as of May 2005, based on data provided by carbon market analysts and brokers Evolution Markets LLC and Natsource LLC, and on interviews with a large number of market participants.

“The certainty of the EU trading system is really what is driving all of the other markets today”, said Andrew Ertel, President of Evolution Markets. “The rampant build up in demand and trade volume is more than expected at this early stage of the market, and it has begun the process of convergence of CDM, JI and EU markets. As the Canadians and Japanese get more clarity we will soon see an explosive effect on the global GHG (greenhouse gas) markets.” 

The release of the report comes in the midst of the largest carbon market fair and conference in the world with over 1000 participants.

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For the complete version of the report, please visit:

http://carbonfinance.org/docs/CarbonMarketStudy2005.pdf

          For additional information, please visit the websites: 
www.carbonfinance.org
www.ieta.org

ANNEX 1

Allowance Markets. 

There are four active markets for greenhouse gas allowances as of May 2005: the EU ETS, the UK Emissions Trading System, the New South Wales trading system and the Chicago Climate Exchange.    In most cases emission allowances are created and allocated (or auctioned) by public regulators under a cap-and-trade regime.  For example under the EU-ETS European governments have allocated greenhouse gas emission allowances to companies and industries.  If a company does not emit its total allowance, it can trade the balance.  

ANNEX 2

HFC₂₃ Destruction

HFC₂₃ is a by-product of the production of HFC₂₂, a hydro fluorocarbon, which is used as a refrigerant and as a raw material for the production of fluorinated resins. HFC₂₃ is a very potent greenhouse gas. The release of one ton of HFC₂₃ in the atmosphere has the same long-term effect on climate change than the release of 11,700 times tons of carbon dioxide.

ANNEX 3

Carbon Finance at the World Bank (www.carbonfinance.org)

The World Bank’s strategic objectives in carbon finance are to expand core carbon market development and encourage the private sector;  extend carbon finance to poorer communities in developing and smaller, poorer countries; demonstrate the sustainable development impact of carbon finance on sequestration of carbon dioxide in agro forestry projects; and build the capacity of host countries to attract climate-friendly investment.

The World Bank’s Carbon Finance Business has more than US$850 million under management in eight funds (either approved or under operation), which include: The Prototype Carbon Fund (PCF), a public-private partnership of 17 companies and 6 government entities that are pioneering the market in greenhouse gas emission reductions;  the Community Development Carbon Fund extends carbon finance to small-scale projects in least developed countries and poorer areas of all developing countries; the BioCarbon Fund applies carbon finance to agroforestry and land use projects; OECD Country Funds (Netherlands CDM and JI, Italy, Denmark and Spain), which expand carbon market development; and the European Partnership Carbon Fund.

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