“State Of The Carbon Market 2004” Report

Anita Gordon 44-7709-415-253 or  202-473-1799

agordon@worldbank.org

Sergio Jellinek  202-294-6232

Sjellinek@worldbank.org

Cologne, GERMANY, June 9, 2004—A new World Bank carbon market intelligence study shows that the carbon finance market is establishing itself as one of the lynchpins in the fight against climate change.  Not even halfway through 2004, more than 64 million tons of carbon dioxide equivalent (CO₂e) have been traded – this amounts to nearly three quarters of the 78 million tons transacted in all of 2003. 

The World Bank’s State of the Carbon Market 2004 report was released this Wednesday together with the IETA/Eurelectric market survey at Carbon EXPO in Cologne, Germany.

The studies indicate that the signal is go and grow on all fronts for the greenhouse gas emission reductions market¾there are significant buyers in the market, market volumes are up, major players are involved, and the new European Emissions Trading Scheme (ETS) set to come into force in January 2005 is sending a clear signal that the market is open for business.  Most actors in the market will start trading actively in the next 18 months.

The data clearly shows that the European Union’s Emissions Trading Scheme(EU-ETS) has sent a vote of confidence through the global carbon market.  Russian ratification of the Kyoto Protocol would further enhance a regulatory environment and would send a clear market signal.  “The carbon market is maturing,” says Andrei Marcu, President of the International Emissions Trading Association. “The EU-ETS represents a major milestone in that direction. It creates the single largest allowance market in the world, bringing certainty to the market.  The IETA/Eurelectric survey shows that market participants in the EU ETS are also looking to create or acquire compliance instruments through the Joint Implementation and Clean Development  project mechanisms.”

But despite the good news on the carbon market, the World Bank warns that  “this may be a lost opportunity for some developing countries and economies in transition” due to the lack of any international commitments to reduce greenhouse gas emissions beyond 2012.  The EU ETS is an important component of the European Union strategy to collectively reduce emissions by 8 percent as agreed under the Kyoto Protocol.  However, given the significant lead-time required for projects to get off the ground, the window to purchase meaningful quantities of emission reductions from developing countries and economies in transition will very likely close by 2006.

“The good news is that the market is growing, but the cautionary note is that the clock is ticking on the possibility of delivering projects that can produce significant quantities of emission reductions before 2012,”  said Ken Newcombe, Manager of Carbon Finance, at the World Bank.  “This problem is made worse by the fact that there are no international commitments to reduce emissions beyond 2012.  It is the Bank’s experience that it can take anywhere from 3 to 7 years to implement a project from conception to operation. Governments and private companies in industrial countries must pay attention to this issue.”

The State of the Carbon Market 2004 report also shows that many European companies prefer to enter the market through intermediaries or public-private partnerships like the Prototype Carbon Fund (PCF).   The PCF is among the top three buyers, behind Japanese companies and on par with the Netherlands.  These three buyers represent nearly 90 percent of the carbon market.

The market intelligence study prepared by the World Bank’s carbon finance business unit, draws from information provided by carbon brokers Natsource, LLC and greenhouse gas analyst Point Carbon, as well as from interviews with leading international companies. According to Jack Cogen, President of Natsource  “We believe this market will continue to grow. The start of the EU system and approvals of project methodologies has led to larger volume transactions and new investments in the market.”    

“The carbon market is maturing. The most important development in the last half-year is that a short-term reference price has been created in the EU market, which also points toward the mid- to long-term. This helps enhancing market liquidity and prompts investors to evaluate their investment portfolios,” said Kristian Tangen, CEO at Point Carbon.

Asia now represents half of the supply of project-based emission reductions, with Latin America second (27 percent).  Africa is far behind with only 4 percent of the carbon trades happening on that continent.  This concerns the World Bank.  Says Newcombe, “Carbon finance activities are a natural extension of the Bank’s mission to reduce poverty.  The Bank is making every effort to ensure that poor countries can benefit from international responses to climate change, including the rapidly growing carbon market for greenhouse gas emission reductions.”

The data shows that there is a growing concentration of projects in larger countries; with two-thirds of the volume supplied by only five countries.  Destruction of HFC₂₃ represent nearly a third of the total volume supplied, demonstrating the potential of this technology. One-sixth of all the carbon finance projects involve landfill gas (LFG).  This demonstrates that carbon finance has the potential to revolutionize waste management in developing countries.

The reports are being released at the first Carbon Expo – host to more than 700 participants, including greenhouse gas emission reductions buyers and sellers, intermediaries, and service providers from companies and countries around the world. Carbon finance provides an opportunity for industrial country companies and governments to meet some of their international targets to reduce greenhouse gases that contribute to climate change at a reasonable cost – by purchasing emission reduction credits in transition economies and developing countries. These emission reductions are measured by metric tons of carbon dioxide (CO₂) equivalent.

For more the report, and more information, please visit the websites: http://carbonfinance.org/docs/CarbonMarketStudy2004.pdf 

www.carbonfinance.org 

www.ieta.org

ANNEX 1

Total Market Since Inception

Total market value since inception:

Known minimum: 500 m$ (the green bars )

Estimated total:    800 m$ ( the green and the shaded bars)

ANNEX 2

Data Details and Implications

§          The steady growth of the market is reflected in the volume of carbon traded. A total of 64 million metric tons of carbon dioxide equivalent (tCO₂e) was exchanged through projects from January to May 2004, nearly as much as during all of 2003 (78 million), which suggests that the market may have doubled by the end of the year.

§           HFC₂₃ destruction represent nearly a third of the volume supplied in 2003-2004 – from only two project sites – before landfill gas to energy and renewables. This is a dramatic change compared with last year, which underlines the important potential of this technology, for which mitigation costs are low, a methodology has been approved and published, and total supply per site is large.

§           The demand remains heavily concentrated. Japanese companies now represent the single largest group of buyers in the carbon market, before the World Bank Carbon Finance Business and the Government of the Netherlands. These three groups of buyers account for nearly 90 percent of the demand in 2003-2004.

§           Asia is now the largest supplier of emission reductions, before Latin America, developed economies, and Eastern Europe. Five countries (India, Brazil, Chile, Indonesia, and Romania) represent two thirds of the supply in volume terms. Increased concentration of Clean Development Mechanism (CDM) flows to a limited number of countries continue to leave Africa essentially bypassed, raising concerns about the long-term distribution of the benefits of the CDM. The fact that the potential HFC₂₃ destruction projects are heavily concentrated in a handful of countries reinforces that concern.

ANNEX 3

The World Bank’s Carbon Finance Business (CFB)

The CFB’s strategic objectives 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 agroforestry projects; and build the capacity of host countries to attract climate-friendly investment.

The World Bank’s Carbon Finance Business has more than US$410 million under management in six 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), which expand carbon market development.