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CARBON 2011
Point Carbons sixth annual survey shows a slight overall dissatisaction with the Cancun outcome.However, the Cancun COP is viewed much less negatively than the Copenhagen COP one yearearlier.
The survey garnered 2,535 responses rom 101 countries. Among the respondents, 43% stated thatthey were involved in trading various compliance carbon allowances and credits, or owned suchcarbon instruments.
Evaluations o the EU ETS are getting more avourable. The EU ETS is held as the most cost-eectiveinstrument or reducing emissions in the EU by 49% o respondents, the highest level to date.
A record 59% o respondents in EU power and heavy industry sectors say that the EU ETS hasalready caused them to reduce their own emissions. This is up rom 54% last year. However, thereductions caused by the EU ETS are typically seen at 10% or less compared to business as usual.
Power sector respondents eel they know their EU ETS phase 3 allocation the best. Among allsectors, the share saying they know their allocation exactly or airly well is up rom 22% to 28%,while the group o those who are very uncertain or have no idea is down rom 37% to 25%.
The CDM still represents an immature market, according to respondents. Only 18% agree with thestatement that the CDM market is mature. The share considering the CDM market the most cost-ecient way to reduce emissions in developing countries is 31%, against 34% who disagree.
More than hal o respondents involved in the primary CDM market say they have invested or willinvest in least developed countries (LDCs). Over the next three years, the same respondents nd itmost likely that 50-100 CDM projects in LDCs will be registered.
A majority o respondents expects urther qualitative restrictions in the EU ETS. A total o 56% thinkthe EU will ban project types beyond HFC and adipic acid N
2O.
In Caliornia, most respondents expect a carbon price o $10-15/t in 2012. Most also expect prices torange between $17/t and $50/t in 2020. RGGI participants expect a tighter cap rom 2012.
In the New Zealand ETS, 41% o respondents say they are short. The survey shows close to noindications o carbon leakage caused by the NZ ETS.
Among emerging osets, respondents nd reduced deorestation (REDD) credits most likely to
emerge by 2016. NAMA credits are seen as the least likely, with bilateral, sector and EU domesticosets in the middle.
Respondents expect a global carbon price o 31/t or $35/t in 2020. This is unchanged rom 2010.
A majority (54%) expect a second Kyoto commitment period. CDM project developers are the mostlikely to expect continued Kyoto targets, while Japanese and New Zealand emitters are the leastlikely to do so.
TO THE POINT
This report was published at Point Carbons 7th annual conerence, Carbon Market Insights 2011
in Amsterdam, 1-3 March 2011. For more inormation, see www.pointcarbon.com
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Carbon 2011
About the report:This report was written and edited by Endre Tvinnereim, Elizabeth Zelljadt, Natalia Yakymenko and EmilieMazzacurati. For citations, please reer to: Point Carbon (2011): Carbon 2011. Tvinnereim, E. et al. 48 pages.
ABOUT THOMSON REUTERS POINT CARBONProviding critical insights into energy and environmental markets
Thomson Reuters Point Carbon is a world-leading provider o independent news, analysis and consulting servicesor European and global power, gas and carbon markets. Thomson Reuters Point Carbons comprehensive servicesprovide proessionals with market-moving inormation through monitoring undamental inormation, key marketplayers and business and policy developments.
Thomson Reuters Point Carbons in-depth knowledge o power, gas and CO2 emissions market dynamics positionsus as the number one supplier o unrivalled market intelligence o these markets. Our sta includes experts ininternational and regional climate policy, mathematical and economic modeling, orecasting methodologies, riskmanagement and market reporting.
Thomson Reuters Point Carbon now has more than 30,000 clients, including the worlds major energy companies,nancial institutions, organisations and governments, in over 150 countries. Reports are translated rom Englishinto Japanese, Chinese, Portuguese, French and Spanish.
Our largest annual conerences Carbon Market Insights and Carbon Market Insights Americas are two o the mostrespected and prominent conerences in the worlds carbon markets. Point Carbon also runs a number o regionalconerences, high-level networking events, workshops and training courses.
Point Carbon has oces in Oslo (Head Oce), Washington D.C., London, Tokyo, Beijing, Kiev, Hamburg, Zrich andMalm.
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EXECUTIVE SUMMARY
1 March 2011
Over the past year, the world has moved closer to theend o the rst Kyoto commitment period (2008-12),and the rst period is looking increasingly likely to bethe last. While the EU is orging ahead with preparationsor the third phase o its emissions trading scheme(ETS), the US Congress has all but buried cap-and-trade at the ederal level or the oreseeable uture.
Point Carbons sixth annual survey ran rom 27 January
to 14 February 2011 and garnered 2,535 responsesrom 101 countries, using a web-based tool. Among therespondents, 1,064 or 43% stated that they were involvedin trading various compliance carbon allowances andcredits, or owned such carbon instruments. The threetop groups o respondents were CDM developers/aggregators, nancials and emitters covered by the EU ETS.
We see a clear upswing in participants evaluationso the EU ETS this year. The share o respondentsconsidering that the EU ETS is the most cost-eectiveinstrument or reducing emissions in the EU is up to49%, the highest level on record. By contrast, 21%disagree or disagree strongly with this statement.
We also see that a record 59% o respondents in EUpower and heavy industry sectors say that the EU ETShas already caused them to reduce their own emissions.This is up rom 54% last year. Add to this the 9% sayingthat the EU ETS has prompted reductions to be planned,and we see that more than two-thirds report an eecto the EU ETS on current or uture emissions. However,the reductions caused by the EU ETS are typicallyquantied at 10% or less below businessas usual.
Looking ahead to phase 3, respondents in the EU ETSknow their level ree allocation better than last year,with the power sector overall appearing to have themost inormation probably because most power
companies will be 100% short. Among all sectors, theshare saying they know their allocation exactly or airlywell is up rom 22% to 28%, while those who are veryuncertain or have no idea are down rom 37% to 25%.
The end o 2012 is a major deadline or the CDM market.From 2013 onwards, the EU will not accept creditsrom CDM projects registered ater that date, unlessthey come rom least developed countries (LDCs). Wesee that more than hal o respondents involved in theprimary CDM market have invested or will invest in LDCs.
Over the next three years, this group collectively ndsit most likely that 50-100 CDM projects in LDCs will
be registered, a small number compared to the almost3,000 CDM projects that have been registered to date.
Our survey urther shows that more than hal odevelopers and investors say they are involved in orplanning to get involved in programmes o activities(PoAs) under the CDM, an approach consideredsuitable in many LDCs. Moreover, a majority orespondents expects urther qualitative restrictions
in the EU ETS. A total o 56% think the EU will banproject types beyond HFC and adipic acid N2O.
We have also introduced a number o new questionsabout ETSs outside Europe and emerging osets.In Caliornia, where an ETS is expected to launch in2012, most respondents expect a carbon price o $10-15/t in that year. There is also a general consensusthat prices in 2020 will be seen between $17/t and$50/t in 2020. RGGI participants expect lower prices,but still an increase over current levels (below $2/short ton), in part due to expectations o a tightercap starting with the 2012-14 compliance period.
In July 2010, New Zealand expanded its domestic ETS
to cover uels and industry. Among current marketparticipants, 41% o respondents say they are short,but almost hal say the ETS has not caused themto reduce emissions. At the same time, the surveyreveals almost no carbon leakage rom the NZ ETS.
Moving on to emerging osets, we asked survey takerswhich new mechanisms were likely to produce tradableosets by 2016 and 2020. The overall sense is that themarket considers REDD credits most likely, ollowedby bilateral credits, EU domestic osets and sectoralcredits. NAMA credits appear at the bottom o the list.
Amid increased independence between marketsegments, we still see that 60% o respondents expect
a global reerence price or carbon in 2020. This is downrom 73% in 2008 and 66% last year, but still represents acomortable majority o respondents. The price expectationis unchanged, however, at 31/t or $35/t in 2020.
Despite the pledge-and-review ramework that wesee emerging, a majority o survey participants expectcontinued Kyoto commitments or rich countries.Not unexpectedly, CDM and JI project developers arethe most bullish on Kyoto, while Japanese and NewZealand compliance entities show the least aithin uture quantitative targets under the Protocol.
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FOREWORD
I have accepted the invitation to contribute a orewordto this years report as I am a regular, interestedand attentive consumer o the survey results.
This years results again give interesting ood orthought. In view o my role working or the regulatoro the worlds leading carbon market, however, Iwill abstain rom giving a personal or institutionalview o what I nd surprising or less surprising inthe results. Instead I will take the opportunity to
look back at 2010 and orward to the rest o 2011.
In 2010 two major trends characterised the world oclimate policy and carbon markets. Firstly, on the domesticront we saw a ailure to move orward with climatelegislation in various industrialised countries, in particularthe US. The lack o progress in the US Senate means awindow o opportunity to pass climate legislation and laythe legal oundations or a ederal carbon market therehas closed or the coming years. The setback in the USalso seems to have taken the momentum out o eorts byJapanese lawmakers to pass carbon market legislation.
Secondly, the international process showed renewedsigns o lie with the Cancun agreements in December.These endorsed all the key elements o the CopenhagenAccord, including the goal o keeping global warmingbelow 2C, and rmly anchored the domestic pledgeso action to meet this aim while also acknowledgingthat they will need to be urther improved.
However, this success has arisen rom international climatepolicy endorsing domestic policy, and it is not clear howmuch urther some countries are willing to go in termso an international agreement. Last years developmentsmay be more a refection o the high domestic andlow international expectations that preceded them.
Turning to 2011, much will stay the same, in particular
with the European carbon market continuing to accountor the lions share o turnover in the international carbonmarket and remaining the stable core o the carbonmarket in a rather uncertain environment outside Europe.
At the same time this may be the crunch year thatdetermines whether multilateral eorts to reormexisting crediting mechanisms and create new ones willsucceed - or indeed whether they will even be pursued
urther. The Durban climate conerence in Decembercould see the nal attempts to adopt an enablingdecision endorsing new market mechanisms andthereby avert a world o ragmented crediting standards.
As a rst sign o what such a uture may look like,we already witnessed Japan taking initial stepstowards bilateral crediting mechanisms in 2010. TheEUs legislation allows or establishing new sectoralcrediting mechanisms as well as setting standards
or credits since 2009. Europes recent decision tophase out recognition o most industrial gas creditcategories in 2013 is also indicative o the growingneed to improve multilateral crediting mechanisms.
This year many are looking with great expectationsto China. Through its dominance o the CDM Chinahas become the second-biggest player in the carbonmarket ater Europe. Throughout 2010, China madesignicant steps towards carbon trading pilots. Startinga transition rom being the leading supplier o carboncredits to becoming a more complete user o thecarbon market would be an important step change.
We now await with keen interest what the 12th ChineseFive Year plan will say in this regard. In the absenceo US Congress approval o a ederal cap-and-tradesystem, maybe the most important decisions orthe uture o the international carbon market to betaken outside Europe this year will come rom Beijing.
Peter Zapel,
DG Climate Action,
European Commission
The oreword reects the personal opinion o the writer and does not constitute an ofcial view o the
European Commission.
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1 INTRODUCTION 1
2 EU ETS 2
2.1 Does the EU ETS work? 3
2.2 Whats let o phase 2? 8
2.3 Price expectations 9
2.4 The role o credits 11
2.5 Views on phase 3 13
3 CDM 16
3.1 CDM in 2010 16
3.2 CDM and the 2012/13 transition 17
3.3 Changes to the CDM 19
4 NORTH AMERICAN CARBON MARKETS 22
4.1 US ederal climate policy22
4.2 RGGI, 2 years on 22
4.3 Caliornia: the new ETS 24
4.4 North American osets 27
5 GLOBAL CARBON MARKETS 29
5.1 NZ ETS: Eects on new sectors 29
5.2 Emerging markets 31
5.3 Emerging osets 33
6 INTERNATIONAL NEGOTIATIONS 34
7 CONCLUSION 36
TABLE OF CONTENTS
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1.1 Trading carbon 2
2.1 Assessing the EU ETS 3
2.2a EU ETS and internal abatement 4
2.2b EU ETS and internal abatement by sector 4
2.3 Extent o abatement 5
2.4a EU ETS and carbon leakage 6
2.4b EU ETS and carbon leakage. Sector outlook 6
2.5 EU ETS raud 7
2.6 Carbon pricing and investments 7
2.7a: No longer as short 8
2.7b No longer as short, by sector 8
2.8 Selling the surplus? 9
2.9a-d Should I buy, sell, bank or reduce emissions? 10
2.10 How does your company plan to use its CER/ERU credit limit? 11
2.11 Expectations or CER/ERU surrender in 2011 11
2.12 Spread between eligible and ineligible CERs 12
2.13a How well do you know your phase 3 allocation? 13
2.13b How well do you know your phase 3 allocation? By sector 13
2.14 Does your company expect to be short EUAs in phase 3? 14
2.15 Expected EU target or 2020 14
2.16 Expecting phase 4? 15
3.1 Evaluations o the CDM market, 2006-11 16
3.2: CDM/JI raud? 17
3.3: Expected registration in 2011 17
3.4 Investing in projects to be registered ater 2012? 18
3.5-3.6 Investing in LDCs and/or PoAs? 19
3.7 LDC registrations, 2011-13 19
TABLE OF FIGURES
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3.8 Any changes to the CDM? 19
3.9 More eligibility restrictions to come? 20
3.10 From China with CERs? 21
3.11 Plans or CDM involvement in 2011 21
4.1 Yes, we cap? 22
4.2 A tighter RGGI cap? 23
4.3 Stuck at the foor? 23
4.4 Long or short in Caliornia 24
4.5 Buying Caliornian carbon 24
4.6 Buying osets in Caliornia 25
4.7 Floored 25
4.8 Caliornia prices in 2020 26
4.9 Caliornian internal abatement 26
4.10 Whos next or WCI? 27
4.11 NA Compliance market wants greater oset supply 27
4.12 Real but opaque 28
4.13 Prices or oset types in the North American market 28
5.1 NZ ETS and internal abatement 29
5.2 NZ ETS: long or short? 30
5.3 NZ ETS and carbon leakage 30
5.4 ETS around the world 31
5.5 Going global 32
5.6 Price expectations or 2020 32
5.7 Emerging osets in 2016 and 2020? 33
5.8 Comparing the CDM and emerging osets 34
6.1 Good COP, bad COP? 35
6.2 Kyoto one more time? 35
6.3 I not Kyoto, then what? 36
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1. INTRODUCTION
The past year has been anextraordinary one in the globalgreenhouse gas markets andin international negotiationsover climate change. The UShas rozen its plans or ederalcap-and-trade, but Caliorniawill be launching its own stateprogramme in 2012 and other USand Canadian jurisdictions areplanning to ollow. The RegionalGreenhouse Gas Initiative,covering states rom Marylandto Maine, has been operationalon the East Coast since 2009,and steps may be orthcoming totighten this oversupplied market.
In Europe, the EU has mademajor decisions on ree allocationbenchmarks and auctioningor phase 3 (2013-20) o itsemissions trading scheme (ETS).Signicantly or the market
in emission reduction projectcredits, Europe has also decidedwhich types o credits rom theClean Development Mechanism(CDM) and Joint Implementation(JI) to exclude in phase 3.
Specically, credits rom HFC-
23 and adipic acid N2O projectsmay not be used to coveremissions that take place ater1 January 2013. The EU alsorequires developers to registerprojects beore the end o 2012
unless they are based in leastdeveloped countries or theircredits to be eligible. These twodecisions have already changedthe pace o the CDM market,encouraging compliance buyersto surrender HFC and adipic acid
N2O credits early and spurringa rush to register projects.
Moving east, New Zealandexpanded its ETS on 1 July, 2010,to include uels and industry.
Plans or domestic carbon tradinghave appeared in Japan, Korea,Australia and at the provinciallevel in China. Notably, the newChinese ve-year plan mentionscarbon trading as a key instrumentor controlling the countrysgreenhouse gas emissions.
At the international level, theCancun climate summit inDecember 2010 healed many othe wounds rom the controversialCopenhagen conerence oneyear earlier. Although the policyramework around the globalcarbon market has changedrom a top-down to a bottom-upapproach ater Copenhagen, all
major emitters including theUS and China are determinedto develop a carbon policyregime with wider participationthan the Kyoto Protocol.
In this context, we present oursixth annual report on the globalcarbon market. The main datasource or the report is our CarbonMarket Survey, which aims togather the views o carbon marketparticipants and observers acrossthe globe. The survey ran rom 27
January to 14 February 2011 andgarnered 2,535 responses rom 101countries, using a web-based tool.Responses were gathered by directinvitation and through variouslinks distributed in newslettersand on www.pointcarbon.com.
Among the respondents, 1,064 or43% stated that they were involvedin trading various compliancecarbon allowances and credits, orowned such carbon instruments.
In this group, the largest subsetcomprises CDM project developers,aggregators and others involvedin the primary CDM market. Thesemake up 468 o the respondentsinvolved in carbon trading, or46%. Second comes the groupo nancial institutions, banksand unds globally, with 325respondents or 32%. In thirdplace, we see companies withemissions regulated under the
EU emission trading scheme (EUETS), counting 274 respondentsor 27% o all respondents directlyinvolved in the carbon market.
Note that multiple responseswere possible on this question.Thus, or example, somerespondents may have reportedrepresenting both an EU ETScompliance entity and an investorin the primary CDM market.
Below the top three, we see
North American oset developersand aggregators, accountingor 160 respondents or 16%,then Joint Implementation (JI)project developers/aggregators/participants (15% o respondentsinvolved in carbon markets) andgovernments (5%). Companiescovered by carbon tradingprogrammes outside Europe camenext, with representatives rom theNew Zealand ETS (4%), Caliorniasplanned ETS (3%), the RegionalGreenhouse Gas Initiative (RGGI,
2%) and Japanese companiescovered by CO2 regulation (2%).
Figure 1.1 shows the distributiono respondents amongentities trading carbon.
Similarly to last year, 64% o ourrespondents have a degree in eitherengineering or nance/economics.Almost 65% are between the ageso 25 and 44. The largest numbero respondents is ound in the US
1,064 o 2,535
respondents involved in
carbon trading
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Figure 1.1: Trading carbon
Categories o respondents involved in buying/selling/holding carbon instruments (N=2,459)
Source: Point Carbon
a total o 372. The next countrieswith more than 50 respondentsare the UK (223), India (111),Canada (107), Australia (100),Germany (93), China (77) Norway(70), Switzerland (58), Brazil (56),France (55) and New Zealand (52).
It should be noted that this surveyis conducted among individualsthat are signicantly more thanaverage interested in carbontrading. Furthermore, since
taking the survey is based in parton individual motivation, thesampling o various subsets o thecarbon community is less thanscientic and thus susceptibleto bias. All interpretations othe survey should thereore beread bearing in mind that thesample has not been drawn in arepresentative way. Furthermore,inerences to general publicopinion should be avoided.
2. EU ETS
In the penultimate year o the EUETS phase 2, we have decidedto add more questions aboutpreparations or phase 3, whileretaining the most importantretrospective questions that wehave asked or many years. Forexample, does the EU ETS workby spurring emission reductionsand infuencing long-terminvestments, or does it simply
cause carbon leakage? What pricesdo compliance entities requireto sell EUAs, and what spreadsdo they expect between eligibleand ineligible CERs in phase 3?What do companies know abouttheir phase 3 allocation, and dothey expect to be long or short?
2.1. Does the EU ETSwork?
With lowered prospects or anextension o Kyoto commitments
or Annex 1 countries, the EU ETSis increasingly infuencing globalGHG reduction eorts. Not onlyis the EU ETS the key instrumentor reducing emissions in Europe,it also aects reductions indeveloping countries throughits qualitative restrictions andpromotion o sectoral crediting.
Looking rst at the unctioningo the EU ETS in Europe, howwell does the system work? We
have asked survey respondents toevaluate the EU ETS or six yearsin a row, with the results givenin Figure 2.1. Respondents areasked to provide their evaluationo two statements on a scale rom1 (completely disagree) to 5(completely agree). We countoptions 4 and 5 as agreement.
We see a clear upswing inparticipants evaluations thisyear. The share o respondents
46%
32%
27%
15%
15%
6%
5%
4%
CDM project developer/aggregator, or otherwise involved,in primary CDM market
Financial institution/bank/fund
Company with emissions regulated under the EU EmissionsTrading Scheme (EU ETS)
Offset project developer/aggregator, or otherwise involved,in North American carbon market
JI project developer/aggregator, or otherwise involved in JImarket
Government
Company covered by other CO2 regulation
Company with emissions regulated under the New Zealand
3%
2%
2%
12%
0% 20% 40% 60%
Company with emissions that will be regulated under theCalifornia cap-and-trade program
Company with emissions regulated under the RegionalGreenhouse Gas Initiative (RGGI)
Company with emissions covered by Japanese CO2regulation
Other
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Carbon 2011
market is somewhat surprising.
While the EU ETS increasinglyappears to be the most cost-eective instrument or reducingemissions in Europe, and also amore mature market, how welldoes it deliver actual emissionreductions inside the EU? At amore undamental level thantrading, the EU ETS cannot remainpolitically viable unless it canbe shown that companies arereducing their GHG emissions.
An increasing number o surveyrespondents say their companyhas reduced emissions as a resulto the EU ETS. As in previousyears, these responses are drawnrom EU ETS emitters only (seeFigure 1.1 above). A ull 59% orespondents rom this groupsay that the EU ETS has alreadycaused emission reductions intheir rm. This is up rom 48%
considering that the EU ETS isthe most cost-eective instrumentor reducing emissions in theEU is up to 49%, the highestlevel on record. By contrast,21% disagree or disagreestrongly with this statement.
The share o respondents thinkingthat the EU ETS is a maturemarket is also up, reaching 37%this year ater continuous growthrom 10-11% percent in 2006-07.Respondents disagreeing withthe statement that the EU ETSis mature make up 28%. Fewerthan 10% o respondents said theyhad no opinion on the matter. Itshould be noted that the surveytook place during the same periodas news stories about EUAs beingstolen rom several EU registriesappeared in media across Europe.Against this backdrop, theincreasing share o respondentsseeing the EU ETS as a mature
in 2007, the rst year in whichthis question was asked. Addto this the 9% saying that theEU ETS has caused reductionsto be planned, and we see thatmore than two-thirds report aneect o the EU ETS on current oruture emissions. Nevertheless,the quarter o respondents orwhose companies the EU ETShas had no eect on emissions isvirtually unchanged since last year.
In what EU ETS sectors do wesee the most GHG emissionreductions? The power sector is
generally where the CO2 price hasthe greatest impact on emissionlevels. However, when it comesto the number o responses,the distribution o abatement
47%45%
42% 42% 43%
49%
18%
25%
31%
37%
20%
30%
40%
50%
60%
EU ETS is the most cost-efficient way to reduceemissions in the EU
EU ETS is a mature market
11% 10%
2006 2007 2008 2009 2010 2011
0%
10%
Increase in internal
abatement under EU ETS
Source: Point Carbon
Figure 2.1: Assessing the EU ETS
Share o respondents agreeing with the given statements, given as options 4 and 5 on a scale
rom strongly disagree (1) to strongly agree (5). All respondents except those based in
North America. N=2,146.
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60%
71%
64%
56%
56%
55%
8%
6%
7%
33%
11%
13%
23%
12%
20%
11%
33%
26%
8%
12%
9%
5%
All
Cement, Limeand Glass
Public Powerand Heat
Pulp and Paper
Metals
Oil and Gas
50% 3% 36% 11%
0% 20% 40% 60% 80% 100%
Other
The EU ETS has already caused emission reductions in my company
The EU ETS has caused reductions to be planned but not yet started
The EU ETS has not caused any emission reductions in our company
Don't know
action remains relatively uniormacross most EU ETS sectors, asdisplayed in Figure 2.2b. Theshare o respondents saying thatthe EU ETS has already causedemission reductions rangesrom 50% (Other sectors) to71% (Cement, lime and glass).
Note that the pulp and papersector had only eight respondentsthis year, implying that thesurvey is an uncertain indicatoro abatement in this sector.The aviation sector (not shown)only had our respondents, owhich one said that the EUETS had caused reductionsto be planned whereas theremainder reported no reductions.
Whether the EU ETS hascaused emission reductions isone question, the size o thesereductions another. A ew bigcompanies reducing a lot could
be more valuable than manysmaller companies reducinga little. Indeed, the purpose oemission trading is not to spreadreductions across participatingrms, but to identiy the low-costreductions and thus minimisethe cost o cutting emissions.
Last year we asked about theemission reductions caused bythe EU ETS: To what extent arethey incremental improvementsand to what extent do they
represent radical conversion tolow-carbon equipment? Weconcluded that most installationshad probably implementedincremental reductions, giventhat overall ETS emissionswere declining only gradually.
This year we asked respondents toquantiy the emission reductionscaused by the EU ETS. Thequestion went to all the 138respondents who reported that
the EU ETS had caused emissionreductions in their companies.
As Figure 2.3 shows, the mostrequent response was thatemissions were 1-5% below
Source: Point Carbon
59%54%47%46%48%
9%10%
15%16%17%
24%25%29%30%
14%
9%12%9%8%20%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20112010200920082007
EU ETS has already caused emission reductions in my company
EU ETS has caused reductions to be planned but not yet started
EU ETS has not caused any emission reductions in our company
Don't know/not relevant (2007)
Source: Point Carbon
where they would have beenwithout the EU ETS in the threeyears rom 2008 to 2010. Amongsubstantive responses (thoseother than dont know/cannot
Figure 2.2a: EU ETS and internal abatement
Companies covered by the EU ETS. N=234
Figure 2.2b: EU ETS and internal abatement by sector
Companies covered by the EU ETS. N=234
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Figure 2.3: Extent o abatement
By how much did your company reduce emissions in 2008-10, as a consequence o the EU
ETS? Respondents saying the EU ETS has caused abatement in their companies. N=134.
8%
6%
3%
42%
35%
33%
18%
25%
17%
15%
17%
10%
6%
9%
11%
1%
25%
30%
22%
54%
8%
6%
Cement, Limeand Glass
Oil and Gas
Other
Public Powerand Heat
3% 25% 16% 10% 2% 42%1%
0% 20% 40% 60% 80% 100%
All
>1% below baseline 1% - 5% 5% - 10%
10-20% 20-30% More than 50%
Don't know/cannot answer
answer), these make up almosthal. This supports the conjecturewe oered last year: reductionscaused by the EU ETS are usuallyincremental rather than radical.
Beyond emission reductions atexisting plants and machinery,a carbon price aects long-termemission trends by infuencinginvestment decisions. Facingcarbon costs, rms may choosenew capital investments thatare more expensive, but emitless an important result, giventhat power plants or industrialinstallations will continueoperating or decades. But carboncosts may also induce anotherresponse moving operationsto areas where there is no priceon GHG emissions, a situationknown as carbon leakage.
Does the EU ETS cause carbonleakage? Are investment decisions
more generally aected by
the price o carbon? We nowhave ve years o responses tosuch questions that allow us tosee trends in these two areas.
In the survey, we ask whether therespondents company has moved,planned to move or consideredmoving production outside the EUETS area because o carbon costs.
Figure 2.4a shows that 80%o respondents companieshave not even consideredrelocating outside the EU ETSarea. This is not surprising,given that many companies notably in the grid-boundpower sector cannot relocate.
The trend is stable over time.
Our results, given in Figure2.4b, also show that the metalssector is the one where themost respondents mention theircompanies have moved, plannedor considered to move productionout o the EU ETS area. Power andoil/gas are the sectors in whichthe ewest respondents mentionrelocation. These sectoral resultsare similar to those seen last year.
The EU ETS market has allenvictim to various types o crimeover the past two years, includingvalue-added tax (VAT) raud andthet o EUAs rom registries. Inour survey, 9% o the emittersand European nancials surveyedsaid they had witnessed specicinstances o raud, embezzlement,corruption or thet in connectionwith the EU ETS. Conversely,79% said they had not, as shownin Figure 2.5. While not a hugenumber, it is still worrying
that one in ten respondents
80% have not even
considered moving
production
Source: Point Carbon
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report having seen illegalactivity in the EU ETS market.
Widening the scope beyond the EUETS, what do companies acrossthe world say about the eecto carbon prices on long-terminvestments? As seen in Figure2.6, the reported eect o thecarbon price on new investmentshas increased somewhat overthe past ve years. Nevertheless,the main picture is stability,even as the number saying thecarbon price is decisive hasgone down by three percentagepoints since last year. In the EU,the power sector has the highestshare o responses consideringthe carbon price a decisive actoror new investments, with 60% orespondents selecting this option.
We also note that in Germany,78% o respondents see the long-term carbon price as a decisiveactor or new investments. Inthe UK, by contrast, only 24% orespondents selected this option.These percentages are almostidentical to those we ound lastyear. We also asked this questionoutside Europe, with the result
that 33% o US emitters (in RGGIand Caliornia) considered thecarbon price decisive, whereas thecorresponding gure or Japanwas 25%, similar to the UK result.
In terms o emission levels, 53%o respondents rom companieswith emissions above 10 Mt/yearsaw the carbon price as a decisiveactor or new investments. Thiscompares to 61% last year and50% in 2009. Smaller emitters,
producing less than 500 kt CO2e/year, were less likely (33%) toconsider the carbon price decisive.Note, however, that installationsize correlates with sector insuch a way that the power sector,where the carbon price matters
more, also tends to have theinstallations with the highestemission levels. The eect o sizeon the perceived importance o thecarbon price may thus be spurious.
Eect o carbon price
on investments has
increased somewhat91%
89%
69%
56%
56%
6%
7%
16%
25%
22%
2%
6%
3%
2%
9%
19%
22%
Oil and Gas
Public Powerand Heat
Other
Cement, Limeand Glass
Pulp and Paper
44%
80%
44%
13% 2%
11%
6%
0% 20% 40% 60% 80% 100%
Metals
All
No Yes, are considering moving production
Yes, have planned to move production Yes, have already moved production
Source: Point Carbon
80%84%81%83%
40%
50%
60%
70%
80%
90%
00%No
Yes, are consideringmoving production
Yes, have planned tomove production
Yes, have alreadymoved production
6%3%4%2%
2%2%2%3%
13%12%13%12%
0%
10%
20%
30%
2011201020092008Source: Point Carbon
Figure 2.4a: EU ETS and carbon leakage
Has your company considered moving production outside the EU ETS area
because o carbon costs? EU ETS companies. N=215.
Figure 2.4b: EU ETS and carbon leakage. Sector outlook
EU ETS companies. N=215
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9%
79%
Yes
No
12%
0% 20% 40% 60% 80% 100%
DK
Source: Point Carbon
52%47%48%56%53%
4%7%10%6%8%
30%
40%
50%
60%
70%
80%
90%
100%
44%47%42%38%39%
0%
10%
20%
20112010200920082007
Decisive factor Influencing calculation, but not decisive No importance
Source: Point Carbon
Figure 2.5: EU ETS raud
Have you ever witnessed raud, embezzlement, corruption or thet in connection with the EU ETS? This would apply
to specic instances o illegality that you have experienced - not to observations about the EU ETS in general. EU ETS
companies and EU nancials. N=349.
Figure 2.6: Carbon pricing and investments
How important is the long-term carbon price (e.g. in 2020) or new investments in your industry? All companies
covered by carbon regulation. N=287.
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Figure 2.7a: No longer as short.EU ETS allowances and credit limits compared to expected emissions inPhase 2. EU ETS companies. N=256.
25%27%31%
36%
21%23%
31%37%
25%22%14%13%
30%
40%
50%
60%
70%
80%
90%
100%
29%28%24%15%
0%
10%
20%
2011201020092008
Surplus EUAs to sell Need allocation+some credits
Need allocation, credits, buy EUAs Don't know
2.2. What remains ophase 2?
It has been clear or a long timenow that phase 2 o the EU ETSis oversupplied with EUAs. Thismeans that EU ETS operatorswill not only have enough EUAsto attain compliance over the2008-12 period, they will also beable to bank signicant amountso EUAs into phase 3 (2013-20).
Figure 2.7a shows the evolutiono EUA balances at respondentcompanies over the past ouryears. Two trends are clear: rst,the number o respondentssaying their companies havesurplus EUAs to sell is increasing.Second, there is a decline in thenumber o companies needingto use credits or buy EUAs tomeet their ETS target. This isconsistent with more companiesrealising they are long, and ewer
thinking they are short, in phase 2.
However, the share o respondentssaying they dont know theirphase 2 balance has increasedmarkedly in 2010 and 2011. Oneinterpretation is that respondentsare increasingly starting toactor in phase 3, so that theirneed to bank means they areless willing to sell any surplus.
The surpluses seen at theinstallation level in phase 2
are due to high levels o reeallocation to installations, notablyin the industry sectors. How dothese relationships between reeallocation and expected phase 2emissions break down by sector?Figure 2.7b gives some answers.Similarly to last year, the power/heat and oil/gas sectors showthe ewest responses indicatinga surplus in phase 2. However,almost one in ve respondents inpower and heat still state that his
Source: Point Carbon
Figure 2.7b: No longer as short, by sectorEU ETS allowances and credit limits compared to expected emissions inPhase 2. EU ETS companies. N=256.
82%
53%
44%
33%
20%
18%
11%
26%
44%
20%
5%
8%
27%
32%
23%
22%
32%
Pulp and Paper
Cement, Lime andGlass
Other
Metals
Oil and Gas
20%
29%
26%
25%
29%
21%
25%
25%
0% 20% 40% 60% 80% 100%
Public Power andHeat
All
Surplus EUAs to sell Need allocation+some credits
Need allocation, credits, buy EUAs Don't know/cannot answer
Source: Point Carbon
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or her company has surplus EUAsin phase 2. This situation willchange in phase 3 as auctioningbecomes the rule, although powercompanies in Eastern Europe willstill receive some EUAs or ree.
Given that so many companiesare long in phase 2, what ishappening to their excess EUAs?
As Figure 2.8 shows, morerespondents report having soldpart o their phase 2 surplus thanlast year. The size o the increaseis ve percentage points. At thesame time, ew respondents saythey have sold their entire phase 2surplus. This suggests that manycompliance players are savingEUAs or phase 3, when targetsare expected to be tougher.
2.3. Price expectations
Phase 3 is moving closer, butemissions are still ar below theETS cap in phase 2. How does thisinfuence price expectations andbehaviour in the coming year?Companies with a surplus maychoose to sell their excess EUAs,or may decide to bank them.
Companies that are or will soonbe short may take advantage owhat might later turn out to below carbon prices today by buyingEUAs now beore the ull impacto phase 3 is elt on prices. Andall companies covered by the EUETS may choose to reduce theirown emissions to make moneyon EUA sales or reduce outlayson extra allowances. A keydeterminant o whether to sell,buy or bank is price. At low prices,
banking o EUAs could makesense, especially i one expectsto be short in phase 3. Figure 2.9(a-d) shows the various reportedprice levels at which respondentsreckon their companies wouldbuy, sell or bank EUAs; and wherethey would reduce their emissionsor the purpose o selling EUAs.The thick lines in dark blue
represent this years responses.
As regards the prices at whichrespondents say they will buy orsell EUAs, there is little overallchange since last year. Onaverage, there is a willingness
27%
47%
7%
32%
43%
We haven't sold surplus EUAs
We have sold our surplus from2008-2010
We have sold our estimated
19%
9%
17%
0% 10% 20% 30% 40% 50%
-
Don't know
2011
2010
Source: Point Carbon
Figure 2.8: Selling the surplus?
Has your company sold any o its surplus EUAs? EU ETS companies with reported EUA surplus. N=70.
More respondents report
having sold their surplus
or phase 2
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to buy at 13/t and to sell at18/t. The main change is that54% o respondents this yearstate the 15-20 range as thelowest at which they wouldsell EUAs, against 34% thisyear. This suggests a greaterrmness a smaller standarddeviation on the sell side.
This price survey also showsthe prices at which respondentswould either bank or reduce
emissions. Since Point Carbon andother analysts expect EUA pricesto go up in the coming years, it isnot surprising that the averageprice or banking vs. selling hasgone up there is now moreto gain sooner rom banking.
Interestingly, the price at whichcompanies will engage in internalabatement is down on last year,rom an average 38/t to 30/t,possibly connected to the greater
30%
40%
50%
60%
70%
80%2011
2010
2009
2008
I/we would buy EUAs today at a maximum price of
Average 2011 - 13Average 2010- 12Average 2009- 11Average 2008 - 18
0%
10%
20%
above
100
50-100
35-50
30-35
25-30
20-25
15-20
10-15
0-10
Source: Point Carbon
Figure 2.9a-d: Should I buy, sell, bank or reduce emissions?
EU ETS companies. N=196
20%
30%
40%
50%
60%
2011
2010
2009
2008
I/we would sell EUAs today at a minimum price of
Average 2011 - 18Average 2010- 17Average 2009- 18Average 2008 - 29
0%
10%
above
100
50-100
35-50
30-35
25-30
20-25
15-20
10-15
0-10
15%
20%
25%
30%
35%
40%
2011
2010
2009
2008
I/we would bank any surplus EUAs into Phase 3 rather thansell them, at prices below
Average 2011 - 15Average 2010 - 13
Average 2009 - 15
0%
5%
10%
above
100
50-100
35-50
30-35
25-30
20-25
15-20
10-15
0-10
Average 2008 - 2210%
15%
20%
25%
30%2011
2010
2009
2008
We would seek to reduce our own emissions and start tosell EUAs if the EUA price were to stay above
Average 2011 - 35 Average 2010 - 38 Average 2009 - 35
Average 2008 - 48
0%
5%
above
100
50-100
35-50
30-35
25-30
20-25
15-20
10-15
0-10
requency o emission reductionsseen above (Figure 2.2a). Note,however, that these price resultsare based on a limited sampleo EU ETS respondents andthat the margin o error is wide.
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Figure 2.10: How does your company plan to use its CER/ERU
credit limit?
EU ETS companies. N=240.
23%
22%
5%
28%
22%
0%
Use entire CER/ERU limit inphase 2
Bank some of the CER/ERUlimit into phase 3 (up to 50%)
Bank a significant share of theCER/ERU credit limit intophase 3 (more than 50%)
2011
2010
5%
45%
4%
47%
0% 10% 20% 30% 40% 50%
Use entire CER/ERU limit inphase 3
Don't know/cannot answer
2.4. The role o credits
Emitters may surrender CERsand ERUs or compliance in theEU ETS instead o EUAs, up to alimit. Since these credits tradeat a discount, it makes sense tosurrender them early instead oEUAs. Furthermore, HFC-23 and
adipic acid N2O credits will not beeligible to cover phase 3 emissions,so operators covered by the EU
ETS will likely seek to surrendersuch credits now, while they can.
On the other hand, CERs havetraded in backwardation or years with the December 2012 delivery
trading below ront-year contracts.This means that rms could benetin the long run i they avoid usingup their credit limit until creditsbecome cheaper. There is nothingpreventing companies romsaving their credit limits until theend o phase 3, although urtherqualitative limits could reducethe amount o eligible CERs.Such a strategy, however, wouldmean surrendering higher-valueEUAs earlier, reducing liquidity.
How do compliance players dealwith this situation? As Figure 2.10shows, 23% o respondents saythey will use the entire credit limitin phase 2. An almost equal sharewill bank some o it into phase 3.This is a change rom last year,
Early surrender o HFC
and adipic acid N2O
credits likely
23% say they will use
their entire credit limit in
phase 2
Source: Point Carbon
Figure 2.11: Expectations or CER/ERU surrender in 2011
How many CERs/ERUs will be surrendered or 2010 compliance in the
EU ETS, compared to previous years?Respondents include only CDM/JI
developers and nancials with European ocus. N=562.
17%
39%
31%
15%
20%
25%
30%
35%
40%
45%
1
3%
0%
5%
10%
Significantly moreCER/ERUs (more
than 100 Mt)
Slightly moreCERs/ERUs (up to
100 Mt)
Roughly the samevolume of
CERs/ERUs (75-85Mt)
Slightly fewerCERs/ERUs (down to
60 Mt)
Significantly fewerCERs/ERUs (below
60 Mt)
Source: Point Carbon
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when 28% said they would usethe entire credit limit in phase 2.
Interestingly, the EUs recentocus on qualitative restrictionsin phase 3 has not caused rmsto use up their credit limit inphase 2 while they can stillsurrender most types o credits.Rather, more players intend tosave the option to use creditsuntil the more stringent phase 3.
We also asked CDM/JI developersand nancials how manyCERs they thought would besurrendered in 2011 to cover2010 emissions. The EU ETS saw81.7 million credits surrendered
or 2008 emissions and 81.5million to cover 2009 emissions.
An eligible-ineligible spread isemerging, and we have askedthis years respondents how wideit is. Specically, we ask whatwill be the price dierence, atthe end o 2012, between CERsthat are eligible in phase 3 andthose that are only eligible tocover phase 2 emissions. Theanswers are given in Figure 2.12.
The answers we received aboutthe eligible-ineligible spreaddisplayed a wide spread, rom1/t to more than 10/t. Theplurality o respondents expecteda 3-5/t spread between HFC/
adipic acid N2O CERs and others,but as the gure shows, there
were also signicant numbers
89 Mt is average orecast
or CER/ERU use to
cover 2010 emissions
The answer, given in Figure 2.11,conficts somewhat with thending that operators are lessinterested in using credits in phase2. However, the average creditvolume or 2010 compliance,as predicted by developers andnancials, is only 89 Mt. Thisaverage orecast is less than 10%higher than the actual volumesurrendered in 2009 and 2010.
For many smaller installations,a motivation to use up thecredit limit early is to cash inon the spread between EUAsand secondary CERs. Given thelooming qualitative restrictionson credits in phase 3, however,there is no longer a single sCERprice to ollow. Rather, themarket distinguishes betweencommoditised sCERs, typicallytraded on exchanges and made
up o HFC-23 and adipic acid N2Ocredits, and other types o sCERs,
which usually trade at a premiumto exchange-traded CERs.
Figure 2.12: Spread between eligible and ineligible CERs
What do you think the spread between phase 3 eligible and non-eligible secondary CERs will be at the end o
2012? EU ETS companies, CDM developers and nancials with European ocus. N=699. .
16%
15%
22%
25%
20%
15%
20%
25%
30%
3%
0%
5%
10%
> 10 /t7 - 10 /t3 - 7 /t3 - 5 /t1 - 3 /t< 1 /t
Source: Point Carbon
Wide array o predictionsor eligible-ineligible
CER spread
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below and above that level. Wewill have to wait or the marketto be the judge when morecontracts or EU ETS eligibleCERs are launched this spring.
2.5. Views on phase 3
In the course o 2010, EUregulators made some keydecisions concerning the EU ETSphase 3. They adopted the auctionregulation and benchmarks or
ree allocation and agreed on thequalitative limitations on CERs andERUs discussed above. The latterare now only subject to a ormalitybeore they are also adopted.
The benchmarks or ree allocationto trade-exposed industries aectmany companies. They are likely tohave enhanced the understandingo how long or short variousoperators will be in phase 3.
We started last year askinghow well respondents in the EUETS understand their phase 3allocation. At that time, only 22%o respondents said they knewtheir allocation exactly or airlywell. The power and heat sectordominated among those who
knew their allocation, presumablybecause many knew they wouldget no ree EUAs in phase 3 andbecause this sector is the mostactive in the carbon market.
This year, the share o respondentssaying they know their allocationexactly or airly well is up to28%, as shown in Figure 2.13a.At the same time, those whoare very uncertain or haveno idea are down rom 37% to
28% know their phase
3 allocation exactly or
airly well
Figure 2.13a: How well do you know your phase 3 allocation?
EU ETS companies. N=252
9%
19%
27%
17%
9%
13%
25%
14%
Know exactly whatallocation will be
Know allocation levelfairly well
Somewhat uncertain
Very uncertain
2011
2010
8%
20%
18%
21%
0% 5% 10% 15% 20% 25% 30%
Have no idea
Don't know/cannotanswer
Source: Point Carbon
Figure 2.13b: How well do you know your phase 3 allocation? By
sector
EU ETS companies. N=252
17%
37%
30%
22%
18%
37%
40%
33%
20%
16%
20%
33%
16% 8%
11%
10%
11%
21%
Cement,Lime and
Glass
Pulp andPaper
Metals
Public Powerand Heat
We know exactly whatour phase 3 allocationwill be
We know our Phase 3allocation level fairlywell
We are somewhatuncertain about ourPhase 3 allocation
We are very uncertain
2%
9%
16%
19%
44%
27%
4%
17%
4%
8%
29%
20%
0% 20% 40% 60% 80% 100%
Oil and Gas
All
a ou our aseallocation
We have no idea what
our Phase 3 allocationwill be
Don't know/cannotanswer
Source: Point Carbon
25%. Figure 2.13b shows thatpower sector respondents knowtheir phase 3 allocation the best.
I more companies know theirallocation now compared to last
year, does this mean that theyexpect to be short? As Figure 2.14shows, 73% o those surveyedamong companies with an EUETS compliance obligationexpect to have higher emissions
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Figure 2.14: Does your company expect to be short EUAs in phase 3?
EU ETS companies. N=250.
73%
89%
81%
68%
7%
6%
11%
20%
11%
13%
20%
All
Metals
Public Powerand Heat
Oil and Gas
Yes
No
DK
58%
50%
5%
30%
37%
20%
0% 20% 40% 60% 80% 100%
Cement, Limeand Glass
Pulp and Paper
Source: Point Carbon
Figure 2.15: Expected EU target or 2020
What do you expect will be the EUs nal greenhouse gas reduction target or 2020? All respondents outside North
America. N=1,978.
17%
39%
33%
20%
25%
30%
35%
40%
45%
12%
0%
5%
10%
Don't know30%Between 20% and 30%20%
Source: Point Carbon
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in phase 3 than the volume oEUAs given to them or ree.This is up rom 68% in 2010.
Not unexpectedly, 81% orespondents in the power sectorexpect to be short, whereas68% o respondents in the oil/gas sector said the same. Atthe lower end o the scale wesee shortages expected by50% o those employed in thepulp and paper sector, and by58% in cement, lime and glass.
Crucially, the extent to which EUETS operators will collectively beshort in phase 3 and thereorethe price o carbon dependson the EUs nal GHG reductiontarget, which remains undecided.As Figure 2.15 shows, the modal
(most requent) response isthat the target will be neither20% nor 30%, but something inbetween. Almost orty percentselect this option. This agreeswith Point Carbons assessment,as we see think that a 25% targetis the most likely outcome. Wealso reckon that a 20% target ismore likely than the 30% option.
Finally, beyond the phase 3question, we have also addedone on phase 4. Specically, wehave asked: Will the EU ETS exist
81% o respondents in
power sector expect to
be short
Figure 2.16: Expecting phase 4?
Do you think the EU ETS will continue beyond 2020? All respondents outside North America. N=2,102.
77%
11%
Yes
No
12%
0% 20% 40% 60% 80% 100%
DK
Source: Point Carbon
beyond 2020? As Figure 2.16shows, there is an overwhelmingexpectation that the EU ETS will goon as is specied in the directive.
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3. CDM
The CDM market is well-established, having been createdas early as in 1997 by the KyotoProtocols Article 12. The CDM
also involves more countriesthan any market segmentdiscussed in this report, withsellers across the developingworld and buyers or traders inall Annex 1 countries includingthe US. As noted above, almosthal the respondents involved incarbon trading say they work ora project developer, aggregatoror company otherwise involvedin the primary CDM market.
However, the CDM market ischanging. The EU, home tothe largest buyers o CERs,wants to end the CDM in moreadvanced developing countriessuch as Korea, China and India.Japan, long rustrated with themechanisms delays and lowvolumes generated, is orgingahead with an alternative,bilateral crediting mechanismor the post-2012 period.
3.1. CDM in 2010
How do market participants andobservers evaluate the CDMover time? We have asked twoquestions about the CDM everyyear since 2006, see Figure 3.1.This years answers, more or lessunchanged rom last year, indicatethat respondents think the CDMis still an immature market.
The share o respondentsconsidering the CDM marketthe most cost-eective wayto reduce emissions has gonedown slightly to 31%, while34% take the opposite view.
Similar to the questions aboutcorruption in the EU ETS describedabove, we asked respondents thisyear and last whether they havewitnessed raud, embezzlementor corruption in connectionwith specic CDM or JI projects
Figure 3.2 shows that 15% orespondents had seen instances oraud, embezzlement or corruption
CDM still seen as an
immature market
One-third o respondents
consider the CDM cost-
eective
Figure 3.1: Evaluations o the CDM market, 2006-11
Share o respondents agreeing with the given statements, given as options 4 and 5 on a scale rom strongly
disagree (1) to strongly agree (5). All respondents except those based in North America. N=2,067.
40%
45%
36%
41%
38%35%
nts
31%31%
25%
respo
nde
The CDM market is the most
cost-effective way to reduceemissions in non-Annex 1
17%16%
12%15%
20%
Share
of (developing) countries
The CDM market is mature
7%
5%
10%
0%
201120102009200820072006
Source: Point Carbon
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in connection with a CDM or JIproject. This does not apply tothe mechanisms in general, butonly to specic projects where therespondents company is involvedor is considering involvement. Thenumber is virtually unchangedsince last year, whereas thenumber o respondents whosay they have seen no suchbehaviour is up somewhat.
3.2. CDM and the 2012/13transition
The end o 2012 is a majordeadline or the CDM market. Asdiscussed in the previous chapteron qualitative restrictions, theEU will not accept credits romCDM projects registered aterthat date, unless they comerom least developed countries(LDCs). Consequently, it will beimportant or market players toknow about both the registrationlevels beore 31 December 2012and the CDM potential o LDCs.
In 2010, a record 702 projectswere registered by the CDMExecutive Board (EB). As gure
3.3 shows, respondents expecta close to similar registrationlevel this year with mostresponses alling between400 and 1,000 projects. Theaverage number expected is 640.
Are investors interested in CDMprojects that are unlikely to beregistered beore the end o 2012,and thus unlikely to yield EU ETSeligible credits (unless they arebased in LDCs)? As Figure 3.4
Respondents expect
an average 640
registrations in 2011
Figure 3.2: CDM/JI raud?
Have you ever witnessed raud, embezzlement or corruption in connection
with a CDM or JI project? N=571
15%
71%
15%
59%
Yes
No
2011
2010
14%
26%
0% 10% 20% 30% 40% 50% 60% 70% 80%
DK
Share of respondents
Source: Point Carbon
Figure 3.3: Expected registration in 2011
How many CDM projects do you expect to be registered in the course o
2011? CDM developers and nancials. N=540
22%
26%
25%
19%
10%
15%
20%
25%
30%
8%
0%
5%
> 1,000800-1,000600-800400-600< 400
Source: Point Carbon
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shows, there is some appetiteor such projects, as one-thirdo respondents answered inthe armative. This number issurprisingly high given the stricteligibility criteria imposed by theEU. However, the number couldrefect that project developersalso anticipate demand romother countries (mainly Japan).
The act that our sample isdominated by project developerslikely explains the high number opositive responses. Financials weresignicantly more guarded, withonly 18% o European respondentsin the sector saying they wouldinvest in post-2012 projects.
One in ve respondents saidthey would invest in projects
registered ater 2012, but onlyi the projects were based inLDCs and would thus produceCERs eligible in the EU ETS.
As Figure 3.5 shows, more thanhal the 530 respondents askedabout projects in LDCs say thatthey have invested or are planningto invest in them. However, suchprojects typically ace manybarriers, as governments lack thenecessary institutional rameworkto support CDM projects andthe projects themselves involve
small emissions sources romwhich it is not possible to gaina lot o reduction credit througheciency or other improvements.
One way o overcoming the latterbarrier is to aggregate emissionsreduced rom replicable activities,or example large numbers oecient cook stoves or solarwater heaters. Projects carriedout in this way oten take placeunder the ramework known as
programmes o activities (PoAs).
As Figure 3.5-3.6 shows, hal o thedevelopers and investors surveyedare already involved PoAs, muchthe same result as or projectsin LDCs. Note, however, that therespondents reporting investments
in LDCs are not necessarily thesame as those involved in PoAs o the 173 responding yes to theormer question, only 66 gave thesame answer to the latter question.
What does this mean in termso the actual number o EU-eligible projects? At the time othe survey, 20 CDM projects hadbeen registered in LDCs. Figure3.7 shows how many LDC projectsour survey participants expect to
Figure 3.4: Investing in projects to be registered ater 2012?
Is your company willing to invest in CDM projects that are unlikely to be
registered beore 2013? N=532.
33%
20%
31%
Yes
Yes, but only if theprojects are basedin least developedcountries (LDCs)
No
16%
0% 5% 10% 15% 20% 25% 30% 35%
Don't know/cannotanswer
Share of respondents
Hal o respondents
involved in PoAs and
LDC projects
Source: Point Carbon
33% are willing to invest
in projects likely to be
registered ater 2012
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Figure 3.5-3.6: Investing in LDCs and/or PoAs?
Is your company investing : 1) in CDM projects based in LDCs; or 2) in PoAs?
N=530.
30%
31%
31%
29%
39%
40%
13%
17%
CDM projects based in LDCs
PoAs under the CDM
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Yes, already invested Planning to invest No plans to invest DK/cannot answer
Figure 3.7: LDC registrations, 2011-13
How many CDM projects do you think will be registered in least developed
countries (LDCs) over the next 3 years? Financial institutions, CDM
developers and Japanese companies. N=542.
12%
28%27%
13%
10%
15%
20%
25%
30%
2%
4%4%
0%
5%
>1000500-1000251-500151-250101-15051-10026-500-25
be registered over the next threeyears (up to the end o 2013).
The most requent response isbetween 51 and 100 projects overthe next three-year period, nota great acceleration comparedto the current level. Given theshare o high assessments,however, the average number oLDC registrations expected byrespondents is 140. This numbershould be taken with a graino salt, as the existence o highresponse options in the surveymay itsel have a signicantbearing on the average result.
Overall, the survey results
suggest that we will see healthyCDM activity in LDCs in theuture, but also that manyinvestors still shy away romthese countries. O criticalimportance here is what CERvolumes these projects yield.The positive responses to oursurvey questions show a lot ointerest in LDCs, but that couldzzle i such projects do not endup generating credit volumesthat justiy the investment.
3.3. Changes to the CDMWhat changes do marketparticipants and observersexpect in the coming years?
As Figure 3.8 shows,standardised baselines top thelist, as 57% o respondents expectthe EB to introduce these. Thatexpectation is up six percentagepoints rom last year, which isnot surprising given that the
Source: Point Carbon
Source: Point Carbon
51-100 LDC registrations
expected by most over
the next 3 years
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Conerence o the Parties inCancun endorsed moves towardstandardisation. Hal the sample,which consists o people involvedin the primary CDM market, alsoexpects limits on HFC credits,presumably infuenced by theEU ETS phase 3 restrictionsdiscussed in the previous chapter.
We asked the same question lastyear, but the overall change in
answers is so small that we havenot included the 2010 result inFigure 3.8. The main dierencerom last year involves expected
limitations on HFC and N2Oprojects, which have increasedrom 39% to 54% and rom27% to 39%, respectively. Newexpectations about industrial-gas projects are probably dueto the ongoing revision o theHFC-23 methodology, as well asthe EU ETS exclusion o theseproject types in its phase 3.
Beyond HFC and adipic acid N2Ocredits, will Europe ban creditsrom any urther project types oruse in the ETS? The revised ETSdirective opens or such changesduring phase 3. Point Carbon
does not expect any new decisionson exclusions to be made beore2015, but Figure 3.9 showsthat a majority o respondentsamong project developers andnancials expect new qualitativerestrictions to emerge. In thecomment eld next to thequestion, respondents pointed tolarge hydro projects as potentiallyon the EUs chopping block
The transer o CERs rom a
Will the EU ban
additional credit types?
Respondents say yes
Figure 3.8: Any changes to the CDM?
Which changes, i any, do you think will be made to the CDM? Primary CDM
market participants. N=426.
57%
54%
45%
44%
43%
39%
38%
33%
33%
32%
31%
Standardised baselines
HFCs limited/excluded
Sectoral CDM
REDD
Benchmarks use
N2O limited/excluded
Aviation
CCS
Large-hydro limited/excluded
Differentiation CERs
Positive list for specific projects/countries
29%
25%
10%
7%
4%
0% 10% 20% 30% 40% 50% 60%
Marine transport
Policies reducing emissions
Nuclear energy
No changes
Other changes
Share of respondents
Source: Point Carbon
Figure 3.9: More eligibility restrictions to come?
Do you think the EU is going to ban project types beyond HFC and adipic acid
N2O or phase 3 compliance? CDM/JI developers and nancials in Europe and
Asia. N=548.
56%
26%
Yes
No
18%
0% 10% 20% 30% 40% 50% 60%
No opinion/cannotanswer
Source: Point Carbon
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Figure 3.11: Plans or CDM involvement in 2011How will your organisations involvement in the CDM be in 2011
compared to 2010? N=710.
42%
41%
38%
42%
14%
12%
5%
4%
Investing directlyin CDM projects
Purchasingand/or tradingprimary CERs
from CDMprojects
40% 47% 9% 4%
0% 20% 40% 60% 80% 100%
and/or trading
secondary CERs
Increase Stay as it is Decrease Stop
non-Annex 1 country requiresa letter o approval (LoA) romthat countrys government,permitting project participantsto receive issued CERs. In mostcases, LoAs are issued or theduration o a projects creditingperiod, be that or seven or tenyears. China, however, usuallygrants LoAs only or creditsexpected to be generatedduring the 2008-12 period.
Consequently, China may chooseto withhold CERs ater 2012 i itso chooses. How likely is such ascenario? Almost three-quarterso our respondents think Chinawill continue to supply CERs tothe market ater 2012. The share
o China-based respondentsexpecting CERs to fow is evenhigher. Thus, the market doesnot ear the disappearanceo the main carbon creditsource in the next ew years.
Given the level o uncertaintyregarding additional eligibilityrestrictions rom the EU ETS andthe level o CER demand, theshare o respondents planning toincrease their involvement in theCDM in 2011 compared to 2010
is relatively high. Some 45% orespondents plan to increase theirdirect investments, 42% plan toincrease their purchasing andtrading o primary CERs, and 40%plan to increase sCER tradingactivity. In addition, between 37and 48% o respondents indicatedthat their CDM involvementwill stay as it is. This indicatesa general condence aboutbusiness opportunities in theCDM market, but contains a
China will still be CER
supplier ater 2012
Source: Point Carbon
potential bias because thecompanies most active in themarket are also representedwith the most answers.
Figure 3.10: From China with CERs?
Do you think CERs will be issued rom China-based projects ater 2012? N=
427 (o whom 19 in China).
71%
16%
84%
0%
Yes
No
13%
16%
0% 20% 40% 60% 80% 100%
DK
All respondents
China based
Source: Point Carbon
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4. NORTH AMERICAN
CARBON MARKETS
The ocus in North America hasshited rom US ederal climatepolicy to regional initiatives,with all eyes on Caliornia as itdevelops its own cap-and-tradeprogram. Other US and Canadian jurisdictions that are part o theWestern Climate Initiative (WCI)will probably join the Golden State,
though the timeline or a regionalemissions trading programremains to be determined.
4.1. US ederal climatepolicy
Will there be a US ETS in theoreseeable uture? Ater theUS House o Representativespassed the Waxman-Markeybill containing provisions or acap-and-trade system in June2009, the mood turned sour in
Washington and the Senate ailedto consider similar legislation. Withthe Republican takeover o theHouse ater the November 2010elections, President Obama seemsto have given up on the legislativebranch enacting measures tocut GHGs, instead ocusing onmeasures his administrationcan take via the EnvironmentalProtection Agency (EPA).
This change is also evident inthe responses to our most recentsurvey. We asked survey recipientswhether they thought there wouldbe a US ederal, mandatory cap-and-trade system or greenhousegases with a start date beore2018. For the rst time since westarted asking this question in
Less than 20% thought the UScould meet its sel-imposed target.
4.2. RGGI, 2 years on
The Regional Greenhouse GasInitiative (RGG) has now been inoperation or just over two years,and the rst trades took placethree years ago. Market activityhas been slow and prices kept incheck by the markets very largeover-allocation, with over 30%more allowances available thanthere were actual emissions in therst compliance period, 2009-2011.
Prices in RGGI were bolsteredby the prospect o a ederal USmarket, but dropped to the auctionreserve price in early 2010. Tradedvolumes ollowed as the prospector translating RGGI allowancesinto ederal ones evaporated.
Yet the compliance obligationis real and participation atRGGI auctions has been high,at least until recently. We askedrespondents involved in RGGI
Fewer expect US ederal
cap-and-trade
Figure 4.1: Yes, we cap?
In the US, do you think there will be a ederal, mandatory cap-and-trade
system or greenhouse gases with a start date beore 2018? N=2,213.
Note: previous years have listed 2015 as start date.
41%
61%
81%
71%
44%
40%
50%
60%
70%
80%
90%
Yes
No
DK
11%
15%
15%12%
7%14%0%
10%
20%
30%
2011201020092008
Source: Point Carbon
2008, there were more negativethan positive responses (seeFigure 4.1, although the dierence
is within the margin o error. Thiscontrasts starkly with the gureo 81% who in 2009 expectedUS cap-and-trade by 2015.
Moreover, this years questionis weaker than in previousyears, as we have askedabout 2018 as the start yearrather than 2015. Given thatthe respondent pool may beinclined to avour cap-and-tradelegislation and thus display abias in expectations, getting over40% Yes is still airly bullish.
As the chances o a US ETS thisdecade dwindle, what are theconsequences or US emissionstoward 2020? Under theCopenhagen Accord o 2009,the US pledged to reduce itsGHG emissions by 17% below2005 levels by 2020. Will this beachievable without a carbon cap?Seventy% o our respondentsanswered no to this question.
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(N=14) how they were complyingwith the targets and ound thathal were buying allowancesin auctions (50%) or on thesecondary market (36%, morethan one answer possible).Several companies said theywere reducing their emissions,and a ew also declared theywere developing oset projects.No oset credit has been issuedin RGGI yet, as allowance prices
below $2 a short ton have ailedto provide much incentive oroset development so ar.
The ten RGGI states rom Marylandto Maine are required to reviewthe scheme in 2012, and thestakeholder process or this reviewstarted in 2010. A major questionor the review, given that themarket is long, is whether the capshould be tightened in the nextthree-year compliance period,which runs rom 2012 to 2014.
Within a respondent poolconsisting o companies coveredby RGGI and North Americannancial institutions, almosthal expect a tighter RGGI cap(see Figure 4.2). By contrast,only one-quarter say they do notoresee an increase in stringencyo the programme, while theremaining quarter is uncertain.
The size o the RGGI cap in the2012-14 compliance period will
naturally be a major infuencingactor or the price. What pricesdo market players expect in thenortheastern carbon tradingprogramme at the beginning othe third trading period in 2015?Figure 4.3 shows that mostrespondents expect a price justabove todays level, and up to $5/short ton. A non-negligible numbero respondents expect higherprices, over $5 a ton, consistentwith the expectation that the capwould be tightened somehow.
Figure 4.2: A tighter RGGI cap?
Do you think the RGGI 2012 Review will lead to a tightening o the cap
in the next compliance period (2012-14)? RGGI compliance entities and
NA nancials. N=50.
48%
25%
Yes
No
27%
0% 10% 20% 30% 40% 50%
DK
Source: Point Carbon
Figure 4.3: Stuck at the foor?
RGGI compliance entities and NA nancials. N=50.
23%
26%
43%
20%
25%
30%
35%
40%
45%
3%
6%
0%
5%
10%
15%
Above $20$10-20$5-10$2-5$0-2
Source: Point Carbon
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RGGI may see some noteworthydevelopments i the 2012 reviewleads to an adjustment o thecap that impacts the marketbalance, but overall is likely toremain a airly low-prole market.
4.3 Caliornia: the newETS
As prospects or ederal cap-and-trade wane in Washingtonand RGGI prices and volumesdrop, attention in the US carbonmarket has shited to the othercoast. The Caliornia cap-and-trade programme is scheduledto enter into orce on 1 January2012, and the rst orward tradesin Caliornia carbon allowances(CCAs) have already taken place.
The number o emitters whoresponded to Caliornia-specic survey questions issmall (N=26) but contains
a good mix o power andindustrial emitters, and a slightoverrepresentation respondentsrom the oil and gas sector.
Caliornia is a larger market thanRGGI, with close to 400 Mt coveredin 2015. It will start with 90% reeallocation a major dierencerom RGGI, where almost 100%o allowances were auctioned
rom the start. Will emittersregulated under the cap-and-tradeprogramme in Caliornia be longor short in the rst complianceperiod? How well do they knowtheir situation? While 44% o ourrespondents expect they will haveto buy allowances to top o theree allocation, 7% have identied
that they may be sellers on thenew market. A good third doesntknow yet where the axe will all.
When asked about theircompliance strategy, mostcompanies listed a combination obuying allowances or oset credits,reducing their own emissions andinvesting in osets. Only 8% said
they had not started preparing.
On what platorms do utureCaliornia ETS participants oreseetrading carbon? As shown in Figure4.5 most but not all planned toparticipate in the auctions. Over45% plan to buy on an exchange,which contrasts with the earlydays o the EU ETS where over
Most respondents have
started preparing or
Caliornia ETS
Figure 4.4: Long or short in Caliornia
What best describes your companys situation in the Caliornia cap-and-
trade program in the rst compliance period (2012-2014)? N=27.
44%
7%
We will need to buy offsets orallowances (permits)
We will receive enough freeallowances (permits) and will
not need offsets
Wedonothavea com liance15%
33%
0% 10% 20% 30% 40% 50%
obligation in the first period
Dont know/cannot answer
Figure 4.5:Buying Caliornian carbon
How is your company planning to procure allowances or the Caliornia
market? (Select all that apply). N=26.
50%
46%
35%
Buy allowances in auctions
Buy allowances on anexchange
Buy allowances through a
23%
0% 10% 20% 30% 40% 50% 60%
ro er
Dont know/cannot answer
Source: Point Carbon
Source: Point Carbon
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75% o the transactions tookplace over the counter. Exchangesnow dominate transactions inEurope, and are actively preparingor the Caliornia market, in linewith the trends identied here.
Most Caliornian complianceentities surveyed plan to useosets, see Figure 4.6. A majorityo respondents in this category saytheir companies plan to developprojects on their own. Brokersare also expected to play a moreprominent role or oset credittransactions than or allowances.
What carbon prices dorespondents in the CA ETS expect?
To gauge market expectations,we surveyed both emitters thatwill be covered by the programmeand nancials with involvementin the North American carbonmarkets. Most expect theprogram to start close to theprice foor, around $10-15/tonne.
Future Caliornia participantsexpect prices to increase steeplyto 2020, as the cap tightens andaccess to osets is restricted.Yet ew oresee prices at the
Price Containment Reserve- $69 or above - and insteadexpect them to stay under$50 a tonne (see Figure 4.8).
The purpose o any cap-and-trade programme is to reduceemissions at the lowest possiblecost. The Caliornia market hasnot yet entered into orce, butrespondents nevertheless say thatit has already initiated emissionreductions. Figure 4.9 shows that
just over hal the respondentscompanies have either reducedtheir emissions or introduced plansto reduce emissions as a resulto the Caliornian ETS severalcommented that cap-and-tradeprovided an added incentive or
their voluntary reductions alreadyunder way. It will remain to beseen, however, what the size othese emission reductions will be.)
As noted in the EU ETS section, anunintended consequence o the
Caliornia carbon prices
seen at $10-15/t in 2012
Figure 4.6: Buying osets in Caliornia
How is your company planning to procure osets or the Caliornia
market? (Please select all that apply) N=26.
54%
46%
39%
Develop projects in-house
Buy offset credits through abroker
Buy offset credits on anexchan e
19%
0% 10% 20% 30% 40% 50% 60%
Dont know/cannot answer
Source: Point Carbon
Figure 4.7:Floored
What prices do you expect in the Caliornia market in 2012? Companies
with uture CA obligation and NA nancials. N= 63.
25%
51%
20%
30%
40%
50%
60%
2%0%
12%10%
0%
10%
$40-50 (CostContainment
Reserve
price)
$30-40$20-30$15-20$10-15$0-10 (belowauction
reserve price)
Source: Point Carbon
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Figure 4.9: Caliornian internal abatement
To what extent has the Caliornian cap-and-trade program caused your
company to reduce its own emissions? Companies with uture CA. N=253.
36%
28%
24%
Has not caused emissionreductions
Already caused emissionreductions
Reductions to be planned but
12%
0% 10% 20% 30% 40%
no ye s ar e
Don't know
Figure 4.8: Caliornia prices in 2020
What prices do you expect in the Caliornia market in 2020? Companies
with uture CA obligation and NA nancials. N= 63.
33%
43%
15%
20%
25%
30%
35%
40%
45%
50%
10%
4%2%
8%
0%
5%
10%
Above $87$69-87(ContainmentReserve price)
$50-69$30-50$17-30$0-17 (belowauctionreserve)
Source: Point Carbon
Source: Point Carbon
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introduction o an ETS is carbonleakage. Among 23 Caliorniarespondents, only one said thathis/her company had plannedto move production because othe introduction o the CA ETS.The remaining 22 said that theircompanies had no such plans.
Caliornias ETS sits withinthe broader Western ClimateInitiative. Which states andprovinces will take part in theWCI? Figure 4.10 shows thecollective judgment o our surveyrespondents. As expected, threeo the top our are Canadian these provinces are arthestalong in terms o passingdomestic legislation enabling
participation in a regionalcarbon market and issuing dratregulations governing trading.Washington and Oregon arestill expected to join, althoughboth have made clear that theywould not be ready in 2012.
4.4 North Americanosets
The North American osetmarket has also turned itsattention to Caliornia and the
WCI, with a ocus on osetsthat could become eligible orcompliance. So ar those includeClimate Reserve Tonnes (CRTs)rom orest, livestock methane,and ozone depleting substanceprojects. Caliornia regulatorsand their counterparts in otherWCI jurisdictions are evaluatingosets rom project types otherthan the ones currently allowed.
We asked survey respondentswhich oset types regulators
BC, Washington, Quebec
seen as most likely to join
Caliornia in WCI
Figure 4.10: Whos next or WCI?
In your view, which o the ollowing WCI jurisdictions will have a cap-and-
trade program in place by 2015? (Please select all that apply.) North American
emitters and nancials. N=220. .
51%
40%
35%
35%
32%
22%
British Columbia
Washington
Quebec
Ontario
Oregon
Manitoba
11%
7%
7%
0% 10% 20% 30% 40% 50% 60%
Arizona
Montana
Utah
Source: Point Carbon
Figure 4.11: NA Compliance market wants greater oset supply
Which additional project types would you like to see included in the CA/
WCI compliance market? Select all that apply. Entities involved in North
American oset market. N=161.
57%
54%
45%
Landfill gas (pre-2011vintages)
Agricultural (croplandmanagement and nutrientmanagement protocols)
Coal mine methane
28%
24%
0% 10% 20% 30% 40% 50% 60%
N2O
Others
Source: Point Carbon
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should allow. Out o 160 whoanswered (Figure 4.11), morethan hal indicated they want tosee oset credits rom landllgas projects included orcompliance in the Caliornia and/or WCI cap-and-trade programme.Agricultural protocols and coalmine methane projects were the
other two avourites, while N2Oonly drew support rom 22%o the respondents. Includingthese protocols would add
signicant supply to the Caliorniamarket, which is otherwise atrisk o being undersupplied.
The North American voluntarymarket still sees some action asiderom CA/WCI pre-compliancetransactions. Just hal o marketparticipants think the marketproduces real emission reductions,and 43% agree that it ostersinnovation. Yet many do not seeit as a transparent market: onlya quarter o the respondents
said it was transparent,a shown in Figure 4.12.
Not all projects are equal, and theexpected value o some oset typeshas dropped dramatically over the
past two years see Figure 4.13.
On the pure voluntary market,renewable and energy eciencyprojects consistently etch the
highest prices (see Figure 4.13).
Figure 4.12: Real but opaque
Agreement with the given statements (4 or 5 on a 1-5 scale). Entities
involved in North American oset market. N=183.
50%
43%
The North American offsetmarket produces real emission
reductions
The North American offsetmarket fosters innovation inemission reduction methods
25%
0% 10% 20% 30% 40% 50% 60%
The North American offsetmarket is transparent
Source: Point Carbon
Figure 4.13: Prices or oset types in the North American market
How much value, on a scale o 1 to 5, can you assign to oset credits rom the ollowing project types? Please answer
based on projects originating in North America. N=128. Note: The question was about the voluntary market in 2009 and
2010, but with mostly North American respondents .
3.9
3.6
3.5