Stock-Take on Market and Compliance Gap as Kyoto Protocol enters into force

HCC Meeting, Washington DC

February 15, 2005

Total Value of Carbon Sales (in million U.S.$, nominal)

0

100

200

300

1998 1999 2000 2001 2002 2003 2004

Known Estimated

(Jan-May)

2

Main Seller: AsiaIn percent of volume sold from end 2003 to May 2004

OECD10% Transition

Economies8%

Africa4%

Asia51%

Latin America27%

3

Main Buyers: Japanese Firms In percent of volume purchased since Jan.2003

Netherlands23%

Japan41%

Carbon Finance Business24%

Other EU3%

Canada3%

USA3%

Australia & New Zealand

3%

4

Current Kyoto gap of Annex II: 620 MtCO2e

-8%

-6% -6%

-2%-3%

+20%

+12%

+9%

EU15

(228 MtCO2e)

Canada

(159 MtCO2e)

Japan

(214 MtCO2e)

Other Western Europe+ New Zealand

(19 MtCO2e)

Pe

rce

nt

of

19

90

em

iss

ion

s l

ev

el

Kyoto Target

Current (2002) Emissions

Emission Trends 1990-2002 in EU15, Japan and Canada

90

95

100

105

110

115

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

GH

G E

mis

sio

ns

(In

de

x 1

00

= 1

99

0)

EU15

Japan

Canada

Projected Gap of Annex II: 945 – 1116 Mt/yr

0

100

200

300

400

500

600

E.U. 15 Canada Japan Rest of Annex B woUS/Aus

Ky

oto

Ga

p in

MtC

O2e

Central US DoE Scenario High US DoE Scenario Central IEA Scenario

Current Kyoto gap of EU15: 228 MtCO2e

-13%

-8%

-21%

+0%

-21%

-7%

-28%

-6%

+15%

+4%

+9%

+3%+7%

-2%

+29%

+9%

+1%

+40% +40%

-4%

-15%-13%

+27%

+13%

+25%

+0%

-19%

-0%

+26%

-19%

Au

stri

a (1

7)

Bel

giu

m (

15)

Den

mar

k (1

4)

Fin

lan

d (

5)

Fra

nce

(-1

1)

Ger

man

y (3

0)

Gre

ece

(1)

Irel

and

(9)

Ital

y (7

8)

Lu

xem

bo

urg

(1)

Net

her

lan

ds

(15)

Po

rtu

gal

(8)

Sp

ain

(72

)

Sw

eden

(-5

)

Un

ited

Kin

gd

om

(-15

)

Per

cen

t o

f 19

90 e

mis

sio

ns

leve

l

Kyoto Target (EU bubble)

Last reported / base year

Current Kyoto gap of EU15: 228 MtCO2e

-13%

-8%

-21%

+0%

-21%

-7%

-28%

-6%

+15%

+4%

+9%

+3%+7%

-2%

+29%

+9%

+1%

+40% +40%

-4%

-15%-13%

+27%

+13%

+25%

+0%

-19%

-0%

+26%

-19%

Au

stri

a (1

7)

Bel

giu

m (

15)

Den

mar

k (1

4)

Fin

lan

d (

5)

Fra

nce

(-1

1)

Ger

man

y (3

0)

Gre

ece

(1)

Irel

and

(9)

Ital

y (7

8)

Lu

xem

bo

urg

(1)

Net

her

lan

ds

(15)

Po

rtu

gal

(8)

Sp

ain

(72

)

Sw

eden

(-5

)

Un

ited

Kin

gd

om

(-15

)

Per

cen

t o

f 19

90 e

mis

sio

ns

leve

l

Kyoto Target (EU bubble)

Last reported / base year

Current Kyoto gap of EU15: 228 MtCO2e

-13%

-8%

-21%

+0%

-21%

-7%

-28%

-6%

+15%

+4%

+9%

+3%+7%

-2%

+29%

+9%

+1%

+40% +40%

-4%

-15%-13%

+27%

+13%

+25%

+0%

-19%

-0%

+26%

-19%

Au

stri

a (1

7)

Bel

giu

m (

15)

Den

mar

k (1

4)

Fin

lan

d (

5)

Fra

nce

(-1

1)

Ger

man

y (3

0)

Gre

ece

(1)

Irel

and

(9)

Ital

y (7

8)

Lu

xem

bo

urg

(1)

Net

her

lan

ds

(15)

Po

rtu

gal

(8)

Sp

ain

(72

)

Sw

eden

(-5

)

Un

ited

Kin

gd

om

(-15

)

Per

cen

t o

f 19

90 e

mis

sio

ns

leve

l

Kyoto Target (EU bubble)

Last reported / base year

Current Kyoto gap of EU15: 228 MtCO2e

-13%

-8%

-21%

+0%

-21%

-7%

-28%

-6%

+15%

+4%

+9%

+3%+7%

-2%

+29%

+9%

+1%

+40% +40%

-4%

-15%-13%

+27%

+13%

+25%

+0%

-19%

-0%

+26%

-19%

Au

stri

a (1

7)

Bel

giu

m (

15)

Den

mar

k (1

4)

Fin

lan

d (

5)

Fra

nce

(-1

1)

Ger

man

y (3

0)

Gre

ece

(1)

Irel

and

(9)

Ital

y (7

8)

Lu

xem

bo

urg

(1)

Net

her

lan

ds

(15)

Po

rtu

gal

(8)

Sp

ain

(72

)

Sw

eden

(-5

)

Un

ited

Kin

gd

om

(-15

)

Per

cen

t o

f 19

90 e

mis

sio

ns

leve

l

Kyoto Target (EU bubble)

Last reported / base year

Projected Gap of Annex II: 945 – 1116 Mt/yr

0

100

200

300

400

500

600

E.U. 15 Canada Japan Rest of Annex B woUS/Aus

Kyo

to G

ap in

MtC

O2e

Central US DoE Scenario High US DoE Scenario Central IEA Scenario

Current Surplus of Transition Economies: 2,180 MtCO2e

-8% -8% -6% -8% -8% -6% -8% -8% -8%

-56%

-12%

-26%

-55%

-31%

-63%-66%

-32%

-48%

-37%

-28%

-47%

0%0%

-5%-8%

-1%

Per

cen

t o

f 19

90 e

mis

sio

ns

leve

l

Kyoto Target

Current (2002) Emissions

Baseline Baseline –– EI T Hot AirEI T Hot Air

2000 2008 2012 2018

Emissions

Target

Baseline Emissions

Hot Air, 1st Period: A

A

Hot Air, 2nd Period: B - C

B

C

Kyoto Obligation for EITs

Actual Emissions, below KP obligation because of economic downturn

Explaining the Special Case of the Transition Economies

14

OECD Compliance Gap

Ratifying OECD cumulative target reductions will be 5-5.5 billion tons of carbon dioxide below 1990 levels by 2012 based on their Kyoto obligations

If half emissions reductions are achieved domestically the “compliance gap” to be met through trade with developing countries and transition economies through 2012 would be 2.5 billion tons – 10 times current carbon purchase contracts

Current gap over domestic action suggests need for > 3 billion t/CO2e

Carbon is currently selling for about $5 ton of carbon dioxide, but likely to increase to about $10 ton

At a selling price of $5-$10 per ton carbon payments to developing countries and EITs between now and 2012, trade value will be between $12.5 billion and $25 billion

Sources of Supply to fill the Compliance Gap

• Carbon contracts with developing countries (Clean Development Mechanism) today are <200 MT for 2012 delivery.

• Its too late for conventional investment projects to more than double this amount.

• Emissions trading with EITs (Assigned Amount Units) has to be at least 2 billion tons (the EITs have the potential to trade about 7 billion tons because their emissions are significantly below their allocation under the KP due to the economic downturn)

“Greening” the AAUs to OECD Sovereign buyers will be essential - implies about $30 billion of new investment over the next 4-5 years

The balance of about 1 billion tons will probably be made up of trades involving industrial gases: HFC-23 and N2O (primarily with China – CDM) where “greening” is also required

Bank Carbon Finance Business Programs Representing Sellers

Economies in Transition and Greening of AAU Trade• Green Investment Schemes designed for Bulgaria and

planned for Czech and Slovak Republics and Latvia in collaboration with commercial banks

• Dialogue beginning with Russia and Ukraine China Industrial Gases Greening

• Partnership with China to assure buyers of the sustainable development benefits of trade in HFC23 that is vital to supply of compliance grade carbon assets to ratifying OECD. Trade value is $3 billion plus

Argentina – request for Bank assistance to develop and present high quality carbon assets to global market

20 developing countries supported under CF-Assist to develop carbon assets for sale to others at/around Carbon Expo. Bank as buyer of last resort