CER Prices

The fragmented nature of the global carbon market generates differentiated prices for emissions reductions as shown in Table 4.11.

Table 4.10 Certified Emission Reduction (CER) Procurement Funds Multilateral Funds Government Funds

Prototype Carbon Fund (US$ 180 million)

Own Tender

• Dutch Government C-ERUPT Program • Finnish CDM/JI Pilot Program (€ 20 million)

• Sweden International Climate Investment Program – CDM

• Austria JI/CDM Procurement Program Community Development

Carbon Fund (US$ 100 million)

Through Commercial/Development Banks • Rabo Bank (Dutch Government)

• Japanese Bank of Industrial Cooperation (Japan CDM Fund - 4 billion yen)

• Development Bank of Japan (Japan CDM Fund - 3 billion yen Through Multilateral Institutions

• World Bank (The Netherlands Clean Development Facility - € 70 million)

• IFC (IFC-Netherlands Carbon Facility - € 44 million)

World Bank Bio-Carbon Fund (US$ 100 million)

Through Bilateral Transactions (signed MOUs) • Canadian Government with Colombia and Chile • Dutch Government with Bolivia, Colombia, Uruguay and Ecuador

• Danish CDM Portfolio -bilateral agreements with Malaysia and China.

CDM Monitor, http://www.pointcarbon.com, accessed 24-06-2004;

http://www.senter.nl, accessed 25-06-2004; and http://www.ecosecurities.com, accessed 28-12-2004.

Allowance markets generate high emission reduction prices since the delivery risks are believed to be minimal. Though JI and CDM are both project-based, PCF pays higher prices for ERUs since JI are supported by Host Country Agreements and Assigned Amount Units, which reduces PCF’s exposure to risks. ERUPT however in its January 2003 tender for JI projects have specified a price range similar to

CERUPT tender for CDM projects.

The current price spread of CERs is US$ 3 – 6 per TCO2e (Table 4.11). PCF’s price

average is relatively lower than that of CERUPT’s. The Finnish Government’s offer for CERs from its pilot program is lower than CERUPT’s price range since it focuses on small-scale projects, which have higher transaction costs and delivery risks. Table 4.11 Carbon Emission Reduction Prices (per tCO2e)

Project Based Clean Development Mechanism (CDM)

Joint Implementation (JI)

Allowance (ET) Markets

PCF1

• US$3.0-3.5

• premium of US$0.5 per ton of CO2e for projects

with developmental components (Colombia Wind Farm) PCF5 • US$ 3.5-4.0 Regional • EU-ETS8 (indicative price) - €5.0-7.0 CERUPT2 (maximum prices) • renewable energy – €5.5 • biomass energy - €4.4 • energy efficiency - €4.4 • fuel switch and methane - €3.3

• average price - €4.73

ERUPT6

• First tender average price - €8.46 (closed in April 2001) • Second tender average price - €4.78 (closed in March 2002) • Third tender - expected price range - €3.0-5.07 (closed in January 2003)

National

• UK-ETS9 – Bid price £1.75, offer price £2.25

Finnish Government4 • small-scale - €2.47-3.2

Denmark-Romania JI7

• estimated price range €5.40- 8.10 Firm • BP Emissions Trading Scheme10 (Scheme discontinued in 2001) average in 2000 – US$7.6 average in 2001 – US$39.63

Source: 1: PCF Annual Report 2002; 2: C-ERUPT Tender Document 2002; 3: Carbon Market Europe (March 21 2003); 4: http://global.finland.fi; 5: PCF Annual Report 2002; 6: Environmental Finance (February 2003); 7: GHG Market Trends 2/2003; Carbon Market Europe (March 7, 2003); 8: Carbon Market Europe (May 2 2003); 9: Carbon Market Europe (August 15 2003); 10

Among the CDM projects being contracted by PCF, a price premium of US$0.5 per tCO2 e has been offered to the Colombia Jepirachi Wind Farm sponsors for the

delivery of activities that improve the social conditions of the local indigenous population that hosts the project.

CERUPT’s CER offer prices are on the other hand differentiated according to technology types. Renewable energy in general, except biomass, has been assigned with a premium price. Biomass and energy efficiency projects, and fuel switching and methane projects are respectively priced 20 and 40 % lower than renewable energy projects.

The CER is being differentiated from other emission reduction instruments due to its high delivery risks. Moreover, there is no standardized CER price. Instead CERs are differentiated according to its related risks, sustainable development component, and technology type.

4.7 Conclusion

After the COP7 agreement the aggregate effective emission reduction commitment by Annex B countries is relatively small, due to the withdrawal of the United States and crediting of sequestration under Article 3.4 of the Kyoto Protocol. The global carbon market in the first commitment period is likely to be characterised by low demand and low prices. Although the potential role for the CDM is seriously

diminished, a significant amount of CDM projects in developing countries could still be achieved – depending on international market factors such as quota supply from Russia or the design of rules for CDM project implementation.

Low market prices for carbon offsets credits mean that only the lowest cost options for emissions reductions would be implemented as CDM projects. It is important to keep the CDM competitive, transaction costs need to be low. There are other factors that intense competition between developing countries to attract CDM investments, and the quality of domestic institutions, internal political stability and efforts to market CDM projects to investors will be crucial for individual countries to secure their share in the CDM market. On the demand side, there are a number of factors,

which could further reduce demand for emission offsets and thereby reduce the size of the CDM, or even preclude completely commercially driven CDM projects. Key factors that could harm the CDM are lower business-as-usual emissions growth in Annex B countries, higher supply of surplus emissions quota (hot air) from EIT countries, and also crediting under Article 3.4 of sequestration in agricultural soils, if the potential for these activities turns out to be large. On the other hand, if the United States participates in implementing the Kyoto Protocol, none of these factors would be a threat to a viable and sizeable CDM.

The macroeconomic estimates such as Haites, Austin et al, US administration, discussed above mostly based on computer models, range from 67–723MtC and US$3.3–21.0bn. The financial flows under the CDM projected are not very large compared to the volumes of money in any Annex B economy. However, it is more appropriate to compare this estimate with the financial flows in the developing countries. For example, the present official development aid (ODA) from Annex B to developing countries is around US$50bn per year – a CDM of US$12bn (average of lowest and highest estimates) therefore would add 24% to these flows. Another comparison could be made with foreign direct investment (FDI), currently running at around US$240bn. The CDM (again of US$12bn) would add only around 5% to investments in developing countries. However, the CDM value quoted here should only be the additional value to the project investments. It doesn’t seem likely that projects with very high-added costs will be implemented; added costs in the range of 2–10% of the project costs are more likely. Thus half to all of the FDI could be redesigned to fit the CDM criteria, and that would make the CDM a very powerful tool.