State and Trends 2012 Web Optimized 19035 CVR

srarr axn rnrxns ov rnr
Washington DC, May 2012

Lead authors
A|exandre Kossoy, Team leader
Pierre Guigon
Tis World Bank report beneted greatly from
contributions of Bianca Ingrid Sylvester.
Other insightful perspectives were provided by
Martina Bosi, Klaus Oppermann, and Felicity Spors.
srarr axn rnrxns ov rnr
Washington DC, May 2012

The findings and opinions expressed in this report are the sole responsibility of the authors and should not be cited
without permission. They do not necessarily reflect the views of the World Bank group, its Executive Directors, the
countries they represent, or of any of the participants in the carbon funds or facilities managed by the World Bank.
The World Bank does not guarantee the accuracy of the data included in this work and accepts no responsibility
whatsoever for any consequence of their use. This report is not intended to form the basis of an investment decision.
The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment
on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such
boundaries.
The State and Trends of the Carbon Market 2012 received financial support from the CF-Assist Program, managed by
the World Bank Institute (WBI).
Photo credits: page 72 flickr/longhorndave, all others: istockphoto.com
Editing: Steigman Communications
Design: Studio Grafik
Printing: Westland Printers
State and Trends of the Carbon Market 2012 1
List of abbreviations and acronyms
ACCU Australian Carbon Credit Unit
AAU Assigned Amount Unit
AAUPA AAU Purchase Agreement
AB 32 Global Warming Solutions Act of
2006 Assembly Bill 32
ACR American Carbon Registry
ADB Asian Development Bank
aEUA Aviation European Union Allowance
AfDB African Development Bank
AWG-KP Ad Hoc Working Group on Further
Commitments for Annex I Parties
under the Kyoto Protocol
AWG-LCA Ad Hoc Working Group on Long-
term Collaborative Action
BC British Columbia
BOCM Bilateral Offset Credit Mechanism
CAPEX Capital Expenditures
CARB California Air Resources Board
CAR Climate Action Reserve
CCA California Carbon Allowance
CCFE Chicago Climate Futures Exchange
CCS Carbon Capture and Storage
CCX Chicago Climate Exchange
CDM Clean Development Mechanism
CER Certified Emission Reduction
CFI Carbon Farming Initiative
CH
4
Methane
CME Coordinating Managing Entity
CMM Coal Mine Methane
CMP Conference of the Parties serving
as the Meeting of the Parties to the
Kyoto Protocol
CO
2
Carbon Dioxide
CO
2
e Carbon Dioxide Equivalent
COD Chemical Oxygen Demand
COP Conference of the Parties
CPA CDM Programme Activity
CPF Carbon Partnership Facility
CPM Carbon Price Mechanism
CPUC California Public Utilities
Commission
CP-1 First Commitment Period under the
Kyoto Protocol
CRT Climate Reserve Ton
CU Carbon Unit
DC Designated Consumer
DNA Designated National Authority
DOE Designated Operational Entity
EB Executive Board of the CDM
EBRD European Bank for Reconstruction
and Development
EC European Commission
ECJ Court of Justice of the European
Union
ECX European Climate Exchange
EE Energy Efficiency
ER Emission Reduction
ERPA Emission Reduction Purchase
Agreement
ERU Emission Reduction Unit
ETS Emissions Trading Scheme
EU European Union
EUA European Union Allowance
EU ETS European Union Emissions Trading
Scheme
EUTL European Union Transaction Log
FY Fiscal Year
FYP Five-Year Plan
GCF Green Climate Fund
GDP Gross Domestic Product
GGAS New South Wales Greenhouse Gas
Reduction Scheme
GHG Greenhouse Gas
GIS Green Investment Scheme
GW Gigawatt
HFC Hydrochlorofluorocarbon
ICE IntercontinentalExchange
IFC International Finance Corporation
IEA International Energy Agency
IFI International Financial Institution
IFRS International Financial Reporting
Standard
IMF International Monetary Fund
2 State and Trends of the Carbon Market 2012
IOU Investor-Owned Utility
IRR Internal Rate of Return
J-VER Japan Verified Emission Reduction
J-VETS Japan-Voluntary Emissions Trading
Scheme
JI Joint Implementation
JISC Joint Implementation Supervisory
Committee
KM Kyoto Mechanism
KP Kyoto Protocol
LDC Least Developed Country
lCER Long-term Certified Emission
Reduction
LFG Landfill Gas
LoA Letter of Approval
LULUCF Land Use, Land Use Change and
Forestry
MAD Market Abuse Directive
MDB Multilateral Development Bank
MiFiD Markets in Financial Instruments
Directive
MOP Meeting of the Parties
MRV Measurement, Reporting and
Verification
MW Megawatt
MWh Megawatt hour
NAMA Nationally Appropriate Mitigation
Action
NAP National Allocation Plan
NAPCC National Action Plan on Climate
Change
NDRC National Development and Reform
Commission
N
2
O Nitrous Oxide
NMM New Market Mechanism
NPV Net Present Value
NZ ETS New Zealand Emissions Trading
Scheme
NZU New Zealand Unit
OECD Organisation for Economic Co-
operation and Development
OTC Over-the-Counter
PAT Perform Achieve and Trade
pCER Primary Certified Emission Reduction
PDD Project Design Document
PFC Perfluorocarbon
PIN Project Idea Note
PMR Partnership for Market Readiness
PoA CDM Programme of Activities
RE Renewable Energy
REC Renewable Energy Certificate
REDD Reducing Emissions from
Deforestation and Forest
Degradation
REDD+ Extends REDD by including sustain-
able forest management, conserva-
tion of forests, and enhancement of
carbon sinks.
RET Renewable Energy Target
RGGI Regional Greenhouse Gas Initiative
RMU Removal Unit
sCER Secondary Certified Emission
Reduction
SCF Strategic Climate Fund
SF
6
Sulfur Hexafluoride
SME Small and Medium-size Enterprise
tce Tons of Coal Equivalent
tCER Temporary Certified Emission
Reduction
tCO
2
Ton of Carbon Dioxide
tCO
2
e Ton of Carbon Dioxide Equivalent
TMS Target Management System
UN United Nations
UNEP United Nations Environment
Programme
UNFCCC United Nations Framework
Convention on Climate Change
VAT Value-added Tax
VCS Voluntary Carbon Standard
VCU Verified Carbon Units
VER Verified Emission Reduction
WB World Bank
WCI Western Climate Initiative
YOY Year on Year
Contents
List of abbreviations and acronyms 1
Contents 3
1. Executive summary 9
2. Introduction: a changing c|imate 13
3. European Union Emissions Trading Scheme (EU ETS) 17
3.1 At a glance 17
3.2 An expanded scope for the emissions cap in the EU starting in 2012 18
3.2.1 New gases and assets are integrated into the Scheme 18
3.2.2 Many fewer allowances will be allocated for free 19
3.3 A quick review of the supplementarity limit for osets in the European Scheme 21
3.4 Did the Durban outcomes change anything for the Kyoto osets in the EU ETS? 21
3.5 Ensuring the relevance of the EU ETS in the EUs objectives to curb emissions 22
3.5.1 Many low-carbon initiatives; too many? 22
3.5.2 And then comes a set-aside and its arduous decision process 23
3.6 Infrastructure and market integrity: the importance of being secure 26
3.6.1 Market response: a spot market in dormancy 26
3.6.2 Regulatory response: enhanced registry infrastructure 29
3.6.3 Market oversight review: toward classifying carbon as a nancial instrument 30
3.7 EU Allowances: the numbers behind the growing trading volumes 31
3.7.1 Te primary EU Allowance market 32
3.7.2 A Shrinking spot market 32
3.7.3 Increasing bilateral trades 32
3.7.4 Who is trading, how, and why they trade 34
3.8 Secondary osets: smaller gures, similar patterns 37
3.8.1 Myths and facts 37
3.8.2 Futures market with the lions share 38
3.8.3 What spreads can tell 38
3.9 Aviation: the polemic new kid on the block 39
3.9.1 Background: 39
3.9.2 Rules and participants: 40
3.9.3 How representative is aviation within the EU ETS? 41
4. Market instruments under the UNFCCC 45
4.1 Durban climate negotiations and policy evolution 45
4.2 Kyoto exibility instruments 48
4.2.1 Te Clean Development Mechanism 48
4.2.2 Joint Implementation 58
4.2.3 Assigned Amount Units 61
4.2.4 Removal Units 62
4.3 New market instruments 62
4.3.1 Nationally Appropriate Mitigation Actions 62
4.3.2 New approaches to market instruments 64
5. Out|ook 2012 demand and supp|y ba|ance 67
5.1 Government demand 67
5.2 Private sector demand 69
5.3 Supply through to 2012 70
5.4 Residual demand290 MtCO
2
e 71
6. Emissions trading and other |ow-carbon initiatives around the wor|d 73
6.1 Australia 73
6.1.1 Te Clean Energy Future Package 73
6.1.2 Te Carbon Farming Initiative 78
6.2 New Zealand 78
6.3 North America

80
6.3.1 Regional Greenhouse Gas Initiative 80
6.3.2 California, Qubec and the Western Climate Initiative 81
6.3.3 Alberta 88
6.3.4 British Columbia 89
6.3.5 Chicago Climate Exchange 90
6.4 Republic of Korea 90
6.5 Mexico 92
6.6 Brazil

93
6.7 China 94
6.7.1 A look back at the 11
th
Five-Year Plan (2006-2010): whats in Chinas tool box? 95
6.7.2 12
th
Five-Year Plan (2011-2015): piloting market mechanisms 95
6.7.3 Building emissions trading in China: who is involved? 96
6.7.4 Current status: is it the journey or the destination? 98
6.8 India 100
6.9 Japan 102
6.10 Switzerland 103
6.11 Other initiatives 104
Annex 1: Internationa| reaction to aviation in the EU ETS 109
Annex 2: Land-use carbon 112
Annex 3: Te state of the vo|untary market 115
Annex 4: Ca|ifornias cap-and-trade design features 117
Annex 5: Qubecs cap-and trade design features 119
Annex 6: China: targets and supporting measures under the Five-Year P|ans 120
Annex 7: India PAT: market design and governance e|ements 121
Annex 8: Assumptions for estimates of potentia| demand for osets from non-Annex I Countries 122
Methodo|ogy 124
Acknow|edgments 127
G|ossary 128
BOXES
Box 1: Trading around the risk of receiving stolen allowances 27
Box 2: Within the trades 34
Box 3: Te point of view of a market player: the right pathway to address aviation emissions 42
Box 4: Key elements of the Durban decisions 46
Box 5: Brazil integrated solid waste management and carbon nance program 57
Box 6: Track 1 versus Track 2 JI 59
Box 7: Te Swiss policy measures to reduce GHG emissions 104
Box 8: Will there be demand for emission reductions after 2012? 106
FIGURES
Figure 1: Prices and volumes for EUAs, CERs and ERUs in the secondary market, 2008-2011 18
Figure 2: EU registry infrastructure: transition to the Union Registry 30
Figure 3: Annual volume of primary EUAs sold by member states, 2008-2011 32
Figure 4: Annual EUA volumes, 2008-2011 32
Figure 5: Transactions in the EU ETS 33
Figure 6: Trading alternatives: exchange, OTC, and bilateral trades 33
Figure 7: Annual CER and ERU volumes, 2008-2011 38
Figure 8: Spreads CERs versus ERUs and green versus standard CERs, 2011-2012 38
Figure 9: Volumes and average prices for pre-2013 CER transactions since 2002 49
Figure 10: Pre-2013 volumes transacted by seller 2002-2011 (MtCO
2
e) 53
Figure 11: Post-2012 volumes transacted per seller, 2010-2011 53
Figure 12: Pre-2013 volumes transacted per sector 2002-2011 (MtCO
2
e) 54
Figure 13: Post-2012 pCERs per sector, 2010-2011 (%) 54
Figure 14: CER issuance, 2005-2011 55
Figure 15: CDM projects registered until 2011 and projects at validation in 2012 56
Figure 16: Regional distribution of pCDM and CDM (%) 56
Figure 17: Number of existing projects in the JI pipeline per country 59
Figure 18: Cumulative ERU issuance per track Q1 2009 Q1 2012 (MtCO
2
e) 60
Figure 19: Annual pERUs volumes transacted per seller since 2003 61
Figure 20: Estimated changes to the national generation mix in 2011 and 2050 75
Figure 21: Australian GHG emissions and abatement forecasts government policy scenario 76
Figure 22: Market volumes and prices on the RGGI, 2008-2011 80
Figure 23: Californias historical GHG emissions, projections, and reduction targets 82
Figure 24: Pricing for CARB eligible market instruments 85
Figure 25: Qubecs historical GHG emissions, projections, and reduction targets 86
Figure 26: WCI annual market balance through 2020 88
Figure 27: Alberta osets: historic volume and prices 2007-2011 89
Figure 28: Purchases of BC osets by the government of British Columbia 2009-2011 89
Figure 29: CCX Carbon Financial Instruments (CFI) - historical volumes and price 90
Figure 30: China in worlds energy-related CO
2
emissions 91
Figure 31: Building pilot emissions trading schemes in China 94
Figure 32: Renewable Energy Certicates traded volumes and clearing prices 97
TABLES
Table 1: Carbon market at a glance, volumes and values, calendar 2010-2011 10
Table 2: New registry security measures in the EU ETS 29
Table 3: Volumes and value for CER transactions in the primary market, 2010-2011 49
Table 4: Volumes and value for JI transactions, 2010-2011 60
Table 5: Supply and demand in perspective Kyoto market balance, 2008-2012 68
Table 6: Potential demand, contracted supply, and residual demand, 2008-2012 71
Table 7: Australias CPM at a glance 74
Table 8: Eligibility of international units in compliance markets 76
Table 9: Republic of Korea emissions trading scheme 91
Table 10: China: pilot jurisdictions and current ETS status 99
Table 11: Emerging domestic initiatives and supporting readiness programs (non-exhaustive) 105
Table 12: Scenario of potential demand for osets in non-Annex I Countries 201320 (MtCO
2
e) 106
Table 13: Estimates of potential supply under the CDM and JI up to 2020 (MtCO
2
e) 108
Table 14: Investment funds and land-use carbon 113
SECTION
1
Executive summary
WITH MEMORIES OF THE 2008-2009 FINANCIAL CRISIS STILL VIVID,
2011 emerged as yet another turbu|ent year for capita| markets. Vo|ati|ity increased
for energy-re|ated commodities, inc|uding carbon, with the onset of the Arab Spring,
the shutdown of nuc|ear power stations in Japan and Germany in the wake of the
Fukushima disaster,
1
and the downgrade of the United States AAA credit rating.
Equa||y re|evant was the crisis of condence that ensued as the Greek debt crisis
intensied, spurred by fears that it wou|d spread to other European Union (EU)
economies and |ead to a doub|e-dip recession.
Carbon markets were not immune to the eco-
nomic volatility. Compounded by increas-
ing signs of long-term oversupply in the EU
Emissions Trading Scheme (EU ETS), the back-
bone of the EUs climate policy and the engine
of the global carbon market, carbon prices plum-
meted toward the end of the year.
2
Yet even as
prices declined, the value of the global carbon
market climbed in 2011, driven predominant-
ly by a robust increase in transaction volumes.
Te total value of the market grew by 11 per-
cent (%) year on year (yoy) to US$176 billion
(126 billion), and transaction volumes reached
a new high of 10.3 billion tons of carbon dioxide
equivalent (CO
2
e) (see Table 1).
3

Central to the rise in global transaction vol-
umes, EU Allowance (EUA) trading volumes
increased, reaching 7.9 billion tons of CO
2
e, val-
ued at US$148 billion (106 billion). Supported
by increased liquidity in the Certied Emission
Reduction (CER) market and in nascent secondary
Emission Reduction Unit (ERU) exchange-based
activity, trading volumes for secondary Kyoto o-
sets also soared in 2011, increasing by 43% yoy
to 1.8 billion tons of CO
2
e, valued at US$23 bil-
lion (17 billion). Largely driven by hedging and
arbitrage, trading volumes for all assets increased
as annual greenhouse gas (GHG) emissions in
Europe declined for the second time in three years
(primarily driven by weak industrial activity in the
EU) and forecasts of compliance demand were
dwarfed by the oversupply of allowances. As com-
pliance demand and prices deteriorated, the issue
of whether current carbon prices can suciently
spur long-term low-carbon investments emerged
in the debate, surfacing a key challenge in this
market: an oversupply created as a consequence
of demand responding to the current macroeco-
nomic scenario versus a pre-established supply de-
termined under very dierent market conditions.
Te value of the pre-2013 primary CER market
declined once again in 2011 as a consequence of
the imminent end of the rst commitment period
of the Kyoto Protocol. Market value fell by 32%
1. The Fukushima disaster was a consequence of the earthquake and tsunami in Japan in March 2011.
2. Prices for December 2012 delivery of EU Allowances (Dec 12 EUA) and December 2012 delivery of Certified Emission Reductions
(December 12 CERs) fell by 50% year on year (yoy) and 62% yoy respectively, from January 3, 2011, to December 30, 2011. Source:
IntercontinentalExchange (ICE) Futures Europe.
3. Differences in 2010 figures reflect changes in the methodology to calculate the value and volume of trades. For detailed information
regarding the methodology used to measure asset volumes and values, see the Methodology section at the end of this Report.
yoy to US$1.0 billion (0.7 billion). Te size of
the ERU and Assigned Amount Unit (AAU) mar-
kets also decreased, by 36% and 49% respectively.
In stark contrast to this, the post-2012 primary
market increased by a robust 63% yoy to US$2
billion (1.4 billion) despite depressed prices.
Although China remained the largest source of
contracted CERs, African countries largely by-
passed in the pre-2013 market emerged stron-
ger in 2011 and accounted for 21% of post-2012
CERs contracted during the year. Despite the in-
crease in post-2012 volumes, purchase agreements
became less binding due to lingering uncertain-
ties regarding residual compliance demand and
the eligibility of international credits in existing
frameworks and schemes under development.
Te year ended with the 17
th
Conference of the
Parties (COP) in Durban, South Africa. While
COP 17 did not adopt the incremental emission
reduction commitments necessary to close the gap
as per the ambitious level set by the UNFCCC
Parties, it signaled a political commitment to re-
solve critical issues that were far from certain prior
to the meeting. In particular, three key results
formed the backbone of the Durban Platform for
Enhanced Action: (i) the formal provision for a sec-
ond commitment period of the Kyoto Protocol;
4
(ii) the launch of the Green Climate Fund to scale
up long-term climate nance to developing coun-
tries; and (iii) the formal provision for a roadmap
toward a global legal agreement on climate change
(the Durban Platform) to be agreed in 2015 and
2010 2011
Volume (MtCO
2
e) Value (US$ million) Volume (MtCO
2
e) Value (US$ million)
Allowances market
EUA 6,789 133,598 7,853 147,848
AAU 62 626 47 318
RMU - - 4 12
NZU 7 101 27 351
RGGI 210 458 120 249
CCA - - 4 63
Others 94 151 26 40
Subtotal 7,162 134,935 8,081 148,881
Spot & Secondary offset market
sCER 1,260 20,453 1,734 22,333
sERU 6 94 76 780
Others 10 90 12 137
Subtotal 1,275 20,637 1,822 23,250
Forward (primary) project-based transactions
pCER pre-2013 124 1,458 91 990
pCER post-2012 100 1,217 173 1,990
pERU 41 530 28 339
Voluntary market 69 414 87 569
Subtotal 334 3,620 378 3,889
TOTAL 8,772 159,191 10,281 176,020
Sources: World Bank, Forest Trends-Ecosystem Marketplace for data on the voluntary market and Thomson Reuters Point Carbon for
data on the California offsets
Subtotals and totals may not add up due to rounding
Table 1:
Carbon market at
a glance, volumes
and values, calendar
2010-2011
4. To become a reality, the necessary decision to that effect will need to be adopted at COP 18.
take eect in 2020. Te decision on a new market
mechanism further strengthens the international
trust in the UNFCCC process. Still, the restricted
geographic scope of the Kyoto Protocols second
commitment period and prospects for a global
deal to take eect in 10 years did not satisfy the
immediate needs of the existing carbon market in-
frastructure, and the Durban Platform could not
reverse the downward spiraling of the carbon price
that produced record lows through early 2012.
At a time when uncertainties surround the exist-
ing carbon markets, it becomes more important
than ever to take stock of the cumulative impact
of carbon market mechanisms. To date, US$28
billion worth of pre-2013 CERs have been con-
tracted forward (US$30 billion, combined with
ERUs); if all underlying projects are imple-
mented, these contracts will have supported ad-
ditional investments of more than US$130 bil-
lion in developing countries
5,6
and conrm that
project-based mechanisms have the capacity to
mobilize capital eciently toward cost-eective
low-carbon investments. More broadly, low-car-
bon initiatives, including market mechanisms,
have broken the inertia and signicantly raised
awareness of the climate challenge.
In this context, several domestic and regional low-
carbon initiatives, including market mechanisms,
gained increasing traction in both developed and
developing economies in 2011 and early 2012.
Te global carbon market welcomed the news
in late 2011 that the Australian Parliament had
passed the ambitious Clean Energy Act, which
will bring a nationwide cap-and-trade scheme to
Australia by 2015. Te scheme is expected to cov-
er roughly 60% of the countrys 600 million tons
of CO
2
e per year. In 2011, Californias cap-and-
trade regulation was adopted by the California Air
Resources Board. Californias plan is set to go into
eect in 2013; with a coverage expansion planned
for 2015, the plan is expected to cover 85% of
Californias annual emissions. Qubec, which
emits 12% of Canadas annual GHG emissions,
adopted its own cap-and-trade plan, and the
province is now working toward linking it with
Californias (within the context of the Western
Climate Initiative) starting in 2013. In addition,
both Mexico and the Republic of Korea got their
comprehensive climate bills passed a few days
apart in April 2012. Tese initiatives combined
mean ve new jurisdictions are adopting econo-
my-wide cap-and-trade schemes. Tese events are
particularly noteworthy in contrast to 2010, when
no such initiatives were launched. Now the world
looks with particular attention to China, which
is also among the frontrunners in the race to be-
come a low-carbon economy. Its advanced plan to
pilot several regional cap-and-trade schemes is ex-
pected to provide the foundation for a nationwide
scheme in the coming years.
Initiatives that attract competitive private sec-
tor participation are essential to identifying and
implementing least-cost solutions for climate
change mitigation and adaptation, and market-
based mechanisms can catalyze such participa-
tion. However, the allocation of private capital
toward the deployment of new low-carbon tech-
nologies at scale has been constrained by the low
price prevailing in the short term and the ab-
sence of a price signal in the long term, and com-
pounded by nervous nancial markets that favor
exposure to less risky assets and markets. More
ambitious targets are needed from a larger num-
ber of countries to foster demand that can set the
groundwork for a truly transformational carbon
market one that can emerge from fragmented
but workable market initiatives. Te challenge
then will be to chart a course to further evolve
these initiatives through linking and potentially
reshaping the global carbon map.
5. World Bank estimates from 2011 and based on CDM projects in its own pipeline led to an average 1:5 ratio between CER purchase
values and the additional investments required for the underlying project to be implemented.
6. This value refers to the cumulative 2.4 billion CERs contracted in the primary market from 2002-2011. The value does not ensure the
actual transfer of funds from the buyer to the seller as payments for emission reductions purchased in the primary market are commonly
made upon delivery.
SECTION
2
Introduction: a changing climate
SINCE 2007, BOTH CLIMATE SCIENCE AND CLIMATE ECONOMICS HAVE
ADVANCED DRAMATICALLY, main|y in response to the Stern Review in 2006 and
the Intergovernmenta| Pane| on C|imate Changes Fourth Assessment Report in 2007.
As c|imate science has matured, its |imitations have a|so been revea|ed, meaning that the
impacts of c|imate change are sti|| dicu|t to predict. Carbon-cyc|e positive feedbacks
may |ead to far-reaching changes that are increasing|y dicu|t to reverse once they have
taken p|ace. In addition, c|imate risks invo|ve tipping points at which abrupt, perhaps
irreversib|e transitions cou|d occur.
7
Climate damages have already begun to occur;
these are disproportionally impacting the poor,
who are the least resilient and most vulnerable.
From 1970-2008, over 95 percent (%) of natu-
ral-disaster-related deaths occurred in developing
countries. Even under rapid mitigation scenarios,
the magnitude and rate of climate change-related
damage is expected to worsen in years to come,
caused by the delayed eects of past emissions
and emissions expected in the near future (i.e.,
the cumulative emissions over time).
As agreed at the 15
th
Conference of the Parties
(COP) under the United Nations Framework
Convention on Climate Change (UNFCCC)
in 2009, the Copenhagen Accord declared that
deep cuts in global emissions are required so as
to hold the increase in global temperature below
two degrees Celsius. It also called for an assess-
ment that would consider strengthening the
long-term goal, including temperature rises of
1.5 degrees. Te Copenhagen Accord also in-
vited parties to submit mitigation plans with the
UNFCCC. To date, 90 countries, including 48
developing nations
8
have registered plans with
the UNFCCC to reduce emissions by 2020.
Despite international eorts, the climate change
challenge remains daunting and the search for
long-term solutions continues. Total anthropo-
genic greenhouse gas (GHG) emissions at the
end of 2009 were estimated at 49.5 gigatons of
carbon dioxide equivalent (GtCO
2
e) and GHG
emission levels of approximately 39-44 GtCO
2
e
in 2020 would be consistent with a likely
chance of limiting global warming to 2 C.
However, under business-as-usual projections,
global emissions could reach 56 GtCO
2
e by
2020; even if the highest ambitions of all coun-
tries associated with the Copenhagen Accord are
implemented, annual (GHG) emissions would
still reach 49 GtCO
2
e by 2020.
9

7. Source: Stockholm Environment Institute. Climate Economics: The State of the Art, November 2011.
8. Source: Mobilizing Climate Finance, a paper prepared at the request of the G20 finance ministries, 2011 (http://climatechange.
worldbank.org/content/mobilizing-climate-finance).
9. Source: UNEP, The Emissions Gap Report, November 2010.
Other scenarios show that the world is on a trajec-
tory that results in a level of emissions consistent
with a long-term average temperature increase of
more than 3.5 C, assuming the implementation
of recent government policy commitments, or 6 C
or more without them.
10
In addition, as the global population heads to-
ward 9 billion by 2050,
11
there is likely to be
increased pressure on the natural resources that
supply energy and food. Global investments of
US$38 trillion in energy-supply infrastructure
are required between 2011 and 2035, two-thirds
of this in non-OECD countries. However, to-
tal new investments in clean energy reached
US$260 billion only in 2011, with less than one-
third of all clean energy nancial investments
being made in non-OECD countries.
12
If strin-
gent new action is not forthcoming by 2017,
the energy-related infrastructure then in place
will generate all the CO
2
emissions allowed up
to 2035, leaving no room for additional power
plants, factories, and other infrastructure unless
they are zero-carbon.
13

At times of macroeconomic uncertainty, climate
change will test the ability of governments to lead,
as never before. Trade-os will be necessary in the
choices policymakers must make between the
urgency of todays problems and the need to pre-
pare for future risks.
14
Furthermore, the interplay
between climate change mitigation, adaptation,
and disaster risk management will have a major
inuence on resilient and sustainable pathways.
10. Source: International Energy Agency (IEA), World Energy Outlook 2011, November 2011.
11. Source: OECD. Environmental Outlook to 2050: The Consequences of Inaction, 2012.
12. In addition, total renewable energy subsidies totaled US$66 billion, compared to US$409 billion in global fossil-fuel subsidies in
2011. Source: Bloomberg New Energy Finance, Finance Summit, March 20, 2012.
13. Four-fifths of the total energy-related CO
2
emissions permissible by 2035 are already locked-in by our existing capital stock (power
plants, buildings, factories, etc.). Source: International Energy Agency (IEA), World Energy Outlook 2011, November 2011.
14. Source: World Resources Institute (WRI) in collaboration with United Nations Development Programme, United Nations
Environment Programme, and World Bank. World Resources 20102011: Decision Making in a Changing Climate Adaptation
Challenges and Choices, 2011.
SECTION
3
European Union Emissions Trading
Scheme (EU ETS)
3.1 AT A GLANCE
In 2011, the tota| transaction va|ue in the European Union Emissions Trading Scheme
(EU ETS) rose 11 percent (%) year on year (yoy) to US$171.0 bi||ion (122.3 bi||ion).
Te primary cata|yst was a steep increase in the trading vo|ume of European Union
A||owances (EUAs), secondary Certied Emission Reductions (sCERs), and Emission
Reduction Units (ERUs), which co||ective|y rose 20% to 9.7 bi||ion tons. EUA vo|umes
15

represented 81% of a|| EU ETS transactions during the year.
Te growth in overall transaction value occurred
despite annual average prices falling substan-
tially for all three asset classes. Te annual aver-
age EUA price declined 4% yoy to US$18.8/ton
(13.5/ton). Similarly, the annual average sec-
ondary CER and ERU combined price declined
21% yoy to US$12.8/ton (9.2/ton).
16

Although average prices ended down, the year
started strongly. EUA prices staged a robust 20%
increase during the rst 5 months of 2011,
17

tracking broad-based gains in other commod-
ity markets. Te rally extended through to May
2011 before peaking, reversing all gains, and
then hitting new lows. Te trend down coin-
cided (see Figure 1) with the worsening of the
Greek debt crisis, which sparked fears of systemic
contagion (particularly to Spain and Italy) and
concern about a second EU recession in recent
years. Fears about weak demand intensied in
June when the European Union (EU) proposed
a new Energy Eciency Directive (EED) that
mandated energy eciency measures.
18
Te new factors for concern were compounded
by: (i) the dramatic reduction in EU emissions
during the 2008-2009 economic downturn,
followed by a weak industrial recovery;
19
(ii)
substantial investment in domestic renewable
energy capacity in recent years;
20
and (iii) the
current supply of international osets largely
stimulated by the EU ETS itself. Together these
factors painted a clear picture that the oversup-
ply of EUAs already seen in Phases I and II of
the EU Scheme would likely remain for several
more years.
15. Including primary EUAs sold by member states, which accounted for approximately 1% of EUA volumes and values.
16. Differences in 2010 figures reflect changes in the methodology to calculate the value and volume of trades. For detailed information
regarding the methodology used to measure asset volumes and values, see Methodology.
17. A 20% increase versus the closing price on January 3, 2011.
18. Prices fell by almost 20% over the three days following the publication of the draft EED on June 22, 2011.
19. The GHG emissions declined 11% between 2008 and 2009, following a 15% reduction in the EU industrial activity in the same
period. Source: Communication from Sikorski, Trevor, Barclays Capital, March 2012.
20. Investments in wind and solar capacity in 2010 and 2011 amounted to 50 gigawatts in Europe.
Trading volumes soared in 2011, coinciding
with the second decline in veried emissions in
three years.
22,23
Tis was mainly driven by weak
industrial activity in the EU ETS perimeter and
oversupply dwarng compliance demand. A
milder winter in Europe also contributed to the
decline in emissions, as less fuels were burned
for heating. Tese are strong indications that the
collective demand for carbon permits and osets
has a limited impact in market players trading.
A considerable portion of the trades is primar-
ily motivated by hedging, portfolio adjustments,
prot taking, and arbitrage.
3.2 AN EXPANDED SCOPE FOR
THE EMISSIONS CAP IN THE EU
STARTING IN 2012
3.2.1 New gases and assets are integrated
into the Scheme
Substantive changes in the operation and emis-
sions coverage of the EU ETS are set to start in
2013, as part of its Phase III. Te process actually
started in 2012 with preparatory measures and
the inclusion of the aviation sector. Tat sector
will represent the second-largest emitting sector
covered by the scheme.
10
20
30
40
50
0
100
200
300
400
500
600
700
800
900
1,000
12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1 12 11 10 9 8 7 6 5 4 3 2 1
0
2008
EUA volumes
CER volumes
ERU volumes
Average Price of EUA front Dec
Average Price of CER front Dec
Average Price of ERU front Dec
2009 2010 2011
M
o
n
t
h
l
y

v
o
l
u
m
e
s

(
m
i
l
l
i
o
n

t
o
n
s
)
M
o
n
t
h
l
y

a
v
e
r
a
g
e

p
r
i
c
e
s

(
U
S
$
)
Figure 1:
Prices and volumes
for EUAs, CERs
and ERUs in the
secondary market,
2008-2011
21
Source: World Bank
21. Prices are based on the front-December contracts for each respective year (Source: ICE). Volumes exclude primary EUAs sold by
EU governments.
22. On April 2, 2012, the European Commission released verified emissions data for the EU ETS (89% of installations have reported
until that date). Emissions declined by 2.4%, from 1.75 billion tons in 2010 to 1.7 billion tons in 2011.
23. In April 2012, the EC published additional 2011 EU ETS verified emissions data. With around 97% of installations reporting their
emissions, final estimates for 2011 reached 1,896 Mt, or a 2.2% fall in emissions from 1,938mt in 2010. The figure includes new
entrants and excludes installations that failed to comply. By including them, the decline would be 2.5%. Source: Jefferies Bache, Global
Commodities, April 12, 2012.
Trading volumes soared in 2011, coinciding

with the second decline in verified emissions
in three years. A considerable portion of the
trades is primarily motivated by hedging,
portfolio adjustments, profit taking, and
arbitrage.

Te power sector remains the largest sector cov-
ered by the EU ETS. Since its early days, the
EU ETS has covered emissions in power stations
and other combustion plants, oil reneries, coke
ovens, iron and steel plants, cement, glass, lime,
bricks, ceramics, pulp, paper, and board sectors.
Trough 2012, the only greenhouse gas (GHGs)
covered by the scheme is carbon dioxide (CO
2
).
24

As of 2013, the scope of the ETS will be extended
to include other sectors and GHGs. CO
2
emissions
from petrochemicals, ammonia, and aluminium will
be included, as will N
2
O emissions from the nitric,
adipic and glyocalic acid production, and peruoro-
carbons from the aluminium sector. Te capture,
transport, and geological storage of CO
2
emissions
will also be covered. Tese sectors will receive free
allowances, based on industry-specic benchmarks.
Te total number of allowances in the EU-wide
cap in 2013 will be equivalent to the average to-
tal number of allowances issued by member states
during Phase II. Te cap has been established to
deliver an overall reduction of 21% in the veried
emissions by 2020 against 2005 levels. In contrast
to previous phases, the number of allowances will
decrease 1.74% annually until 2020. Te linear
annual decrease will better represent the expected
decline in emissions over that period.
Te preliminary cap for the year 2013 has been
set at 2,039 million tons of CO
2
equivalent
(MtCO
2
e). Te nal number will be adjusted,
however, to reect the broadened scope of the
scheme starting in 2013, any small operators
that member states have chosen to exclude, the
inclusion of the aviation sector, and the inclu-
sion of emissions from Norway, Iceland, and
Liechtenstein. Accounting for the changes in
scope, these numbers may start at 2,291 MtCO
2
e
in 2013 and decline to 2,024 MtCO
2
e in 2020.
25
Te Phase III of the EU ETS is expected to pro-
vide stronger price signals due to a longer trad-
ing period (eight years versus ve years in Phase
II), the annually declining emissions cap, and
a substantial increase in the level of auction-
ing (from less than 4% in Phase II to over 50%
in Phase III).
26
Over 1,200 million EUAs are
expected to be auctioned every year starting in
2013, compared to less than 100 million EUAs
sold in 2011.
27
3.2.2 Many fewer a||owances wi|| be
a||ocated for free
Full auctioning becomes the rule from 2013
onward for electricity generators, who emit the
majority of GHG emissions in the EU ETS.
Few member states will be given the option to
postpone the full auctioning process temporar-
ily; most will start with 30% auctioning in 2013
and progressively get to 100% by 2020. For oth-
er sectors, free allocations will be progressively
phased out starting at 80% in 2013, decreas-
ing to 30% in 2020, and reaching 0% in 2027.
Exceptions will apply for installations in sectors
that are found to be exposed to a signicant risk
of carbon leakage.
28
Harmonization has also been an objective in ar-
eas resulting in an EU-wide emissions cap (re-
placing the national caps for member states in
Phases I and II) and rules for transitional free
allocations (EU-wide rules will apply equally to
all installations across the EU with the same or
similar activities).
As of January 2013, auctioning will take place on
a common EU-wide platform for most European
member states. However, in February 2011,
24. Netherlands has opted to also cover emissions from nitrous oxide (N
2
O).
25. Source: Deutsche Bank, EU Emissions: Scoping the Cap over Phase 3, February 13, 2012.
26. In the interest of solidarity, 12% of the total allowances auctioned will be redistributed to member states with lower GDP.
27. Directive 2003/87/EC allows Member States to auction and/or sell up to 5% of their EUAs in Phase I and 10% in Phase II. These
may include EUAs from closure and surplus of the New Entrant Reserve.
28. Two thirds of the emissions in these sectors come from industry exposed to significant risks of carbon leakage and will benefit from
full free allocation up to their industry specific benchmarks until 2020. Benchmarks reflect the 10% most efficient installations, with the
90% less efficient installations being required to either reach the benchmark or purchase additional allowances.
Germany, Poland, and the United Kingdom
informed the European Commission (EC) of
their decision to opt out of the common auction
platform and instead appoint their own auction
platforms. Tese platforms still need to satisfy
the rules of the Auctioning Regulation and will
require approval from the EC, the Council and
the European Parliament.
A decision was taken to establish a transitional
common auction platform in 2012 to conduct
auctions on a provisional basis. A subsequent
common auction platform, to which the provi-
sions of the Auctioning Regulation will apply
in full, is to be appointed soon thereafter. On a
competitive procurement basis, common auction
platforms will be appointed for a period of maxi-
mum 5 years. Te amendment to the Auctioning
Regulation agreed to by member states in July
2011 provides for the auctioning of 120 mil-
lion Phase III EU allowances (EUAs) in 2012.
Te rst auctions of EU Aviation Allowances
(aEUAs) will also take place in 2012, which is
the year in which aircraft operators come under
the EU ETS.
Te estimated timetable of the early auctions is
as follows:
29
In December 2011, Germany closed the pro-
curement for its transitional platform.
In February 2012, the UK closed the pro-
curement for its platform.
30
On March 9, Germany notied the
Commission that it intends to appoint the
European Energy Exchange AG (EEX) in
Leipzig as its transitional opt-out auction
platform.
On March 24, the call for tender for
the transitional common auction plat-
form under the EU ETS was pub-
lished (with a closing date of May 3).
On April 25, an amendment to Annex 3 of
the Auction Regulation, to list the German
transitional platform, was endorsed by the
EUs Climate Change Committee. Tis
amendment has been submitted to the
Council and the European Parliament for a
three-month scrutiny period. Provided no
objections are raised, the Commission can
adopt the amendment. Tis platform would
become operational and could start early auc-
tions in September 2012 the earliest.
In the end of April, the UK notied the
Commission that it intends to appoint
IntercontinentalExchange (ICE) as its opt-
out auction platform.
In the summer of 2012, the selection of the
common transitional platform is expected to
be announced.
As the auction platform proposed by
Germany, also the auction platform pro-
posed by the UK is to be listed in Annex 3
to the Auctioning Regulation, following the
same procedures. At the earliest in November
of 2012, the UK platform could start early
auctions.
Auctions on the transitional common auc-
tion platform are to start after summer 2012.
Te Commission has refrained from provid-
ing precise estimates for a starting date.
Poland has not yet launched a tender pro-
cedure for its opt-out auction platform.
Tough no formal decisions are known as of
the writing of this report, Poland indicated
it would turn to the transitional common
auction platform for auctioning its share of
allowances until its opt-out auction platform
is appointed and approved, as foreseen in the
Auctioning Regulation.

Te rst stage of the procurement procedure to
appoint an auction monitor that will monitor
the auctions on all auction platforms is to be
published soon.
29. Some data were sourced from Dufour, Claire. Auctions in 2012 & 2013 Expected volumes and calendar, February 2012.
30. The maximum appointment duration for any auction platform is five years.
In December 2011, the European Investment
Bank started the monetization of Phase-3 EUAs
under the NER 300, a program focused on
supporting the deployment of commercial low-
carbon demonstration projects (primarily car-
bon capture and storage (CCS) and innovative
renewable technologies). Te program will be
funded from the sale of 300 million EUAs from
the Phase III New Entrants Reserve (NER) of
the EU ETS. Te European Investment Bank
(EIB) was chosen by the European Commission
and member states as the agent to conduct the
sale, with the responsibility for monetizing the
rst tranche of 200 million allowances within 10
months of delivery (an indicative volume of sales
of 20 million allowances per month).
31

3.3 A QUICK REVIEW OF THE
SUPPLEMENTARITY LIMIT FOR
OFFSETS IN THE EUROPEAN SCHEME
Phase III of the EU ETS also marks a substan-
tial reduction in the relative volume of inter-
national credits that are eligible for compli-
ance purposes. A total of 1,400 million tons
of CERs and ERUs are eligible for compliance
by installations during Phase II of the scheme,
representing approximately 13% of the aver-
age allocation in the period 2008-2012 (about
280 MtCO
2
e per year). In contrast, the import
cap for international credits in Phases II and
III combined (2008-2020), dened under the
revised EU ETS Directive, is approximately
1,700 MtCO
2
e, corresponding to an average
supplementarity limit of 6%, or less than half of
the average supplementarity limit in Phase II.
As broadly known since 2009, during Phase III
Kyoto credits will no longer be de facto compli-
ance units and their fungibility into EUAs will
be conditional. In addition, CERs and ERUs is-
sued against emissions reductions taking place
before 1 January 2013 (CP-1), will have to be
swapped into EUAs by March 31, 2015. Credits
issued against emission reductions occurred after
2012 (CP-2), but generated from projects reg-
istered before December 31, 2012, will be fully
fungible throughout Phase III. Finally, CP-2
credits from projects registered after December
31, 2012, will only be eligible (and swapped into
EUAs) if they come from a project in a Least
Developed Country (LDC) or a country with
whom the EU has signed a bilateral agreement.
32

Tese restrictions might have been avoided if an
international agreement had been reached at the
COP 15 in Copenhagen.
Te ban of credits from hydrouorocarbons
(HFCs) and from adipic acid N
2
O projects com-
pletes the known list of qualitative restrictions.
CP-2 credits generated from these projects will
not be eligible for compliance, while the surren-
der of CP-1 HFC and adipic acid N
2
O credits
will only be eligible for Phase II compliance until
April 30, 2013.
For further details regarding Phase III of the EU
ETS, including import volumes and rules gov-
erning the import of osets into the EU ETS,
please refer to State and Trends of the Carbon
Market 2010.
33
3.4 DID THE DURBAN OUTCOMES
CHANGE ANYTHING FOR THE
KYOTO OFFSETS IN THE EU ETS?
Te COP-17 in Durban in December 2011
concluded with the adoption of the Durban
Platform for Enhanced Action. Te associated
Ad Hoc Working Group on a Durban Platform
for Enhanced Action (AWG-DP) was mandated
to develop a protocol, legal instrument, or an
agreed outcome with legal force to be adopted by
2015 and to come into eect and be implemented
31. Until March 31, 2012, the EIB reported having sold 78.6M EUAs, for a total value of 670.6 million.
32. For the list of LDCs, see http://ec.europa.eu/clima/policies/ets/linking/docs/def_ldc_en.pdf.
33. Source: Kossoy, A. and Ambrosi, P., State and Trends of the Carbon Market 2010 What lies ahead for the EU ETS and Annex I:
Supplementarity under the EU Climate and Energy Package pages 17 and 63, respectively, June 2010.
starting in 2020. Tis outcome raised questions
in the market as to whether the Durban Platform
met the requirements of an eective international
agreement on climate change per Article 11a(7)
of the EU ETS Directive and Article 5(3) of the
Eort Sharing Decision. Some players initially
argued that the Durban outcomes were sucient
to remove the proposed qualitative restrictions on
the eligibility of some Kyoto osets, including
CP-2 credits from projects registered after 2012
in countries other than LDCs.
In response to the debate, the EC in January
2012 claried that Articles 11a(7) of the EU ETS
Directive and Article 5(3) referred to the adoption
of a future international agreement at the COP-
15 in Copenhagen in 2009 (which did not hap-
pen), and that they limit, rather than broaden
the acceptance of CDM credits. Te EC added
that the adoption of a second commitment pe-
riod of the Kyoto Protocol without a legally bind-
ing agreement for the period beyond 2012 under
which other developed countries commit them-
selves to comparable emission reductions and eco-
nomically more advanced developing countries
commit themselves to contributing adequately
according to their responsibilities and capabilities
is therefore not an international agreement as re-
ferred to in Article 11a(7) of the EU ETS Directive
and Article 5(3) of the Eort Sharing Decision.
Tey also said, Once an international agreement
is reached, the limitation to CDM credits from
new projects from the LDCs for the period start-
ing in 2013 continues to apply Credits from
projects in LDCs and other countries started be-
fore 2013 will only be accepted if they originate
from countries that have ratied the agreement.
If an international agreement is adopted in 2015,
even a currently eligible CP-2 credit from a proj-
ect registered by the CDM Executive Board prior
to December 31, 2012, could become ineligible
for surrender if deriving from a host country that
does not ratify the agreement. In practice, this
means that a CER holder will not know whether
assets are eligible until their delivery.
Te EC has made clear that the current restric-
tions could be expanded if deemed appropriate,
heightening even more the uncertainties faced
by project developers and market players hold-
ing Kyoto osets.
3.5 ENSURING THE RELEVANCE
OF THE EU ETS IN THE EUS
OBJECTIVES TO CURB EMISSIONS
3.5.1 Many |ow-carbon initiatives; too many?
Te EU has historically taken international lead-
ership in initiatives toward reaching a low-carbon
economy. Maybe as a consequence of that impe-
tus, however, the parallel establishment of several
policies and initiatives has raised concern as to
whether these mechanisms can co-exist without
undermining one another given the overlaps and
competing outcomes.
One example is the UK carbon oor price intro-
duced in March 2011 and set to be implemented
as of April 2013. Te oor price is targeted at fos-
sil fuel power generators and aims to tax the dif-
ference between the price of EUAs and the UKs
notional carbon oor price. Te purpose of the
tax is to encourage investment in new low carbon
generation.
34
Although it is acknowledged that
complementary measures to the EU ETS will be
needed for the UK to meet its ambitious 80%
emission reduction target by 2050 (relative to
1990 levels), some market participants have ex-
pressed concern that the unilateral UK measure
could potentially result in carbon leakage.
35

In addition, if successfully implemented, the
measure could put downward pressure on EUA
34. The floor will start at around 16/tCO
2
e in 2013 and follow a linear path, increasing at around 2/tCO
2
e per year to target 30/
tCO
2
e in 2020, rising to 70/tCO
2
e in 2030 (in 2009 prices). The carbon price support rates (the levy on fossil fuels) will be
equivalent to 4.94/tCO
2
in 2013-2014. Source: HM Treasury. Carbon Price Floor Consultation: The Government Response, March
2011. In March 2012, the UK administration set the rate for 2014-2015 at 9.55/tCO
2
e (i.e., about 30% higher than the 7.28/tCO
2
e
previously indicated for the same period).
35. Investment may eventually be relocated to other countries with lower carbon taxes.
prices due to lower demand from cleaner British
utilities, and eventually provide a disincentive for
further EU abatement in the short run.
An Energy Eciency Directive (EED),
36
pro-
posed by the EC on June 22, 2011, might also
end up putting downward pressure on EUA
prices. Te aim of the EED is to save energy and
to reach the ECs self-imposed target of a 20%
cut in primary energy consumption by 2020
(relative to 1990 levels).
37
Expected to be imple-
mented by January 1, 2014, the EED is designed
to incentivize energy eciency at several stages
of each member states energy chain from the
transformation of energy and its distribution to
its nal consumption. Te EED denes several
proposed measures, including:
Energy distributors or retail energy sale com-
panies across all member states will have the
legal obligation to save 1.5% of their energy
sale volumes every year.
Public sector entities will have to purchase
energy ecient buildings, products, and
services. In addition, they will also have to
progressively reduce the energy consumed
on their own premises by carrying out an-
nual renovation works covering at least 3% of
their total oor area.
Member states will have to ensure that all
new thermal electricity generation with total
thermal input exceeding 20 MW are provid-
ed with equipment allowing for heat recovery
by high-eciency cogeneration.
Te new EED is designed to lower energy
consumption and GHG emissions in the EU.
Similar to the UK oor price proposal, however,
the measure does not tighten the cap. As a result,
it will create a surplus of allowances that may po-
tentially push EUA prices down.
3.5.2 And then comes a set-aside and its
arduous decision process
Recognizing its possible impact on carbon prices
and the importance of providing a long-term
price signal, the EED includes a proposal to set
aside a number of EUAs from the Phase III auc-
tions as an option to spur low-carbon investment
and to support carbon prices in the EU ETS.
38

A proposal to set aside EUAs is not new. It was
rst mentioned by the EC in mid-2010,
39
and the
same language used in the EED was inserted in the
Roadmap for moving to a competitive low-carbon
economy in 2050
40
in March 2011. While the set-
aside has been brought on the table by the EC at
several occasions, the key motivation has evolved
over time. In 2010 the set-aside was mentioned as
a way to smooth the transition to a more ambitious
30% reduction target. In the low-carbon roadmap
it was mentioned as a tool to neutralize the price de-
pressing eect arising from more aggressive energy
eciency measures. In June 2011, and just days be-
fore ascending to a six-month presidency of the EU,
Poland a country with high coal-based electricity
generation vetoed the Councils conclusions on
the EUs Climate Roadmap for the rst time.
36. Source: Proposal for a Directive of the European Parliament and of the Council on Energy Efficiency and Repealing Directives
2004/8/EC and 2006/32/EC, June 22, 2011 (http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0370:FIN:EN:HTML).
37. Equivalent to 368 million tons of oil equivalent (Mtoe) reduction compared to the projected consumption of 1,842 Mtoe in 2020.
38. In the implementation of the 20% energy efficiency target, the Commission will have to monitor the impact of new measures on
Directive 2003/87/EC establishing the EUs Directive on emissions trading in order to maintain the incentives in the emissions trading
system rewarding low carbon investments and preparing the ETS sectors for the innovations needed in the future. In this respect,
appropriate measures need to be considered, including recalibrating the emissions trading system by setting aside a corresponding
number of allowances from the part to be auctioned during the period 2013 to 2020, should a corresponding political decision be
taken. Source: Proposal for a Directive of the European Parliament and of the Council on Energy Efficiency and Repealing Directives
2004/8/EC and 2006/32/EC, June 22, 2011.
39. The EU Emissions Trading Scheme could reach a 30% emission reductions target by setting aside 1.4 billion allowances in Phase
III, corresponding to an average reduction of 15% in auctioning rights per member state. Source: Carbon Finance Online, referring to a
EC communication, May 2010.
40. In order to keep climate change below 2C, the European Council reconfirmed in February 2011 the EU objective of reducing
greenhouse gas emissions by 80-95% by 2050 compared to 1990. The Roadmap for moving to a competitive low-carbon economy
in 2050, published by the European Commission on March 8, 2011, laid out a plan for the EU to meet that target. It indicates that a
cost effective and gradual transition toward a competitive low carbon economy would require a 40% domestic reduction of greenhouse
gas emissions compared to 1990 as a milestone for 2030, and 80% for 2050 compared to 1990. http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=COM:2011:0112:FIN:EN:HTML.
Te set-aside discussion could not be more perti-
nent. On April 2, 2012, based on data reported
by almost 10,000 installations representing 89%
of EU ETS emissions, veried emissions cov-
ered by the scheme declined 2.4% yoy in 2011.
Although 19 out of the 26 countries that report-
ed data had reduced their emissions, the larg-
est drops were observed in Finland, Denmark,
Lithuania, and Sweden. In contrast, the biggest
increases came from Spain and Romania. Te
fall in emissions was mainly driven by a 3.1%
decline in emissions from the power sector.
41
Te decline translates into an additional surplus
of about 380 million EUAs in the scheme, now
expected to be oversupplied by about one billion
tons until 2020.
42
For a draft Directive to become law in the EU,
it must pass through a tripartite co-decision pro-
cess, involving the initial proposal by the EC,
followed by negotiation and approvals by the EU
Parliament and the Council of Ministers.
43
What
follows is a summary of the relevant steps in the
EED process those taken and those remaining:
On December 20, 2011, the Environment,
Public Health and Food Safety Committee
(ENVI) of the EU Parliament voted favor-
ably to amend the EED in order to withhold
an amount of EUAs from the EU ETS. Te
amendments included (i) allowing for a set-
aside of 1.4 billion allowances, and (i) a tight-
ening of the annual linear-reduction factor to
be used to calculate the ETS cap from 2014
(to 2.25% from the existing 1.74%).
44

Still as part of the parliamentary approval
process, on February 28 the Industry and
Trade Committee (ITRE) of the European
Parliament which is the lead Parliamentary
Committee on this Directive voted on a
compromise amendment. Te ITRE vote
diluted the amendments previously voted on
by the ENVI. It left open the possibility of
a set-aside at some point, but only subject
to a Commission assessment and no longer
specifying the number of EUAs that should
be withheld (Te Commission shall, if ap-
propriate, amend the regulation referred to
in article 10 (4) of Directive 2003/87/EC
in order to implement appropriate measures
which may include to withhold the neces-
sary amount of allowances.). Moreover, the
ITRE also left open whether or not any fu-
ture set-aside would constitute a permanent
or provisional withdrawal of allowances.
45

Some analysts believe the decision on perma-
nence might take a couple of years.
So-called informal trilogues between the Council
of Ministers, the European Parliament, and the
European Commission are expected to be held
between mid-April and mid-May, 2012.
Te next steps in the process are votes in the
Parliament (June 11) and the Council (June
15). If both the Parliament and the Council
agree to leaving open the option of a set-aside
within the Energy Eciency Directive, this
would invite the Commission to propose
withholding a certain number of EUAs from
the market for the period 2013-20.
46
Although several stakeholders have also voiced
support for a set-aside as a tool to neutralize the ef-
fect of the severe economic recession, which led to
the oversupply of allowances, this process has also
raised questions as to whether a regulatory change
to reduce the oversupply temporarily and support
carbon prices is worth the risks it creates. Unless
a permanent cancellation of allowances is agreed
41. Still, emissions by the largest emitters in the EU ETS (all power plants) increased. Emissions in the Polish state-owned power plant
Belchatow, the top emitter for the fourth year in a row, increased by 11%. Source: Thomson Reuters Point Carbon. Carbon Market
Daily, April 2, 2012.
42. Source: Deutsche Bank. EU Emissions: 2011 VED Raises the Pressure, April 4, 2012.
43. European Commission, Co-decision Step by Step (http://ec.europa.eu/codecision/stepbystep/diagram_en.htm).
44. Source: Deutsche Bank. ENVI Vote Underpins Option Value, Global Markets Research, December 20, 2011.
45. The ITRE did not vote to raise the linear-reduction factor used to set the cap. Source: Deutsche Bank. ITRE Vote Underpins Option
Value, Global Markets Research, February 28, 2012.
46. Source: Deutsche Bank. EU Carbon Markets: Q2: Moment of Truth for a Set-Aside, March 27, 2012.
upon,
47
withholding volumes at the beginning of
Phase III just to return them later will not change
the overall supply for Phase III. In addition, some
market analysts believe that the downside inter-
vention may set a precedent for a similar interven-
tion on the other side when/if prices rise.
Despite a general consensus against direct price
intervention in the market and the adoption of
extraordinary measures introduced on an ad hoc
basis as short-term xes,
48
market players and
regulators still agree that a long-term price signal
is required for the scheme to continue to drive
low-carbon investment. Te deep wounds of the
economic downturn in EU industrial activity are
unlikely to heal soon and should lead to a pro-
longed oversupply of allowances in the market.
Te EU would need an average annual 4.3%
growth in its Gross Domestic Product (GDP)
from 2013 onward to cancel out the oversupply.
49

In this context, the adoption of specic targets
for 2030 and beyond (i.e., the 2050 Roadmap)
would provide the long-term trajectory required
to sustain condence in the market mechanism
and promote low-carbon investment.
Finally, subject to the same concerns regarding
the credibility risk resulting from short-term
market interventions, other alternatives that
have been suggested by market participants in-
clude restoring the scarcity initially conceived
for the EU ETS through the adoption of tighter
caps beyond 2020 and mandating an EUA price
oor. While the former is extremely unlikely
to gain political traction, the latter could be
achieved through the adoption of a reserve price
in the Phase III auctions.
50
It would remove the
downside risk and provide a transparent signal
to the market of the EUs long-term low-carbon
trajectory. It is expected that the collapse in car-
bon prices has reduced revenues from EU ETS
auctions by the order of 100bn to 2020.
51

However, in light of the current oversupply in
the market, a reserve price for auctions could
only be implemented if accompanied by the set-
aside or it could freeze investors purchases of al-
lowances at the auctions. In the absence of a con-
sensus for a set-aside, a reserve price could still be
evaluated in the context of wider carbon market
reforms. Other possibilities discussed include the
establishment of a carbon central bank.
52
During the Informal Environment Council meet-
ing on April 19, 2012, the European Climate
Action Commissioner announced that aiming to
achieve a smooth transition to the third phase of
the EU ETS starting next year the Commission
the EC would produce a rst annual report on
the functioning of the European carbon market
and conduct a review of the auction time prole
for Phase III. Tis review could lead to a propos-
al to amend the EU ETS Auctioning Regulation
before the end of the year with the aim to auc-
tion fewer allowances in the early years of phase
III.
53
Tis provisional withdrawal of allowances
in the beginning of Phase III could represent an
easier way compared to a change in the EED, to
restore longer-term scarcity in the EU ETS, as
its approval would only require qualied major-
ity in Climate Change Committee (Comitology
Procedure).
During the discussions on supply-side manage-
ment, prices have remained volatile as market par-
ticipants nervously reacted to each new announce-
ment or rumor. A market analyst summarized this
by saying that this perhaps reects how desperate
EU ETS participants have become when they are
47. A permanent cancellation or removal of allowances would require a change to the EU ETS Directive, to reduce the emissions cap to
2020 and then cancel a volume of EUAs in the set-aside consistent with the new cap, while a set-aside to be reintroduced should only
require a change of the Auction Regulation, i.e., a lighter regulatory process.
48. These could reduce the predictability of the scheme, and undermine support for and trust in it. Source: Centre for European Policy
Studies, The EU Emissions Trading Scheme as a Driver for Future Carbon Markets, 2012.
49. Panel discussion hosted by the European Energy Exchange (EEX) on The European Carbon Market in 2012, March 2012.
50. Although the reserve price is foreseen in the existing ETS Auctioning Regulation, it can only be used to align auction clearing price
with the going secondary market price and not to impose a price higher than the secondary market price.
51. Source: Climate Strategies, Strengthening the EU ETS - Creating a stable platform for EU energy sector investment, March 2012.
52 Sources: Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012.
53 http://ec.europa.eu/commission_2010-2014/hedegaard/headlines/news/2012-04-19_01_en.htm
reduced to reacting to the possibility of a decision
to recommend a study into potentially making a
proposal at some point in the future.
54

3.6 INFRASTRUCTURE AND MARKET
INTEGRITY: THE IMPORTANCE OF
BEING SECURE
After VAT fraud and CER recycling, in 2009 and
2010 respectively, the EU ETS in early 2011 saw
a wave of cyber-attacks targeting its registry infra-
structure. At least three million units were stolen
from national registries,
55
accounting for roughly
0.15% of overall emissions allowances (50 mil-
lion).
56
Fraudsters used classic cyber-criminality
techniques
57
to access accounts in several national
registries and to transfer allowances, perhaps ben-
eting from weak security safeguards and the speed
of transaction execution. To prevent further attacks,
the European Commission suspended all registries
on January 19, 2011. Tey were reopened gradu-
ally, after each country provided sucient evidence
its registry met minimum security criteria. Te nal
registry (Lithuania) reopened a full three months
after the rst suspension.
3.6.1 Market response: a spot market in
dormancy
Although the national registries subjected to
cyber-attacks quickly published lists of serial
numbers
58
of allegedly stolen carbon units, these
were only based on the incidents actually pub-
licized by account holders and thus brought no
guarantee of being exhaustive or up to date. Te
risks perceived by market participants were two-
fold. First, a criminal liability risk for possession
of the stolen carbon units was exposed. Second,
an economic risk, because it was unclear whether
the current holder would have to return them
to the initial holder. Te confusion amongst
market participants was worsened by the lack of
harmonization across the EU over the legal clas-
sication of carbon units as a type of property
and the absence of a mandate for the European
Commission to centralize information and pub-
lish the list of allegedly stolen allowances.
59
Spot trading was suspended on most exchanges,
ahead of or right after the European Commission
closed the national registries. ICE delisted dai-
ly EUA and CER contracts, which are yet to
be reintroduced as of April 2012.
60
Te Green
Exchange also suspended its Daily EUA con-
tract. It re-listed it in April 2011
61
forbidding
delivery of those allegedly stolen carbon units
reported by national registries but saw only
1,000 EUAs traded throughout the rest of the
year.
62
BlueNext resumed spot trading in May
2011, after strong market model revamping. Te
applied security measures consisted of limiting
trading to carbon units, the origin of which had
been veried and legitimated prior to joining the
platform.
63
Although this initiative allowed ex-
change-based spot transactions to resume in the
EU ETS, the restrictions kept liquidity and vol-
umes at lower levels than they were before the cy-
ber attacks. To handle spot trading, some market
participants turned to over-the-counter bilateral
54. Source: JEFCO2 Flash Note, January 24, 2012.
55. Thefts were reported in Austria, Czech Republic, Germany, Greece, Italy, and Romania.
56. Source: De Perthuis, Christian. Carbon markets regulation: The case for a CO
2
Central Bank, Climate Economics Chair, 2011.
57. Two types of cyber-attacks were used: Phishing, which consists of duping an account holder to obtain confidential access
information (e.g., a fake official e-mail or Web site), and hacking, which are direct attacks on registries using Trojan horse-type viruses to
break into the account structure.
58. And, subsequently, a number of carbon exchanges.
59. Source: Sartor, O. Closing the door to fraud in the EU ETS. CDC Climat Research, 2011.
60. Source: ICE Clear Europe. Circular 11/007-Suspension of trading in EUA and CER Daily Futures Contracts. January 19, 2011.
61. Green Exchange also suspended futures contracts for March 2011 delivery. Source: Green Exchange, Delisting of In Delivery
Month European Union Allowance (EUA) Futures Contract (codes EAF and 6T) for delivery in March 2011. CME Group, Advisory
notice, March 10, 2011.
62. Source: Green Exchange, Suspension of Trading and Force Majeure Declaration with Respect to Daily European Union Allowance
(EUA) Futures (code EUL) Contract. CME Group, advisory notice, January 19, 2011.
63. Under a so-called Safe Harbor Initiative, the carbon units which are candidates to join BlueNexts trading platform must enroll in a
two-step verification process. First, the exchange identifies each transfer that the unit has been subject to up to the account it originates
(i.e., states account (EUA, ERU) or CDM Registry (CER)). Second, each transfer identified must be declared legitimate by an authorized
representative of the account that the transfer was initiated from.
transactions with well-known counterparties (see
Section 3.7.3), deploying purchase agreements
with new liability clauses for the seller to com-
pensate the buyer should the transacted units be
subject to claims in the future. Interestingly, no
such disruption was observed on the exchange-
based Futures and Options market, with vol-
umes growing during 2011 (see Section 3.7.2).
Te security measures set up by the exchanges
consisted of a consolidated list of allegedly stolen
carbon units prohibited for delivery at settlement
of the relevant exchange contracts. Although this
brings no guarantee that the units delivered will
not be subject to claims in the future, market
participants appear to have deemed the risk as
marginal.
64

64. We estimate that roughly 215 million EUAs and 63 million CERs were delivered at expiration of the December 2011 contracts across
the different exchanges. This accounts for 5% and 7% respectively of the total volumes exchanged for those contracts since inception,
which is comparable to previous years figures (e.g., 5% EUA and 4% CER in 2010). If market participants had perceived any risk over the
units to be delivered, we believe they would have closed long open positions, or rolled them over to the December 2012 expiry.
Box 1: Trading around the risk of receiving stolen allowances
By Peter Zaman, Partner, Reed Smith.
Any market will face the risk of attracting criminal elements if the market is poorly regulated and
provides the opportunity for criminal elements to act with ease. For reasons well known to all, the
EU ETS market faced such challenges between 2010 and 2011, the impact of which is still felt
today with the continued suspension of exchange-based spot trading.
To their credit, market regulators woke up to the weaknesses that the criminal elements were ex-
ploiting and took rapid steps to try to eradicate them. Most of these steps are incorporated into the
technical changes introduced via the Registries Regulations; others, in particular those relating to
the future regulatory treatment of carbon units, are still being finalized. In a very short period of time,
the EU ETS market will notice a sea change in both the way it operates its trading activities as well
as the way such activities are regulated. While it remains to be seen just how effective these new
rules will be in securing the market, the overall position is likely to be much improved especially
once trading transitions to the new Union Registry in the middle of 2012. That said, one must
assume that the determined efforts of cyber attackers cannot be prevented indefinitely. A risk of
receipt of stolen allowances will continue to exist, even when trading transfers to the Union Registry.
The biggest issue faced by market participants following their receipt of stolen carbon units in 2010 and
2011 arose from the legal uncertainty as to what type of legal property right they should be classified
under. For example, where a person receives stolen goods, the laws of a member state will know under
what circumstances the receiver of the goods will or will not acquire good title to those goods. This is
because in most jurisdictions there is a specific or established legal framework dealing with goods and
it is generally known whether a particular type of property is or is not a good. If the property in question
is not a good (e.g., if it is a dematerialized instrument), there is likely to be a different legal framework that
would be applicable to determining the question of whether good title may be received by the receiver.
The issue facing the market was the lack of certainty as to which of these various legal frameworks a car-
bon unit fell within. This is because there was almost no national level determination and no EU-wide de-
termination of what type of property right a carbon unit is. Even if the legal classification was established
in one member state, once the carbon unit moved across the border to another registry it became subject
to the laws of that member state and the issue would need to be settled in accordance with the conflicts
of law rules between those two member states. In short, no certainty could be gained as to determining
the legitimacy of a claim for the return of the stolen carbon units by the victim of the cyber theft. This led to
inertia in the market, most immediately reflected in the unwillingness of market participants to trade spot
carbon credits. Rather curiously, the volume of futures contracts was less impacted.
Box 1: Trading around the risk of receiving stolen allowances (continued)
Rightly or wrongly, a perception exists that spot trading is riskier than futures trading in carbon units.
The accuracy of this perception can be argued both ways. On the one hand, exchange-based spot
trading was unregulated; as a result, participation in exchange-based spot trading did not invite
the same degree of regulatory supervision as the futures markets. Given that many exchanges that
offered futures products also offered spot products, and the requirements for participation in the
exchange did not wildly differ between the two products, it is not clear that the lack of regulation
of exchange-based spot trading was any more dangerous that futures trading. Similarly, the shorter
settlement life of a spot transaction reduces the credit risk exposure faced by counterparties com-
pared to those trading futures. However, given that most exchanges maintain margin collateral for
their futures exposures, comfort is drawn from this against executing such trades.
In terms of the legal uncertainty that would arise where a counterparty would receive stolen carbon
units, however, the issue would be the same whether they were received under a spot transaction
or a futures transaction. The only difference is volumetric, in that for a futures contract the risk arises
only on the settlement date of that contract; whereas, for a spot contract with a T+2 settlement,
the risk arises each time a spot trade settles. This creates the risk of a legal issue occurring more
frequently.
The solution proposed by the regulators in Article 37 of the Registries Regulation does not solve
the legal property question but rather leaves it to be answered by national laws. In the absence of
a common approach adopted by all member states this maintains the status quo problem. That is
not to say that Article 37 does not give some guidance to member states as to how a carbon unit
should be viewed under its national laws. For example, Article 37 invites member states to treat
carbon credits as fungible units to which the crediting of those carbon credits in an account in the
Union Registry is meant to prima facie represent evidence of title. Further, a purchaser of a carbon
unit for value in good faith should receive good title to that carbon unit even where the seller himself
did not have good title. Unfortunately, Article 37 goes on nonetheless to allow the national laws of a
member state to continue to apply as long as the impact of such laws does not lead to the unwind-
ing of a settled delivery of a carbon unit. For example, equitable claims (such as those raised in the
recent English case of Armstrong DLW GmBH v. Winnington Networks Limited) may continue to
be available to victims of the thefts to pursue against the holders of allegedly stolen carbon units.
Although Article 37 has improved the position of the receiver of an allegedly stolen carbon unit,
its benefits seem to be available only after the Union Registry is fully operational and trading has
migrated there. It is understood that exchanges that have suspended their spot offerings are likely
to re-engage with the market once the transition to the Union Registry has been completed. This is
clearly a positive reaction to the efforts of the regulator. Similarly, in the context of the OTC markets,
IETA and EFET have both adopted uniform language in their latest standard market documentation
that deals with the allocation of the risk of receipt of stolen carbon units between the buyer and the
seller. It relies on the regulators approach of introducing Article 37 to give protection to innocent
purchasers and, at its core, is recognition that the best way to prevent the market from becoming
frozen with fear of receipt of stolen carbon units is to reduce the risk of the claim in the first place.
This is not to say that some claims will not arise, but the circumstances in which they arise, will now
depend on the strength of the protections that Article 37 affords the holder of stolen carbon units.
If the exchanges also adopt the solution introduced in the OTC markets, the management of risk for
dealing with stolen carbon units would be greatly mitigated.
3.6.2 Regu|atory response: enhanced registry
infrastructure
Since the rst Registry Regulation
65
in 2004, sev-
eral amending texts have been introduced to re-
spond to the challenges faced by the EU ETS and
to adapt to its evolutions.
66
Accurate accounting
and transaction integrity within the EU registry
system currently relies on two texts: the 2010
Registry Regulation,
67
which replaced the 2004
text as of January 1, 2012, and the 2011 Registry
Regulation,
68
passed in November 2011, which
sets the new registry functioning rules for the
third phase of the EU ETS. Te 2011 Registry
Regulation also contains provisions that amend
the 2010 Registries Regulation in response to the
January 2011 cyber-attacks (see Table 2).
In addition, in 2012, the EU will fully decou-
ple its registry operations from the National
Registries established under the Kyoto Protocol
and centralize technical management in a Union
Registry (UR) built as a single infrastructure and
operated by a single software.
Te Community Independent Transaction
Log (CITL) currently automatically checks,
records, and authorizes all transactions of EU
Measure Description Application date
Enhanced
control for
account
opening
Stronger and harmonized Know-Your-Costumer (KYC) checks. The
following document must be provided and certified by the competent
authorities: ID, certified power of attorney, company registration
certificate, VAT registration number, financial statement, and domiciliation
certificate.
November 2011
(enter into force of
the 2011 Registry
Regulation).
Enhanced
transactions
security
- Two-factor authentication (e.g., login and password + SMS/ token/
certificate).
- Four-eye principle (two authorized representatives).
- Out-of-band confirmation of transactions (e.g., SMS).
- 26-hour delay is applied at initiation of a transfer. Does not apply to
transfers to a trusted account.
- Transfers can be initiated anytime but they are processed between
10am and 4pm CET from Monday to Friday.
- Trusted account list.*
- New account categories with flexibility over application of transaction
security measures.*
Activation of the
Union Registry
(expected
mid-2012).
*available after the
summer.
Strengthened
registry
oversight
- Registry administrators can suspend access to their registry, and/or
blocks transfers upon suspicions of security breach or fraud.
- European Police Office (Europol) has permanent access to data stored
in the Union Registry and European Union Transaction Log (EUTL).
November 2011
(enter into force of
the 2011 Registry
Regulation).
Enhanced
protection of
the good faith
acquirer
- Non-display of the serial numbers of allowances. For Kyoto units,
only the country code and project number is visible. Access limited to
registry administrators.
- Full fungibility of allowances (substitutability).
- Irrevocability of transfers.
- Acquisition in good faith will gives full entitlement to purchased
allowances.
Activation of the
Union Registry
(expected
mid-2012).
Source: World Bank, European Commission.
Table 2:
New Registry
Security Measures
in the EU ETS
65. Source: European Commission, Commission Regulation (EC) No 2216/2004 of 21 December 2004 for a standardized and
secured system of registries, 2004.
66. Source: Rapin, D. Scurit des registres et transactions, Club Tendances Carbone, CDC Climat Research, June 2011.
67. Source: European Commission, Commission Regulation (EC) No 920/2010 of October 7, 2010 for a standardized and secured
system of registries, 2010.
68. Source: European Commission, Commission Regulation (EC) No 1193/2011, November 18, 2011, establishing a Union Registry for
the trading period commencing on January 1, 2013, and subsequent trading periods, of the Union emissions trading scheme, 2011.
ETS-compliant instruments (EUAs, CERs and
ERUs) that take place between accounts in the
national registries of its 27 Members States, plus
those of Norway, Iceland, and Liechtenstein (see
Figure 2). Te International Transaction Log
(ITL) performs the same functions on Kyoto
units (AAUs, RMUs, CERs, ERUs etc.) between
the national registries of Annex B countries. As
EUAs are currently tagged AAUs, and thus Kyoto
units, their transactions are also overseen by the
ITL. Te activation of the Union Registry (UR)
necessitates the full migration of all EU ETS par-
ticipants accounts from the national registries to
the UR National accounts. National registries
must remain active and linked to the ITL until
2015 for the purpose of Kyoto compliance. Tey
will be kept separate in a Consolidated System
of European Registries (CSEUR). All EU ETS
compliance units (EUAs, aEUAs, CERs, ERUs)
will be traded within the UR and overseen by
the EUTL, and only Kyoto Units (CERs and
ERUs) will be subject to ITL controls. Each na-
tional registry administrator will be in charge of
its countrys accounts within the UR, and man-
age the EU ETS participants accounts that fall
within its jurisdiction.
3.6.3 Market oversight review: toward
classifying carbon as a nancial instrument
In the EU ETS, most secondary market transac-
tions involve derivatives contracts.
70
Such trans-
actions fall under the scope of EU nancial regu-
lation, and thus are protected by strict integrity
and transparency requirements. Tese are mainly
specied in the Markets in Financial Instruments
Directive (MiFID), which sets transaction re-
porting obligations, and the Market Abuse
Directive (MAD), which allows national super-
visory authorities to take measures against ob-
served market abuse (i.e., market manipulation
and/or insider dealing).
71
Although the primary
auction market through which States sell emis-
sion allowances does not fall under nancial
regulation, the Auctioning Regulation sets a spe-
cic oversight framework with similar integrity
*tCERs and lCERs refer to temporary CERs generated from Land-Use, Land-Use Change, and Forestry (LULUCF) CDM projects.
Source: World Bank, European Commission, Clifford Chance,
69
BlueNext
Figure 2:
EU registry
infrastructure:
transition to the
Union Registry
69. Zaman, P. Changing times: Trading carbon in Phase 3 and the fallout from cyber thefts, Clifford Chance, 2011.
70. Derivatives contracts are financial instruments whose value derives from that of an underlying asset.
71. Other requirements cross-referencing to MIFID are set in the provisions of the Anti-Money Laundering Directive and the Settlement
Finality Directive.
Current EU ETS Infrastructure Union Registry Activation (mid-2012)
and transparency measures. Secondary market
spot transactions involving emission allowances
and Kyoto credits, however, do not benet from
any regulatory supervision.
72
In a December
2010 Communication to the Parliament, the
European Commission called for consideration
of two options to address this existing gap.
73
Te
rst option would consist of classifying carbon
units as nancial instruments. Te EC took
the opportunity of the ongoing reviews of both
MiFID and MAD throughout 2011-2012 to
integrate them into the list of nancial instru-
ments, with necessary adjustments to avoid
knock-on eects.
74
Te second option would cre-
ate a new oversight regime tailor-made to the
specicities of spot carbon trading. Despite in-
dustrys concerns over the inclusion of carbon in
MIFID,
75
emissions allowances and Kyoto cred-
its were added to the proposal to revise MiFID
submitted by the EC to the European Parliament
and Council in October 2011.
76

Financially regulated entities must conform to
organizational, operational, and reporting obli-
gations,
77
and thus may bear the implied com-
pliance costs. To illustrate, nancially regulated
entities are subject to risk-based capital require-
ments, which mandate them to maintain a mini-
mum capital reserve, and therefore limit cash
availability for production and investment. In
addition, intermediation activities are subject
to Know-Your-Customer (KYC) standards (i.e.,
established customer due diligence procedures).
Current proposals would exempt ETS opera-
tors from compliance obligations to the extent
that spot carbon trading is for their own ac-
count and remains ancillary to their core activ-
ity. Intermediation services in spot trades would
however require investment rm status under
MiFID rules. Te impact on carbon market
participants of these changes cannot be fully as-
sessed as of today as a number of aspects are still
under discussion. For example, the limit between
proprietary trading and intermediation may be
tested for those energy groups that include car-
bon procurement in their power sales contacts
with covered industrials. It is also still to be deter-
mined if carbon oset originators will fall under
the nancial regulation. Votes by the Economic
and Monetary Aairs Committee (ECON) and
in a plenary session of the Parliament are expect-
ed in July and September 2012 respectively. Te
revised directive would enter into force in 2013.
3.7 EU ALLOWANCES: THE
NUMBERS BEHIND THE GROWING
TRADING VOLUMES
EUA transactions in 2011 reached US$147.8
billion (105.7 billion), representing an 11%
yoy increase compared to US$133.6 billion
(101.1 billion) in 2010. Te increase was led
by a 16% yoy increase in the volumes traded. A
total of 7.9 billion EUAs were traded in the mar-
ket in 2011, compared to 6.8 billion EUAs the
previous year. Te increase in volumes was partly
oset by a 4% decline in prices. Te weight-
ed average EUA price fell from US$19.7/ton
in 2010 to US$18.8/ton in 2011. Te decline
was more pronounced in the assets ocial cur-
rency (Euros), falling from 14.9/ton in 2010 to
13.5/ton in 2011 (10% decline). Prices contin-
ued to fall in the rst months of 2012, reaching
historic lows of 6.2/ton in early April.
78
72. Spot transactions through a regulated market platform are subject to the financial regulation.
73. Source: European Commission, Communication to the European Parliament, Towards an enhanced market oversight framework for
the EU Emissions Trading Scheme, December 2010.
74. Source: European Commission, Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting
on carbon market oversight organized by the commission services, May 2011.
75. Source: International Emissions Trading Association, IETA Response MiFID Consultation, February 2011.
76. Source: European Commission. Proposal for a Directive of the European Parliament and of the Council on markets in financial
instruments repealing Directive 2004/39/EC of the European Parliament and of the Council, October 2011.
77. Source: Patay, M. Alberola, E. Le march secondaire sous rgulation financire: la MiFID. Club Tendances Carbone, CDC Climat
Research, March 2012.
78. Historic low prices during Phase II of the EU ETS based on ICE Daily futures on April 2, 2012. Prices were not tracked after this date.

3.7.1 Te primary EU A||owance market
About US$1.7 billion (1.2 billion), or slightly
more than 1% of the total EUA market value, was
represented by EUAs sold in the primary market
by European governments through auctions or
direct sales. About 92.9 million EUAs were sold
by eight governments in 2011. Germany and the
UK combined to be responsible for 77% of the
total volume, or 71.4 million tons (see Figure 3).
3.7.2 A Shrinking spot market
Following the security issues discussed in Section
3.6, many market players had to rethink their
trading strategies. Te spot market, which to-
taled US$7.5 billion and represented 7% of the
EUA market in 2008, dramatically increased to
US$26.8 billion in 2009 (22% of all EUAs in
the market that year). Tis was partly explained
by the VAT fraud volumes; however, its value
steadily declined in the following years. Last
year, spot EUA trades totaled US$2.8 billion,
or 2% of the EUA annual trading value. Te
decline in EUA spot trade value becomes even
more evident if the total sale of primary EUAs by
most member states is excluded. About US$1.2
billion, or 42% of the EUA spot value in 2011,
consisted of primary EUA transactions.
In 2011, EUA futures volumes grew by 32%
yoy to 7.0 billion EUAs, valued at US$130.8
billion (see Figure 4), representing over 88% of
all EUA transactions. Options on EUAs contin-
ued to expand, totaling US$14.2 billion in 2011
(representing 10% of EUA transaction value), a
US$13.6 billion increase on 2008 values when
options represented US$0.6 billion (1% of EUA
transaction value at the time).
3.7.3 Increasing bi|atera| trades
Transactions in the EU ETS may follow several
dierent paths. Negotiations may happen within
(e.g., screen transactions) or on o-exchange plat-
forms. Te latter may still be intermediated by
brokers or cleared on the exchanges (see Figure 5).
0
10
20
30
40
50
60
70
80
90
100
Netherlands
Norway
Lithuania
Greece
Austria
UK
Ireland
Germany
2011 2010 2009 2008
V
o
l
u
m
e

(
m
i
l
l
i
o
n

t
C
O
2
e
)
Lithuania
Austria
Ireland
40.0
4.0
40.0
25.0
35.8
30.7
12.7
10.0
0.4
0.4
0.2
0.2 0.2
0.2
0.9
6.3
6.3
8.0
4.0
41.1 40.7
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FUTURES OPTIONS SPOT
2011 2010 2009 2008
V
o
l
u
m
e

(
m
i
l
l
i
o
n

t
C
O
2
e
)
Figure 3:
Annual volume of
primary EUAs sold
by member states,
2008-2011
Figure 4:
Annual EUA
volumes,
2008-2011
Volumes include auctions and regular sales, realized through
exchanges, private banks and/or directly.
Source: World Bank
Source: World Bank
About 15% of all trading volume in the sec-
ondary spot and futures markets for both EU
Allowances and osets (i.e., CERs and ERUs)
has been reported as realized bilaterally and
not intermediated (i.e., not through brokers nor
cleared on the existing European exchanges).
Tese transactions are represented with the sym-
bol * in Figure 5.
79

In 2011, with the occurrence of stolen EUAs,
another signicant change was observed in the
modus operandi of the market. A portion of spot
allowance and oset volumes previously traded
over the counter (OTC) or on an exchange was
migrated toward bilateral transactions. Tese
transactions are mainly composed of trades be-
tween utilities or nancial players with their cli-
ents, many of them industrials with limited or no
access to exchanges due to the high fees and strin-
gent access rules. Te shift occurred as exchanges
exercised increased scrutiny (which certain market
participants viewed as cumbersome) in an eort
to contain market oversight. In addition, some
players reported favoring long-term relationships
with trustworthy commercial partners. More
broadly, bilateral transactions have been reported
as enabling large volume transactions and reduc-
ing administrative complexity (e.g., no exchange
or brokerage documentation and fees).
Bilateral trades reached over US$17.3 billion
worth of transactions in the secondary EUA
market (i.e., excluding the volumes sold by
member states), or a 15% increase yoy, and
US$2.9 billion for secondary Kyoto osets, an
18% growth yoy.
Most transactions during 2011, however, were ex-
change-based screen trades. Following a steady in-
crease since 2005, screen trades for EUAs, CERs,
and ERUs combined to represent 49% of all trade
values, reaching US$82.9 billion in 2011.
80
OTC
trades reached 39% (most cleared at the exchang-
es); bilateral trades, 12%
81
(see Figure 6).
0
20
40
60
80
100
120
140
160
180
Bilateral OTC Screen
2011 2010 2009 2008
V
a
l
u
e

(
U
S
$

b
i
l
l
i
o
n
)
Figure 5:
Transactions in the
EU ETS
Figure 6:
Trading alternatives:
exchange, OTC, and
bilateral trades
Source: World Bank
Source: World Bank
79. The data for the screen and exchange-cleared transactions are obtained from the exchanges. The data for the OTC transactions
are obtained from brokers. In order to avoid double counting for the OTC transactions cleared at exchanges and obtained from both
exchanges and brokers, the authors count the largest among the two data on a daily basis.
80. Primary EUAs were treated separately and are not included in these numbers.
81. Bilateral overall values are lower than 15% since options markets are exclusively traded through OTC or exchanges.
Types of Transactions
Negotiation within
exchanges
Negotiation outside exchanges

Cleared at exchanges Not cleared
Intermediated
Not intermediated
&
Intermediated
#
Not intermediated*
Exchange-based: assets negotiated within the exchanges platform i.e., screen)
Over-the-Counter (OTC): assets negotiated outside the exchanges, with the intermediation of brokerage firms, still cleared at exchanges
# Over-the-Counter (OTC): assets negotiated outside the exchanges, with the intermediation of brokerage firms, not cleared at exchanges
& Billateral: assets negotiated bilaterally (buyers and seller), without intermediation of brokerage firms, still cleared at exchanges
* Billateral: assets negotiated bilaterally (buyer and seller), without intermediation of brokerage firms, not cleared at exchanges
3.7.4 Who is trading, how, and why they trade
Te EU ETS witnessed a substantial number
of transactions in 2011 originated by few large
players. Troughout the year, a handful of the
largest players were responsible for approxi-
mately one third of all trades in the scheme.
Te process of market consolidation that com-
menced a few years ago and continued in 2011
has accentuated this process. Large players con-
tinued to acquire under-valued portfolios from
smaller (including cash-strapped) players and
rapidly expanded their market positions and
inuence.
At the time that compliance becomes less rel-
evant than trading opportunities, it is not sur-
prising that some large non-EU players are in-
volved in the market. In 2010 and during the
rst half of 2011, about 10% of volumes traded
in the EU ETS were reportedly originated from
outside the EU block. Engagement by non-
EU players in the market, however, shrunk
alongside the rst signs of the pricing crunch
in mid-2011. Teir exit has also contributed to
the accentuation of the decline in prices.
With the increasing share of futures and options
in the carbon market, sophisticated trading tools
(including nancial and macroeconomic indices,
statistical algorithms, and model forecasts) are be-
ing used to inform decision making. Some of the
parameters include the correlation between car-
bon and other energy-related commodities (e.g.,
power prices in Germany as the largest economy
in the EU and with utilities representing the larg-
est buyer sector in the scheme), gas-coal switch
costs in Europe (i.e., clean dark and clean spark
spreads),
82
and open interest (reecting market
moves and players future expectations).
83
Te following text and gures provide further
details as to how the above-mentioned and other
indices and parameters are considered by traders
in their search for prot opportunities and port-
folio adjustments (see Box 2).
82. Among key indicators are the clean dark spread and clean spark spread. The former refers to the theoretical gross margin of a coal-
fired power generator from selling a unit of electricity after paying for the cost of fuel and carbon allowances. High clean dark spreads in
practice mean that coal-fired generation is economically viable, considering both fuel and EUA prices. The clean spark spread is a similar
indicator that refers to the theoretical gross margin calculation for a gas-fired generator.
83. Open interest refers to the total number of open contracts, and it applies to the futures and options market. It is often used to
confirm trends and trend reversals. An increase in open interest along with an increase in daily prices indicates an upward trend.
Similarly, an increase in open interest along with a decrease in prices indicates a downward trend. An increase or decrease in prices
while open interest declines indicates a possible trend reversal.
Box 2: Within the trades
By Carine Hemery, Energy Market Analyst, Orbeo
The EU ETS, the main carbon market in the world, operates in 30 countries and covers CO
2
emis-
sions from installations such as power stations and industrial factories. In order to anticipate the
behavior of the compliance buyers and sellers, major traders follow several indicators that play on
carbon price dynamics.
Due to the design of Phases II and III, it is estimated that the industrial sector is mainly in excess
of allowances while the utilities sector faces a shortage. In the EU ETS, the power and heat sec-
tor has a crucial role in influencing supply and demand. As utilities are the main players in this
market, their need for carbon allowances and their buying strategies influence a lot the evolution of
carbon prices. Utilities are the most active participants in the market and their behavior influences
the evolution of carbon prices. as the evaluate their carbon needs in line with their energy mix.
Furthermore, utilities can decide whether to sell part of their power production on the forward mar-
ket (up to three years) as a way of managing the risk linked to price fluctuations and the associated
Box 2: Within the trades (continued)
impact on their revenue. When they sell their power forwards to get rid of price risk, utilities relate
the sales to their anticipated generation. In effect, they commit plants and technology clusters
of their production fleet and make the sales correspond to types of plants according to their ma-
turity and the shape of the power delivered (baseload, mid-merit, peak). Then, according to merit
order (which depends on the relative competitiveness of fuels at the time of the decision), large
coal or baseload gas plants (CCGT) are hedged. Companies that sell power forwards generally
simultaneously buy the required inputs (coal, gas, and carbon), reflecting a management practice
to secure the generation margins as they sell their power.
Utilities, therefore, have to hedge their carbon emissions. For arbitrage purposes, utilities look
at their margin and follow the evolution of clean spark spread and clean dark spread. First, if
spark and dark spreads increase, utilities take advantage of higher margins and sell more power
forwards to take advantage of improving clean spreads. This should in turn increase demand for
carbon allowances and support carbon prices. Market traders following these indicators could
decide to buy allowances in order to take advantage of rising prices. Second, traders follow the
gap between clean dark and clean spark spreads. If the clean spark spread is above the clean
dark spread, and if this discrepancy increases, utilities have more incentive to produce electricity
via gas plants (CCGT) as clean spark spreads evolve in favor of gas use. In this case, utilities
should emit less CO
2
and their demand for carbon allowances should decrease, pushing prices
down. In this case, traders could decide to sell EUAs in order to capture the anticipate price drop.
Utilities closely follow the evolution of European energy prices in order to take advantage of im-
proving margins. Therefore, European energy prices are one of the main drivers of carbon prices.
Over time, this link evolves and is more or less important. In order to follow this relationship, trad-
ers look at the evolution of the correlation between carbon prices and European energy prices
(European gas or power prices). For example, if the correlation is high between European gas
(Next season NBP gas) and carbon (Dec12 EUA), traders analyze the fundamental picture (e.g.,
weather, storage level, and so forth) of the European gas market in order to anticipate the evolu-
tion of gas prices in the short term and trade directly on the carbon market.
-10
-5
0
5
10
15
20
25
Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan 10
German Dark Spread (Next calendar)
German Spark Spread (Next calendar)
German Dark Spread - German spark Spread (Next calendar)
Box 2: Within the trades (continued)
Regarding the industrial sector, the surplus of allowances depends mainly on the industrial pro-
duction and the economic activity across Europe. Indeed, following the 2008 financial crisis,
Europe entered into a recession and industrial activity fell strongly. European emissions from the
industrial sector decreased drastically, generating an excess of allowances. This led industrials to
sell their excess carbon allowances and pushed carbon prices down. Traders follow key economic
indicators, including those published weekly and/or monthly the Eurozone Purchasing Managers
Index (PMI), industrial new orders, and expected gross domestic output (GDO) growth. If these
indicators are improving or better than market expectations, traders anticipate that European
economic activity should increase the need for allowances by industrials and push carbon prices
upward. Traders expecting this dynamic either buy allowances or decide to wait to sell.
The carbon market is more and more traded and liquid. Traders use techniques applied in equity,
oil, and other very liquid markets. Technical analysis is one of the best known techniques and is a
method for forecasting price movements based on the study of past price movements. This meth-
od is based on several indicators of estimated past prices and several charts of prices over time
in order to define the future trajectory. The main indicators are the Moving Average Convergence-
Divergence (MACD), the Relative Strength Index (RSI), and the Slow and Fast Stochastics. The
value of these different in-
dicators relative to target
levels indicates whether the
contract is overbought or
oversold. If several indica-
tors show that the contract
is overbought, then prices
should fall. As is shown in
this chart, Slow Stochastics
and MACD give profitable
buy or sell signals. Traders
following these indicators
would sell carbon allowanc-
es from date A, anticipating
that carbon prices should
fall in the coming days or
weeks.
0%
20%
40%
60%
80%
Apr-12 Feb-12 Dec-11 Oct 11 Aug-11 Jun-11 Apr-11
EUA Dec12 & DE power baseload next Cal ()
EUA Dec12 & UK power baseload next Cal ()
100%
3.8 SECONDARY OFFSETS:
SMALLER FIGURES, SIMILAR
PATTERNS
In 2011, the value of secondary CER and ERU
transactions combined rose 12% yoy to US$23.1
billion (16.6 billion), compared to US$20.5
billion (15.6 billion) in 2010. Traded volumes
rose by a robust 43% yoy to 1.8 billion tons,
compared to 1.3 billion tons in 2010.
Despite secondary CER and ERU traded vol-
umes increasing, prices fell dramatically in 2011,
particularly during the second half of the year.
Te decline in oset prices was much more
pronounced than for EUAs. Te weighted av-
erage price for CERs and ERUs combined fell
21% from US$16.2/ton (12.3/ton) in 2010 to
US$12.8/ton (9.2/ton) in 2011. Having hov-
ered around 13/ton in April and May of 2011,
CER prices landed slightly above 4/ton by year
end, after hitting consecutive lows almost on a
weekly basis in the previous three months.
Te accentuated decline in Kyoto oset prices led
to a widening of the CER versus EUA spread. Te
price of a secondary CER at year end was slightly
above 60% of the EUA price, having started 2011
at 86% of the EUA price. Te spread continued to
widen in the rst months of 2012 and for the rst
time ever, in early February, secondary CER prices
reached levels below 50% of EUAs.
84

In 2011, CERs continued to represent the bulk
of secondary Kyoto oset transactions, totaling
US$22.3 billion, or 97%. In the previous year,
the nascent ERU market had represented only
0.5% of the total Kyoto oset trading value.
3.8.1 Myths and facts
In the past, many have attributed declining CER
prices to a decline in the CER issuance (i.e., low
CER liquidity would damage its credibility as an
eective compliance asset in the EU Scheme), as
well as to an increase in the CER issuance (i.e.,
accentuating the oversupply in the market).
Also, many have attributed both low and high
temporary CER-EUA spreads to pushing CER
prices down.
To date, the price of Kyoto assets is almost en-
tirely driven by the EU ETS; this is a one-way
street. Te proportion of CERs and ERUs in the
EU Scheme is limited (i.e., about 1.7 billion tons
until 2020, representing about 6% of the overall
EU ETS cap for the same period), and their eligi-
bility is uncertain until their usage. In addition,
it is clear that the supply of CERs and ERUs will
be much greater than their import limit into the
EU Scheme, and that these credits will be avail-
able much earlier than the expiration of their
eligibility period (i.e., CP-2 credits from projects
to be registered prior to the end of 2012 are, in
principle, eligible until 2020).
Te truth is that short-term issuance rates or
momentary trading dynamics have limited inu-
ence in the long-term Kyoto asset prices. Unless
the CER price is suciently low (relative to the
EUA price) to account for the incremental risk
of importing them, demand for CERs will de-
cline (in favor of less risky EUAs). Furthermore,
the supplementarity limit under the EU ETS
is quickly being exhausted. Once it is reached
(and most analysts forecast this period to be
reached in the next 1-3 years),
85
the CER and
ERU volumes, expected to be in billions of tons,
will require much more than the welcome but
insucient demand coming from the nascent
Australian market.
84. ICE Daily futures on February 8, 2012, reached 8.13 and 4.06 for EUAs and CERs, respectively.
85. CDC Climat Research recently forecasted that the demand for CERs and ERUs will be saturated by 2013-2014. Source: Valentin
Bellassen, Nicolas Stephan and Benot Leguet. Will there still be a market price for CERs and ERUs in two years time? CDC Climat
Research, Climate Brief n13, March 2012.
3.8.2 Futures market with the |ions share
As in the EUA market, the bulk of secondary
CERs and ERUs were traded in the futures mar-
ket. Secondary CER and ERU futures volumes
increased by 56% yoy to almost 1.7 billion tons
in 2011, representing 92% of secondary oset
volumes traded (and the same percentage was
observed for CERs and ERUs when evaluated
separately). Te value of the secondary osets
traded in the futures market reached US$21.2
billion in the period (out of the total secondary
oset trading value of US$23.1 billion).
Secondary CER and ERU futures volumes in-
creased by 122% compared to 2008 when this
market started gaining traction alongside the in-
crease in CER issuance (see Figure 7).
3.8.3 What spreads can te||
A clear trend can be observed in the price dif-
ferential between those CERs that are eligible in
Phase III of the EU ETS (i.e., so-called Green
CERs) and those CERs that will not be eligible.
Te spread between the two asset classes more
than quadrupled from January 2011 to date,
86
indicating that the market is pricing in these
qualitative restrictions.
87
Te narrow spread between CERs and ERUs re-
ects less liquidity in the latter asset. Te spread
between the two asset classes has risen by only
0.05 since January 2011 (see Figure 8).
88

0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FUTURES OPTIONS SPOT
2011 2010 2009 2008
V
o
l
u
m
e

(
m
i
l
l
i
o
n

t
C
O
2
e
)
0.00
0.05
0.10
0.15
0.20
0.25
Spread Green Standard CER
Spread CER ERU
Figure 7:
Annual CER
and ERU
volumes,
2008-2011
Figure 8:
Spreads
CERs versus
ERUs and
green versus
standard
CERs,
2011-2012
Source: World Bank
Source: World Bank
86. As of April 2012.
87. Source: Spot prices from BlueNext.
88. Data reflect prices collected until early April 2012.
3.9 AVIATION: THE POLEMIC NEW
KID ON THE BLOCK
3.9.1 Background:
Te Kyoto Protocol states: Te Parties in-
cluded in Annex I shall pursue limitation or
reduction of emissions of greenhouse gases not
controlled by the Montreal Protocol from avia-
tion and marine bunker fuels, working through
the International Civil Aviation Organization
and the International Maritime Organization,
respectively.
89

Although discussions on how to reduce global
emissions from aviation have evolved under
the auspices of the International Civil Aviation
Organization (ICAO),
90
only very recently has
some progress been made.
91
Meanwhile, the
global GHG emissions released from the avia-
tion sector increased by more than 40% between
1997 and 2008. According to ICAO, the bulk
of emissions in the sector still come from inter-
national ights (62%).
92
In addition, despite the
fast growth of international aviation emissions in
developing countries, particularly in Asia, emis-
sions in industrialized countries account for 65%
of total emissions in the sector.
93
Tus, including
the aviation sector in the EU Emission Trading
Scheme (EU ETS) represents the rst signicant
regulatory initiative to cap CO
2
emissions in this
sector and address the issue at scale.
In addition, since 2002 the European Council has
repeatedly called on the European Commission
(EC) to propose action to reduce the climate
change impact of international air transport. At
the ICAOs 36
th
Assembly held in September
of 2007, and recalling that the 1944 Chicago
Convention on International Civil Aviation
(Chicago Convention) expressly recognizes
the right of each contracting party to apply on
a non-discriminatory basis its own air laws and
regulations to the aircraft of all States, the mem-
ber states of the European Community, and 15
other European States reserved the right under
the Chicago Convention to enact and apply
market-based measures on a non-discriminatory
basis to all aircraft operators of all States provid-
ing services to, from, or within their territory.
Tus, on November 19, 2008, Directive
2008/101/EC of the European Parliament and
of the Council amended Directive 2003/87/EC
that had established emissions trading in the
European community, so as to include aviation
activities in the scheme as of January 1, 2012.
Te Directive states: Aviation contributes to the
overall climate change impact of human activities
and the environmental impact of greenhouse gas
emissions from aircraft can be mitigated through
measures to tackle climate change in the EU and
third countries, especially in developing coun-
tries, and to fund research and development for
mitigation and adaptation including in particu-
lar in the elds of aeronautics and air transport.
Te Directive also allows some exibility, giving air-
lines from other countries the option of seeking alter-
native ways to reduce or mitigate airline emissions:
Te Community and its Member States should
continue to be in contact with third parties during
the implementation of this Directive and to encour-
age third countries to take equivalent measures. If a
89. The Kyoto Protocol to the UNFCCC of December 11, 1997.
90. ICAO is a specialized agency of the United Nations created in 1944 to promote the safe and orderly development of international
civil aviation throughout the world.
91. In October 2010, the ICAO Assembly adopted Resolution A37-19, aiming to include a 2% annual fuel efficiency improvement up to
year 2050 and a medium-term goal of stabilizing global CO
2
emissions at 2020 levels. Measures to meet these targets include improving
the fuel economy of new planes; replacing less-efficient aircraft; improving the operation of existing flights in ways that economize on
fuel; development of a global CO
2
certification standard for aircraft; and facilitating the development and deployment of sustainable
alternative fuels for aviation. The ICAO Assembly also agreed on a set of guiding principles for the design and implementation of market-
based-instruments, such as minimizing carbon leakage and market distortions, avoiding double charging for aviation emissions, and
fair treatment of aviation relative to other sectors. Source: Keen, M., Parry, I., and Strand, J. Market-Based Instruments for International
Aviation and Shipping as a Source of Climate Finance, 2012.
92. All flights between EU Member States are considered to be international flights.
93. Source: Keen, M., Parry, I., and Strand, J. Market-Based Instruments for International Aviation and Shipping as a Source of Climate
Finance referring to ICAO, 2009 (data from 2007), 2012.
third country adopts measures, to reduce the climate
impact of ights to the Community, the Commission
can adopt implementing legislation to exempt in-
coming ights from that country to provide for op-
timal interaction between the Community scheme
and that countrys measures, after consulting with
that country.
94
3.9.2 Ru|es and participants:
Te EU Emissions Trading Scheme (EU ETS)
was launched in 2005 as one of the pillars of the
Unions eorts to combat climate change. Te
inclusion of the aviation sector from January 1,
2012 onward represents a new step in the imple-
mentation of the EU ETS.
All ights that arrive at or depart from an EU
airport are included in the EU ETS. Some ex-
ceptions apply, including commercial air trans-
port operators that operate for three consecutive
four-month periods with fewer than 243 ights
per period; ights with total annual CO
2
emis-
sions below 10,000 tons per year; and military,
reghting, humanitarian, emergency medical
service, and training ights.
In addition to the 27 EU member states, the
scheme for aviation also covers Iceland and
Norway.
95
Croatia will be included in 2013 to
the extent that the country accedes to the EU.
96
A large number of the airline operators aected
by the EU ETS are of non-European origin. As
a result, the inclusion of aviation is also a major
test of the EUs proactive climate policy of en-
gaging other countries to participate in a global
low-carbon economy.
Although included in the scheme in 2012, air-
line operators will be required to join the other
European compliance installations, oset, and
report their actual annual emissions for the pre-
vious year in March 2013 only.
97
Dierent from
other ETS sectors, the 2020 target for aviation
is not set at -21% from 2005 levels. In 2012,
the aviation sector has to reduce its emissions by
3% compared with its average historical annual
emission (2004-2006), between 2013 and 2020,
the sector will have to reduce its annual emis-
sions by 5% per year.
Te allocation of the allowances or emission permits
called EU Aviation Allowances (aEUAs) to air-
craft operators will be mostly free of charge,
98
with
15% of the allowances put up for auction. Starting
in 2013, 3% will be set aside for new operators and
to assist aircraft operators with sharp increases in
the number of tons of kilometers performed (i.e.,
fast-growing airlines).
99
Te number of allowances
to be auctioned in each period by each member
state will be proportionate to its share in the total
attributed aviation emissions for all member states
for the reference year reported. For the period from
January 1 to December 31, 2012, the reference
year shall be 2010; for each subsequent period, the
reference year shall be the calendar year ending 24
months before the start of the period to which the
auction relates. Other rules include:
94. The EU is firm on the implementation of its aviation ETS legislation, while engaging positively in the International Civil Aviation
Organization (ICAO)s accelerated work on market-based measures. This work under ICAO should move beyond discussions in order
for decisions to be made to limit global aviation emissions. The EU cannot suspend its legislation. However, our legislation foresees
flexibility to exempt incoming flights to take into account action by third countries. Furthermore, we will review and possibly amend our
legislation if and when an agreement on market-based measures is found in ICAO. Statement by Mr. Jos Delbeke, Director-General
for Climate Action, February 8, 2012, and following a speech at the conference A New Flightplan - Getting global aviation climate
measures off the ground, February 7, 2012.
95. Already integrated in the European civil aviation market through the European Economic Area (EEA; 1994), on June 21, 2011,
Iceland and Norway also signed an agreement adopting the Civil Aviation Agreement between the U.S. and the EU.
96. Switzerland is not covered, but the country is currently in negotiations with the EC on linking its domestic emissions trading scheme
to the EU ETS starting in 2013. If the two schemes are linked this would include the aviation sector. Source: Thomson Reuters Point
Carbon, Carbon Market Monitor, November 4, 2011.
97. On January 30, 2012, the European Commission has partially activated the new Union Registry to enable access for aircraft
operators.
98. Allocations to all commercial airlines with significant operations to or from the EU are published at http://ec.europa.eu/clima/policies/
transport/aviation/allowances/links_en.htm.
99. If unused by the end of the period, the aEUAs set aside for the special reserve will be auctioned to airlines.
At least 15 months before the start of each pe-
riod the Commission shall calculate and adopt
a decision setting out (a) the total quantity of
allowances to be allocated for that period; b)
the number of allowances to be auctioned; (c)
the number of allowances in the special reserve
for aircraft operators; and (d) the number of
allowances to be allocated free of charge (i.e.,
the dierence between the sum of b and c, and
the total).
Within three months from the date on which
the Commission adopts a decision, each ad-
ministering member state shall calculate and
publish the total allocation of allowances for
the period (and for each year) to each aircraft
operator whose application was submitted to
the Commission. Te allocation will be based
on performance benchmarks.
By February 28, 2012, and by February 28 of
each subsequent year, the competent author-
ity of the administering member state shall
issue to each aircraft operator the number of
allowances allocated to that aircraft operator
for that year.
aEUAs can only be used by airline operators
to account for their emissions,
100
whereas EU
Allowances (EUAs), which are issued to the
existing power and industrial plants, are eli-
gible for compliance by all sectors covered by
the cap-and-trade scheme, including opera-
tors in the aviation sector.
Aviation operators are allowed to use ERUs
and CERs to comply with their obligations
under the scheme. For the 2012 compliance
period, aircraft operators may use CERs and
ERUs up to 15% of the number of allowances
they are required to surrender. Under Directive
Article 11a, airlines can carry over their 15%
oset entitlement from 2012 into subsequent
years. For subsequent periods until 2020, the
usage of CERs and ERUs is set at a minimum
of 1.5% of veried emissions.
101
All revenues from auctioning aviation allowanc-
es are to be used on climate-related initiatives.
102
3.9.3 How representative is aviation within
the EU ETS?
In 2008, the aviation sector accounted for 4%
of total CO
2
emissions from fuel combustion in
the EU, and 13% of emissions from all transport
sources. In 2012, around 4,000 airlines are expect-
ed to increase the emissions covered by the EU ETS
by approximately 223 MtCO
2
e,
103
representing
11% of covered emissions. Te aviation sector will
therefore become the second largest economic sec-
tor in the EU ETS after energy generation. It is es-
timated that aviation emissions in the EU ETS will
rise above 300 MtCO
2
e in 2020, indicating a much
more dynamic growth rate than other sectors. Tis
year, based on its historic emissions, airlines using
EU airports receive 213 million aEUAs, and 208.5
MtCO
2
e per year from 2013 onward.
104
About
180 million aEUAs (i.e., 85% of the total), will be
The aviation sector will therefore become

the second largest economic sector in
the EU ETS after energy generation.
100. Installations from other sectors covered by the EU ETS cannot use aEUAs for their own compliance since the Kyoto Protocol does
not cover emissions from aviation.
101. Source: Directive 2009/29/EC of the European Parliament and of the Council of April 23, 2009.
102. Revenues should be used to tackle climate change in the EU and third countries, inter alia, to reduce greenhouse gas emissions,
to adapt to the impacts of climate change in the EU and third countries, especially developing countries, to fund research and
development for mitigation and adaptation, including in particular in the fields of aeronautics and air transport, to reduce emissions
through low-emission transport and to cover the cost of administering the Community scheme. The proceeds of auctioning should
also be used to fund contributions to the Global Energy Efficiency and Renewable Energy Fund, and measures to avoid deforestation.
Member States shall inform the Commission of actions taken pursuant to this paragraph. Source: Directive 2008/101/EC of the
European Parliament and of the Council, November 19, 2008.
103. Source: Deutsche Bank, EU Emissions: Scoping the Cap over Phase 3, February 3, 2012.
104. Based on average annual historical aviation emissions for the period 2004-2006, the number of aviation allowances to be created in
2012 amounts to 212,892,052 tons (97% of historic aviation emissions), and the number of aviation allowances to be created each year
from 2013 onwards amounts to 208,502,525 tons (95% of historic aviation emissions). Source: Questions & Answers on historic aviation
emissions and the inclusion of aviation in the EUs Emission Trading System (EU ETS), press release, Europa Web site, March 7, 2011.
Box 3: The point of view of a market player: the right pathway to address aviation emissions
By Pierre Albano, Head of Environment, Air France
Aviation achieved outstanding track record in reducing carbon intensity
Aviation has achieved CO
2
efficiency improvements unparalleled in other transport modes. A jet
aircraft coming off the production line today is over 70% more fuel efficient per passenger seat
kilometer than one delivered in the 1960s. Aircraft operators, manufacturers, airports, and air navi-
gation service providers are joining forces in a comprehensive strategy to further improve emis-
sions efficiency. But the 1.5 to 2% annual improvement achieved with best available and foreseen
technologies and procedures is not enough to offset the 4 to 5% annual growth of the air transport
demand. The aviation sector is determined to do its fair share to address the global challenge of
climate change and, in 2008, and the whole industry committed to cap net aircraft emissions from
2020 onward and work to achieve the ambitious goal of a 50% reduction in net emissions by 2050
compared to 2005 levels.
allocated for free to airlines in 2012. From 2013-
2020, the level of free allocations will decline by ap-
proximately 3%, and operators will receive about
170 MtCO
2
e in free allowances per year. Te 3%
of free aEUAs will be set-aside in a special reserve.
Still, airline operators are expected to be short of
allowances in 2012 and through the entire period.
Te sectors overall requirement has been estimat-
ed at about 400 MtCO
2
e over the period from
2012 to 2020.
105
Assuming the price of Kyoto
osets will remain lower than the price for allow-
ances and that they will be available in sucient
amounts, the sector should use those assets up
to the import limit, reaching a demand of up to
around 63 MtCO
2
e until 2020. Tese numbers
are likely to be lower, though, as fuel eciency
gains reduce CO
2
emissions from aircraft.
106
Depending on airlines decisions on how much
to pass on the additional cost to end users, the
cost of a ight per passenger could rise by 2-
12 (US$2.66-15.96).
107
Other studies refer to
a potential increase in the range of 1.3-6.5%.
However, the possibility of passing through
these costs to consumers depends on the price
elasticity of demand for aviation tickets
108
as well
as to the extent to which airlines are exposed to
competition. Some U.S. airlines have recently
announced a US$3 increase in their taris for
ights to Europe.
Airline companies are expected to enter the mar-
ket gradually, depending on the extent of their
compliance requirements, even though the low
carbon price is already spurring them to some
action. Lufthansa and Air France-KLM have
already joined European exchanges (i.e., EEX
and BlueNext, respectively) as part of their trade
strategies. In addition, it has been reported that
the international airline partnership Star Alliance
will likely tender for a broker this year to help its
members buy CO
2
permits; Air France-KLM, a
member of rival group SkyTeam, has said its alli-
ance partners would give a right of rst refusal to
each other when selling allowances.
105. Deutsche Bank estimates the aviation net EUA demand at 390 MtCO
2
(EU Emissions: What is the Value of a Political Option,
November 29, 2011); CDC Climat Research estimates 420MtCO
2
(Aviation in the EU ETS: ECJ clears the runway, Tendances
Carbone #65, January 2012).
106. It is estimated that technological improvements will reduce CO
2
emissions by between 1-2% per year from 2010 to 2020.
Optimization of passenger load factors and use of sustainable alternative jet fuels available by the end of the decade can add another
5.5% reduction in the sector CO
2
emissions. Source: De Perthuis, C., Jouvet, P.A., Climate Economics in Progress 2011, 2011.
107. Source: Thomson Reuters Point Carbon, citing information from the EC, Carbon Market Daily, December 21, 2011.
108. If the price of aviation increases by 10%, then the quantity demanded will decrease by 6% to 14%. Source: Faber, J., Brinke, L.,
The Inclusion of Aviation in the EU Emissions Trading System, September 2011.
Box 3: The point of view of a market player: the right pathway to address aviation emissions (continued)
Aviation can only be a net carbon credits buyer
Transporting people and goods, aviation provides an essential service and brings enormous benefits
to communities and economies around the globe. This mission was enshrined in the preamble of
the Chicago Convention governing international aviation since 1946. Demand for air transport is
not expected to decline. In the near future, no breakthrough technology for low carbon aircraft or
fuel is foreseen and the actual emissions can only continue to grow. Meeting its emissions targets
and closing the gap will therefore require the aviation sector to turn to the use of available mitigation
measures outside the sector through the full and unrestricted access to the global carbon market.
No doubt aviation will remain a net carbon credit buyer until biofuels and new-generation technolo-
gies are broadly deployed.
Aviation in the EU ETS
Aviation is an ultimate global and interconnected industry. Any mechanism, be it a carbon offset or
cap and trade, can only be efficiently developed at the global level. Governments, meeting in the
United Nations specialized agency for aviation (ICAO) have not reached any agreement on a global
framework. The difficulties and slow pace of progress are not different from those encountered
within the global climate negotiations dividing developed and developing nations. Considering the
lack of progress, the European Union unilaterally decided to include international aviation in the first
of its kind regional ETS. Although this type of instrument is relevant to aviation, as recognized by
ICAO, the EU ETS is fiercely opposed by almost all non-EU countries. Indeed, the EU ETS is the
legal framework for the EUs independent commitment to reduce its emissions. In this context, it is
hardly conceivable for non-EU countries to let their nationals contribute to meeting the EUs self-
imposed targets, particularly while they have not been part of the decision whatsoever.
Beyond the sovereignty issue, aviation being a net buyer means that international operators are
invited to purchase permits from other EU-based sectors, thus ultimately financing de-pollution in-
vestments within Europe. China or India for instance already prohibits their airlines from complying
with the EU ETS obligations and, in many countries, countermeasures and restrictions on European
airlines are being considered.
ICAO must be the solution provider
An aggressive unilateral EU position would raise the risk of a major trade conflict; in a sector interna-
tional by nature, multilateralism must prevail. Governments have a key role to play in ICAO in agree-
ing upon a global regulation for international aviation emissions. The current momentum, especially
after the Durban unanimous commitment for a legally binding treaty by 2015, must help in finding
a mechanism, hopefully based on a much-needed global carbon market, for adoption at the ICAO
Assembly in autumn 2013.
The EU ETS is the law. Although a compromise solution must be found, in the meantime airlines will
start trading carbon credits on EU market.

For additional information, please refer to Annex 1: International Reaction to Aviation in the EU
ETS.
SECTION
4
Market instruments under the UNFCCC
4.1 DURBAN CLIMATE NEGOTIATIONS AND POLICY EVOLUTION
Te seventeenth Conference of the Parties (COP 17) to the United Nations Framework
Convention on C|imate Change (UNFCCC) took p|ace in Durban, South Africa in
December 2011. Whi|e the outcome provides no guarantee that the UNFCCC 2C tar-
get wi|| be reached, it represents a po|itica| commitment to reso|ve critica| issues that
were far from certain prior to the meeting.
Tree key results formed the backbone of the
Durban Platform for Enhanced Action that
brought Parties to agreement. Tese include: (i)
provision for the Kyoto Protocol (KP)s second
commitment period to become a reality, with
agreement that the necessary decision to that ef-
fect will be adopted at COP 18; (ii) the launch of
the Green Climate Fund to scale-up long-term
climate nance to developing countries; and
(iii) provision for a roadmap toward a global le-
gal agreement on climate change by 2015 (the
Durban Platform). Tese key decisions along
with other elements of the Durban Agreement
(see Box 4), particularly relating to new mecha-
nisms signaled continued condence in the
UNFCCC process as the forum to address global
climate change and contribute momentum to-
ward climate action.
While the provision on the second commitment
period to the Kyoto Protocol represents an impor-
tant milestone, it still requires eventual accession
or ratication by the requisite number of parties
to enter into force. Until then, the Kyoto Protocol
Second Commitment Period will operate under
provisional application.
109
Under this provi-
sional legal framework, the second commitment
period is to start on January 1, 2013, and con-
clude at either the end of 2017 or 2020 (yet to
be decided). Te scale of ambition and quantied
GHG targets (referred to as quantied emission
limitations or reductions objectives QELROs)
of Annex I Parties is to be determined at the end
of 2012. Te provisional framework was a further
important milestone for the continuation of the
Kyoto Protocols Clean Development Mechanism
(CDM) with no gap when the current phase con-
cludes at the end of 2012.
Te second commitment period is expected to be
limited to the 27 Parties forming the European
Union (EU), as well as Norway, Switzerland, and
Iceland. Croatia will also join upon its ascension to
the EU. While Canada decided to withdraw from
the KP late 2011, Japan, and the Russian Federation
remain signatories of the KP but have already com-
municated their intention not to participate in its
second commitment period. Australia and New
Zealand have yet to conrm their intention to rati-
fy the second commitment period.
110

109. Provisional application is a recognized technique in treaty law by which states undertake to apply a treaty pending its entry into
force Vienna Convention on the Law of Treaties Article 25. It is designed to prevent legal gaps between successive treaty regimes
and allows states to provisionally apply legal obligations that are largely the same as if the treaty were entered into force.
110. No decision has been taken by the two countries at the time of writing this Report.
Te eectiveness of the decision on the KPs sec-
ond commitment period has further come into
question due to the lack of agreement on the car-
ryover of Assigned Amount Units (AAUs) from
the rst to the second commitment periods. Tis
issue has the capacity to aect the scale of ambi-
tion considerably and is to be the subject of ne-
gotiations at COP 18 in December 2012.
Perhaps most critically, the Durban Platform
launches a process to develop a protocol, le-
gal instrument, or agreed outcome with legal
force...to come into eect and be implemented
from 2020 that is applicable to all parties.
111

Tese negotiations are to be completed no lat-
er than 2015 and to come into eect by 2020.
Negotiators wrestled over this language until
past the COP deadline to forge the compromise
considered essential to the formation of the next
phase in a global climate agreement.
Te Durban Platform also calls for an ambitious
rise in the level of mitigation, to be informed by
the scientic assessment of the Intergovernmental
Panel on Climate Change (IPCC). In addition
to making progress on mitigation, the Durban
Box 4: Key elements of the Durban decisions
The Durban Platform for Enhanced Action. By 2015 a protocol, legal instrument, or an agreed
outcome with legal force will be defined, to be implemented by 2020.
The Kyoto Protocol will see a second commitment period from 2013 until either 2017 or 2020.
Annex I Parties participating in the 2
nd
commitment period are to submit information on their emis-
sions targets (quantified emission limitations and reduction objectives - QELROs) by May 2012
with a decision to adopt them to be taken in December 2012. NF3 is an additional gas under this
2
nd
period.
The Green Climate Fund will start operations with the World Bank as interim trustee and the
UNFCCC and Global Environment Facility as interim secretariat. It will be accountable to and
function under the guidance of the Conference of the Parties. The GCF will help scaling up long-
term financing for developing countries rising to US$100 billion per year by 2020.
The Adaptation Committee is to start work by defining what information is to be incorporated into
National Adaptation Plans.
The modalities and procedures of the Technology Executive Committee (TEC) to assist technol-
ogy development and transfer have been approved.
There is agreement to develop general guidelines for measurement, reporting, and verification
(MRV) of domestic actions in developing and developed countries.
Modalities and Procedures for a New Market Mechanism (NMM) operating under the guidance
and authority of the COP to be considered by the COP in December 2012. A decision on a
framework for various approaches, including market-based approaches not developed under the
UNFCC, will also be considered.
Further CDM improvements to increase efficiency, scale, and outreach confirmed, using stan-
dardized baselines, PoAs, and simplified additionality approaches. Carbon capture and storage
projects are now eligible. The materiality standard was completed.
Modalities for countries to submit reference levels for REDD+ were agreed. Decision on REDD+
financing allows for both public and private financing for REDD+, including recognizing that mar-
ket-based approaches may be developed in the coming years.
111. The reference to all parties is significant in that is signals a break from the categories of Annex I (those parties developed
countries and economies in transition with emissions obligations) and non-Annex I (those parties developing countries - without
emissions obligations) that characterizes previous UNFCCC decisions. It reflects the need for global action, beyond mitigation by the
developed countries and economies in transition, to achieve the ultimate objective of stabilizing GHG concentrations in the atmosphere to a
level below 2C above pre-industrial levels deemed necessary to prevent dangerous human-made interference with the climate system.
Platform identies the need to ensure progress on
other key negotiating issues, namely adaptation,
nance, technology development and transfer,
transparency of action, and support for capac-
ity building. Finally, two other policy discussions
witnessed signicant progress: the continuation
of the CDM reform and the development of new
market mechanism.
Te Durban Platform signals sustained interest
in continuing to improve the eectiveness and
eciency of the CDM. Signicant progress was
achieved in Durban toward establishing a ma-
teriality standard in the context of the CDM.
Parties also agreed to include carbon capture and
storage (CCS) as an eligible CDM project activi-
ty. A high-level policy dialogue on the CDM was
launched by the Executive Board of the CDM.
Negotiators also recognized the progress made
in 2011 to implement the CDM reform deci-
sions taken at the sixth Conference of the Parties
serving as the meeting of the Parties (CMP6) in
Cancun (2010) with regard to the following:

Standardization: Standardization refers to re-
placing requirements for individual analysis
of projects by using pre-approved values or as-
sumptions that are deemed applicable to a class
of projects. Te purpose of standardization is
to promote eciency and multiplier eects by
replacing subjective analysis with default ap-
plication criteria. Key achievements in 2011
in this regard are the a) micro-scale addition-
ality guidelines,
112
which allow positive lists to
determine whether projects are additional; b)
the UNFCCCs framework for sector-specic
baselines, which refers to the standardization
of baseline emission factors and additionality;
and c) the guidelines on suppressed demand,
which allow countries with suppressed de-
mand to dene the baseline using predicted
consumption or production rates rather
than relying on historic data. Te UNFCCC
Secretariat is currently conducting an assess-
ment of all methodologies to determine what
elements could be standardized. Te standard-
ized baseline framework is also to be extended
to forestry and transport projects.
113

Stream|ining administrative procedures: A
key example of this is the merger of the two
procedures to handle post-registration chang-
es (deviations from the monitoring plan and
project design changes) into one approval step,
which became eective upon the adoption of
the new project cycle procedure,
114
thus saving
time and transaction cost. A second example is
the introduction of risk-based control systems
that move away from assessing 100 percent (%)
of cases and relieve the regulator from dealing
with straightforward cases of issuance.
115

Negotiators decided that reform in these areas
would continue in 2012, including the simpli-
cation of regulations governing Programmes of
Activities (PoAs). While no major progress on
PoAs was achieved in 2011, the Durban CDM
decision provides for opportunities to make
progress on PoA regulatory reform in 2012.
Furthermore, ongoing work on standardization
could prepare the ground for more far-reaching
improvements on PoAs as well as the project cy-
cle for standalone projects.
116

Major progress was also made on the development
of new market mechanisms under the Convention
(UNFCCC).
117
Tis led to a decision on vari-
ous approaches, including opportunities for using
112. Source: EB 63, Annex 23, Guidelines for demonstrating of additionality of micro-scale project activities, http://cdm.unfccc.int/
UserManagement/FileStorage/WVI3RN692YMCGLZT40QXBOUA8H5KFP.
113. Source: http://unfccc.int/resource/docs/2011/cmp7/eng/03p01.pdf, p. 7, paragraph 19.
114. The procedure can be found on the UNFCCC Web site under information for the EB 63 meeting Annotated Agenda, Annex 11 -
Draft clean development mechanism project cycle procedure.
115. Source: EB 61 Annotated Agenda, Annex 5 - Assessment report of CDM project cycle operations.
EB 61 Report, Annex 23 - Guidance for the development, revision and consolidation of standards and procedures related to the CDM
project cycle (version 01).
116. Source: World Bank. Improving efficiency and outreach of the CDM through standardization, May 2012.
117. Distinct from the negotiations on market mechanisms taking place under the Kyoto Protocol.
markets to enhance the cost-eectiveness of, and to
promote mitigation actions, and provided for (i) a
framework for treatment of various approaches,
which is understood to cover non-market-based
approaches as well as GHG crediting programs
developed outside the UNFCCC; and (ii) the es-
tablishment of a New Market Mechanism (NMM)
operating under the guidance and authority of the
Conference of the Parties (with modalities and pro-
cedures to be elaborated).
Building on the 2010 Cancun decision, the
NMM is to (i) stimulate mitigation across broad
segments of the economy (i.e., go beyond a proj-
ect-by-project approach); (ii) safeguard environ-
mental integrity; (iii) ensure a net decrease and/
or avoidance of global GHGs; (iv) assist devel-
oped countries to meet their mitigation targets;
and (v) ensure good governance and robust mar-
ket functioning and regulation.
Tese decisions represent the foundation upon
which national governments can indicate that
there is a global consensus toward regional, na-
tional, and local initiatives that help address cli-
mate change, even if the design of a global regula-
tory framework is still not clear. Tus, while the
Durban outcome in and of itself is not the kind
of global market that was envisioned in 1997 with
the adoption of the Kyoto mechanisms, Durban
leaves open the door to a wider array of market-
based climate-friendly actions. Tese actions may
oer the potential to be credited in the future,
whether through a new market mechanism, the
docking of national actions within other national
or regional schemes, and/or by devising a means
to credit other sectoral activities.
At the same time, Durban highlighted the dis-
parities in national preferences and priorities,
casting uncertainty around the path toward a
global agreement. Tese outcomes, in particu-
lar relating to the restricted geographic scope of
the Kyoto Protocols second commitment period
and prospects for a global deal to take eect in
2020 only did not satisfy the immediate needs of
the existing carbon market participants. To this
extent, the Durban Platform failed to reverse the
downward spiraling price trajectory that pro-
duced consecutive record lows into early 2012.
4.2 KYOTO FLEXIBILITY
INSTRUMENTS
4.2.1 Te C|ean Deve|opment Mechanism
4.2.1.1 At a glance
Te primary market for pre-2013 Kyoto osets
continued to decline in 2011. Te volume of pri-
mary CERs (pCERs) contracted fell 27% year on
year (yoy) to approximately 91 million tons of
carbon dioxide equivalent (tCO
2
e). As a result,
the total value of the primary CDM market fell
by 32% yoy to US$ 990 million (711 million).
Te sharp decline in market value reects the
downward trend in average prices, tracking
movements in the secondary market. Te aver-
age estimated oset price for all CER contracts
signed in 2011 fell from US$11.8 (9.1/ton) in
2010 to US$10.9 (7.9/ton) (see Figure 9).
As the rst commitment period of the Kyoto
Protocol comes to an end, the above numbers
become less meaningful, as only one year of con-
tract volumes (and value) can be counted. Tus,
given the narrow scope of the pre-2013 market,
a separate analysis is necessary for the post-2012
segment of the market.
These decisions represent the

foundation upon which national
governments can indicate that there
is a global consensus toward regional,
national, and local initiatives that help
address climate change

Te post-2012 market tells a very dierent story.
In 2011, the market for post-2012 pCERs grew
substantially and took over the pre-2013 market,
at about twice its size. Volumes contracted rose
to 173 million tCO
2
e (MtCO
2
e), equating to a
63% yoy rise in market value to nearly US$2 bil-
lion (1.4 billion) (see Table 3).
Te contractual terms in the Emission Reductions
Purchase Agreements (ERPAs) reveal important
information necessary for understanding the shape
and form of the current post-2012 primary market
as well as the trends. Te strong conditional prec-
edents imposed by buyers for ERPAs to become
eective
118
encouraged many buyers to sign those
contracts with the condence that they would be
able to exit from their commitments if and when
needed. Due to the conditional safety clauses and
without a brighter market outlook, it is unlikely
that a substantial proportion of these post-2012
ERPAs will be exercised at the indicative prices and
volumes established in these documents.
In addition to the emergence of less-binding pur-
chase obligations, uncertainty surrounding post-
2012 demand and the eligibility of pCERs led
most buyers to contract volumes using option
structures.
119
As in 2010, a signicant portion of
the primary market in 2011 was transacted us-
ing call options in an eort to manage risk and
also take positions.
120
Options were primarily
contracted on existing projects, representing the
CERs not yet transacted in existing ERPAs and
up to the end of the projects crediting period of
10 or 21 (3 times 7) years. Te vast majority of
these were for projects in China.
118. Refer to the next sections for further details.
119. Since the buyer of an option gains the right but not the obligation to execute, these volumes have not been accounted for in this report.
120. Although all volumes have been tracked, the authors have decided to only account for firm contractual obligations in this report. For
further details, see Methodology.
121. Please note that differences between the numbers reported this year and last reflect the change in the methodology adopted, as
well as additional information obtained after the last report was released concerning earlier transactions.
122. In order to determine the post-2012 market value, annual volumes were multiplied by either the fixed price in these contracts, or
by the corresponding December-expiring contract prices (from ICE) in the case of contracts with floating prices. Unless the specific
discount was reported, a discount equivalent to 15% was applied over December-expiring contract prices for 2010 deals and 25% for
2011 deals. For further details, see Methodology.
Figure 9:
Volumes
and average
prices for
pre-2013 CER
transactions
since 2002
121
Table 3:
Volumes and
value for CER
transactions
in the primary
market,
2010-2011
122
0
100
200
300
400
500
600
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
0
2
4
6
8
10
12
14
16
18
V
o
l
u
m
e

(
M
t
C
O
2
e
)
P
r
i
c
e

(
U
S
$
/
t
o
n
)
Volume Price
Source: World Bank
Source: World Bank
2010 2011
Volume (MtCO
2
e) Value (US$ million) Volume (MtCO
2
e) Value (US$ million)
Pre-2013 124 1,458 91 990
Post-2012 100 1,217 173 1,990
Total 224 2,675 263 2,980
without a brighter market outlook, it is

unlikely that a substantial proportion of
these post-2012 ERPAs will be exercised
at the indicative prices and volumes
established in these documents.

Very few post-2012 projects have been grant-
ed Letters of Approval (LoAs) by the Chinese
National Development and Reform Commission
(NDRC)
123
for post-2012 CERs. When pro-
vided, volumes in the LoAs implied that CERs
would be generated until approximately 2015.
Tis can be explained by the fact that China has
indicated its intention to launch a domestic mar-
ket in the next few years; it is assumed by many
analysts that these credits could provide liquidity
for this market. In addition, it is likely that, by
2015, the EU ETS will have reached its import
cap on international credits. As a result, all post-
2015 volumes reported in China were contract-
ed through options.
4.2.1.2 Lack of demand determines the new
contract dynamics
As reported last year, those governments that
have historically engaged in origination activi-
ties and have been large promoters of the proj-
ect-based primary market have gradually shifted
their eorts toward the Assigned Amount Unit
(AAUs) and secondary CER (sCER) markets.
Tis is because AAUs deliver predictable vol-
umes (this is important as the rst commitment
period of the Kyoto Protocol comes to an end).
Similarly, sCERs have minimal delivery risks and
can be obtained through fast and simple contrac-
tual processes.
Compliance-driven demand for primary osets
from the private sector has also dropped substan-
tially. As annual emissions in the EU fell for the
second time in three years due to weak industrial
activity, demand for compliance assets as a whole
also fell. As reported in the section 3, analysts
forecasts estimate that the scheme will be collec-
tively oversupplied by over one billion tons until
2020, including the exhaustion of the Kyoto o-
sets allowed into the scheme (these forecasts as-
sume that the necessary volume of Kyoto osets
will be available in the market at a price lower
than the EUAs). However, due to the high vol-
ume of CERs and ERUs already contracted by
EU ETS operators, the residual amount allowed
into the EU Scheme until 2020 up to its exhaus-
tion is likely to be considerably lower than one
billion (see Section 3.5.2). If the gures above
are conrmed, EU ETS operators would thus
not need to import any additional osets beyond
what has already been secured.
124
Finally, the carbon market has continued to con-
solidate (e.g., Carbon Resource Management
was fully acquired by Vitol in early 2011, and
Climate Change Capital was acquired by Bunge
Limited, in February 2012). Project portfolios
were also absorbed at sometimes undervalued
levels as part of these acquisitions. Tis shifted
investment away from new projects and was an-
other contributing factor to the downward trend
in pre-2012 primary market deals and the conse-
quent buyers market that exists today.
Te minimal pre-2013 residual compliance de-
mand and signals of oversupply through to 2020
have also increased the bargaining power of active
buyers. Tis has been reected in ERPAs where
the terms and conditions increasingly transfer
oset eligibility risk to the seller. As a result, pre-
2013 project registration and EU ETS eligibility
have become standard clauses in the majority of
ERPAs. In addition, more stringent conditionality
and guarantee clauses have been reported. Tese
include pricing realignment with voluntary mar-
ket (or other market) levels and the shift from rm
commitment into options if the market is not liq-
uid enough to absorb the osets at the buyers dis-
cretion, even if the osets remain eligible.
A more-complex dynamic emerged in the sec-
ond half of 2011. As explained above, buyers
have incorporated the lessons learnt from pre-
2013 ERPAs to negotiate softer and less binding
post-2012 ERPAs. However, to further mini-
mize risk, several buyers who in the past had an
incentive to keep contracts operational, sought
renegotiation of existing ERPA volumes and
prices. Others simply terminated ERPAs in their
123. NDRC represents the Chinese designated national authority (DNA) responsible for authorizing the sale of the credits.
124. Still, the achievement of the collective targets does not mean that every operator has reached its targets.
entirety. Motives and arguments included any
window of opportunity to be found in the terms
of unfullled contractual clauses, such as annual
or cumulative delivery volumes.
It has been reported that many sellers have tried to
nd mutually acceptable compromise solutions
to deal with these new challenges. In many cases,
sellers resolved to convert xed-price contracts to
oating-price contracts or negotiated post-2012
osets in exchange for pre-2013 osets. Others
resolved to temporarily hold project verication
and/or payment of delivered osets to avoid the
possibility of price and volume cuts.
125

Some large buyers also reportedly used their size
and contractual position to impose ERPA renego-
tiations. Having hired the Designated Operational
Entity (DOE) themselves, these buyers threatened
to delay verication or cancel the DOE contract.
Alternatively, by being the sole CDM focal point
in certain projects, they renegotiated contracts
based on the fact that the projects CERs would
only be transferred upon their sole request, thus
leaving sellers with no choice other than to accept
new contractual terms.
A few deals have still been reportedly signed
above prevailing secondary market prices, main-
ly by governments. Reasons to pay above-market
prices are that (i) low prices do not secure the
CER delivery (i.e., projects may not remain com-
mercially viable and collapse before delivering,
or sellers may be inclined to breach the contract
when/if prices recover); (ii) low prices would pri-
marily attract riskier projects rather than more
solid ones thus increasing the chance for un-
derdelivery; and (iii) low prices would ultimately
lead to more fundamental questions related to
the projects additionality. In addition, some
large investors had reasons to pay above the
prevailing market prices, especially when deal-
ing with state-owned companies, since carbon
would be for them an entry point to negotiate
much bigger contracts in other sectors.
4.2.1.3 A fading pre-2013 market and a
promising post-2012 market
Pre-2013: despite many sellers preferences for
xed-price contracts, buyers were reportedly able
to negotiate most pre-2013 ERPAs at oating
prices. As explained in previous reports, the buy-
ers preference for oating prices is a clear indica-
tion that downside risk prevails in todays market.
Most deals were reportedly signed at 80-95% of
the spot CER price at the time of delivery.
Tose xed-price ERPAs that were observed in
2011 were primarily in China where the NDRCs
indicative national oor price remains. Overall,
the pCER price averaged 7.9 and hovered in
the 79 range across the market. Prices fell by
11% on an annual basis compared to the average
8.9 average price in 2010.
Above prices reect deals almost entirely signed
during the rst half of the year, when sCER
prices were still being traded in the 11.513.0
range. In the second half of the year, the accen-
tuated decline of sCER prices led both buyers
and sellers to lose pricing references and origina-
tion activity froze. Buyers were concerned about
where the bottom line would be. By the end of
the year, prices had dropped to levels that forced
project developers to make sure prices were still
above the underlying projects marginal abate-
ment cost (i.e., their natural breakeven point).
At the same time, the very few CP-1 CERs from
industrial gases although not eligible for the
EU ETS after April 2013 continued to be on
the radar screen of government buyers that can
potentially use them until the end of the Kyoto
Protocol true up period in 2015. Tey were
purchased either in the primary or secondary
markets, and prices for these assets followed the
AAU prevailing prices, which are equally accept-
able as Kyoto compliance assets.
Post-2012: the weighted average price for post-
2012 primary market deals in 2011 was 8.3,
125. Similar practices were reported by Thomson Reuters Point Carbon, on CER buyers seek contract rejigs, exits as prices collapse,
January 6, 2010.
down from 9.2 in 2010. As already explained,
in order to estimate the post-2012 market value,
weighted average prices in this report were cal-
culated using either the xed prices reported or,
in the case of ERPAs with oating prices, the
December-expiring CER prices from ICE for
each future date (e.g., Dec-13, Dec-14, and so
on). Ten a 25% discount, consistent with mar-
ket practices reported, was applied to the result-
ing prices for those future vintages. Given the
fact that post-2012 sCERs trade at a premium
to pre-2013 CERs (i.e., these are CERs eligible
for the EU ETS Phase III), the weighted average
prices provided in this report are higher than the
price in the 68 range in the rare xed-price
contracts reported, mostly until mid-2011.
Safety provisions made almost all ERPAs look
like quasi-options, with extremely few exceptions
being reported. At the time when many govern-
ment buyers continued to receive clear instruc-
tions to refrain from any exposure to post-2012
osets, private sector buyers were responsible for
the majority of contracts. Still, post-2012 CERs
continue to be valued at zero by many buyers
concerned about the possibility of nancial loss-
es. Although few ERPAs up to 2020 reported,
most contracts limited to the end of the projects
rst crediting period or 2015, whichever comes
rst. In eect, this reduces the overall value of
ERPA contracts for monetization purposes.
Te unpredictable futures market and the over-
supplied EU ETS led buyers to pursue post-2012
deals at oating prices. On the other hand, sellers
seeking nance have indicated a strong prefer-
ence for xed-price contracts, at least for the ini-
tial years of their contracts. However, in a buy-
ers market, very few succeeded to conclude sales
contracts at xed prices. As a result, some sellers
simply chose not to sell. Prices traded in a range
of 70-85% of the spot CER price at delivery.
Te post-2012 market resembles the early days of
the carbon market, when activity was primarily
motivated by either testing ground objectives or
by rst mover opportunities rather than demand
per se. Tese market players can benet from fa-
vorable prices, commercial terms, and the trans-
fer of eligibility risk to sellers. Nevertheless, these
same low prices and safety provisions undermine
the possibility for these projects to succeed. Since
carbon revenues are dicult to forecast and ex-
tremely limited under these circumstances, it is
challenging to assert that a project would not
have happened without the CDM, thus ques-
tioning its additionality.
To date, sCER prices represent a natural ceiling for
pCERs (i.e., the buyers opportunity cost). Tese
prices are at the same level or even at a lower
level than what is perceived to be the breakeven
point for several CDM investments, which repre-
sents the natural oor for pCERs from the sup-
ply (i.e., project developer) side. Tese conditions
have created a strong mismatch in pricing expec-
tations between buyers and sellers.
Current prices and practices provide little incen-
tive for project developers to pursue either new
CDM credits or pursue issuance from existing
CDM projects, given that monitoring and veri-
cation costs and CDM fees combined can out-
weigh the risk-adjusted revenues from selling
CERs, particularly for smaller projects. It is clear
that a curbed supply will not be noticed, given that
the EU ETS is largely oversupplied. However, this
situation undermines the further development of
this market mechanism and its capacity to direct
capital toward eective, low-cost solutions.
4.2.1.4 Who bought and who sold
Te decline in pCER prices and looser com-
mercial terms incentivized some private sector
buyers to capitalize on low-hanging fruits and
early mover opportunities for both pre-2013 and
post-2012 CERs. In addition, some government
buyers remained engaged partly to honor previ-
ous commitments, as did a handful of multilat-
eral and governmental agencies that wound up
funds close to full subscription.
China increased its share of pre-2013 transac-
tions to a record 79 million tons or 87% of all
volumes contracted in the primary market dur-
ing the year. Paradoxically, since global pre-2013
pCER transacting volumes shrunk to record
lows, the volumes contracted in China in 2011
also represent the lowest volumes in absolute
terms since 2005. Cumulatively, China has been
the host to 1.6 billion pCERs or 71% of the 2.3
billion CERs contracted in the primary market
since 2005 (see Figure 10).
Other Asian countries produced about 6% of
pre-2013 pCER transactions in 2011, followed
by Africa with 4%. Latin America, a region
which was the source of almost 20% of the global
pCERs contracted in 2005, after having almost
sourced most of its projects in advanced stage of
development, represented 2% of the market in
2011 (the same percentage as the previous year).
Although new primary market transactions de-
creased in Latin America, in April of 2012 the
market welcomed the issuance of the rst tempo-
rary CERs in a reforestation project in Brazil.
126,127

Te post-2012 market oers a very dierent
picture (see Figure 11). China accounted for
73 million tons or 43% of post-2012 pCERs in
2011.
128
Other Asian countries, including India,
Vietnam, and Indonesia, accounted for 43 mil-
lion tons or 25% of the volume. Africa emerged
as a signicant newcomer, accounting for 36 mil-
lion tons or 21% of post-2012 CERs. Key coun-
tries included Democratic Republic of Congo,
Burundi, and Nigeria, among others. Contracts
based on stronger commitments were reported
for ERPAs signed in Africa, particularly in Least
Developed Countries (LDCs), given the eligibil-
ity of these assets in Phase III of the EU ETS. As
in the pre-2013 market, a smaller market share
(19 million tons or 11% of the volume) derived
from Latin American countries.
P
r
e
-
2
0
1
3

v
o
l
u
m
e
s

t
r
a
n
s
a
c
t
e
d

(
M
t
C
O
2
e
)
0
100
200
300
400
500
600
700
Other & Unsp.
Africa
Latin America
Others Asia
China
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
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7
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6
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5
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0
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4
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0
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2
P
o
s
t
-
2
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1
2

v
o
l
u
m
e
s

t
r
a
n
s
a
c
t
e
d

(
M
t
C
O
2
e
)
0
50
100
150
200
2011 2010
Other & Unsp.
Africa
Latin America
Others Asia
China
Figure 10:
Pre-2013
volumes
transacted by
seller 2002-
2011 (MtCO
2
e)
Figure 11:
Post-2012
volumes
transacted
per seller,
2010-2011
129
Source: World Bank
Source: World Bank
126. Over 4 million tCERs were issued in the Reforestation as Renewable Source of Wood Supplies for Industrial Use in Brazil.
127. For additional information on land-use activities and investment, please refer to Annex 2: Land-use Carbon
128. As previously explained, much larger volumes were reported in China, but sourced as options rather than purchase agreements.
129. Post-2012 transactions were not being collected prior to 2010.
Africa emerged as a significant

newcomer, accounting for 36 million
tons or 21% of post-2012 CERs.

Te larger interest in Africa comes at a time
when buyers reiterate their desire to diversify
the geographic origin of their project portfolio
in order to reduce their risk exposure to the few
traditional sellers. Te emergence of Africa is also
becoming increasingly evident in other stages of
project development. Te 46 projects located in
the Sub-Saharan Africa region that started vali-
dation in 2011 have the potential to deliver al-
most 30 million CERs in the coming years.
130
No signicant shift was observed in CDM proj-
ect technologies. Carbon revenues continue to
leverage relatively low-risk investments in proven
technologies by improving the marginal rates of
return and enhance the chances of the projects
being developed and remaining operational. As
a result, after almost completely exhausting the
market for HFCs and N
2
O, most primary CERs
in recent years have been generated from wind,
hydro, and other renewable energy projects. On
trend with 2010, these projects produced 57 mil-
lion tons or 63% of all pre-2013 CERs in 2011.
Other prominent project activities included
energy eciency, waste management, and coal
mine methane (see Figure 12).
Te post-2012 market looks very similar.
Renewable energy projects accounted for 97 mil-
lion tons, representing 56% of market share (up
from 71 million tons in 2010). Te largest vol-
umes in 2010 and 2011 came from hydro (34
million tons or 34% in 2010, and 45Mt or 26%
in 2011) and wind (23Mt or 23% in 2010, and
28Mt or 16% in 2011). Other large volumes in
both years derived from energy eciency, bio-
mass energy, waste management, and fuel switch
projects (see Figure 13).
p
r
e
-
2
0
1
3

v
o
l
u
m
e
s

t
r
a
n
s
a
c
t
e
d

(
M
t
C
O
2
e
)
0
100
200
300
400
500
600
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
Other & Unsp.
LFG + waste mng't
E.E. + Fuel switch
Renewables
Industrial gas
Figure 12:
Pre-2013
volumes
transacted
per sector
2002-2011
(MtCO
2
e)
Figure 13:
Post-2012
pCERs per
sector, 2010-
2011 (%)
Source: World Bank
Source: World Bank
LFG and other waste mg't
26% Hydro
34% Hydro
23% Wind
16% Wind
10%
Biomass
energy
8%
Biomass
energy
4% Other
Renewables
6% Other Renewables
12%
EE+Fuel
switch
16%
EE+Fuel
switch
11% LFG
and other
waste mg't
14% LFG
and other
waste mg't
2% CMM and
other fugitive
6% CMM and
other fugitive
3% N
2
O
3% N
2
O
4% Other
6% Other
post-2012 pCERs per sector (%) 2010 post-2012 pCERs per sector (%) 2011
130. Source: UNEP Risoe, CDM Pipeline, April 2012.
Te geographic origin of primary oset buyers
shifted due to market consolidation and interest
in alternative mechanisms. As in 2010, Japan re-
duced its position in the pre-2013 and post-2012
primary market following its announcement to
support bilateral schemes rather than Kyoto ex-
ibility mechanisms. Japanese buyers contracted
only 1% of the pre-2013 market (for both CERs
and ERUs), down from 13% in 2009, and 2%
of the post-2012 market, down from 24% in
2009 (in this case pCERs only). Entities in the
UK transacted the largest share, accounting for
47Mt or 39% of pre-2013 pCERs and 44Mt or
26% of post-2012 pCERs. Te primary catalyst
for this was the high concentration of buyers in
the UK. However, a large portion of these vol-
umes are known to be redistributed upon deliv-
ery. Switzerland had a robust increase in 2010
and in 2011 in both pre-2013 and post-2012
markets compared to previous years. Te Swiss
market share came right after the UK, for the
same reasons as the latter.
For project-based transactions in the voluntary
market, please refer to Annex 3: Te State of the
Voluntary Market.
How many projects may be registered in 2012?
With the rst commitment period of the Kyoto
Protocol approaching its end as well as the dead-
line for project registration to ensure EU ETS
eligibility, it is interesting to zoom in on the sup-
ply side to see how many projects will be able to
make the EU ETS cut. Another question as rel-
evant as the former is whether or not the projects
making the cut will be able to sell their credits
at a time when the maximum volume of osets
(e.g., supplementarity limit) allowed into the
scheme is being quickly exhausted.
In fact, the reason for CERs and ERUs ap-
proaching the cap so fast is partly due to the
fact that issuance picked up at impressive rates
in 2011, with the CDM Executive Board (EB)
successfully cleaning up old backlogs. In 2011
alone, 315 million CERs were issued, represent-
ing a 140% increase over 2010 and about 40%
of all issuances until that year. In order to have
those CERs issued, the EB handled over 1,500
issuance requests in the year, another substantial
increase from previous years (see Figure 14).
Despite of the higher CER issuance rates, out of
the over 8,500 projects that have entered the CDM
pipeline since 2003,
131
approximately 3,500 projects
are currently in the validation process. Taking the
859 projects registered in 2011 as a sample for cal-
culation purposes, the average validation time was
525 days. Assuming that the validation processing
time will not materially change in 2012, many proj-
ects that had not started validation by the rst half
of 2011 will have limited chances to pass validation
and request verication on time prior to 2013 when
the new EU ETS restrictions on osets take eect.
About 1,800 projects are in that category. Another
500 projects initiated validation more than three
years ago, and many have chronic problems that
might prevent them from being validated.
Te remaining 1,200 projects should be able to
request registration before the end of 2012. For
illustration purposes, the maximum number of
131. As of February 2012.
0
50
100
150
200
250
300
350
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
0
200
400
600
800
1,000
1,200
1,400
1,600
V
o
l
u
m
e

(
m
i
l
l
i
o
n

t
o
n
s
)
N
u
m
b
e
r

o
f

i
s
s
u
a
n
c
e
s
CERs issued (million tons)
# issuances processed
Figure 14:
CER issuance,
2005-2011
Source: World Bank, IGES
projects processed by the CDM Executive Board
(EB) in a year was 859 (i.e., also an all-time high
in 2011). Tus, unless the projects submitted
pass the completeness check, they may not have
sucient time to make the necessary adjust-
ments before December 2012 (see Figure 15).
Additional regulatory procedures may also aect
those projects seeking registration in 2012. Tese
include the introduction of last-minute changes
to CDM regulation without granting grace peri-
ods beyond the end of 2012, such as the intro-
duction of the new Validation and Verication
Standard (VVS) that will become mandatory by
October 2012 at the latest.
4.2.1.6 Programmes of Activities:
scaling up the CDM
A Programme of Activities (PoA) is a voluntary
coordinated action by a private or public entity
that coordinates and implements any policy/
measure or stated goal (e.g., incentive schemes
and voluntary programs) that leads to anthropo-
genic GHG emission reductions or net anthro-
pogenic greenhouse gas removals by sinks that
are additional to any that would occur in the
absence of the PoA, via an unlimited number of
CDM program activities (CPAs).
132
PoAs allow
to use carbon revenues as a source to fund incen-
tive schemes and policy implementation schemes
with that PoAs have the potential to substantially
up-scale the CDM and to test new approaches
to carbon crediting beyond a project-by-project
limitation.
As of today 269 PoAs have entered the CDM
cycle. Te PoA pipeline provides a more diverse
geographical distribution relative to standalone
CDM projects, with Africa accounting for 28%
of the PoAs (versus fewer than 3% in the project-
based CDM).
133
Tis illustrates the potential of
PoAs to improve regional access to the CDM
(see Figure 16).
Despite the progress achieved, PoAs are still
under early stage of development and the PoA
regulation is far from enabling its full potential.
Against this background the discussion on im-
proving PoA regulation is expected to continue
in 2012 covering, among others, the following
key elements:
0
1,000
2,000
3,000
4,000
2
0
1
2
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
projects at validation
more 3-y
after 1H'11
2009-1H'11
projects
registered
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CDM pCDM
Middle-East Africa Europe &
Central
Asia
Asia
& Pacific
Latin
America
17
14
51
81
1 1.1
28
2.8
2
1.1
Figure 15:
CDM projects
registered
until 2011
and projects
at validation in
2012
Figure 16:
Regional
distribution
of pCDM and
CDM (%)
Source: World Bank, IGES
Source: UNEP Risoe
132. Source: EB 47. Procedures for Registration of a Programme of Activities as a Single CDM Project Activity and Issuance of
Certified Emission Reductions for a Programme of Activities, Annex 29, May 2009.
133. Source: UNEP Risoe, PoA Pipeline, April 2012.
Application of small-scale/micro thresholds to
the units under a CPA and not to the CPA
itself. Tis would allow to fully use the positive
list approach to additionality for PoAs address-
ing micro scale activities and facilitate the de-
sign of corresponding incentive schemes while
reducing regulatory risk without compromis-
ing on environmental integrity.
Introduction of standardized inclusion
procedures for micro-scale activities into
PoAs with a potential to reduce transac-
tion costs substantially and to facilitate
PoA-operationalization.
134
Increase exibility on verication require-
ment for PoAs without compromising envi-
ronmental integrity, including by allowing
a Coordinating Managing Entity (CME) to
choose between one or several verications
per year and by allowing a CME to contract
one or more DOEs for each verication to
ensure timely completion.
PoAs have the potential to both expand the scale
of CDM project activities and to simplify project
preparation and registration procedures (relative
to standalone CDM projects), thereby overcom-
ing host country capacity constraints and long
processing times. If the CME can also provide
the underlying nance for the CPAs, the lat-
ter can overcome the investment barrier faced
by standalone CDM projects (i.e., the primary
reason for most project failures). In addition, a
sophisticated and creditworthy CME naturally
reduces the counterparty risk in an ERPA, en-
abling CPAs to access higher CER prices and
more commercially attractive ERPA clauses. Te
following example (see Box 5) provides a good
sense of the transformational potential of PoAs.
Box 5: Brazil integrated solid waste management and carbon finance program
The Brazil Integrated Solid Waste Management (SWM) and Carbon Finance PoA aims to support
the recently enacted National Solid Waste Policy. The PoA focuses on scaling-up the implementa-
tion of carbon finance in the solid waste sector in Brazil. Caixa Econmica Federal (CAIXA)
135
will be
the CME of the program. Several CPAs have already been identified, giving this PoA the potential to
reduce over 30 MtCO
2
e in the next 15 years.
136
Solid waste management is a sector with relatively poor records in the country, with a large number
of uncontrolled waste dump sites posing significant environmental and social liabilities. This can
be attributed to lack of investment in the sector, partially due to municipalities with decentralized
responsibilities and limited investment capacity and access to credit for SWM services, as well as
to limited private-sector interest.
137
The recently enacted National Solid Waste Policy aims to tackle this situation by mandating that
municipal and state governments prepare solid waste management plans, with the objective of eradi-
cating garbage dumps within four years.
In this context, CAIXA aims to play a major role in the implementation of the National Solid Waste
Policy and the transformation of the solid waste sector in Brazil. The entity developed a strategy to
134. Source: World Bank, Improving efficiency and outreach of the CDM. May 2012.
135. CAIXA is the second largest public bank in Brazil and the main financing source for municipalities in the country. CAIXA invested
R$514 million (US$286 million) in clean-tech initiatives in 2011; it expects to increase that amount in the coming years, partly triggered
by the possibility of blending carbon finance with traditional lending.
136. An Emission Reductions Purchase Agreement between CAIXA and the Carbon Partnership Facility of the World Bank was signed
in 2011 aiming for the purchase of CERs until 2018.
137. Investment barriers associated with capital-intensive projects with low investment rates of return (IRR) has been a major reason for
many low-carbon technologies not accessing adequate sources of underlying finance.
4.2.2 Joint Imp|ementation
4.2.2.1 A perspective for continuation
Te Joint Implementation (JI) mechanism pro-
vides a common basis for countries with quanti-
ed emission targets to collaborate in the mitiga-
tion of climate change. In principle, therefore,
the decision at CMP 7 to adopt a second com-
mitment period of the Kyoto Protocol allows JI
to continue. However, regulatory uncertainty
remains regarding the adoption of quantied
emission limitation or reduction objectives
(QUELROs), the length of the second commit-
ment period (2017 or 2020), and whether and
how AAUs from the rst commitment period
can be transferred to the second.
Te Joint Implementation Supervisory
Committee (JISC) is currently revising the JI
guidelines in an eort to improve the transparen-
cy and credibility of the mechanism. To this end,
CMP 7 invited observer organizations to submit
views on the revision of the JI guidelines by April
16, 2012.
138
Te JISCs recommendations to
date include merging Tracks 1 and 2 (see Box 6).
It is recommended that this single, unied track
be governed by a single verication supervisory
body. In addition, it is proposed that the respon-
sibility for ERU issuance be transferred from the
host country to the UNFCCC.
Following the rules applicable to CERs, the EU
ETS allows the surrender of ERUs generated and
issued until 2012 as well as ERUs generated and
issued from 2013 onward, from projects regis-
tered before 2013.
139
However, the Kyoto frame-
work does not enable ERUs to be created from
2013 onward in the absence of new quantied
Box 5: Brazil integrated solid waste management and carbon finance program (continued)
cooperate with states and/or consortia of municipalities. This strategy seeks the promotion of new
operations, such as regional landfills, which will make feasible both the final disposal and treatment
of urban solid waste from small municipalities and the access of these municipalities to the carbon
markets. As part of its strategy, CAIXA has put together an innovative financing package with the
following objectives:
a. Improving the technical capacity of municipalities on concessions. Several municipalities
in Brazil have limited capacity to prepare and conduct concession processes, deal with issues
related to waste pickers, and process environmental licensing. CAIXAs program will support
these processes by providing technical assistance to interested municipalities to structure their
SWM operations (e.g., preparation of bidding documents for private concessions).
b. Enabling public entities to access carbon markets through innovative financing packag-
es in the SWM sector. Under this program, eligible projects will benefit from financing options
that integrate carbon finance revenues. CAIXA will accept the future carbon revenues as partial
guarantee toward the loan. In addition, the terms, including the debt service of the loan, will be
linked to the performance of the CDM project, mitigating risks and providing a strong incentive
to the operator of the landfill. CAIXA will also provide technical assistance to the municipalities
on the development of carbon-finance-related documentation.
c. Supporting municipalities on the social aspects of SWM Projects. The program will also
help to develop adequate social inclusion strategies for waste pickers, a requirement under the
new law.
138. These views were not available when this report was written.
139. To the extent that the levels of CER and ERU use competent authorities shall allow operators to exchange CERs and ERUs
from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from
2013 onward. Source: Directive 2009/29/EC of the European Parliament and of the Council (http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=OJ:L:2009:140:0063:0087:en:PDF), Articles 11a.2 and 3, April 23, 2009.
emission targets in place for host countries.
140
A
mainly political question is whether emission re-
ductions generated after 2012, based on AAUs
carried over from the rst commitment period
(CP-1), can qualify for ERUs. Tis regulatory
uncertainty has hindered new investment in
the mechanism and can only be claried by the
UNFCCC (this is expected in 2012).
Under the Track 1 process, countries are entitled
to determine the eligibility of projects unilaterally,
apply their own methodologies for baseline set-
ting, and monitor and verify emission reductions.
Tis has raised concerns regarding consistency in
the application of procedures and issuance across
jurisdictions, including information provided in
national languages instead of English.
4.2.2.2 Numbers: same old pattern, increased
volumes
To date, there are 570 existing projects in dif-
ferent stages of development, in the JI pipeline.
Almost 60% of this pipeline is hosted in the
Ukraine and the Russian Federation (167 and
164 projects, respectively). Other active coun-
tries include the Czech Republic and Bulgaria
(59 and 40 projects, respectively). France hosts
the largest number of JI projects outside of
Eastern Europe (26 projects) (see Figure 17).
141
Te Ukraine and the Russian Federation also mo-
nopolize ERU issuance. Until March 2012, out of
the 131 million ERUs already issued, 66 million
tons (50%) were generated in the Ukraine and
32 million (26%), from the Russian Federation.
Te disparity in issuance volumes can be attrib-
uted to the Ukraine moving ahead with issuance
earlier than the Russian Federation. However,
issuance has accelerated in the latter; in June
2011, the President of the Russian Federation
signaled that the country needed to scale up its
0
30
60
90
120
150
180
L
a
t
v
i
a
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e
d
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n
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o
v
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k
i
a
S
p
a
i
n
F
i
n
l
a
n
d
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e
w

Z
e
a
l
a
n
d
G
e
r
m
a
n
y
H
u
n
g
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r
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t
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i
a

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h

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e
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.
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u
s
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i
a
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r
a
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e
Box 6: Track 1 versus Track 2 JI
Track 1
The host party verifies the emission reduc-
tions /enhancements of removals.
The host party issues and transfers the
ERUs.
Track 2
The emission reductions /enhancements
of removals are verified following the verifi-
cation procedure under the JISC.
The host party issues and transfers the ERUs.
140. There are views in the market that CP-1 ERUs can still be created based on CP-1 AAUs, even for emission reductions occurring
after 2012.
141. Source: UNEP Risoe, JI pipeline, April 1, 2012.
Figure 17:
Number of
existing projects
in the JI pipeline
per country
Source: World Bank, UNEP Risoe
JI program to take advantage of the mechanism
before the end of the rst commitment period of
the Kyoto Protocol. A couple of months follow-
ing the announcement, Russia issued 17 million
ERUs and launched a 70-million-ton tender. In
September, an amendment to the Russian JI pro-
gram was signed, setting the ERU issuance limit
at 300 million until 2012.
142

To date, most projects and issuances have taken
place under Track 1 (see Figure 18).
143
However,
the data available does not necessarily paint an
accurate picture of the market in real time, as
Track 1 does not require host countries to pub-
lish approved projects. Even the International
Transaction Log (ITL), established and adminis-
tered by the UNFCCC Secretariat, does not have
the mandate to communicate or disclose data so
temporary discrepancies have been reported.
144
Primary ERU prices in 2011 averaged US$12.1
(8.7), falling 7% from US$13.0 in 2010. Volume
of primary ERUs (pERUs) contracted also fell, by
31% yoy, to 28 million tons. Tus, the total value of
the primary JI market fell by 36% yoy to 339 million
(256 million) (see Table 4). ERU prices remained
higher than CER prices in the primary market de-
spite the removal of the Russian Federations 10
oor price, because JI ERPAs were signed on projects
at a more advanced stage of development than in the
CDM (i.e., closer to nal determination).
Not surprisingly, the largest volumes transacted
in the primary market came from Ukraine and
the Russian Federation (98% of the 28 million
tons contracted in 2011). However, for the rst
time in ve years, the Russian Federation was no
longer the primary source of pERUs, accounting
for 10.7 million (38%) tons versus 16.7 million
(60%) from Ukraine (see Figure 19).
0
20
40
60
80
100
120
140
Track 2 Track 1 Total issuance
J
a
n
-
1
2
O
c
t
-
1
1
J
u
l
-
1
1
A
p
r
-
1
1
J
a
n
-
1
1
O
c
t
-
1
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u
l
-
1
0
A
p
r
-
1
0
J
a
n
-
1
0
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c
t
-
0
9
J
u
l
-
0
9
A
p
r
-
0
9
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a
n
-
0
9
E
R
U

V
o
l
u
m
e
s

i
s
s
u
e
d

(
M
t
C
O
2
e
)
2010 2011
Volume
(MtCO
2
e)
Value
(US$
million)
Volume
(MtCO
2
e)
Value
(US$
million)
41 530 28 339
Table 4:
Volumes and
value for JI
transactions,
2010-2011
Figure 18:
Cumulative
ERU issuance
per track Q1
2009 Q1
2012 (MtCO
2
e)
142. Source: CDC Climat Research. Joint Implementation in Russia: On track to overtake Brazil as the third largest supplier of Kyoto
offsets, October of 2011.
143. Source: UNEP Risoe, JI pipeline, April 1, 2012.
144. Source: Shishlov, I., Bellassen, V., Leguet, B. Joint Implementation: a frontier mechanism within the borders of an emissions cap
(Climate Report No. 33), CDC Climat Research, 2012.
4.2.3 Assigned Amount Units
In 2011, AAU prices continued to decline from
the 57 range observed at the end of 2010 to be-
low 5, and some prices have reportedly reached
as low as 1 per ton toward the end of the year.
Since most of the 2011 AAU transactions were
signed in the rst half of the year (before prices
plunged), the average AAU prices reported in
2011 was 5.1.
Contract negotiation for AAUs can take rela-
tively lengthy periods of time depending on
the level of complexity of the underlying GIS.
Although prices plunged towards the end of the
year, AAU deals were concluded at prices higher
than prevailing market prices (i.e., prices reect-
ing market conditions in earlier months). Buyers
honored earlier commercial terms and signed the
AAU Purchase Agreements since AAU sellers are
governments. A few options were also reported.
Te downward trend coincided with the overall
trajectory for all carbon assets, motivated primar-
ily by lower-than-expected emissions and length
in allowance supply. Other contributing factors
include (i) regulatory uncertainty surrounding
surplus AAUs and how they will be treated in
the second commitment period of the Kyoto
Protocol, and (ii) the fact that some Japanese
private entities, who had been key AAU buy-
ers since 2009, shifted their priorities elsewhere
after the Fukushima incident. Tis fueled the
downward trajectory as sellers increased and ac-
celerated sales, even at lower prices, suppressing
AAU prices further. Against this backdrop, new
host countries seemed to be discouraged from
entering the market, compounded by increasing
pressure to launch accountable and transparent
Green Investment Schemes (GIS) to reduce the
greening risk.
Following previous years trends, Japanese pri-
vate buyers still absorbed a large portion of the
volumes contracted, albeit less than in previous
years. As Annex 1 government buyers approach
their Kyoto obligation targets, they reduce the
pace of their purchases, thereby reducing AAU
trading opportunities for private-sector players.
Still, the faster decline in AAU prices compared
to pCERs and ERUs resulted in a large spread
between these assets, oering some protable
swap opportunities for private-sector rms,
mostly Japanese. Te same interest was reported
coming from government buyers facing restrict-
ed budgets.
Total volumes of transacted AAUs declined 23%
yoy to 47 million tons. As in 2010, Estonia
sold the largest number of AAUs, followed by
Lithuania, which emerged as a newcomer follow-
ing the development of its GIS program in 2010.
Other active countries, most of which were
early movers and have now commenced GIS
implementation as agreed upon under previous
Assigned Amount Unit Purchase Agreements
(AAUPAs), include the Czech Republic, Poland,
and Latvia.
In 2011, Estonia established the Electro-
mobility Program 2011-2013, which consists
of deploying electric cars in municipalities for
use by social workers. More than 500 of those
Figure 19:
Annual pERUs
volumes
transacted per
seller since
2003
Source: World Bank
p
r
i
m
a
r
y

J
I

a
n
n
u
a
l

v
o
l
u
m
e
s

t
r
a
n
s
a
c
t
e
d

(
M
t
C
O
2
e
)
0
10
20
30
40
50
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
Romania
Poland
Bulgaria
Ukraine
Russia
Lithuania
Estonia
New Zealand
Other Europe
Hungary
cars were bought from the proceeds of a sale
of 10 million AAUs to Japanese Mitsubishi
Corporation in March 2011.
145
Another sale
of 1.5 million AAUs to Marubeni Corporation
was approved in January 2012, and the proceeds
raised will be invested into energy eciency
measures in Estonian theatres.
146
4.2.4 Remova| Units
Tese units can be issued by parties on the ba-
sis of land use, land-use change and forestry
(LULUCF) activities such as reforestation.
RMUs represent the same compliance value as
other Kyoto exibility mechanisms and can be
traded among parties. Te rst RMUs were is-
sued in 2011, in the National Registries of
France, Australia, Russia, and Hungary. At the
end of 2011, both France and Australia held
23 million RMUs in their National Registries.
Russia held 4 million RMUs at the end of 2011,
and was issued 462 million RMUs in February
2012.
147
2011 witnessed the rst sale of Removal Units
(RMUs), coming from Hungary.
148
Hungarys
forests cover around a fth of the country after
its forested area grew 13% to 19,217 square kilo-
meters between 1990 and 2011, referring to data
from the Hungarian Statistic Oce. As a result,
Hungary issued itself the rst RMUs in 2011
after the UN nalized the countrys 2008 green-
house gas emissions data in the previous years.
Te country, along with Denmark, France, and
Switzerland, has opted to print RMUs annually,
while other Kyoto signatories will receive RMUs
in 2014, two years after emissions data for the
entire 2008-2012 Kyoto period is nalized.
In October 2011, the National Development
Ministry of Hungary announced it had issued
3.9 million RMUs.
149,150
Te country also an-
nounced that the revenue from the sale of the
units would be used to support environmentally
friendly investments. Te sale of a certain vol-
ume was announced in December 2011. Neither
the volume nor its value were conrmed; howev-
er, in a press brieng, the Hungarian government
conrmed that Kyoto permit revenues in 2011
totaled HUF 2.7 billion ($11.5 million) and
that it expects further HUF 1.6 billion in 2012.
Since no AAU deal was announced by Hungary
in 2011, it is likely that revenues came from the
RMU sale. Finally, the New Zealand registry
showed the transfer of 3.9 million RMUs from
overseas in 2011.
151
Although not conrmed, if
the volume shown in the New Zealand registry
corresponds to the purchase of the Hungarian
RMUs, average prices for the transaction were
US$2.95 per RMU (US$11.5 million for 3.9
million RMUs).
4.3 NEW MARKET INSTRUMENTS
4.3.1 Nationa||y Appropriate Mitigation Actions
Over 50 developing countries have now submit-
ted proposals to the UNFCCC
152
to limit the
growth of greenhouse gas emissions by 2020.
Tese proposals, also known as Nationally
Appropriate Mitigation Actions (NAMAs), re-
fer to a set of mitigation policies and/or actions
that a developing country voluntarily under-
takes in an eort to reduce its GHG emissions
and report these reductions to the UNFCCC.
Te concept of NAMAs emerged in 2007
145. Source: Tuisk, J. Ministry of Economic Affairs and Communications of Estonia, Estonian Electromobility Program 2011-2013, 2011.
146. Government of Estonia, Proceeds from the sales of AAUs to Marubeni Corporation will be invested into energy efficiency in
Estonian theatres, January 26, 2012.
147. Source: Thomson Reuters Point Carbon, Outlook for 2012-2014: Entering a new phase, February 2012.
148. Based on 2008-09 inventory data, analysts forecast 1.2 billion RMUs issued over CP-1. Source: Valentin Bellassen, Dossier du
Club Carbone Fort-Bois n3, Rsultats nationaux des pays de lAnnexe 1, 2011.
149. Source: Business Recorder, Hungary pioneers sale Kyoto units-Point Carbon, December 2011.
150. Source: http://www.bbj.hu/economy/hungary-has-about-39m-rmus-to-sell_60873.
151. Source: https://app.eur.govt.nz/eats/nz/index.cfm?fuseaction=search.nzeur_incoming_transaction_year&hc=IilOPCAK&nc=3C7EA
3755D487F29CBF884FAA35537A7.
152. See a compilation of the proposals in document FCCC/AWGLCA/2011/INF.1, posted on the UNFCCC Web site.
under the UNFCCC Bali Action Plan, which
called for [the implementation of ] Nationally
Appropriate Mitigation Actions by developing
country parties in the context of sustainable de-
velopment, supported and enabled by technol-
ogy, nancing, and capacity building, in a mea-
surable, reportable, and veriable manner. Te
Cancun Agreement achieved signicant progress
in the concept and, inter alia, set milestones for
the development of a central registry of NAMAs
(including those seeking international funding
support) and guidelines for measuring, report-
ing, and verication (MRV). Tere is no ocial
denition of a NAMA; therefore the proposals to
date indicate a wide variety of approaches. Tese
encompass policies, programs, and projects, as
well as sectoral or national emission goals. Te
openness of the denition places emissions miti-
gation and low emissions development within
the context of a nations economic and social ob-
jectives and allows for climate change mitigation
beyond the project osetting structure of the
Clean Development Mechanism (CDM).
Discussions and literature on NAMAs often refer
to two types of NAMAs based on the sources of
funding:
Unilateral NAMAs, which are nanced and
supported entirely by the host country.
Supported NAMAs, which will be imple-
mented if provided with the needed interna-
tional support.
For several countries, the supported NAMAs
may be nanced through the sale of carbon cred-
its and have been referred to as credited NAMAs;
they thus have a link to the negotiations on a
new international market-based instrument.

Some guidance on NAMA was laid out in the
2010 Cancun Agreement and in the COP 17
decisions in Durban (2011). Parties agreed that
supported NAMAs will be recorded in a regis-
try to match proposed mitigation actions with
international nancial, technology, and capac-
ity-building support. Accordingly, a registry
prototype shall be developed by the UNFCCC
Secretariat by the time of the 36
th
session of the
Subsidiary Body for Implementation with the
design to be nalized at COP 18 in December
2012. Parties also agreed that Non-Annex-I
Parties shall submit National Communications
every four years and Biennial Update Reports
(BURs) with information on their NAMAs
as well as on their national inventories - every
two years (UNFCCC 2011a). Te Subsidiary
Body for Scientic and Technological Advice is
also to develop guidelines for domestic MRV
of Unilateral NAMAs (UNFCCC 2011b).
Negotiations continue on equivalent guidelines
for supported NAMAs to further dene the
concept and its underlying assumptions as well
as achieve some level of consistency and trans-
parency so that mitigation actions are not only
nationally appropriate but also meet some form
of global appropriateness. While many aspects of
the policy architecture around NAMAs is yet to
be dened, much progress has been achieved on
an operational level, particularly in Non-Annex
1 countries. Tese bottom-up activities are likely
to provide valuable lessons for the development
of the NAMA framework at the international
policy level.
Many developing countries are in the process of
identifying, selecting, and preparing proposals
for NAMAs. By way of example, the 30 NAMAs
tracked by the Ecofys NAMA database
153
as un-
der development indicate that:
Geographical distribution is weighted to
Latin America (13 activities or 43%), fol-
lowed by Asia, Africa and Europe. Tis con-
trasts with the CDM, which has been more
highly used in Asia.
153. Source: Roser et al., 2011 and Ecofys NAMA database, September 30, 2011.
Sectoral distribution is weighted towards
transport (12 activities or 40%), followed
by energy, waste, industry, buildings, for-
estry, and agriculture. Tis contrasts with the
CDM, where only 0.6% percent of projects
relate to transport.
154

Activity types are categorized as strategies/
plans, policies/programs, and projects, with
a relatively equal distribution amongst them.
Conversely, CDM to date has been strictly
project based.
Te scope is generally nation- or sector-wide.
CDM PoAs share the most resemblance with
NAMAs and may provide valuable insights
for credited NAMA, particularly in deter-
mining baselines and associated MRV.
Implementation of NAMAs requires nancing at
the scale that may not be the same as those that
have been most targeted by the CDM, but also
oers investment opportunities. Several coun-
tries are looking at the possibility of leveraging
nancing through a new crediting mechanism.
Te bottom-up NAMA activities that Non-
Annex I countries have identied as well as exist-
ing ground work on new market instruments
155

can provide valuable experience and insights for
the development of the international policy ar-
chitecture. While progress continues at the oper-
ational level, negotiations continue on the form
and scope of NAMAs as well as on an overarch-
ing framework to translate them into a market-
based mechanism.
In several developing countries, climate change
champions used to be primarily international-
negotiations-oriented sta. However, Ministries
of Finance and/or Planning have increasingly be-
come engaged on this topic. Te main reason is
that many countries have taken voluntary com-
mitments since Copenhagen COP, and these com-
mitments although not binding internationally,
have been reected in the domestic climate change
programs and laws making them mandatory in-
ternally. As a result, national debates are heating
up, and the Ministries of Finance and/or Planning
are heavily investing in identifying the domestic
instruments needed to integrate these new objec-
tives in an ecient way consistent with national
development requirements. Tis is a turning point
in the political economy of climate change in
emerging economies. In this new context, the key
words are national policies and domestic instru-
ments, with NAMAs being a partial reection of
these initiatives in the international negotiations
arena. NAMAs will certainly become important
means to articulate domestic voluntary eorts and
international support.
4.3.2 New approaches to market instruments
COP 17 represented an important step forward
in dening new approaches to market instru-
ments. Parties reached agreement that the role of
these instruments is to enhance cost-eective-
ness of, and to promote, mitigation action,
156
bearing in mind the dierent circumstances of
developed and developing countries. Among the
various approaches discussed was a proposal for
a framework that would enable Parties to design
and implement their own approaches under de-
centralized governance and, on the other hand,
a mechanism to be guided by the COP under
centralized governance. Tese two approaches
are discussed below.
4.3.2.1 Framework for various approaches
COP 17 recognized Parties abilities to develop
and implement their own approaches to contrib-
uting to global GHG reductions and sustainable
development. Such approaches may support o-
setting or crediting through bilateral or regional
cooperation. Te pursuit of such a exible and
decentralized mechanism is intended to allow
swift implementation at low transaction costs.
154. Source: UNEP RISOE Centre, 2011.
155. Initiatives such as the World Banks Partnership for Market Readiness (PMR).
156. Decision 2, COP 17, para 83.
COP 17 recognized
Parties abilities to develop
and implement their own
approaches to contributing to
global GHG reductions and
sustainable development.
However, important to note that such an ap-

proach must meet standards that delivery real,
permanent, additional and veried mitigation
outcomes, avoid double counting of eort, and
achieve a net decrease and/or avoidance of green-
house gas emissions. Specic issues have been
proposed for elaboration, include:
Eligibility criteria for the projects and the
project selection process.
Underlying principles of methodologies and
their approval process.
Roles of third-party certication entities and
their accreditation process.
Approaches to managing projects and credits
issued (including measures to avoid double
counting).
Te UNFCCC Parties will elaborate a frame-
work for various approaches with the objec-
tive to making a recommendation to COP 18
which will take place in December 2012 in
Doha.
4.3.2.2 New Market-Based Mechanism
In addition to the decentralized means of the
framework for various approaches, the UNFCCC
is also considering dening a new market-based
mechanism (NMM) as a means to encourage
mitigation eorts and nancial ows at scale.
Tough the denition and modality for the
NMM are yet to be elaborated, the UNFCCC
Parties agreed that NMM should stimulate
mitigation across broad segments of economy.
Specic suggestions have been proposed:
Crediting: Emissions from a broad sector of
an economy will be checked against an ex-an-
te agreed crediting threshold. If emissions are
below this threshold, emission credits will be
issued ex post, which can be sold to recover,
at least partly, the cost of mitigation activities.
If emissions are not below the threshold, no
penalty will be applied (no-lose target).
Trading: In accordance with an ex-ante de-
ned absolute target for a broad sector of an
economy, emissions allowances will be issued
ex ante. If emissions are lower than the num-
ber of issued allowances, excess allowances
can be sold to recover, at least partly, the cost
of mitigation activities. If emissions are high-
er than the number of allowances issued, ad-
ditional allowances need to be purchased on
the global carbon market to comply with the
target agreed for the broad segment.
Going forward, essential elements for dening a
NMM include:

Eligibility/participation requirements
Boundaries
Baselines and targets, including timelines
Monitoring, reporting, and review
Technical requirements to facilitate issuance
and safe transfer of units
Institutional requirements
Countries have provided a diverse range of sub-
missions on the elaboration of the modalities
and procedures under both approaches so that a
decision can be adopted at COP 18. While the
purpose of the new market approaches is to con-
tribute to ensuring cost-ecient mitigation ac-
tion globally, it remains to be seen whether they
can provide an overarching framework and clear
guidance as to what asset can be legitimately and
transparently traded as a result of domestic miti-
gation activity.
SECTION
5
Outlook 2012 demand and supply balance
THIS CHAPTER INVESTIGATES THE BALANCE BETWEEN THE DEMAND
FOR THE KYOTO ASSETS, inc|uding demand from governments and private sector
entities,
157
and the supp|y of these Kyoto assets. We have revised our estimates, and com-
pared to |ast year, we found a higher residua| demand of 290 million tCO
2
e (MtCO
2
e),
virtua||y a|| coming from European governments. A|though GHG emissions data for the
rst three years of the rst commitment period of the Kyoto period (2008-2010) hint at
|arger shortfa||s than previous|y expected, the market ba|ance remains unchanged due to
the |arger oversupp|y of Kyoto assets, notab|y AAUs.
5.1 GOVERNMENT DEMAND
Demand estimates for Kyoto assets from Annex B
governments were revised upward, to 574 MtCO
2
e
from 437 MtCO
2
e estimated in last years report.
Te EU-15 accounts for about 75% of the total
and Japan for almost 17% (see Table 5).
Updated emissions projections that reect pro-
longed global economic downturn show that
the EU-15 and the EU as a whole continue to
expect to meet and overachieve their Kyoto tar-
gets with current policies in place.
158
However,
it cannot be assumed that overachievement of
the collective target will enable certain member
states to cover shortfalls from others. Terefore,
some EU-15 members plan to use the Kyoto
exibility mechanisms to ensure that their indi-
vidual Kyoto targets are met.
Estimates from the 2011 report were revised,
taking into account new data on GHG emis-
sions in non-EU ETS sectors (2010) as well as
updated gures for governments intended use
of Kyoto units and sinks.
159
Declared intended
use of Kyoto assets now amount to roughly 443
MtCO
2
e from 2008 to 2012, mainly from Spain,
Italy, the Netherlands, and Austria. In addition,
in our estimates it appears that several countries
(Austria, Italy, and the Netherlands) show a gap
between their intended purchases of Kyoto assets
and their GHG emissions targets. According to
our estimates, if in 2011 and 2012 their respective
sinks and additional measures do not sequester
157. Those are entities covered by existing or anticipated domestic climate regulation, like the EU ETS or the NZ ETS, or participants to
sectoral agreements, like the Keidanren Voluntary Action Plan in Japan. For the vast majority, they belong to the private sector; however,
some public installations (like hospitals under the EU ETS) are also regulated.
158. The EU-15 is expected to over-achieve its Kyoto target by an amount equivalent to 4.6-5.1% of base-year emissions, depending
on whether the expected effects of additional measures are realized by 2012. Source: European Environment Agency, Tracking
progress towards Kyoto and 2020 targets in Europe, October 2011.
159. Our projections are based on GHG emissions for 2008, 2009, and 2010 from National Inventory Submissions to UNFCCC (April
2012), adjusted for the economic outlook for 2011 and 2012. Emissions projections have been revised using GDP forecasts by the
International Monetary Fund (Source: IMF, World Economic Outlook Update, April, 2012). The following figures are sourced from the
European Environment Agency: annual emissions and removals from LULUCF activities, intended annual use of Kyoto mechanisms,
and emissions in sectors not covered by the EU ETS, in the EU Member States, and Lichtenstein, Norway, and Switzerland. Source:
European Environment Agency, Tracking progress towards Kyoto and 2020 targets in Europe, October 2011.
and reduce GHG emissions more than in 2008,
2009, and 2010, these countries may have to col-
lectively purchase 75 MtCO
2
e in addition to their
intended purchases.
160
On the other hand, we esti-
mate that some countries may not need to buy the
amount of Kyoto units initially intended. Tese
include Spain, Belgium, Portugal, and Denmark.
Based on these results and assumptions, we
therefore estimate the governmental demand for
Kyoto assets in the EU-15 taken as a whole at
428 MtCO
2
e (see Table 6), compared to the 315
MtCO
2
e estimated last year.
Te earthquake and tsunami that struck Japans
northeast in 2011 may lead the country to use
more carbon-intensive fossil fuels to compensate
for the loss of nuclear capacity. Nevertheless, the
increased carbon intensity of output in Japan,
though will likely be oset by subdued economic
growth over the coming months. As of December
2011, Japan was still unable to determine the real
implication for its Kyoto achievement target.
161

In addition, Japan did not purchase carbon units
in 2011, leaving cumulative acquisitions to 97.8
MtCO
2
e since the commencement of the buy-
ing program in 2006.
162
In this context, gross
demand for Kyoto assets from the Government
of Japan is maintained at 100 MtCO
2
e, its initial
public procurement goal.
Gross demand from other Annex B governments
is estimated at 46 MtCO
2
e, mainly through
Norway and Switzerland. Although Norway
seems likely to meet its Kyoto target (+1%)
solely through domestic policy and measures,
its demand for Kyoto mechanisms stems from
its long-term commitment to carbon neutrality,
including an overachievement of its Kyoto tar-
get by 10%. On the contrary, we estimate that
Switzerland may have to purchase 7 MtCO
2
e
Table 5:
Supply and
Demand in
Perspective Kyoto
Market Balance,
2008-2012
Potential Demand from Industrialized Countries
(MtCO
2
e)
Potential Supplies (MtCO
2
e)
Country or entity Kyoto assets demand Official target*
EU
Government (EU-15)
Private sector (EU ETS)
1,293
428
865
Potential GIS
Ukraine
Russian Federation
Czech Republic
Other EU-10
>1,500
500700
200
120
600
Japan
Government
Private sector
300
100
200
Rest of Annex B
Government
Private sector
51
46
5
CDM & JI
CDM
JI
1,573
1,273
300
range: 1,5001,658
1,2501,301
250357
TOTAL
Government
Private Sector
1,644
574
1,070
* These numbers correspond to the amounts of AAUs governments intend to sell. They are much lower than the whole amount of
excess AAUs, now estimated at more than 10 billion tCO
2
e over the first commitment period, with Russia accounting for half, Ukraine
one-quarter, and Poland one-fifth.
160. Although we used reported emissions data for 2008-2010, our estimates rely on projections for 2011 and 2012 emissions. These
are only based on expected economic growth factors, and thus consider the performance of national sinks and additional measures
over 2011-2012 constant from 2008-2010. If those were to outperform in the last two years of the Kyoto period, our figures would
consequently need to be revised downward.
161. On the other hand, due to many factors that are difficult to estimate those impacts after the Great East Japan Earthquake, such as
operational status of nuclear power plants, electricity demand, and business activity, as well as weather forecast, it is difficult to estimate
GHGs emissions for the rest of the years of the 1st KP period at this stage. Source: Global Warming Prevention Headquarters under
the Cabinet of Japan, Progress Report of the Kyoto Protocol Target Achievement Plan, December 2011. (p3, translated from Japanese).
162. Source: Ministry of Environment of Japan, Government Purchase of Kyoto Credit, April 2, 2012.
more than initially intended (10 MtCO
2
e).
Australia and New Zealand continue to expect to
meet their Kyoto obligations through domestic
policy measures and carbon sinks.
163
5.2 PRIVATE SECTOR DEMAND
Gross demand from private entities has been re-
vised up 12% from last year, to 1,070 MtCO
2
e
(see Table 5), with demand in the EU ETS ac-
counting for 81% of the total. Te main reason
for this increase is the expected preferential sur-
render of CERs and ERUs (instead of EUAs) by
EU ETS operators in response to the ECs quali-
tative restrictions on the eligibility of osets in
Phase III as well as low prices for Kyoto osets
since the end of 2011.
Analysts expect Phase II of the EU ETS to be
oversupplied by about 1,300-1,600 MtCO
2
e. Te
surplus will be banked in the form of allowances,
including remaining reserves, set-asides, and un-
used osets.
164
In addition, prolonged economic
downturn, investment in renewable energy gener-
ation, and expected incremental energy eciency
measures in the EU have led analysts to expect
the EU ETS to remain oversupplied throughout
Phase III, with a 750-1,300 MtCO
2
e surplus in
2020 (including osets). Tus, by contrast with
the demand from governments reecting actual
shortfalls, the demand from the private sector en-
compasses arbitrage opportunities, even under an
oversupplied scenario.
However, it is expected that some installations
primarily utilities and airlines will be short.
165
A
shortfall of 400 MtCO
2
e is expected for airlines
until 2020. Tis may be supplied with CERs and
ERUs (up to 63 MtCO
2
e throughout 2020), or
with Aviation EU Allowances (see Section 3.9).
Remaining demand could also come from gener-
ators that start to hedge their future exposure in
Phase III as a result of tighter caps and increased
auctioning. Depending on the schedule of antic-
ipated sales or auctions of Phase III allowances,
this hedging behavior could induce some volatil-
ity in the EU ETS market during the transition
from Phase II to Phase III. Changes in the gener-
ation mix, brought by shifts in Germanys nucle-
ar energy policy or overheating in global energy
prices, for instance, could further push compli-
ance demand from power sector installations.
So far, EU ETS participants have contracted ap-
proximately 1.9 billion CERs and ERUs (nominal),
with CERs from HFC and adipic acid projects ac-
counting for about 25% of that amount.
166
Despite
the market being long, EU ETS operators may
nonetheless seek to benet from the price dier-
ence existing between CERs (or ERUs) and EUAs,
and therefore sell or bank EUAs to use CERs (i.e.,
CER/EUA swap operation). In addition, given
the ban of CERs from HFC and adipic acid proj-
ects in Phase III, it is expected that installations will
actually increase their use of CERs and ERUs over
the end of Phase II. In this context, last years esti-
mate of CDM and JI credits use over Phase II has
been revised from an average 750 MtCO
2
e to 865
MtCO
2
e (see Table 6) over 2008-2012.
167

163. Source: Department of Climate Change and Energy Efficiency of Australia, Quarterly Update of Australias National Greenhouse
Gas Inventory, December 2011. New Zealand estimates it will have a surplus of 23.1 MtCO
2
e for the Kyoto Period of 2008-2012.
Source: Ministry of Environment of New Zealand, April 2012.
164. Sources: Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012: Long position over Phase II: 677
MtCO
2
e, use of CERs and ERUs over Phase II: 819 MtCO
2
e. Societe Generale. Carbon Specials, March 20, 2012: Long position over
Phase II: 486 MtCO
2
2
e. Barclays Capital. Monthly Carbon Standard, March 26,
2012: long position over Phase II: 675 MtCO
2
2
e.
165. Based on 90% of the verified emissions for 2011, published verified emissions for the first four years of Phase II (2008-2011)
showed that the power and heat sector, which accounts for 74% of the emissions, was short by 10.3% accumulated over 2008-2011
(against free allowances), while the surplus was attributable to the remaining sectors which were long by 24.1%.. Source: Kppl, A., et al.
Views of the EU ETS, Climate Policy Brief, Austrian Institute of Economic Research, April 2012.
166. We estimate this amount to be 828 million CERs and ERUs after adjustment for risk performance. For details on the risk-adjustment
calculation, see Methodology.
167. The CERs and ERUs surrendered by EU ETS operators amounted to 84 MtCO
2
e in 2008, 81 MtCO
2
e in 2009, 137 MtCO
2
e
in 2010, and 254 MtCO
2
e in 2011. With an estimate of 865 MtCO
2
e surrendered over 2008-2012, this leaves 311 MtCO
2
e to be
surrendered in 2011 and 2012.
Private-sector companies in Japan have report-
edly contracted more than 465 MtCO
2
e in CERs,
ERUs, and AAUs (273 MtCO
2
e after risk adjust-
ment) that can be surrendered under the Keidanren
Voluntary Action Plan, which should amply cover
their estimated needs of 200 MtCO
2
e. We see two
explanations as to why Japanese private companies
continue to purchase Kyoto units. First, power and
steel companies anticipate increasing emissions
from the shutdown of nuclear capacity in Japan.
Although the government has yet to estimate how
this will impact national emissions (as explained
above), there are estimates that the shutdown of
nuclear capacity in Japan could create an additional
demand of 6070 MtCO
2
e.
168
In addition, the ob-
served increasing purchase of AAUs versus CERs
and ERUs by Japanese private companies could
also be regarded as the rst indications of Japanese
market participants exchanging the CERs and
ERUs they acquired in the primary market against
AAUs in order to cash in on the price dierence
between those assets.
169

Reported private-sector purchases beyond the
EU and Japan (e.g., U.S, Republic of Korea) have
mainly been driven by intermediaries seeking re-
turns in selling CERs and ERUs in the secondary
market. Although the New Zealand and Australia
emissions trading schemes do and will accept
CERs and ERUs, we did not track any primary
market transaction in 2010 and 2011 intended
to serve these markets. Private participants in the
market indicated procurements occur through the
secondary market, the liquidity of which is bet-
ter hedged against the market price volatility and
uncertainties over the utilization of Kyoto credits.
5.3 SUPPLY THROUGH TO 2012
About 1,270 mi||ion CERs are expected to be
issued pre-2013, of which slightly more than
half should be issued to HFC and adipic acid
projects.
170
Supply projections are up 10% on
average since last year, reecting primarily im-
proved timelines for registration. First, the CMP
decision in Cancun to move forward the start-
ing date of the crediting period has the potential
to add three to six months worth of CERs (or
the average time from request of registration to
eective registration) to a projects expected de-
liveries.
171
In 2011, 315 million CERs were is-
sued, which was a 140% increase over 2010 and
accounted for 40% of all issuance to-date (see
Section 4.2.1.5). Second, the inow of projects
entering the CDM pipeline doubled from the
start to the end of 2011, from 330 new projects
in Q1 2011 up to 609 in Q4 2011. Tis is the
highest rate ever perhaps reecting the fact
that project developers are rushing to get projects
registered before 2013 in light of EU eligibility
restrictions for Phase III.
172

Market analysts estimate that around 300 mi|-
|ion ERUs will be issued through 2012. Tis is
an increase over last years estimate (+20%), and
is largely a result of Russian eorts to increase
supply.
173
Te supply of ERUs was roughly mul-
tiplied by ve from 25 MtCO
2
e in December
2010 to 119 million ERUs in January 31, 2012.
Te supply of AAUs remains far larger than
the anticipated demand (i.e. countries have an-
nounced intentions to sell over 1,500 mi||ion
168. Sources: Deutsche Bank. Japans Quake & The Implications for Commodities. Commodities Special Report, March 14, 2011: 70
MtCO
2
e. Barclays Capital. Monthly Carbon Standard, April 11, 2011: 60 MtCO
2
e.
169. We tracked 23 MtCO
2
e AAUs and 0.9 MtCO
2
e CERs and ERUs purchased by Japanese private companies in 2011. For
comparison, in 2009 we tracked 36 MtCO
2
e and 29 MtCO
2
e respectively.
170. Sources: Cormier, A., Bellassen, V. The risks of CDM projects: how did only 30% of expected credits come through? CDC
Climat Research, 2012 and Shishlov, I., Bellassen, V., Leguet, B. Joint Implementation: a frontier mechanism within the borders of an
emissions cap. CDC Climat Research, 2012 and Deutsche Bank. EU Energy: ETS Reform Should Not Be Set Aside, April 12, 2012.
Thomson Reuters Point Carbon, Carbon Project Manager, April 26, 2012.
171. The CDM Executive Board was requested to revise the procedures for registration to allow the effective registration date/start of
crediting period to be the date on which a complete request of registration has been submitted by the designated operational entity
where the project activity has been registered automatically.
172. 330 new projects entering the CDM pipeline in Q1 2011, 385 in Q2, 510 in Q3, and 609 in Q4. Source: World Bank, from UNEP
Risoe, CDM Pipeline, February 2012.
173. The Russian increase in issuance of ERUs in 2011 came in response to an amendment to the Russian JI program, signed in
September 2001, and setting up the ERU issuance limit at 300 million until 2012. Source: CDC Climat Research, Paris. Shishlov, I.,
Bellassen, V., Leguet, B., 2012. Joint Implementation: A frontier mechanism within the borders of an emissions cap (Climate Report
No. 33). CDC Climat Research.
AAUs), and the uncertainties regarding the
bankability of AAUs has a fundamental role to
play in the existing supply and demand imbal-
ance and market dynamics. In addition, the rst
RMUs were issued in 2011 (see Section 4.2.4).
5.4 RESIDUAL DEMAND290 MTCO
2
E
Expected gross use of Kyoto assets now stands at
1.64 billion tCO
2
e over 200812 (up 18% from
last year), with approximately 65% of demand
coming from the private sector and 35% from
governments.
Adjusting the approximately 2.6 billion CERs
and ERUs contracted (nominal) for risk of un-
derdelivery, and accounting for AAU transactions
as well as some secondary transactions by govern-
ments, leads to an estimated residual demand of
290 MtCO
2
e of Kyoto assets by the end of 2012
(up from 136 MtCO
2
e last year), virtually all from
European governments (see Table 6).
Te three Kyoto exibility mechanisms are ex-
pected to be used by government buyers to meet
their demand for Kyoto assets. Although they
will be able to surrender Kyoto assets until the
end of the true-up period running through
mid-2015, most remaining purchases are expect-
ed to occur by the end of 2013 as many will use
the remaining year to ne-tune purchases only
(by that time, they will have a better handle on
the actual gap they have to compensate for). Our
estimates show that over 2008-2011, EU-15
governments bought less than 50% of the Kyoto
assets they may need; following the practices seen
in previous years, it is anticipated that they will
favor the use of AAUs and secondary osets to
meet their residual needs. As an example, Austria
announced in April 2012 that it sought to buy at
least 32 million AAUs to cover its entire expected
shortfall following revised GHG projections.
174
A brief exercise on supply and demand for post-
2012 is provided in Box 8.
Potential demand Contracted CERs and ERUs AAUs/RMUs Residual demand
(MtCO
2
e)
nominal
(MtCO
2
e)
Adjusted for
performance
(MtCO
2
e) (MtCO
2
e) (MtCO
2
e)
EU 1,293 2,175 969 79 245
Government (EU-15) 428 259 141 79 208
Private sector (EU
ETS)
865 1,916 828 0 37
Japan 300 380 169 194 9
Government of Japan 100 34 15 76 9
Japanese private
sector
200 346 154 119 0 (-73)
Rest of Annex B
and others
51 29 13 4 35
Government 46 24 11 0 35
Private sector 5 5 2 4 0 (-1)
Total 1,644 2,584 1,151 277 290
Government 574 316 167 154 253
Private sector 1,070 2,267 984 122 37
Note: Numbers may not add up due to rounding. Although the Government of Switzerland is included in Rest of Annex B and others,
we incorporated the CERs and ERUs contracted by private participants based in Switzerland in Private section (EU ETS) as we
consider that those are purchased by intermediaries based in Switzerland but serving EU ETS participants and EU-15 governments.
Table 6:
Potential demand,
contracted
supply, and
residual demand,
2008-2012
174. Source: Thomson Reuters Point Carbon, Austria to buy 32 mln AAUs: minister, April 4, 2012.
SECTION
6
Emissions trading and other low-carbon
initiatives around the world
SEVERAL DOMESTIC AND REGIONAL LOW-CARBON INITIATIVES, inc|ud-
ing market mechanisms, emerged in both deve|oped and deve|oping economies in 2011
and ear|y 2012. Te g|oba| carbon market witnessed the approva| of an ambitious bi||
that wi|| bring a nationwide cap-and-trade scheme to Austra|ia by 2015 and is expected
to cover rough|y 60% of the countrys annua| GHG emissions. Ca|ifornias cap-and-
trade regu|ation is set to go into eect in 2013, and by 2015 the p|an is expected to
cover 85% of Ca|ifornias annua| emissions. Qubec adopted its own cap-and-trade
p|an and is now working toward |inking it with Ca|ifornias (within the context of the
Western C|imate Initiative). Both Mexico and the Repub|ic of Korea got their compre-
hensive c|imate bi||s passed a few days apart in Apri| 2012. Tese initiatives combined
mean ve new jurisdictions are adopting economy-wide cap-and-trade schemes. Now
the wor|d |ooks with particu|ar attention to China, which is a|so among the frontrun-
ners in the race to become a |ow-carbon economy. Its advanced p|an to pi|ot severa|
regiona| cap-and-trade schemes is expected to provide the foundation for a nationwide
scheme in the coming years.
In addition to the new initiatives, this section
also summarizes some of the regional, national,
and sub-national policy and market-based initia-
tives that currently exist to support global cli-
mate change eorts. While the list of countries
described is not exhaustive, it does illustrate the
diversity of measures that are either under con-
sideration or implementation.
6.1 AUSTRALIA
6.1.1 Te C|ean Energy Future Package
In November 2011, the Australian Parliament
passed the Clean Energy Legislative Package as
part of an eort to comply with Australias un-
conditional target of reducing net emissions by
ve percent (%) below 2000 levels by 2020.
175
Te legislative package, known as the Clean
Energy Future Package, includes a Carbon Price
Mechanism (CPM) that is to take eect from July
2012 and link with international oset markets
from July 2015, as well as includes signicant
175. The net emissions pledge allows for Australia to use international emission reductions to help meet the target.
the Australian Parliament

passed the Clean Energy
Legislative Package

additional measures such as the establishment of
a Clean Energy Finance Corporation (CEFC) to
invest A$10 billion in renewable energy over 10
years from 2013-14 (complementing the exist-
ing Renewable Energy Target which requires that
20% of Australias electricity be produced from
renewable energy sources by 2020)
176
(see Table
7). Te passage of the legislation provides business
with increased policy certainty following a decade
of debate on the issue. However, there is still need
for further regulatory and political clarity.
Te CPM will commence with a xed price
for the rst three years. Te price will be set at
A$23/ton (18.50) (indexed annually by 2.5%)
and will operate similar to a tax. However, the
Scheme will require participants to acquire and
surrender permits, tradable as personal prop-
erty and regulated as nancial products - quite
dierent to an ordinary levy or tax. Te purpose
of this initial phase is to ease the transition to a
trading scheme, although business groups have
raised concern that the high xed price may re-
sult in it instead being punitive to industry and to
competitiveness. During this phase, scheme par-
ticipants may not surrender international units,
but may surrender Kyoto-compliant Australian
Carbon Credit Units (ACCUs) created under
the Carbon Farming Initiative (CFI) to meet up
to 5% of their obligation.
From July 2015, the domestic price will oat
but be subject to a price oor and a ceiling until
July 2018,
177
when the price is to oat freely. Te
oor will be set at A$15 and the ceiling will be
set at A$20 above the international price (indexed
annually at 4% and 5% respectively). Troughout
this stage, the number of Carbon Units (CUs)
176. In addition to complementary measures, the adoption of the legislation has also replaced the need for some existing measures.
These include the New South Wales Greenhouse Gas Abatement Scheme (GGAS), which the state government has agreed to abandon
on July 1, 2012, upon commencement of the CPM. The baseline and credit scheme has operated since 2003, targeting emission
reductions primarily in the states electricity sector but also in industry and forestry. Data relating to this scheme is included in this report
as part of Other Schemes.
177. Domestic ACCUs will not be subject to the price floor or cap.
Table 7:
Australias CPM
at a glance
Indicator Detail
Objective Help to lower Australias carbon emissions by 5% by 2020 (relative to 2000 levels)
and by 80% (also relative to 2000 levels) by 2050.
Commencement Fixed price period : July 1, 2012;
Flexible price period : July 1, 2015; and
Floating price: July 1, 2018.
Coverage Four Kyoto Protocol GHG gases: carbon dioxide (CO2), methane (CH4),
nitrous oxide (N20), perfluorocarbons (PFCs). Sulphur hexafluoride (SF6) and
hydrofluorocarbon-23 (HFC 23) will be regulated by non-trading legislation; and
Broad coverage. Forestry, agriculture and some transport not covered.
Compliance basis Annual, based upon 30 June year-end.
Caps Caps will be set by May 2014 for the first five years of the flexible price period of the
CPM; and
Each year thereafter a further years cap will be determined such that there will
always be caps set five years in advance.
Eligible from July 1, 2015 (up to 50% of annual obligation for liable entities);
International offsets Qualitative restrictions apply to some CERs; and
Subject to a surrender charge during the flexible price period.
Assistance Households to be the largest recipients of assistance; and
The bulk of sectoral assistance will be provided primarily in the form of free permits to
trade exposed industries.
0%
20%
40%
60%
80%
100%
2050 2011
Gas CCS
Gas and oil
Coal CCS Renewables
Brown coal
Black coal
P
e
r
c
e
n
t
made available by the Government will be limited
by a cap which will be set by May 2014 for the
rst ve years of the exible price period of the
CPM. Each year thereafter a further years cap will
be determined such that there will always be caps
set ve years in advance. Te exibility to set the
fth year cap annually contrasts with the EU ETS
and is designed to ensure that the caps underpin
Australias medium- and long-term targets, taking
into account a range of economic, environmental
and other relevant factors. Of the CUs made avail-
able, a portion will be freely allocated to business-
es to support jobs and competitiveness and to ease
the transition. Te remainder will be sold by the
Clean Energy Regulator (the Regulator) at auc-
tion. During this period, scheme participants may
also purchase international osets to meet 50% of
their obligations to 2020 in addition to ACCUs
for which there will be no quantitative restriction.
Te CPM is expected to cover approximately
500 businesses representing 60% of Australian
GHG emissions from electricity generation, in-
dustrial facilities, fugitive emissions, and some
landlls sectors.
178
An equivalent carbon price
will be applied to some business transport emis-
sions; big fuel users may opt into the scheme.
Te agricultural and land sectors will not be cov-
ered, but emission-reducing opportunities are
oered through the CFI.
Figure 20 indicates the sectoral impact of the
Scheme and measures to achieve Australias
mitigation target. Several sectors will receive as-
sistance in the form of free permits: electricity
generators will receive A$5.5 billion over ve
years; Emissions-intensive Trade-exposed (EITE)
industries will receive A$8.6 billion to 2015
179
in
the form of free permits set at two assistance lev-
els (94.5% or 66%) as well as grants to increase
energy eciency. Households will be the largest
recipients of assistance with over A$15.1 billion
allocated to low- and middle-income households
over four years.
From July 2015, scheme participants can meet
up to 50% of their emissions obligation with
international units. Unlike the EU ETS, there
are not yet constraints on the geographic origin
of international units or constraints on units
from projects registered post-2012 (see Table
8). Like New Zealand, Australia may therefore
be a source of demand for those CERs that will
no longer be eligible in the EU ETS starting in
2013. Scheme participants may also surrender
any international units which might subsequent-
ly be allowed by the Australian Government.
Importantly, the Government reserves the right
to disallow the use of some international units
at any time to ensure the environmental integ-
rity of the Scheme.
180
Te Australian market will
need to manage the risk around changing eligi-
bility with reference to this.
Figure 20:
Estimated
changes to
the national
generation mix in
2011 and 2050
Source: Department of Climate Change and Energy Efficiency,
Australian Treasury Modeling, Strong Growth, Low Pollution,
Modeling a Carbon Price, Update (2011).
178. Source: Australian Government, Clean Energy Future Fact Sheet, Carbon Pricing Mechanism: Who is liable?
179. Source: Australian Government, Mid-year Economic and Fiscal Outlook 2011-12.
180. The Government may allow other international units by regulation where they do not compromise the CPMs environmental integrity
and with advance notification to the market. For disallowed units, liable parties will be able to use such units for the compliance year in
which they were disallowed, but not subsequently. This effectively represents a grace period of 7-19 months in case of regulatory change,
compared with the EU ETS grace period of 6 months - 3 years from which a decision to exclude a project type may enter into force.
Figure 21 indicates the anticipated level of
Australias net emissions (with a carbon price)
to meet its commitment to a 5% reduction on
2000 emissions levels by 2020 and the antici-
pated extent of imports of international units.
182

Te Australian Treasury estimates that these
could reach 97 million tCO
2
e at 2020; this
assumes, amongst other things, a A$29 (23.3)
carbon price.
183
It is also estimated that roughly
350-400 MtCO
2
e of international units will be
imported over the entire 2015-2020 period.
184
Tis equates to approximately 26% of covered
emissions in 2020. Secondary CERs, rather than
primary CERs, are likely to represent the bulk
International unit Eligibility*
CPM EU ETS NZ ETS
CERs
CERs registered post 2012 and outside of LDCs
CERs - HFC-23, adipic acid, nuclear, afforestation, reforestation and large
scale hydro not compliant with World Commission on Dam guidelines

Ex. Large hydro
ERUs
RMUs
*Subject to restrictions
Table 8:
Eligibility of
international
units in
compliance
markets
181
Figure 21:
Australian GHG
emissions and
abatement
forecasts
government
policy scenario
0
200
400
600
800
1000
1200
2050 2040 2030 2020 2010
Without carbon pricing With carbon pricing Including overseas abatement

M
t
C
O
2
e
Internationally-sourced abatement
Domestic abatement
58
94 463
435
Abatement
2020 2050
152 897
Note: Emissions without carbon pricing include CFI abatement
Source: Treasury estimates from Monash Multi-Regional Forecasting (MMRF). Note that the internationally-sourced abatement forecasts
throughout the remainder of this document refer to the internationally-sourced abatement forecasts in the Strong Growth Low Pollution
(SGLP) modeling forecasts of 97 MtCO
2
e at 2020.
181. Source: Australian National Registry of Emissions Units Bill 2011; New Zealand Government, The New Zealand Emissions Trading
Scheme, Guidance on the use of CERs in the NZ ETS February 2012; Kossoy, A. and Ambrosi, P., State and Trends of the Carbon
Market 2010, What lies ahead for the EU ETS and Annex I: Supplementarity under the EU Climate and Energy Package, pages 17
and 63, respectively, June 2010.
182. Based on results from Australian Treasury Modeling, SGLP, Modeling a Carbon Price, Update, 2011.
183. Source: Australian Government Treasury, Strong Growth, Low Pollution, Modeling a Carbon Price - September, 2011.
184. Sources: Australian government (communication) and Thomson Reuters Point Carbon, Carbon Market Australia-New Zealand,
October 2011.
of this abatement as these units are highly liquid
and fungible and currently trade at relatively low
prices, especially given the strong Australian dol-
lar.
185
However, it is important to note that, dur-
ing the exible price period, entities that choose
to surrender international permits will need to
pay an additional surrender charge on top of the
international permit price.
186
Te Government
has released a discussion paper that outlines
four dierent ways to implement the surrender
charge. Te options discussed range from valu-
ing the oset at the actual price versus the market
price at the time it was purchased versus the mar-
ket price at the time of surrender. Te introduc-
tion of the surrender charge has been the sub-
ject of extensive discussions, including whether
its implementation constrains the capacity for
scheme participants to meet their obligations in
a exible, low-cost way.
Despite the schemes liberal linking provisions
and low international unit prices, purchases of
these units are likely to be depressed until further
clarity is provided on:
Te structure of the Governments Surrender
Charge, to be claried in forthcoming regulations.
Te level of the caps that will be set by a non-
political and independent Climate Change
Authority and will help to inform scheme
participants of their need for osets.
Overall political situation, given pledges by
the opposition leader to repeal the carbon
price after the next election.
In the absence of international unit purchases, a
range of domestic trading opportunities may arise
in the medium term. Tese include the trade of:
Freely allocated CUs that may be sold to other
entities or back to the government. However,
in the xed price stage, these units cannot be
banked into subsequent periods.
Auctioned CUs: Te government is likely
to commence advance auctions of up to 15
million CUs for each oating price year.
Although the timetable has not yet been set,
the governments proposal is to commence
auctions in FY 2013-14, most likely in early
2014.
187,188
ACCUs. Tese credits will be an attractive
option during the xed-price period if they
trade below the xed price. However, as
ACCUs are a new type of unit, there is as yet
no set pricing for them.
Exchange products. Australias main bourse,
the Australian Stock Exchange (ASX), is ex-
pected to introduce carbon futures trading,
oering both CUs and A$ denominated in-
ternational units.
Te CPM is designed to link with other emis-
sions trading schemes operating internation-
ally. Te Australian Government is engaged in
discussions with the European Union and New
Zealand regarding the possibility of linking their
schemes with the CPM.
It is also estimated that roughly

350-400 MtCO2e of international
units will be imported over the entire
2015-2020 period. Secondary CERs,
rather than primary CERs, are likely to
represent the bulk of this abatement
185. A question remains as to whether Australian entities may be able to use CERs if its government decides not to sign up for the
second commitment period of the KP.
186. When the international price is lower than the floor price.
187. Source: Australian Government, Legislative Instrument for auctioning carbon units in Australias Carbon Pricing Mechanism,
February 2012. This position paper indicates that the governments preferred position is to implement a sequential ascending clock
auction. Accordingly, bidders will not be permitted to increase the bid quantity as the auction progresses. This type of auction is
designed to optimize price discovery and contrasts with EU trading auctions, which are mainly uniform price sealed bid auctions (price
discovery is less of an objective as a liquid secondary market exists). The government is expected to finalize the auction design in the
first half of 2012.
188. While auctioning CUs ahead of the next federal election may reduce the risk that the opposition party, if elected, will unwind the
scheme, there is also concern that a pre-election auction would see limited demand due to perceived sovereign risk.
6.1.2 Te Carbon Farming Initiative
Alongside the CPM, the Australian Government
has also formally launched the rst regulated pro-
gram that allows abatement activities from the
land sector to generate carbon osets. ACCUs
will be issued in respect of each ton of abatement
achieved by:
Reducing or avoiding emissions (e.g., capture
of methane emissions from landlls, reducing
emissions from savannah burning, livestock
production, and fertilizer use).
Removing carbon from the atmosphere
through bio-sequestration (e.g., growing
trees) or sequestration within the ground
(e.g., soil carbon).
CFI abatements that count toward Australias
Kyoto Protocol target can earn Kyoto ACCUs
that will be fungible in both the CPM and in the
international compliance market established un-
der the Kyoto Protocol. Eligible sources include
reforestation, and reducing emissions from live-
stock, manure, fertilizer, and waste deposited in
landlls (before July 1, 2012). Some sources of
CFI abatement will not be included in Australias
national greenhouse accounts under the Kyoto
Protocol. Trough the CFI, these activities can
earn non-Kyoto ACCUs. Eligible sources in-
clude soil carbon, feral animal management,
and improved forest management.
ACCUs will also only be issued for additional
abatement. Tis means that ACCUs will not be
available for projects that are required by law
(regulatory additionality), or activities that are
common practice and already widely adopted.
While regulatory additionality will be assessed
for individual projects, activities that go be-
yond common practice will be assessed using a
Positive List. Tis approach assesses additionality
for activities rather than for projects and, there-
fore, represents a streamlined way of identifying
activities that are not common practice. Te CFI
is one of the rst carbon oset schemes to use
a Positive List approach to additionality. As at
February 2012, three activities have been identi-
ed as Positive List activities: vegetation and wet-
land restoration, legacy landll gas, and livestock
management.
ACCU supply is expected to be limited at the out-
set, due to the long lead-time of projects, meth-
odological complexity and uncertainty over mea-
suring emissions. Te Government has estimated
abatement from Kyoto ACCUs at 7 MtCO
2
e
in 2020.
189
Te CPM will provide demand for
Kyoto ACCUs, while the Australian Government
will be a direct source of demand for non-Kyoto
ACCUs in order to support the development of
these projects, for which it has allocated A$250m
over six years from 2012-13 for this purpose.
In addition, Australias National Carbon Oset
Standard
190
will be amended to recognize both
Kyoto and non-Kyoto ACCUs as eligible.
While abatement opportunities are likely to be
leveraged in the medium to long term, the CFI
oers an important opportunity for road testing
approaches to land-use osets and additionality
through positive lists. As such, the scheme has
been awarded bipartisan support.
6.2 NEW ZEALAND
In its third surrender year for mandatory sectors,
New Zealands Emissions Trading Scheme (NZ
ETS) closely tracked international markets given
low international oset prices. A government-
appointed review of the scheme was also com-
pleted; it recommended that the scheme contin-
ue, but at a slower pace. Tis recommendation
189. Source: Australian Treasury Modeling, Strong Growth, Low Pollution, Modeling a Carbon Price. Update 2011.
190. National Carbon Offset Standard The Australian Government introduced the National Carbon Offset Standard (NCOS) on July 1,
2010 to provide national consistency and consumer confidence in the voluntary carbon market. The standard serves two primary functions
it provides guidance on what is a genuine voluntary offset and sets minimum requirements for calculating, auditing and offsetting the
carbon footprint of an organization or product to achieve carbon neutrality.
was on the basis that New Zealand is on track to
meet its Kyoto Protocol obligations (emissions to
remain at 1990 levels) as well as its conditional
10-20% reduction target by 2020 and 50% re-
duction target by 2050.
Te independent government-appointed review
of the NZ ETS, published in September 2011,
considered the operation and eectiveness of the
scheme since it commenced for forestry in 2008
and for energy producers, industrial processes,
and transport in 2010. In view of the status of
UNFCCC negotiations, and actions by its key
trading partners, the Review also provided rec-
ommendations on how the scheme should oper-
ate post-2012, as follows:
Gradually scaling up the current provision
to surrender one emission unit for every two
tCO
2
e from 2013 to 2015 (increasing at in-
tervals of 67% in 2013, 83% in 2014, and
100% in 2015).
Agriculture surrenders one unit per every two
tCO
2
e for the rst two years of its entry into
the ETS in 2015.
191
Including the waste sector and the synthetic
gas sector in 2013. Tis will cover methane
from landlls, and hydrocarbons and peru-
rocarbons for refrigeration and other uses.
Maintaining commitments to cover agricul-
ture from 2015 and exclude any price oors.
Scrutinizing the eligibility of Certied
Emission Reductions (CERs) generated from
hydrouorocarbon-23 (HFC 23) and nitrous
oxide (N
2
O) projects on the basis of environ-
mental integrity and supply-side concerns.
Te government responded by regulating
a ban on these credits from December 23,
2011.
192

In April 2012, the government released a con-
sultation paper that considers these recommen-
dations. Te paper proposes a raft of changes in
an eort to improve the operation of the ETS
and to create more consistent incentives for
domestic abatement. Some of the key propos-
als include setting an absolute cap on covered
emissions; limiting the use of international o-
set credits; maintaining the NZ$25 price ceil-
ing beyond 2015; changing the ETS rules for
pre-1990 forest-owners to bring them into line
with new international forestry rules decided at
COP 17 in Durban last year; and allocating al-
lowances through auctions from 2014 or 2015.
Once the public consultation phase is complete,
an amendment bill is expected to follow.
In 2011, scheme participants secured enough
secondary CERs to achieve compliance for the
next two to three years,
193
given low CER prices,
a strong New Zealand dollar, and the schemes
100% international oset provisions. Domestic
activity in the NZ ETS has been assessed based on
the internal transfers
194
tracked within the New
Zealand Emissions Unit Register (NZEUR). It
indicates that about 27 million New Zealand
units (NZUs) changed hands in 2011, represent-
ing a total value of US$351 million.
195

Te steady inow of international osets placed
pressure on domestic emission permits, which
fell from NZ$20 in May to converge close to
secondary CERs, at NZ$7.00, in December
2011. While this has dampened the short-term
incentive to increase forest coverage, some forest-
ers remain present in the market and, according
to brokers, have been buying back New Zealand
Units (NZUs) that had been previously sold at
higher prices. Prior to the slump in domestic
prices, forest plantings had risen 27% in the year
to April 1, 2011.
196

191. To increase by NZ$5 each year.
192. Credits already purchased from these projects may be used for compliance in 2012 and 2013.
193. According to local brokers.
194. It is therefore conservatively assumed that most transactions are made on a spot basis, given the low level of maturity (most
demand-side participants joining the ETS in July 2010) and sophistication of the market (absence of exchange-based trades).
195. Source: Prices kindly provided by Westpac.
196. Source: Thomson Reuters Point Carbon, Carbon scheme boosts NZ tree planting, December 20, 2011.
In addition to its liberal international linking
provisions with the Kyoto Protocols exibility
mechanisms, New Zealand is considering link-
ing with the Australian carbon market from
2015. As in Australia, a question remains as to
whether New Zealand entities will be able to ac-
cess CERs if its government decides not to sign
up for a second commitment period of the KP.
6.3 NORTH AMERICA
197
6.3.1 Regiona| Greenhouse Gas Initiative
In 2009, the Regional Greenhouse Gas Initiative
(RGGI) was launched. It became the rst man-
datory Emissions Trading Scheme (ETS) in
the United States, and it covers emissions from
power plants in the Northeast and Mid-Atlantic
States
198
through to 2018. Te scheme is charac-
terized by three compliance periods, the rst of
which was completed in 2011. Over the course
of the rst compliance period, emissions across
the 10 participating states remained relatively
stable, declining only 2.7 million short tons of
CO
2
e (stCO
2
e)
199
from 123.7 million stCO
2
e
(MstCO
2
e) to 121 MstCO
2
e. Tis is 36% low-
er than the annual cap, which was set at 188
MstCO
2
e, based on an analysis of 2000-2004
emissions. Te primary catalysts for the decline
in emissions from 2005 onward include lower
electricity demand due to the development of en-
ergy eciency measures and weather conditions;
fuel switching from coal and petroleum to gas
triggered by lower relative natural gas prices; and
increasing power generation from non-emitting
sources such as nuclear and renewable energy.

Te rst compliance period of the scheme was
therefore marked by signicant over-allocation
and prices that tracked the US$1.86 oor price
(US$1.86 in 2010 and US$1.89 in 2011) from
September 2010 onward (see Figure 22).
Coinciding with the over-allocation of permits
and low prices, the share of secondary market
exchange-based transactions fell from 85% in
2009 to 6% in 2011, with most transactions
conducted on a bilateral spot basis. Te average
daily volume of RGGI futures contracts listed
on the Chicago Futures Exchange (CCFE) de-
clined by a factor of 100 over the same period,
from an average daily volume of 2.7 MstCO
2
e in
2009 to 0.28 MstCO
2
e in 2011. Te little dif-
ference between the average settlement price of
auctions (US$1.89/stCO
2
e) and that of bilateral
transactions through the RGGI CO
2
Allowance
Tracking System (RGGI COATS) (US$1.91/
stCO
2
e) in 2011 tends to show that most bilat-
eral transactions were spot. Such a radical move
may hint at a decreasing interest from compli-
ance participants in hedging positions through
derivatives contracts in the context of an over-al-
located market, and/or the exit of some nancial
participants that used to provide liquidity onto
the CCFE platform.
197. The sequence of jurisdictions follows alphabetical order.
198. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.
199. A short ton of CO
2
e is equal to 0.9072 metric tons of CO
2
e. For the sake of data homogeneity with other markets, we convert
volumes in metric tons in our global market figures in Chapter 1 (i.e., in 2011, 132x0.9072 = 120MtCO
2
e).
V
o
l
u
m
e

(
M
i
l
l
i
o
n

s
h
o
r
t

t
o
n
s
)
U
S
$
0
100
200
300
400
500
600
700
800
900
1,000
2011 2010 2009 2008
Price Bilateral
Exchange Auction
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
3.52
1.96 1.89
2.97
Figure 22:
Market volumes
and prices
on the RGGI,
2008-2011
Source: World Bank, data from RGGI COATS, CCFE, ICE.
As of December 31, 2011, 89% of rst compli-
ance period CO
2
allowances were sold at auc-
tion. Since commencement in September 2008,
auction revenues have totaled about US$952
million
200
and have been roughly allocated across
all RGGI states on an average basis as follows:
201
48% to energy eciency programs promot-
ing new installations and retrots in residen-
tial and commercial facilities (e.g., insula-
tion). Tese measures are estimated to have
generated electricity bill savings of US$1.3
billion for residential, commercial, and in-
dustrial consumers across the participating
states. Savings in non-electric energy supply
(natural gas, heating oil) amount to an ad-
ditional US$174 million;
20% to states general budgets;
14% to direct electricity bill assistance;
7% to support renewable power generation;
11% to various other environment related
programs and outreach activities.
Although electricity generators lost US$1.6 bil-
lion in revenue over the period (2009-2011) due
to lower demand caused by RGGI-funded energy
eciency investments, consumer gains and other
benets, including cash injection into the econ-
omy, led to a net economic impact of US$1.6
billion and the creation of 16,000 jobs.
202
Only nine states will participate in the second
compliance period, from 2012-2014, following
New Jerseys announcement that it would with-
draw from the program in 2011.
203
Te annual
cap for this period is set at 165 MstCO
2
e, still
far above the trend for emissions. However, in
2012, the program embarked on a comprehen-
sive review, as specied in the 2005 memoran-
dum of understanding establishing the RGGI.
Te review is expected to result in a set of recom-
mendations for consideration in late-2012, and
will be applied, following relevant rulemaking,
legislative, and public processes in each partici-
pating state. Te states are working with stake-
holders to evaluate key program design elements,
such as the redenitions of the cap trajectory and
the price oor level, the introduction of further
price collars, imported electricity and associated
emissions,
204
and the place of the oset program
in the scheme.
6.3.2 Ca|ifornia, Qubec and the Western
C|imate Initiative
In 2007, the Western Climate Initiative (WCI)
was launched; it now encompasses the Canadian
provinces of British Columbia, Manitoba,
Ontario, and Qubec, as well as the U.S. State
of California. Since then, all partners have
been working together to develop harmonized
cap-and-trade legislation, with the intention to
have their laws be adopted, implemented, and
regulated under each jurisdictions authority. In
November 2011, a nonprot corporation WCI,
Inc., was created to provide the partners with ad-
ministrative and technical support to help them
operate their programs. In 2011, California and
Qubec were the rst two jurisdictions to adopt
cap-and-trade regulations. Although some of
200. A total of 22% of the allowances offered at auctions were not sold. In December 2011, the states of Connecticut, Delaware,
Maryland, Massachusetts, New York, Rhode Island, Vermont, and, by default, New Jersey, announced their intent to retire 93.6% of those
unsold allowances from the market; the States of Maine and New Hampshire had not, as of early April, agreed to do the same..
201. Source: P. J. Hibbard, S. F. Tierney, A. M. Okie, P. G. Darling, The Economic Impacts of the Regional Greenhouse Gas Initiative
in Ten Northeast and Mid-Atlantic States. Review of the Use of RGGI Auction Proceeds from the First Three-year Compliance Period,
Analysis Group, 2011.
202. Source: P. J. Hibbard, S. F. Tierney, A. M. Okie, P. G. Darling, The Economic Impacts of the Regional Greenhouse Gas Initiative
in Ten Northeast and Mid-Atlantic States. Review of the Use of RGGI Auction Proceeds from the First Three-year Compliance Period,
Analysis Group, 2011.
203. Source: Department of Environmental Protection, State of New Jersey. Notice of withdrawal of agreement to the RGGI
memorandum of understanding, November 29, 2011.
204. An econometric analysis performed by the New York Independent System Operator (the electricity grid administrator) finds no
evidence of interstate leakage from 2008-2010 caused by RGGI compliance costs, but does forecast such impact with higher RGGI
allowance prices. Source: A. G. Kindle, D. L. Shawhan. An Empirical Test for Inter-State Carbon-Dioxide Emissions Leakage Resulting
from the Regional Greenhouse Gas Initiative. New York Independent System Operator Inc., and Rensselaer Polytechnic Institute, 2011.
them are reported to be facing their own politi-
cal challenges,
205
the other three WCI partners
continue eorts to develop and adopt their re-
spective programs. As recommended by WCI
rules,
206
California and Qubec are now working
toward linking from the start of their programs
in January 2013.
6.3.2.1 California
Te Global Warming Solutions Act of 2006
known as Assembly Bill (AB) 32 requires
California to cut GHG emissions to 1990 levels
by 2020 and directs the California Air Resources
Board (CARB) to develop and adopt regulations
across the state economy to provide incentives
for reducing the states dependence on fossil fu-
els, stimulating investment in clean and ecient
technologies, and improving public health.
207

Under AB 32, a 2008 Scoping Plan was created
which calls for the establishment of a broad-based
cap-and-trade scheme as the core instrument of
Californias climate change strategy. Te cap-
and-trade scheme is to cover 85% of statewide
GHG emissions of which transport and power
accounted for 38% and 25% in 2008 respectively
(see Figure 23).
208
It joins a suite of other major
measures, including standards for ultra-clean cars,
low-carbon fuels, and renewable electricity.
209
205. Source: Lancaster. R, Counting Down Carbon Trading magazine, February 2012.
206. Source: Western Climate Initiative, Design for the WCI Regional Program, 2010.
207. Source: State of California, Global Warming Solutions Act of 2006, 2006.
208. Source: California Air Resources Board, California Greenhouse Gas Inventory for 2000-2008, 2010.
209. The main measures in the electricity sector include the expansion of the 2002 Renewable Portfolio Standard (RPS) up to 2020,
with a 33% target for the share of renewable energy in utilities power generation or procurement, as well as energy efficiency standards
for buildings and new appliances. For transport, a Low Fuel Carbon Standard sets a 10% carbon intensity reduction target for fuel
vehicles by 2020, and a Low Emission Vehicle (LEV) program will further bring down existing emission standard targets for new
passenger motor vehicles produced up to 2025. Source: California Air Resources Board, State of California, Climate Change Scoping
Plan, 2008.
210. CARBs 2020 forecast includes projected reductions from existing RPS and LEV programs (38 MtCO
2
e in total). Cap data results
from the total allowance budget minus the allowances set aside in the Price Containment Reserve (PCR, thereafter described) and
Voluntary Renewable Electricity (VRE) program. The result is a 16% reduction from business-as-usual (BAU) levels in 2020 for total
emissions and 24% for those under the cap. Source: California Air Resources Board, California GHG Emissions - Forecast (2008-
2020), 2010.
Figure 23:
Californias
historical GHG
emissions,
projections, and
reduction targets
210
Source: World Bank, CARB.
CAP
Electricity Transport Industry Building
0
100
200
300
400
500
600
2
0
2
0
2
0
1
9
2
0
1
8
2
0
1
7
2
0
1
6
2
0
1
5
2
0
1
4
2
0
1
3
2
0
1
2
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
1
9
9
0
Agriculture
and Forestry
Not specified
TOTAL BAU Total capped TOTAL 2020 TARGET
BAU TOTAL
EMISSIONS
TARGET TOTAL
EMISSIONS
BAU CAPPED
EMISSIONS
CAP
-16%
-24%
160
507
427
409
427
157
378
366
355
332
310
321
E
m
i
s
s
i
o
n
s

-

M
t
C
O
2
e
Californias cap-and-trade regulation was adopted
by CARB in October 2011 and will be enforced
from January 1, 2013. In the programs rst com-
pliance period (2013-2014), it will cover large sta-
tionary sources that emit at least 25,000 tCO
2
e per
year in the industry and electricity sectors, includ-
ing out-of-state generation (i.e., imports). From
2015, distributors of transportation, residential,
and commercial fuels will enter the scheme, bring-
ing the number of covered entities to about 600.
Te cap is set in 2013 at about 2% below CARBs
2012 emissions level forecast, declines 2% in 2014,
and then 3% annually from 2015.
211
Allocation to industrial facilities is based on a
carbon emissions eciency benchmark specic
to each manufactured product. Facilities with
products too complex for product benchmark-
ing will be given their allocations using an en-
ergy-based allocation method. From scheme
commencement, they will receive most allow-
ances for free to lessen the nancial impacts of
the scheme and minimize emissions leakage.
For those with the least level of trade exposure
and emissions leakage risks (e.g., pharmaceutical
and medicine manufacturing), the share of free
allowances will decline from 100% in the rst
compliance period (CP1) down to 50% in CP2
and 30% in CP3. In the power sector, only dis-
tributors as opposed to generators will be giv-
en free allowances. Private entities, referred to as
Investor Owned Utilities (IOUs), are required to
fully monetize them at auction; Publicly Owned
Utilities (POUs) can also use them to cover
compliance obligations. Te California Public
Utilities Commission (CPUC), which regulates
IOUs, is currently looking at how to spend the
resulting proceeds to maximize end-consumers
benets on their electricity bills. Additional al-
lowances will be accessible through quarterly
auctions, the rst of which is expected to be held
on November 14, 2012.
212
Te minimum bid is
set at US$10 in 2012, and will increase 5% (plus
ination) annually. In its 2012-2013 budget,
Californias Department of Finance estimates it
will receive US$1 billion in revenues from auc-
tions. Half is planned to be used to cover the
states costs related to GHG mitigation activi-
ties, while the remaining half shall be invested in
clean and ecient energy, lowcarbon transpor-
tation, natural resource protection, and sustain-
able infrastructure development.
213
Several cost-containment mechanisms will be es-
tablished to limit compliance participants expo-
sure to high prices. A percentage of each annual
allowance budget will be set aside in an Allowance
Price Containment Reserve (PCR). Tose allow-
ances will be available to compliance participants
from 2013, at a xed pre-determined price and
until the reserve is exhausted, if these face or ex-
pect high prices (see Annex 4: Californias Cap-
and-Trade Design Features). Te use of osets
is limited to 8% of covered entities compliance
obligation, which amount to a maximum of 218
MtCO
2
e over 2013-2020.
214
Eligible osets can be generated through four
sources:
Compliance Osets Credits issued by
CARB from a project in the U.S. or its
Territories, Canada, or Mexico, and devel-
oped according to a compliance oset proto-
col approved by CARB. As of today, four o-
set protocols have been approved by CARB:
U.S. Forest Projects, Livestock Projects,
Ozone Depleting Substances Projects, and
Urban Forest Projects. Te four approved
protocols restrict eligible activities to the
211. The cap in Figure 23 is the annual allowance budget netted by the allowances joining the Allowance Price Containment Reserve.
212. Source: California Air Resources Board, Testimony of Chairman Mary D. Nichols at Senate Select Committee on Environment,
Economy & Climate Change, 2012.
213. Source: Department of Finance of the State of California, Governors Budget 2012-2013, Environmental Protection Budget, 2012.
214. 28.0 MtCO
2
e over 2013-2014 (CP1), which is 8% of the allowance budget for that period, 99.8 MtCO
2
e in CP2, and 90.3
MtCO
2
e in CP3.
U.S., which means that additional protocols
would be needed for projects to be in Canada
or Mexico. Additional protocols are currently
under consideration.
215

Early Action Osets Credits issued by
a voluntary program approved by CARB,
and generated from a U.S.-based project
developed according to a CARB-approved
protocol for emission reductions and/or se-
questration achieved between January 2005
and December 2014. Before an Early Action
Oset Credit can be transacted on CARBs
tracking system and/or used for compli-
ance, it must rst undergo regulatory veri-
cation and review. CARB will then issue a
Compliance Oset Credit, based on a one-
to-one basis. As of today, only four Climate
Action Reserve (CAR) project types can gen-
erate Early Action Oset Credits.
216
As of
April 5, 2012, CAR had issued 7.5 million
Climate Reserve Tons (CRTs) under those
four protocols. Of these, 1.2 million CRTs
have been retired for voluntary purposes,
leaving approximately 5.3 million CRTs
available for conversion for compliance use.
CAR expects to issue 29.5 million of those
by the end of CP1 in 2014.
217
Should all of
them be compliance-oriented and succeed in
converting to CARB-issued compliance o-
sets, they could support the entire demand
for osets for CP1 (i.e., 28 MtCO
2
e).
Sector-Based Oset Credits from crediting
programs (including REDD) in an eligible
developing country or some of its jurisdic-
tions. Such credits are subject to a sub-limit
of 2% of compliance obligation in CP1, and
4% in CP2 and CP3, which represents about
97.7 MtCO
2
e maximum over 2013-2020.
Following the signature of a Memorandum
of Understanding with the states of Acre in
Brazil and Chiapas in Mexico in 2010, a
REDD Oset Working Group was estab-
lished to inform the potential inclusion of
such credits. Tis will, however, be subject to
further regulation.
Compliance Oset Credits issued by a
linked regulatory program, subject to further
rulemaking.
All oset credits issued by CARB are subject to
an invalidation provision, under which CARB
may remove or require replacement of those
credits, the generation of which has proved to
result from an over-estimation of the GHG re-
duced and/or removed or be in breach of ap-
plicable law. Tis provision has attracted strong
criticism from the industry as it places poten-
tial liability on buyers of the credits.
218
In April
2012, the CPUC approved rules for IOUs car-
bon procurement. Tese require that IOUs only
engage in bilateral transactions of carbon units in
the secondary market through public Requests
for Oers. Te rules also restrict osets procure-
ment to spot transactions
219
and forbid the pur-
chases of early action credits.
Californias market has yet to take o, as it has
been hampered by strong regulatory uncertain-
ty; this is largely due to several legal challenges
faced by the cap-and-trade scheme in the past.
Te absence of IOUs, whose authorization and
conditions for participation have yet to be ruled
by CPUC, has also restrained market liquidity.
Exchange-based trading of California Carbon
Allowances (CCAs) started in September 2011
with the introduction of derivatives contracts
215. Notably, some of the protocols developed by the American Carbon Registry: Emissions Reductions in Rice Management Systems,
N
2
O Emissions Reductions from Changes in Fertilizer Management, and Conversion of High-Bleed Pneumatic Controllers in Oil &
Natural Gas Systems.
216. Several CAR protocols can be used to cover the four project types for which CARB has a compliance offset protocol. These are
the Climate Action Reserve Urban Forest Project Protocol versions 1.0 through 1.1, U.S. Ozone Depleting Substances Project Protocol
version 1.0, U.S. Livestock Project Protocol versions 1.0 through 3.0, and Forest Project Protocol version 2.1 and versions 3.0 through
3.2.
217. Source: Climate Action Reserve, Projections of future CRT issuance, April 5, 2012.
218. Source: International Emissions Trading Association, IETA submission to CARB on AB32 program rules during first commenting
period, 2011.
219. Source: Public Utilities Commission, State of California, Decision on System Track I and Rules Track III of the Long-Term
Procurement Plan Proceeding and Approving Settlement, April 2012.
on the ICE and the Green Exchange. A total
of 3.927 million CCAs were exchanged, mostly
through ICEs OTC platform.
220
In addition,
Point Carbon tracked 196,000 CCAs that were
exchanged bilaterally. We estimate the total value
for the CCA market in 2011 at US$63 million.
In 2011, 7.375 million tons of U.S. domestic o-
sets subject to transactions motivated by compli-
ance in California (US$67.7 million value) were
tracked.
221
A series of contracts have emerged
on the market, and as many price references,
according to the risk of eligibility in the future
compliance regime of the underlying assets. Te
CARB guaranteed oset contract captures the
highest value, as it provides buyers with the guar-
antee to be delivered CARB-issued Compliance
Oset Credits at expiration and guarantees that,
if the credits are revoked by CARB, the seller
will replace them. According to Point Carbon,
the corresponding December 2013 forward con-
tract traded at an average US$12.25 in March
2012, which was 12.5% o the CCA price (see
Figure 24). Tis discount can be explained by
the 8% oset utilization limit applied to oset
credits as opposed to CCAs, which have no
oset limits and thus enjoy higher liquidity.
In addition, osets carry the invalidation risk,
unique to Californias market, and therefore dif-
fer from that existing between EUAs and CERs
in the EU ETS. Te CARB non-guaranteed
oset contact traded at a 12% discount from
the latter oset. Tese contracts do not provide
a guaranty that a credit will be replaced in case it
is revoked. A third category of contract provides
delivery of credits issued by the Climate Action
Reserve, the so called Climate Reserve Tons
(CRTs), under four protocols U.S. forest,
ozone-depleting substances, livestock methane,
and urban forestry from 2005-2014, eligible
to be converted into CARB Early Action Oset
Credits. In March 2012, those voluntary credits,
yet regarded as pre-compliance, ranged from
US$7.75 to US$8.25, which is roughly 35%
below the price of CARB-guaranteed osets.
Tis discount therefore reects the risk attached
to the further regulatory verication and review
which is necessary for eligible CRTs to be con-
verted into compliance oset credits by CARB.
0
2
4
6
8
10
12
14
16
18
20
Mar-12 Feb-12 Jan-12 Dec-11 Nov-11 Oct-11 Sep-11 Aug-11 Jul-11 Jun-11 May-11 Apr-11 Mar-11
U
S
$
/
t
C
O
2
e
CCAs Dec 13 CRTs for livestock
methane projects
CRTs from ODS projects
CRTs for US forest
projects V3.1
CARB guaranteed
offset Dec-13
CARB non-guaranteed
offset Dec-13
Figure 24:
Pricing for CARB
eligible market
instruments
Source: Thomson Reuters Point Carbon
220. Green Exchange lists futures and option contracts for delivery in Decembers 2012, 2013, 2014, and 2015. 0.025 Million CCAs
Futures were traded in 2011. ICE offers OTC clearing services on forward and option contracts for delivery in December 2012, 2013,
2014, and 2015. A total of 2.377 million futures and 1.525 million options were cleared on ICE in 2011.
221. Thomson Reuters Point Carbon communication.
6.3.2.2 Qubec
In 2009, Qubec emitted 81.8 MtCO
2
e, ac-
counting for 11.9% of Canadas GHG emis-
sions.
222
Te 2009 per capita GHG emissions
stood at 10.4 tCO
2
e, which is almost half of the
nationwide gure.
223
As in California, the trans-
port sector accounts for the largest share of GHG
emissions, with 43.5% of the total; these have
increased 26.6% from their 1990 level. Industry
stands at 28%, buildings at 14%, agriculture at
7.9%, waste at 5.9%, and electricity generation
at 0.8%. It is in the last sector that Qubec dif-
ferentiates itself the most from California (25%
of total GHG emissions), as 97% of its electric-
ity is sourced from hydropower plants.
224

In November 2009, Qubec adopted the target
to reduce GHG emissions to 20% below 1990
levels by 2020; this is equivalent to a 19% drop
by 2020 from a business-as-usual scenario (see
Figure 25).
225
A key instrument to achieve the
target will be a cap-and-trade program passed in
December 2011
226
within the broader context of
the WCI, which will start operations in January
2013. Qubec joined WCI in April 2008.
227
222. GHG inventory excludes emissions from land use, land-use change, and forestry (LULUCF). Source: Ministry of Sustainable
Development, Environment and Parks of Qubec. Inventaire Qubcois des missions de gaz effet de serre en 2009 et leur volution
depuis 1990, 2011.
223. Canadas per capita GHG emissions stood at 20.5 tCO
2
e. For reference, Alberta reached 63.7 tCO
2
e per capita in 2009, and
California 13.1 tCO
2
e per capita.
224. Source: Ministry of Natural Resources and Wildlife of Qubec.
225. Projections from Qubecs Ministry of Sustainable Development, Environment and Parks. Source: Ministry of Sustainable
Development, Environment and Parks of Qubec, Etat des lieux de la lute contre les changements climatiques au Qubec, 2011.
226. The cap-and trade program is part of the Qubecs Climate Change Plan. The first Plan covered 2006-2012 and its measures
resulted in a drop of 2.5% of GHG emissions from 1990 to 2009. New measures will be defined in the upcoming Plan will cover 2013-
2020. Source: Ministry of Sustainable Development, Environment and Parks of Qubec, 20062012 Action Plan, Qubec and climate
change, a challenge for the future, 2008.
227. Source: Government of Qubec, Regulation respecting a cap-and-trade system for greenhouse gas emission allowances,
Environment Quality Act, 2012.
0
10
20
30
40
50
60
70
80
90
100
2
0
2
0
2
0
1
9
2
0
1
8
2
0
1
7
2
0
1
6
2
0
1
5
2
0
1
4
2
0
1
3
2
0
1
2
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
1
9
9
0
CAP
Electricity Transport Industry Building Agriculture
and Forestry
Waste
TOTAL BAU TOTAL 2020 TARGET
BAU TOTAL
EMISSIONS
TARGET TOTAL
EMISSIONS
-19%
(-20% from
1990)
23.5
83.9
81.8 82.3
67.1
23.1
61.1
58.6
56.2
52.1
47.3
49.7
E
m
i
s
s
i
o
n
s

-

m
i
l
l
i
o
n

t
o
n
s

C
O
2
e
Figure 25:
Qubecs
historical GHG
emissions,
projections,
and reduction
targets
Source: World Bank, Ministry of Sustainable Development, Environment and Parks of Qubec.
From 2013, the cap-and-trade program will
cover about 75 industrial and power facilities
emitting more than 25,000 tCO
2
e per year.
Distributors of fuels for the transportation and
building sectors will enter the scheme from
2015. Although it will cover roughly seven times
less emissions than Californias plan,
228
Qubecs
regulation features very similar design and pro-
visions (see Annex 5: Qubecs Cap-and Trade
Design Features). However, it includes some no-
table dierences: although industrials will also be
allocated free allowances based on a performance
benchmark, only 75% of these will be allocated
every year; the remaining 25% will be set aside
until the following year, and will eventually be at-
tributed based on veried emissions. In addition,
the regulator may also claim back any allowance
proved to have been over-allocated. Compliance
obligations are not due annually, but only the
year following the end of the compliance period
(i.e., 2015, 2018, and 2021). Oset provisions
are similar to those of California, with a limit set
at 8% of compliance obligations for each compli-
ance period. Further detail on the use of osets
is not yet known as Qubecs oset regulation
is still under development and will not be pre-
sented before the summer of 2012. In addition,
emitters will be issued Early Reduction Credits
(ERCs) for permanent, additional, and irrevers-
ible emissions reductions achieved ahead of the
program start, up to January 1, 2008.
Qubecs budget for 2012-2013 provides for
green investments in an amount of CN$2.7
billion, 70% higher than the previous year.
229
Almost 90% is expected to come from auctions
revenues under the cap-and-trade program. Two-
thirds of the funds will be allocated to the trans-
port sector for the development of an ecient
network and eet for Qubecs mass transport
system. Te other third will contribute to the de-
velopment of energy eciency in building and
industry, renewable energy for households heat-
ing systems, and other GHG reduction-related
measures.
6.3.2.3 Linking Californias and Qubecs
emission trading schemes
California and Qubec are taking the necessary
step to establish a single regional carbon market
with full fungibility of each others compliance
instruments from January 1, 2013. Although
both regulations were developed in accordance
with WCI guidelines, further rulemaking and
technical revisions are necessary to accommo-
date such linkage. On March 30, 2012, CARB
sta published a discussion draft with proposed
amendments to its cap-and-trade regulation.
Tose mainly relate to market infrastructures
(e.g., account structure) and administration
(e.g., exchange rate management) to ensure con-
sistent operation of a single market across juris-
dictions. Te proposed linkage regulation is ex-
pected to be submitted for Board consideration
on June 28, 2012. It is expected that Qubec will
undergo the same process over 2012 and enforce
necessary amendments ahead of the rst auction.
Te rst joint auction previously planned for
August 2012 was postponed to November 14,
2012, with no expected impact on the start of
the program or on the volume of allowances of-
fered in 2012.
230
228. Source: Government of Qubec, Annual caps on greenhouse gas emission units relating to the cap-and-trade system for
greenhouse gas emission allowances for the 2013-2020 period, Draft Regulation, Environment Quality Act, 2012.
229. Source: Ministry of Finance of Qubec, Budget 2012-2013, Qubec and Climate Change a Greener Environment, 2012.
230. Source: California Air Resources Board, 2012, Testimony of Chairman Mary D. Nichols at Senate Select Committee on
Environment, Economy & Climate Change.
California and Qubec are taking

the necessary step to establish a
single regional carbon market with full
fungibility of each others compliance
instruments from January 1, 2013.

It is estimated that Californias and Qubecs
combined GHG emissions under a business-as-
usual scenario would decline from current lev-
els through 2020, largely driven by Californias
complementary measures, such as the 33%
Renewable Portfolio Standard (see Figure 26).
231

However, both jurisdictions feature high mar-
ginal abatement costs for power generators and
limited opportunities for reductions in transport
fuel consumption. It is therefore expected that
oset supply availability will be the main allow-
ance price driver in the WCI regional market.
Tis would stand at US$12-27/tCO
2
e in 2013
and US$60-131/tCO
2
e in 2020, with the high
end of the range in a scenario where respective
oset programs would not expand beyond the
four protocols approved by California.
6.3.3 A|berta
Alberta is Canadas largest greenhouse gas
(GHG) emitting province, accounting for 34%
of the countrys total GHG emissions in 2010.
Tis represents 235 MtCO
2
e, a 41% increase
from 1990 levels, driven primarily by increased
production activity in its oil and gas sector.
232

On July 1, 2007, Alberta launched a manda-
tory GHG emission intensity-based mechanism,
enacting the rst GHG emissions legislation in
Canada. Approximately 100 entities with annual
emissions exceeding 100,000 tCO
2
e (ktCO
2
e),
are required by the legislation to reduce their
emission intensity by 12% from average 2003-
2005 levels.
233
Entities that do not meet reduc-
tion requirements on a given year may choose to
meet these obligations by:
0
50
100
150
200
250
300
350
400
450
500
2020 2019 2018 2017 2016 2015 2014 2013
Emissions CA net cap
QC net cap
Offset forecast
PCR + VRE deduction
M
t
Figure 26:
WCI annual market
balance through
2020
Source: Point Carbon.
231. Source: Thomson Reuters Point Carbon, WCI price forecast the offset gap, March 29, 2012.
232. Source: Government of Canada, Canadas Greenhouse Gas Inventory Submission to the UN Framework Convention on Climate
Change, April 2012.
233. Source: Government of Alberta, Climate Change Emissions Management Act, 2007.
Trading Emissions Performance Credits
(EPC) that are awarded to covered entities
that reduce emissions below their set target;
Paying CN$15 (US$15.2) into a technology
fund; and/or
Purchasing Alberta-based osets issued by the
Alberta Osets Registry under an approved
protocol. Oset credits are only available on
a go-forward crediting basis in accordance
with changes to the regulations that took ef-
fect on January 1, 2012. Previously, produc-
ers were eligible for retroactive crediting. As
per the new regulations, retroactive credits
from 2002 to 2011 must be registered with
the government by March 31, 2012.
234

Although the volume of Alberta osets retired in
2011 was not yet made public at the time of writ-
ing, it is estimated be similar to that of 2010 (see
Figure 27). Tus, we estimate that the 2011 mar-
ket value was roughly US$51.5 million (US$202
million since the start of the market in 2007).
6.3.4 British Co|umbia
Te 2007 Greenhouse Gas Reduction Targets
Act
235
commits the Government of British
Columbia to reduce its GHG emissions by 33%
from 2007 levels by 2020 and at least 80% by 2050.
Te regulation also directs public sector organiza-
tions including schools, hospitals, post-second-
ary institutions, and core government ministries
to reach carbon neutrality from 2010 onward,
using osets for unavoidable GHG emissions. Te
2008 Emission Osets Regulation
236
gives exclu-
sive mandate to the Pacic Carbon Trust (PCT), a
Crown corporation of the Government of British
Columbia,
237
to source British Columbia-based
(BC) osets, with a broader directive to stimulate
the growth of the green economy in BC.
In 2011, the Government of British Columbia
bought 729,782 tCO
2
e of BC osets from PCT
(US$18 million). In 2010, the British Columbia
government became carbon neutral in accor-
dance with the rst year of the full carbon neu-
trality program. Purchases of osets prior to this
(i.e., 2009 and 2010) were used to oset govern-
ment travel (see Figure 28).
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2011 2010 2009 2008 2007
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
U
S
$
Volume Price (US$)
M
t
C
O
2
e8.7
13
14.2
13.4 13.3
Figure 27:
Alberta offsets:
historic volume and
prices 2007-2011
Figure 28:
Purchases of BC
offsets by the
government of
British Columbia
2009-2011
Source: World Bank, Government of Alberta,
238
Karbone.
239
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2011 2010 2009
22
23
24
25
26
27
28
29
U
S
$
Volume Price (US$)
M
t
C
O
2
e
28.5
25.8
24.7
Source: World Bank, Pacific Carbon Trust.
234. Source: Government of Alberta, Alberta Environment and Water, Notice of Final Deadlines for Claiming Historic Offset Credits,
December 2011.
235. Source: Government of British Columbia, Bill 44 2007: Greenhouse Gas Reduction Targets Act, 2007.
236. Source: Government of British Columbia, Emission Offsets Regulation, 2008.
237. Crown corporations are business enterprises established by the Government of Canada to implement public policy.
238. Source: Government of Alberta, Alberta Environment and Water, Specified Gas Emitters Regulation Results for the 2010
Compliance Year, May 2011.
239. Average price series also integrates sales of EPCs, which trade at similar price level to offsets. Source: Karbone Research and
Advisory Group. Alberta Specified Gas Emitters Regulation: Carbon Offset Market Overview, April 2012.
6.3.5 Chicago C|imate Exchange
From 2003 through 2010, the Chicago Climate
Exchange (CCX) operated as a voluntary cap-
and-trade scheme. Its full members were mostly
U.S-based entities that had made a commitment
with the exchange to reduce GHG emissions. Each
year, covered entities needed to surrender enough
CCX compliance instruments so-called Carbon
Financial Instruments (CFIs) to comply with their
reductions commitments.
240
Te total program
baseline covered approximately 700 MtCO
2
e.
241

Oset project developers could also participate in
the scheme as participant members and provide
the trading platform with CCX veried osets.
Once on the platform, these osets would be recog-
nized as CFIs, as would CCX emissions allowances
that could be purchased by members or liquidity
providers for compliance or other purposes.
242
Following buyout of CCXs owner, Climate
Exchange Group, the CCX program and platform
was discontinued in January 2011.
243
Te Chicago
Climate Future Exchange (CCFE), which was
the U.S. Derivatives branch of Climate Exchange
Group, also delisted all contracts in February
2012;
244
it migrated some of them to ICE Futures
Europe.
245
From 2003 to 2011, 745 MtCO
2
e of
CCX compliance instruments were traded on the
CCX, the CCFE, or the CCX oset registry, rep-
resenting a cumulative value of US$290 million.
246

In 2011, 203,000 tCO
2
e of CCX osets were ex-
changed on the CCX Oset registry, representing a
total value of US$64,715 (see Figure 29).
247
6.4 REPUBLIC OF KOREA
In early 2010, the Republic of Korea enacted
the Framework Act on Low Carbon and Green
Growth.
248
Te act establishes the legal frame-
work to implement policies and measures set
out in the countrys Green Growth Strategy and
its pledge to reduce GHG emissions by 30%
below business-as-usual levels by 2020. It is in-
tended that the main instrument of the national
climate change policy will be the implementa-
tion of a nationwide emissions trading scheme
(ETS). On May 2, 2012, after almost a year of
review, the ETS Act
249
passed the Legislation
and Judiciary Committee, and the National
Assembly as a whole, lifting the last hurdles to
ETS implementation.
M
t
C
O
2
e
U
S
$
0
20
40
60
80
100
120
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
Spot price
CCFE CFI Options
CCFE CFI Futures
CCX CFI (spot)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0 Figure 29:
CCX Carbon
Financial
Instruments (CFI) -
historical volumes
and price
240. 1 CFI=100tCO
2
e
241. Source: IntercontinentalExchange, Chicago Climate Exchange Fact Sheet, December 2011.
242. Source: Guigon, P., Bellassen, V., Ambrosi, P, Voluntary Carbon Markets: What the Standards Say, CDC Climat Research, 2009.
243. Source: Chicago Climate Exchange, CCX Advisory 2010-16, December 2010.
244. Source: Chicago Climate Future Exchange, CCFE Advisory 2012-04, February 2012.
245. In its place, ICE launched a new CCX registry program in February 2011 that allowed for the issuance and OTC trading of CCX
offsets to continue. The new CCX Offset Registry Program also allowed for OTC transactions of CCX allowances for entities formerly
covered by the CCX program to close off their 2010 compliance obligations throughout 2011.
246. CCX compliance instruments refer to CFI contracts, CCX allowances, and CCX offsets. CCX offered spot trading for CFI
contracts, and CCFE for Futures and Options CFI contracts. The CCX Offset Registry now allows for spot transaction of CCX
allowances and offsets.
247. CCX offsets exchanged were 79.3% landfill, 11% renewable energy, 7.2% forestry, and 1.1% fuel switch, with the remaining from
agricultural methane, agricultural soil, energy efficiency, and organic waste methane.
248. Source: Ministry of Government Legislation, Republic of Korea, Framework Act and its Presidential Decree on Low Carbon and
Green Growth in Korea, 2010.
249. Republic of Korea, Act on Allocation and Trading of GHG Emissions Allowances, May 2, 2012.
Source: World Bank, CCX, CCFE, ICE.
In 2011 the Republic of Korea also implemented a
GHG/Energy Target Management System (TMS)
to support the development of the infrastructure
and measuring, reporting, and verication (MRV)
frameworks necessary to implement the ETS. By
2014, the TMS will mandate all entities that emit
over 50,000 tCO
2
e per year to meet sectoral GHG
reduction targets based on the last three years of
GHG emissions records.
250
Te TMS will also
cover other entities that do not reach the threshold
but own individual facilities (e.g., industrial plants)
that emit over 15,000 tCO
2
e per year.
251
A total of
468 entities that collectively account for 60% of
national GHG emissions are to be covered.
252

Te economy-wide ETS is set to start in 2015,
including the entities and facilities covered by
the TMS. Te ETS will cover entities that emit
above 125,000 tCO
2
e per year and facilities that
emit above 25,000 tCO
2
e per year (see Table 9).
Facilities emitting between 15,000-25,000 tCO
2
e
per year will remain covered by the TMS, al-
though they will have the option to join the ETS
on a voluntary basis. In response to strong opposi-
tion from industry, the ETS legislation has been
softened since it was rst introduced. Te original
proposal to start the scheme in 2013 has been de-
ferred to 2015,
253
and most allowances are now
to be allocated for free over the rst (2015-2017)
and second (2018-2020) phases of the scheme.
after almost a year of

review, the ETS Act passed
the National Assembly, lifting
the last hurdles to ETS
implementation.

250. A total of 372 entities in the industry and energy sectors, 46 in the building and transportation sectors, 23 in the waste sector,
and 27 in the agriculture sector. Source: Taehee, K., Koreas Policy to Reduce GHGs, Target Management System & Emission Trading
Scheme, Presidential Committee on green Growth, Republic of Korea, March 2012.
251. The inclusion threshold under the TMS progressively decreases from 125,000 tCO
2
e per year for entities and 25,000 tCO
2
e per
year for individual facilities in 2011, to 50,000 tCO
2
e per year for entities and 15,000 tCO
2
e per year for individual facilities in 2014.
252. Total GHG emissions in the Republic of Korea stood at 607.6 MtCO
2
e in 2009 (excluding LULUCF), representing a 105%
increase from 1990 levels. Source: Greenhouse Gas Inventory & Research Center of Korea, Koreas Third National Communication
Under the UNFCCC, October 2011.
253. Source: Park, Hyoung Kun (Leo), Development of Korean Emissions Trading Scheme, Presidential Committee on Green Growth of
the Republic of South Korea, Greenhouse Gas Market 2011, IETA, October 2011.
GHG CO
2
, CH
4
, N
2
O, HFCs, PFCs, SF
6
.
Sectoral scope -60% of the national total GHG emissions.
-Inclusion threshold:
Entities emitting more than 125,000 tCO
2
e;
Individual facilities emitting over 25,000 tCO
2
e.
Compliance periods -Compliance periods (CP): CP1 2015-2017, CP2 2018-2020.
-CPs to last 5 years from CP3.
Allocation -Over 95% free allowances in CP1 and CP2.
-100% free for energy-intensive trade-exposed sectors.
-Future allocation by Presidential decree.
Auctions Early auctioning allowed.
Banking & borrowing -Banking allowed over a CP and first year of the following CP.
-Borrowing allowed over a CP only.
Other cost containment A maximum of 25 % allowances will be reserved for the new entrant.
Offsets Applicable standards (e.g. CDM and/or own standard) and utilization limit for
international offsets to be specified by Presidential decree (expected in 2012)
Penalty for
non-compliance
Up to 3 allowances for each allowance not surrendered (at most) with the
maximum cap of 10 million Korean Won (KRW) per allowance (8,800 US$).
Linking Considered in the future.
Source: World Bank, Presidential Committee on Green Growth.
Table 9:
Republic of Korea
emissions trading
scheme
6.5 MEXICO
In April 2012, Mexicos Congress passed a
General Law on Climate Change to support its
target of reducing greenhouse gas (GHG) emis-
sions by 30% below business-as-usual levels by
2020. Te law also establishes a framework for
the development of mitigation and adaptation
actions. In doing so, it provides the government
with a clearer mandate to act. Te law comple-
ments existing initiatives, including the Public
Service Electricity law that requires the consider-
ation of externalities when evaluating the cost of
electricity generation technologies and sets limits
on electricity generation from fossil fuels (65%
by 2024, 60% by 2035, and 50% by 2050).
Te general law on climate change provides the
federal government with the authority to create
programs, policies, and actions to mitigate emis-
sions, including an emissions trading scheme
(ETS). It is envisioned that these will likely be
implemented in two phases: (i) a voluntary capac-
ity-building phase, followed by (ii) the establish-
ment of specic mitigation goals. To support its
implementation, a National Emissions Registry
is to be created by the Ministry of Environment.
Te law also prioritizes sectors that could be
covered under these programs, including energy
generation and use, transport, agriculture, forests
and land use, waste, and industrial processes.
Te new framework also denes the responsibili-
ties of existing ministries and the three levels of
government, and it allows them to explicitly al-
locate nancial resources to climate change miti-
gation and adaptation. As such, it mandates the
Ministry of Energy to create policies and incen-
tives for the deployment of low-carbon technolo-
gies and the Environment, Finance, and Energy
Ministries to dene and create programs to in-
centivize emission reductions. In addition, it pro-
vides authority to the Ministry of Environment
to create a voluntary emissions trading system,
in which participants could perform transactions
and operations linked to other international sys-
tems (e.g., through bilateral mechanisms).
Finally, the law also transforms or creates new
institutions to carry out policies, strategies, and
actions, including (but not limited to):
A National Ecology and Climate Change
Institute (previously the National Ecology
Institute). Te Institute will perform research
and development activities and will advise the
Ministry of Environment on technical issues.
It will have greater independence and a bud-
get of its own.
Inter-Ministerial Commission on Climate
Change. Te Commission will supplant the
previous Commission (created by presiden-
tial decree), and will be the main body in
charge of developing climate change policy.
Climate Change Council. Te Council was
established as a permanent consultation body
of the Commission; it will be composed of
members of civil society.
While much progress is still required to imple-
ment the activities that the law provides for, its
passage is a signicant step forward and signals
Mexicos strong commitment to the climate
change agenda.
In April 2012, Mexicos Congress

passed a General Law on Climate
Change to support its target of reducing
greenhouse gas (GHG) emissions by 30%
below business-as-usual levels by 2020.

6.6 BRAZIL
254
In recent years, climate change policies and sub-
sequent capital mobilization have created an en-
abling environment for low-carbon investment
and market initiatives in Brazil. Further invest-
ment is envisioned ahead of Brazils hosting of
the Soccer World Cup in 2014 and the Olympic
Games in 2016. In this context, the federal gov-
ernment, sub-national governments, and the pri-
vate sector have pursued green infrastructure op-
portunities. Tis is likely to be showcased when
Brazil hosts the Rio+20 Conference (June 20-22,
2012), which is to focus on how to build a green
economy and develop an institutional frame-
work for sustainable development.
A federal law laid out the conditions for a nation-
al carbon market. Passed in December 2009, the
National Policy on Climate Change mandated a
voluntary national target to reduce emissions by
36.1% to 38.9% by 2020. Te provision does
not specify the principles for a national carbon
market, but does allow for the national stock ex-
changes to be integrated into the scheme.
255
An
approved regulation included sectoral goals.
256
A
technical working group led by the Ministry of
Finance was established to make proposals for a
national carbon market. In addition, sub-nation-
al jurisdictions are also moving ahead with low-
carbon initiatives.
257
Acre has been a pioneer in the development of
public policies aiming at the sustainable use of
natural resources. In 2010, Acre passed a law
258

establishing the States System of Incentives for
Environmental Services (SISA) to preserve and
foster a forest-based, low-carbon economy. Te
law also establishes a comprehensive REDD+
policy. Other initiatives include: (i) the creation
of the Promotion and Environmental Services
Enterprise
259
, a public-private partnership aim-
ing to develop local capacity through the estab-
lishment of domestic and international network-
ing; and (ii) the participation in the Governors
Climate and Forest Task Force.
260
Finally, in
November of 2010, Acre signed a Memorandum
of Understanding for environmental cooperation
with the states of California (United States) and
Chiapas (Mexico), which includes the possibility
to provide REDD+ credits to the California cap-
and-trade scheme (AB32).
261
Two forward-looking initiatives already under-
way may place the state and the city of Rio de
Janeiro among the front-runners of the carbon
market in Brazil. An emissions trading scheme
(ETS) for the State of Rio de Janeiro will have its
rst legally binding period for private companies
starting in 2013.
262
Te program will be present-
ed during the Rio+20 Conference, with the rst
pilot stage ending in 2015; subsequent stages will
run in three 5-year phases. Te initial targets will
primarily cover the oil and gas, steel, chemical,
petrochemical, and cement sectors. Te second
activity is a partnership between the state and the
city of Rio de Janeiro to create the BVRio, the
Rio de Janeiro Environmental Asset Exchange.
BVRio will provide a carbon market platform for
companies to negotiate and trade environmen-
tal assets in the form of allowances, osets, and
other carbon-linked nancial products.
In 2009, the State of Sao Paulo passed a law de-
ning a mandatory target to reduce its economy-
wide emissions by 20% by 2020 to 112 MtCO
2
e,
254. The text benefited from the generous and thoughtful insight provided by Ludovino Lopes, Eufran Amaral, Fabio Vaz, Monica Julissa,
Walter Figueiredo de Simoni, and Fabiana Ferreira Candiano.
255. Source: Law n 12.187, December 29, 2009.
256. Source: Regulation of the National Policy by Decree Number 7.390, December 9, 2010.
257. States are intentionally listed in alphabetical order.
258. Law n. 2.308/2010.
259. Companhia de Fomento a Servios Ambientais, in Portuguese.
260. The Governors Climate and Forest Task Force is a multi-jurisdictional collaborative effort between 16 States and provinces from
Brazil, Indonesia, Mexico, Nigeria, Peru, and the U.S. focused on the development of rules and capabilities necessary to generate
compliance-grade assets from REDD.
261. To implement this memorandum, the Sub-national REDD Task Force (ROW) was created.
262. Source: Thomson Reuters Point Carbon. Rio releases ETS details, sets periods for 3 phases, March 29, 2012.
down from 140 MtCO
2
e in 2005.
263
Sectoral
targets are yet to be dened. Although the law
anticipates the creation of economic, nancial
and scal incentives to foster the development of
low carbon projects, it does not include a provi-
sion for a domestic carbon market. In addition,
the States Green Economy Promotion program
was created to oer credit lines for actions aim-
ing at curbing GHG emissions.
265,265
Among the
existing private-sector initiatives, the Brazilian
Securities, Commodities, and Futures Exchange
(BM&FBOVESPA) has played an active role in
auctioning carbon credits.
266
Ahead of the game,
57 of the largest companies in the country, most
of them based in Sao Paulo, have already estab-
lished voluntary emission reduction plans.
267
Despite a slow start, voluntary carbon markets are
also gaining momentum. Although voluntary car-
bon markets in Brazil are in the early stages, they
already represent 60% of the voluntary credits
originated in Latin America. Two private standards
have been developed: Brasil Mata Viva (BMV),
a certication program for forestry projects, and
the Social Carbon Standard. Te Association for
Standardization (ABNT) recently developed guide-
lines for voluntary transactions of Veried Emission
Reductions (VERs) in Brazil
269
and started a capac-
ity-building program to assist small and medium
enterprises (SME) in building GHG inventories
and exploring carbon opportunities.
270,271
6.7 CHINA
272

China has witnessed phenomenal economic
growth over the last decade,
273
lifting it to become
the worlds second largest economy in 2010.
274
It
has been accompanied by rising primary energy
consumption and increasing pressure on its do-
mestic energy supply, giving rise to a number of
environmental and social challenges. Chinas 11
th

Five-Year-Plan (FYP), covering the period 2006-
2010, addressed energy savings and environmental
protection by establishing a series of quantitative
goals and policy initiatives. Notwithstanding these
eorts, China emerged as the worlds largest green-
house gas (GHG) emitter in 2008 (see Figure 30),
fueling international pressure for it to further inten-
sify domestic environmental policies and initiatives.
263. Source: Inventario de emissoes antropicas de gases de efeito estufa diretos e indiretos do Estado de Sao Paulo, comunicacao
estadual / CETESB, 2011.
264. Source: Law 13.798, November 9, 2009, regulated by decree n. 55.947, June 24, 2010.
265. Source: 1 Relatrio de Referncia do Estado de So Paulo de Emisses e Remoes Antrpicas de Gases de Efeito Estufa,
perodo de 1990-2008.
266. Both initiatives are supported by the Inter-American Development Bank (IADB).
267. Preview of Climatescope 2012.
268. Source: International Energy Agency, CO
2
emissions from fuel combustion, 2011.
269. Source: ABNT NBR 15498:2011. Voluntary carbon market Principles, requirements, and guidelines to commercialize verified
emission reductions, April 25, 2012.
270. Both standards counted on 36 projects as of late 2011 (Presentation of PMR Expression of Interest Brazil, http://
wbcarbonfinance.org/docs/3_PA2_EoI_Presentation_Brazil.pdf accessed on 4/16/2012).
271. FUMIN apoia oportunidades de negcios na gesto de gases de efeito estufa para PME brasileiras.
http://www.iadb.org/pt/noticias/comunicados-de-imprensa/2012-01-05/brasil-gestao-de-gases-do-efeito-estufa-apra-as-pme,9802.html
272. This section benefited from the generous and thoughtful insight provided by Mr. Jiang Kejun, researcher at the Energy Research
Institute (ERI) of the National Development and Reform Commission (NDRC), and Ms. Wen Wang, researcher at the Climate Economics
Chair (CEC) of Paris-Dauphine University and Climate Change Research Centre of the Chinese Academy of Agricultural Sciences
(CAAS).
273. The Gross Domestic Product (GDP) increased 10.5% year on year according to Chinas National Bureau of Statistics.
274. Source: World Bank. An Eye on East Asia and Pacific, The Role of China for Regional Prosperity, April 2011.
Figure 30:
China in worlds
energy-related
CO
2
emissions
268
0
5
10
15
20
25
30
World
2
0
0
9
2
0
0
5
2
0
0
0
1
9
9
5
1
9
9
0
1
9
8
5
1
9
8
0
0%
5%
10%
15%
20%
25%
PRC's share
E
m
i
s
s
i
o
n
s

-

B
i
l
l
i
o
n

t
C
O
2
P
R
C
'
s

s
h
a
r
e

(
%
)
PRC
12.9
23.6
7.8
Source: World Bank, International Energy Agency.
Te 12
th
FYP, which entered into force in March
2011, further strengthens these policies in response
to the international climate community. As such, it
calls for the deployment of innovative domestic ini-
tiatives and emissions trading designed to address
the carbon intensity of its economy.
6.7.1 A |ook back at the 11
th
Five-Year P|an
(2006-2010): whats in Chinas too| box?
Troughout the 11
th
FYP, Chinas primary energy
consumption per unit of GDP dropped 19.1%,
within close reach of the 20% energy intensity
target for the period set by the central govern-
ment, thereby reducing GHG emissions by 1.46
billion tCO
2
e in absolute terms.
275

Tese achievements can be attributed to strength-
ened regulatory framework
276
that was enforced
locally (i.e., through provinces and municipali-
ties) as well as new initiatives such as:
Te Ten Key Energy Conservation Projects.
Tis initiative called on the government to
provide nancial incentives to support the
deployment of new equipment and processes
in the industrial (e.g., coal-red boilers) and
building (e.g., energy-saving bulbs) sectors.
Te Top-1000 Enterprises Energy Conservation
Program. Tis initiative set energy-saving tar-
gets to the largest energy-consuming indus-
tries, accounting for one third of national en-
ergy consumption.
277
Covered enterprises were
required to develop an energy conservation
plan and perform audits to allow local authori-
ties to monitor progress.
Te Phasing-out of Outdated Production
Capacity Program. Tis initiative required
local authorities to assign phase-out targets
to industrial companies, which were required
to shut down their least ecient small plants.
For example, in the cement sector, 330 million
tons of cement production capacity was re-
moved, which led to a 28.6% decline in energy
consumption per ton of cement produced.
Reductions in primary energy consumption
were complemented by eorts to expand clean
energy through feed-in tari and subsidy poli-
cies. From 2006-2010, renewable generation
capacity more than doubled, with an additional
133 GW installed.
278

6.7.2 12
th
Five-Year P|an (2011-2015):
pi|oting market mechanisms
Te 12
th
FYP targets annual GDP growth of 7%
and denes 24 key indicators of economic and so-
cial development with 2015 targets. As shown in
Annex 6: China: Targets and Supporting Measures
under the Five-Year-Plans, energy intensity is set
to decrease 16% below 2010 levels. In addition,
the forest cover is aimed to increase a further
12.5 million hectares. In addition, two new in-
dicators were specically introduced to respond
to climate change and reect Chinas mitigation
action pledge under the UNFCCC for the years
2013-2020.
279
First, the quantity of CO
2
emitted
per unit of GDP (or the carbon intensity of the
economy) was assigned a reduction target of 17%
below 2010 levels by 2015. Second, nationwide
forest stock is to increase by an additional 14.3
275. Source: National Development and Reform Commission (NDRC), Remarkable energy saving results achieved - 11th Five-Year
review of energy saving, March 10, 2011, National Development and Reform Commission (NDRC).
276. The main pieces of legislation were the revised Renewable Energy Promotion Law and the Energy Conservation Law,
respectively enforced in 2006 and 2007.
277. Source: Price, L., Wang, X., Yun, J. Chinas Top-1000 Energy- Consuming Enterprises Program: Reducing Energy Consumption
of the 1000 Largest Industrial Enterprises in China, 2008.
278. This is an additional 133 gigawatt (GW) of non-fossil-fuel installed capacity, which consists of +92.00GW hydro power, +32.33
GW wind, +1.30 GW solar, 2.50 GW biomass, +0.80 GW bio-ethanol, and +4.01 GW nuclear. In addition, at the end of 2010, 31.00
gigawatts of extra nuclear installed capacity was under construction.
279. On January 28th 2010, Director General of Climate Division of the National Development and Reform Commission Su Wei
submitted Chinas climate mitigation actions under the Copenhagen Accord. Chinas pledges had been previously announced by
President Hu Jintao at the United Nations General Assembly in September 2009, and consist of reducing Chinas carbon dioxide
emissions by 40-45% per unit of GDP by 2020 compared to 2005 levels; increasing the share of non-fossil fuels in primary energy
consumption to around 15% by 2020; and increasing forest coverage by 40 million hectares and forest stock volume by 1.3 billion
cubic meters by 2020 from 2005 levels.
billion cubic meters over the 2011-2015 period.
An Energy Conservation Plan
280
and a GHG
Control Plan
281
were subsequently released to
support the enforcement of the nationwide en-
ergy- and carbon-intensity reduction targets at the
provincial and municipal levels.
Te 12
th
FYP sustains and scales up some of the ini-
tiatives that proved to be eective under the previ-
ous FYP. For example, the Top-1000 Enterprises
Energy Conservation Program has been expand-
ed to become a Top-10,000 Enterprises Energy
Conservation Program; it actually covers more
than 16,000 enterprises. Various eciency stan-
dards have also been raised. Eorts to improve en-
forcement and monitoring of central government
policies at the local level have also been extended.
In addition, the plan calls for the establishment of
innovative tools, with explicit reference to carbon-
trading mechanisms.
Te central governments interest in market
mechanisms was rst evident in July 2010,
when the National Development and Reform
Commission (NDRC) launched Low-carbon
Pilot Development Zones in ve provinces
and eight cities.
282
Tis program called on lo-
cal authorities to implement measurement and
reporting of GHG emissions data and to estab-
lish low-carbon development plans. In addition,
authorities were encouraged to explore comple-
mentary policies, including market mechanisms.
Explicit notice for implementation only came
in October 2011, with the NDRC proposing
that ve cities (Beijing, Tianjin, Shanghai,
Chongqing, and Shenzhen) and two provinces
(namely Guangdong and Hubei) establish Pilot
Emissions Trading Schemes (ETS) on a vol-
untary basis.
283
Local authorities were asked to
determine overall targets, allocation rules, and
governance systems, and to work on the devel-
opment of market infrastructures. Although the
notice gave no implementation timeline, some
ocials from the NDRC said on several occa-
sions that the plan is to have them up and run-
ning in 2013 to inform the development of a
nationwide mechanism by 2015.
284
Tis is, how-
ever, by no means a formal commitment or rm
timetable.
6.7.3 Bui|ding emissions trading in China:
who is invo|ved?
In 2009, domestic carbon market mechanisms be-
gan to emerge through voluntary initiatives. Te
Panda Standard and the China Green Carbon
Foundation (CGCF) were established in 2009
and 2010 respectively, to address emissions in the
agriculture and forestry sectors.
285
A voluntary
emission intensity-based market on heat suppliers
for residential buildings was also launched in the
municipality of Tianjin in 2010. Despite the regu-
latory uncertainties and the lack of voluntary de-
mand that have limited their size, these initiatives
have provided valuable lessons learned. Indeed, the
involvement of local experts, the collection of data,
and the development of the market infrastructure
necessary to support early demonstration activities
280. Source: State Council of PRC, Comprehensive Working Plan for Energy Conservation and Emission Reduction under the 12th
Five-Year-Plan, September 2011.
281. Source: State Council of PRC, Working Plan for GHG Control under the 12th Five-Year-Plan, January 2012.
282. Provinces of Guangdong, Hubei, Liaoning, Shaanxi and Yunnan, and cities of Baoding, Chongqing, Guiyang, Hangzhou, Nanchang,
Shenzhen, Tianjin, and Xiamen. Source: National Development and Reform Commission, Notice on low-carbon pilot development zones
at the province and city levels, 2010.
283. Source: National Development and Reform Commission notice on market mechanisms experimental work, 2011. It is important
to note that this program does not prevent other local jurisdictions from establishing pilot market mechanisms. As a matter of fact, the
province of Jiangsu and city of Qingdao (Shandong province) were reported to the authors as actively preparing their own pilot ETS
plans, and the NDRC may call for a second batch of participants. In addition, the city of Yantai initiated an energy consumption cap-and-
trade system involving the 14 counties within its administrative borders as participants. The first trade was announced between two of
them in July 2011 for 50,000tce for a value of roughly US$1.5 million. Source: China Economic Net, Inter-regional energy consumption
trading, November 2011.
284. Source: Sun Cuihua and Wang Shu, China Organizing Framework under the World Banks Partnership for Market Readiness, 2011.
285. The Panda Standard is a certification scheme for domestic and forestry offset projects initiated by the China Beijing Environment
Exchange, BlueNext, Winrock International, and the Asian Development Bank. The China Green Carbon Foundation was launched in
2010 by Chinas State Forestry Administration. Source: Wang Wen, Linking climate finance to the agriculture and forestry sectors in
China, 2011, Climate Economics in Progress. Economica.
has laid a foundation to support the development
of domestic emissions trading. To illustrate, in
2011 a methodology to quantify carbon sequestra-
tion in bamboo sinks in China - currently not eli-
gible under the CDM was approved by the Panda
Standard.
286
A few transactions engaging Chinese
companies were also reported, with the state-
owned Sinochem Group acquiring 16,800 Panda
Standard credits at US$9.14/tCO
2
e in March
2011, and some 148,000 credits from the CGCF
sold to a consortium of 10 companies in November
2011 at an undisclosed price.
While encouraged by Chinese authorities, these
voluntary market initiatives have seen very little
involvement from these authorities. In contrast,
the preparation of the pilot emissions trading
schemes has begun to mobilize a range of central
and local authorities (see Figure 31). Te NDRCs
Department of Climate Change, which directed
their establishment, stands at the center of these
eorts and will oversee their development. Despite
the exibility given to local authorities in the de-
sign of the emissions trading schemes, they will
nonetheless have to accommodate the NDRC
Department of Climate Changes requirements
and guidance on measuring, reporting, and veri-
cation (MRV) issues. In addition, other depart-
ments within the NDRC will be key to the scope
and success of the pilot emission trading schemes
and their possible scale-up at a national level.
Te Department of Social Development and the
Department of Industry will be in charge of im-
pact assessments on the economy and industry
STEPS
CENTRAL
POLICY
ETS
MARKET
DESIGN
MARKET
INFRASTRUC-
TURE
DEVELOPMENT
ETS
IMPLEMENTATION
MARKET
MONITORING
& REGULATION
POLICY &
REGULATIONS
Pilot ETS Plan
12th Five-Year-Plan
Working Plan for
GHG Control under
the 12th FYP
Low-carbon Provinces
and Cities
Pilot ETS in Provinces
and Cities
VER Regulation
ETS Trading Rules
Guidelines on GHG
accounting and
submission
Third party verification
process
Platform trading rules
Market oversight
regulation
GOVERNANCE
Climate Change Dpt.
NDRC
Social Development Dpt.
Price Dpt.
Ministry of Industry and
Information Technology
Provincial/municipal
Government
- Approves Pilot ETS
Plan
Local National Reform
Commissions (DRC)
- Design Pilot ETS Plan
- Submit approved
Pilot ETS Plan to
NDRC
Economic and
Information Technol-
ogy Commission
- Economic activity
data
- Energy consumption
data
- Transfer to MIIT for
centralization
Trading platform
- Market surveillance
TECHNICAL SUPPORT
INTERNATIONAL

World Bank
- Partnership for
Market Readiness
Asian
Development Bank
- Beijing Green
Finance Strategy
- Tianjin Pilot ETS
Design
UK Strategic
Programme Fund
- Guangdong Pilot
ETS Design
European Union
EU-China Low Carbon
and Environment
Sustainability
Programme
DOMESTIC
Ministry of Science
and Technology

Energy Research
Institute of NDRC
China Academy of
Social Sciences
Nuclear and New
Energy Research
Institute (Tsinghua
University)
286. Source: Panda Standard. New Methodology Form for AFOLU Projects - Forestation of degraded land using bamboo and non
bamboo trees. 2011.
Figure 31:
Building pilot
emissions trading
schemes in China
Source: World Bank.
respectively. If power generation falls under the
cap, the Department of Price will play a central
role in deciding how to manage the cost of carbon
and its uctuations in the context of a regulated
power market. Beyond the NDRC, the Ministry
of Industry and Information Technology will also
come into play as it centralizes economic activity
and energy consumption data received from its lo-
cal counterpart, the Economic and Information
Technology Commission. Approval of the pilot
ETS plans and operational implementation will
fall under provincial or municipal governments,
whose several bureaus will ultimately ensure eec-
tive operations and regulation of the pilot schemes.
Several technical assistance programs have been
launched to support Chinese authorities in mov-
ing forward with the study and in the formula-
tion and implementation of market mechanisms
at both national and local levels.
287,288,289,290
6.7.4 Current status: is it the journey or the
destination?
In March 2012, the Beijing Municipal
Government became the rst of Chinas prov-
inces and municipalities to publish a discussion
draft for a planned pilot ETS.
291
Te discussion
draft conrms that Beijing intends to set a cap on
its absolute emissions as required by the NDRC.
It also sets out a draft timetable for implemen-
tation which comprises three key phases: (i) by
end-2012, the Beijing Municipal Government
aims to have the necessary market infrastruc-
ture and MRV regulations implemented; (ii)
in January 2013, it aims to move to initial
implementation, which will consist of devel-
oping market oversight supporting regulations;
and (iii) in April 2014, the operational phase is
scheduled to commence. Te sectors to be cov-
ered once the ETS is in operation are not explic-
itly listed, but entities that emitted above 10,000
tCO
2
e per year over the 2009-2011 period are
to be covered under the cap. In addition, the in-
dustrial sector, power and heat generators, and
public buildings are to provide historic emissions
data to the municipal government. Allowances
are to be mostly allocated for free. Allocation is
scheduled to start in December 2012 for 2013
allowances, and in May of each following year
based on the previous years emissions. Banking
is to be authorized, but not borrowing. In addi-
tion, the Beijing Municipal Government is per-
mitted to withdraw or auction additional allow-
ances for cost containment purposes. Similarly, it
has authorized the surrender of Chinese Certied
Emission Reductions (CCERs) that meet the re-
quirements of the National VER Regulation is
currently being prepared by the NDRC.
Although Beijing is the rst to publicly release
details on its pilot ETS design, this does not
necessarily mean it is the most advanced or that
it will be the rst to implement an operational
mechanism. It has been reported to the authors
that progress has also been achieved in Shanghai,
Guangdong province, Shenzhen, and Tianjin.
Details regarding ongoing eorts in the remain-
ing provinces remain elusive at the time this re-
port was written (see Table 10). In this context, it
is not clear whether all of the seven jurisdictions
will have operating pilot markets.
287. The World Banks Partnership for Market Readiness (PMR) provided an initial US$350,000 grant for Chinas central authorities to
prepare a Market Readiness Proposal (MRP) with the purpose of helping the Country to identify suitable market instruments to scale
up mitigation efforts in line with their climate change mitigation goals and development objectives. If deemed eligible, China may receive
additional US$3-8 million in implementation funding.
288. Through the EU-China Low Carbon and Environmental Sustainability Programme, the European Union plans to allocate 5 million
by June 2012 to the realization of ETS pilot models at a provincial level. Source: European Commission, Commission Implementing
Decision of 6.12.2011 on the Annual Action Programme 2011 in favor of China to be financed under Article 19100101 of the general
budget of the European Union December 2011 Action Fiche II, December 2011.
289. The Asian Development Bank issued a US$750,000 tender in December 2011 to advise the Tianjin Municipal Government on its
pilot ETS design and support the deployment of related registry and trading infrastructure. The study is expected to start in June 2012
after the selection of international and domestic experts. Source: Asian Development Bank, Technical Assistance Report Peoples
Republic of China: Developing Tianjin Emission Trading System, December 2011.
290. The UK Strategic Partnership Program (SPF). The program provides technical assistance to local institutes on ETS design for some
pilots, notably in Guangdong Province.
291. Source: Beijing Development Reform Commission, Discussion Draft on Beijing Emissions Trading, March 2012.
Jurisdiction Population
2010
(Mln)
GDP
2010
(Bln
US$)
292

YOY
Change
(%)
GDP
per
capita
2010
(US$)
YOY
Change
(%)
GDP by
sector I/
II/III 2010
(%)
2015
energy
int.
target
(% 2010)
2015
carbon
int.
target (%
2010)
ETS status
(as of April 2012)
Beijing
Municipality
GDP 2010 208 +10.3 11.2 +7.8 0.9 / 24.0
/ 75.1
17 18 -Pilot ETS Plan
approved.
-Release of design
discussion draft in
March 2012.
Tianjin
Municipality
YOY
Change
(%)
GDP per
capita
2010
(US$)
YOY
Change
(%)
GDP by
sector
I/II/III
2010
+16.7 1.6 / 52.4
/ 46.0
18 19 -Pilot ETS Plan
approved.
-Market design
study to start in
June 2012.
Shanghai
Municipality
2015
energy int.
target
254 +10.3 11.2 +10.0 0.7 / 42.1
/ 57.2
18 19 Pilot ETS Plan
approved.
Hubei
Province
2015
carbon int.
target
236 +14.8 4.1 +23.1 13.4 /
48.7 / 37.9
approved.
Chongqing
Municipality
ETS status 117 +17.1 4.1 +20.4 8.6 / 55.0
/ 36.4
approved.
Guangdong
Province
104 680 +12.4 6.6 +8.7 5.0 / 50.0
/ 45.0
18 19.5 -Pilot ETS Plan
approved
-Kick-off meeting
on marketdesign
held in September
2011.
Shenzhen
Municipality
234
9 141 +12.0 13.9 +7.60 0.1 / 47.5
/ 52.4
19.5 21 Pilot ETS Plan
approved.
PRCs central
government
1,341 5,926 +10.3 4.4 +9.90 10.1 /
46.8 /
43.1
-16 -17 Early stage. Early
stage. NDRC
requested the
World Banks PMR
to provide support
to the design of
the national ETS
and carry out
feasibility studies
on some sectors.
Total 1,350 6,067 n/a 18.3 n/a n/a n/a n/a n/a
Source: World Bank, China Statistical Yearbook 2011, Statistical Yearbook of Guangdong Province.
Table 10:
China: pilot
jurisdictions and
current ETS status
Te ve cities and two provinces called on to es-
tablish voluntary pilot emissions trading schemes
account for 18% of Chinas population and 28%
of its national GDP. It is commonly believed that
the NDRC has called for the establishment of
these pilot schemes to test the use of emissions
trading as a tool that could be expanded to a
national scale. Te implementation process has
already triggered much discussion and involved
292 Average US$/RMB exchange rate in 2010. Source: U.S. Federal Reserve.
293. Shenzhen is a municipality within Guangdong Province.
domestic and international expertise that may in-
form parallel work being led by the NDRC at the
national level. In addition, several other initiatives
could also facilitate and catalyze the implementa-
tion of a national carbon market. For example, the
Top 1000 Enterprises program, and its extension
to 10,000 entities over the 12
th
FYP, may provide
solid MRV foundations for a national scheme.
In addition, the drafting process for the VER
Regulation that started in 2010 with the objec-
tive of encouraging corporate social responsibility
policies in China-based enterprises,
294
could sup-
port the establishment of common infrastructure
and rules for a national domestic oset program.
Moreover, as mentioned above, the Municipality of
Beijing intends to use the osets eligible under this
regulation for its pilot ETS.
While primarily relying on command-and-con-
trol policies, the 12
th
Five-Year-Plan has opened
large working fronts to build Chinas readiness in
carbon markets and addressed the several chal-
lenges to their implementation, such as the de-
regulation of the energy market, cross-provincial
governance, and/or interactions with the CDM.
6.8 INDIA
In 2008, India announced a National Action Plan
on Climate Change (NAPCC). Te plan pri-
oritizes energy eciency gains and an increased
substitution of conventional fuels with renewable
energy as key milestones to achieving sustainable
economic growth and climate change co-bene-
ts.
295
Two market-based mechanisms were intro-
duced to address these goals: Renewable Energy
Certicate (REC) schemes and the Perform
Achieve and Trade (PAT).
Renewable Energy Certicate (REC) Schemes:
In March 2011, Indias REC mechanism was
introduced to support the countrys Renewable
Purchase Obligations (RPOs) targets under the
NAPCC.
296
Te RPOs require that 5% of the
nationwide share of electricity be sourced from
renewable energy in 2010, increasing at 1% per
year for ten years. In addition to taking actions,
to meet the targets eligible participants may buy
or trade RECs, each equivalent to one megawatt
hour (MWh) of electricity generated. RECs are
issued to eligible renewable energy operators and
purchased at monthly auctions by any obligated
entity not reaching its RPO requirements. Te
India Energy Exchange (IEX) and Power Exchange
India Ltd (PXIL) provide the auction platforms.
Te mechanism seeks to promote interstate REC
transactions, thereby helping those regions with
high renewable energy potential overcome gen-
eration capital barriers while allowing regions with
less potential to nonetheless assign more ambitious
RPO targets to local obligated entities.
As of December 31, 2011, 341 renewable energy
generation projects had been accredited by State
Nodal Agencies across India. Tis represents a
combined 1,890 MW
297
or 9.4% of the coun-
trys total renewable energy generation installed
capacity, according to data from the Central
Electricity Regulatory Commission (CERC).
298
As shown in Figure 32, 546,808 RECs were is-
sued in Indias registry in 2011, and 438,249 were
the 12
th
Five-Year-Plan has opened
large working fronts to build Chinas
readiness in carbon markets and
addressed the several challenges to their
implementation
294. Source: Chinas Expression of Interest and Questionnaire on Market Readiness Capacity, Partnership for Market Readiness,
World Bank, January 2011.
295. At an annual economic growth rate of 8-9%, India anticipates it will need to increase its primary energy supply and electricity
generation installed capacity by four and six times, respectively, over the next 20 years. Source: Expert Group on Low Carbon Strategies
for inclusive growth, Planning Commission, Government of India, Low Carbon Strategies for Inclusive Growth, An Interim Report, 2011.
296. Source: Central Electricity Regulatory Commission Regulations, Terms and Conditions for Recognition and Issuance of
Renewable Energy Certificate for Renewable Energy Generation, 2010.
297. Breakdown by technology: 44.3% wind, 28.5% bio-fuel cogeneration, 22.6% biomass, 4.2% small hydro, and 0.4% solar.
298. As of December 31, 2011, renewable energy accounted for 10.8% of Indias total installed power generation capacity. Source:
Central Electricity Authority, Ministry of Power, Government of India, Installed capacity of power utilities as of December 31, 2011, 2011.
purchased on exchanges
299
and subsequently re-
tired for compliance. Te resulting 2011 market
value was US$22.6 million.
300
Since April 2012,
the CERC has xed new oor and ceiling prices
for non-solar and solar RECs which will remain
valid for a period of ve years.
301
Te oor and
ceiling prices are intended to provide market par-
ticipants with longer-term visibility and a com-
petitive alternative to the Clean Development
Mechanism (CDM) given current weak prices.
302

Perform Achieve and Trade (PAT): On April 1,
2012, the PAT was introduced, covering eight in-
dustrial sectors out of the 15 energy-intensive sec-
tors identied in the NAPCCs National Mission
on Enhanced Energy Eciency (NNEEE). Te
scheme mandates specic energy consump-
tion reduction targets to designated consumers
(DCs) that collectively account for 25% of na-
tional GDP and about 45% of its commercial
energy use.
303
Tose DCs that over-achieve on
their benchmarks are issued Energy Eciency
Certicates (ESCerts) to be traded bilaterally
or through the two national power exchanges.
Te Bureau of Energy Eciency at Indias Power
Ministry has issued the rules and procedures per-
taining to measuring, reporting, and verication
(MRV).
304
It is expected to announce the trading
infrastructure rules in the near term, with trad-
ing of ESCerts to commence thereafter. For fur-
ther details on PAT please refer to Annex 7: India
PAT: Market Design and Governance Elements.
Te PAT is projected to avoid 19,000 MW of ad-
ditional generation capacity, save 6.6 million tons
oil equivalent (toe), and reduce GHG emissions
by 26.21 MtCO
2
e by the end of the rst compli-
ance period (March 31, 2015).
305
Using support
provided through the World Banks Partnership
for Market Readiness, India has plans to expand
the PAT by deepening the scope of coverage in
existing sectors and extending it to new sectors.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
RECs traded (IEX, PXIL) Clearing price USD RECs issued
Dec-11 Nov-11 Oct-11 Sep-11 Aug-11 Jul-11 Jun-11 May-11 Apr-11 Mar-11
0
10
20
30
40
50
60
70
80
90
100
V
o
l
u
m
e

(
n
u
m
b
e
r

o
f

R
E
C
s
)
P
r
i
c
e

(
U
S
$
)
Figure 32:
Renewable Energy
Certificates
traded volumes
and clearing
prices
Source: World Bank, data from IEX, PXIL, and India REC Registry.
299. IEX accounts for 92% of traded volumes in 2011.
300. The average clearing price for Indian REC in 2011 was INR2575 per unit (US$55.2). 2011 exchange rate US$1=INR47.
301. Source: Central Electricity Regulatory Commission, 2011, Determination of Forbearance and Floor Price for the REC framework
to be applicable from April 1, 2012.
302. Applying the 2012-2017 price floor for non-solar RECs (INR1500), and an emission factor in Indias grid of 0.93tCO
2
/MWh, the
generation of renewable energy generates revenues of REC=US$32/MWh under the REC scheme and US$10.3/MWh under the CDM,
according to our average 2011 price for primary CERs, and all things being equal.
303. Source: Bureau of Energy Efficiency, Government of India, 2011, www.bee-india.nic.in.
304. The rules and procedures pertaining to the MRV and trading aspects of the scheme are available at www.bee-india.nic.in.
305. Source: the Bureau of Energy Efficiency in Sengupta, A., Kumar, S., Roadmap for India in energy efficiency, The Atlantic Energy
Efficiency Policy Briefs, 2011.
6.9 JAPAN by Yuji Mizuno, PhD, Senior
Planning Officer, Office of Market Mechanisms
306

Te Japanese carbon market can be broadly di-
vided into four parts.
First, Japan commits to reduce greenhouse
gas emissions by 6% compared with 1990
levels during the rst commitment period of
the Kyoto Protocol. To achieve this target, the
Japanese government plans to acquire Kyoto
credits by using the Kyoto mechanisms to cover
the shortfall remaining after domestic reduc-
tion eorts have been implemented. Tis is
in accordance with the Kyoto Protocol Target
Achievement Plan (formulated April 2005, re-
vised March 2008). Purchase agreements were
signed for 31 million tons in Financial Year (FY)
2008, 41.5 million tons in FY 2009, 4 million
tons in FY 2010, and no purchase agreements
were signed in FY 2011. Tis brought the cu-
mulative total that was contracted to around
98 million tons. In addition to that, the electric
power industry has announced plans to acquire
260 million tons and the steel industry is to
acquire 53 million tons of Kyoto credits in the
Keidanren Voluntary Action Plan.
Second, the Tokyo cap-and-trade scheme has
been launched as a local emissions trading
scheme. Tis covers major facilities and build-
ings located within the Tokyo metropolitan
area, with the rst compliance period running
from FY 2010 to FY 2014 and the second
from FY 2015 to FY 2019. Targets have been
set at a 6% reduction compared to base-year
emissions levels (average emissions levels dur-
ing any three consecutive years between FY
2002 and FY 2007) in the rst compliance pe-
riod and a reduction of 17% (planned) in the
second compliance period. Tis scheme also
permits osets to achieve these targets.
307

Tird, on the national level, the Japan
Voluntary Emissions Trading Scheme
(JVETS) was launched in FY 2005 by the
Ministry of the Environment. Under the
JVETS, the participating organizations must
commit CO
2
emission reduction targets, and
they can reduce emissions by purchasing sub-
sidized equipment as well as by undertaking
emissions trading. Kyoto credits can be used
in the JVETS. A total of 389 organizations
have taken part as participants that have ad-
opted targets, and so far reductions of 1.89
million tons have been achieved.
308

Fourth, two voluntary crediting schemes are
operating in parallel to the national level. Te
rst is a Domestic Credit Scheme introduced
in October 2008. In this scheme, major com-
panies provide technology, funding or other
assistance to small and medium-sized com-
panies, civil society (businesses and house-
holds), transport, and other sectors, and au-
thorize greenhouse gas emission reductions
achieved as credits. Major companies can use
those credits to meet the targets set by the
Keidanren Voluntary Action Plan.
309

In addition, the Japan Veried Emission Reduction
(J-VER) Scheme was established by the Ministry
of the Environment of Japan in November 2008.
It is a verication scheme for credits generated
through the reduction/removal of greenhouse
gases carried out by domestic projects.
310

306. The Climate Change Policy Division of the Ministry of the Environment in Japan.
307. Eligible offsets are credits from small and medium-sized business within Tokyo, renewable energy (electricity or heat) credits, and
credits from large business premises outside Tokyo; Kyoto credits are not included at this point. As of December 2011, 2,132 tons had
been issued as renewable energy credits and 360 tons were traded.
308. Approximately 260,000 tons were traded from FY 2006 to FY 2010 at an average price of around 7501,250 (US$9-16)
per ton. This is the most active trading to have taken place in a domestic Japanese scheme to date. In addition to this scheme, an
experimental ETS was launched in October 2008 (scheduled to run until FY 2012). A total of 152 companies had set targets for FY
2010, including absolute emissions targets and intensity targets.
309. This is a government-wide initiative, with a secretariat composed of the Ministry of Economy, Trade and Industry, the Ministry of the
Environment, and the Ministry of Agriculture, Forestry and Fisheries. As of December 2011, a total of 574 projects for domestic credits
had been authorized for around 313,000 tons.
310. As of the end of January 2012, 184 projects were registered, and the amount of total certified J-VER credit was around 161,000
tons. The median asking trading price for credits from the emissions reduction is around 4,000 (US$50) per ton; the price for those
from forest sinks is around 10,000 (US$125) per ton.
Following the end of the rst commitment period
of the Kyoto Protocol, it was decided to set a second
commitment period at the COP17 meeting held in
Durban. Japan will not participate in the second
commitment period, but will continue its eorts
to reduce GHG emissions in accordance with the
Cancun agreements. Japan is proposing the bilat-
eral oset credit mechanism (BOCM) as a practical
new market mechanism to complement the CDM,
with the aim of contributing to global emissions re-
ductions and carbon sinks. Te BOCM is designed
to further promote low-carbon investment on a
global scale by means of the appropriate evaluation
of emission reductions through the introduction of
advanced low-carbon technology and products in
developing countries.
311

Te future of the Japanese carbon market will be
greatly aected by mid-term targets for green-
house gas emission reductions. At this point,
the conditional target is for a 25% reduction in
2020 compared with 1990 levels. In response to
the changed situation, due to the earthquake and
the nuclear power plant accident in March 2011,
the government of Japan is aiming to present a
number of options for a unied energy and envi-
ronmental strategy. Tis strategy will be presented
to advisory councils to the government in the
spring, following the formulation of basic propos-
als on options for nuclear power policy, energy
strategy, and mitigating policy to climate change
based on the fundamental direction set out by the
governments Energy and Environment Council.
Te aim is to nalize a mid-term target for green-
house gas emission reductions by the summer.
6.10 SWITZERLAND
In 1997, the Swiss administration (Federal
Council) presented a federal law to reduce CO
2
emissions, proposing a 10% reduction target by
2010 (midway through the period 2008 to 2012)
as compared to 1990 levels. Te target was to be
achieved primarily through voluntary measures,
with the introduction of a CO
2
incentive tax if
the target could not be achieved on a voluntary
basis.
112
Te so-called CO
2
Act was adopted by the
Swiss parliament in 1999
313
and entered into ef-
fect on May 1, 2000; it represents the central pillar
of Swiss climate policy.
314
Te act also introduced
separate sectoral targets. In particular, emissions
from the burning of fossil fuels for heating and
transportation
315
purposes were set to be reduced
by 15% and 8% respectively, thus also contribut-
ing toward Switzerlands KP target of 8%.
316

Forecasting a signicant shortfall in achieving the
targets for transportation fuel, the government
began to introduce a number of additional mea-
sures. As such, on March 23, 2005, the Federal
Council adopted the application of a CO
2
tax
for heating fuels,
317
which took eect on January
1, 2008. It also introduced the climate cent
311. The intention to consider introducing the BOCM has already been stated in joint declarations with the heads of state of Vietnam
and the countries of the Mekong region (October 2010). An intergovernmental document with Indonesia in November 2011 also
states cooperation for the BOCM. In addition, a memorandum between the Ministry of Nature, Environment, and Tourism of Mongolia
and the Japanese Ministry of the Environment regarding cooperation between the two countries, including the BOCM, was signed in
December 2011. A feasibility study for the BOCM was carried out by the Ministry of Economy, Trade and Industry and the Ministry of
the Environment, and 79 studies were adopted in FY 2011. The Ministry of the Environment commissioned experts to conduct capacity
building for the implementation of the BOCM in 33 countries in Asia, Latin America, Africa, and elsewhere.
312. The CO
2
law also envisioned separate targets for heating oils and motor fuels, respectively. Source: Swiss Federal
Department of the Environment, Transport, Energy and Communications (DETEC), March 17, 1997. (http://www.uvek.admin.ch/
dokumentation/00474/00492/index.html?lang=en&msg-id=3156).
313. Loi fdrale sur la rduction des missions de CO
2
, October 8, 1999 (http://www.admin.ch/ch/f/rs/6/641.71.fr.pdf).
314. The Swiss Federal Office for the Environment (FOEN) is responsible for the CO
2
Act, which is being implemented jointly by the
FOEN and the Swiss Federal Office of Energy (SFOE), with the aid of the Swiss Energy program. Source: DETEC (http://www.bfe.
admin.ch/themen/00526/00531/index.html?lang=en).
315. Kerosene used for international flights is not included.
316. Switzerland ratified the Kyoto Protocol (KP) in 2003, thereby committing to reduce GHG emissions by 8% below 1990 levels for
2008-2012.
317. At a rate of 0.03 CHF/l for fuel oil and 0.025 CHFs/cubic meter for gas.
for transportation fuels, which took eect on
January 1, 2006. Te Climate Cent Foundation
(CCF), funded by a tax on gasoline and diesel,
invests in environmental measures.
318

On February 20, 2008, the Federal Council de-
cided to revise its CO
2
law after 2012. Switzerland
xed targets comparable to those of the EU,
namely a minimum GHG reduction target of
20% below 1990 levels by 2020 (see Box 7).
6.11 OTHER INITIATIVES
Several other countries and regions have started
to develop the domestic capacity to establish
market mechanisms relating to carbon, renew-
able energy, and energy eciency. Table 11 pro-
vides an overview of these instruments as well as
some of the readiness programs designed to sup-
port them.
318. Source: Biofuels Platform (http://www.biofuels-platform.ch/en/infos/ch-lco2.php#note1).
Box 7: The Swiss policy measures to reduce GHG emissions
By Mr. Marco Berg, Managing Director of the Climate Cent Foundation (CCF)
The Climate Cent Foundation (CCF) was founded in 2005 by four major Swiss business organiza-
tions. Its purpose was to prevent a lawfully looming levy on transport fuels by making use of the
flexible mechanisms of the Kyoto Protocol. To this end, CCF was committed to surrendering 17
million credits, at least 2 million domestic, to the Swiss government in 2013. To date, 14.5 million
Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs), as well as 2.5 mil-
lion domestic credits, have been purchased, or secured, to offset or reduce excess emissions in
Switzerland in the 2008-12 period. The funds required for this (i.e., 700 million CHF) were gener-
ated by a charge levied on petrol and diesel imports (at a rate of 0.015 CHF per liter).
As the sole source of demand for domestic offsets and with no experiences to build on, CCF had
to establish the rules and programs to define and procure domestic offsets. In one program, CCF
gave direct financial support to owners of existing buildings who invested in a refurbishment of
the building envelope beyond mandatory energy standards. Emission reductions were calculated
compared to a standardized baseline. More than 8,000 projects were included in what worked like
a Program of Activity under the Clean Development Mechanism (CDM), although that concept did
not exist in 2005.
A second program addressed renewable energy and energy efficiency projects that reduced fossil
fuel use. The 150 projects under contract, generally small-scale, typically involve the use of wood,
waste heat, or biofuels. They are credited along standard CDM rules by CCF, which took the risk
that the government might deem them to be unacceptable upon examination. Project owners had
to participate in one of ten rounds of auctions by making a bid stating volume of credits offered and
price per credit. A given volume of funds in was auctioned in each round, which determined the
cut-off for the highest bid considered.
A third program addressed industrial emitters, who had voluntarily opted-in for the Swiss Emissions
Trading Scheme (ETS) to get exempt from the levy on heating fuels, as well as small to medium
enterprises (SMEs), who had committed to intensive emission reduction targets with the govern-
ment. CCF conducted three rounds of auctions where companies were to offer different volumes
of credits in a given range of prices per credit. Here the auctioned volume of funds determined the
equilibrium price for each participant who made a bid at that price. On average, the price of the
domestic credits was reduced at CHF100 /tCO
2
.
319. Source: LAssemble fdrale de la Confdration suisse, Loi fdrale sur la rduction des missions de CO
2
, December 23, 2011.
320. Source: European Union, Clima East: support to climate change mitigation and adaptation in Russia and eastern neighbourhood
countries Eastern Partnership Integrated Border Management Programme: Strengthening Surveillance Capacity on the Green and
Blue Border between the Republic of Belarus and Ukraine, 2011.
321. Source: PMR Implementing Country Participants Organizing Frameworks for Scoping of PMR Activities and updates (www.
wbcarbonfinance.org/pmr). These proposed activities are tentative and may be modified. Some of the countries listed are yet to submit an
organizing framework in 2012.
322. Source: Asian Development Bank, Beyond Carbon: Fuel Security as a New Market Mechanism, June 2011.
Box 7: The Swiss policy measures to reduce GHG emissions (continued)
Despite the fact that in December 2011 a national climate law for the period up to 2020 was
passed,
319
many uncertainties about future demand remain. Lawmakers want domestic emissions
in 2020 to be at 80% of their 1990 level, seemingly without using international offsets. However,
Switzerland starts with a surplus of of three million tons of emissions in 2012 the amount of inter-
national offsets used to comply with the KP. Therefore, the reduction path had Switzerland fulfilled
its Kyoto target domestically is merely hypothetical. Realistically, the reduction path will need to be
steeper (see Figure). One way of reducing the burden on the Swiss would be to allow for the triangle
area between the two reduction paths, roughly 10.5 million tons, to be offset internationally. The
government is expected to make a decision on this in 2012.
G
H
G

E
m
i
s
s
i
o
n
s

(
m
i
l
l
i
o
n

t
o
n
s
)
35
37
39
41
43
45
47
49
51
53
55
Adjusted emission
trajectory
Verified emissions Emission targets
2008-2020
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 1990
COUNTRY /
REGION
DOMESTIC MARKET MECHANISMS ENVISAGED
AND SECTORS COVERED (IF KNOWN)
SUPPORTING PROGRAM(S)*
Belarus Emissions Trading Scheme (ETS). European Union: Clima East
320
Chile Crediting mechanism and/or ETS: the energy,
agriculture, forestry, and transport sectors are
considered.
World Bank: Partnership for Market
Readiness (PMR)
321

Colombia Crediting mechanism in the transport sector. World Bank: PMR
Costa Rica Crediting mechanism: transport, energy, mining
sectors are considered.
World Bank: PMR
East Asia
Pacific
Fuel security certificate market mechanism:
implementation of pilots in 2 or 3 cities yet to be
selected across the East Asia Pacific region.
Asian Development Bank:
Sustainable Transport Initiative
322
Indonesia Crediting mechanism. World Bank: PMR
Jordan Crediting mechanism: energy and waste
management sectors (considered).
World Bank: PMR
Table 11:
Emerging
domestic initiatives
and supporting
readiness
programs
(non-exhaustive)
COUNTRY /
REGION
DOMESTIC MARKET MECHANISMS ENVISAGED
AND SECTORS COVERED (IF KNOWN)
SUPPORTING PROGRAM(S)*
Kazakhstan ETS: implementation of a pilot over 2013-2015. European Bank for Reconstruction
and Development (EBRD):
Preparedness for Emissions Trading in
the EBRD Region (PETER)
323
Morocco Crediting mechanism: electricity, cement production,
phosphate extraction and processing (considered).
World Bank: PMR
South Africa Carbon tax to be possibly converted into a domestic
ETS.
World Bank: PMR
Thailand Crediting mechanism and/or ETS: industry sector
(urban areas).
World Bank: PMR
Turkey Infrastructure for market readiness. World Bank: PMR
EBRD - Sustainable Energy Initiative
III
Ukraine ETS: energy and iron & steel sectors. World Bank: PMR
EBRD: PETER
European Union: Clima East
Vietnam Crediting mechanism and/or ETS: steel, solid waste
management, transport, power, and agricultural
process sectors (considered).
World Bank: PMR
*Several bilateral programs also support capacity building in carbon markets in these countries.
Source: World Bank.
Table 11:
Emerging domestic
initiatives and
supporting
readiness
programs
(non-exhaustive)
(continued)
Table 12:
Scenario of
potential demand
for offsets in non-
Annex I Countries
201320
(MtCO
2
e)
Country (group of) Assumptions Potential demand
(MtCO
2
e)
Australia Carbon Price Mechanism, cap in line with target of
5% below 2000.
348
EU-27, Iceland,
Liechtenstein, and Norway
20%below 1990, with differentiation EU ETS and
effort sharing.
1,635
Japan Between 25% and 0% below 1990. 539

New Zealand NZ ETS: 10% below 1990. 77
North America Western CIimate Initiative (WCI): limited to
California and Qubec, with international offsets
allowed in California only.
94
Switzerland 20%below 1990, with ETS and other measures. 2.3 -12.8
TOTAL 2,706
Notes: For detailed assumptions see Annex 8: Assumptions for Estimates of Potential Demand for Offsets
from non-Annex I Countries.
: Already accounts for an inflow in the EU ETS of 865 million CERs and ERUs during Phase II.
Box 8: Will there be demand for emission reductions after 2012?
Despite the recent confirmation of several initiatives looking beyond 2012, the overall demand for
international credits remains uncertain. Their key features such as import limits and eligible crediting
mechanisms still require further rule making, and may likely be influenced by the outcomes of the
ongoing international negotiations.
323. Source: European Bank for Reconstruction and Development, Regional (TCS 33506): Preparedness for Emissions Trading in the
EBRD Region (PETER), December 2011.
324. Source: Japans Ministry of Foreign Affairs, Ministry of Economy, Trade and Industry, Ministry of the Environment, Japans initiatives
on the Bilateral Offset Credit Mechanism (BOCM) and other activities for developing countries, April 14, 2012.
325. Over 2010-2011, 50 projects over more than 18 countries were selected by the Government, in order to perform feasibility
studies. The mechanism is expected to start operations in 2013.
Box 8: Will there be demand for emission reductions after 2012? (continued)
We estimate that demand for emission reductions generated in developing countries could range
from 2,156 to 2,706 billion tCO
2
e over 20132020 (see Table 12). Such demand may be met
through offsets generated from CDM and JI projects, as well as new market approaches under the
UNFCCC or agreements concluded outside of the multilateral process:
The EU Climate and Energy Package remains the main driver of post-2012 demand for interna-
tional offsets, with a total of 1,635 MtCO
2
e over 2013-2020 absorbed by the EU ETS and EU in-
ternal burden sharing (60-76% of the total). If the EU moved from 20% to 30% GHG emissions
target below 1990 level by 2020, we estimate such demand will reach roughly 2,435 MtCO
2
e.
In addition, Australias Carbon Price Mechanism, which allows scheme participants to use inter-
national offsets to meet up to 50% of their liability from 2015, is expected to import another 348
MtCO
2
e from overseas until 2020.
In North America, potential demand currently only comes from California, with 94 MtCO
2
e maxi-
mum over 2013-2020 of sector-based offset credits. However, if Qubec and the other three
WCI partners adopted similar provisions, we estimate the collective demand for such credits
could amount to roughly 200 MtCO
2
e.
Although Japan will not participate in the Kyoto Protocols Second Commitment period, it intends
to remain in the Protocol and to rely on Kyoto Mechanisms to achieve its post-2012 target.
324

Japan is also preparing a Bilateral Offsetting Credit Mechanism (BOCM) that is intended to
complement its use of Kyoto Mechanisms.
325
We estimate Japan may represent a maximum de-
mand of 539 MtCO
2
e for both credits types by 2020.
Based on current targets, New Zealand could add 77 MtCO
2
e to the total demand.
Based on current targets, Switzerland could add 2.3 to 12.8 MtCO
2
e, depending on on-going
policy ruling.

As detailed in earlier in the Section, there are also several non-Annex I countriessuch as Brazil,
Chile, China, or the Republic of Koreathat already moved forward emissions trading, and which
may, at some point, generate possible demand for domestic and international offsets. However, it is
still impossible to provide any estimate of this demand and thus we do not consider it here.
Estimates of supply for international offsets are forecasts for CDM and JI only (see Table 13). About
2.3 to 4.8 billion offsets could be generated post-2012. The lower end of this range does not ac-
count for new projects possibly entering the CDM pipeline after April 2012 and for possible renewal
of crediting period for already registered projects. The upper end of the range assumes full crediting
renewal of the projects. We expect limited unused pre-2013 credits to come in addition to this sup-
ply. One can conclude that the supply of existing current Kyoto mechanisms, i.e. CDM and JI, may be
sufficient alone to serve global demand for international offsets over 2013-2020. Beyond 2012, the
lack of demand for international offsets and uncertainties over their utilization in the current initiatives
are the main constraints to the carbon market. This provides no further encouragement to build up
a substantial and credible supply based on innovative mechanisms. For both developed and devel-
oping countries, this could be a missed opportunity to benefit from market instruments to mobilize
resources and engage the private sector in climate action.
Table 13:
Estimates of
potential supply
under the CDM
and JI up to 2020
(MtCO
2
e)
pre-2013 post-2012 Cummulative
(up to 2020)
Point Carbon
CDM-EU ETS eligible 1,250 2,138 3,388
CDM-other - 554 554
ERU 296 51 347
Total 1,546 2,743 4,289
Deutsche Bank*
CDM-other 2 468 470
ERU 250 - 250
Total 1,553 2,315 3,869
CDC Climat**
CDM-other 2 1,415 1,417
ERU 357 - 357
Total 1,628 4,797 6,425
* Secured supply from the first crediting period of projects registered of April 2012.
** Risk-adjusted issuance and full crediting renewal of projects in the CDM pipeline.

Box 8: Will there be demand for emission reductions after 2012? (continued)
Annex 1: International reaction to aviation
in the EU ETS
On December 16, 2009, the Air Transport
Association of America (currently called Airlines
for America or A4A), together with American
Airlines, Continental Airlines, and United
Airlines, led a lawsuit contesting the measures.
Tey contended that the directive (i) infringes on
the Chicago Convention, the Kyoto Protocol,
326

and the Open Skies Agreement
327
because it im-
poses a form of tax on fuel consumption; and
(ii) infringes on certain principles of customary
international law in that it seeks to apply the al-
lowance trading scheme beyond the EUs territo-
rial jurisdiction.
328

On October 6, 2011, the Advocate General of
the Court of Justice of the EU (ECJ) issued a
preliminary opinion supporting the decision to
include non-EU airlines in the EU ETS. On
December 21, 2011, the ECJ ruled that the
EU decision to include the aviation sector in its
Emission Trading Scheme (ETS) from 2012 is
lawful under international law, thereby providing
that all airlines including those of third coun-
tries will have to acquire and surrender emis-
sion allowances for their ights departing from
and arriving at European airports.
329
On March
27, 2012, A4A announced it was dropping its
private lawsuit against the ETS, but urged the
U.S. government to accelerate its work to re-
verse this unilateral tax.
330

Te International Air Transport Association
(IATA), whose 230 members carry more than
93% of scheduled international air trac, has
claimed the ETS will cost airlines 1.2 billion
Euros ($1.6 billion) this year, rising to an esti-
mated 9 billion Euros ($11.8 billion) in 2020; it
has forecast a 29% drop in the industrys prot
in 2012.
331
Other analyses produced by the
European Commission
332
and MIT
333
dier.
Studies show that while the inclusion of avia-
tion in the EU ETS is being implemented in a
way that limits distortion of competition, some
changes in competitiveness may occur. Hub air-
ports just outside the EU, along with the non-
EU airlines that serve these airports, may become
more competitive for some routes. Tus, some
carbon leakage is likely to take place, meaning
that the reduction of aviation emissions within
the EU is partly compensated for by an increase
of emissions outside of the EU ETS. Still, the
impact of this shift in air trac is deemed to be
limited.
334

326. Regarding the principle of common but differentiated responsibilities between Annex 1 and non Annex 1 countries enshrined in the
Framework Convention.
327. Air Transport Agreement between the United States of America, of the one part, and the European Community and its Member
States, of the other part, concluded on April 25-30, 2007.
328. Source: Court of Justice of the EU, Press Release No 139/11, Luxembourg, December 21, 2011, on Judgment in Case C-366/10:
Air Transport Association of America and Others v Secretary of State for Energy and Climate Change.
329. Source: Judgment of the Court (Grand Chamber), December 21, 2011, reference for a preliminary ruling from the High Court of
Justice of England and Wales, made by decision of July 8, 2010; InfoCuria. http://curia.europa.eu/juris/document/document.jsf?text=&do
cid=117193&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=5925.
330. Source: Carbon Finance Online, EU aviation dispute to fade, as U.S. association drops lawsuit, March 28, 2012.
331. Source: Thomson Reuters Point Carbon, Carbon Market News, January 4, 2012.
332. Source: European Commission. Questions & Answers on the benchmark for free allocation to airlines and on the inclusion of
aviation in the EUs Emission Trading System (EU ETS), September, 2011.
333. Source: Journal of Air Transport Management. The impact of the European Union Emissions Trading Scheme on US aviation.
December, 2011.
334. Source: Faber, J., Brinke, L., The Inclusion of Aviation in the EU Emissions Trading System, September 2011.
A sequence of recent international reactions is
provided below:
Reacting to the letters sent by major airlines
to several government ocials in Europe,
including France, on March 22, 2012, the
French Prime Minister sent a letter to EC
President Jose Manuel Barroso urging the
Commission to make all the necessary ef-
forts to nd a solution acceptable to countries
outside the region, as this situation is caus-
ing strong concerns among companies.
335

On March 22, 2012, Indian ofcials directed
its airlines not to report their emissions or
submit emissions monitoring plan to the EU
authorities. Tey also indicated that a basket
of measures was available to the Indian gov-
ernment to counter the scheme.
336

Also on March 22, 2012, the South African
Tourism Minister urged the EU to suspend
the inclusion of aviation in the EU ETS for
two years to allow time for a global agreement
on carbon tax at the United Nations.
337

On March 12, 2012, Airbus and other major
airlines wrote to Europes leaders warning about
the economic consequences of the ETS on the
aviation sector. Tey called on governments
to nd an unspecied compromise solution
to the growing dispute over the extension of
the EU Emissions Trading System to the sec-
tor: claims have been made that US$12 billion
worth of Airbus orders have been suspended
in China. Airbus estimates this will jeopardize
more than 1,000 Airbus jobs in Europe and a
further 1,000 in the supply chain.
338
A few days
later, in addition to the previously suspended
purchase of 10 Airbus A380 super-jumbos and
35 A330s worth $12 billion, China delayed the
purchase of an additional 10 Airbus long-haul
jets. Tis brings to US$14 billion the value of
the purchases halted.
339

On February 14, 2012, the U.S. enacted
the FAA Modernization and Reform Act of
2012, which includes a clear congressional
statement opposing the extraterritorial reach
of the EU ETS and advising the government
to use all political, diplomatic, and legal
tools at its disposal to ensure the scheme is
not applied to U.S. registered aircraft or to
the operators of such aircraft.
340

On February 6, 2012, the Civil Aviation
Administration of China reportedly ordered
Chinese airlines not to comply with the EU
ETS and prohibited companies from charging
customers with the cost of reducing emissions
under the scheme. At the same time, Chinas
State Council, or cabinet, reportedly said that
all domestic airlines were banned from taking
part in the EU ETS unless given government
approval. Following that news, on February
7, the Chinese Foreign Ministry spokesman
conrmed: China will consider taking nec-
essary steps in accordance with the way things
develop to protect the rights of our nationals
and our companies ; we hope that the
EU ... can pay attention to Chinas concerns
and take a practical and constructive attitude
to increase communication and coordination
with all sides to nd an appropriate solution
that all sides can accept.
341

335. Source: Thomson Reuters Point Carbon, France urges EU to solve airlines carbon payment row, Carbon Market Daily, April 5,
2012.
336. Source: Thomson Reuters Point Carbon, After China, India asks airlines to boycott EU carbon scheme, Carbon Market Daily,
March 22, 2012.
337. This came from Pretorias tourism minister, Marthinus van Schalkwyk, at the Air Transport Action Group (ATAG) Aviation &
Environment Summit 2012 in Geneva conference. Source: Climate Connect News, March 22, 2012.
338. In a letter to UK Prime Minister David Cameron and high-level members of the EC, the CEOs of British Airways (BA), Virgin
Atlantic, and Airbus warned that threatened retaliatory measures over the extension of the EU ETS to aviation are now becoming very
real and are being translated into concrete action, which is starting to have serious consequences on the European aviation business.
Similar letters were sent to the leaders of France, Germany, and Spain by carriers Air France, Iberia, Air Berlin, and Lufthansa, and
equipment manufacturers Safran and MTU Aero Engines. Source: Carbon Finance Online, Aviation industry urges compromise solution
to EU ETS dispute, March 13, 2012.
339. Source: Thomson Reuters Point Carbon, Carbon Market Daily, March 15, 2012.
340. Source: Clifford Chance, Turbulence in the EU ETS a practical overview of the EU ETS for aircraft lessors and lenders, Briefing
Note, February, 2012.
341. Source: Thomson Reuters Point Carbon, Carbon Market Daily, February 7, 2012.
On December 16, 2011 (i.e., 5 days prior
to the ECJs decision), in a letter sent by the
U.S. administration to EU ocials, the U.S.
Secretaries of State and Transportation wrote:
we strongly urge the EU and its Member
States within their respective competences
to reconsider this current course; halt or, at
a minimum, delay or suspend application
of this Directive, also saying, Absent such
willingness on the part of the EU, we will be
compelled to take appropriate action. Te
letter also included a list of 43 countries
342
that publicly opposed the application of the
directive to non-European airlines.
343
A reply
was sent on January 16, signed by Siim Kallas
(Vice President of European Commission)
and Connie Hedegaard (Climate Action
Commissioner).
On October 24, 2011, the House of
Representatives in the U.S. Congress passed
a bill (H.R. 2594) that would make it illegal
for U.S. airlines to comply with their obliga-
tions under the EU ETS. In order to become
U.S. law, a similar bill would have to be ad-
opted by the U.S. Senate; this is considered
unlikely by market analysts. U.S. airlines are
expected to continue to comply with their
EU ETS obligations.
CATA, which represents Chinas four major
airlines (ag-carrier Air China Ltd, China
Southern Airlines, China Eastern Airlines,
and Hainan Airlines), refuses to accept the
resolution and declared Chinese airlines
would consider legal action against the EU in
response to its charges for carbon emissions.
In addition, China has reportedly blocked a
$3.8 billion aircraft purchase by Hong Kong
Airlines from France-based Airbus at the Paris
air show in June.
344

Australias Qantas Airways has said it is also
considering legal action against the scheme.
Facing a sluggish economy and weak cargo
demand, Hong Kong-based Cathay Pacic
Airways, Ltd, and some other Asian airlines
have said they might impose surcharges or in-
crease airfares to counter the ETS impact.
Te director general of the Association of
Asia Pacic Airlines said: Te EU has paint-
ed itself into a corner, by stubbornly refusing
to recognize the legitimacy of the concerns
repeatedly voiced by foreign governments on
this issue. We urge the EU to scrap plans
to include foreign airlines within the EU
ETS, rethink its position and reengage with
the international community.
In early 2012, low-budget Malaysian airline
AirAsia X said it is withdrawing two services
to Europe partly in response to the airline be-
ing regulated under the EU ETS.
342. Countries include Brazil, Canada, China, India, Japan, Mexico, Republic of Korea, Russian Federation, South Africa, and the United
States.
343. Source: http://images.politico.com/global/2011/12/scan_letter_hillary_clinton.pdf.
344. Source: Thomson Reuters Point Carbon, Carbon Market Daily, September 30, 2011.
Annex 2: Land-use carbon
Land-use greenhouse gas mitigation activities have
long remained on the fringe of global carbon mar-
kets.
345
Limited in scope for generating credits that
are not eligible in the main compliance regimes,
land-use carbon has been mostly restricted to the
much-smaller voluntary market.
346
Te latter has,
however, provided interesting ground for innova-
tion and helped project developers address new
types of land-use activities and develop specic
carbon accounting tools.
347
Te on-the-ground
experience acquired, has informed and enhanced
the discussion on land-use carbon, both domesti-
cally and internationally. Te year 2011 saw long-
term land-use eorts begin to bear fruit and was
therefore a transitional year for the market. First,
the prospect of scaled-up demand for land-use as-
sets materialized with the emergence of new carbon
markets such as in Australia and California.
348

Tese markets have set out plans to tap into domes-
tic forest and soil sinks to generate compliance o-
sets. At an international level, Durban recognized
that market-based approaches may be developed in
the coming years to nance REDD+ activities.
349

It also opened the door for expanding the scope of
CDM land-use activities beyond reforestation and
aorestation. Te supply of land-use carbon osets
also became tangible with the issuance of the rst
REDD voluntary credits in February 2011. Tese
credits were generated from a Kenyan carbon proj-
ect. In addition, the rst forestry credits under the
Kyoto Protocol were issued in April 2012, gener-
ated from a reforestation project in Brazil that was
granted 4 million temporary CERs (tCERs).
While mostly relying on public nancing until
recently, and despite lingering uncertainties on
the size and timeline for compliance demand,
land-use carbon is gradually gaining traction
from a more diversied set of investors. In 2011
and 2012, several funds emerged and joined the
rst few pioneers (see Table 14). Although far
from their full capitalization targets, these funds
are estimated to collectively raise about US$530-
550 million (402-417 million) by the end of
2012 for investment in land-use carbon o-
sets.
350
Te funds that have emerged have a range
of investment strategies, markets, and scope of
investors, as described below.

Most of the funds listed in Table 14 invest in
carbon osets through o-take agreements with
project developers. Once the credits are issued,
the fund managers may directly monetize them
in the secondary market and return the proceeds
to their participants (yield-driven funds). Te
credits can also be delivered to participants who
either seek monetization or use them for their
own compliance or voluntary osetting. In the
specic case of equity funds, investors seek re-
turns from the dividends of their shareholdings
345. In this section, land-use carbon broadly refers to carbon offsets sourced from forestry and agricultural soil management activities
that reduce and/or sequester greenhouse gases.
346. In 2011, the voluntary carbon market accounted for roughly 0.2% of global carbon markets volumes (see Executive summary).
347. Source: Guigon, P., Voluntary Carbon Market, How Can they Serve Climate Policies, 2011. OECD.
348. Carbon Farming Initiative (CFI) in Australia, and cap and trade program in California.
349. REDD-plus refers to incentives for reducing greenhouse gas emissions from deforestation and forest degradation and for
promoting forest conservation, sustainable forest management, and enhancement of forest carbon stocks.
350. This figure is an estimate based on either public information (if available) or confidential information (bilateral interviews), and
represents the financial commitments that the funds listed have collectively secured as of April 2012, and/or should have secured
by the end of 2012. This estimate does not account for one fund, for which such information could not be obtained. Although these
funds intend to primarily address land-use carbon, some may also source credits from rural energy use projects. The targeted financial
commitments featured only derive from publicly accessible sources (e.g., presentation, advertisement support). Exchange rate used 1
= US$1.32. Source: European Central Bank, as at April 20, 2012.
in project enterprises earning income from the
sale of production outputs (e.g., carbon osets,
timber, or various agricultural commodities).

Although some funds specically address compli-
ance markets (e.g., Kyoto Protocol, California),
most of them still invest in voluntary assets.
However, those often bet on enhanced returns
from potential grandfathering of their assets in
future compliance markets, such as under an in-
ternational or bilateral REDD+ agreement.
Te wide range of land-use activities covered by
the funds exemplies the dierent markets that
they address, as well as the availability of carbon
accounting methodologies. In California, for ex-
ample, the forestry protocols currently approved
under the compliance oset program involve
tree planting and forest management activities
in both rural and urban areas.
351
A number of
methodologies approved under the Veried
Carbon Standard (VCS) address both forest and
agricultural land (for the latter, the rst meth-
odology was approved in December 2011) and
may ultimately supply the generation of future
compliance regimes.
352
Although most of the
funds invest in standalone land-use projects,
some are seeking scale through a more integrated
approach, using landscape accounting
353
or even
crediting against national baselines.
Launch
year
Targeted
commitment
(million
US$)
Manager Investors
(non-exhaustive)
Investment
strategy
Scope Targeted
carbon
market
Althelia
Climate
Fund
2011 325 Althelia
Ecosphere
Dutch
Development
Finance
Institution, indus-
trial corporate(s),
institutional
investor(s)
Assets:
carbon credits,
sustainable
commodities ,
and Payments
for Ecosystem
Services.
Yield-driven:
credits mon-
etization and
delivery.
Activities:
forest (REDD,
landscape).
Scale: project,
at scale.
Voluntary.
BioCarbon 2011 25 BioCarbon
Group
Macquarie Group,
International
Finance
Corporation
(World Bank),
Global Forest
Partners.
Assets: carbon
credits.
Yield-driven:
monetization.
Activities: forest
(REDD), soil
Scale: project
Voluntary.
Pre-
compliance:
post-Kyoto,
bilateral.
BioCarbon
Fund ( I ,II,
III)
2004 (I)
2007 (II)
2012 (III)
90 (closed)
60 (open)
World Bank Spain, Japan
Petroleum
Exploration,
Tokyo Electric
Power, Agence
Franaise de
Dveloppement,
Ireland.
354
Assets: credits.
Not yield-
driven: credits
delivery.
Activities: for-
est (diverse),
soil, landscape
(rural energy also
envisaged.)
Scale: Project, at
scale
Compliance:
Kyoto
Voluntary.
351. Source: California Air Resources Board, Compliance Offset Protocol for U.S. Forest Projects, 2011.
352. The methodologies approved under the VCS are available at http://www.v-c-s.org/methodologies/what-methodology.
353. Landscape carbon accounting is an integrated approach which consists of crediting for a variety of greenhouse gas emission
reduction activities (e.g., land-use and rural energy activities) within a defined large-scale boundary. It therefore differs from classic silos
where activities are addressed separately. Source: World Bank, BioCarbon Fund Tranche 3, Concept note, March 2012.
354. For the full list of participants, refer to the website of the Carbon Finance Unit of the World Bank.
Table 14: Investment funds and land-use carbon
Launch
year
Targeted
commitment
(million
US$)
Manager Investors
(non-exhaustive)
Investment
strategy
Scope Targeted
carbon
market
Carbon
Fund for
Forests
2011 132 CDC Climat
Asset
Management
CDC Climat,
Orbeo, institu-
tional investors.
Assets: carbon
credits.
Yield-driven:
monetization.
Activities: forest
(diverse)
Size: project.
Compliance:
North America
Voluntary.
Pre-
compliance:
post-Kyoto,
bilateral.
EKO
Green
Carbon
Fund
2011 5-10 EKO Asset
Management
Partners
BP Alternative
Energy, institu-
tional investors,
family offices.
Assets: carbon
credits.
Yield-driven:
monetization.
Activities: forest
(diverse), soil
Scale: project.
Compliance:
North America
FCPF
Carbon
Fund
2011 215 World Bank Norway, Germany,
UK, Australia,
USA, European
Commission,
CDC Climat,
BP Alternative
Energy,
The Nature
Conservancy,
Switzerland,
Canada.
Assets: emis-
sion reductions,
with the poten-
tial of becoming
credits. .
Not yield-
driven: delivery.
Activities: forest
(REDD)
Scale: jurisdic-
tion (subnation-
al, national).
Voluntary.
Pre-
compliance:
post-Kyoto,
bilateral.
Forest
Carbon
Partners
2012 Not
disclosed
New Forests Not disclosed. Assets: carbon
credits.
Yield-driven:
monetization.
Activities: forest
(diverse), soil.
Scale: project.
Compliance:
North
America.
Livelihoods
Fund
2011 40-66 Livelihood
Venture
CDC Climat,
Credit Agricole,
Danone,
Schneider
Electric.
Assets: carbon
credits (100%
up-front finance
in exchange for
carbon credits).
Not yield-
driven: delivery.
Activities: forest
(diverse), soil
(rural energy
also envisaged).
Scale: project.
Voluntary.
Moringa
Fund
2012 132 Compagnie
Benjamin de
Rothschild
(CBR), ONFI
Development
Finance
Institutions, , insti-
tutional investors,
family offices.
Assets:
equity (invest-
ment in project
companies).
Yield-driven:
dividends based
on sales of
timber & agro
products with
an upside com-
ing from carbon
credits.
Activities: agro-
forestry (out-
puts: timber, soft
commodities
carbon & other
environmental
externalities).
Scale: project.
Voluntary.
Terra Bella
Fund
2011 150 Terra Global
Investment
Management
The U.S.
Overseas Private
Investment
Corporation, insti-
tutional investors.
Assets: carbon
credits, equity
Yield-driven:
monetization,
dividends.
Activities:
forest (REDD),
agriculture.
Scale: project.
Voluntary.
Pre-
compliance:
post-Kyoto,
bilateral.
Table 14: Investment funds and land-use carbon (continued)
Annex 3: The state of the voluntary market
By Forest Trends-Ecosystem Marketplace
In 2011, activity in the voluntary carbon mar-
ket (VCM) stabilized to contract 79 million tons
(Mt) for immediate or future delivery. Overall
transaction volumes decreased 39% from 2010.
However, excluding one low-priced, high vol-
ume outlier from the 2010 market, this repre-
sents a 14% increase over 2010 levels.
Te value of the voluntary OTC marketplace in-
creased by 35% to US$573 million as the aver-
age oset price jumped from US$6/ton in 2010
to US$7.3/ton in 2011. As always, prices were
highly stratied according to standard, location
and technology, ranging from a low US$0.1/ton
to over US$100/ton.

Renewable energy projects generated around 56
Mt of all transacted reductions roughly the size
of the entire 2009 VCM OTC market. Of this
volume, wind projects blew away other technol-
ogies to transact over 20 Mt.
For projects that reduce emissions from de-
forestation and forest degradation (REDD),
2011 launched with optimism with progress
around REDD+ at the UNFCCCs 2010 16
th
Conference of Parties in Cancun as well as
project developer Wildlife Works fast-moving
Kenyan REDD project that brought the rst
veried VCS REDD credits to market.
As the year progressed, however, only one other
REDD project achieved verication, as project
developers and third-party standards continued
to navigate REDD projects unique political and
technical challenges. REDD projects contracted
7.7 Mt representing 60 percent less volume than
in 2010 but nonetheless remained a popular
project type.
As a result of voluntary buyers renewed inter-
est in clean energy projects, Asia emerged as the
top location for oset supply taking the lead
from the United States, which was the leading
credit source in 2009 and 2010. Demand for
credits from Asian renewables was reective of
the CDMs historic inuence on the VCM. Last
year, market players followed the CDM market
into Africa to transact the highest ever volume
of credits from the region (7.4 Mt). Africa-based
projects beneted both from the CDMs intensi-
ed post-2012 focus on credits from LDCs, as
Market Average Price
(US$/tCO
2
e)
Volume
(MtCO
2
e)
Value
(US$ million)
2010 2011 2010 2011 2010 2011
Voluntary OTC Market 6 6.5 69* 87 414 569
Of which Verified Carbon Standard 5 4.4 28 43 142 191
Of which Gold Standard 11.3 10.4 6.5 8 73 86
Of which Climate Action Reserve 6 7.3 13 9 79 65
Of which American Carbon Registry 1.6 5.7 1.5 4 2.5 24
*129Mt with single large CCX outlier transaction of 59Mt.
well as innovative cook stove, forestry and water
purication projects that emerged from the pipe-
line in 2011 after years of capacity building and
methodology development.
Te U.S. retained its standing as the largest sin-
gle country supplier of osets, however and
also the largest buyer for both voluntary purpos-
es and to prepare for regulation in the emerging
California cap-and-trade market.
Worldwide, suppliers reported that 80% of credits
were transacted by voluntary buyers with the in-
tent to retire credits and over half of all voluntary
buyers were based in Europe. Buyers from the en-
ergy, manufacturing and nancial sectors picked
up the lions share of purely voluntary osets.
Purchases were motivated by the aim of meeting
and communicating their corporate GHG targets
(59%). Another 6% of buyers worldwide pur-
chased osets to green their supply chains.

Tird party standards continued to launch new
methodologies and in cases such as the Climate
Action Reserve, are becoming increasingly rel-
evant to regulators. Overall, the Veried Carbon
Standard (VCS) maintained its lead in contract-
ed volume.
Annex 4: Californias cap-and-trade design
features
Gases CH
4
, CO
2
, HFCs, NF
3
, N
2
O, PFCs, SF
6
.
Sectoral scope -Coverage: 85% of Californias GHG emissions
-From 2012: stationary facilities emitting at least 25,000 tCO
2
e per year, in industry
and power generation (including imports).
-From 2015: distribution (including imports) of fuels for combustion in the
transportation and building sectors, whose combustion emits more than 25,000 tCO
2
e
per year. Including threshold for power imports drops to 0tCO
2
e per year.
Compliance periods -Three compliance periods: 2013-2014 (CP1), 2015-2017 (CP2) and 2018-2020
(CP3).
-Annual compliance: 30% of the compliance obligations of a year is due no later than
1 November of the following calendar year.
-Triennial compliance: the balance of compliance obligations for the whole compliance
period is due no later than 1 November of the year following the end of the compliance
period (i.e. 2015, 2018, and 2021).
Cap -Target: -9% from 2005 levels, or 0% from 1990 levels.
*Under the Voluntary Renewable Electricity (VRE) program, ARB sets aside allowances
(0.5% in CP1, and 0.25% in CP2 and CP3) to be retired on behalf of uncovered
entities purchasing renewable electricity.
Regulator California Air Resources Board (CARB).
Compliance units -Emissions allowance issued by CARB.
-Offset credit issued by CARB.
-Early action offset credit issued by ARB following regulatory verification and review of
an offset from an eligible program.
-Compliance instrument issued by another GHG linked program.
Allocation -Free allocation to eligible industrial facilities based on 1) a product-specific
greenhouse gas emissions benchmark, and 2) an assistance factor based on exposure
to leakage, which declines over time for some industries.
-Free allocation to electricity distributors: Investor Owned Utilities (IOU) are required
to auction all free allowances, Publicly Owned Utility (POU) can either auction free
allowances or use them for compliance.
Auctions -Quarterly auctions. First auction on November 14, 2012.
-Uniform price, single round, sealed bids, and proportional allocation for tied bids.
All bids converted to a single currency using the exchange rate by the Auction
Administrator on the day of the auction prior to bidding window.
-Market share limit: only applicable to auctions taking place until 2014. 15% of the
offered allowances for a compliance participant (40% for an electrical distribution
utility - removed in draft linked amended regulation), and 4% for a non compliance
participant.
-Reserve price set at US$10/unit in 2012, increasing 5% per year plus inflation rate
to be specified. Reserve price in Canadian dollars (CN$) is that of the previous year
increased by 5 percent plus as adjusted in Financial Administration Act of Qubec.
Auction Reserve Price is reset on day of auction as the higher of the California and
Qubec auction reserve price when converted to a single currency.
-US$/CN$ exchange rate as specified by the Auction Administrator.
YEAR 2013 2014 2015 2016 2017 2018 2019 2020
Allowance budget
(million units)
162.8 159.7 394.5 382.4 370.4 358.3 346.3 334.2
CAP (net PCR and VRE*) 160.4 157.3 337.7 366.1 354.7 332.3 321.2 310.0
Banking & borrowing -Unlimited banking (but subject to holding limit).
-No borrowing stricto sensu, but advance auctions (on year N auctions of 10% of the
allowances from future budget year N+3), and an allowance price containment reserve
(see below).
Offsets -Utilization Limit: 8% of compliance obligations for each compliance period (i.e. 218
MtCO
2
e maximum).
-Unused offset capacity cannot be banked across CPs. -Four sources:
1) Compliance Offset Credits issued by CARB.
2) Early Action Offset Credits issued by CARB.
3) Compliance Offset Credits issued by a linked regulatory program (subject to further
rule-making).
4) Sector-Based Offset Credits from crediting program (subject to further rule-
making). Applicable sub-limit of 2% of compliance obligations in CP1, and 4% in CP2
and CP3 (i.e. 94 MtCO
2
e maximum).
-Invalidation provision: CARB can remove from its holders account or require its
replacement, within a timeframe of 8 years, or 3 years if the project has been reviewed
by a second verifier within 3 years.
Allowance Price
Containment
Reserve (PCR)
-Share of total allowance budget feeding the reserve: 1% in 2013-2014, 4% in 2015-
2017, 7% in 2018-2020.
-First sale on March 8, 2013, and six weeks after each auction for the following ones.
-Sales only open to compliance participants.
-Reserve divided in three equal-sized tiers according three fixed price categories:
40USD, 45USD, and US$50 per unit in 2013, increasing 5% per year plus inflation
rate to be specified.
-Draft linking amended regulation defines that entities from another GHG linked
program are not eligible to purchase allowances from the reserve.
Holding limit -Limit in the number of California allowances that any entity or group of affiliated
entities can hold on its account.
-Calculation formula: Holding Limit = 0.1 * base + 0.025 * (Compliance Period Budget
Base). E.g., 5.945 million allowances in 2013.
-Draft linking amended regulation include allowances from other external linked
programs in the calculation of the holding limit, and defines a holding limit for each
allowance vintage year.
Penalty for
non-compliance
Four allowances for each missing one.
Source: World Bank, California Air Resources Board.

The text in italic reflects some of the amendments to the cap-and-trade regulation proposed by CARB staff in a discussion draft
published on March 30, 2012. Source: California Air Resources Board, Discussion Draft - March 30, 2012 Amendments to the
California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms to Allow for the Use of Compliance
Instruments Issued by Linked Jurisdictions, March 2012.
Annex 5: Qubecs cap-and trade design
features
Gases CH
4
, CO
2
, HFCs, NF
3
, N
2
O, PFCs, SF
6
.
Sectoral scope -From 2012: stationary facilities emitting at least 25,000 tCO
2
e per year, in industry and
power generation (including imports, i.e. out-of-state generation).
-From 2015: distribution (including imports) of fuels for combustion in the transportation
(excluding aviation and shipping) and building sectors.
Compliance
periods
-Three compliance periods: 2013-2014 (CP1), 2015-2017 (CP2) and 2018-2020 (CP3).
-Compliance obligations no later than 1 October of the year following the end of the
compliance period (triennial compliance).
Cap
Regulator Ministry of Sustainable Development, Environment and Parks.
Compliance
units
-Emissions allowance issued by Qubec.
-Early reduction credit issued by Qubec.
-Compliance instrument issued by a government under official agreement with Qubec.
-Offset credit issued by Qubec.
Allocation -Free allocation to eligible emitters, based on performance benchmarks.
-75% of the free allowances allocated in January of each year.
-Remaining 25% is put aside until September of the following for adjustment based on annual
verified emissions.
-Regulator to claim back surplus if any after adjustment.
Auctions -Quarterly auctions (at most).
-Uniform price, single round, sealed bids.
-Market share limit: 15% for a compliance participant, and 4% for a non compliance
participant for 2013 and 2014 units, and 25% for any bidder for 2015.
-Reserve price set at CN$10/unit in 2012, increasing 5% per year plus as adjusted in
Financial Administration Act of Qubec.
Holding limit -Limit in the number of allowances that any entity or group of affiliated entities can hold on its
account.
-Calculation formula: Holding Limit = 0.1 * base + 0.025 * (Compliance Period Budget
Base).(e.g., 0.875 million allowances in 2013).
Banking &
borrowing
-Unlimited banking (subject to holding limit).
-No borrowing stricto sensu, but an allowance price containment reserve (see below).
Offsets -Issued by the Regulator.
-Limit of 8% of compliance obligations (for each compliance period ): 34 MtCO
2
e maximum
(4.1 MtCO
2
e in CP1, 15.9 MtCO
2
e in CP2, 13.9 in MtCO
2
e CP3)
Allowance Price
Containment
Reserve (PCR)
-Share of total allowance feeding the reserve: 1% in 2013-2014, 4% in 2015-2017, and 7%
in 2018-2020.
-Sales according to three price categories: CN$40, CN$45, and CN$50 per unit in 2013,
increasing 5% per year plus as adjusted in Financial Administration Act of Qubec.
Early Reduction
Credits
-Issued for reductions made by covered entities over 2008-2011 and measured against
2005-2007 emissions.
-Must be permanent, additional, and irreversible.
Penalty for
non-compliance
-Three allowances for each missing allowance.
-30-day notice before preemption over the next allocation.
Source: World Bank, Government of Qubec.

YEAR 2013 2014 2015 2016 2017 2018 2019 2020
Allowance budget (million) 23.7 23.3 63.6 61 58.5 56 53.4 50.9
CAP (net PCR) 23.463 23.067 61.056 58.56 56.16 52.08 49.662 47.337
Annex 6: China: targets and supporting measures
under the Five-Year Plans
11
th
FYP (2006-2010) 12
th
FYP (2011-2015)
Global goals Key
indicators
2010 targets
(from 2005
levels)
Results Supporting
tools and
measures
2015 target
(from 2010
levels)
Additional sup-
porting tools
and measures
Existing
pilot market
initiatives
Decreasing
emissions
of carbon
and other
pollutants
with energy
conservation
and clean
energy
Energy
consumption
intensity
-20% -19.06%
(-630
million
tce,
-1.46
billion
tCO
2
e)
-Elimination of
backward produc-
tion capacity
-Ten Key Energy
Conservation
Projects
-Top-1000
Enterprises
Energy
Conservation
Program
-Energy-efficient
products for the
benefit of people
-Installation of
flue-gas
desulfurization
systems on coal
plants
-Energy
Management
Companies
(ESCOs)
355
8.7 tce/thou-
sand yuan
from 10.3
(-16%)
Market
mechanisms:
-Voluntary
market
-Pilot ETS
-Low carbon city
plans
-Energy
Management
Companies
(ESCOs)
Existing
initiatives are
maintained or
expanded in
scope (e.g., Top
1000 to 10,000
Enterprises),
higher standards
are set
-Pilot en-
ergy efficiency
scheme in Tianjin
Municipality
-SO2 trading in
Jiangsu
Emissions
of major
pollutants
-10% SO2
(15.49 from
22.95 million
tons)
-10% COD
(12.73 from
14.14 million
tons)
-14.29%
SO2
-12.45%
COD
-8% SO2
-8% COD
-10% NOX
-10% NH3
CO
2
emis-
sion intensity
New to 12
th
FYP -17%
Share of
non-fossil
fuels in pri-
mary energy
consumption
Up at 10%
from 7.5%
8.3% (up
3.1%)
-Feed-in tariffs
-Indicative tariffs.
-Mandated mar-
ket share (similar
to Renewable
Portfolio
Standard)
No official
target to date
Continuation
of the same
supporting mea-
sures (higher
standards)
None
Increasing
carbon
sequestration
Forest cover Up to 20%
from 18.2%
20.36%
(+25.29
million
ha)
-Afforestation
programs
-Forest
conservation
-Restoration of
desertified lands
21.66%
(+12.5 mil-
lion ha)
Continuation
of the same
supporting
measures
-Panda standard
(AFOLU offset
certification
scheme)
-China Green
Carbon Fund
by the State
Forestry
Administration
Forest stock New to 12
th
FYP 14.3 from
13.7 billion m
Source: World Bank, PRC State Council, NDRC.

355. Energy management companies, known as ESCOs, help industries identify and implement energy efficiency projects by bringing upfront finance
for investments in new technologies or renovated equipment. Industries incur no net cash costs, as they reimburse ESCOs with regular payments
from the cost savings made until their investment is recovered.
356. Rules and procedures are available at www.bee-india.nic.in.
Annex 7: India PAT: market design and
governance elements
COMMENTS
ESTABLISHING
LEGISLATION
Energy Conservation Act 2001, modified by the Energy Conservation
Amendment Act 2010, Article 14 (August 2010).
REGULATOR Bureau of Energy Efficiency (BEE) of Indias Ministry of Power, under
supervisions of the Central Electricity Regulatory Commission.
ADMINISTRATOR BEE.
COVERAGE -Selected DCs in 8 energy intensive sectors (478 DCs): Thermal Power plants,
Iron & Steel, Cement, Fertilizer, Aluminum, Textile, Pulp & Paper, Chlor alkali.
-Possible sectoral extension in the second compliance periods.
COMPLIANCE PERIOD -First PAT cycle going from April 1, 2012 to March 31, 2015.
-Fulfillment of compliance obligations subsequent to first cycle termination.
BASELINE -Defined as the average total energy input per production unit over 2007-2010.
-All energy sources are considered and converted in metric ton of oil equivalent
(MTOE).
TARGET -Specific energy consumption (SEC) target assigned to each DC, in percentage
of the baseline.
-Overall reduction of 4.2%, equivalent to 6.6 million MTOE.
-Revision in each subsequent PAT cycle.
MONITORING AND
VERIFICATION
-Based on a Baseline Energy Audit (BEA).
-Performed by Designated Energy Auditors (DENA) accredited by BEE.
-First BEA at the end of the first PAT cycle (2014), possible annual BEA
thereafter.
ENFORCEMENT Penalty of 10 lakhs (US$20,000) in addition to the value of compliance.
TRADING - ESCert issued to any DC exceeding own SEC target.
-Bilateral transactions or cleared through the two national power exchanges, i.e.
Power Exchange India, India Energy Exchange.
-Market design elements (e.g., banking) under consideration.
MARKET READINESS -Target setting by March 2012 (completed).
-Rules and procedures completed.
356
-Trading infrastructures and rules to be announced soon (ongoing).
Source: World Bank, Bureau of Energy Efficiency.
Annex 8: Assumptions for estimates of
potential demand for offsets from non-
Annex I Countries
EU: Under the EU Climate and Energy Package,
the EU commits to cut its GHG emissions by
20 percent below 1990 levels, possibly tighten-
ing to 30 percent depending on developments in
climate negotiations. For the EU ETS, this trans-
lates into further tightening of the cap from an
average 6 percent below 2005 levels over 2008
20 to 21 percent by 2020 (or more in the 30
percent scenario), with a corresponding shortfall
of about 2,500 MtCO
2
e over 201320 in the 20
percent scenario (resp. 3,500 MtCO
2
e in the 30
percent scenario).
357

Te total amount of osets that can be used over
200820 is estimated at 1,700 MtCO
2
e in the
20 percent scenario (2,200 MtCO
2
e in the 30
percent scenario). On aggregate, the amount of
osets that can be surrendered during Phase III
corresponds to the dierence between the over-
all amount allowed over Phases II and III jointly
minus what has been already surrendered during
Phase II. Te following qualitative restrictions
apply with regard to the use of CERs/ERUs
against Phase III obligations:
CERs from project activities targeting the de-
struction of HFC-23 and N
2
O from adipic
acid production are banned from the EU ETS.
CP-1 osets will still be allowed until the end
of April 2013 against Phase II obligations.
CP-1 ofsets (including ERUs) from eligible
project types can be banked and surrendered.
Ofsets generated post-2012 must come ei-
ther from a project registered before end of
2012 or from a project based in an LDC if
registered after 2013.
For non-ETS covered sectors, the Climate and
Energy Package translates into cuts of 10 percent
(or more) below 2005 levels by 2020. Osets can
be used to cover about one-third of the eort in
the 20 percent scenario, estimated to represent
about 800 MtCO
2
e over 201320. In the 30
percent scenario, osets can in principle be used
to cover half of the additional eort, leading to
a total demand of about 1,100 MtCO
2
e. No re-
striction applies so far to the use of osets.
New Zea|and: Te NZ ETS continues to expand
its coverage, with synthetic gases and waste join-
ing in 2013 and agriculture in 2015. Te cap of
the scheme is set in line with the country inter-
national commitmentto reduce emissions by
10 percent below 1990 levels by 2020 or, if a
comprehensive global agreement is reached, by
20 percent. Tis could translate into a shortfall
of 75 to 105 million tons over 201320, ac-
counting for a limited uptake of forestry.
358

Austra|ia: Under Australias Carbon Price
Mechanism (CPM), operators will be able to
meet up to 50% of their compliance obligations
with international osets from 2015. If the cap is
set in line with Australias target of 5 percent be-
low 2000 levels by 2020 (unconditional pledge
under the Copenhagen Accord), the CPM par-
ticipants could therefore theoretically source
almost 1 billion tCO
2
e overseas (maximum),
357. This includes also aviation. Source: Barclays Capital. Monthly Carbon Standard, April 11, 2011.
358. Source: own calculation based on New Zealand Fifth National Communication.
i.e. up to 50% of their cumulative liability un-
der the CPM over 2015-2020.
359
However, this
gure disregards the costs of domestic abate-
ments in covered and non-covered sectors (i.e.
Carbon Farming Initiative). Taking these into
account, the Australian Government models that
Australian businesses would source 348 MtCO
2
e
of abatement overseas by 2020.
360

Japan: As plans for a mandatory ETS in Japan
are delayed, one simply assumes here that o-
sets could be used up to 50 percent to ll the
gap to the -25% conditional pledge. Accounting
for sinks, this could correspond to a cumula-
tive demand for osets of 540 MtCO
2
e over
20132020.
361

Switzer|and: As its main additional climate poli-
cies and measures, Switzerland implements an
ETS similar in design to the EU ETS. Tis could
result in a cumulative demand for osets from
covered entities over 201320 of 2.3 MtCO
2
e in
the 20 percent scenario, reaching 4 MtCO
2
e in
the 30 percent scenario. In addition, a national
law was passed in December 2011 and set for
the countrys GHG emissions a 2020 target of
20% below their level of 1990. Although no de-
cision was made as of the time of writing, law-
makers may allow the use international osets,
which would generate a demand of 10 million
international osets (see Box 7). Last year, we ac-
counted for a third source of demand for osets
stems from the obligation for producers and im-
porters of fossil fuels to oset 2530 percent of
CO
2
emissions in the 20 percent scenario (gearing
up to 40-45 percent in the 30 percent scenario).
We estimated that this measure could generate
a demand of 25 to 50 MtCO
2
e of international
osets.
362
However, this measure was over-rules
by the national law passed in December 2011,
and this demand is restricted to domestic osets.
Northern America: As of today, California is
the only cap and trade program in Northern
America to accept international credits. Tese
are Sector-Based Oset Credits for which we
estimate a demand of 94 MtCO
2
e maximum
over 2013-2020 (see Section 6.3.2.1). Qubec
has yet to release its oset program as of the time
of writing the report. May all the other three
WCI partners, i.e. British Columbia, Manitoba,
and Ontario start operating their own cap and
trade in 2015, with similar international osets
provisions as California, a collective demand of
roughly 200 MtCO
2
e international credits could
be generated over 2013-2020 across the ve
WCI jurisdictions.
363
Although RGGI is cur-
rently under review process, we do not expect it
will generate demand for international osets.
359. Own calculation based on Department of Climate Change and Energy Efficiency, Australias emissions projections, 2010.
360. Source: Government of Australia, Treasury, Strong Growth, Low Pollution, Modeling a carbon price, update, 2011.
361. Assuming Japans emissions grow in line with projections by the U.S. DoE Energy Information Administrations International Energy
Outlook 2010 (High oil price case). Carbon sinks are maintained at 20 MtCO
2
e (that is, their planned use under the Kyoto Protocol), though
they could decrease. Source: Ministry of the Environment, Japan, National Greenhouse Gas Inventory Report of JAPAN, April 2012.
362. Own calculation based on Switzerland Fifth National Communication.
363. Own calculation based on GHG emissions projections of British Columbia, California, Manitoba, Ontario, and Qubec.
Methodology
In the State and Trends of the Carbon Market
Report of 2011, the size of the global carbon
market in 2010 derived from the growth rate
between 2009 and 2010 of each market seg-
ment (for example, primary Certied Emission
Reduction (CER), other project-based markets,
Assigned Amount Units (AAUs), European
Union Allowances (EUAs), and other allow-
ance markets), drawing on information obtained
primarily from Tomson Reuters Point Carbon
and Bloomberg New Energy Finance. Te value
of the voluntary transactions was obtained from
data provided by Ecosystem Marketplace. Since
the original information from Tomson Reuters
Point Carbon and Bloomberg New Energy
Finance was provided in Euros, the impact of the
US$/Euro exchange rate in the same period was
eliminated and the US$ results were applied to
the values of each market segment, as calculated
by the World Bank in 2009. When applicable,
the unweighted average from the sources was
used, although some adjustments were made as
deemed appropriate.
Instead of using external data, however, in 2012
the authors calculated the volumes and values for
2010 (following the methodology described be-
low). Te calculation resulted in higher volumes
and values, particularly for EUA and secondary
CER transactions. Instead of the global carbon
market of US$142 billion reported in 2010, the
revised calculations resulted in a global carbon
market that is greater by about US$17 billion
year on year (yoy). A higher value in the EUA
market accounted for about US$14 billion, or
80% of the dierence. Tis years calculation also
resulted in a secondary CER market greater by
US$2 billion in 2010 yoy. Te remaining dier-
ence is explained by the value of the post-2012
CER transactions, not reported last year, which
reached over US$1 billion in 2010.
Monitoring the activity of the primary project
market is a challenging task given the number of
transactions and the diversity of participants. In
addition, prices and contract structures are con-
dential in an increasingly competitive market.
Te authors surveyed major carbon-industry
publications
364
and conducted approximately
150 interviews with a broad range of market play-
ers: analysts and intelligence providers, project
developers and aggregators, exchanges and trad-
ing platforms, nancial institutions and brokers,
regulators, managers of carbon purchasing funds
and facilities, including public procurement pro-
grams and carbon portfolios of companies fac-
ing compliance obligations. Tis report focuses
on regulatory compliance; therefore its coverage
of the voluntary market is not exhaustive. Te
information on the voluntary market (includ-
ing pre-compliance activity in North America)
has been kindly provided by Forest Trends-New
Energy Finance and Ecosystem Marketplace.

Only signed ERPAs are included in the project-
based transaction database. Although they re-
ceived a high level of cooperation from market
players during their research, the authors were
not able to obtain comprehensive information
364. Including online sources such as Carbon Finance (www.carbon-financeonline.com), Joint Implementation Quarterly (www.jiqweb.
org), Thomson Reuters Point Carbon (www.pointcarbon.com) as well as Carbon Positive (www.carbonpositive.net), CDC Climat
Research (www.cdcclimat.com), IISD Reporting Services (www.iisd.ca), IDEAcarbon (www.ideacarbon.com), Forest Trends-Ecosystem
Marketplace (www.ecosystemmarketplace.com), and Thomson Reuters, the CDM and JI pipeline databases and analyses maintained by
UNEP Risoe, and IGES, and Web sites of market players (DNAs, DOEs, project developers and aggregators, exchanges and trading
platforms, financial institutions and brokers, regulators, carbon purchasing funds and facilities, public procurement programs, and
companies facing compliance obligations). One should also mention other resources, including reports prepared by financial institutions,
such as analyses by Barclays Capital, Deutsche Bank, Orbeo, and Socit Gnrale, that have been kindly made available to the authors.
for all reported transactions. Te authors are
relatively condent that the database captures
most transactions entered into by governments
and a representative proportion of the activity of
private-sector buyers in the primary market. In
between the periodic reports in this series, the
authors have occasionally become aware of un-
recorded transactions from previous years as well
as of the cancelation or postponement of previ-
ously recorded transactions. Adjustments have
been made in the database, explaining why data
for former years may be slightly dierent from
previous publications in this series.

Data for transactions on the so-called secondary
Clean Development Mechanism (CDM) and
Joint Implementation (JI) market, including spot
transactions
365
and forward transactions with de-
livery guarantees from a creditworthy seller (com-
monly nancial institutions in Europe), were
obtained from exchanges, clearing houses, and
brokers.
366
Tis is also the case for transactions
of EUAs and derivatives.
367
Te authors have
also obtained detailed information on transac-
tions conducted under Alberta, British Columbia,
California, Chicago Climate Exchange (CCX),
New Zealand Emissions Trading Scheme (NZ
ETS), and the Regional Greenhouse Gas Initiative
(RGGI), as well as aggregate information on trans-
actions under the New South Wales Greenhouse
Gas Reduction Scheme (NSW GGAS).
368
With
regard to Removal Units (RMUs) and AAU
transactions, several sources have been used and
cross-checked: public announcements, interviews
with some buyers and sellers, and examination of
Kyoto Parties registries when possible.
To estimate the volume of pure bilateral trans-
actions of EUAs and CERs (i.e., those deals that
are not closed through brokers or exchanges
including those cleared over the counter (OTC),
the authors surveyed several market players. Te
answers varied depending on respondents (nan-
cials or naturals), with an average of 15% of vol-
umes transacted or cleared through exchanges.
Taking into account all inputs, this coecient is
applied to volumes and values of spot and for-
ward transactions to compute the entire value of
the EUA and secondary CER markets in 2010.
In 2011, inputs led the authors to increase the
percentage to 25% applied to spot volumes
transacted or cleared through exchanges, for
both EUA and secondary CER markets.
In consultation with several market players, the
options market in this report was valued at to-
tal volumes times strike price, assuming that the
bulk of transactions are at-the-money options
where the strike price is similar to prevailing
market prices.
Prices and values are primarily expressed in nomi-
nal US$ per tCO
2
e, unless indicated otherwise.
369

Average annual exchanges of 1 = US$1.327 for
2010 and 1 = US$1.392 for 2011 were applied,
unless data were available with a ner granular-
ity, in which case an average exchange rate over
the period considered (e.g., Q111, June 2011) is
applied. Te cut-o date for information is April
20, 2012. A ton (abbreviated as t) refers to a
metric ton (1,000 kg).
365. Some of these spot transactions relate to sales of issued CERs directly by project sponsors, either those who have chosen to
develop their projects unilaterally or those who have been issued more CERs than they had sold through forward transactions. These
spot transactions could arguably be considered to be primary transactions, although commercial conditions, including prices, are aligned
with the secondary market. It is not possible, however, to extract those from the broader secondary market activity.
366. For 2010 and 2011, such exchanges, clearinghouses, and brokers were: BlueNext, Climex, Chicago Climate Futures Exchanges
(CCFE), Energy Exchange Austria (EXAA), European Energy Exchange (EEX), Gestore del Mercato Elettrico (GME). Green Exchange,
Green Market, LCH Clearnet, IntercontinentalExchange (ICE), London Energy Brokers Association (LEBA), and Nordpool.
367. Data on EUA transactions in 2010 and 2011 (spot, futures, and options) were obtained from the following sources: BlueNext,
Climex, Energy Exchange Austria (EXAA), European Energy Exchange (EEX), Gestore del Mercato Elettrico (GME). Green Exchange,
Green Market, LCH Clearnet, IntercontinentalExchange (ICE), London Energy Brokers Association (LEBA), and Nordpool.
378. For Alberta, sources are Government of Alberta (volumes) and Karbone (prices). For British Columbia, the source is the Pacific Carbon
Trust. For California, sources are ICE and Green Exchange (exchange-based volumes et prices), and Thomson Reuters Point Carbon (offset
volumes and prices). For Chicago Climate Exchange (CCX), sources are CCX, CCFE, and ICE. For NZ ETS, sources are New Zealand
Emission Unit Register (volumes of internal transfers) and Westpac (prices). For RGGI, data come from RGGI Inc., RGGI CO
2
Allowance
Tracking System, CCFE, ICE, Green Exchange. For NSW GGAS, data come from the Registry (volumes) as well as from Nextgen (prices).
369. Exchange rates from European Central Bank (www.ecb.int), and U.S Federal Reserve (www.federalreserve.gov).
Te report has written contributions kindly pro-
vided by Forest Trends-Ecosystem Marketplace
(voluntary and pre-compliance activities), Air
France (Aviation), Ministry of the Environment
in Japan (Japan), Orbeo (EU ETS), Reed Smith
(EU ETS), and Climate Cent (Switzerland).
In order to estimate the likely supply of pre-2013
credits in the section 5, the authors applied a de-
livery cut to the nominal volumes contracted (i.e.,
a risk-adjusted supply). Te delivery cut aims to
reect underdelivery caused by both regulatory
and operational issues. In order to rene the es-
timate, the authors also adopted two dierent
delivery cuts according to a projects regulatory
status, as projects in a more advanced stage of de-
velopment in the regulatory process have higher
chances to have their credits issued before 2013.
Based on the UNEP Risoe CDM Pipeline, the
nominal volume of 2,17 billion CERs from reg-
istered projects should deliver about 1,13 billion
tons by the end of 2012,
370
or a 52% risk-ad-
justed rate. On the other hand, a much lower
success rate of 6% is seen for projects at an earlier
stage in the regulatory process.
371
To date, the cu-
mulative nominal volume of credits contracted
has reached 2.58 billion tons. Applying the 6%
risk-adjusted delivery over the 0.42 billion tons
newly contracted and in early stage of develop-
ment (i.e., the dierence between 2.58 billion
and 2.17 billion), early-stage projects shall de-
liver 25 million tons. All in all, 1.15 billion tons
shall become available for buyers until the end of
2012 (i.e., 1.13 + 0.025).

370. To date, 895 MtCO
2
e have been issued.
371. As of April 2012.
Acknowledgments
We would like to acknowledge our colleagues in
the carbon market who provided their written
contributions and perspectives during the elab-
oration of this report, ensuring its quality and
clarity: Pierre Albano, Philippe Ambrosi, Cesar
Adrian Arreola Croda, Valentin Bellassen, Marco
Berg, Ana Bucher, Isabelle Curien, Charles Di
Leva, Carine Hemery, Benot Leguet, Manuel
Luengo, Yuji Mizuno, Sidney Nakao Nakahodo,
Maria Netto de A. C. Schneider, Molly Peters-
Stanley, Simone Ruiz, Guido Schmidt-Traub,
Xueman Wang, and Peter Zaman.
We wish to extend our gratitude to those who
oered their cooperation and insights during
the development of this report: Andrew Ager,
Imtiaz Ahmad, Hanna-Mari Ahonen, Manelle
Ait-Sahlia, Emilie Alberola, Ivan Albino,
Herv Allgre, Andreas Arvanitakis, Ismael
Aznar Cano, Kai-Uwe Barani Schmidt, Ellysar
Baroudi, Ricardo Bayon, Bridget Beals, Francois
Beaurain, Luca Bertali, Benoit Bosquet, Bengt
Bostrm, Guillaume Bouculat, Franka Braun,
Kevin Brennan, Jean-Philippe Brisson, Urs
Brodmann, Nigel Brunel, Jonathan Burnston,
Michel Buron, Luis Caete, Giorgia Caropreso,
Marcos Castro, Philippe Chauvancy, Clment
Chenost, Olga Chistyakova, Annika Christell,
Margaret Chu, Benjamin Coleman, David
Costa-Dsa, Matt Cowie, Anthony DAgostino,
Richard De Ferranti, Lennard de Klerk, Christian
De Perthuis, Franois Dejean, Anais Delbosc,
Giuseppe Deodati, Michel DiCapua, Wolfgang
Diernhofer, Eduardo Dopazo, Claire Dufour,
V.K. Duggal, Laura Dzelzyte, Johannes Ebeling,
Bodo Einicke, Alana Ellis, Sandra Enteirio,
Amaral Eufran, Emmanuel Fages, Guillaume
Ferragu, Fabiana Ferreira Candiano, Walter
Figueiredo de Simoni, Michael Fleming, James
Foster, Javier Freire Coloma, Sandeep Garg,
Gary Gero, Michael Gibbs, Jay Gillette, Sylvain
Goupille, Matthew Gray, Christoph Grobbel,
Isabel Hagbrink, Kate Hamilton, Anthea Harris,
Kristian Havskov Srensen, Johannes Heister,
Renat Heuberger, Richard Hobbs, Robert M.
Hunt, Shigeru Inaba Maeda, Keisuke Iyadomi,
Sara Jellie, Sam Johnson-Hill, Francois Joubert,
Monica Julissa, Abyd Karmali, Jiang Kejun,
John Kilani, Taehee Kim, Elif Kiratli, Sigurd
Klakeg, Daigo Koga, Miyuki Konuma, Robyn
Kuhn, Charles Lapierre, Fabrice Le Sache,
Mark C. Lewis, Ludovino Lopes, Tomas
Marcello, Alexandre Marty, Ajay Mathur, Taisei
Matsuki, Stephen McComb, Mike McKensey,
Brookly McLaughlin, Damien Meadows,
Jan Meuleman, Mark Meyrick, Yuji Mizuno,
Arantzazu Mojarrieta Sanz, Nadine Mueller,
Tomas Myhrvold-Hanssen, Sidney Nakao
Nakahodo, Dimitar Nikov, Akiko Nishimae,
Robert Noel De Tilly, John OBrien, Moe Moe
Oo, Hyoung Kun Leo Park, Cecile Petit, Leila
Pourarkin, Neeraj Prasad, Brice J. M. Quesnel,
Olivier Raevel, David Rapin, Tuomas Rautanen,
Juha Ruokonen, Owen Ryan, Rajinder Sahota,
Alexander Sarac, Denise Seabra, Ash Sharma,
Chandra Shekhar Sinha, Brian Shillinglaw,
Trevor Sikorski, Nicole Singh, Teresa Solana
Mendez de Vigo, Jean-Francois Steels, Nicolas
Stephan, Niclas Svenningsen, John-Paul Taylor,
Michiel ten Hoopen, Sarah Underwood, Antonio
Valcovich, Jan-Willem van de Ven, Lloyd Vas,
Jari Vayrynen, Fabio Vaz, Ronald Velghe, James
Vener, Daniele Violetti, George Waldburg, Wen
Wang, Martijn Wilder, Miguel Winkels, Raoul
Wirtz, Yevgen Yesyrkenov, Peter Zapfel, Richard
Zehter, Elizabeth Zelljadt, and Kelly Ziegler.
Glossary
Accredited Independent Entity (AIE): Accredited
independent entities (AIEs) are independent audi-
tors that assess whether a potential project meets
all the eligibility requirements of the JI (deter-
mination) and whether the project has achieved
greenhouse gas emission reductions (verication).
Additiona|ity: A project activity is additional if
anthropogenic GHG emissions are lower than
those that would have occurred in the absence of
the project activity.
Aorestation: Te process of establishing and
growing forests on bare or cultivated land that
has not been forested in recent history.
Annex I (Parties): Te industrialized countries list-
ed in Annex I to the UNFCCC were committed
to return their greenhouse gas emissions to 1990
levels by 2000. Tey currently include Australia,
Austria, Belarus, Belgium, Bulgaria, Canada,
Croatia, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein,
Lithuania, Luxembourg, Monaco, the Netherlands,
New Zealand, Norway, Poland, Portugal, Romania,
Russian Federation, Slovakia, Slovenia, Spain,
Sweden, Switzerland, Turkey, Ukraine, the United
Kingdom, and the United States, as well as the
European Economic Community. All but Turkey
are listed in Annex B.
Annex B (Parties): Te 39 industrialized
countries (including the European Economic
Community) listed in Annex B to the Kyoto
Protocol have committed to country-specic
targets that collectively reduce their GHG emis-
sions by at least 5.2 percent below 1990 levels on
average over 200812.
Assigned Amount Unit (AAU): Annex I Parties
are issued AAUs up to the level of their assigned
amount, corresponding to the quantity of green-
house gases they can release in accordance with
the Kyoto Protocol (Article 3), during the rst
commitment period of that protocol (200812).
One AAU represents the right to emit one metric
ton of carbon dioxide equivalent.
Backwardation: A downward sloping forward
curve (i.e., the price of the future is less than the
spot price of underlying commodity). Antonym:
contango.
Banking or carry over: Compliance units under
the various schemes to manage GHG emissions
in existence may or may not be carried over from
one commitment period to the next. Banking
may encourage early action by mandated enti-
ties depending on their current situation and
their anticipations of future carbon constraints.
In addition, banking brings market continuity.
Banking between Phase I and Phase II of the EU
ETS is not allowed; it is allowed between Phase
II and further Phases. Some restrictions on the
amount of units that can be carried over may ap-
ply; for instance, EUAs may be banked with no
restriction, while the amount of CERs that can
be carried over by a Kyoto Party is limited to 2.5
percent of the assigned amount of each party.
Base|ine: Te emission of greenhouse gases that
would occur without the policy intervention or
project activity under consideration.
Biomass Fue|: Combustible fuel composed of a
biological material (for example, wood or wood
by-products, rice husks, or cow dung).
Ca|ifornia G|oba| Warming So|ution Act
AB32 (AB32): Te passage of Assembly Bill 32
(California Global Warming Solution Act AB32)
in August 2006 sets economy-wide GHG emis-
sions targets as follows: Bring down emissions to
1990 levels by 2020 (considered to be at least a 25
percent reduction below business-as-usual) and to
80 percent of 1990 levels by 2050. Covering about
85 percent of GHG emissions, a cap-and-trade
scheme (still under design) would be a major in-
strument, along with renewable energy standards,
energy eciency standards for buildings and ap-
pliances as well as vehicle emissions standards.
Cap and Trade: Cap-and-trade schemes set a de-
sired maximum ceiling for emissions (or cap) and
let the market determine the price for keeping
emissions within that cap. To comply with their
emission targets at least cost, regulated entities
can either opt for internal abatement measures or
acquire allowances or emission reductions in the
carbon market, depending on the relative costs
of these options.
Carbon Asset: Te potential of greenhouse gas
emission reductions that a project is able to gen-
erate and sell.
Carbon Finance: Resources provided to activities
generating (or expected to generate) greenhouse
gas (or carbon) emission reductions through the
transaction of such emission reductions.
Carbon Dioxide Equiva|ent (CO
2
e): Te uni-
versal unit of measurement used to indicate
the global warming potential of each of the six
greenhouse gases regulated under the Kyoto
Protocol. Carbon dioxide a naturally occurring
gas that is a by-product of burning fossil fuels
and biomass, land-use changes, and other indus-
trial processes is the reference gas against which
the other greenhouse gases are measured, using
their global warming potential.
Certied Emission Reductions (CERs): A unit
of greenhouse gas emission reductions issued
pursuant to the Clean Development Mechanism
of the Kyoto Protocol and measured in metric
tons of carbon dioxide equivalent. One CER rep-
resents a reduction in greenhouse gas emissions
of one metric ton of carbon dioxide equivalent.
Chicago C|imate Exchange (CCX): Members to
the Chicago Climate Exchange make a voluntary
but legally binding commitment to reduce GHG
emissions. By the end of Phase I (December
2006), all members will have reduced direct
emissions four percent below a baseline period
of 1998-2001. Phase II, which extends the CCX
reduction program through 2010, will require all
members to ultimately reduce GHG emissions
six percent below baseline. Among the members
are companies from North America as well as
municipalities, U.S. states, and universities. As
new regional initiatives began to take shape in
the U.S., membership in the CCX grew from
127 members in January 2006 to 237 mem-
bers by the end of the year; new participants ex-
pressed their interest in familiarizing themselves
with emissions trading.
C|ean Deve|opment Mechanism (CDM): Te
mechanism provided by Article 12 of the Kyoto
Protocol, designed to assist developing countries
in achieving sustainable development by allow-
ing entities from Annex I Parties to participate in
low-carbon projects and obtain CERs in return.
C|imate Action Reserve (CAR): Te Climate
Action Reserve is a U.S.-based osets program
that establishes regulatory quality standards for
the development, quantication, and verica-
tion of greenhouse gas (GHG) emission reduc-
tion projects in North America; issues carbon
oset credits known as Climate Reserve Tons
(CRT) generated from such projects; and tracks
the transaction of credits over time in a transpar-
ent, publicly accessible system.
Community Independent Transaction Log
(CITL): Te Community Independent
Transaction Log (CITL) conducts supplemen-
tary checks to those done by the ITL for trans-
actions involving registries of at least one EU
member state, such as the issuance, transfer, can-
cellation, retirement, and banking of EUAs.
Conference of Parties (COP): Te supreme
body of the Convention. It currently meets once
a year to review the Conventions progress. Te
word conference is not used here in the sense
of meeting but rather of association, which
explains the seemingly redundant expression
fourth session of the Conference of the Parties.
Conference of the Parties serving as the Meeting
of the Parties (CMP): Te Conventions supreme
body is the COP, which serves as the meeting of
the parties to the Kyoto Protocol. Te sessions of
the COP and the CMP are held during the same
period to reduce costs and improve coordination
between the Convention and the Protocol.
Contango: A term used in the futures market to
describe an upward sloping forward curve (i.e.,
futures prices are above spot prices). Antonym:
backwardation.
Crediting period: Te crediting period is the
duration of time during which a registered, de-
termined, or approved project can generate emis-
sion reductions. For CDM projects, the credit-
ing period can be either seven years (renewable
twice) or ten years (non-renewable).
Designated Foca| Point (DFP): Parties partici-
pating in the Joint Implementation (JI) mecha-
nism are required to nominate a Designated
Focal Point (DFP) for approving projects.
Designated Nationa| Authority (DNA): An of-
ce, ministry, or other ocial entity appointed
by a party to the Kyoto Protocol to review and
give national approval to projects proposed un-
der the Clean Development Mechanism.
Designated Operationa| Entities (DOEs):
Designated operational entities are independent
auditors that assess whether a potential proj-
ect meets all the eligibility requirements of the
CDM (validation) and whether the project has
achieved greenhouse gas emission reductions
(verication and certication).
Determination: Determination is the process of
evaluation by an independent entity accredited
by the host country (JI Track 1) or by the Joint
Implementation Supervisory Committee (JI
Track 2) of whether a project and the ensuing re-
ductions of anthropogenic emissions by sources
or enhancements of anthropogenic removals by
sinks meet all applicable requirements of Article
6 of the Kyoto Protocol and the JI guidelines.
E|igibi|ity Requirements: Tere are six Eligibility
Requirements for Participating in Emissions
Trading (Article 17) for Annex I Parties. Tese
are: (i) being a party to the Kyoto Protocol; (ii)
having calculated and recorded ones Assigned
Amount; (iii) having in place a national system
for inventory; (iv) having in place a national
registry; (v) having submitted an annual inven-
tory and; and (vi) having submitted supplemen-
tary information on ones Assigned Amount. An
Annex I party will automatically become eligible
after 16 months have elapsed since the submis-
sion of its report on calculation of its assigned
amount. Ten, this party and any entity having
opened an account in the registry can participate
in emissions trading. However, a party could
lose its eligibility if the Enforcement Branch
of the Compliance Committee has determined
the party is noncompliant with the eligibility
requirements.
Emission Reductions (ERs): Te measurable re-
duction of release of greenhouse gases into the
atmosphere from a specied activity, and a speci-
ed period of time.
Emission Reductions Purchase Agreement
(ERPA): Agreement which governs the transac-
tion of emission reductions.
Emission Reduction Units (ERUs): A unit of
emission reductions issued pursuant to Joint
Implementation. One ERU represents the
right to emit one metric ton of carbon dioxide
equivalent.
Emissions Trading Scheme (ETS): See Cap and
Trade.
EU-10: Bulgaria, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania,
Slovakia, and Slovenia.
EU-15: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Spain,
Sweden, and the United Kingdom.
European Union A||owances (EUAs): Te al-
lowances in use under the EU ETS. An EUA
unit is equal to one metric ton of carbon dioxide
equivalent.
European Union Emission Trading Scheme (EU
ETS): Te EU ETS was launched on January
1, 2005, as a cornerstone of EU climate policy
toward its Kyoto commitment and beyond.
Trough the EU ETS, member states allocate
part of the eorts toward their Kyoto targets to
domestic emission sources (mostly utilities). Over
20082012, emissions from mandated instal-
lations (about 40 percent of EU emissions) are
capped on average at 6 percent below 2005 levels.
Participants can internally reduce emissions, pur-
chase EUAs, or acquire CERs and ERUs (within
a 13.4 percent average limit of their allocation
over 200812). Te EU ETS will continue be-
yond 2012, with further cuts in emissions (by
21 percent below 2005 levels in 2020 or more,
depending on progress in reaching an ambitious
international agreement on climate change).
First Commitment Period: Te ve-year period,
from 2008 to 2012, during which industrialized
countries have committed to collectively reduce
their greenhouse gas (or carbon) emissions by
an average of 5.2 percent compared with 1990
emissions under the Kyoto Protocol.
Green Investment Scheme (GIS): A voluntary
mechanism through which proceeds from AAU
transactions will contribute to contractually
agreed environment- and climate-friendly proj-
ects and programs both by 2012 and beyond.
Greenhouse Gases (GHGs): Both natural and
anthropogenic, greenhouse gases trap heat in the
Earths atmosphere, causing the greenhouse ef-
fect. Water vapor (H
2
O), carbon dioxide (CO
2
),
nitrous oxide (N
2
O), methane (CH
4
), and
ozone (O
3
) are the primary greenhouse gases.
Te emission of greenhouse gases through hu-
man activities (such as fossil fuel combustion
or deforestation) and their accumulation in the
atmosphere is responsible for an additional forc-
ing, contributing to climate change. Te Kyoto
Protocol regulates six GHGs: carbon dioxide
(CO
2
), methane (CH
4
), and nitrous oxide (N
2
0),
hydrouorocarbons (HFCs), peruorocarbons
(PFCs), and sulfur hexauoride (SF
6
).
G|oba| Warming Potentia| (GWP): An index
representing the combined eect of the diering
times greenhouse gases remain in the atmosphere
and their relative eectiveness in absorbing out-
going infrared radiation.
Interna| rate of return: Te annual return that
would make the present value of future cash ows
from an investment (including its residual market
value) equal the current market price of the invest-
ment. In other words, the discount rate at which
an investment has zero net present value.
Internationa| Transaction Log (ITL): Te ITL
links together the national registries and the
CDM registry and is in charge of verifying the
validity of transactions (issuance, transfer, and
acquisition between registries, cancellation, ex-
piration, and replacement, retirement and car-
ryover). It is the central piece of the emissions
trading under the Kyoto Protocol.
Japan-Vo|untary Emissions Trading Scheme
(J-VETS): Under the J-VETS, companies re-
ceive subsidies to implement mitigation activi-
ties in line with voluntary commitments and can
resort to emissions trading (including osets) to
meet their commitments with more exibility.
Tough growing, its impact remains limited:
over the rst three years of the scheme, partici-
pants (288 companies) reduced their emissions
by about one million tCO
2
e. Te J-VETS has
contributed to the development of an MRV sys-
tem, third-party verication system, and the reg-
istry system. Te J-VETS has been incorporated
into the Experimental Integrated ETS as one of
the participating options.
Joint Imp|ementation (JI): Mechanism provid-
ed by Article 6 of the Kyoto Protocol whereby
entities from Annex I Parties may participate in
low-carbon projects hosted in Annex I countries
and obtain Emission Reduction Units in return.
Kyoto Mechanisms (KMs): Te three exibil-
ity mechanisms that may be used by Annex I
Parties to the Kyoto Protocol to fulll their com-
mitments. Tese are the Joint Implementation
(JI, Article 6), Clean Development Mechanism
(CDM, Article 12), and International Emissions
Trading (Article 17).
Kyoto Protoco|: Adopted at the Tird
Conference of the Parties to the United Nations
Convention on Climate Change held in Kyoto,
Japan, in December 1997, the Kyoto Protocol
commits industrialized country signatories to
collectively reduce their greenhouse gas emis-
sions by at least 5.2 percent below 1990 levels on
average over 20082012 while developing coun-
tries can take no-regret actions and participate
voluntarily in emission reductions and removal
activities through the CDM. Te Kyoto Protocol
entered into force in February 2005.
Monitoring P|an: A set of requirements for
monitoring and verication of emission reduc-
tions achieved by a project.
Nationa||y Appropriate Mitigation Actions
(NAMAs): Refers to a set of mitigation poli-
cies and/or actions a developing country un-
dertakes aiming at reducing its GHG emissions
and reports to UNFCCC on a voluntary basis.
Te concept of NAMAs emerged in 2007 un-
der the UNFCCC Bali Action Plan, which
called for [the implementation of ] Nationally
Appropriate Mitigation Actions by developing
country parties in the context of sustainable de-
velopment, supported and enabled by technolo-
gy, nancing and capacity building, in a measur-
able, reportable and veriable manner. Trough
international negotiations within the UNFCCC,
NAMAs have been steadily rened. Te Cancun
Agreement of last December achieved signicant
progress in the concept of NAMAs and, inter
alia, set milestones for the development of a cen-
tral registry of NAMAs (including NAMAs seek-
ing international funding support) and guide-
lines for measuring, reporting, and verication.
Denitions on these elements are expected by
the end of this year.
Nationa| A||ocation P|ans (NAPs): Te docu-
ments, established by each member state and
reviewed by the European Commission, that
specify the list of installations under the EU ETS
and their absolute emissions caps, the amount of
CERs and ERUs that may be used by these in-
stallations, as well as other features, such as the
size of the new entrants reserve, the treatment of
exiting installations, and the process of allocation
(free allocation or auctioning).
New South Wa|es Greenhouse Gas Reduction
Scheme (NSW GGAS): Operational since
January 1, 2003 (to last at least until 2012), the
NSW Greenhouse Gas Abatement Scheme aims
at reducing GHG emissions from the power sec-
tor. NSW and ACT (since January 1, 2005) re-
tailers and large electricity customers have thus
to comply with mandatory (intensity) targets
for reducing or osetting the emissions of GHG
that arise from the production of electricity
they supply or use. Tey can meet their targets
by purchasing certicates (NSW Greenhouse
Abatement Certicates or NGACs) that are gen-
erated through project activities.
New Zea|and Emissions Trading Scheme (NZ
ETS): Te NZ ETS will progressively regulate
emissions of the six Kyoto gases in all sectors of
the economy by 2015. Forestry has been covered
since 2008; by July 1, 2010, stationary energy,
industrial process, and liquid fossil fuel were
phased in. Te government recently announced,
however, that full implementation could be de-
layed if adequate progress is not made in estab-
lishing similar regulations in other developed
countries.
Osets: Osets designate the emission reduc-
tions from project-based activities that can be
used to meet compliance or corporate citizenship
objectives vis--vis greenhouse gas mitigation.
Primary transaction: A transaction between the
original owner (or issuer) of the carbon asset and
a buyer.
Project Design Document (PDD): A central
document of project-based mechanisms, the
PDD notably describes the project activity (in-
cluding environmental impacts and stakeholders
consultations), the baseline methodology and
how the project is additional, and the monitor-
ing plan.
Project Idea Note (PIN): A note prepared by a
project proponent presenting briey the project
activity (for example, sector, location, nancials,
estimated amount of ERs, and so forth).
REDD p|us (REDD+): All activities that reduce
emissions from deforestation and forest degrada-
tion and contribute to conservation, sustainable
management of forests, and enhancement of for-
est carbon stocks.
Regiona| Greenhouse Gas Initiative (RGGI):
Under RGGI, 10 Northeast and Mid-Atlantic
states aim to reduce power sector CO
2
emissions
by 10% below 2009 levels in 2019. Within this
ten-year phase, there are three shorter compli-
ance periods. During the rst and second com-
pliance periods (20092011 and 20122014)
the cap on about 225 installations is set at 171
MtCO
2
e (or 188 M short ton CO
2
e). Tis is fol-
lowed by a 2.5% per year decrease in the cap dur-
ing the third compliance period (201518).
Reforestation: Tis process increases the capac-
ity of the land to sequester carbon by replanting
forest biomass in areas where forests have been
previously harvested.
Registration: Te formal acceptance by the
CDM Executive Board of a validated project as a
CDM project activity.
Remova| Unit (RMU): RMUs are issued by par-
ties to the Kyoto Protocol in respect of net re-
movals by sinks from activities covered by Article
3(3) and Article 3(4) of the Kyoto Protocol.
Secondary transaction: A transaction where the
seller is not the original owner (or issuer) of the
carbon asset.
Supp|ementarity: Following the Marrakesh
Accords, the use of the Kyoto mechanisms shall
be supplemental to domestic action, which shall
thus constitute a signicant element of the eort
made by each party to meet its commitment un-
der the Kyoto Protocol. Tere is no quantitative
limit, however, to the utilization of such mecha-
nisms. While assessing the NAPs, the European
Commission considered that the use of CDM
and JI osets could not exceeded 50% of the ef-
fort by each member state to achieve its com-
mitment. Supplementarity limits may thus aect
demand for some categories of osets.
United Nations Framework Convention on
C|imate Change (UNFCCC): Te international
legal framework adopted in June 1992 at the Rio
Earth Summit to address climate change. It com-
mits the parties to the UNFCCC to stabilize hu-
man induced greenhouse gas emissions at levels
that would prevent dangerous manmade inter-
ference with the climate system, following com-
mon but dierentiated responsibilities based on
respective capabilities.
Va|idation: Validation is the process of inde-
pendent evaluation of a project activity by a
Designated Operational Entity (DOE) against
the requirements of the CDM. Te CDM re-
quirements include the CDM modalities and
procedures and subsequent decisions by the
CMP and documents released by the CDM
Executive Board.
Veried Emission Reductions (VERs): A unit
of greenhouse gas emission reductions that has
been veried by an independent auditor. Most
often, this designates emission reductions units
that are traded on the voluntary market.
Verication: Verication is the review and ex-
post determination by an independent third
party of the monitored reductions in emissions
generated by a registered CDM project, a deter-
mined JI project (or a project approved under
another standard) during the verication period.
Vo|untary market: Te voluntary market caters
to the needs of those entities that voluntarily de-
cide to reduce their carbon footprint using o-
sets. Te regulatory vacuum in some countries
and the anticipation of imminent legislation on
GHG emissions also motivates some pre-com-
pliance activity.
Western C|imate Initiative (WCI): Te WCI
covers a group of seven U.S. states (Arizona,
California, Montana, New Mexico, Oregon,
Utah, and Washington) and four Canadian prov-
inces (British Columbia, Manitoba, Ontario,
and Quebec), with an aggregate emissions target
of 15% below 2005 levels by 2020. Other U.S.
and Mexican states and Canadian provinces have
joined as observers.
NOTES
1818 H STREET, NW
WASHINGTON, DC 20433 USA
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srarr axn rnrxns ov rnr

Washington DC, May 2012

Washington DC, May 2012

Trading volumes soared in 2011, coinciding

State and Trends of the Carbon Market 2012 19

Negotiation outside exchanges

The aviation sector will therefore become

These decisions represent the

State and Trends of the Carbon Market 2012 49

without a brighter market outlook, it is

50 State and Trends of the Carbon Market 2012

Africa emerged as a significant

54 State and Trends of the Carbon Market 2012

However, important to note that such an ap-

the Australian Parliament

74 State and Trends of the Carbon Market 2012

It is also estimated that roughly

California and Qubec are taking

88 State and Trends of the Carbon Market 2012

after almost a year of

In April 2012, Mexicos Congress

State and Trends of the Carbon Market 2012 93

Japan Between 25% and 0% below 1990. 539

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