London, 2 June 2011: The World Bank has issued its annual report on the status and trends of carbon markets. The report assesses the various carbon reduction, mitigation and trading schemes planned or under implementation in developed and developing countries. It also gauges the supply-demand scenario of the Kyoto carbon market and provides with estimates of future trends.
The report notes that the demand for Kyoto assets, CERs, AAUs and ERUs has been decreasing. This can be attributed to the projection that EU-member states are likely to achieve their emission reduction targets set for 2012 under the Kyoto Protocol.
Demand from Government Sector (EU)
The demand from government sector in EU, Japan and Annex-B countries between 2008-12 has been estimated at 437 million tCO2, with EU-15 accounting for 72% of the total, Japan 23% of the total and all other Annex-B countries 5%.
Since most of the countries in the EU are expected to overshoot their emission reduction targets, the demand for Kyoto assets is likely to reduce from the initial estimate of 465 million tCO2 to about 300-330 million tCO2. Since the beginning of the compliance period in 2008, 132 million CERs and ERUs and 54 million AAUs have been purchased. Thus the residual demand till 2012 from the government sector is likely to be 129 million tCO2.
Demand from Private Sector (EU)
Demand forecasts from the private sector have increased by 28% from last year to 955 million tCO2 with EU ETS contributing 79% of the global demand. The report notes that most analysts believe availability of surplus allowances after the second phase of EU ETS ends in 2012.
However, some sector power and aviation are likely to push demand as they would be short of allowances. Power sector alone is likely to experience a shortfall of about 500 million tCO2 cumulative since 2008. Demand may also come from generators who accumulate allowance for the third phase (2013-2020). Additionally, changes in the energy mix (like Germany's recent change in nuclear policy) and increase in global energy prices may further push demand from the power sector.
The aviation sector will face auctioning of allowances in 2012 which would result in demand of 50 million tCO2 likely to be filled by CERs, ERUs or Aviation allowances.
About 25% of the 1.6 billion CERs contracted in EU ETS so far are from HFC decomposition projects and adipic acid projects, since these CERs would be banned at the end of Phase II, some generators are likely to surrender allowances more than their shortfalls and bank some of the allowances for Phase III. All in all, the demand for Kyoto assets from EU ETS between 2008-12 is estimated to be 750 million tCO2 which is likely to be fulfilled easily through already contracted CERs and ERUs.
Supply of Kyoto Assets
The report expects that about 1,150 million CERs would be issued by 2012 with half of these issued to HFC and adipic acid projects. The supply projections of CERs has increased by 12% from last year mainly due to changes in the CDM pipeline — starting date of crediting period for projects was forwarded, the average number of projects entering the CDM pipeline over the last 15 months has been the highest-ever.
215 million ERUs are expected to be issued by 2012 with Russia likely to contribute as much as 50%. Several European countries like Slovakia have announced intentions to sell over 1.5 billion AAUs which clearly outnumber the actual demand for AAUs.
The total demand for Kyoto assets from EU, Japan and other Annex-B countries between 2008-12 is estimated to be 1,392 billion tCO2. 1,085 billion tCO2 have so far been contracted as ERUs and CERs while 245 million have been contracted as AAUs. This leaves a residual demand of 136 million tCO2.
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