International carbon markets - the 43 billion dollar question
Analysis from Bloomberg New Energy Finances shows that EU climate goals should stimulate EUR 31bn of low carbon investment in developing countries
London, 29 March 2011 – Additional investment in clean energy and energy efficiency projects of EUR 31bn in developing countries up to 2020 could result, if the European Union achieves its goals for reducing emissions, according to new research published by Bloomberg New Energy Finance. This EUR 31bn ($43bn) figure includes all capital invested in the project, not just that part equivalent to revenues from selling the carbon credits.
The analysis assumes that the EU moves towards a marginally tougher target in 2020 - a 22% reduction on 1990 levels compared to the currently legislated 20% - and takes into account restrictions on the imports of carbon credits from developing countries. From 2013, the credits from projects that destroy the potent global warming gases of HFC (hydroflourocarbons) from refrigerant manufacturing and N2O (nitrous oxide) from adipic acid (a widely used industrial chemical) will be banned from entering the EU Emissions Trading Scheme. These credits are cheap to produce and to date have accounted for around 70% of carbon credits issued by developing countries. From 2013 onwards, carbon credits from developing countries will need to come from more capital-intensive renewable energy and energy efficiency projects.
Bloomberg New Energy Finance calculates that the future demand for international carbon credits from businesses covered by the EU Emissions Trading Scheme (EU ETS) and European governments will be 3.9bn tonnes between 2008 and 2020. Credit supply from projects currently in operation and those in the planning pipeline - as published by the UNFCCC (UN Framework Convention on Climate Change) - is forecast at 2.9bn tonnes over the same period. The result is a shortfall of around 1bn tonnes of CO2 equivalent.
Taking into account the ending of cheap industrial gas credits, we calculate that the average investment needed to produce an international carbon credit will increase by two thirds from EUR 19/tCO2 in the pre-2012 market to around EUR 32/tCO2 in the post-2012 market.
There will also be significant shifts in the location of projects - away from more advanced developing countries such as China. Bloomberg New Energy Finance calculates that China accounts for 62% of carbon credits currently in the UN pipeline, but estimates that less than a third of new investment is likely to take place in China.
Guy Turner, director of carbon market research at Bloomberg New Energy Finance, commented: “The EU's climate policy is still the driving force in the world carbon market and continuation of current policies will stimulate material new investment in clean technologies in developing countries. If other developed countries follow suit, this number will increase significantly.”
The Kyoto Protocol was agreed in 1997 and entered into force in 2005, establishing a firm international demand for carbon emissions. Countries are unlikely to reach a comprehensive climate agreement by the end of the Kyoto period (2012). However, Bloomberg New Energy Finance expects the Clean Development Mechanism to continue in some form. At the UN climate talks in Cancun, Mexico, in December 2010, participants generally supported the mechanism's continuation. Furthermore there is a mandate in the Kyoto Protocol itself, for it to remain in operation even in the absence of an international agreement.
Our analysis only incorporates the more certain demand for credits based on current legislation. Up to 2012, we include demand created by the Kyoto Protocol from European and non-European governments and EU ETS participants. For 2013–20, only confirmed, EU demand for credits is included. For the EU, the Climate and Energy Package sets a target of a 20% emission reduction from 1990 levels, with the option to tighten the target up to 30%. Our analysis assumes a 20% probability that the EU moves to the tougher target.
In terms of credit supply we consider the UN project pipeline as it stands today and adjust the related credit-generating potential for risks related to the different stages in the UN approval process, project underperformance and time delays.
In-house cost estimates are used to calculate investment figures for each project type. The investment figures in this press release refer to total upfront project cost and not just the incremental carbon component. For example, the carbon-related finance for a clean energy project may be 10% of the total project cost. The remainder of the project cost would be covered by sales of power or heat.
ABOUT BLOOMBERG NEW ENERGY FINANCE
Bloomberg New Energy Finance is the world’s leading independent provider of news, data, research and analysis to decision‐makers in renewable energy, energy smart technologies, carbon markets, carbon capture and storage, and nuclear power. Bloomberg New Energy Finance has staff of more than 180, based in London, Washington D.C., New York, Tokyo, Beijing, New Delhi, Singapore, Hong Kong, Sydney, Cape Town, São Paulo and Zurich.
Bloomberg New Energy Finance Insight Services provide deep market analysis to investors in wind, solar, bioenergy, geothermal, carbon capture and storage, energy efficiency, and nuclear power. The group offers Insight Services for each of the major emerging carbon markets: European, Global Kyoto, Australia, and the U.S., where it covers the planned regional markets as well as potential federal initiatives and the voluntary carbon market. Bloomberg New Energy Finance’s Industry Intelligence Service provides access to the world’s most comprehensive database of investors and investments in clean energy and carbon. The News and Briefing Service is the leading global news service focusing on clean energy investment. The group also undertakes applied research on behalf of clients and runs senior‐level networking events.
New Energy Finance Limited was acquired by Bloomberg L.P. in December 2009, and its services and products are now owned and distributed by Bloomberg Finance L.P., except that Bloomberg L.P. and its subsidiaries (BLP) distribute these products in Argentina, Bermuda, China, India, Japan, and Korea. For more information on Bloomberg New Energy Finance: http://www.bnef.com
Bloomberg is the world’s most trusted source of information for businesses and professionals. Bloomberg combines innovative technology with unmatched analytic, data, news, display and distribution capabilities, to deliver critical information via the BLOOMBERG PROFESSIONAL® service and Multimedia platforms. Bloomberg's media services cover the world with more than 2,300 news and Multimedia professionals at 146 bureaus in 72 countries. The BLOOMBERG TELEVISION® 24-hour network reaches more than 240 million homes. BLOOMBERG RADIO® services broadcast via Sirius XM Radio and 1worldspace™ satellite radio globally and on WBBR 1130AM in New York. BLOOMBERG MARKETS® magazine, Bloomberg Businessweek magazine and the BLOOMBERG.COM® Web site provide news and insight to business leaders and financial professionals. For more information, please visit http://www.bloomberg.com.
The BLOOMBERG PROFESSIONAL service and data products are owned and distributed by Bloomberg Finance L.P. (BFLP) except that Bloomberg L.P. and its subsidiaries (BLP) distribute these products in Argentina, Bermuda, China, India, Japan and Korea. BLOOMBERG, BLOOMBERG NEWS, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG MARKETS AND BLOOMBERG.COM are trademarks and service marks of Bloomberg Finance L.P., a Delaware limited partnership, or its subsidiaries. All rights reserved.