The Future of Carbon Markets
UKELA Climate Change and Energy Working Party
Melanie Shanker
email: melanie.shanker@linklaters.com
tel: +44 207 456 2994
21 October 2013
Linklaters LLP
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
The Science Matters
> The 5th IPCC Report released on 27 September 2013 concludes:
> Human activities causing sustained and unequivocal rise in global temps
> “Each of the last 3 decades has been successively warmer at the Earth’s
surface than any other preceding decade since 1850.”
> NEW: CARBON BUDGET - To limit warming to less than 2°C, total cumulative
CO2 emissions from all human sources must be limited to 1 trillion tonnes of
carbon.
> We’re half way there already.
> Delayed action will only increase the burden of acting later.
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
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Not just a lot of hot air…
Broad scientific consensus if we do not abate there is expected to be…
> Increases in global average temperature between 2.6°C and 4.8°C
> Sea levels rising 45-82cm *
> Desertification and water stress likely in some regions and increased rainfall in
others*
> Increase in extreme weather events: bushfires, hurricanes, drought and flood.*
> IEA WEO 2010: trends show will end up at over 650ppm – temperature increases
over 3.5 %. This implies very serious impacts.
> August 2012 marked the 36th consecutive August and 330th consecutive month with
a global temperature above the 20th century average**
*(Source: Intergovernmental Panel on Climate Change, 5th Report 2013
**(Source: National Oceanic and Atmospheric Administration National Climatic Data Center, State of the Climate Global Analysis, August 2012)
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
2
What temperature change means
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
3
Scale of investment Required
> Cost of shifting to a low carbon energy system
> Stern Review: 1% annual global GDP ($500bn) for 550ppm CO2e by
2050 (= approximately 3°C)
> IEA WEO: $ 550 bn/year to 2030 in renewables and energy efficiency to
limit to 450ppm CO2e
> NEF Global Futures: $515bn/year over extended period on
renewables/energy efficiency 450/550 ppm CO2e
> More expensive with delay
> Will need to be a combination of public and private money.
> Common but differentiated responsibility >>Climate Finance
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
4
What is Climate Finance?
Climate Finance = developed country funds for developing
country GHG emissions reduction and adaptation.
> What is it actually?
> Existing finance ‘mechanisms’ such as:
> Clean infrastructure finance
> Climate-resilient development assistance
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
5
Mobilizing Climate Finance
> Requires:
> Public AND private funds
> Removal of certain barriers to entry for the private sector
> Two key barriers:
> Financing Costs: Low-carbon v BAU?
> Foreign investment risk
> Policy Solutions
> Policy de-risking instruments
> Financial de-risking
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
6
Green Climate Fund
> Cancun COP agreed to established in 2010
> The GCF is to “play a key role in channelling new, additional,
adequate and predictable financial resources to developing
countries by 2020”
> Currently governed by a transitional committee
> Intention to build with private sector support
> 2 private sector observers
> Headquarters will be Songdo, Korea
> New Exec Director: Hela Chiekrhouhou, formerly of African
Development Bank
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
7
Operationalising the GCF
> GCF to operate through intermediaries, not as a bank
> Interim secretariat has agreed the minimum requirements to be satisfied
before donor countries start making commitments to the GCF including:
> Risk management and investment frameworks
> Resource allocation rules
> Initial modalities for operation of the mitigation, adaptation and Private
Sector windows
> GCF will report to COP but COP will not be able to reverse decisions of
GCF.
> Private Sector Facility (PSF)
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
8
NAMAs
NAMA = Nationally Appropriate Mitigation Action
> Policies and actions that a country may take to reduce GHG
emissions and voluntarily communicated to UNFCCC
> Intended to be a way for developing countries to contribute to global
mitigation efforts
> The exact definition of what is a NAMA is still open but it may
facilitate private sector financing
> Majority will not generate credits for trading
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
9
New Market Mechanism and FVA
> Disambiguation: The NMM vs new market mechanisms
> Modalities of the New Market Mechanism (NMM) and Framework for
Various Approaches FVA are still to be agreed (designed)
> Credits gained under the NMM could be used by KP Parties for
compliance.
> Framework for Various Approaches (FVA): “To conduct a work programme to
consider a framework for such approaches (including opportunities for using markets, to enhance
the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different
circumstances of developed and developing countries), with a view to recommending a decision
to the Conference of the Parties at its eighteenth meeting.”
> Could be a way to link different markets.
> Design challenge: how to design an appropriate mechanisms without clear
view on demand for credits.
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
10
Carbon Markets 2.0
> EU ETS: backloading, cap beyond 2020, aviation stop-the-clock
> California: cap-and-trade scheme commenced in 2013, covering
85% of California’s emissions. Linking to Quebec.
> China: Developing 7 regional trading schemes with purported aim to
launch economy-wide scheme by 2015. Shenzhen launched.
Shanghai close behind.
> Japan: looking developing bilateral mechanisms
> Korea: plans to launch an ETS in 2015 covering 60% of South
Korea’s more than 600 million tonnes of annual CO2 emissions.
> Australia: cap-and trade scheme to be repealed in 2014.
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
11
Where lawyers are needed?
> Carbon markets are highly regulated environments both in terms of
the product and the way it is traded
> Non-standard documentation and drafting – basis risk
> Transition into regulated environments or between phases of
schemes
> Allocating registry and transfer system risks
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
12
The Future: “Unburnable carbon”?
“Smart investors can see that investing in companies that rely solely or heavily
on constantly replenishing reserves of fossil fuels is becoming a very risky
decision.”
Professor Lord Stern
> Carbon Tracker Initiative
> Stranded Assets – how should environmentally unsustainable assets be
valued?
> Analysts reports – DB, Citi, GS predict softening of fossil fuel demand
> Impacts business, but is also an opportunity.
> see: http://carbontracker.live.kiln.it/Unburnable-Carbon-2-Web-Version.pdf
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
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Melanie Shanker
Tel: +44 (0)20 7456 2994
Email: melanie.shanker@linklaters.com
Melanie is a Managing Associate in London with a focus on emissions
trading and climate change law. She has considerable experience
advising in relation to emissions trading, including complex structured
transactions under existing and emerging Kyoto mechanisms (CDM, JI
and REDD+). Prior to joining Linklaters in 2011, Melanie was in-house
counsel for five years at Climate Change Capital, investment manager
to the largest private carbon fund in the world.
Recent experience includes: advising on a number of structured offset
and allowance transactions in the Californian carbon market; advising
on the structuring and implementation of an environmental bond
deriving returns from carbon monetization and ecosystem services; and
advising a co-ordinating managing entity on the implementation of a
CDM Programme of Activities in Kenya.
21 October 2013
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or
an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open
to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
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