Carbon trading (8 November 2007)

New carbon funds are proliferating and there are few investment banks or financial institutions that are not moving into the field.

Remarks by Maurice Strong to the Closing Session of the International Finance Forum Conference

I am pleased to have this opportunity of making a few remarks at this closing session of the 4th Global Annual Conference. I congratulate the organizers and sponsors who have made this such an important and intluential event on the international calendar. Your very impressive program has included enlightened and informative statements from some very distinguished leaders and experts much more knowledgeable than I am on the critical financial issues now confronting China and the international community. I have learned a great deal from their presentations and will concentrate my own remarks on one issue which is creating a new generation of opportunities for the financial community and for China.

China is at the early stages of its commitment to a socialist market economy, utilizing market mechanisms to achieve its objective of producing a harmonious society through scientific development to meet the needs and expand the opportunities of its people. Like other aspects of China's remarkable progress, this transition opens up new frontiers of opportunity for innovation and leadership which also produces substantial economic and social benefits. It will generate too difficulties and controversies that inevitably accompany such changes but these are now being addressed resolutely and I am confident that they will, indeed, be resolved. While the scale and the speed of China's economic development present a challenge beyond what more developed countries have experienced, China has demonstrated a remarkable capacity to respond to the unprecedented challenges it faces.

Market mechanisms

In my brief remarks, I will refer to one of the most promising of these, the use of market mechanisms to mobilize funding for clean energy projects, reduction of carbon dioxide and other greenhouse gas emissions on a cost-effective basis through the Clean Development Mechanism (COM), and the trading of Certified Emission Reductions (CERs), provided for by the Kyoto Protocol to the United Nations Framework Convention on Climate Change. I have to disclose my own association with this process in my earlier role in the United Nations negotiations which established the basis for the development of these new opportunities, and now as Chairman of China Carbon Corporation and Vice-Chairman of the Chicago Climate Exchange. My colleague Frank Joshua, President of China Carbon Corporation, pioneered the development of emissions trading by the United Nations.

As you will know, the Clean Development Mechanism enables those who are required to or voluntarily decide to reduce their emissions to do so either by investing in their own projects or by purchasing the rights to offset their emissions from a party that can reduce them at lower cost. It is the difference between these costs that create the value, represented by Certified Emission Reductions (CERs) which can be bought and sold either in private transactions or through an exchange.

Already, internationally carbon revenues from CERs are increasing rapidly, generating 2,4 billion dollars in 2005 and 5.2 billion dollars in 2006. Although it is difficult to forecast the future size of the carbon market there are many signs of substantial and rapid growth, The OECD estimates that its members will have a commitment gap of about four to five billion tons of C02 equivalent under the Kyoto Protocol up to the year 2012 when its current period ends, It is therefore likely that overall the carbon market will be short by some one to two billion CERs by 20 I2, This would produce significantly rising prices, particularly as the European Union penalties for non-compliance will be raised to lOO Euras per ton in the period 2008-2012.

Climate exchange

Last year (2006) the average price for European Union Allowances (EVAs) was 22 dollars US per ton C02, while the average prices of CERs generated by projects in developing countries ranged from 8 to 14 US dollars in the primary markets, and 14 to 20 US dollars in the secondary markets; and with the impending shortages are likely to rise much higher. China has set a minimum price for CERs of 8 Euros per ton.

China has the largest potential for earning CER funds. but is still lagging behind India. As of the end October 2007 China had a total of 860 projects in the UN CDM pipeline, of which 125 had successfully completed registration with the CDM Executive Board , the UN body that administers the CDM program. During the Same period India had registered 287 projects, out of a total of 773 projects in the COM pipeline, These projects range from coal mine methane, hydro, wind, landfills, HFCs, fossil fuel switching and industrial energy efficiency, in all of which there is great potential for additional projects. Priority for buyers of credits is being concentrated on those projects which can be registered and completed by 2012 when the current Kyoto Protocol provisions expire.

China has not yet decided whether and how it will authorize the establishment of a climate exchange, but is likely to do so soon. It would be distinctively Chinese while linking the China market with other world exchanges. The Chicago Climate Exchange as leader in the field is fully prepared to assist and cooperate in creation and developing a China Climate Exchange which would make a major contribution to ensuring that China benefits to the fullest extent from emissions trading.

The impressive progress of the Chicago Climate Exchange illustrates well the potential in the field. As the world's first cap-and-trade integrated emissions reduction and trading systems for all greenhouse gases which began trading in 2003 and now has members throughout the world. It created and launched the European Climate Exchange, has entered into a joint venture to launch the Montreal Climate Exchange and it is working with several others establishing new Exchanges. It is also launching innovative new products, most recently a Climate Futures Exchange for Certified Emission Reductions (CERs) futures contract. The capacity of emissions trading to reduce emissions on a cost-effective base is evidenced by its success in achieving dramatic reductions in sulfur-dioxide emissions in the United States. This, too. was achieved through the leadership of Chicago Climate Exchange and its Chairman, Dr. Richard Sandor.

Incentives and means

The CDM process makes substantial contributions to the transition by industry to sustainable, scientific development in providing the incentive and means to employ the latest technologies and develop their own technological capacities. It also makes important contributions to health and safety. China, which continues to rely on coal for some 70% of its energy, can use CDM funding to capture and utilize methane which is the source of so many tragic mine accidents that have happened in China and is one of the main contributors to greenhouse gas emissions.

In China purchases of CERs have concentrated on the larger projects which produce substantial credits. But as "low-hanging fruit" becomes less available purchasers are beginning to move toward smaller projects, Some of these involve packages of projects, such as the production of low-cost and low-emission stoves and other projects which can meet grass-roots needs while enabling them to benefit from COM funding.

With the immense increase in public awareness and political attention to the climate change issue arising largely from the latest scientific findings of the United Nations Intergovernmental Panel on Climate Change and the initiatives of Former US Vice President AI Gore, which were recognized by their award of the 2007 Nobel Peace Price, there has been a rapid increase in the response ofthe financial community to the opportunities created by the carbon market.

New carbon funds are proliferating and there are few investment banks or financial institutions that are not moving into the field. Indeed, many are represented here today.

The World Bank has taken a lead in promoting the utilization of the COM process to finance development projects which produce significant emission reductions in developing countries. More controversially it has become a major competitor with private funds for the purchase of CERs.

While CDMs and emissions trading must be seen as only a partial and a still imperfect response to the challenge of climate change, they nevertheless are the main game in town in terms of new and expanding opportunities for the financial community, which at the same time will contribute significantly to China's commitment to scientific development and a sustainable, harmonious society.