# **2.3 Financial flows to low-income countries resulting from offset markets**

This type of financial flows is as noted the only among the four main flow types indicated above, that is currently of a substantial magnitude. Table 2.2 shows the current (2006-2007) level of these flows. Among the financial flows registered in this table, EU–ETS trading dominates; this is however not directly relevant in the context of this study as these represent c-a-t related financial flows (which should be grouped rather under category d), treated below). These flows also only take place between (relatively high-income) European Union countries.

As for net flows benefiting LICs, the Clean Development Mechanism dominates: The total volume of financial transactions in the CDM market to non-Annex I countries has grown rapidly, from 3.9 billion Euros in 2006, to 24.2 billion Euros in 2008.<sup>3</sup> Much of the transaction volume is however secondary trading of CERs. The primary trading in this market, representing basic revenue flow to lower-income countries (figures in parentheses), was much smaller in 2008, namely 6 billion Euros on a volume of 550 million tons CO2e.<sup>4</sup> Other offset market flows are much smaller. The two most important are those related to Joint Implementation under the Kyoto Protocol (JI), representing a trading value of about 0.7 billion Euros, on volume of about 70 million tons CO2e, in 2008 (some of which, however, is secondary-market trading); and other offset markets representing a value of about 0.5 billion Euros.<sup>5</sup> Note that JI leads to some financial flows to LICs, but only to countries within Annex 1, all in East Europe or the former Soviet Union.

**Table 2.2: Trading volumes, and values of trade, in emissions markets, 2006-2007. Volumes in million tons CO2, and values in Billion Euros.**

|Market||2006||2007|2|008|
|---|---|---|---|---|---|---|
||Volume|Value|Volume|Value|Volume|Value|
|EU-ETS|1017|18.1|1643|28.1|3091|67.0|
|CDM<br>(primary CDM)|562|3.9|947|11.7|1609<br>(550)|24.2<br>(6.0)|
|Other markets<br>(JI)|51|0.4|86|0.5|195<br>(72)|1.2<br>(0.7)|

Sources: Point Carbon (2008, 2009).

More interesting is the scope for such financial flows in the period to come. This is highly uncertain and will not be speculated on here. Its future magnitude will depend on general features of energy markets, on the overall aggressiveness of mitigation policy, and on the degree to which offset markets will be relied on also in the future. Importantly, offset markets will be relevant only when not all countries are subject to binding agreements on mitigation, such as through a comprehensive cap-andtrade regime or a comprehensive system of GHG emissions taxes. Most indications are today (spring 2009) that such a comprehensive agreement is unlikely to come about soon. Thus, GHG emissions offset markets are likely to be with us for a long time, perhaps on a large and increasing scale.

# **2.4 Financial flows to lower-income countries related to technology and energy development**

Financial flows can be expected also in relation to energy developments that are not spurred directly by offset market finance such as CDM. Two types of such finance are publicly-sponsored projects on

> 3 Point Carbon (2008).

> 4 Note that, while emissions trading prices held up reasonably well through October 2008, they have been reduced substantially more recently, in the EU-ETS from about 25 Euros/tCO2e to about 13 Euros currently (March 2009), due to the current global economic recession.

> 5 The largest market in the “other” group is the RGGI, which is the ten-state c-a-t scheme recently started up in the northeastern US, with compliance period starting in January 2009.

7