Oct 17, 2011

CARBON FINANCING: NEW BUSINESS OPPORTUNITIES

Session 5 : Carbon Reduction, Carbon Markets and Emissions Trading

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

OUTLINE
Terminology Carbon Market EUEU-ETS
Development of EU-ETS EU-ETS - Key Points ETS Market Emergence (Buyers and Sellers) ETS Operational Coverage ETS and Kyoto Flexi USA ?

KEY TERMINOLOGY IN CARBON MARKET

Carbon credits: AAUs, EUAs, CERs, ERUs, CFIs, VERs, RMUs, Carbon Trading, EU-ETS Clearing house Credit Banking/Borrowing Community International Transaction Log (CITL) Crediting Period Grandfathering Green Investment Scheme Installations Leakage National Allocation Plan Primary CERs Regional Greenhouse Gas Initiative Registry

WHAT ARE CARBON MARKETS?

Carbon Market

The market resulting from buying and selling of emission allowances and reduction credits in order to enable countries and companies meet their GHG emission targets targets.

Compliance Market Cap and Trade Emissions Trading Under the Kyoto Protocol
EU-ETS New South Wales GHG Abatement Scheme (NSW GHGAS) Regional Greenhouse Gas Initiative (RGGI) Western Climate Initiative (WCI) Clean Development Mechanism (CDM) Joint Implementation (JI) The EU-ETS Linking Directive

Voluntary Carbon Markets Emission offset by (Businesses, governments, NGOs, and individuals ) purchase
Certified CDM Voluntary market (Verified or Voluntary Emissions Reductions)

Baseline-and-Credit Systems Baseline-and-

CARBON MARKET & TRANSACTION T YPES

Carbon Market

Emission Reduction Units (ERUs) Certified Emission Reduction (CERs) Assigned Amount Units (AAUs)

Carbon Market voluntary VERs

Removal Units (RMUs)

Regulated Allowance Based Project Based JI AAUs EUAs CERs CDM ERUs

Cap & Trade System

Baseline & Credit System

Each unit is equivalent to 1MtCO2e

COMPLIANCE MARKET T YPES OF EMISSIONS TRADING SCHEMES

Carbon Market

Carbon Market

HOW CARBON CREDITS REACH TO MARKET ?

Carbon Market

Carbon Market

FEATURES OF MARKETS

Carbon Market

Terms Level of the cap Type of trading permitted The sector scope

EU ETS

NSWGGAS

CCX 6% of 1998-2001 baseline all

UK ETS

5.8% of 2005 emission Baseline power 55% minerals 12% metals 12% oil & gas 10% Allowance power

Allowance not specified

Extent of flexibility

European Union

Australia

Asia New Zealand North America Canada

whole of UK

NSWGGAS: New South Wales Green House Gas Abatement Scheme

CC SUPPLY

Carbon Market

MARKET EMERGENCE

Carbon Market

1997-2000: US/Canada Companies under taken company-wide voluntary GHG reductions No CDM Guidelines Pilot AIJ tested - with poor environmental integrity 1999 - Establishment of Prototype Carbon Fund: 6 Govt.+ 15 companies invested and $180 mln operationalised in 2000. The closed Mutual Fund managed by World Bank with objective to purchase Carbon credits under JI and CDM
Learning/Experience to operate in Market Gaining Competitive and strategic Advantageous over competitors Informing the Negotiators Acquiring Carbon credits Influencing the on-going negotiations Generate the Additional resources for Development Assistance

MARKET EMERGENCE
2001 First Carbon Tender by Govt. of Netherlands 2002 First CDM project in Chile 2002-03 : Pvt. Japanese companies entered into market. Japan Climate Policy in 2005. 2004 - European Companies participated (EU-ETs and CER eligibility in EU-ETs)

Carbon Market

2005- Annex B Governments earmarked large funds for purchase of CERs 2006 - Secondary market development
(Banks, speculators, individuals without compliance commitments participated)

MARKET GROWTH

Carbon Market

Volume growth is more than 200% on annual basis since last 5 years, except 2009-10 due to recession. Initially equal Allowance based and Project based transaction, but now moving towards more Allowance basis trading. As CERs are eligible for EU-ETs and KP compliance, both have strong pricing influence on Carbon Market. The volume of CERs generated are more than traded as trading is restricted only upto 2012 delivery period. Large market capitalization is supporting the confidence in market.
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CARBON MARKET GRWOTH

Disappointment (Copenhagen, 2009) to renewed optimism (Cancun 2010) restored market confidence. Kyoto Protocol mechanism will continue for to Annex I Parties (objectives) inspite of uncertain future of Kyoto Protocol itself. AW-LCA will consider the establishment of one or more market-based mechanisms to enhance the costeffectiveness of mitigation actions by Parties.

Source: World Bank, 2011

EMERGING INTERNATIONAL PERSPECTIVE

Emergence of a fragmented carbon market A workable situation of Multiple regulatory systems procedural decentralization Market further evolves and matures through linking depends on:
Compatibility in effort or ambition Use of offsets Monitoring, reporting and verification (MRV) standards Absence of price caps

Range of policy measures - (NAMA/NAPA) A post-2012 Facing Low Demand and Low Supply

CDM/CERS GROWTH

Kyoto

European Union Emission Trading Scheme (EU-ETS)

DEVELOPMENT OF EU-ETS
EU-ETS established for first period 2005-07 Experimental for establish the market links to Emissions AAUs have strong implications on carbon market National Allocation Plans for second ETS trading period for 2008-12 (aligned for Kyoto commitment period) Major expected benefit was to bring down the compliance cost by half.

DEVELOPMENT OF EU-ETS

European Union Emission Trading Scheme (EU-ETS)

Main source of commitments was Koyto

Average reduction 5.2% Monitoring and penalties for not meeting targets Three strategies adopted Reduce, Stabilize and Free

Reduce - USA (7%), Japan (6%), EU (8%) below 1990 level Stabilize - Russia, Ukraine, Newzeland Binding free Developing Countries Marrakesh (2001)
Ratifying parties to monitor domestic Carbon emissions Annex-1 to maintain the National Registries for emission permits Provisional agreement to take penalties for non-compliance Operational Guidelines to Flexibility Mechanisms JI, CDM

European Union Emission Trading Scheme (EU-ETS)

CREDIT UNITS IN EMISSION TRADING

Annex 1 : Buy/Sell permits Three type
1. Assigned Amount Units (AAUs) Koyto commitments
AAUs is 1 mtCO2 and tradable (among Annex -1) Marginal abatement cost in a country was main determinants

2. ERUs JI - Issuance from Jan 1, 2008. 23. CERs - CDM Additional permit at 2-4 time lower cost of mitigation

ERU/CERs to be Supplemental to Domestic actions (Marrakesh)

Ex. Germany 12 % additional emissions might be offsetting by ERUs / CERs

ALLOWANCE DISTRIBUTION

European Union Emission Trading Scheme (EU-ETS)

AAUs = Average emissions (1990 level) x 5 reduction commitment (Kyoto) Monitored Emissions = AAUs + ERUs + CERs + AAUs (acquired) + RMUs Emission Credit Bank (future commitment periods) Withdraw or Cancel of Carbon permits upto the emission levels at end of 2012 Earning of credits ERU retrospectively since 2000

European Union Emission Trading Scheme (EU-ETS)

EMERGENCE OF SELLER AND BUYERS

Prevailing Situation Credits Surplus
Russia and Ukraine Economic decline after 1990 Baselines > actual during 1990s (Russia 40 % below in 2005)

Comfortably Complying
Germany Unification of East and West and closing down of East Germanys inefficient facilities UK- Coal production curtailment in 1990s

European Union Emission Trading Scheme (EU-ETS)

EMERGENCE OF BUYERS AND SELLERS (CONTD.)

Russia/ Ukraine in Excess position Major Supplier Doubt that this may not bring down the actual emissions European Countries under Civil Society pressure not to buy from Russia/Ukraine Canada Committed to block any such purchase Final Response
AAUs Unrestricted sale RMUs Russia vast hinterland Limited to 121 million mtCO2 per annum.

European Union Emission Trading Scheme (EU-ETS)

EU-ETS OPERATIONAL COVERAGE

Coverage of EU-ETS
Covers 11400 combustion installations with 5000 firms (Energy Generation, Steel, Cement etc.) Residential and Transportation emissions excluded

Preparation in 2004 EU Member State submitted the National Allocation Plan (NAPs) to European Commission Distribution of EUAs to Domestic Producers Large endowments to producers Planned make-up through Other sectors, Koyto Flexi (JI, CDM) Allocation Logics Producers historic output levels Annual Allocations AAUs Auctions Upto 5 % (10% during 2008-12) EU Parliament pushed for 100% auctioning by 3rd period Almost like a Carbon Distribution Pricing

European Union Emission Trading Scheme (EU-ETS)

EU-ETS
EU Linking Directives (2004)
Allows the installation to use the CDM Credits towards the EUA allowance JI credits in second period Did not allowed the Carbon sink offsets

ETS Penalties for nor meeting NAP targets

Companies would pay 40 Euros per ton of CO2defalt and surrender the corresponding credits in next year Countries 1.3 times the value of permits to make-up the difference

USA A DELICATE HINGE

Largest Carbon Emitter Uncertainties
Beyond Kyoto 2012 Enforcement mechanism for Kyoto commitments ETS without world binding

Policy shift from Bush to Obama Recent US commitment (Churned within) States and Cities Carbon Reduction Plans Regional GG Initiatives (RGGI) 9 Sates Group Reggie Cap and Trade for major electricity generators
MoU for Emission level 2005 upto 2015 and 10% reduction by 2019

USA A DELICATE HINGE

California for Joint Carbon Trading Scheme with EU/UK. Bill to reduce the Carbon emissions to 1990 level by 2020 (25 % drop) 28 US states prepared Climate Change Action Plans. Mayors Climate Protection Agreement 200 US cities (40 million citizens) Pledge to meet or exceed Kyoto

PRIVATE INITIATIVES
Corporations started announcing their plans
BP (reduction, renewable energy investments) GE Service Industries (NGO collaborations reforestations, Clean technology)

Chicago Climate Exchange CFI - Motorola, Amtrak, New Mexico State

CDM/CERS PRICE MOVEMENT

Price Crashed in Feb 2009 EUA Maximum Price : 31$/tCO2 EUA Lowest Price : 8.8 $/tCO2 Price of pCER are lower than sCER EUA are better priced than CER Present Price range is around 18$/tCO2

CARBON EXCHANGE ?
Platform to Transact the Carbon Registered Buyer and Sellers Type of Trade Spot and Futures Value Addition

CLIMATE EXCHANGE PRICE MOVEMENT

CARBON EXCHANGE: T YPICAL SCREEN

Thank you

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CARBON CREDITS : OVERVIEW

European Union Emission Trading Scheme (EU-ETS)

EU-ETS AND KYOTO FLEXI

Formally, both have independent operations 2008-12 : EU Countries to meet both ETS (NAP) and Kyoto targets AAUs (Kyoto) will not count towards the ETS targets and neither reverse flight Expected benefits is lowing of cost of meeting the Kyoto compliance due to ETS