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Carbon Trading Training for visiting Caribbean Group

Carbon Trading Training for visiting Caribbean Group. Guglielmo Cioni - Senior Expert London 6 October 2010. Today’s Agenda. 9:00 - Module 1. - Introduction Introduction to Climate Change International treaties and EU legislation

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Carbon Trading Training for visiting Caribbean Group

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  1. Carbon Trading Training for visiting Caribbean Group Guglielmo Cioni - Senior Expert London 6 October 2010

  2. Today’s Agenda 9:00 - Module 1. - Introduction • Introduction to Climate Change • International treaties and EU legislation • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI) • Carbon Credits Markets: Primary and Secondary Markets 10:30 – 10:45: Coffee Break 10:45 - Module 2. Origination of Carbon Credits • Project Cycle for CDM and JI 12:00 - Module 3. Primary Market • The transaction: ERPA – Emission Reduction Purchase Agreement • Cost evaluation for a typical CDM Cycle • Case Studies 13:00 – 14:30 - Lunch Break 14:30 – Module 4. The Secondary Market • Trading Carbon Credits and Allowances on Exchange Platforms and OTC • Carbon Primary and Secondary Pricing 16:00 – Questions and Exercises 17:00 - Workshop closing

  3. ERANOVA CLIMATE a Swiss company, constituted of high profile, skilled professionals with long experience and proven track record in private equity with successful exits, project finance, carbon origination and trading, banking and project management. Consulting – helping clients (mainly financial institutions like large banks with extensive commercial customer bases) understand, measure and manage the business risks associated with climate change policy and regulation Financial advisory – helping project organisations source and structure funding for clean technology projects in emerging economies, notably Latin America and South East Asia. Effectively, project development organisations who have viable projects eg. wind farms or hydraulic power plant, which need funding will approach Eranova for help with identifying and acquiring finance from banks, private equity firms, hedge funds, etc Investment fund management – setting up and managing innovative investment funds focused on the clean technology and carbon trading sectors.

  4. Module 1. - Introduction • Introduction to Climate Change • International treaties and EU legislation • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI) • Carbon Credits Markets: Primary and Secondary Markets

  5. 1.1Introduction to Climate Change Video: A Global ClimateChange

  6. 1.1Introduction to Climate Change IPCC says: No more than 2° C increase! Thatmeans: No more than: 450 ppm (0,045%) of CO2 in the atmosphere The world CO2 concentration in the atmosphere: Pre industrial Era: 280 ppm Today:

  7. 1.1Introduction to Climate Change

  8. 1.1Introduction to Climate Change Beware! Notonly CO2! OtherimportantGHGs Methane: 1t CH4 = 21 tCO2eq N2O: 1t N2O = 310 tCO2eq HFCs, PFC: 1t HFC23 = 11,000 tCO2eq SF6: 1t SF6 = 22,000 tCO2eq

  9. 1.1Introduction to Climate Change Howmuchisit? 3,000 Gtof CO2 on Earth Howmuch are wethrowing in? 27 Gtof CO2/y Isit a lot? 75,000 times the weightof Empire State Building in NY

  10. 1.1Introduction to Climate Change Whatshallwe do Source ETP 2010 - IEA

  11. 1.1Introduction to Climate Change Source ETP 2010 - IEA

  12. 1.1Introduction to Climate Change Howmuchitisgoingtocost? Source WEO 2009 - IEA

  13. 1.1Introduction to Climate Change Howmuchitisgoingtocost? Source WEO 2009 - IEA

  14. 1.1Introduction to Climate Change Whoisgoingtopay? Ifwe don’t do it Everyone The Stern Report (Sir N. Stern - 2006) forecastslossesof 5 to 20% of the World’s GDP due toClimateChangeEffects Source WEO 2009 - IEA

  15. 1.1Introduction to Climate Change Whoisgoingtopay? DevelopedNationsPledges: 100 USDbn/y until 2020 devotedtomitigation and adaptationmeasures So far no clearevidenceofsuchfunding: Public? Private? Instruments? Carbon Markets are the mosttestedtoolto finance mitigationactions

  16. Module 1. - Introduction • Introduction to Climate Change • International treaties and EU legislation • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI) • Carbon Credits Markets: Primary and Secondary Markets

  17. 1.2 International Treaties and • EU legislation Under the UN Framework Convention on Climate Change negotiated at the 1992 Earth Summit in Rio de Janeiro, nations committed to developing and implementing climate protection measures "appropriate for the specific conditions of each Party." In addition, industrialized ("Annex I") countries agreed to voluntarily reduce their GHG emissions to 1990 levels by 2000. The Convention entered into force in May 1994 and has been ratified by 186 countries including the United States. Very few industrialized countries, however, have met the voluntary target. For instance, U.S. GHG emissions have climbed nearly 15 percent since 1990 The 1997Kyoto Protocol would significantly strengthen the Convention, establishing binding emission targets for industrialized countries and establishing a range of mechanisms to encourage cost-effective compliance. The emission targets, for the period 2008 - 2012, average 5.2 percent below 1990 levels and range from 8 percent below (European Union) to 10 percent above 1990 levels (Iceland). The target for the United States is 7 percent below 1990 levels.

  18. 1.2 International Treaties and • EU legislation The Kyoto Protocol: Commitments. The heart of the Protocol lies in establishing commitments for the reduction of greenhouse gases that are legally binding for Annex I countries, as well as general commitments for all member countries. Implementation. In order to meet the objectives of the Protocol, Annex I countries are required to prepare policies and measures for the reduction of greenhouse gases in their respective countries. In addition, they are required to increase the absorption of these gases and utilize all mechanisms available, such as joint implementation, the clean development mechanism and emissions trading, in order to be rewarded with credits that would allow more greenhouse gas emissions at home. Minimizing Impacts on Developing Countries by establishing an adaptation fund for climate change. Accounting, Reporting and Review in order to ensure the integrity of the Protocol. Compliance. Establishing a Compliance Committee to enforce compliance with the commitments under the Protocol.

  19. 1.2 International Treaties and • EU legislation Kyoto Protocol Annex I parties and commitments Source: UNFCCC

  20. 1.2 International Treaties and • EU legislation Kyoto Protocol CaribbeanCountries

  21. 1.2 International Treaties and • EU legislation Kyoto Protocol CaribbeanCountries Emissions Tot. 132 Mt CO2 Source EIA - USA

  22. 1.2 International Treaties and • EU legislation ational focal points Kyoto Protocol National communication Exampleofemission data Jamaica National Focal Point

  23. 1.2 International Treaties and • EU legislation EU Legislation: The EU ETS – Emission Trading Scheme

  24. 1.2 International Treaties and • EU legislation European Union (EU) • Within EU • 27 Member states • 23 countries have Kyoto targets as “Annex B” parties, Malta and Cyprus do not have targets • Original 15 EU Member States have • Collective Kyoto target of (8% below 1990 levels), but • Differentiated responsibilities under the EU Burden Sharing Agreement

  25. 1.2 International Treaties and • EU legislation EU Burden Sharing Agreement

  26. 1.2 International Treaties and • EU legislation EU Climate Change Policy • EU is using a portfolio of policies to meet goal across all sectors through the EU Climate Change Program (ECCP) • Cross-cutting cap and trade • Regulation • Incentives • Voluntary approaches • Updated goals and binding measures for ECCP portfolio announced January 23, 2008: • Energy supply measures: increase share of renewable energy to 20% by 2020 • Energy demand measures: 20% reduction in energy consumption through energy efficiency • Transportation, buildings, agriculture:reduce emissions 10% below 2005 levels • Commitments by car makers to reduce CO2 emissions rate from new passenger cars by 25% below 1995 levels by 2008/2009 • Increase share of sustainable biofuels to 10% of overall petrol and diesel consumption • Improved EU ETS Overall EU Goal: Reducing its overall emissions to at least 20% below 1990 levels by 2020 Source: Point Carbon, European Climate Change Program, http://ec.europa.eu/environment/climat/eccp.htm

  27. 1.2 International Treaties and • EU legislation • The EU ETS is one of the policies to tackle climate change • Why Emissions Trading? • Way of reducing emissions at least cost to industry • offers industry more flexibility than ‘traditional’ regulation • Offers incentives for industry to go beyond what is expected of them • Overall environmental impact the same

  28. EU as whole is a Party to the Kyoto Protocol and agreed to 8% reductions In 1998 the then EU 15 agreed a burden sharing agreement All 27 MS have ratified Kyoto, 23 have emission targets as Cyprus and Malta are non-Annex 1 Parties Ranging from a 21% reduction for Germany, 12.5% reduction in the UK and a 15% increase for Spain Most new Member States have set a target of 8% below base level, with the exception of Hungary and Poland – 6% below • 1.2 International Treaties and • EU legislation EU and the Kyoto Protocol

  29. 1.2 International Treaties and • EU legislation Relevant EU Decisions • EU Emission Trading Directive • Registry Regulation • Linking Amendment (CDM and JI) • Monitoring Mechanism (Kyoto Reporting and Registries) • Monitoring Guidelines

  30. 1.2 International Treaties and • EU legislation How does the EU ETS work? • “Cap and trade” system with Carbon dioxide as the only Green House Gas • First phase runs until December 31st 2007 • 2nd phase in line with 1st Kyoto Protocol commitment period, 2008-2012 • Mandatory for certain activities as energy activities, ferrous metals, mineral industry and pulp and paper • Allowances freely tradable throughout EU • One allowance = one tonne of CO2e

  31. 1.2 International Treaties and • EU legislation Monitoring and reporting • Calendar year reporting of emissions • 28th February each year - each participant receives allocation of allowances (year X) • End of March final report of Emissions (X-1) • By end of April following year- each participant must surrender number of allowances equal to annual reportable emissions (X-1) these allowances then cancelled • Operator needs sufficient allowances in account to cover emissions

  32. 1.2 International Treaties and • EU legislation Options for Participants • Annual emissions exactly equal to the number of allowances given each year • Decrease emissions and sell surplus • Let emissions remain high and buy extra allowances needed to cover the gap • Penalty per tonne of excess emissions • €40 (2005-2007) • €100 (2008-2012) • Still have to bring account into compliance

  33. 1.2 International Treaties and • EU legislation Transactions in the EU ETS

  34. 1.2 International Treaties and • EU legislation EU ETS Market • Price volatility • Prior to 2005 driven by political dimension • First Phase Market to understand and come into line with fundamentals • Uncertainty regarding CDM credits, EU connection to ITL and EU Phase II

  35. 1.2 International Treaties and • EU legislation Review of EU ETS Directive • Commission Review to improve function and design post 2012 • Priority areas include • expansion to other sectors and gases • the most appropriate process for setting the cap; • harmonised allocation methodology (including CHP); • linking to other schemes at national and regional level; • robust compliance; • streamlining – small emitters and harmonised definitions • Report from the EU Commission, surveys and papers

  36. 1.2 International Treaties and • EU legislation UK Trading sector Non trading sector Sweden Trading sector Non trading sector EUA EU Trading Directive EU-25

  37. 1.2 International Treaties and • EU legislation JI JI Linking Directive Annex I countries ratified the Kyoto protocol EU-25 Non-annex I countries ratified Kyoto protocol CDM Countries that haven’t ratified the Kyoto protocol EUA ERU CER

  38. 1.2 International Treaties and • EU legislation Kyoto Transactions

  39. Module 1. - Introduction • Introduction to Climate Change • International treaties and EU legislation • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI) • Carbon Credits Markets: Primary and Secondary Markets

  40. 1.3 CDM and JI • 1997: Marrakech Accords • FlexibleMechanisms • CDMCleanDevelopmentMechanism • JI Joint Implementation • Goalsof CDM • Facilitate the transfer ofcleanpractice and technologytodevelopingcountries • Incentive fordevelopedcountriestoinvest in Emissionreductionprojects in developingcountries • Streamlinefinancialflowsto project activitiesthat reduce emissions • Allowforcostefficiency in emissionreductions • Build a rigorousregulatoryarchitecturefor the generation of Carbon Credits • Build a knowledge base forprojects and policies

  41. 1.3 CDM and JI CDM IN SHORT Monitoring&Verification EmissionReduction Project in a Non Annex I Country CDM Procedure CERs Eligibility Sale ofCERs Entity in Annex I Country

  42. 1.3 CDM and JI CDM: Figures More than 5,000 CDM Projects in Pipeline More than 8 USDbnworthofprimarytransactions More than 2,300 CDM ProjectsApproved 182 Methodologies Around 1 bnCERsexpectedtobegeneratedbefore 2012

  43. 1.3 CDM and JI CDM Project Types and Methodologies • Methane • Landfill Gas • Associated Gas (oil fields) • AnimalManure • CO2 • Renewable Energy • Energy Efficiency • Industrial Gases • N2O destructionfromAdipic acid and Nitric acid production plants • HFC destruction in Coolinggasesplants or poliurethaneinjectionplants

  44. 1.3 CDM and JI CDM ProgramofActivities • Replacementof Light bulbswith CFL in cities and districts • Replacementofelectricengineswith more efficientones in industrial sectors • Distributedrenewableenergy production in houses and buildings • Verycomplicated and under development

  45. 1.3 CDM and JI CDM Projects in the Caribbean 6 project registered: OK! 3 Terminated: Too Bad! 6 at validation: we’llsee…

  46. Module 1. - Introduction • Introduction to Climate Change • International treaties and EU legislation • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI) • Carbon Credits Markets: Primary and Secondary Markets

  47. 1.4 Carbon Credits Markets Buying and selling carbon credits Credits: whatcredits? ComplianceCredits - CERs CarbonCredits VoluntaryCredits - VERs

  48. 1.4 Carbon Credits Markets Markets - whatmarkets? Usuallyofftakecontracts Delivery qty non guaranteed No penaltiesfor the seller Seller isusually project owner or developer Projects are early stage Primary non Guaranteed Fromprojects or portfolios Delivery non guaranteed Can beofftake or portionsof total delivery Seller issometimes the developer or the primary buyer Secondary non Guaranteed SecondaryGuaranteed Contracts are forspecifiedguaranteed delivery quantity Seller bearspenalties OTC or Exchange traded

  49. 1.4 Carbon Credits Markets Who’s buying Who’s selling Carbon Funds Compliancebuyers Banks Aggregators Governments Project Owners Project Developers Primary non Guaranteed Primarybuyers Banks CarbonFunds Secondary non Guaranteed CarbonFunds and Aggregators Banks Industries SecondaryGuaranteed

  50. Technology Technology $ $ Finance Finance Carbon Fund Investor Companies Project Owners in Dev. Country or Economies in Transition CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions 1.4 Carbon Credits Markets Whatis a Carbon Fund

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