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Carbon Markets

Carbon Markets. In relation to CDM projects in China. Main Elements Carbon funds and facilities Carbon brokers Feasibility and risk analysis Pricing structures Carbon contracts. Carbon Markets

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Carbon Markets

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  1. Carbon Markets In relation to CDM projects in China

  2. Main Elements • Carbon funds and facilities • Carbon brokers • Feasibility and risk analysis • Pricing structures • Carbon contracts

  3. Carbon Markets • Compliance markets Players buy carbon credits in order to meet a mandatory (legally imposed) emission reduction target • Voluntary markets Based on voluntary efforts to reduce emissions. They are largely driven by the threat of governmental regulation and compliance targets, in non-Kyoto countries • Offset markets Retail offset purchasers are typically corporations or individuals aiming to become carbon neutral.

  4. Compliance Markets • Kyoto Annex 1 Countries trade: • Certified Emission Reductions (CERs) • Emission Reduction Units (ERUs) • Assigned Amount Units (AAUs) • Units regulated under other schemes e.g. EU Allowances (EUAs) Retail Offset Market Purchasers (usually individuals, organisations or events) buy CERs and VERs with high sustainable development benefits in order to become carbon neutral Voluntary Markets Non-Kyoto Countries trade Verified Emission Reductions (VERs) and have requirements under various schemes, e.g. Chicago Climate Exchange (CCX) and New South Wales Scheme

  5. Sale of Carbon Credits • Spot market transactions occur when actual, existing, verified or certified credits are transferred. • Forward sales are the most common transaction form – they are the promise to purchase credits once they are generated, at a specified price.

  6. Market Drivers • European UnionBegan trading carbon emission reductions in January 2005 based on a cap-and-trade programme • United KingdomProject-based GHG emissions reduction pilot launched in 2002 • United StatesChicago Climate Exchange (CCX) has established a voluntary cap-and-trade programme initially in North America and Brazil

  7. EU Emissions Trading Scheme • EU ETS establishes emission reduction requirements for about 10,000 large industrial and electricity generating sources (about half of Europe’s emissions of CO2) • Phase 1 started in January 2005 and runs through 2007 • Phase 2 corrsponds to 2008-2012 (first commitment period of the Kyoto Protocol) • EU allowances are EU ETS compliance instruments allocated by EU governments

  8. EU Emissions Trading Scheme • Market for European Union Allowances (EUAs) experienced explosive growth in 2005 (from about 9 Mt in 2004 to over 322 Mt in 2005), due largelly to trading activity of electricity generators • Prices increase dramatically in 2005 from about € 7 to a high of about € 30, due to rising natural gas prices, which resulted in increased coal-fired generation • Continued expansion in first quarter of 2006

  9. Market Buyers • World Bank/Prototype Carbon FundFinances projects that produce high-quality GHG emission reductions • World Bank Umbrella Carbon Facility (UCF) Created in December 2005, the UCF will aggregate multiple sources of funding to purchase large volumes of emission reductions • Natsource GHG Credit Buyers PoolUS$ 200 million GHG-Credit Aggregation Pool that will purchase project-based GHG emission reductions

  10. Market Buyers • Certified Emission Reduction Unit Procurement Tender (CERUPT) Provides project funding to purchase CERs • Emission Reduction Unit Procurement Tender (ERUPT) Purchases carbon emission reductions • International Finance Corporation-Netherlands Carbon Facility (INCaF) Purchases project-based carbon emission reductions

  11. Market Facilitators • Asian Development Bank Renewable Energy, Energy Efficiency and Climate Change (REACH) facility Works cooperatively with development funds in Denmark, the Netherlands and Canada • Global Environment Facility (GEF) Provides cost-sharing grants and concessional funding to help fund projects that protect the environment (climate change mitigation is one of it’s four focus areas) • Carbon Brokers Natsource, Cantor Fitzgerald/CO2e.com, Evolution Markets LLC

  12. Possible sources of finance • World Bank/Prototype Carbon Fund • Certified Emission Reduction Unit Procurement Tender • IFC-Netherlands Carbon Facility • Chicago Climate Exchange (CCX) • GHG-Credit Aggregation Pool • Asia Development Bank (ADB) • GEF • Carbon brokers

  13. The future • According to Natsource: EU, Japan and Canada are likely to be 3 to 4 billion tonnes short of achieving emission reduction targets in 2008-2012 • Continued growth in trading of project-based emission reductions

  14. Risk areas relevant to CDM projects Regulatory risk: Are the regulations surrounding independent power producers developed and stable? Is the implementation of a new energy efficiency regulation likely? Technical risk: RE/EE technologies are often new, or new to the location Credit risk of parties to transaction: How likely is it that the financier will get their investment back should any aspect of the project fail or under-perform? Country/political risk: What is the likelihood of local government intervention in the project, or appropriation of profits or assets? Demand and supply risk of outputs: How well has the market demand for outputs, or availability of supply of project inputs been tested?

  15. Risk Mitigation

  16. Prices paid for project-based emissions reductions • Stage of the project in the project cycle • Creditworthiness of the seller and buyer • Delivery guarantees • Investment and regulatory climate of the host country • Technology performance

  17. Trends in 2005 and 1st quarter 2006 • HFC23 destruction projects accounted for 58% of traded reductions • 78% of traded emissions reduction in 2005 and the first quarter of 2006 were non-CO2 gases • Landfill gases were 9% of traded volume • Coal mine methane gases were 6% of traded volume • Hydroelectric power, wind, biomass and other renewables and energy efficiency projects accounted for 12% (down from 25% in 2004)

  18. Regulatory incentives • Companies are liable to a fine of 40 € per tonne over the permitted limit during the three-year transitional period • A fine of 100 € per tonne of CO2 will be applicable from 2008 to 2012

  19. Parties involved in CER purchase Trader Legal Credit Risk Management

  20. CER transaction process Initial Proposal Term Sheet and Negotiation Signing of ERPA Ongoing Monitoring • Trader discusses principal terms of deal with seller • Legal checks terms against internal procedures • Risk Management & Credit analyse Seller and CDM project and give specific requirementzs to legal • Legal co-ordinates due diligence on CDM project and host country • Wording agreed between Buyer and Seller • Final draft subject to review by Board • Board approves entry into ERPA • Trader keeps ongoing relationship with Seller • Risk Management and Credit monitor any events that might affect deal • If such events occur, all discuss how to respond (termination, amendment, assignment, etc.)

  21. Emissions Reduction Purchase Agreement (ERPA) Type of Purchaser Risk Mitigation ERPA Types of Pricing Mechanisms Time of Transaction Carbon Project Type

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