Nov.

3, 2011

CARBON FINANCING: NEW BUSINESS OPPORTUNITIES

SPM, Gandhinagar

Session 6: Global Carbon Trade

References Used

1. IPCC Website 2. The Clean Development Mechanism: History, Status and Prospects, Policy Monitor Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

SESSION OUTLINE
Players Carbon Contracts Market in Recession Market till 2012 EU Package CDM and Market

CARBON CREDITING PROCESS

Course Instructor: Er. Ashwani Kumar,

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

Carbon Market

PLAYERS & INSTITUTIONS IN CARBON MARKET

Carbon Market

PLAYERS & INSTITUTIONS IN CARBON MARKET

Carbon Funds: A Group of participants purchasing in advance the types or location of carbon assets with the specific service objectives
Reduce the risk of non-delivery High quality assets Market research/dynamics, Technical assistance Success fee or only cover the costs payments New methodologies Purchase assets in difficult sectors.

Compliance Buyers: Purchase large volumes of CERs for compliance with domestic legislation (under Kyoto). Specific year CER (vintage), CERs compete with other asset classes such as EUAs and ERUs. Emission Reductions Tenders or Purchase Agreement: Industrialized (Annex I) governments for compliance and specific thrust to certain projects (Registered/low registration risk).

Carbon Market

PLAYERS & INSTITUTIONS IN CARBON MARKET

Brokerage Firms: Matching buyers needs with sellers assets: success fee or flat-rate model. Poses sophisticated knowledge. Consulting Services: Technical/Financial assistance to develop carbon assets, CDM cycle. Trading Platforms and Auctioning

CARBON CONTRACTS
Planned as Development investment model Pl d D l i d l Emerged as Commodity market

Carbon Market

Forward contract:
Emission Reduction Purchase Agreement (ERPA) A t

Upfront payments Spot transaction

Assessment skill requirements (Technical, Financial, Contracting, Legal, Management, Social ) Buyers are non- d l B development concerned investor t di t Forward contracts determines the future prices (upto 2012 and beyond) Variables: Risk sharing (Non-registration risk, demand for CERs with Punitive provisions) is one of determent of Carbon price. Decreasing non-registration risk and increase in the delivery risk has been observed Confidential contract structures

MARKET EMERGING OUT OF RECESSION

2008 09: 2008-09: The global economy cooled while the heightened urgency of taking action on climate change. ( Policy proposals: EU Climate & Energy package (20% below 1990 levels by 2020) which guarantees a level of carbon market continuity beyond 2012. EU package + U.S. + Australia -> key issues of ambition, flexibility, scope and competitiveness. Major industrialized countries commitments fallen short of Kyoto (Annex I) ambition - (25-40% below 1990). Market signals to stimulate greater cooperation from developing countries to scale up mitigation. p g

Carbon Market

CARBON MARKET SIZE

Project Based Market shrinks (CDM/JI/VM) Secondary trade Based Market increased (CDM and Allowance) fivefold in value and volume : Certified Emission Reductions (sCERs) as financial market with spot, futures and options transactions without any emission reductions. Cashing in on Carbon During the Credit Crunch Real R l CDM reduced d to d d due regulatory delays, financing/financial crisis, lead to the renegotiation or cancellation of some ll i f carbon contracts. Unclear rules EU post2012

CARBON MARKET : THROUGH TOUGH PERIOD

Present Secondary CER Price: ~ Euro 12-15, INR 800-1000

Source: Point Carbon

REMAINDER OF PHASE II (2008-12):

EU ETS shortfall for Phase II to be much smaller and net long Likely response: Surrendering of CERs/Emission Reduction Units (ERUs) or cheaper abatement measures. Inspite of swift economic recovery (2009-10), the high carbon prices may not happen in near time and thus the lower EUA prices. Banking of carbon assets from Phase II to Phase III (tougher targets)
Encourages market participants to buy excess or surplus EUA and bank those E k t ti i t t b l EUAs d b k th for Phase III. Expectations for a truly tight Phase III market and EU rules on clear eligibility of p j project types and countries of origin. yp g

Expectation on linked schemes in the U.S. and Australia.

EU CLIMATE AND ENERGY PACKAGE (20-20-20)

EuropeanParliamentadoptedtheClimateandEnergyPackage(Dec.17,2008) European Parliament adopted the Climate and Energy Package (Dec 17 2008)
Makingcarbonmarketcontinuitybeyond2012moreconcrete StrengtheningandexpandingtheEUETStoandbeyond2020

Objectives
toreduceoverallGHGemissions to20%below1990levelsby2020(ormore); toincreasetheshareofrenewableenergysources t 20% b 2020 t i th h f bl to20%by2020;and, d toimproveenergyefficiency by20%by2020.

IssuesreflectingthedifferentiationofMemberStates:
Auctioningofallowancesanditsimplicationsfortherespectivepowersector; Competitivenessandthepotentialriskofcarbonleakage; MitigationcommitmentsacrossMemberStates;and, Transitionorcompensationschemes.

CDM AND CARBON MARKET

Approval Process for CDM Projects Timelines for the process Entitlement of CDM Benefits Transaction Cost Cost associated with penalty for non-delivery of contracted CERs Taxing CDM benefits Capacity Building related issues Governmental Instutional Framework G t l I t ti lF k Low hanging fruit Easying the Approval Process Country Risk Financiers
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

Carbon Market

Thank you y