Introduction to Carbon Markets Financing sustainable development

Agenda What is global warming and what is causing it? How is the international community reacting? How does the Kyoto Protocol create carbon markets? What about carbon markets outside of Kyoto protocol? How does carbon finance work? What are the companies emerging around this space?

What is global warming and what is causing it?

How is the international community reacting?

How does the Kyoto Protocol create carbon markets?

What about carbon markets outside of Kyoto protocol?

How does carbon finance work?

What are the companies emerging around this space?

The case for sustainability: Global Warming What is global warming? Increase in the average temperature of the Earth's surface, air and oceans. What is the big noise all about? The temperature is rising rapidly in the last 50 years or so. The average temperature risen by 0.74 o C since the late 1800s … but is expected to rise by > 1 o C in the next 100 years … and could be much more if the problem is ignored What could be the effects? Extinction of cities Rise of sea levels Shrinkage of forests and glaciers Increase in the intensity of extreme weather investments Reduction in agricultural yields

What is global warming?

Increase in the average temperature of the Earth's surface, air and oceans.

What is the big noise all about?

The temperature is rising rapidly in the last 50 years or so.

The average temperature risen by 0.74 o C since the late 1800s

… but is expected to rise by > 1 o C in the next 100 years

… and could be much more if the problem is ignored

What could be the effects?

Extinction of cities

Rise of sea levels

Shrinkage of forests and glaciers

Increase in the intensity of extreme weather investments

Reduction in agricultural yields

What causes Global Warming? Visible light (solar radiation) enters the atmosphere and makes contact with earth’s surface. Atmosphere 1. 2. 3. The surface heats and emits infrared radiation into atmosphere. Some radiation stays in the atmosphere and some is lost to space. Greenhouse gases trap and remit some of the infra red radiation back to the surface. This causes the temperature of earth to be about 30 deg C greater than it would have been otherwise. What are the green houses gases? Mainly water vapor, but also CO 2 , methane and ozone. Increasing industrialization is increasing the concentration of greenhouse gases thus increasing this warming effect Sun

Global reaction to a global challenge? The Intergovernmental Panel on Climate Change (IPCC) evaluates the risk of climate change caused by human activity. established in 1988 … .by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) United Nations Framework Convention on Climate Change (UNFCCC) Treaty aimed at stabilizing greenhouse gases Entered into at Earth summit held at Rio in June 1992 Kyoto Protocol establishes legally binding commitments for the reduction of greenhouse gases Adopted for use in December 2007

The Intergovernmental Panel on Climate Change (IPCC)

evaluates the risk of climate change caused by human activity.

established in 1988

… .by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP)

United Nations Framework Convention on Climate Change (UNFCCC)

Treaty aimed at stabilizing greenhouse gases

Entered into at Earth summit held at Rio in June 1992

Kyoto Protocol

establishes legally binding commitments for the reduction of greenhouse gases

Adopted for use in December 2007

Kyoto Protocol: Broad Objectives Legally binding targets and timelines Applicable to developed countries Reduce greenhouse gas emission by 5.2% in 2008-2012 compared to emission level in 1990 Equivalent to a 29% if compared with could have been … Philosophy of Kyoto: “ Common but differentiated responsibilities." among nations Largest responsibility lies with the highest developed countries Poor countries with least emissions are most likely to suffer Economies will require to transition into a path of sustainable progress Create incentives for developed countries to invest into emission reduction projects in developing countries

Legally binding targets and timelines

Applicable to developed countries

Reduce greenhouse gas emission by 5.2% in 2008-2012 compared to emission level in 1990

Equivalent to a 29% if compared with could have been …

Philosophy of Kyoto:

“ Common but differentiated responsibilities." among nations

Largest responsibility lies with the highest developed countries

Poor countries with least emissions are most likely to suffer

Economies will require to transition into a path of sustainable progress

Kyoto Protocol: Greenhouse gases targeted These are groups of gases Used as alternative to ozone-depleting CFCs in refrigeration systems Hydroflurocarbons (HFCs) and Perfluorocarbons (PFCs) Used in the electrical insulator, freezing agent, heat conductor. Sulfur hexafluoride (SF6) Emitted from the use of nitrogen fertilizers, from burning fossil fuels and from some industrial and waste management processes Nitrous oxide (N20) Comes from landfills, coal mines, oil and natural gas operations, and agriculture. Methane ( CH4) By far the most important GHG . Generated from burning fossil fuels and deforestation. Over 80% of US GHG emissions comes from CO2 generated from burning fossil fuels Carbon Dioxide ( CO2) Description Green House Gas (GHG)

Global Warming Potential (GWP) of GHGs Measure of contribution to global warming over different time periods … relative to Carbon dioxide Depends on: Heat (infrared radiation) absorption ability The decay rate (the amount removed over time). * There are other gases in these families. Representative only 9800 11700 9100 264 HFC 23* 10000 6500 4400 50000 Perfluoromethane* 34900 23900 16300 3200 Sulfur hexafluoride Nitrous oxide Methane Carbon dioxide GHG* 170 310 280 120 6.5 21 56 12±3 1 1 1 Variable 500 years 100 years 20 years GWP over Time horizon Lifetime

Measure of contribution to global warming over different time periods

… relative to Carbon dioxide

Depends on:

Heat (infrared radiation) absorption ability

The decay rate (the amount removed over time).

Kyoto Protocol: Status of global ratification Range of targets : European union: 8% (devolved to individual targets for member countries) United States: 7% Japan: 6% Russia:0% Australia: + 8% increase Iceland: + 10% increase Industrialized countries with binding emission reduction targets are also called Annex B countries As of Jan 2009: 183 countries and the EEC have ratified the treaty This represents about 64% of industrialized country emissions US is the one major exception

Range of targets :

European union: 8% (devolved to individual targets for member countries)

United States: 7%

Japan: 6%

Russia:0%

Australia: + 8% increase

Iceland: + 10% increase

As of Jan 2009:

183 countries and the EEC have ratified the treaty

This represents about 64% of industrialized country emissions

US is the one major exception

Carbon Markets Reduced emissions have a value and therefore a market Three mechanisms to effectively help create the market Clean Development Mechanism (CDM) Joint Implementation (JI) Emissions Trading 2 main commodities traded in the carbon market Emission allowance Project-based emissions reductions Emission reduction Units ( ERUs ) Developed countries buy credits from emissions reduced in projects in other developed countries Joint Implementation Certified Emission Reductions ( CERs ) Developed countries buy credits from emissions reduced in projects in developing countries Clean Development Mechanism (CDM) Tradeable Units Description Market Mechanism

Reduced emissions have a value and therefore a market

Three mechanisms to effectively help create the market

Clean Development Mechanism (CDM)

Joint Implementation (JI)

Emissions Trading

2 main commodities traded in the carbon market

Emission allowance

Project-based emissions reductions

CDM Process Project Design Document National Approval Validation Certification/CER issuance Registration Verification Project Developer Designated National Authority Designated Operational Entity Executive Board Designated Operational Entity Designated Operational Entity Activity Responsible Authority The Executive Board (EB) is the core organization responsible for the CDM mechanism All countries must have a Designated National Authority (DNA) which approves CDM project activities Designated Operational Entity (DOE) are independent private organizations accredited to act as external controllers The key CDM principle is Additionality : a project should only be able to earn credits if the greenhouse emission reductions would not have occurred without the expectation of revenue carbon credit sales. CER (Certified Emission Reductions), are carbon credits with each CER representing the abatement of one tonne of carbon dioxide equivalent

CDM Project Statistics China and India are the major CDM project hosts 4733 CDM projects are in the works out of which 1596 have been registered Source: UNFCC site Source: http://www.cdmpipeline.org Renewable energy forms the major chunk of projects HFCs,PFCs and N20 reductions consititute only 2% of projects but 25% of CERs by 2012

Joint Implementation Two tracks of JI Track 1 can be implemented without external supervision but requires national compliance to specific guidelines Track 2 are approved by JISC (JI Supervisory Committee) Track 2 has been more popular as JISC has established a clear procedure Additionality is central to JI as in CDM The carbon credits under JI are ERUs represent the abatement of one tonne of C02

Two tracks of JI

Track 1 can be implemented without external supervision but requires national compliance to specific guidelines

Track 2 are approved by JISC (JI Supervisory Committee)

Track 2 has been more popular as JISC has established a clear procedure

Additionality is central to JI as in CDM

The carbon credits under JI are ERUs

represent the abatement of one tonne of C02

JI Projects Statistics 203 JI projects are in the works out of 176 are Track 2 projects Russia and Ukraine dominate the JI market. Methane reductions (mainly loss in natural gas pipelines) forms major chunck of projects as well as ERUs

Emissions Trading The Emissions trading scheme under Kyoto is a cap-and-trade scheme How does a Cap and trade system work? GHG emission cap (set by authorities) Cap is lowered over time Businesses that don’t reduce emissions enough must buy credits Businesses that reduce emissions more than required can sell credits Credits Money The European Union Emission Trading Scheme is the largest under Kyoto

The Emissions trading scheme under Kyoto is a cap-and-trade scheme

How does a Cap and trade system work?

Advantages of Cap and Trade The cap guarantees reduction in GHG emission The trade mechanism allows reduction in the most cost effective manner The trade mechanism creates incentives for businesses to reduce emissions more than required Cap and trade has worked before: US Acid Rain Other alternatives to cap and trade are command and control and carbon tax

The cap guarantees reduction in GHG emission

The trade mechanism allows reduction in the most cost effective manner

The trade mechanism creates incentives for businesses to reduce emissions more than required

Cap and trade has worked before: US Acid Rain

European Union Emission Trading scheme The EU-ETS covers 12,000 installations in 25 countries and 6 major industrial sectors Power, oil, iron & steel, cement, glass, pulp & paper 25 countries include both original EU-15 and entrants in 2004 Building energy usage and transportation are not covered Implementation Timetable: Warm up phase: 2005-2007 First phase: 2008-12 (coinciding with the Kyoto compliance period) Subsequent phases in 5 year period In the first phase the focus is on Carbon dioxide Key features: Emission allowances can be distributed free or via auction Banking of allowances for future periods allowed Countries can “opt-in” and “opt-out” individual installations, within limits Stringent monitoring and hefty fines (100€ /ton-equivalent CO2)

The EU-ETS covers 12,000 installations in 25 countries and 6 major industrial sectors

Power, oil, iron & steel, cement, glass, pulp & paper

25 countries include both original EU-15 and entrants in 2004

Building energy usage and transportation are not covered

Implementation Timetable:

Warm up phase: 2005-2007

First phase: 2008-12 (coinciding with the Kyoto compliance period)

Subsequent phases in 5 year period

In the first phase the focus is on Carbon dioxide

Key features:

Emission allowances can be distributed free or via auction

Banking of allowances for future periods allowed

Countries can “opt-in” and “opt-out” individual installations, within limits

Stringent monitoring and hefty fines (100€ /ton-equivalent CO2)

EU ETS …terminology AAUs: Assigned Amount Units: levels of allowed emissions, over 2008-2012 commitment period. NAP: National Allocation Plan covers overall emissions, allocation by industry and by individual facility. EU Allowances : Carbon credits equivalent to the abatement of one tonne of C02 Registries: “ banking type” system to record transactions of the credits under the various programs The biggest contribution of EU ETS has made a major contribution in setting the price of carbon. Companies have the incentive to reduce emissions. Carbon prices have come down from € 30 in mid 2008 to about € 12(Q1 2009) in line with decreased economic activity but carbon prices are expected to rise with the lowering of the cap in subsequent years

AAUs: Assigned Amount Units:

levels of allowed emissions, over 2008-2012 commitment period.

NAP: National Allocation Plan

covers overall emissions, allocation by industry and by individual facility.

EU Allowances :

Carbon credits equivalent to the abatement of one tonne of C02

Registries:

“ banking type” system to record transactions of the credits under the various programs

European Climate Exchange (ECX) ECX is the most liquid marketplace EU Allowances under EU ETS ECX is part of the Climate Exchange plc group of companies, listed on AIM of the LSE The Chicago Climate Exchange and the Chicago Climate Futures Exchange are group companies Currently trades two types of carbon credits: EU allowances (EUA's) and Certified Emission Reductions (CERs). Trading on ECX began in April 2005

ECX is the most liquid marketplace EU Allowances under EU ETS

ECX is part of the Climate Exchange plc group of companies, listed on AIM of the LSE

The Chicago Climate Exchange and the Chicago Climate Futures Exchange are group companies

Currently trades two types of carbon credits:

EU allowances (EUA's) and Certified Emission Reductions (CERs).

Trading on ECX began in April 2005

Voluntary Carbon markets Originates from the US (not ratified Kyoto Protocol) Companies are not bound to participate but once having agreed to they are legally required to reduce emissions Chicago Climate Exchange (CCX) is the earliest market CCX facts: Uses a cap and trade mechanism Started in 2003 350 members ( incl. companies, municipalities and universities) Covers North America and Brazil Deals in 6 GHGs Members are committed to reduce emissions by 6% by 2010.

Originates from the US (not ratified Kyoto Protocol)

Companies are not bound to participate but once having agreed to they are legally required to reduce emissions

Chicago Climate Exchange (CCX) is the earliest market

CCX facts:

Uses a cap and trade mechanism

Started in 2003

350 members ( incl. companies, municipalities and universities)

Covers North America and Brazil

Deals in 6 GHGs

Members are committed to reduce emissions by 6% by 2010.

Other US Voluntary markets status Source: Wikipedia 7 Northeastern and Mid-Atlantic states is the first mandatory U.S. cap-and-trade program for carbon dioxide. Targets capping carbon dioxide emissions at current levels in 2009, and then reducing emissions 10% by 2019. Allowances have been auctioned in 2008. Regional Greenhouse Gas Initiative (RGGI) 6 Midwestern states 1 Canadian province. The design of the program is due to be completed in 2009. Midwest Greenhouse Gas Reduction Accord (MGGRA) 7 US states and 4 Canadian provinces. Target of 15 percent below 2005 levels by 2020. Cap and trade program will start by Jan 2012 Western Climate Initiative (WCI) Scope and Status Initiative

Carbon Markets: Round Up data The Carbon market in 2008 was USD 120 bn broken up: EU ETS: 95 bn Primary CDM: 6 bn ( have a delivery risk: CERs not yet issued ) Secondary CDM: 15 bn ( have no delivery risk: CERs already generated and issued ) Others: 4 bn (Voluntary Markets +JI) Growth rates in carbon volumes have been very rapid: > 100% YoY Source: EcoSecurities Investor presentation 1.0 5.2 EUA-CER spread 9.0 17.4 CER 10.0 22.6 EUA 2009 Q1-Q2 2008 Contract (€/tCO2)

The Carbon market in 2008 was USD 120 bn broken up:

EU ETS: 95 bn

Primary CDM: 6 bn ( have a delivery risk: CERs not yet issued )

Secondary CDM: 15 bn ( have no delivery risk: CERs already generated and issued )

Others: 4 bn (Voluntary Markets +JI)

Growth rates in carbon volumes have been very rapid: > 100% YoY

Carbon Finance Funnels investments from developed to developing countries for emission reduction projects Can play a key role in reducing GHG emissions and long term sustainable development Prototype Carbon Fund (PCF) was the first carbon fund: Set up in April 2000 with 17 companies and 6 countries managed by the World Bank pioneered the market for project-based GHG emission reductions total capital of $180 million.

Funnels investments from developed to developing countries for emission reduction projects

Can play a key role in reducing GHG emissions and long term sustainable development

Prototype Carbon Fund (PCF) was the first carbon fund:

Set up in April 2000

with 17 companies and 6 countries managed by the World Bank

pioneered the market for project-based GHG emission reductions

total capital of $180 million.

Carbon Funds under the WB Funds to help countries/regions to achieve Kyoto obligations: Carbon Fund for Europe Euro 50 million Danish Carbon Fund for USD 68.5 million Italian Carbon fund for USD 155.6 million Netherlands Carbon Fund for USD 264.7 million Spanish Carbon Fund Netherlands European carbon facility Funds with special interests: Bio carbon fund USD 99 million to sequester or conserve greenhouse gases in forests Community Development Carbon Fund to help poorer countries USD 128.6 million Umbrella Carbon facility to pool funds for large projects Forest Carbon Partnership Facility to help developing countries in their efforts to reduce emissions from deforestation and land degradation Carbon Partnership Facility to purchase credits after 2012 (post Kyoto) Most of the above funds are public private partnerships

Funds to help countries/regions to achieve Kyoto obligations:

Carbon Fund for Europe Euro 50 million

Danish Carbon Fund for USD 68.5 million

Italian Carbon fund for USD 155.6 million

Netherlands Carbon Fund for USD 264.7 million

Spanish Carbon Fund

Netherlands European carbon facility

Funds with special interests:

Bio carbon fund USD 99 million to sequester or conserve greenhouse gases in forests

Community Development Carbon Fund to help poorer countries USD 128.6 million

Umbrella Carbon facility to pool funds for large projects

Forest Carbon Partnership Facility to help developing countries in their efforts to reduce emissions from deforestation and land degradation

Carbon Partnership Facility to purchase credits after 2012 (post Kyoto)

Carbon Funds: market classification FE Global Asia and Clean Energy Services Fund Private Energy Market Fund – 2 Asia Carbon Fund Russia Carbon Fund EcoSecurities Camco Ag Cert Climate Change Capital Carbon Fund European Carbon Fund KfW Carbon Fund Prototype Carbon Fund Merzbach Carbon Finance Austrian CDM Project facility Climate Cent Foundation Danish Carbon fund Bio Carbon Fund Japan Carbon Facility Irish Carbon Fund Spanish Carbon Fund … Invest directly in projects along with bringing know- how Buy carbon credits from project developers for resale National governments or private companies to meet commitments Sell side – Project Development Buy Side- Intermediary Buy Side - Compliance

Carbon Software companies There are about 40 cos in this pace including IBM and Cisco which overlaps with smart grid. Look out for our Smart Grid Overview soon! On demand software to Track energy usage and emissions across the enterprise Verisae Draper Fisher Jurvetson (DFJ) Carbon modeling software to manage emission reduction strategies Planet Metrics Novak Biddle Venture Partners and Kinetic Ventures: now being acquired by SAP Measure and manage carbon emissions and other environmental impacts Clear Standards O’Reilly AlphaTech Ventures, Union Square Ventures,The Accelerator Group. Aggregation platform to measure and track carbon emissions. Allows developer to build their own applications AMEE NGEN Partners and Swiftsure Capital Manage emission inventories and carbon projects Carbonnetworks @Ventures, Clean Pacific Ventures, OVP Venture Partners and Meridian Energy Manage CDM & Voluntary carbon projects CarbonFlow Investors Software to… Company

Carbon Consultants There are several small localized companies in this space. Services include: Helping businesses (and individuals) assess their emission status (carbon footprint) and helping them buy requisite credits. EcoSecurities is the only large listed player in this space Australia Brokers Carbon Now part of the JP Morgan Environmental Markets group Cimatecare SFO, US 3Degrees US/UK Carbon Advice Group Montana, US HCS Carbon Netherlands Climate Focus US Climate Action Partners Helsinki/SFO,US /Shanghai Climate Wedge India/SE Asia Emergent Ventures India WW presence EcoSecurities (listed In London) Offices in Company/Firm

Authors Zi Zi Searles http://www.linkedin.com/in/zizisearles Sanjoy Sanyal http://www.linkedin.com/in/sanjoysanyal The presentation has been released under Attribution license of Creative Commons

Zi Zi Searles

http://www.linkedin.com/in/zizisearles

Sanjoy Sanyal

http://www.linkedin.com/in/sanjoysanyal

The presentation has been released under Attribution license of Creative Commons

Sources Wikipedia UNFCCC site www.cdmpipeline.org World bank site on Carbon Finance CCX and ECX websites The Pew Center on Global Climate Change The New Carbon Finance EcoSecurities website

Wikipedia

UNFCCC site

www.cdmpipeline.org

World bank site on Carbon Finance

CCX and ECX websites

The Pew Center on Global Climate Change

The New Carbon Finance

EcoSecurities website