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Merchant & Private Banking |   Global Markets |19/12/08 |
Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
Why do we need greenhouse gas reduction? The latest IPCC report is calling for a reduction of Greenhouse gases compared to...
The Kyoto Protocol <ul><li>The Kyoto protocol is the fundamental international agreement governing the global carbon marke...
How it works, in theory JPN/CAN/NZ Private sector Forwarding  compliance EU ETS Governments Gov. AAU sales Gov. procuremen...
EU-ETS  Market participant behaviour, Phase Two
Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
Cross Commodity & CO 2 All variants on the same theme: Cross Commodity relationship between  gas, coal, power and CO 2  pr...
The theory of saving carbon in Europe gas price comp.  EUA comp. coal price comp.  EUA comp. EUA “switch level” EUAs high ...
Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
EUA vs CER <ul><li>Different ‘currencies’: in Europe, the  EUAs  (European Union Allowance) is the official currency of EU...
Today’s Carbon Markets: CER/ERUs versus EUAs EUAs CERs/ERUs <ul><li>import limit and  (2) ITL-CITL link </li></ul>YES Use ...
EUA vs CER <ul><li>CERs or ERUs, the Kyoto credits linked to CDM and JI projects, also cover one ton of CO2 and are valid ...
Volume Developments CERs Total liquidity seems to have increased until July and started again to decrease in August. The s...
CDM market’s current status <ul><li>China is expected to be the world’s largest pool of potential CDM projects. </li></ul>...
Nature of carbon finance for a typical CDM project Capital Markets (Financial Institutions, Private Equity, Hedge Funds......
Structured Financing-Hedging transaction proposal:  CER interest payment Fortis Environmental Markets Fortis CIB CDM proje...
CDM project’s risk assessment <ul><li>Fortis Bank Environmental Markets has undertaken significant research in the field o...
Conclusion <ul><li>Emissions trading works! </li></ul><ul><ul><li>market is sufficiently liquid and rapidly growing </li><...
Seb Walhain [email_address] Set the cap Let the market do its work
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The Carbon Market, A View from the Trenches

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Presentation from TBLI CONFERENCE EUROPE 2008.

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  • Transcript of "The Carbon Market, A View from the Trenches"

    1. 1. Merchant & Private Banking | Global Markets |19/12/08 |
    2. 2. Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
    3. 3. Why do we need greenhouse gas reduction? The latest IPCC report is calling for a reduction of Greenhouse gases compared to 2000 by 24-40% till 2020 and 80-95% till 2050 Comment Reduction goal of the Kyoto Protocol (-5.2% compared to 1990) seems not sufficient
    4. 4. The Kyoto Protocol <ul><li>The Kyoto protocol is the fundamental international agreement governing the global carbon market. </li></ul><ul><li>The European Union has established the EU ETS in response to its member states’ Kyoto obligations and to help its industry to prepare for the challenges and opportunities presented by global response to climate change. </li></ul>Developing countries such as China & Brazil are not bound to reduce emissions by the Kyoto protocol but can use the Clean Development Mechanism ( CDM ) to reduce GHG emissions thus creating valuable carbon assets known as CER s (Certified Emission Reductions). Comment
    5. 5. How it works, in theory JPN/CAN/NZ Private sector Forwarding compliance EU ETS Governments Gov. AAU sales Gov. procurement programmes = Supply = Demand CDM/JI
    6. 6. EU-ETS Market participant behaviour, Phase Two
    7. 7. Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
    8. 8. Cross Commodity & CO 2 All variants on the same theme: Cross Commodity relationship between gas, coal, power and CO 2 prices Clean/Dirty Spark Spread Clean/Dirty Dark Spread Marginal Power Cost Merit Order Optimisation Switch Levels
    9. 9. The theory of saving carbon in Europe gas price comp. EUA comp. coal price comp. EUA comp. EUA “switch level” EUAs high  preference for gas gas price comp. EUA comp. coal price comp. EUA comp. power price gas price comp. EUA comp. coal price comp. EUA comp. EUAs low  preference for coal
    10. 10. Content <ul><li>The Carbon Market </li></ul><ul><li>Cross Commodity Issues </li></ul><ul><li>EUA vs. CER </li></ul>
    11. 11. EUA vs CER <ul><li>Different ‘currencies’: in Europe, the EUAs (European Union Allowance) is the official currency of EU ETS. </li></ul><ul><li>CERs (Certified Emission Reductions) generated by developing countries are the carbon market’s international currency and can be used by any Annex-I countries to comply with their emission reduction obligation. </li></ul><ul><li>One EUA, in the same way as one CER represents the right to emit one tonne of carbon dioxide equivalent. </li></ul><ul><li>Two main differences : </li></ul><ul><ul><li>The EU ETS (European Trading Scheme) only covers carbon dioxide emissions while the CDM covers all Kyoto GHG emissions (see diagram left) </li></ul></ul><ul><ul><li>The EU ETS has only one aggregate market while CDM is divided into a primary and a secondary markets where CERs have different pricing levels </li></ul></ul>EU ETS CDM (e.g. China)‏ CERs The table above summarizes the Global Warming Potential (GWP) of different GHG s (GreenHouse Gas) defined by the Kyoto protocol. CO 2 is the weakest GHG. Instead, reducing one tonne of CH 4 will lead to an equivalent reduction of 21 tonnes of CO 2 , thus generating potentially 21 tonnes of CERs. 23900 SF 6 6500-9200 PFCs 150-11700 HFCs 310 N 2 O 21 CH 4 (methane)‏ 1 CO 2
    12. 12. Today’s Carbon Markets: CER/ERUs versus EUAs EUAs CERs/ERUs <ul><li>import limit and (2) ITL-CITL link </li></ul>YES Use in EU-ETS Phase Two primary, secondary (only CERs), different prices one market, EU-ETS Market right to emit 1ton CO 2 eq. right to emit 1ton CO 2 Value global EU-ETS Validity
    13. 13. EUA vs CER <ul><li>CERs or ERUs, the Kyoto credits linked to CDM and JI projects, also cover one ton of CO2 and are valid in the EU-ETS. For compliance purposes, an installation can use EUAs, CERs and/or ERUs. </li></ul><ul><li>Under Phase II of the EU ETS (2008-2012) the Governments have set a limit (%) on the use of project credits (CERs) at an installation level. This limit is based upon allocation not amount emitted. </li></ul><ul><li>There currently exists a price differential between EUAs and CERs, which is decreasing heavily at the moment. It is possible to take advantage of this discount, extracting additional value from your ‘free’ allocation without impacting your compliance obligations. </li></ul><ul><li>Why a Price Spread between EUA and CER ? </li></ul><ul><li>ITL-CITL link date. </li></ul><ul><li>Non transparency of the CDM market, post-2012 uncertainty </li></ul><ul><li>CERs are deemed to be higher risk Carbon Instruments. </li></ul><ul><li>Cap on amount of CERs that can be used for compliance in the EU ETS of about 13.4% of total allocations </li></ul><ul><li>Other trading schemes may impose strict caps on CER imports in favour of domestic reductions </li></ul><ul><li>Reputational differences : internal abatement <> external emission reductions </li></ul>EUA price [EUR/tonCO2]
    14. 14. Volume Developments CERs Total liquidity seems to have increased until July and started again to decrease in August. The steep increase in liquidity was mainly due to the introduction of a CER contract on the ECX A lot of brokered trades were afterwards cleared on the ECX. Real screen trades (green and red) are a lot less!
    15. 15. CDM market’s current status <ul><li>China is expected to be the world’s largest pool of potential CDM projects. </li></ul><ul><li>A 50% market share for China in the CER market will mean generating over 1.5 billion tonnes of credits, saving 1.5 billion tonnes of CO 2 equivalent emissions in China. </li></ul><ul><li>In addition, Fortis Intertrust has acted as custodian and escrow agent for the world’s biggest emission-reduction purchase deal to date, a USD 1 billion deal that will help two Chinese chemical companies reduce emissions . </li></ul><ul><li>Compared to China, India and Brazil are ‘matured markets’ for CDM with many more projects in all stages currently. However the average CER purchase price in these two countries also tends to be higher. </li></ul><ul><li>Currently, China is rated as A-, Brazil as BBB, India as A- by PointCarbon. </li></ul>
    16. 16. Nature of carbon finance for a typical CDM project Capital Markets (Financial Institutions, Private Equity, Hedge Funds...)‏ Equity and/or Debt Ownership + Dividend and/or Principle + Interest Power Purchase Agreement Cash Main product: Electricity Global Carbon Market By-product: CERs Cash CERs
    17. 17. Structured Financing-Hedging transaction proposal: CER interest payment Fortis Environmental Markets Fortis CIB CDM project Mezzanine Financing Principle Interest payment in CERs + the rest of ERPA CER purchase Global Carbon Market Cash CERs Cash Interest payment in cash
    18. 18. CDM project’s risk assessment <ul><li>Fortis Bank Environmental Markets has undertaken significant research in the field of CDM project risk assessment. </li></ul><ul><li>A thorough understanding and assessment of the CDM project’s delivery risk will enable us to maximize our investment return by constructing a diverse CERs portfolio in terms of technology, stage, size and geography. </li></ul><ul><li>Fortis Environmental Markets’ desk has developed a highly objective and auto-improving Delivery Risk Model to screen most CDM projects. </li></ul>Country Risk Operational Risk Counterparty Risk Technological Risk Delivery Risk
    19. 19. Conclusion <ul><li>Emissions trading works! </li></ul><ul><ul><li>market is sufficiently liquid and rapidly growing </li></ul></ul><ul><ul><li>prices follow semi-logical trends based on fundamentals </li></ul></ul><ul><ul><li>emissions are reduced fuel switch in power sector, CO 2 value taken into account in other sectors </li></ul></ul><ul><ul><li>Scheme considerably expanded in 2008 </li></ul></ul><ul><ul><li>The US will be (partly) capped from 2010 and China and India have agreed to talk targets </li></ul></ul><ul><ul><li>The EU has taken a reduction cap of 20% by 2020, to be increased to 30% in case of a global carbon agreement </li></ul></ul><ul><li>To date, many of the world’s premier institutional investors have invested in CDM projects. This strong interest is mainly due to CDM projects’ unique return profile and superior diversification benefits due to its total lack of correlation with traditional securities market. Over time carbon finance, given enough investment certainty, will decrease the cost of delivering environmental results to the most efficient global abatement cost curve. </li></ul>
    20. 20. Seb Walhain [email_address] Set the cap Let the market do its work
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