NE W F R O N T I E R A D V I S O R Y How To P From Trading Carbon www.newfrontieradvisory.com • email: firstname.lastname@example.org • 45 Beech Street London EC2Y 8AD • +44 (0) 207 953 9860
IntroductionThe task of helping the environment is now 100 global businesses are direct members for growth, and there is already the Chicagobig business. Carbon credits are being including Barclays, BP Newedge, E.ON UK, , Climate Exchange (CCX), which tradestraded all around the world by companies Fortis, Goldman Sachs, Morgan Stanley and voluntary credits from 400 members includingto meet environmental emissions targets, Shell, in addition to several thousand traders Ford, DuPont and Motorola, driving globalindividuals looking to decrease their personal around the world with access via clearing growth further.emissions, and investors looking to pro t from members. The carbon credit trading system is often seenthe carbon market boom whilst helping the As well as the ECX, the European Union as a way of investing in something that helpsenvironment. Emissions Trading Scheme (EU ETS) is the the environment as well as generating a pro t.According to the latest report from the World largest multi-national emissions trading Each carbon credit bought puts money into aBank, the global carbon trading market is scheme in the world, and a major pillar of project that is ve ed to reduce greenhousenow worth a phenomenal US$144 billion, up EU climate policy. The EU ETS is a scheme gas emissions, and can then be sold to6% from 2008 despite the global downturn. which monitors European company’s carbon companies who need to reduce emissions toMarketplaces such as the European Climate emissions, and creates a market for them to comply with global targets, or to individualsExchange (ECX) have seen trading volumes buy and sell credits to meet emissions targets. who want to reduce their emissions. But whatsoar, with 2009 seeing an 82% increase are carbon credits exactly? Who buys them? And it’s not just in Europe. The US is activelyyear-on-year, surpassing 5 billion tones And how can investors pro t? setting up its own trading scheme, the USof CO2e equivalent to €68 billion. Over ETS, to create a more e cient marketplace 4.93% Number of projects entering the CDM pipeline140 Number of days10570350 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Source: unEP Risoe and World Bank 2 www.newfrontieradvisory.com • email: email@example.com • 45 Beech Street London EC2Y 8AD • +44 (0) 207 953 9860
What are carbon credits?The opportunity to trade carbon credits wascreated by the United Nations’ Kyoto Protocol, a CERs VERslegally binding document committing countries Reductions (CERs) were created under the Kyoto Protocol’s Clean third party, but without the costs associated with(GHGs). Development Mechanism (CDM) to allow CERs, which are a type of carbon credit subject industrialised countries to invest in emission to much more stringent regulation, pushingThe treaty created a number of emission reducing projects in developing nations. The up the price. This means that individuals andreduction targets that nations needed to meet CDM projects generate CERs, credits which can companies can reduce their emissions in a moreto safeguard the environment. Collectively, S. y. Despite thereindustrial nations agreed to reduce their GHGs Once a CER has been issued it carries the same being less regulation, VERs are still subject to aby 5.2% from 1990 levels. On an individual compliance value as an EUA. standard, and emissions reductions must be real,country basis, this ranges from an 8% reduction measurable, permanent, additional to what isin the European Union to 6% for Japan, 0% CER credits are highly regulated and must meetfor Russia, and an increase permitted of 8% forAustralia and 10% for Iceland. These countries the Kyoto Protocol. The emissions reductions VERs trade over the counter and on someare now responsible for ensuring that companies, must be real, measurable, permanent, additional exchanges such as the Chicago Climateand the governments themselves, are reducing to what is already being done, and independently Exchange (CCX). This is giving structure to theGHGs. market, and helping it grow.To facilitate this, the Kyoto Protocol gave GHGs The VER market is growing. In 2008, 123.4a value, known as a carbon credit. Each carbon million metric tones of CO2 were transacted, acredit is equivalent to one tonne of CO2. If acompany has emissions over its allowance, then EUAs near doubling of the 2007 volume. VER prices then increased by 20% in 2009, and the marketthis entails a cost. Conversely, companies able These are the emission allowances given to was valued at US$705 million, with annualto stay under this allowance receive credits which participants in the EU ETS and are traded in growth of 15% projected. General marketcan be traded on exchanges for their value. a secondary market on the European Climate opinion is that the wider scope of the voluntaryThirdly, projects in developing countries which Exchange (ECX). One EUA gives the holder the market, and growth led by the private sector,actively reduce GHG emissions become eligible right to emit one tonne of CO2. Approximately not public policy, means that it has a strongfor these carbon credits, and by selling on an 2.3bn EUAs have been issued annually to potential to outstrip the mature market size of theexchange can raise funds. industries covered under the EU ETS. compliance regime. By the end of 2013, the total value transacted in the carbon markets is projected to reach US$669 billion, making it one of the biggest growth stories in investment (Carbon Emissions Trading Markets Worldwide, 2010). CDM Project Distribution by Type (%) Each carbon credit is equivalent 4.93% Capture of fugitive emission 17.00% to one tonne of Waste handling and disposal Transport (0.11%) CO 2 Mining (0.96%) Metal production (0.29%) 62.61% 4.54% Af/Re-forestation (0.54%) Renewable energy sources Agriculture Energy demand (0.96%) 2.39% Chemical industries 4.82% ManufacturingSource: United Nations Framework Convention on Climate Change, 2010 3 www.newfrontieradvisory.com • email: firstname.lastname@example.org • 45 Beech Street London EC2Y 8AD • +44 (0) 207 953 9860
Gold Standard and VCSmarkets established by the Kyoto Protocol as wellby the Gold Standard Forganization that has trademarked the GoldStandard Label, which is today internationally-recognised as the leading indicator of quality incarbon markets.Supporters of the Gold Standard are committedto promoting sustainable development throughby transparency and equality of access for allmarket participants. It was designed to ensurethat emissions reductions that back up carbonthe project activities make a measurable impacton sustainable and social development in localcommunities.The Gold Standard logo is a trademarked brandthat represents premium quality in the carbonmarket. Each carbon credit is equivalent to one tonne of CO 2 4.93% EUA average prices (US$)4530 Jan 2010150 Jan 2008 Mar 2008 May 2008 Jul 2008 Sep 2008 Nov 2008 Jan 2009 Jan 2009 Mar 2009 May 2009 Jul 2009 Nov 2009 Source: World Bank 4 www.newfrontieradvisory.com • email: email@example.com • 45 Beech Street London EC2Y 8AD • +44 (0) 207 953 9860
Who’s buying credits?The potential market for carbon credits is huge. in Europe, followed by a Polish energy group. The prices of the credits themselves vary and canUnder the Kyoto Protocol, not just companies but Overall, European groups are spending £800 be volatile, creating the potential for large gains million on carbon credits. as demand grows.Even outside of the agreement, many companiesare buying up credits to help their corporate Last year, Spain announced that in order to As of the 30th September 2010, CER spotimage and to encourage their customers to go Kyoto Protocol, it would be purchasing prices were €13.56 and EUA spot prices €15.60green. 6 million tonnes of carbon credits, and is as traded through the exchanges. Running calculating that it will need to spend €1.2 billion alongside this are the OTC markets, where overall to comply. Most countries are spending one of the largest companies charge £15.49ability to purchase credits for a number of years similar amounts or more. And in the voluntary per credit, ranging to £10.90 for each credit Westin resort and Spa and over the counter (OTC) markets 94 million from another supplier. British Airways charge tonnes of CO2 were traded last year, with market y, and have reduced 800 tonnes participants predicting that over 1 billion tonnesof CO2 to date. The Swedish energy group per annum will be traded by 2020.Vattenfall is the largest single buyer of creditsThis is where investors come in.(also known as the spread) of OTC creditsbought from a company which either gets themfrom an exchange or direct from a project canensuring that the investors money is going intoemissions reducing projects worldwide. This formthe communities where the projects are located, r.Through some credit trading companies, theyare available from as little as €5, creating thetrading company which preferably has access toBlueNext, the world’s leading trading exchangefor credits. Tand high quality, which increases credit value,buy only gold standard or VCS (Voluntary CarbonStandard) credits.The carbon market continues to grow, andcontinues to provide further opportunities to Each carbon credit is equivalent to one tonne of CO 2 5 www.newfrontieradvisory.com • email: firstname.lastname@example.org • 45 Beech Street London EC2Y 8AD • +44 (0) 207 953 9860
NE W F R O N T I E R A D V I S O R Y 360 Contact us for more information+44 (0) 207 953 9860 • email@example.com • www.newfrontieradvisory.com New Frontier Advisory LTD, Centralpoint, 45 Beech Street, London EC2Please remember that all investments carry risk.Whilst we undertake all due diligence and research topresent accurate scenarios and investment opportunities, the information presented is based on today’smarket value and predicted growth rates and as such cannot be guaranteed.