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Carbon Market 101


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Carbon Market 101

  1. 1. Carbon Market 101Climate Change, CDM & Carbon Trading <br />Immanuel Edward. J.A<br />Climate Change/Sustainability Advisory<br />HMR Environmental Engineering Consultants<br />
  2. 2. Agenda<br /> Introduction<br />Climate Change & its impact<br />Response to mitigate Climate Change<br />Kyoto Protocol’s Financial Mechanism<br />UNFCCC’s Institutional Framework<br />CDM <br />CDM Project Cycle<br />General CDM Project requirement<br />Eligible Projects – CDM Cost<br />Carbon Trading<br /><ul><li>Concept of Emissions Trading
  3. 3. Global Carbon Market
  4. 4. EU – ETS
  5. 5. CER Supply & Demand
  6. 6. CER Pricing
  7. 7. EUA price & Impact on CER Price
  8. 8. CER Transaction Models
  9. 9. CER Delivery Structure
  10. 10. CER Price Trend</li></li></ul><li>Basics of Climate ChangeThe Greenhouse Effect<br />Source: The Pew Center Reports<br />
  11. 11. CO2 Levels in the Atmosphere<br />
  12. 12. Earth’s temperature<br />
  13. 13. Climate Change Signals<br /><ul><li>Global average surface temperature has increased by 0.6 ºC over the 20th century
  14. 14. 67% of glaciers in Himalayas have retreated in the past decade</li></ul>IPCC Third Assessment Report projections for 2100<br /><ul><li>Temperature rise of 1.4 - 5.8ºC
  15. 15. Sea level rise of 9 - 88 cm</li></ul>This projected temperature rise is greater than that experienced in the last 10,000 years !!!<br />IPCC : Intergovernmental Panel on Climate Change<br />
  16. 16. Impact of Climate Change<br />
  17. 17. Response to Mitigate Climate Change<br />1992<br />1979<br />1997<br />1988<br />1954<br />2005<br />
  18. 18. Objective of UNFCCC<br />Stabilizationof greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interferencewith the climate system<br />Such a level should be achieved within a time-frame sufficient :<br /><ul><li> to allow ecosystems to adapt </li></ul> naturally to climate change<br /><ul><li> to ensure that food production is </li></ul> not threatened and <br /><ul><li> to enable economic development
  19. 19. to proceed in a sustainable </li></ul> manner<br />Principles<br />The Parties should protect the climate systems on the basis of:<br /><ul><li> Equity
  20. 20. Common but differentiated </li></ul> responsibility<br /><ul><li> Respective capabilities</li></li></ul><li>The Kyoto Protocol<br />Adopted at 1997 UNFCCC’s Conference of Parties 3 (COP3) in Kyoto, Japan, the Protocol<br />defines quantified GHG emission reductions for Annex 1 countries as a reduction from their CO2 emission level by at least by 5.2% over 1990 base level, by the end of first commitment period (2008 – 2012)<br />Introduces three flexible market mechanisms which can be used by parties and private firms to fulfill their reduction obligations <br />Joint Implementation, or JI (Article 6)<br />Clean Development Mechanism, or CDM (Article 12)<br />International Emissions Trading (Article 17)<br />Entered into force in February 16, 2005 (after the ratification of Russia)<br />
  21. 21. Kyoto Mechanisms<br />Overall target - at least 5.2% reduction below 1990 levels in net anthropogenic emissions* of Annex I countries by 2008-2012.<br />No targets for developing countries<br />Joint implementation<br />
  22. 22. Emissions Trading: Article 17<br />Allowances<br />Annex I countries<br />Annex I countries<br />Allowances<br />Allowances allocated by Annex I Govts. to Emission Intensive Industries<br />Allowances allocated by Annex I Govts. to Emission Intensive Industries<br />Within an Annex I country and between Annex I countries<br />Allowance based mechanism <br />
  23. 23. Joint Implementation: Article 6<br />ERUs<br />Annex I countries<br />Annex I countries<br />Investment<br />Implement projects or carbon sequestration<br />ERUs removed from the national budget<br />Project based mechanism <br />
  24. 24. Clean Development Mechanism: Article 12<br />CERs<br />Developed countries<br />Developing countries<br />Resources <br />High cost of domestic emission reduction<br />Low cost of emission reduction<br />Guiding principles<br />Achieve SD, TT, Investment<br />Meet ER targets in a cost effective way<br />Project based mechanism <br />
  25. 25. Carbon Credits<br />Emissions trading (among Annex I countries)<br />Assigned Amount Units (AAUs)<br />Joint Implementation (between Annex I countries)<br />Emission Reduction Units (ERUs)<br />Clean Development Mechanism – CDM (between Annex 1 and non-Annex 1 countries)<br />Certified Emission Reductions (CERs) <br />
  26. 26. UNFCCC’s CDM Institutional Setup<br />
  27. 27. CDM Executive Board<br />
  28. 28. PP : Project Promoter<br />DOE : Designated Operational Entity<br />EB : Executive Board<br />COP/MOP : Conference of Parties / <br /> Meeting of Parties<br />DNA : Designated Operational Entity<br />CER : Certified Emission Reductions<br />
  29. 29. Key Players in CDM Process<br />
  30. 30. How to Indentify a CDM Project<br />CDM Project Requirements<br />Project implemented in developing nations – Non-Annex 1 countries<br />Project should result in net CO2 Emission Reduction (real, Measureable, Verifiable)<br />Contribute towards sustainable development of the nation<br />Annex I public funding for CDM to be additional to ODA and financial obligations <br />No nuclear projects in CDM<br />
  31. 31. CDM Project Requirements….<br />Establishment of a credible emissions baseline<br />Project should establish Additionality<br />Contribute towards Sustainable Developmentof the Host Country<br />Concept of CDM, Emission reductions and Carbon revenue should be incorporated in the Planningstage of the project<br />
  32. 32. CDM Prior Consideration<br />Within 6 month from the project start the DNA and UNFCCC must be informed<br />EB49 annex 22: The project participant must inform the Host Party DNA and the UNFCCC secretariat in writing of the commencement of the project activity and of their intention to seek CDM status. Such notification must be made within six months of the project activity start date and shall contain the precise geographical location and a brief description of the proposed project activity, using the standardized form F-CDM-Prior Consideration. <br />
  33. 33. Emissions<br />Baseline emissions (most Plausible scenario/existing project)<br /> Emissions from a green / new project<br />Time<br />Baseline<br />
  34. 34. Additionality<br />STEP 0: Claiming credits for project with start date prior <br />to date of registration – if not applicable go to step 1 directly<br />CDM consideration proved: Pass<br />STEP 1: Identification of alternatives consistent with current laws and regulations<br />- If proposed CDM project only alternative left: NON-ADDITIONAL (NA)<br />More than one alternative: Pass<br />STEP 3: Barrier Analysis<br />No barriers: NA <br />STEP 2: Investment Analysis<br />CDM financially attractive<br />CDM financially not attractive<br />CDM faces Barriers<br />STEP 4: Common Practice Analysis – credibility check<br />- If similar activity observed with no essential difference: Project NA<br />No similar activity or similar activities present but difference in circumstances<br />STEP 5: Impact of CDM registration <br />- If CDM benefits have no impact: Project NA<br />
  35. 35. Typical Projects<br />
  36. 36. Project Scale<br />Small-Scale CDM (SSC) project categories<br />RE projects up to 15 MW<br />Energy efficiency projects reducing energy consumption by up to 60 GWh/yr<br />Other project activities that reduce emissions less than 60 ktCO2eq<br />
  37. 37. CDM Transaction Cost<br />
  38. 38. Emissions Trading<br />
  39. 39. Carbon Market Theory <br />
  40. 40. Global Carbon Market at a Glance<br /><ul><li>Transaction Volumes and Values, Global Carbon Market, 2008 and 2009</li></ul>Source: World Bank, and Bloomberg New Energy Finance and Ecosystem Marketplace for data on the voluntary market<br />
  41. 41. ETS - Scopes<br />Source: WBCSD/WRI GHG Protocol, 2005<br />
  42. 42. How Emission Trading works? <br />Emissions limit<br />after trading (60tCO2)<br />+10<br />Units bought<br />Emissions limit before trading <br />(50tCO2)<br />-10<br />Units sold<br />Carbon dioxide/ GHG emissions<br />Emissions limit after <br />trading (40tCO2)<br />50<br />50<br />Company 2<br />Company 1<br />Source: UK Emission Trading Group <br />
  43. 43.
  44. 44. Another illustration for ETS<br />Company A can reduce 1000 tons CO2e at $2/ton = $2000<br />Company B can reduce 1000 tons CO2e at $6/ton = $6000<br />BUY<br />SELL<br />1000 tons CO2e at $4/ton = $4000<br />$2000 Profit<br />$2000 Savings<br />Company B - Buyer<br />Company A - Seller<br />
  45. 45. The Way of Emission Trading <br />Make or Buy decision<br />Developing countries<br />Carbon market<br />Company<br />CO2 €<br />Carbon Credit<br />€<br />Invest in energy efficiency<br />Fuel switching<br />Modification of operation procedure<br />Emission trading<br />Sustainable Development<br />
  46. 46. Cap-and-Trade<br />Cap-and-Trade <br /><ul><li>A government establishes a cap that limits the total amount of emission allowed,
  47. 47. and then distributes permits for a “right to emit” the global atmosphere, which can be traded as private property.
  48. 48. Comparison of proposed vs. approved caps for 2008 to 2012</li></li></ul><li>Registered CDM Projects <br />Source : UNFCCC Interactive map of CDM project locations <br /><ul><li>Registered CDM activities (2nd March 2011) : 2871 projects all over the world…. </li></li></ul><li>CDM Projects<br />Source: (Feb 2011) <br />
  49. 49. Africa & Middle East<br />
  50. 50. CDM Projects<br />Data Source: UNEP Riso<br />Dec 2010<br />
  51. 51. CER Volume<br />41<br />Data Source: UNEP Riso<br />Dec 2010<br />
  52. 52. Primary CDM/ JI Buyers <br />
  53. 53. Carbon Trading: Unilateralism<br />
  54. 54. CERs : Risk Vs Price <br />Source: EcoSecurities<br />CER Price Increases<br />Source: Natsource<br /><ul><li>Approved methodology
  55. 55. Host government approval
  56. 56. Strong project partners, technology supplier, EPC, Operator, etc.
  57. 57. Good Credit
  58. 58. Ability for buyer to become a Project Participant
  59. 59. Project is registered
  60. 60. Guaranteed delivery schedule with punitive damages for non-delivery
  61. 61. Payment on delivery into buyer’s national registry account
  62. 62. Only a PIN (or less) available
  63. 63. Project developing new methodology
  64. 64. No Host government approval
  65. 65. Poor Credit or No Credit
  66. 66. Project not registered
  67. 67. Flexible CER delivery schedule
  68. 68. No punitive damages
  69. 69. Unilateral
  70. 70. Advance payment
  71. 71. Payment upon CER issuance into pending account</li></li></ul><li>CER Price<br />Reasons observations on the CER Price <br /><ul><li>There has been a fluctuation in the demand for CERs due to lower emission on account of lower demand and temporary shutdown of companies due to economic slowdown.
  72. 72. CER prices are likely to shoot up due to increase in crude prices. CER rates and crude prices are inextricably linked.
  73. 73. Some buyers have postponed their purchases due to financial constraints.
  74. 74. Some sellers have also made distress sales of CERs since they needed immediate cash to get over the current credit crunch</li></ul>Source: GTZ Newsletters<br />
  75. 75. EUA-CER Price Trend <br />Source :<br />
  76. 76. Carbon Price <br />
  77. 77.
  78. 78. CDM Projects : Typical Risks <br />CDM Regulatory<br />Country / Political Risk<br />regulatory<br />process<br />PDD development<br />Registration(CDM EB)<br />regulatory<br />change<br />Tax / revenue share<br />implications<br />tax<br />change<br />FDI Rules<br />validation<br />monitoring & <br />verification<br />host country<br />approval<br />Issuance<br />Financial<br />crediting<br />period<br />FEX / currency<br />Technology<br />Cost/Delay<br />price<br />precedence<br />Legal<br />compliance<br />cost<br />Project related <br />performance<br />Delays <br />(project / delivery)<br />ERPA <br />
  79. 79. Outcome from Cancun<br /><ul><li>Improved transparency including annual greenhouse gas inventory reporting by developed countries
  80. 80. Restored confidence in the multilateral process
  81. 81. Effectiveness of market mechanisms emphasised
  82. 82. Targets pledged by developed countries that have ratified the Kyoto Protocol, have been formally recognised, anchoring commitments covering the large part of global emissions
  83. 83. Establishment of a Global Climate Fund to support pollution reduction in developing countries with goal of mobilising $100bn by 2020 (reconfirmation & progress)
  84. 84. New program established to reduce emissions from deforestation and forest degradation (REDD+)
  85. 85. Increased emphasis on "adaptation" support for vulnerable countries </li></ul>Whatz Next in South Africa Dec-2011 ??<br />
  86. 86. Uncertainty in Future CO2 Emissions <br />
  87. 87. USEFUL WEBSITES<br />CDM<br /><br /><br /><br />CER: TRADING & MARKET<br /><br />CARBON NEWS<br /><br /><br />
  88. 88. Immanuel Edward. J. A<br />Manager – Climate Change Advisory<br />HMR Environmental Engineering Consultants<br /><br />Thank you<br />