4. Certified Emission Reductions (CERs) vs
Voluntary Emission Reductions (VERs)
• VERs are carbon credits which are sold to any business or organisation
that wants to voluntarily reduce its carbon footprint.
• CERs are used by businesses or organisations that have to comply with
mandatory emission initiatives under the United Nations Framework
Convention on Climate Change (UNFCCC) like the European Union
Emission Trading Scheme (EU ETS.)
5. CERs vs VERs
CERs VERs
Created through regulated projects Produced from unregulated projects with
independently verified under UNFCCC no centralised authority.
protocols
Exchange traded commodity (liquid, OTC traded
transparent pricing)
Legislation demands compliance and Buyers have no obligation to engage in
supports the market (Kyoto Protocol) long term purchase agreements
Clearing through an exchange reduces Easy to purchase hard to sell
counterparty risk
6. The Kyoto Protocol
• The Kyoto Protocol is an international treaty that sets binding obligations
on industrialised countries to reduce emissions of greenhouse gases. 191
countries (all UN members, except Andorra, Canada, South Sudan and the
United States), as well as the European Union are Party to the Protocol.
• The Protocol took effect in February 2005 and consists of three phases
that required the developed nation signatories to abate their greenhouse
gas emissions by 5.2% for the 2008 – 2012 period relative to 1990 this
second phase ended in December 2012. The third phase will run from
2013 to 2020.
7. Cap and Trade
• The consensus is that a free market cap & trade system is the most
effective economic approach for tackling climate change.
• The "cap" sets a limit on emissions, which is lowered over time to reduce
the amount of emissions released into the atmosphere.
• The "trade" creates a market for carbon allowances. Trading lets
companies buy and sell allowances, leading to more cost-effective
pollution cuts, and incentive to invest in cleaner technology.
8. Certified Emission Reductions
(CERs)
• Certified Emission Reductions (CERs) are a type of emissions unit (or carbon
credit) issued by the Clean Development Mechanism (CDM) for emission
reductions achieved by CDM projects and verified under the rules of the Kyoto
Protocol.
• CERs are created primarily from renewable energy projects situated in lesser
developed countries (LDC).
• CERs require full accreditation and undergo a strict verification and validation
process.
• CERs can be used by industrialised countries in order to comply with their
emission limitation targets or by operators of installations covered by the
European Union Emission Trading Scheme (EU ETS) in order to comply with
their obligations to reduce their CO2 emissions
• CERs can be purchased from the primary market (purchased from the original
party that makes the reduction) or the secondary market (resold from a
marketplace).
9. The European Union Emission Trading Scheme
( EU ETS )
• The European Union Emissions trading scheme (EU ETS) works on the Cap
and Trade principle and is the largest compulsory emission scheme
currently in operation and represents 72% of Global carbon market
volume and 80% of value. The scheme operates a phased based
mechanism; each phase represents a number of years with specific
objectives and emission reduction targets.
10. 3 Phases of the EU ETS
Phase I 2005 – 2007
Reduction target to reduce emissions by 2.5% compared to levels
recorded in 1990
Included Oil Refineries, Power and Heat Generation and Energy
intensive industries
Phase II 2008 – 2012
Reduction target to reduce emissions by 5.2% compared to levels
recorded in 1990
Metals and Pulp and Paper industry added
11. EU ETS PHASE III
Like any free market mechanism the emissions market is affected by supply and demand, and has
experienced a period of price correction as a result of oversupply. The 3rd phase of the EU ETS
takes effect from 2013 and market forces will be significantly affected by the changes during this
period.
Increases in Demand
• Emission reduction targets for companies operating within the EU ETS will increase from
5.2% in relation to levels recorded in 1990 during phase 2 to 21.5% in relation to levels
recorded in 2005 in phase III.
• The Aviation and Maritime sectors become part of the EU ETS and companies within those
sectors will have to meet emission obligations and surrender CERs and EUAs to meet their
liabilities. In 2010 shipping accounted for 15.3% of the EU's transport emissions, airlines
accounted for 12.4%.
• The EU ETS implement an auction process for allowances which previously allocated without
charge to companies, in phase III those companies will have to bid and pay for allowances.
12. EU ETS PHASE III
Restrictions on Supply
• CERs that were created from industrial gas destruction projects including HFCs
and nitrous oxide (N2O) will be decommissioned.
• CERs from these projects will no longer be accepted as legitimate credits
within the EU ETS and can no longer be surrendered to meet obligations. It is
estimated that this will represent a reduction in the supply of CERs by
approximately 75%,
• The supply will be restricted further through the Reduction of Origination
initiative through the CDM where CERs will only be issued from projects
registered before the end of 2012. As a result there will tighter control on
what projects are accepted, and only projects in truly Least Developed
Countries (LDC) will be eligible for consideration.
13. Carbon Market Value
The value of the market at the end of 2012 stood at US$176 billion.
(Source World Bank )
In 2012 The EU ETS saw a 26% leap in the total trading volume of carbon
allowances to 10.7 billion metric tonnes, equivalent to a third of the world’s
total CO2 emissions.
(Source Bloomberg New Energy Finance)
In January 2013 the traded volume of carbon was more than 5 times higher
than the previous year.
(Source EEX ( European Energy Exchange)
14. CERs as an investment
• From phase I and moving into phase II of the Kyoto Protocol, we saw a
huge increase in volumes of credits traded as this market established
itself. We then saw prices fall from a high of €17 in 2008 to today’s levels
of less than €1. The major reason for this slide was a massive oversupply
of credits to the market.
• As we enter 2013 and the changes to legislation are implemented, we will
start to see this surplus of credits picked up. Basic supply and demand
tenets will then create a positive price environment within the market,
supporting the price of the commodity and pushing it upwards throughout
Phase III.
• This investment should be seen as a medium to long term hold (3-8 years)
15. Future Market Development
• The issue of Global warming continues to be a key political issue of
governments across the Globe and the Cap and Trade methodology of the
EU ETS is being adopted by a number of industrialised countries.
• New Zealand’s ETS has been running since 2008 and in 2015, Australia and
South Korea are due to open carbon markets, while China is beginning its
own project this year. The State of California launched its first carbon
allowances auction on November 14, 2012.
• The EU ETS remains the largest market within the emissions sector, a
position which they will maintain, controlling the supply of CERs, ensuring
EU member states have uniform systems in place.
• The consensus is that carbon credits will continue to develop into a
recognised industrial currency.
16. Unique Selling Points
• Secure Asset – CERs are produced from projects validated by the United Nations one of
the most trusted global organisations under the banner of the UNFCCC. The UNFCCC
secretariat under the authority of the CDM Executive Board, holds all details on CERs
electronically in the CDM registry, providing a full electronic audit trail.
• Liquid Market – CERs are spot tradable on global exchanges including the European
Climate Exchange listed and admitted for trading on the ICE Futures Europe electronic
platform, removing counterparty risk and providing enhanced client control of exit
strategy.
• Registry - CERs are held within an FSA regulated registry account with full client access
via a web portal.
• Ground Floor Entry Opportunity – The current price of CERs is depressed because of
an imbalance in market forces . The start of phase III within the EU ETS which will
restrict supply and increase demand indicates a technical buying opportunity to
capitalise on low unit price.
• Ethical Investment– Investment in CERs provides green finance to developing countries
providing social and economic benefit to the local communities. The CDM projects
provide clean sustainable sources of power reducing the need for fossil fuel use in
emerging markets which in turn reduces harmful emissions which will have an impact
on the reducing the effects of Global warming.
17. Product Summary
• CERs purchased at circa £1.60 (tbc at time of trade)
• Minimum investment £5,000 and in increments of £2,500 thereafter
• Cash or SIPP investment
