CORPORATE FINANCE   FINANCIAL INSTITUTIONS   ENERGY AND INFRASTRUCTURE   TRANSPORT   TECHNOLOGY




    Fact, Fiction, or ...
The Climate Change Reality


In its 4th Assessment Report (2007) the Inter-Governmental Panel on Climate
Change (IPCC) fou...
What Will It Cost?

“In the Peak Scenario,CO2 emissions from the world’s energy infrastructure peak at 30.8 GtCO2-e in
201...
The Global Carbon Market

•    Current policy framework has two pillars : the Kyoto Protocol government-level compliance
 ...
CDM Project Cycle
            CDM project                     Project meets CDM participation             Project Design D...
Traditional CDM Project Structure
                                                                    Possible Issues
    ...
Bali Action Plan
                      •   “Shared vision” to be developed by all Parties on
                          tac...
Copenhagen Accord
Moderate success?
•   Resort to “bottom-up” approach (versus European “top-down”) championed by the US
•...
“Too much conversation, a little more action please ....”




                                                            9
European Union – Under Pressure
•   World leader in carbon markets and legislative action to reform economy
•   Backseat i...
United States – Recent Legislative Progress
                                               September 22, 2009
          Ju...
United States – Piecemeal Markets
      Western Climate Initiative (WCI)                        Regional GHG Initiative (R...
United States – Prospects
•    Obama’s State of the Union address January, 2010:
        ― Called for comprehensive energy...
China – Ahead of the Game
•   Copenhagen Accord: reduce "carbon intensity" by 40-45 per cent on 2005 levels by 2020
•   WR...
Japan – Temperature Rising
•   Copenhagen Accord: 25 per cent from 1990 levels by 2020 conditional upon global agreement
•...
Australia – Leading from Behind
•   Rudd Government severely burned by Senate failure and Copenhagen outcome
•   Worst-cas...
Canada – The Rogue Nation
•   By 2007, 34 per cent above Kyoto target – Government: compliance = economic ruin
•   Critici...
South Africa – BASIC Concerns
•   Acute shortage of electricity generation capacity and supply: threatens economic progres...
Russia – Hot Air and Indifference
•   Historically poor engagement with international
    climate change process / discuss...
Others

South Korea – On the Move
•   Copenhagen Accord: 30 per cent reduction on BAU by 2020 (4 per cent on 2005 levels)
...
A Truly Global Market?

              Potential total size of the global carbon market by 2020 is
                        ...
Opportunities or Risks?

Where do the Opportunities Lie?

•   Clear long term signals for long term investments – confiden...
Gazing Into the Crystal Ball ...

•    Two steps backwards, one step forward for global action: high-level engagement posi...
Global Practice: Deal Map




                            24
CORPORATE FINANCE   FINANCIAL INSTITUTIONS   ENERGY AND INFRASTRUCTURE   TRANSPORT   TECHNOLOGY
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Regulación en los mercados de Carbono

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lo largo de estas jornadas, expertos nacionales e internacionales en el tema analizan la situación actual, tendencias futuras y principales retos que plantean los esquemas de reducción de emisiones y los mercados de carbono como herramientas en la lucha contra el calentamiento global, especialmente después de la cumbre de Copenhague. Anthony Hobley, Jefe de Cambio Climático y Finanzas de Carbono. Norton Rose LLP, participa con la ponencia "Regulación en los mercados de Carbono".

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Regulación en los mercados de Carbono

  1. 1. CORPORATE FINANCE FINANCIAL INSTITUTIONS ENERGY AND INFRASTRUCTURE TRANSPORT TECHNOLOGY Fact, Fiction, or Fancy? An International Carbon Market Anthony Hobley Partner, Norton Rose LLP Global Head of Climate Change and Carbon Finance
  2. 2. The Climate Change Reality In its 4th Assessment Report (2007) the Inter-Governmental Panel on Climate Change (IPCC) found that •It is very likely – that is, there is a greater than 90 per cent probability – that climate change is due to the observed increase in anthropogenic greenhouse gas emissions •A reduction of at least 25–40 per cent by 2020 on 1990 levels will need to be made by developed countries to limit the global average temperature rise to below two degrees Celsius •Global greenhouse gas (GHG) emissions must peak in the next 10-15 years and must then be followed by substantial reductions to achieve this end •Nations are deciding not on the whether they should act, but what they should do and how it best be done Emissions reduction and mitigation frameworks have become a reality for both individuals and corporations 2
  3. 3. What Will It Cost? “In the Peak Scenario,CO2 emissions from the world’s energy infrastructure peak at 30.8 GtCO2-e in 2019. In order to achieve this target, annual investments need to rise from $55 billion today to $500 billion by 2020.” UNEP / New Energy Finance, June 2009 “This adds up to a total of at least €65–100 billion per year on average from 2010-2020, ramping up over that time.” Climate Works Foundation, June 2009 •UNFFCC: up to 86 per cent of the global finance needed to respond to climate change will come from private investment sources •World Bank: the private sector will have to bankroll close to 85 per cent of all clean energy and climate projects in the future The global carbon market grew by 100 per cent between 2007-20081 It is projected to grow to a value of $550 billion by 20122 Sources: (1) World Bank, (2) New Carbon Finance 3
  4. 4. The Global Carbon Market • Current policy framework has two pillars : the Kyoto Protocol government-level compliance obligations and the EU ETS • The global carbon market was valued at $126 billion in 2008 • EU ETS accounted for $93 billion, and Kyoto mechanisms for $33 billion Chicago Climate EU ETS Exchange $93 billion $307 million Regional Greenhouse * Asia 88% Gas Initiative (RGGI) $246 million * Africa 2% New South Wales Greenhouse Gas Abatement * Latin Scheme America $183 million 5% * Regional share of Kyoto project-based credits suppplied Sources: (1) World Bank, (2) New Carbon Finance 4
  5. 5. CDM Project Cycle CDM project Project meets CDM participation Project Design Document (PDD) identified and eligibility criteria completed Issuance of CERs Designated National Authority of the Host Country issues a letter of approval DOE delivers Certification Report to the CDM Executive Board which constitutes a Validation of the project by an request for issuance of CERs equal to the independent designated operational emission reductions achieved by the entity (DOE) CDM project achieved. Registration of the Project Verification by DOE of the GHG Monitoring of the Project and (i.e. the project is formally emission reductions and provision of a monitoring report to accepted by the CDM Certification by the DOE of the the DOE Executive Board as a CDM emission reductions achieved project) 5
  6. 6. Traditional CDM Project Structure Possible Issues • No (or delayed) registration PROJECT ERPA PROJECT • Late commissioning SELLER BUYER • Under-performance • Poor monitoring leading to delayed issuance of CERs Assumptions • Seller responsible for managing successful development of Project • Buyer pays for CERs if they are delivered ... Some Risks • Licensing / Regulatory: registration, appraisal (PDD), certification, verification, monitoring, crediting • Political: host country approval, regulatory change, tax change, etc. • Financial: currency, price, etc. • Technology: performance, etc. • Cost / Delay: compliance, completion, etc. • ERPA Counterparty: credit etc. 6
  7. 7. Bali Action Plan • “Shared vision” to be developed by all Parties on tackling climate change going forward ADAPTATION • Four building blocks ― Mitigation ― Adaptation ― Technology transfer MITIGATION ― Financing • Negotiations amongst developed and developing states for a new climate deal FINANCING • AWG-KP: Ad-hoc Working Group tasked with detailing the second commitment period of the Kyoto Protocol • AWG-LCA: Ad-hoc Working Group tasked with detailing TECHNOLOGY TRANSFER the details of the Long-Term Cooperative Action, as mandated by the Bali Action Plan • Two-track negotiations: discrete, but intrinsically linked 7
  8. 8. Copenhagen Accord Moderate success? • Resort to “bottom-up” approach (versus European “top-down”) championed by the US • First truly global declaration on climate change FINANCING MRV TARGETS USD 30bn by 2012 Developing country Due by January 31 USD 100bn by 2020 supported NAMAs (deadline flexible) Abysmal failure? ― Only politically binding ― No timeline for global legally-binding agreement ― No commitments to specific aggregate mid-term targets ― No agreement on tenets of Bali Action Plan via the AWG-LCA Next steps • COP16, Mexico City, December 2010 aim for legally binding framework • Until then regional developments key 8
  9. 9. “Too much conversation, a little more action please ....” 9
  10. 10. European Union – Under Pressure • World leader in carbon markets and legislative action to reform economy • Backseat in Copenhagen process • A War Lost leadership backfires at COP15 accusation: unrealistic expectations? • Scrambling to regroup post-COP15 Recent developments • Copenhagen Accord: maintains 20 per cent reduction by 2020 pledge; 30 per cent conditional • Markets already suffering: analyst expectations low, investors withdrawing Next steps • New mechanisms plans severely compromised, but EU still carries “demand stick” • Possibility of tariffs for imports: 9 per cent (in line with WTO regulations, IEA) • Inter-EU Member dissent: who cuts most? • Worries in Brussels: Transatlantic carbon market compromised – all eyes on Washington 10
  11. 11. United States – Recent Legislative Progress September 22, 2009 June 26, 2009 EPA issues mandatory monitoring rule IN PROGRESS: Bipartisan House of Representatives passes under the authority of the Clean Air comprehensive energy bill, American Clean Energy and Security Act. Entities emitting 25Mt+ CO2-e per being drafted by Senators John Act (ACES) – the Waxman-Markey year, required to report GHG emissions Kerry, (D) Joe Lieberman, (I) Bill data annually starting January 2010. and Lindsey Graham (R) STATUS: PASSED First annual reports due to EPA in 2011. December 14, 2009 September 15, 2009 September 30, 2009 EPA adopts EPA and National Clean Energy Jobs and Endangerment and Highway Traffic and American Power Act (CEJAPA) – Cause and Contribute Safety Administration the Kerry-Boxer Bill Findings (GHGs propose standards for STATUS: BEING DEBATED ON “threaten public health” light-duty vehicles (for SENATE COMMITTEE LEVEL so under CAA EPA will adoption March 2010) regulate) 11
  12. 12. United States – Piecemeal Markets Western Climate Initiative (WCI) Regional GHG Initiative (RGGI) • 7 US States, 4 Canadian provinces (3 provinces, 6 • Established December 2005 by Governors of Mexican states observers) North-eastern and Mid-Atlantic States • Regional goal of 15 per cent below 2015 by 2020 • Sets a cap on fossil-fuel fired electricity generators • To begin on January 1, 2012 greater than 25 MW in size • Two phases: Phase I implicates emissions from • First cap emissions at current levels in 2009, then electricity, industrial combustion and processes reduce by 10 per cent by 2018 • Phase II (2015) includes transportation fuels etc. • Auctions quarterly, use of offsets from other sectors California Cap-and-Trade Chicago Climate Exchange (CCX) • AB32: product of the Californian Global Warming • Launched in 2003, now more than 450 members Solutions Act of 2006 • Voluntary listing, mandatory reporting of emissions • STATUS: California Air Resources Board will issue • World’s first and US’s only cap-and-trade system regulations by January 1, 2011. for all 6 GHGs • Effective 2012 • Members make voluntary, legally-binding • Subject to a consultative process commitment to reduce emissions by 6 per cent • International offsets eligible (CERs, REDD?) from 2000 levels by 2010 • Emissions reductions 27.3Mt by 2020 • Cumulative cuts of more than 400Mt achieved 12
  13. 13. United States – Prospects • Obama’s State of the Union address January, 2010: ― Called for comprehensive energy and climate bill to “make ― clean energy the profitable kind of energy in America” ― No reference to ETS, but not excluded: hybrid approach? • Legislative priorities 2010: Nuclear, off-shore drilling: hooks for ― Economy – jobs, jobs, jobs Republicans? ― Healthcare ― Financial sector reform • Senator Scott Brown’s (MA) victory (January 19, 2009) = no more Democrat Senate majority • If no legislation Q1/Q2 unlikely until 2011 mid-term elections November 2010 • Hurdles: Congressional partisanship, economic concerns, busy legislative agenda, timing: legislative structure: post-Senate new Bill in joint sitting, then President signs into law • Copenhagen Accord: 17 per cent by 2020; difficult , not impossible without cap-and-trade • Cap-and-trade not good for jobs creation message – good for cutting compliance costs More likely: Energy and jobs Bill, renewable energy target, GHG regulation in the short-term, instead of cap-and-trade: business has not been vocal 13
  14. 14. China – Ahead of the Game • Copenhagen Accord: reduce "carbon intensity" by 40-45 per cent on 2005 levels by 2020 • WRI: “comparable to US targets” but will do no more – worries about economic growth. • Will measure only energy consumption and industrial activity emissions • Will likely significantly exceed targets = bargaining chip in future negotiations Prospects for a carbon market? • Have relied more on administrative measures vs markets – bottom-up approach • But government encouraging domestic carbon market creates incentives for emissions reductions • Plans to include pilot emissions trading system in Five Year Plan 2010-15 • Already operating, largely in VERs and with small volumes: Beijing Climate Exchange, Shanghai Climate Exchange, Tianjin Climate Exchange Next steps • Will bank on technology transfer • Already majority market share of renewable energy generation parts • Government committed to capitalizing on global shift in priorities • Also – energy security big issue. China needs to cut own dependence on fossil fuels. 14
  15. 15. Japan – Temperature Rising • Copenhagen Accord: 25 per cent from 1990 levels by 2020 conditional upon global agreement • New climate bill due March 2010: likely to include cap-and-trade, some form of tax, no start dates • Renewable energy target: 10 per cent of primary energy by 2020 (currently 1.3 per cent) Obstacles? • Already energy efficient: what percentage to come from domestic action? • Strong opposition from business and industry: compliance costs likely to be very high Purchased To Purchase 25 million CERs Energy efficiency decrease of 1.6 per $2.15bn on + cent by 2013 + target carbon credits 71.6 million AAUs through of carbon credits by end of 2012 Prospects for carbon market • Voluntary ETS since October 2008: created demand for CERs and AAUs by business • April 2010: mandatory ETS for businesses in Tokyo to begin • March 2010 bill to include mandatory national ETS 15
  16. 16. Australia – Leading from Behind • Rudd Government severely burned by Senate failure and Copenhagen outcome • Worst-case scenario: no measures – double dissolution unlikely considering election timeline • Opposition leader Tony Abbott – climate sceptic, appealing to Conservative minority • Carbon Pollution Reduction Scheme (CPRS) due for Senate reintroduction February 2, 2010 ― Need 7 non-Party votes to pass – last attempt failed by 5 votes ― 2 Coalition Senators crossed the floor in last vote (have stated that reserve right to repeat) ― 5 Greens Senators – all opposed (looking for no less than 25 per cent reduction) Recent developments • Copenhagen Accord: Australia first to associate. 5 per cent on 2005 level “unconditional offer”; 15 and 25 per cent reduction trajectories dependent on global agreement • Government ex-climate change advisor Ross Garnaut calls for tax of AUD20 as interim measure • Coalition looks to soil carbon and no-cost alternatives to reaching 5 per cent target • Australia may be short on Kyoto compliance (new LULUCF data released) compliance will come from public chequebook without CPRS • Federal election end of 2010: legislation late 2010 / early 2011? • Mandatory Renewable Energy Target (MRET) 20 per cent by 2020 – scheme under review 16
  17. 17. Canada – The Rogue Nation • By 2007, 34 per cent above Kyoto target – Government: compliance = economic ruin • Criticized by developing countries, now calls for Commonwealth suspension • Copenhagen Accord: 17 per cent on 2005 levels or 3 per cent on 1990 levels by 2020 • What Canada wants: no limits on mining tar sands in Alberta for oil • Conservative Government at 30 per cent approval in polls Recent developments • December 30, 2009: PM Harper announces “period of prorogation” – 36 bills failing to receive Royal Assent prior to recess, cease to exist; all legislative committee activity stops Tar sands: significantly more carbon intensive than regular extraction • PM likely to appoint handful of Conservative nominees to Senate (Liberals lose control of upper house) • March 3, 2010: PM to deliver new Throne Speech to launch 40th Parliament; federal budget released, new committees formed, bills reinstated or reintroduced Next steps • Focus on provinces, members of WCI: Ontario, Quebec, Manitoba and British Columbia • Continuing dialogue with the US: we move when (and if) you move 17
  18. 18. South Africa – BASIC Concerns • Acute shortage of electricity generation capacity and supply: threatens economic progress • Continues energy rationing amongst industrial users (implemented after blackouts in 2008) • Copenhagen Accord: 34 per cent below projected BAU by 2020 (conditional on international deal and financial support) after meeting with other BASIC leaders in Delhi • Renewable energy target: 4 per cent of all energy by 2013 Existing policies and measures • 2009: instituted Africa’s first wind feed-in tariff of ZAR1.25 ($0.16) per kilowatt hour – more than EU member states • Currently: less than 10 megawatts (MW) of operational wind capacity • Early 2008: Eskom solar water heating rebate program • Mid-2007: Eskom Energy Efficient Motors Programme promotes replacing old, inefficient motors by subsidizing purchase cost Natural resources and mining: Africa’s biggest export industry Next steps • Development of NAMA • Continuation of project finance via CDM (E+/E- issues) 18
  19. 19. Russia – Hot Air and Indifference • Historically poor engagement with international climate change process / discussions • No significant domestic policy to speak of • Some measures involving fines for high-polluting vehicles – status undetermined • Less JI projects than Eastern bloc neighbours • Resource companies nationalised • No energy security issue energy dependence of others critical for international status • No sale of AAUs 1997-2009 • Sberbank authorized to sell 300 million AAUs • EC concerned about market flooding, but no significant buyers for the amount (Canada?) • Substantial project finance and REDD potential, but no government moves to develop • Copenhagen Accord: December 2009 increase reduction pledge from 10-15 per cent to 25 per cent on 1990 levels but still significant surplus, not yet affiliated with Accord • AAU banking issue to remain contentious in any post-2012 policy framework • Engagement unlikely 19
  20. 20. Others South Korea – On the Move • Copenhagen Accord: 30 per cent reduction on BAU by 2020 (4 per cent on 2005 levels) • December 31, 2009: Low Carbon Green Growth Act passes Korean National Assembly • January 13, 2010: President signs LCGGA into law • Effective from April 13, 2010, will provide comprehensive legal ground to all subsequent regulations, policies and measures to “transform South Korea into low-carbon society” • Enforcement ordinances, regulations to be created by government ministries in next few months Singapore – Ambition Decreases • Post-Copenhagen: emissions cut by 7-11 per cent on BAU levels by 2020 (pre-COP, 16 per cent) • Ambitions of being Asian carbon trading hub New Zealand – A Soft Start • Conditional targets 10 to 20 per cent on 1990 levels • Emissions trading scheme enacted late 2009 • July 1, 2010 – January 1, 2013 transition period. Emitters pay fixed price of NZ$25 ($18.25) per tCO2-e (1 unit for every 2 emissions units). Assistance phased out 1.3 per cent / year from 2013. • NZUs not for export, but forestry NZUs can be converted to AAUs and sold abroad 20
  21. 21. A Truly Global Market? Potential total size of the global carbon market by 2020 is estimated at €2,000 billion CDM Host US Federal EU ETS Countries / Scheme Sectoral Regional Mechanisms Schemes CDM Host CDM Hosting Countries Countries / CDM Host Countries / Sectoral Sectoral Mechanism CPRS & Mechanisms NZ ETS Potential future linking opportunity Linking via Kyoto project mechanisms 21
  22. 22. Opportunities or Risks? Where do the Opportunities Lie? • Clear long term signals for long term investments – confidence in policy makers • Certainty of change – e.g. to carbon constrained economy • Nuances and differences in implementation which create arbitrages • Broad spectrum of asset classes • New products required e.g. ― Financial products to manage risks ― Activities in renewable energy ― Activities in nuclear ― Avoided deforestation McKinsey Low-Cost Abatement Curve 22
  23. 23. Gazing Into the Crystal Ball ... • Two steps backwards, one step forward for global action: high-level engagement positive, UN process in question, speed of action may not meet scientific imperative • Currently, “policies and measures” – not markets – politically palatable • Short-term outlook very bearish: EU is ahead of the game, global market some years away • Activities in renewable energy / nuclear / avoided deforestation more likely Harbinger of success: How will Copenhagen affect the development of regional markets and schemes? SHORT-TERM MEDIUM-TERM LONG-TERM Discrete regional schemes, first number of Linking of regional schemes, Global carbon market / economies years linked only by offset mechanisms pairing of scale • Developments occur very quickly e.g. House of Representatives in US • Tariff threats may provide impetus • Cost-efficiency of market mechanisms will come to the fore – industry must advocate Global action is inevitable How coordinated the action will be remains in question 23
  24. 24. Global Practice: Deal Map 24
  25. 25. CORPORATE FINANCE FINANCIAL INSTITUTIONS ENERGY AND INFRASTRUCTURE TRANSPORT TECHNOLOGY
  26. 26. Presentation 1 No individual who is a member, partner, shareholder, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. 2 Any reference to a partner means a member of Norton Rose LLP or a consultant or employee of Norton Rose LLP or one of its affiliates with equivalent standing and qualifications. 3 This presentation contains information confidential to Norton Rose Group. Copyright in the materials is owned by Norton Rose Group and the materials should not be copied or disclosed to any other person without the express authorisation of Norton Rose. 4 This presentation is not intended to give legal advice and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. Readers must take specific legal advice on any particular matter which concerns them. If you require any advice or information, please speak to your usual contact at Norton Rose Group. 26

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