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Opportunities and risks in carbon markets final


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Intervención de Hassen Bali, Vice President, Markit Environmental Registry , Londonen el marco de las Jornadas de Mercados de Carbono.

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Opportunities and risks in carbon markets final

  1. 1. <ul><li>17 th February 2011 </li></ul>Opportunities and Risks in Global Carbon Markets
  2. 2. About Markit
  3. 3. About Markit <ul><li>Markit is a leading global financial information services company with over 2,000 employees </li></ul><ul><li>We provide independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency </li></ul><ul><li>Our client base includes the most significant institutional participants in the financial marketplace </li></ul>
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  6. 6. Markit accolades
  7. 7. Present Situation
  8. 8. International Carbon Markets <ul><li>Developed country commitments </li></ul><ul><ul><li>Kyoto signatories to measure and reduce domestic emissions </li></ul></ul><ul><li>Existing compliance markets </li></ul><ul><ul><li>EU ETS to include CDM (CERs), Joint Implementation (ERUs) and Allowances (EUAs) </li></ul></ul><ul><ul><li>Clean Development Mechanism (links to both EU ETS and international Kyoto signatories) </li></ul></ul><ul><ul><li>New Zealand with NZUs </li></ul></ul><ul><ul><li>RGGI in the USA </li></ul></ul><ul><ul><li>New South Wales in Australia </li></ul></ul><ul><li>Existing voluntary markets </li></ul><ul><ul><li>International, independent standards providing robust emission reductions </li></ul></ul><ul><ul><li>International activity from corporations and institutions </li></ul></ul>
  9. 9. International Carbon Markets Volume & Value of Carbon Trades 2006 - 2009 Markets Volume (MtCO2e) Value (US$ million) 2006 2007 2008 2009 2006 2007 2008 2009 Voluntary OTC market 14.3 43.1 54.0 51.0 58.5 262.9 420.0 326.0 CCX 10.3 22.9 69.2 41.0 38.8 72.4 306.7 50.0 Other Exchanges - 0.0 0.2 2.0 - 0.0 2.0 12.0 Total Voluntary 24.6 66.0 123.4 94.0 97.3 335.3 728.7 388.0 EU ETS 1,104.0 2,061.0 3,093.0 6,326.0 24,436.0 50,097.0 100,526.0 118,474.0 Primary CDM 537.0 551.0 404.0 211.0 5,804.0 7,426.0 6,511.0 2,678.0 Secondary CDM 25.0 240.0 1,072.0 1,055.0 445.0 5,451.0 26,277.0 17,543.0 Joint Implementation 16.0 41.0 25.0 26.0 141.0 499.0 367.0 354.0 Kyoto [AAU] - 0.0 23.0 155.0 - 0.0 276.0 2,003.0 New South Wales 20.0 25.0 31.0 34.0 225.0 224.0 183.0 117.0 RGGI - - 62.0 813.0 - - 241.0 2,667.0 Alberta's SGER - 1.5 3.3 5.0 - 13.7 34.0 61.0 Total Regulated 1,702.0 2,919.5 4,713.3 8,625.0 31,051.0 63,710.7 134,415.0 143,897.0 Total Global Market 1,726 2,985 4,836 8,719 31,148 64,046 135,143 144,285
  10. 10. Outcomes from Cancún – Avoiding Deforestation (REDD+) <ul><li>Agreement on all three proposed phases of Reduced Emissions from Degradation and Deforestation (REDD+): </li></ul><ul><ul><li>REDD+ readiness </li></ul></ul><ul><ul><li>REDD+ implementation </li></ul></ul><ul><ul><li>Results-based payment-for-performance (phase 3).  </li></ul></ul><ul><li>Includes a global goal for reducing emissions from deforestation, and allows for interim state-level REDD+ programs that have clear paths toward becoming national-level </li></ul><ul><li>Sustainable and large scale carbon markets financing to be explored before Durban (COP 17) </li></ul>
  11. 11. Outcomes from Cancún – Avoiding Deforestation (REDD+) <ul><li>Technical advisory group to the Convention has an action to decide on the monitoring, methods and safeguards needed to implement REDD+ in the next two years </li></ul><ul><li>REDD+ decision incorporates social and environmental safeguards including  transparency measures for protection for indigenous peoples. Critically important as they are best-suited to monitor and protect their land from deforestation. </li></ul><ul><li>Financing for REDD+ activities tied to these environmental and social safeguards. </li></ul>
  12. 12. Outcomes from Cancún – Climate Finance <ul><li>Establishment of a Green Climate Fund (GCF) to disburse funds devoted to climate mitigation and adaptation activities </li></ul><ul><ul><li>Priority demand of developing countries </li></ul></ul><ul><ul><li>Governed by a board of 24 members, with equal representation from developed and developing countries </li></ul></ul><ul><ul><li>World Bank is interim trustee for the next three years and will manage and deliver the funds under direction from the Board with clear administration and accounting guidelines </li></ul></ul><ul><ul><li>Committed to $100 billion investment per annum by 2020 </li></ul></ul><ul><li>Reaffirmation of Copenhagen Accord commitment to deliver on ‘fast-start finance’ within three years </li></ul><ul><ul><li>Improved reporting; balanced focus on key themes, e.g. adaptation, mitigation and capacity building; priority to the most vulnerable nations </li></ul></ul>
  13. 13. Outcomes from Cancún – Climate Finance <ul><li>Designation of a Standing Committee for the GCF to activate resources for long-term financing </li></ul><ul><ul><li>Discussion postponed to Durban or beyond, but must address: </li></ul></ul><ul><ul><ul><li>Ways to reach the targeted $100 billion per year climate funding by 2020, </li></ul></ul></ul><ul><ul><ul><li>Inclusion and role of well-designed and transparent market mechanisms.  </li></ul></ul></ul><ul><ul><ul><li>Role of governments in providing initial financing, that leads to scalable and sustainable sources of finance via the private sector, as a response to government incentives </li></ul></ul></ul>
  14. 14. Outcomes from Cancún – Monitoring, Reporting and Verification (MRV) <ul><li>Essentially agreement on transparency and accountability </li></ul><ul><ul><li>Directly connected to developed and developing countries’ mitigation actions and for the financing of developing country actions </li></ul></ul><ul><ul><li>Compromise between the US and China was a significant facilitating step </li></ul></ul><ul><li>Commitments </li></ul><ul><ul><li>Developed countries will enhance reporting of their mitigation actions and will also improve reporting of financial, technological and capacity-building support to developing countries </li></ul></ul><ul><ul><li>Developing countries will improve their reporting on emissions and actions </li></ul></ul><ul><li>Links to the continuing development of Nationally Appropriate Mitigating Actions (NAMAs) which developing countries are committed to defining and implementing </li></ul>
  15. 15. Outcomes from Cancún – Future of the Kyoto Protocol <ul><li>Developed country parties to the Kyoto Protocol embraced a goal to reduce emissions by 25-40% below 1990 levels by 2020 </li></ul><ul><ul><li>Without agreeing to a second round of emission reduction commitments after 2012 </li></ul></ul><ul><li>Japan and Russia announced they will not sign up for post-2012 obligations without the United States and major emerging economies taking on obligations too </li></ul><ul><li>Discussions deferred to continue prior to Durban </li></ul><ul><ul><li>Goal of avoiding a gap between the first and second commitment periods </li></ul></ul><ul><ul><li>Decision on length of the second commitment period were also postponed until Durban </li></ul></ul><ul><li>Questioning of whether the CDM can continue without an agreed successor to the Kyoto Protocol </li></ul>
  16. 16. Outcomes from Cancún – Key targets <ul><li>No formalisation of the Copenhagen Accord’s pledges to set binding targets for emissions reduction either: </li></ul><ul><ul><li>through the second commitment period post Kyoto </li></ul></ul><ul><ul><li>through until 2050 </li></ul></ul><ul><ul><li>Agreement on the need to take urgent action to meet goal of holding temperature increases below 2 degrees Celsius </li></ul></ul><ul><ul><li>also agreed to a review and possible strengthening of the goal to 1.5 degrees Celsius, a key priority of small island states </li></ul></ul><ul><li>Agreement on the need for ‘peaking emissions’ </li></ul><ul><ul><li>work in 2011 towards identifying a timeframe for when emissions at a global level should reach their peak and begin declining </li></ul></ul>
  17. 17. Opportunities
  18. 18. Opportunities – REDD <ul><li>Deforestation accounts for approximately 20% of global emissions (World Bank research) </li></ul><ul><li>Most densely forested countries are predominately developing </li></ul><ul><ul><li>Central belt of sub tropical rainforest especially relevant </li></ul></ul><ul><ul><li>Presently a source of income </li></ul></ul><ul><ul><li>Pressures for alternative land use – agriculture, cattle, fuel, urbanisation... </li></ul></ul><ul><li>Facilitating countries to extract the inherent value of native resources in a sustainable manner </li></ul><ul><ul><li>Developed countries invest in developing countries with native forest </li></ul></ul><ul><ul><li>Carbon assets generate income </li></ul></ul><ul><ul><li>Incentivises positive engagement with local communities delivering socio -economic benefits </li></ul></ul>
  19. 19. Opportunities – REDD <ul><li>Roles for all types of participation </li></ul><ul><ul><li>International framework – led by the UNFCCC </li></ul></ul><ul><ul><ul><li>Global agreement on action </li></ul></ul></ul><ul><ul><ul><li>Drives commitment to funding </li></ul></ul></ul><ul><ul><ul><li>Underpins cross border eligibility of carbon assets </li></ul></ul></ul><ul><ul><li>National schemes </li></ul></ul><ul><ul><ul><li>Establish forestry baselines </li></ul></ul></ul><ul><ul><ul><li>Ensure ongoing MRV </li></ul></ul></ul><ul><ul><ul><li>Ensure appropriate allocation of funds </li></ul></ul></ul><ul><ul><li>Sub-national schemes – state or regional level </li></ul></ul><ul><ul><ul><li>Ensure local engagement and governance </li></ul></ul></ul><ul><ul><ul><li>Stimulates bottom up action </li></ul></ul></ul><ul><ul><li>Private sector – institutional investors and corporations </li></ul></ul><ul><ul><ul><li>Essentially for long-term funding, innovation and market stimulation </li></ul></ul></ul><ul><ul><ul><li>Stimulates bottom up action </li></ul></ul></ul><ul><ul><li>Bilateral agreements between sovereignties </li></ul></ul><ul><ul><ul><li>Norway has committed $1billion to both Indonesia and Guyana </li></ul></ul></ul><ul><ul><li>Combining compliance and voluntary market mechanisms </li></ul></ul>
  20. 20. Opportunities – Technology <ul><li>Renewable energy </li></ul><ul><ul><li>Wind continuing to be rolled out with incremental increases in efficiency </li></ul></ul><ul><ul><li>Solar potentially most scalable, combining micro and large scale generation – price parity is vital to it’s long term success </li></ul></ul><ul><ul><li>Hydropower – significant potential for small scale generation </li></ul></ul><ul><ul><li>Wave technology – remains very early stage </li></ul></ul><ul><li>Energy efficiency initiatives </li></ul><ul><ul><li>At point of power generation, e.g. fuel switching, carbon scrubbing </li></ul></ul><ul><ul><ul><li>RWE targeting to reduce from 0.8 tCO2e per MW hour in 2009 to 0.45 tCO2e per MW hour in 2020 </li></ul></ul></ul><ul><ul><li>At point of utilisation of power </li></ul></ul><ul><ul><ul><li>Monitoring, managing and reducing consumption – electricity, fuel, gas </li></ul></ul></ul><ul><ul><ul><li>LED technology </li></ul></ul></ul><ul><ul><li>Adopted by governments, municipalities, companies and individuals </li></ul></ul>
  21. 21. Opportunities – Technology <ul><li>Smart grid </li></ul><ul><ul><li>Investment in transmission, distribution and metering systems in Europe could reach $187 billion through the next 30 years (Goldman Sachs) </li></ul></ul><ul><ul><li>Opens up opportunities to import electricity from further </li></ul></ul><ul><ul><li>Storage of electricity is an important development </li></ul></ul><ul><li>Future energy mix – renewables, coal, gas, biomass, nuclear </li></ul><ul><ul><li>Europe is reaching a critical period in selecting how it will deliver short and mid term power </li></ul></ul><ul><ul><li>Developing countries take decisions largely on cost, however additional revenue streams offered by carbon markets counter this to a degree </li></ul></ul><ul><li>Carbon Capture and Sequestration (CCS) </li></ul><ul><ul><li>Key technological development to underpin continued use of coal as a primary power source </li></ul></ul>
  22. 22. Opportunities – Technology <ul><li>Waste management </li></ul><ul><ul><li>Conversion to biofuels or power generation </li></ul></ul><ul><ul><li>Recycling of materials </li></ul></ul><ul><li>Agricultural technology, as a means to: </li></ul><ul><ul><li>Reduce emissions and provide additional revenue streams </li></ul></ul><ul><ul><li>Increase productivity </li></ul></ul><ul><ul><li>Reduce continuing trends in land use changes e.g. deforestation </li></ul></ul>
  23. 23. Opportunities – Finance <ul><li>Government funding </li></ul><ul><ul><li>Contribution to international funds e.g. GCF </li></ul></ul><ul><ul><li>Bilateral agreements with countries for specific actions e.g. Norway, Japan </li></ul></ul><ul><ul><li>International development banks </li></ul></ul><ul><li>Institutional investment </li></ul><ul><ul><li>Investment banks </li></ul></ul><ul><ul><li>Asset managers, Pension funds, Sovereign wealth funds </li></ul></ul><ul><ul><li>Hedge funds </li></ul></ul><ul><ul><li>High net worth individuals and family offices </li></ul></ul><ul><ul><li>Venture capital, Private equity </li></ul></ul><ul><ul><li>Corporate treasury </li></ul></ul>
  24. 24. Opportunities – Finance <ul><li>International development agencies </li></ul><ul><ul><li>World Bank and IFC </li></ul></ul><ul><ul><li>Inter American Development Bank (IADB) </li></ul></ul><ul><ul><li>Asian Development Bank (ADB) </li></ul></ul><ul><ul><li>KfW </li></ul></ul><ul><ul><li>Brazilian Development Bank (BNDES)... etc. </li></ul></ul><ul><li>Combination of public and private investment to support international funds </li></ul><ul><ul><li>GCF needs to stimulate private investment as $100 billion per annum from governments will be spread very thinly </li></ul></ul><ul><li>Loans and structured debt </li></ul><ul><ul><li>Funding contingent on inclusion of environmental considerations </li></ul></ul><ul><ul><li>Repayment via carbon credits, feed in tariffs or other sustainable assets and revenues </li></ul></ul>
  25. 25. Opportunities – Finance <ul><li>Trading Activity </li></ul><ul><ul><li>Emission reduction credits (CERs, ERUs, NZUs, VERs etc.) </li></ul></ul><ul><ul><li>Allowances (AAUs, EUAs etc.) </li></ul></ul><ul><ul><li>Futures and options (OTC and exchange) </li></ul></ul><ul><ul><li>Swaps </li></ul></ul><ul><ul><li>Other structured instruments, largely OTC </li></ul></ul><ul><li>Green bonds, with underlying assets to include: </li></ul><ul><ul><li>government backed via green or climate banks </li></ul></ul><ul><ul><li>municipal based on energy efficiency gains </li></ul></ul><ul><ul><li>forestry </li></ul></ul><ul><ul><li>project activity under recognised mechanisms </li></ul></ul>
  26. 26. Opportunities – Corporate Action <ul><li>Companies can act immediately to embed and invest in sustainability: </li></ul><ul><ul><li>pre-compliance </li></ul></ul><ul><ul><li>consideration of the bottom line; e.g. energy efficiency saves money </li></ul></ul><ul><ul><li>creating new revenue opportunities </li></ul></ul><ul><ul><li>differentiation from competitors </li></ul></ul><ul><li>Consumer engagement </li></ul><ul><ul><li>branding </li></ul></ul><ul><ul><li>products and services </li></ul></ul><ul><ul><li>including carbon as a key business practice </li></ul></ul><ul><li>Opportunity for all types and sizes of organisation </li></ul><ul><ul><li>Utilities, petroleum, mining and industrial </li></ul></ul><ul><ul><li>Pharmaceuticals, consumer goods and food & beverage </li></ul></ul><ul><ul><li>Transport and aviation </li></ul></ul>
  27. 27. Opportunities – Emerging Markets <ul><li>Significant schemes developing across the globe </li></ul><ul><li>Carbon market mechanisms at various levels </li></ul><ul><ul><li>California (independently and as part of the Western Climate Initiative) </li></ul></ul><ul><ul><li>Australia (National Carbon Offset Scheme & Carbon Farming Initiative) </li></ul></ul><ul><ul><li>South Korea </li></ul></ul><ul><ul><li>Brazil </li></ul></ul><ul><ul><li>Governors’ Climate and Forestry Taskforce (3 US states, 5 Indonesian states, 5 Brazilian States, 1 Nigerian state) - REDD focused </li></ul></ul><ul><li>Specific national actions </li></ul><ul><ul><li>Bilateral agreements – Japan and Norway </li></ul></ul><ul><li>All will require a blend of technologies and financing </li></ul><ul><li>Potential to combine a top down, with a bottom up approach to progress towards an international carbon market </li></ul>
  28. 28. Risks <ul><li>Time </li></ul><ul><ul><li>To implement the political decision making processes and underpin global action </li></ul></ul><ul><ul><li>Left before the detrimental environmental impacts are profoundly worse </li></ul></ul><ul><li>Political uncertainty </li></ul><ul><ul><li>Overall Kyoto framework </li></ul></ul><ul><ul><li>Structure and role of the CDM post 2012 and in relation to emerging regional frameworks </li></ul></ul><ul><ul><li>Green Climate Fund (GCF) </li></ul></ul><ul><ul><ul><li>where will the investment arrive from </li></ul></ul></ul><ul><ul><ul><li>how will funds be distributed </li></ul></ul></ul><ul><ul><li>Ascension of REDD+ into regional and international market mechanisms </li></ul></ul><ul><ul><li>Actions of nations, particularly China, US and countries with large forest coverage e.g. Brazil </li></ul></ul>
  29. 29. Risks <ul><li>Technology Risks </li></ul><ul><ul><li>Ability of renewable energy to scale sufficiently </li></ul></ul><ul><ul><li>Ability of renewable energy to reach price parity with fossil fuels and role of subsidies in the interim </li></ul></ul><ul><ul><li>Will CCS deliver and in time to make a difference? </li></ul></ul><ul><ul><li>What will be the chosen role of nuclear? </li></ul></ul><ul><ul><li>How will fuel sources such as biomass evolve alongside food and water issues? </li></ul></ul><ul><li>Private sector </li></ul><ul><ul><li>Risk appetite for institutional and other investors to participate </li></ul></ul><ul><ul><li>Ability for markets to form transparently and in a robust manner </li></ul></ul><ul><ul><li>Influence of continuing increase in oil and other conventional fuel prices </li></ul></ul><ul><ul><li>Role of and engagement by international corporations </li></ul></ul><ul><ul><li>Engagement with consumers – how to do this effectively? </li></ul></ul>
  30. 30. Risks <ul><li>Socio-Economic </li></ul><ul><ul><li>Ensuring indigenous peoples have their rights protected as intended under the broad agreements reached </li></ul></ul><ul><ul><li>If investment is not forthcoming do less developed countries have the mechanism to mitigate and adapt for climate change? </li></ul></ul><ul><ul><li>Inefficiencies caused by emerging market challenges of balancing growth and climate impact </li></ul></ul><ul><li>Carbon market governance </li></ul><ul><ul><li>Significant challenges faced by the EU ETS </li></ul></ul><ul><ul><li>Inconsistency in application of rules and regulations </li></ul></ul><ul><ul><li>Stimulating increased participation on a global level </li></ul></ul><ul><ul><li>Effectively managing rapidly evolving mechanisms </li></ul></ul><ul><ul><li>Linking the bottom up development of regional schemes with the top down global political approach </li></ul></ul>
  31. 31. Risks <ul><li>Confidence </li></ul><ul><ul><li>in the objectives of mitigating climate change </li></ul></ul><ul><ul><li>in the carbon markets </li></ul></ul>
  32. 32. Thank you! Questions? <ul><li>Hassen Bali </li></ul><ul><li>Vice President – Environmental Markets </li></ul><ul><li>Markit </li></ul><ul><li>[email_address] </li></ul><ul><li> </li></ul>
  33. 33. Disclaimer <ul><li>Opinions, estimates and projections in this report constitute the current judgment of the author(s) at the time of writing. They do not necessarily reflect the opinions of Markit Group Limited. Markit Group Limited has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. </li></ul><ul><li>The content, information and any materials (“data”) provided by Markit in this presentation is on an “as is” basis. Markit Group makes no warranty, expressed or implied, as to its accuracy, completeness or timeliness, or as to the results to be obtained by recipients, and shall not in any way be liable to any recipient for any inaccuracies, errors or omissions herein. Without limiting the foregoing, Markit Group shall have no liability whatsoever to a recipient of this report, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by such recipient as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by it or any third party, whether or not based on the content, information or materials contained herein. </li></ul><ul><li>Copyright © 2011, Markit Group Limited. All rights reserved. Any unauthorised use, disclosure, reproduction or dissemination, in full or in part, in any media or by any means, without the prior written permission of Markit Group Limited is strictly prohibited. </li></ul>