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LSE Green Forum Presentation: European Climate Exchange

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  • Richard Sandor key roleStarted late 1990’s (most market people saw issue as fringe)US was the leader – CCX set to be focal point – US failed to ratifyEurope took centre stageECX established 2004Began operating 2005 – now centre of marketCCX playing a major role in US Voluntary arenaPlus continuing political role and operate markets in sulphur/nitrous oxide etcCCX will aim to be key US player when national system adopted
  • There is now real Global Momentum for cap-and-trade:Every year more than 30 billion tonnes of carbon dioxide are pumped into the atmosphere, contributing to global warming.In 1997 the Kyoto Protocol set out targets to reduce emissions by 5% against 1990 levels.It laid out its so-called ‘flexible mechanisms’ to help countries to meet this target – one of which is Emissions TradingWith its European Emissions Trading Scheme, or EU ETS, Europe has taken a leadership position:we are currently in its second phase, with phase 3 set to begin in 2013However Europe is not alone: one of the issues that both US presidential candidates agree on is the full backing a Federal cap-and-trade scheme for GHG emissions.And there is already a thriving and liquid voluntary cap-and-trade market in the US – this voluntary scheme at CCX is in a good position to evolve into a mandatory scheme – hence the price of a tonne of CO2 on CCX has risen from less than $2 before Super-Tuesday to around $7 today.And the USA has cap-and-trade experience with other environmental markets such as trading Sulphur Dioxide and Nitrous Oxide (or Sox and Nox) to combat localised acid rain – so it is not coming into emissions trading from a standing start.In the next few years we are set to see similar emerging national schemes in Canada, New Zealand and Australia, and Japan is at last beginning to shape its own ETS.But back to Europe, where ECX operates….
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  • So who trades these EUAs and CERs???There is a range of different players that, to an extent, overlap.The market is driven by companies under compliance – the Naturals/Physical players, hedging their exposure to carbon – eg oil companies, utilities, industrials. Also include project developers. Orbeo have a 100m tonnes of CERs, many of which are from projects hosted in South Korea, they are actively hedging this portfolio on ECX.Then there are the Speculators and Abitrageurs: most large European & US banks as well funds and prop shops – eg Saxon / Geneva Trading / Jane Street CapitalAnother emerging group might be called the Investors: there are banks offering a range of tradeble indices aimed at institutional investors and increasingly to retail clients. These include UBS / Barclays / Socgen….. and ETFs such as KlimaInvest / Airshares. Although hedgers will always have high proportion of O.I., we envisage their proportion of overall trade to decrease, as you find in most mature commodity markets….
  • So what next??All signs are pointing to more participants from more regions, more national schemes – could this lead to a global market??Even China is making encouraging moves and explorations into cap-and-trade, though this may not happen for a while.With all the growing pains associated with Europe’s regional cap-and-trade scheme and all the regulatory differences between competing schemes, a global cap-and-trade seems distant, but by no means impossible – just as equities trading has become more global.And if these emerging trading schemes allow the UN Kyoto credits, CERs, to be imported for compliance, then these CERs could act as the glue that binds these regional carbon markets together.The main liquidity for trading CERs is currently on the European Climate Exchange, so we are well positioned as this market expands and matures.
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    1. 1. European Climate Exchange The Carbon Market: Opportunities in a Growing Industry LSE, 6th March 2009
    2. 2. About ECX: Europe’s leading Carbon Exchange Climate Exchange PLC (CLE) European Climate Chicago Climate Exchange (ECX) Exchange (CCX) Chicago Climate Futures Exchange (CCFE) 2
    3. 3. Carbon – The Next Asset Class Obama cap-and-trade quotes in 2009: “We would put a cap and trade policy in place that is as aggressive if not more aggressive than anyone out there” “If somebody wants to build a coal-powered plant, they can. It's just that it will bankrupt them.“ 3
    4. 4. Emission Trading – A Growing Market EU ETS trading volumes have But carbon is still young compared grown roughly 106% annually to other commodity markets and between 2005 and 2008… has significant growth potential… Exchange Traded Carbon Volume “Market Churn” (in MM tons C02) Ratio of Trading Volume / Physical Volume * * Source: ECX / ICE, MMT Energy. Data based on 2007 traded volume across major global commodity exchanges and excludes OTC volume. Source: Core Carbon group. Disclaimer: Cannot be reproduced or used without the express consent of Core Carbon Group. Core Carbon Group not responsible 44 for inaccurate or incorrect information.
    5. 5. Price and volume – ECX Contracts • 94 million tonnes of CO2 traded in 2005 with a market value of €2.1 billion • 452 million tonnes of CO2 traded in 2006 with a market value of €9 billion • 1 billion tonnes of CO2 traded in 2007 with a market value of €17.5 billion • 2.8 billion tonnes of CO2 traded in 2008 with a market value of €51.3 billion 5
    6. 6. Who is the Carbon Market? Hedgers Investors Speculators Arbitrageurs 6
    7. 7. Where Next? Aus ETS 445Mt EU ETS 2,080Mt NZ ETS 100Mt CERs bridge the Regional Schemes? Japan ETS Voluntary US ETS 5,760Mt Canada ETS China? 400Mt 7
    8. 8. Thank You for Listening! Sar a St åhl Di r e c t o r   o f   M r k e t   a De v e l o p me n t Eur opean Cl i m e at Exchange ( ECX) Te l : +4 4 ( 0 ) 2 0 7 3 8 2 7 8 0 4 Ema i l : s a r a . s t a hl @ c x. e u e W b: e www. e c x . e u 8