Carbon Environmental Commodities 2010

1

Carbon Emissions and its mitigation

The environmental markets

February 2010

ijjkbkjknkl

2

Climate Change – Some observations

ijjkbkjknkl

3

The problem…

Source: US National Academy of Sciences

Source: Climatic Research Unit; University of East Anglia.

4

Climate change ------ is the earth warming up?

September 1979

September 2005

5

Climatology: Global and Regional Troubles

Increases in global temperature would have impact on physical and biological systems

Early flowering of trees;Declines in plant and animal population

IPCC – Intergovernmental Panel on Climate Change ---- emphasis on scenarios of projected changes in temperatures and hydrological indicators

The resulting variation in water cycle is likely to cause increased risk of drought and floods.

Degradation of water qualityRise in sea level

Rising temperatures to influence crop yields

Frequency of deaths due to climate changes increaseWHO has estimated 150,000 increased deaths each year due to incidence of diseasesMovement in temperatures by 1 unit would easily double this number

6

Carbon emissions ---- as it grows!!!

Source: EIA

Source: IEA ----Carbon emissions by region (1973), (2004)

7

Carbon Emissions -------- who is doing it?

Global primary energy demand is projected to grow by more than 50% between now and 2030, at around 1.6% per year.

Fossil fuels remain the predominant source of energy to 2030, accounting for 83% of the overall increase in energy demand between 2004 and 2030.

Coal sees the biggest increase in demand in absolute terms, driven by power generation. China and India account for almost four-fifths of the incremental demand for coal.

8

Some terminology

Abate. Used in the sense of “to bring down” or “to reduce or lessen in degree or intensity” and applied to the rate of emission of greenhouse gases.

Mitigate. This word is used in two different ways in the climate-change literature: (1) to take steps ex ante to reduce greenhouse gas emissions, i.e. to abate; and

(2) to take steps to reduce, ex post, the effects of greenhouse gas emissions, i.e. to adapt.

Adaptation. The process whereby economies adjust to the effects of climate change.

9

Climate change ------ what measures?

10

Activity Timeline…..

Source: World Resource Institute; www.wri.org

11

Activity Timeline…..

Source: World Resource Institute; www.wri.org

12

Kyoto Protocol Status

13

Investment Framework for climate change analysis

14

Impact of Climate Change on IBanking/Capital Markets

Investment banks will also gain from new trading markets,e.g. carbon emissions, weather futures etc, not least given the central roleenvisaged for market prices in addressing the impact of climate change.

Outstanding weather futures contracts on the Chicago Mercantile Exchange (CME) grew 800% between end 2004 and September 2005 to reach US$22bn.

The World Bank estimated the size of the global carbon trading market at US$22bn in September 2006, representing annualised growth of 167%.

The impact on proprietary trading profits from existing secondary markets will also be important.

If global warming leads to greater market volatility owing to an uncertain economic outlook, trading revenues may be impacted.

15

Impact of Climate Change on Insurance

•Retailing industry will also be influenced by climate change……how?

•The silicon industry??

16

Growing catastrophic risk!!

Source: EIA, Swiss Re manuscripts

17

EUA pricing………

18

CDM Model for sustainable future

ijjkbkjknkl

19

Kyoto Flexibility Mechanisms

•AAU--- Assigned amount units

•CER – Certified emission reduction

•ERU – Emission Reduction Unit

Source: UNEP

20

CDM Project Cycle

Reference for up-to-date list of methodologies

21

CDM---- By Sector

Source: UNEP, Eco securities

Projects by Sector

CERs received by sector

The projects involving the most potent GHGs such as HFCs, PFCs or N2O (2% by number of projects) nevertheless lead to the issuance of most CERs.

Although about 80% of CDM projects are either renewable energy or methane reduction projects, their emission reductions pale in comparison to HFC and N2O, with only 33% of total CERs issued.

GWP

22

Project Cycle

Source: Eco securities

23

Parties involved…..

Source: Eco securities

24

Carbon Finance

ijjkbkjknkl

25

Drivers and opportunities

Source: World Bank, varied.

26

Where does the buck come from?

Carbon Funds

Multilateral and private financiers

www.carbonexpo.com

Source: UNEP, varied sources

27

Where does the buck come from?

28

Cash flow schema for a CDM project -- ---- financial model

Source: Eco securities

29

Project Risks and need for sensitivity analysis

Source: Eco securities

30

Technology – as we cut out the carbon!

Source: IEA, 2004.

31

What are banks doing about it?

32

Europe ------ as in 2005/06

Source: Environmental Finance, May 2005.

33

Carbon finance: driving sustainable investments!!