Embed Size (px)
Citation preview
1
Overview and Status:Overview and Status:CDM and JI CDM and JI
Heather McGeory
Project Manager, Natsource
Introductory Workshop on the Clean Development Mechanism (CDM) & Joint Implementation (JI)
International Institute for Sustainable Development
Winnipeg, Manitoba
March 1, 2006
2
Natsource at a GlanceNatsource at a Glance Asset Management Services
– Greenhouse Gas Credit Aggregation Pool (GG-CAP) US$550
million
– 26 Buyers from EU, Japan, North America
– Managed Accounts
– Other pools under development
Advisory and Research Services– Risk assessments
– Trading design
– Market intelligence and pricing
Transactional Services – Over $7.5 Billion traded in GHG, Renewables and conventional air
pollutants markets
3
What Is Emissions Trading?Comparative Advantage
Can reduce 1000 tons CO2E at €2/ton
= €2000
Can reduce 1000 tons CO2E at €6/ton
= €6000
Company A - Seller Company B - Buyer
1000 tons CO2E at €4/ton = €4000
SELL BUY
€2000 Profit
€2000 Savings
Cost of abatement is less Cost of abatement is less for Company Afor Company A
4
Emissions Trading RationaleEmissions Trading Rationale
Harness market opportunities to achieve targets in most cost-effective and flexible way.
Benefits:– Incentive/priority to innovate at home– Lower aggregate costs– Lower individual costs– Additional revenue for over achievement
EU JI: CH4, N2O
An Expanding Global MarketAn Expanding Global Market
EU ETSCO2 Only
CDM: Any gas, any sector
Full Global Trading
Large Sources of CO2, CH4, N2OHFC, PFC, SF6
Transport???
All Major Emitting Countries
Norway
Norway
Phase 1 Phase 2 Beyond 2012
Non-EU JI: Any gas, any sector
EU ETSCO2 only,
Power focus
JapanCanada
6
Estimated Credit Shortfall Estimated Credit Shortfall 2008-20122008-2012
Ratification of the Kyoto Protocol requires that developed countries will reduce GHG emissions during 2008-2012
Market Areas
Carbon Credit Shortage
(in tonnes)
Japan 800,000,000
Canada 1,350,000,000
Europe 1,600,000,000
Total Short = 3,750,000,000
CDM and JI help manage the total shortage
7
Major Components of the Major Components of the Carbon MarketCarbon Market
EU Allowances (EUAs)– 2006-2008– European Union Emissions Trading Scheme
(EU ETS)
Certified Emission Reductions (CERs)– 2006-2012 – Clean Development Mechanism (CDM) (Kyoto
Protocol, Article 12)
Emission Reduction Units (ERUs)– 2008-2012– Joint Implementation (JI) (Kyoto Protocol,
Article 6)
8
Types of CreditsTypes of CreditsEUA CER ERU
Crediting period
2005-2007 (non bankable from ’07-’08)
2005-2012 (bankable from ‘07-’08)
2008-2012
Origination and Transfer
European Union
“developing” country to Annex B country
Annex B country to Annex B country
Project development timeline
New Can have started in 2000
Can have started in 2000
Transacted? Yes Yes Yes
UN Registered Projects?
N/A Yes No
9
Assessing CDM/JI projects:Assessing CDM/JI projects:Natsource Delivery Risk ModelNatsource Delivery Risk Model
Outputs at the project and portfolio level:
(1) delivery (in metric tons)
(2) delivery shortfall against contracted amount
(3) standard deviation of delivery
(4) equivalent 'investment rating' of project
(5) risk management options
Applied in:assisting the World Bank's Carbon Finance Business develop a
framework to evaluate ER projects and portfolios;
working with a large European development bank to develop an acquisition strategy for its EUR 50 million carbon fund;
Natsource’s recently launched carbon aggregation pool, GG-CAP
10
Project Risk AssessmentProject Risk Assessment
Due Diligence
Project Pre-Screening
Project Screening and Scoring
Contractual Conditions Analysis
Credit Review, Collateral Requirementsand Structuring (if needed)
Standard MOU / LOI
Using Using
Natsource Asset Natsource Asset Management Management
(NAM)(NAM)
Delivery Risk Delivery Risk ModelModel
11
Key Screening FactorsKey Screening Factors
Host country’s investment climate
Host country’s CDM institutional readiness
Credit rating of project participants
Project’s financing stage
Project’s stage in CDM cycle
Project’s stage of development
Technology used
Stakeholders’ acceptance
Clear ownership title
Example of Key Risk Factors:
Project’s
Delivery Shortfall
+
Rating
ModelModel
12
CER Price driven by Delivery RiskCER Price driven by Delivery Risk
Only a PIN available Project developing new
methodology No DNA or Host
government approval only given after Validation by DOE
Poor Credit Project not registered Flexible CER delivery
schedule No punitive damages Unilateral Upfront payment
CER Price increases
Using approved methodology
Host government approval Strong project partners,
technology supplier Good Credit Ability for buyer to become
a Project Participant (Multilateral)
Project registered Guaranteed delivery
schedule with punitive damages for non-delivery
Payment on Delivery
13
Valuation of EUAs vs. CERsCERs are not yet a commodity
Higher risk = lower price
EUA CER
Risk Low, €40 excess emission penalty (€100 from 2008)
High, no guaranteed delivery
Registry Functional Registries International Transaction Log not presently functioning
Trading partners
Trades occur with companies with investment grade credit
Trades occur with non-credit worthy companies
Contract Length
through 2007 through 2012
Contract Size
10,000 – 50,000 100,000 +
14
Global Carbon Markets:Global Carbon Markets:Trends and Current Trends and Current
DevelopmentsDevelopments
15
Carbon Market Transaction Carbon Market Transaction Overview Overview
20052005
EU ETS up and running CDM Registered Projects: 20-30 Total transactions:
– 800 million tons traded– $USD 11.28 billion
Clean Development Mechanism/Joint Implementation transactions: – 425 million tons traded– $USD 2.4 billion
16
Carbon Market Project Carbon Market Project Overview Overview
20052005
Purchasers Project Types
Source: Point Carbon
17
Carbon Market Overview Carbon Market Overview 20062006
Market liquidity increasePrice increase ($USD 26 to $USD 33
from January to early-Feb) More players coming into the marketIncreased numbers of project
approval flow from the CDM EB
18
CER Pricing TrendsCER Pricing Trends
Upward price pressure:
Japanese buying will continueUS regional programs may create
some demandEU tightness will continue to seek
CERs to fill needs
19
CER Pricing TrendsCER Pricing Trends
Downward price pressure:
Canadian uncertainty Increased registration of CER
projectsIndustrial Gas “Mega” Projects (i.e.
$USD 930 million China HFC Project)Corporations with excess allocation
not trading yet
20
CER Pricing TrendsCER Pricing TrendsUncertain price pressure:
EU ETS uncertainties– First true-up, May 2006– NAP allocations for 2008-2012, June
2006Post-2012 negotiationsRussia & Ukraine supply has not
been priced into the market
21
CER Market TrendsCER Market Trends
Prices expected to continue to increase in 2006 Commoditization of CERs Increased funding for the CDM Executive
Board– Increase in the number of registered projects
Will likely continue as mechanism of choice for emissions reductions – Well-established frameworks for project
development– Likely to survive post-Kyoto
Link between EU ETS and other developing markets
22
JI DevelopmentsJI Developments
First meeting of the JI Supervisory Committee on 2-3 February 2006
In 2005, 28 million tons transacted with a value of €96 million
23
Canadian vs. EU SystemsCanadian vs. EU Systems
Canada – No firm targets– Delays have been, and
continue to be, costly– Comparatively little
interest in international projects among Canadian private sector vs EU private sector
– Thin market predicted
EU– Firm targets– More companies more
seriously engaged– Looking to hedge risk
in international projects– Active market, with
purchases made by both governments and corporations
24
Natsource offices in: Calgary, Ottawa, New York, Washington, London and Tokyo
www.natsource.comwww.natsource.com
Heather [email protected]
+ 1 212 232 5305+ 1 212 232 5305
