Embed Size (px)
Citation preview
The Carbon Market
Trading Emissions Contracts
February 2009
2
Contents
Introduction
Cap and Trade
Kyoto mechanics
European market experience
Conclusions
ECX
3
Why?
• If your house was on fire, would you try to put it out?
• The world is heating up, it is caused by humans (anthropogenic), and we have the chance to address it.
• The global cost of a Cap and Trade based solution is estimated at 2% of GDP – if we act now.
• If we don’t act, what legacy are we leaving to future generations?
4
Understanding Cap and Trade
5
The Cap
• Measure
• License
• Limit supply
• Creating a shortage in something that was always deemed to be limitless
• Requires great political leadership – those covered will naturally resist
• Has different resistance points depending on local factors
• Will never be truly fair – some people will suffer more than others
6
Cap – underlying philosophy
• Those who continue to pollute at the old levels will have to pay, and the charges will increase as the supply is squeezed. Over time this will make them LESS competitive
• Those who change early will be rewarded for their action. Over time they will become MORE competitive.
• The overall improvement is the quantum of the reduced supply
7
Trade
• Brings buyers and sellers together thereby creating a price formation mechanism
• Provides transparency and liquidity
• Allows active financial risk management
• Facilitates the monetisation of excess credits
8
Cap and trade
SIMPLE!
• Creates a cost and/or an opportunity
9
Kyoto Protocol – key points
• Divides world into two parts – Annex 1 countries (developed world) and non-Annex 1 countries
• Covers period 2008 -2012• Reduce Annex 1 emissions by (an average of) 5.2% below 1990 levels
• National caps applied – but multiple mechanisms for compliance
10
Kyoto Protocol flexible mechanisms
BACK TO CONTENTS
• Emissions Trading– Annex I parties may trade emissions allowances at a national or
regional level
• Clean Development Mechanism (CDM)– Annex I parties may implement emission reduction projects in non-
Annex I countries in order to meet their own emissions targets
• Joint Implementation (JI)– Annex I parties may implement emission reduction projects in
certain other Annex I countries in order to meet their own emissions targets
11
Kyoto Implementation
• Europe – global leadership position
• Pre-Kyoto trading scheme (Phase I) 2005-2007• Phase II coincides with Kyoto period• EUETS legally binding across all 27 member
states• Average reduction of 8% (from 1990 levels)• 12% of allowances can come from CDM (national
limits ranging from 0 to 20%) • 2013-2020 scheme being finalised
12
Kyoto Implementation
• United States – failed to ratify agreement
• The largest per-capita emitter of carbon, responsible for approximately one third of Annex 1 pollution
• Various regional initiatives – California, RGGI• Voluntary (legally binding0 scheme managed by
Chicago Climate Exchange• Both Presidential candidates vocal supporters of
cap and trade• Possible post-Kyoto implementation 2013?
13
Kyoto Implementation
• ROW – varied responses• Canada – scheme commencing 2010• Australia – scheme announced 2010• New Zealand – scheme to start 2009 (possible link
to Australia)• Japan – details not yet available
14
CountryBase year GHG
emissions (mt CO2e)
2005 GHG emissions (mt CO2e)
Change in GHG emissions
base-2005 (%)
Kyoto Protocol target as change
from base (%)Difference (%)
Australia 418.3 525.4 25.6 8 17.6
Belarus 127.4 75.6 -40.6 -8 -32.6
Canada 596.0 746.9 25.3 -6 31.3
Croatia 31.6 30.5 -3.4 -5 1.6
European Union 5133.4 4711.0 -8.2 -8 -.2
Hungary 115.7 80.22 -30.7 -6 -24.7
Iceland 3.4 3.7 10.5 10 .5
Japan 1272.0 1359.9 6.9 -6 12.9
Liechtenstein .23 .27 17.4 -8 25.4
Monaco .11 .10 -3.1 -8 4.9
New Zealand 61.9 77.2 24.7 0 24.7
Norway 49.8 54.2 8.8 1 7.8
Poland 586.9 399.0 -32.0 -6 -26.0
Russia 2989.8 2132.5 -28.7 0 -28.7
Turkey 170.1 296.6 74.4 -8 82.4
Ukraine 923.8 418.9 -54.7 0 -54.7
United States 6229.0 7241.5 16.3 -7 23.3
Total 18,709.6 18,182.3 -2.8 -5.2 2.4
Performance against Kyoto targets
15
Post Kyoto
• Aiming for agreement in Copenhagen 2009
• To cover period 2013 – 2020
• 20-30% reduction by Annex I countries (?)• Number of CER’s to be allowed• Commitment from non-Annex I
16
Corporate structure
Climate Exchange PLC
(CLE)
European ClimateExchange (ECX)
Chicago Climate Exchange (CCX)
Chicago ClimateFutures Exchange
(CCFE)
17
About ECX
• European Climate Exchange is the most liquid marketplacefor trading CO2 EU Allowances (EUAs) under the EUEmissions Trading Scheme. ECX is part of the Climate Exchange plc group of companies, listed on AIM of the LSE
• ECX and ICE Futures Europe have a partnership where ECX manages marketing and product development for its carbon emissions contracts and ICE lists those products for trading on its electronic platform known as WebICE.
• ECX CFI (Carbon Financial Instrument) contracts are:– Listed & traded on ICE Futures Europe electronic platform, a
Recognized Investment Exchange– Regulated by the Financial Services Authority– Financially guaranteed by LCH.Clearnet
18
ECX Products
Futures and Optionsbased on underlying:
EUAsEuropean Union Allowances
CERsCertified Emission Reductions
EU ETS -European Union
Emissions Trading Scheme
CDM - Clean Development
Mechanism project credits
19
About ECX
Global Exchange Volumes (EUAs + CERs)January 2009
ECX / ICE67.4%
Nordpool0.5%
Bluenext30.8%
EEX1.2%
Green Exchange0.1%
ECX / ICE Nordpool Bluenext EEX Green Exchange
20
Price and volume ECX EUA Futures 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
ECX CFI Contracts Monthly Volume
0
50
100
150
200
250
300
350
400
450
Apr-05
Jul-05
Oct-05
Jan-06Apr-0
6Jul-0
6Oct-0
6
Jan-07Apr-0
7Jul-0
7Oct-0
7
Jan-08Apr-0
8Jul-0
8Oct-0
8
Jan-09
DATE
VO
LU
ME
(m
illi
on
to
nn
es C
O2)
€ 0.00
€ 5.00
€ 10.00
€ 15.00
€ 20.00
€ 25.00
€ 30.00
€ 35.00
Settlem
ent P
rice
EUA Futures EUA Options CER Futures
CER Options EUA Dec-08 Sett
21
Open Interest ECX EUA Futures Contracts
ECX EUA Futures Contracts Open Interest currently rests at 171 million tonnes
ECX EUA Futures Open Interest Breakdown
0
50
100
150
200
250
300
DATE
VO
LU
ME
(mill
ion
ton
nes
CO
2)
2012 2011 2010 2009 2008 2007 2006
22
Volume ECX EUA Options Contracts341 million tonnes of CO2 have traded in EUA options and 79 million tonnes of CER options on ECX / ICE
Futures Europe
0
10
20
30
40
50
VO
LU
ME
(m
illi
on
to
nn
es C
O2)
Nov-06Jan-07
Mar-07
May-07Jul-0
7Sep-07
Nov-07Jan-08
Mar-08
May-08Jul-0
8Sep-08
Nov-08Jan-09
MONTH
ECX EUA and CER Options VolumeEUA Calls EUA PutsCER Calls CER Puts
23
Who is the Market?
Hedgers
Speculators
Arbitrageurs
Investors
24
ICE Futures Members enabled to trade ECX Contracts
Accord Energy Galp Energia Osterreichische Elektrizitatswirtschafts-AG ADM Investor Services International Gazprom Marketing & Trading R.J. O’Brien & Associates
All Energy Trading Geneva Ireland Financial Trading Rand Financial Services All Options Curaçao Getco RBC Capital Markets Corporation Atel Trading GFI Securities RBS Sempra Energy Europe Bache Commodities GH Financials Royal Bank of Canada Europe Banc of America Securities Goldman Sachs International Sagacarbon Barclays Capital Grupo Santander Saxon Financials BG International HSBC Bank Schneider Trading BHF Bank ICAP Securities Schnell & Co. BNP Paribas Commodity Futures Infinium Capital Management Scottish Power Energy Management BP Gas Marketing IMC SEB Futures British Energy Trading Jane Street Capital Shell Energy Trading Carbon Capital Markets Jaypee International Shell Int. Trading & Shipping Company CEZ JP Morgan Securities Smartest Energy Citadel Derivatives Trading Jump Trading Spectron Energy Services Citadel Equity Fund KFW Starmark Trading Citigroup Global Markets KlimaInvest Statkraft Energi Climate Change Capital Limestone Trading Sucden UK Credit Suisse Securities Madison Tyler Trading Susquehanna Deutsche Bank Marex Financial TFS Derivatives Dresdner Bank Marquette Partners The Royal Bank of Scotland E&T Energie Marubeni Corporation ThyssenKrupp E.On UK Merrill Lynch Commodities Tibra Trading Europe EDF Trading Merrill Lynch International Tradelink EDP – Energias de Portugal MF Global Tullett Prebon Securities EGL Trading Mizuho Securities USA UBS Clearing & Execution Services ELECTRA Deutschland Morgan Stanley & Co International UBS Electrabel Natixis Commodity Markets Universal Data (UK) Endesa Generacion Newedge - Calyon Wachovia Bank First New York Securities Newedge – FIMAT XConnect Trading Fortis Bank Global Clearing Optiver VOF
25
Price Drivers
• Macro– Political will– National developments– Economic
(growth/recession)– Innovation
• Micro– Demand and Supply– Oil price– Coal price – Gas price– Weather/temperature– Interest rates– Other markets
26
EUA-CER Price Spread
EUA price
CER price
Spread
0.00
5.00
10.00
15.00
20.00
25.00
30.00
€
27
EUA Price Correlations
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
220.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
EEX German Power €/MWh UK Power £/MWh Brent Crude $/BarrelRotterdam Coal $/Tonne UK Nat Gas p/therm ECX CFI €/tCO2
28
ICE ECX Screen Shot
BACK TO CONTENTS
29
Where Next?
US ETS5,760Mt
EU ETS2,080Mt
Aus ETS445Mt
NZ ETS100Mt
Japan ETS1,272 Mt
China/India?Canada ETS
400Mt
CERs bridge theRegional Schemes
30
Multiple roads to the same destination
Behavioural change
Renewable energy sources
Voluntary markets
(CSR and pre-mandatory)
Mandatory cap & trade
31
Carbon – The Next Asset Class
“Global greenhouse gas emissions markets are clearly the next great frontier in the commodities trading world”
Commissioner Bart Chilton – US Commodity Futures
Trading Commission, March 2008
32
Watch this space!
“The total global carbon market value could reach €2 trillion ($3.1 trillion) by 2020.”
- POINT CARBON, May 2008
34
Other Information Authorised Data Vendors
Codes for viewing live ECX CFI prices
EUA Futures EUA Options CER Futures
Bloomberg EMIT OMONCARA comdty
CT<GO>Reuters 0#CFI: 0#CFI2Y 0#CERE:CMS UX n/a n/aIDC <17>t, UX n/a <17t>CERmy CQG UX Options UX QCER
ICE Energy Live LUX n/a n/a
E-Signal/ Futuresource
LUX n/a <17t>CERmy
