© UPU 2010 – Tous droits réservés Feasibility study on the establishment of a carbon offset...

© UPU 2010 – Tous droits réservés

Feasibility study on the establishment of a carbon offset system for the postal sector

April 2010

France and Great Britain

CA C 2 GPDD 2010.1–Doc 4.Annexe 1

© UPU 2009 – All rights reserved

2© UPU 2010 – Tous droits réservés

Agenda

− Objectives of the postal carbon offsetting project− Carbon market overview

• The Kyoto Protocol and the flexibility mechanisms • The European Union Emission Trading System (EU ETS)• The Voluntary Emission Reduction market• Measure, reduce and offset emissions and reach targets

− Postal offsetting strategy outline• Choosing the right offsetting scheme• Benefits for postal participants• Overview of the offsetting postal scheme• Using carbon finance for sustainable development purposes• Keys to credibility• How to involve member Posts?

− Next steps and planning− Appendix



Objectives of the Postal carbon offsetting project− Support the climate change policy of the UPU

• Extend scope of actions (measuring GHG emissions and devising a common protocol)

• Involve members in a collective action− Demonstrate that postal operators are responsible players− Position the UPU as a proactive and innovative trade organization− Accompany the sustainable development of the postal sector

• Favour the development of the postal sector in developing and transition countries

• Energize the whole postal sector through local investments

• The opportunity study laid the ground for the French proposal submitted at the UPU's CA in November 2009

− The report included• Insights into potential offsetting strategies• An assessment of what further studies were needed to implement the

project

First survey with



Carbon market overview

France and Great Britain © UPU 2009 – All rights reserved


• Follows the United Nations Framework Convention on Climate Change (Rio de Janeiro, 1992)

• Average greenhouse gas (GHG) emissions from the 39 most industrialized countries must be reduced over 2008– 2012 by at least 5% vs 1990– Objectives differ from country to country (eg -6% for Japan)

– Anthropogenic emissions of six GHG are targeted: CO2, CH4, N2O, HFC, PFC, SF6

– Developing countries not committed to any absolute emission reduction

• Protocol signed in 1997, but enforced in 2005 only

• International market of carbon emission rights for industrialized countries– Industrialized countries are allocated Assigned Amount

Units (AAU) in an amount equal to their respective emission target

• Under Clean Development Mechanism (CDM) and Joint Implementation (JI), players based in industrialized countries may fund emission reduction projects abroad in return for tradable carbon offsets– Offsets can be used to compensate for emissions in excess

of national cap

Kyoto Protocol

Flexibility mechanisms

Project-based Kyoto offsets

CDM in developing countries

JI in transition or

industrialized countries

CertifiedEmissionReduction

EmissionReduction

Units

Em

iss

ion

s (

t C

O2 e

)

Emission reduction = number of offset

units

Actual emissions under the CDM/JI

project

Estimate of emissions without

CDM/JI project

Project starts

time



• What? A cap and trade system

– EU Member States define emission caps consistent with their commitments under the Kyoto Protocol

– Tradable emission permits (European Union Allowance or EUA) in an aggregate amount equal to the cap are allocated to installations covered by the scheme in each country

– Participation is mandatory for businesses in the sectors covered

• Who?

– Geographical scope has grown as the EU itself enlarged to 27 Member States (+ 3 non EU countries)

– Covers power generation and manufacturing sectors (11,400 installations) accountable for about 50% of CO2 emissions in the EU

• From 2012 will be expanded to include emissions from air flights to and from European airports

• How?

– Businesses that run larger emissions than their quota (e.g. utilities) may purchase EUA from installations in the opposite situation (e.g. industrials)

• Emissions are cut where the abatement costs are the lowest

– Subject to importation limits, EUA may be substituted with CER

– After an initial 3-year pilot phase, tighter caps on emission allowances for the 2008–2012 trading period (-8% EU 15)

– In 2013 a revamp of the EU ETS will take effect with a view to strengthen, expand and improve its functioning

European Union Emission Trading System (EU ETS)

Industrial sector allocation in 2009 in the EU 27

Cement11%

Ferrous metal & steel10%

Ceramic & glass2%

Pulp & paper2%

Others2%

Oil refining8%

Fuel combustion (including power)

65%

Sou

rce

: Eur

opea

n

28 Feb 30 Mar 30 Apr

Government allocates a

number of EUA to installation for year Y+1

Installation reports actual

emissions for year Y

Installation gives back EUA based on actual

emissions in year Y

Year Y



• Organizations outside the scope of compulsory regimes may elect to mitigate their GHG emission on a voluntary basis through a combination of outright reduction and compensation initiatives

• This can be achieved by using either Kyoto offsets such as CER or voluntary compensation units called Voluntary Emission Reductions (VERs)

• The logic behind VERs is similar to Kyoto offsets, yet there are no established rules and regulations for the voluntary carbon market

• Voluntary projects may serve– as a testing field for new procedures, methodologies and

technologies– as a niche for micro projects that are too small to warrant

the administrative burden of CDM

• On the flip side, the lack of regulatory control has led to the production of some low quality VERs

– Not all VERs are the same!

• Only VERs labelled with well-regarded standards offer the desired degree of integrity and are deemed credible

The Voluntary Emission Reductions Market

Standards Project typesCo

benefits (vs CDM)

Price (vs CER)

CDMAll except

REDD*, new HFC and nuclear

= n/a

Gold StandardEnergy

efficiency and renewables

+ More expensive

VCS All except HFC - Cheaper

VER+Similar to CDM

except large hydro

+ Cheaper

CCBSLand Use, Land Use Change and

Forestry**+ Cheaper

* REDD = Reduced Emissions from Degradation and Deforestation

** LULUCF = Bio-sequestration

Source: Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, WWF Germany, March 2008



Measure, reduce and offset emissions and reach targets

CO2CO2CO2CO2

CO2CO2CO2CO2CO2

CO2

CO2

CO2

CO2

1Activity without CSR

policy

CO2CO2

CO2CO2

CO2

CO2CO2

2Outright

carbon emission reduction

CO2

CO2CO2

CER ERU

3 Offsetting of non-reducible emissions

4 Emissions mitigated up to target balance

CO2

CO2CO2

CERERU



Postal offsetting strategy outline



Choosing the right offsetting scheme– Three alternative scenarios were considered (see table in appendix)

– Reasons behind the choice

• Capitalizes on the skills, contacts and experience of an established carbon asset manager to source, select and manage investments

• Avoids building up a costly infrastructure within UPU (human and material resources)

• Reduces operational risks

• Saves considerable time for the UPU and allows member Posts' staff to focus on their core businesses

• Only light governance structure required within the UPU

• Asset manager contractually bound by mandate granted by the UPU

Specifies investment objectives and constraints

Defines responsibilities between the asset manager and the UPU

Ensures alignment of interest (management in the best interest of the postal sector)

• Easy to implement

A compensation mutual fund with management sub-contracted to third party comes out as the most suitable solution for the postal sector



The compensation mutual fund proposal has numerous benefits for postal participantsSecure supply of carbon offsets for investing posts

– Post operators that cannot source offsets on their own achieve critical mass by teaming up with others

– Ability to build a diversified carbon asset portfolio that matches UPU objectives, and combines

• large-scale projects with higher profitability

• smaller projects involving a wide range of technologies in a variety of countries

• projects related to the postal sector that may originate from UPU members

– Achieve both technology and know how transfers while providing much needed funding to less favoured post operators

– Access offsets in a cost efficient way by pooling resources

• through optimized management and administrative fees/expenses

• fixed costs spread on a larger asset basis

• better bargaining power with intermediaries/service providers vs dispersed voluntary compensation arrangements



Overview of the offsetting postal scheme

Regulated or voluntary

projects

Postal projectswith direct positive

impact for the postal sector!

Membershipcharter

Signatory

Executive CommitteeEthics committee

Investing Posts

Willing to offset their emissions

Sub-contracted

asset manager

Management/investment

Non-postalprojects

that have an indirect positive

impact for the postal sector as defined in UPU selection criteria

Man

date

Rep

ortin

g

SUBSCRIPTION – €€

Financing SD policy of

posts (selection of project by the

executive committee)

€€

OFFSET CAPACITY

Detailed investment report for communication with external stakeholders

Su

rplu

s CC

sal es

CC storage and

retirement

CC registers

Su

rplu

s pro

ceeds – €€

Sur

plus

Pro

ceed

s –

€€

If surplus carbon credit

CC

Surplus CC

Carbon market

CC = Carbon Credit

CC

CC

Surplus Proceeds – €€

€€



Using carbon finance for sustainable development purposes– The compensation mutual fund is governed by rules in line with the UPU's sustainable

development principles

Projects financed through the fund meet the following goals • act as a lever for the economic and social development of postal operators• boost postal activity (e.g. in developing territories increases exchanges and flows)

whether indirectly (first stage) or directly (as soon as possible)– The compensation mutual fund is a not-for-profit fund

• A payment in offsets to investing posts financing projects that ultimately benefit the postal sector

• A guarantee of integrity and a safeguard against fraud through "centralized" management

project flows, whether financial or physical, are not handled by the investing posts

the compensation mutual fund holds a register through which carbon credits pass and are retired (thus averting the risk of carbon credits resale)

• Proceeds from surplus carbon credits sales may be used to subsidize sustainable development policy in the postal sector (selection by executive committee)

While being subject to sound financial management, the compensation mutual fund is a lever for "sustainable growth" in the postal sector



Key for the compensation mutual fund's credibility: governance bodies and contractual obligations

Usual asset management governance structure to ensure compliance with mandate and tailor-made mechanisms to manage rights to compensation

EXECUTIVE COMMITTEE Sets up membership rules Monitors the fund: regular management reviews ensure due consideration for postal requirementsStaffed by UPU and Restricted Union representatives

ETHICS COMMITTEECarries out (bi) annual reviews of

postal sector guidelines investment reports

Is independent: the committee is the fund's moral guarantee and a warrant of credibility for the scheme

Within the UPU

Double-deck governance structure in charge of

investment/compensation strategy and monitoring

Under fund manager

TRANSPARENCY AND TRACEABILITY OF

INVESTMENTS

Asset manager must behave in the best

interest of investing Posts and is accountable for all decisions pursuant to management mandate

Contract between the UPU and the fund manager

MANDATE GRANTED TO THIRD PARTYACTING AS FUND MANAGER

The third party sources and selects projects, builds and hedges the offset

portfolio and carries all such duties that fall under the investment

management mandate

detailed specifications are of the essence, and include among others:

– Investing rules: taking into account sustainable

development in the choice of host countries and

project types– Monitoring rules: ensuring the

integrity of the mechanism© UPU 2009 – All rights reserved


How to involve member Posts? (1/4): a progressive and fair involvement in postal projects

– Trade-off between profitability and postal focus

• In the short term, investment in emission reductions projects that indirectly benefit the Posts of developing countries

Classical projects give rise to either certified emission reductions (CER – CDM projects) or emission reduction units (ERU – JI projects)

Projects in line with sustainable development priorities of the UPU

– positive environmental side-effects

– benefits for the local communities

Projects contribute to the economic development and welfare of local areas and territories

Projects thus boost the activity of local postal operators



How to involve member posts? (2/4): a progressive and fair involvement in postal projects

• At a later stage, investment in emission reductions projects that directly upgrade the postal sector (e.g. replacement/retrofitting of vehicle fleets, green electricity, afforestation/reforestation, etc.)

Projects owned and developed by individual postal operators, presented on a stand-alone basis or through Restricted Unions

Project eligibility subject to stringent investment guidelines: tools and training available to local postal correspondents for a better screening of postal projects

Emissions reductions related to certain postal projects to be materialized through voluntary emissions reductions (VER) in those cases where no relevant UNFCCC methodology is in force or can be submitted in a reasonable timeframe

– Earmark proceeds from "excess credit" sales to fund sustainable development policies of postal operators in developing countries

– Long-term objective to turn non-investing signatory Posts into investing ones



PotentialLaunch N+3N+2N

201320122011

2011: launch of the fund • Purchase of "mainstream" offsets on a forward or spot basis

2011: launch of the fund • Purchase of "mainstream" offsets on a forward or spot basis

2012: investment in post-related ER* projects

• Forward purchase of postal primary offsets

2012: investment in post-related ER* projects

• Forward purchase of postal primary offsets

From 2012 on: ER* postal projects originated by post operators (subject to availability of projects and methodologies)

• ER* projects sourced by the UPU or member Posts• Profits reinvested in SD policy of non-investing Posts

From 2012 on: ER* postal projects originated by post operators (subject to availability of projects and methodologies)

• ER* projects sourced by the UPU or member Posts• Profits reinvested in SD policy of non-investing Posts

How to involve member posts? (3/4): gradual involvement

• Develop tools and guidance for postal operators, with a view to facilitate the sourcing, screening, documentation and submission of suitable ER* projects

• Develop tools and guidance for postal operators, with a view to facilitate the sourcing, screening, documentation and submission of suitable ER* projects

• Eligible ER* projects adding value to the postal sector likely to be sourced from third parties at first

• Eligible ER* projects adding value to the postal sector likely to be sourced from third parties at first

*ER = emission reduction

1 Preliminarystudies Design

2 Development Raising awareness & building

capacity

Till POC and CA

2010

3 Maturity Initiation of postal projects

N+1

Postal involvement



How to involve member posts? (4/4): conditions for subscribing to the compensation mutual fund • Being compliant with the investing Posts' charter ("membership charter")

Respecting the postal standard to report CO2 emissions Investing Posts have a sustainable development policy in place and staggered CO2

emission reduction targets Investing Posts are implementing actions to reduce emissions before any

compensation, and actively seek further reduction opportunities Investing Posts only use offsets to cover emissions that are irreducible in the short

term

• Two different compensation needs identified among potential investing Posts Compensation sized to meet a fraction of estimated corporate emissions so as to

achieve a corporate target Compensation in an amount that matches offsetting items sold to customers (e.g.

stamps associated with several grades of offsets)

The compensation mutual fund will be set up in such a way so as to allow maximum transparency and facilitate communication with external stakeholders (including clients) for investing Posts

How to use it?



Next steps and planning



Roadmap for 2010Define project requirements ("what")• Choose the favourite offset scheme and come up with

an outline of the project

• Build momentum and gather support for the project among postal operators

Define project specifications ("how")1 Assess the overall scheme size based on compensation needs by investing Posts and offset projects availability (postal resources – 5 to 10k€ )2 Determine the time horizon of the fund and how it would be deployed (10 to 15 k€)

3 Define the structure of the fund and all associated operating rules and costs (25 to 50 k€ depending on legal aspects) and set up investment guidelines (15 to

20 k€ depending on legal aspects)

4 Identify and meet potential partners (postal resources)

5 Promote the project in order to get the main Posts on board (postal resources)

Validation of the project implementation

Planning

Until April 2010: presentation at the POC This meeting will be an opportunity to raise awareness of carbon finance (e.g. by means of a training)

Between April and September 2010

Between August and October 2010

November 2010: presentation at the CA



Next steps: activities of the subgroup

Share the workload among the subgroup members (Algeria, Brazil, Cameroon, France, Great Britain

Indonesia, South Africa and Switzerland)

– Promote the project in the region and obtain feedback

(interest, potential involvement, recommendations...) (interest, potential involvements, recommendations...)(interest, potential involvements, recommendations...) feedbacks

– Initiate contact with designated national authorities

(local authorities in charge of compensation projects

approval) in order to prepare to source projects

compensation

Plan steps ahead and schedule deliverables and meetings

• Prepare the POC

Schedule next meeting

Presentation to be sent to the UPU at the beginning of March



Appendix



Different offsetting options have been considered: a compensation mutual fund comes out as the most suitable solution

Options Benefits Challenges

Postal sector-wideEmissions Trading Scheme

Reliance on partially existing instruments and infrastructures

– More difficult to explain to the general public, or even to member Posts

– Potentially complex to implement and administer– Requires careful cost analysis

Compensation mutual fund with in-house management

– Opportunity to build capacity internally– Enhanced visibility for the UPU acting as

asset manager– Better control on investment decisions

vs third party management– Postal sector knowledge readily available

– Involves setting up and operating an asset management arm– Involves regulatory approval and registration– Potential lack of internal expertise or experience in asset management– Requires careful cost analysis

Compensation mutual fund with management sub-contracted to third party

– Relative ease of implementation– Quick to set up– Ability to rely on the expertise and credibility of an established carbon market player, while at the same time becoming familiar with the asset class– Cost effective, if fees properly negotiated

– Selection of a suitable partner– Potential lack of postal sector track record by third party– Management/performance fees to be paid to third party to be carefully negotiated– Alignment of interest to ensure that third party manages the fund in compliance with UPU specifications and objectives (governance and suitable incentives are key)


© UPU 2010 – Tous droits réservés Feasibility study on the establishment of a carbon offset...

Documents

Transcript of © UPU 2010 – Tous droits réservés Feasibility study on the establishment of a carbon offset...