Preparing for EU Carbon Regulations - A Practical Guide by Evolution Markets & Climate Connect
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Transcript of Preparing for EU Carbon Regulations - A Practical Guide by Evolution Markets & Climate Connect
Preparing for EU Carbon
Regulations: A Practical Guide
Presented By
Lenny Hochschild, Evolution Markets
&
Prashant Kulshrestha, Climate Connect
Please direct your queries to
CC Analyst
Overview, Current Status &
Position of Airlines
© Evolution Markets Inc. | Climate Connect Limited 1
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Fast and accurate news helps in making informed decisions impacting your bottom-line
About Climate Connect – Specialist News & Data
provider in emerging Post 2012 Environmental
Markets
© Evolution Markets Inc. | Climate Connect Limited 2
Kentucky
New Delhi
London
Beijing
Our expertise in EU ETS Aviation
I. Latest News Published over 100 news stories on EU ETS Aviation
July 20, 2012 AirAsia signs deal with GE Aviation to cut carbon emissions, fuel consumption
July 19, 2012 Etihad plans to cut emissions using Rolls Royce's fuel optimization...
July 16, 2012 EU ETS will cost €10 million to Emirates
July 10, 2012 EU ETS Aviation may impact production says Airbus; proposes reforms
July 9, 2012 VerifAvia expands operations to cover airport emissions
July 9, 2012 UN calls for $25 per tonne carbon tax in developed countries
July 6, 2012 South African Airways eyeing voluntary carbon offset project
July 5, 2012 NATS partners with Royal Jet to achieve environmental goals
June 21, 2012 European Commission activates single EU Emission Trading registry
II. Dedicated Monthly Aviation Newsletter – Aviation focus To be launched on first week of August 2012
II. Global Newsletter Published Monday to Friday with a section on Aviation
III. Post-2012 Carbon Markets Report Published every Tuesday with a section on Aviation
© Evolution Markets Inc. | Climate Connect Limited 3
Climate Connect interviewed Paul Steele, Executive
Director, Air Transport Action Group at COP 17, Durban
Click here to see the interview
About Evolution Markets – the carbon markets’
leading brokerage firm
Evolution Markets provides strategic financial and industry-leading transactional services to
participants in global environmental markets and the clean energy sector
Unique approach called EvoFinance™, a single source for innovative financial services solutions
Evolution Markets Inc. and Climate Connect, JV that provide comprehensive advisory and
transaction services to assist aircraft operators and their partners around the globe with
services and strategies to comply with the European Union's carbon reduction mandates
© Evolution Markets Inc. | Climate Connect Limited 4
Market Pioneer
First Trade of Kyoto Allowances (Green-AAUs) (Dec. 2002)
First Brokered EU ETS Trade (Apr. 2003)
First EU ETS Trades Using the ISDA Contract (Jun. 2004)
First Large-Scale EUA Transaction (400K EUAs) (Nov. 2004)
First EUA Trade for Settlement in 2008 (Nov. 2004)
First Brokered EUA Option (Sep. 2005)
First Indexed CER Trade (Mar. 2006)
First “Phase Three” (post-2012) EUA Trade (Mar. 2007)
First RGGI-Compliant Offset Trade (Jun. 2007)
First CER Option (Sep. 2007)
First RGGI Allowance Trade for Physical Settlement (Mar. 2008)
First Brokered EUA Spot Trade (Jun. 2009)
First Quarterly EUA Options Trade (Jul. 2009)
First Brokered ERU Cleared Trade (Jul. 2010)
First Guaranteed California Compliant Offset Trade (Dec. 2010)
First GreenEx-Cleared California Carbon Allowance Trade (Sep. 2011)
Presentation Structure
© Evolution Markets Inc. | Climate Connect Limited 5
Introduction to EU ETS
Aviation under EU ETS & its significance
Opposition by other states – Why?
Important Timelines
Financial implications – Compliance/Non-
compliance
Special issues faced by airlines
Mitigating the Compliance – Data needed
EU ETS Registry
Documentation, Monitoring, Reporting &
Verification
Trading allowances under EU ETS
Associated Risks with the Trading
EUA/EUAA/CERs – Historical prices/trend
Compliance efforts -Current Scenario
Future forecast
Evolution & Climate Connect – Snapshot of
our Services
Thank You
Q&A
Launched in 2005 with ‘cap-and-trade’ as its principle
Covers 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and
Norway), 40% of total GHG emissions
Covers 11,000 power stations and industrial plants in 30 countries
Inclusion of Aviation from Jan 1st,2012, others from 2013
Introduction to EU ETS
Phase I Phase II Phase III
2005-2007
Emissions rose 1.9%
Increase of 37.88 million tons
2008-2012
Allowance cap: 2.8 billion tons
Average cut of 7% from 2005 levels
2013-2020
EU-wide emissions cap
Reduce emissions to 1.7 Bn tons
Various European Commission
documents
© Evolution Markets Inc. | Climate Connect Limited 6
Aviation under EU ETS & its
significance Global emissions of carbon dioxide (CO2) rose by 3%
Worldwide, flights produced 676 million tonnes of CO2
CO2 emissions from EU international aviation increased by 110% between 1990 and 2008
On 2 February 2009, EU legislation incorporated aviation into the EU Emissions Trading Scheme (ETS)
as from 2012
Airlines operating into and out of the EU are required to immediately begin purchasing emissions
allowances, but are only expected to remit the sums in 2013
Non compliance, leads to fines of up to EUR100 (USD122) for each tonne of carbon dioxide emitted
© Evolution Markets Inc. | Climate Connect Limited 7
Opposition by other states –
Why?
© Evolution Markets Inc. | Climate Connect Limited 8
A group of 26 countries including China, the United States and India jointly
denounced the ETS as "illegal“
EU ETS breaches the Chicago Convention, which prohibits taxation of international
aviation
BASIC (Brazil, South Africa, China & India) nations showed deep concern about
the unilateral action by the EU to include international aviation in the EU-ETS
EC estimates the ETS will cost Chinese airlines less than €2.5m a year and Indian
airlines €1m a year, which is an "insignificant amount"
Important Timeline
Allowance allocation in 2012
Free allowances: 180.95 Mn tons
Allowance auction: 31.93 Mn tons
July 2012
Identify requirements and resources
for Carbon Registry Account
application
Aug 2012 Submit Carbon Registry
Account application
Sept 2012 Submit new Monitoring Plan for
next trading period (if required)
Oct 2012
Activate Carbon Registry
account
Obtain approved plan and
approval letter from Competent
Authority
Nov 2012 QA assessment validating
internal process
Jan 2013 Submit report and supporting
documentation to a third-party verifier
Various resources available
at European Commission
© Evolution Markets Inc. | Climate Connect Limited 9
Mar 2013 Submit verified report to
Competent Authority
Financial implications –
Compliance/Non-compliance
$0.5 - $1 billion by 2020
€3.1 billion by 2020
$719 million by 2020
Reuters estimates: $2.8 billion by 2020
Bloomberg estimates: 844 million offset deficit
by 2020
IATA estimates: $17.7 billion by 2020
EC estimates: $20 billion profits by 2020
Cost Estimates
To comply: Airlines that do not have
enough allowances will have to buy
them in the carbon market or face a
€100 / ton fine.
© Evolution Markets Inc. | Climate Connect Limited 10
Special issues faced by the
Small Airlines
© Evolution Markets Inc. | Climate Connect Limited 11
Difficulty to directly access to international carbon market in Europe
Inability to qualify or meet stringent Know your customer (KYC) requirements of big
carbon traders or exchanges
Inadequate access to regulatory and market information
Inability to find qualified staff in country of origin with adequate carbon market
knowledge
Administrative expenses could be higher relative to compliance obligation
No avenues for carbon market education in country of origin
Mitigating the Compliance – Data needed
© Evolution Markets Inc. | Climate Connect Limited 12
All the airlines will have to
Monitor tonne-kilometers and CO2 emissions begins 1 January each calendar year for EU-
ETS
Report tonne-kilometer data to your Member State's regulatory authority no later than 31
March of each calendar year
Report CO2 emissions data to your Member State's regulatory authority no later than 31
March of each calendar year
Surrender allowances for 2012 emissions by 30 April 2013
DETERMINATION OF CO2 EMISSIONS
CO2 emissions = Fuel consumption x emission factor
Emission factors for aviation fuels
Fuel Emission factor
(tCO2 /tfuel)
Aviation gasoline (AvGas) 3,10
Jet gasoline (Jet B) 3,10
Jet kerosene (Jet A1 or Jet A) 3,15
Documentation, Monitoring,
Reporting & Verification
© Evolution Markets Inc. | Climate Connect Limited 13
What is a monitoring plan?
Aircraft operators will be required to submit two monitoring plans to their administering Member State:
How the aircraft operator intends to monitor and report fuel consumption (the emissions monitoring plan) and
Tonne-kilometre data (the tonne-kilometre monitoring plan)
Data required in emissions monitoring plan
Data identifying the aircraft operator, contact details of the aircraft operator
A list of aircraft types in the fleet, the number of aircraft per type and the fuel calculation method per aircraft type.
An indicative list of the additional types and numbers expected to join the fleet.
A description of the procedures used to monitor the list of flights operated.
A description of the methods used for monitoring (and transmitting, storing and retrieving) fuel consumption data,
including:
The chosen methodology for the calculation of fuel consumption.
The procedures for measurement of fuel uplifts and fuel in tanks.
The procedure to ensure the total uncertainty of fuel measurement will comply with the monitoring and
reporting requirements.
The procedure for measurement of fuel density, and the emission factors used for each fuel type used
Continue…
© Evolution Markets Inc. | Climate Connect Limited 14
tonne-kilometre monitoring plan
A list of aircraft types in the fleet, the number of aircraft per type and the fuel calculation method per
aircraft type.
An indicative list of the additional types and numbers expected to join the fleet.
A description of the procedures, systems and responsibilities used to update the list over the
monitoring year.
A description of the procedures used to monitor the list of flights operated.
A description of data acquisition and handling activities, and quality control and assurance activities,
including maintenance and calibration of measurement equipment.
A description of the methods used for determining tonne-kilometre data per flight, including:
The procedures, responsibilities, data sources and calculation formula for determination and
recording of distance per aerodrome pair (=GCD + 95km).
Description of the procedures or method used to determine the mass of freight and mail and the
mass of passengers and checked baggage.
Description of the measurement devices used for measuring mass of passengers, freight and mail
as applicable.
EU ETS Registry
© Evolution Markets Inc. | Climate Connect Limited 15
The Union registry or EU ETS Registry is a secure web-based application that
records:
Allowances allocated and held in registry accounts
Annual verified emissions
The transfer of allowances between accounts
Annual compliance status
Each Aircraft operator have to open an Aircraft operator holding account (AOHA) for
the transaction of allowances in the Union registry
• A certified copy of Certificate of Incorporation or registration of the Applicant evidencing the full name of the Applicant
• The company registration number and VAT registration number
• The names of all Directors
• A statement signed by the individual or Authorised Representative confirming the full name, permanent residential address, place & date of birth, email address etc.
Documents Required (Any one)
Important
Step-by-step registration process
© Evolution Markets Inc. | Climate Connect Limited 16
Trading allowances under
EU ETS
© Evolution Markets Inc. | Climate Connect Limited 17
Exchange Traded:
Margining implications
Clearing
Access to real time pricing
Access to live quotes on screen
Bilateral/Non-Exchange Traded
Credit Approval
Pre-Trade Bilateral Documentation
Counterparty Risk
Access to wholesale pricing
Associated Risks with the
Trading Carbon Credits
© Evolution Markets Inc. | Climate Connect Limited 18
Insufficient Risk Management Controls
Counterparty Performance Risk / Credit Risk
Price Volatility
Political/Regulatory Uncertainty
Reputational Risk
EUA/EUAA/CERs – Historical prices/trend
© Evolution Markets Inc. | Climate Connect Limited 19
5
6
7
8
9
10
2/28/2012 3/28/2012 4/28/2012 5/28/2012 6/28/2012
EUAA Dec 12: Price Action
3.00
7.00
11.00
15.00
19.00
23.00
27.00
31.00
Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12
€
EUA & CER: Price Action
Pre -2012 Strip EUA
Pre-2012 Strip CER
11-'14 EUA Strip
11-'13 CER Strip
Compliance efforts -Current
Scenario
© Evolution Markets Inc. | Climate Connect Limited 20
Biofuel Alaska Airlines launched its maiden biofuel-powered flight, from Seattle to Washington D.C.
Australia's Qantas airline makes first commercial biofuel flight
Azul Airlines announces plans to test Amyris sugarcane-based jet fuel
United Airlines, Boeing, Honeywell’s UOP, the Chicago Department of Aviation and the Clean Energy
Trust announced the formation of the Midwest Aviation Sustainable Biofuels Initiative (MASBI)
KLM Royal Dutch Airlines became the first airline in the world to operate flight on aviation biofuels
Boeing, Airbus team up on EU carbon charge, biofuels
Emission
Trading
Air Berlin concluded first trade of EU aviation allowances
SAA to Raise Surcharge to comply with EU Emissions Trading Scheme
major airlines Deutsche Lufthansa AG, AirFrance-KLM and others buying or plan to buy carbon
permits
Virgin will receive nearly 3.6 million EU aviation allowances for the year 2012, and a total of 27 million
for the period 2013-2020
Efficiency United Airlines orders 150 Boeing 737s, 15% more fuel-efficient per seat
Etihad Airways chooses Rolls-Royce to help cut emissions and save fuel
Boeing, American Airlines 737-800 ecoDemonstrator Airplane Prepares for Flight Test Program
ANS EU prepares for common air traffic management
LATAM Airlines eyes wider use of RNP navigation tools
Royal Jet colloborate NATS, air navigation service provider to improve the environmental
performance of its flights in UK airspace
Regulatory IATA Welcomes ICAO Progress on a CO2 Standard for Aircraft
Canada launches its own GHG reduction plan for aviation
Current & Future regulatory
developments
© Evolution Markets Inc. | Climate Connect Limited 21
EU ETS inspired other countries and regions to launch cap and trade
schemes
ICAO establishing a worldwide CO2 Standard for aircrafts, a system,
which characterizes the CO2 emissions for aircraft types with varying
technologies
Aviation industry looks for other ways of reduction of CO2 emissions e.g.
South African Airways exploring the implementation of voluntary carbon
offset project
Carbon Leakage
New sectoral market mechanisms in the EU ETS
Evolution & Climate Connect – Snapshot of our
Services
© Evolution Markets Inc. | Climate Connect Limited 22
Aviation Advisory Services:
Sustainability Consulting: A comprehensive report on the
Aviation ETS program, inclusive of compliance obligations,
allowance allocation, auction structures and frequency, and
carbon offset programs.
Compliance and Reporting: Support in fulfilling EU ETS
obligations, including analysis of emissions data, reporting,
and timely submission of data to the respective authorities.
Governance and Risk Management: Development of a
comprehensive and strategic risk management program.
Sustainability Reports: Reports and analysis of Aviation
Allowances, Carbon Emissions, and market trends.
Registry Services and Documentation: Acting as your
appointed representative, allowing you to cost-
effectively outsource coordination with the appropriate
registry for the delivery of compliance units.
Monitoring and Verification: Assessment and procurement
of the services of a third-party verifier to complete the
monitoring and verification of emission data.
Carbon Trading: Accessing the carbon market for
allowance and offset procurement and sale, as well as
execution of various hedging strategies.
Knowledge Services:
Carbon Workshops: On-site workshops or Webinars to
stay on top of market and regulatory developments.
News Broadcasts: News and regulatory updates on
carbon markets designed specifically for the aviation
industry. Carbon Market Research: Research reports on
carbon pricing and market liquidity, focused on your
specific risk profile and information needs.
Intelligence Reports: Aviation industry business
intelligence reports and case studies on aircraft operator
strategies to meet carbon compliance obligations.
Allowances and Carbon Credit Reports: Reports
detailing EUAs and CERs issuance and surrender rates.
Carbon Price Data: Access to industry-leading market
data services.
Thank You Privileged Information Seeker
www.climate-connect.co.uk | www.evomarkets.com
To find out more about Evolution Markets’ and Climate
Connect’s advisory services for the aviation sector
Call: +1 415.963.9138 (US), +44 207.193.8996
(UK/Europe), +91 11.4505.6713 (India)
or email: [email protected]
Disclaimer: Climate Connect Ltd has taken due care and caution in compilation and reporting of data as has been obtained from various sources including
which it considers reliable and first hand. However, Climate Connect Ltd does not guarantee the accuracy, adequacy or completeness of any information and it
not responsible for errors or omissions or for the results obtained from the use of such information and especially states that it has no financial liability whatsoever
to the users of this report. This research and information does not constitute recommendation or advice for trading or investment purposes and therefore Climate
Connect Ltd will not be liable for any loss accrued as a result of a trading/investment activity that is undertaken on the basis of information contained in this report.
Climate Connect Ltd does not consider itself to undertake Regulated Activities as defined in Section 22 of the Financial Services and Markets Act 2000 and it is
not registered with the Financial Services Authority of the UK.
© Evolution Markets Inc. | Climate Connect Limited 23
Evolution Markets Inc. and its suppliers believe the information or data contained herein was obtained from reliable sources. Nevertheless, Evolution Markets Inc.
does not guarantee the accuracy and/or the completeness of the information or data included herein, to you or to any other person or entity, and Evolution
Markets Inc. shall have no liability for any errors or omissions with respect to such information or data. Evolution Markets Inc. makes no express or implied
warranties to you, or to any other person or entity, and expressly disclaims all warranties or merchantability or fitness for a particular purpose or use, with respect
to the information or data included herein. Without limiting any of the foregoing, in no event shall Evolution Markets Inc. have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages. Prices and or bids/offers reflect (i) data from
completed transactions, (ii) data from pending transactions, (iii) firm bids to buy and/or firm offers to sell, (iv) prices purchasers have expressed a willingness to
pay, but for which we have not received, or are not aware of, a firm bid to buy or prices sellers have expressed a willingness to accept, but for which we have not
received, or are not aware of, a firm offer to sell and/or (v) our judgment of the price(s) at which transactions could be concluded based on any combination of the
above information. © Copyright 1999-2011, Evolution Markets Inc.