Presentation Outline
description
Transcript of Presentation Outline
Carbon Offsets: An OverviewU.S. Climate Partnership Association (USCPA)Washington, D.C.Thursday, June 25, 2009
© 2008 ECOSECURITIES GROUP PLC
Presentation OutlineI.Background on EcoSecuritiesII.An Introduction to the Carbon Markets
•How have they developed and how do they work?•Voluntary carbon markets vs. compliance markets•Voluntary offset standards and the different commodities they create•What carbon commodities exist today?•What markets are currently the most liquid?•Some data on volume, prices, and growth in existing markets
III.Opportunities & Risks in Carbon Trading•Why should an individual trader consider trading carbon?•From a corporate perspective, why are companies getting involved?•What are the risks to individual and corporate players?•The risks involved when developing projects vs. trading issued credits•How do aggregators mitigate risks for investors?•Some data on market participant perspectives
© 2008 ECOSECURITIES GROUP PLC
I. Background on EcoSecurities
© 2008 ECOSECURITIES GROUP PLC
Who We AreEcoSecurities is one of the world’s leading companies in the business of originating, developing and trading carbon offsets
both domestically and abroad.
EcoSecurities structures and guides greenhouse gas (GHG) emission reduction projects from beginning to end, working with both project developers and buyers of carbon credits
EcoSecurities works with companies in developing and industrializing countries to create emission reduction credits from projects that reduce emissions of GHGs in a wide range of sectors, including renewable energy, agriculture and urban waste management, industrial efficiency, and forestry
© 2008 ECOSECURITIES GROUP PLC
EcoSecurities’ HighlightsLeading offset provider:
– 385 projects in portfolio in more than 30 countries using more than 20 different technologies;
– 140 million tonnes to 2012;– 133 projects registered with the Clean Development Mechanism;– 10 projects contracted in the US voluntary market; – EcoSecurities responsible for 21% of issued tonnes on the California
Climate Action Reserve;– First two projects to be registered with Voluntary Carbon Standard; – EcoSecurities responsible for 100% of issued VCUs; and, – First issued credits transferred on TZ1 and APX registries.
© 2008 ECOSECURITIES GROUP PLC
Our Global PresenceBuenos AiresBangkokBeijingBernCasablancaChengduClaremontDelhiDubaiDublinJakartaJohannesburgKarachiKievKuala Lumpur
LimaMadridManilaMexico CityNew YorkOxfordPanamaPortlandRio de JaneiroRomeSan FranciscoSan JoseSantiagoSingaporeThe HagueTokyo
Countries where EcoSecurities has projects
EcoSecurities’ current office locations or representatives
© 2008 ECOSECURITIES GROUP PLC
So what do we do exactly?
7
Originators & project developers help assume risk> On the “buy” side
– Provide a guaranteed price for a set period of time– Assume risks throughout the project development process associated with
its success (investment of time and resources)– Assume any risks associated with the salability of the asset
> On the “sell” side– Provide guaranteed delivery of credits at a guaranteed price (especially
essential for compliance buyers)– Hedge against individual project failure or underperformance
© 2008 ECOSECURITIES GROUP PLC
Offset Project Type Examples
© 2008 ECOSECURITIES GROUP PLC
A Quick EcoSecurities Case StudyCO2 from electricity use at swine farm
Animal Waste
CH4 from waste breakdown
Other concerns: odor, ammonia, VOCs, groundwater contamination…
© 2008 ECOSECURITIES GROUP PLC
A Quick EcoSecurities Case StudyCO2 from electricity use at swine farm
Animal Waste
Co-benefits: reduced odor, water issues, and other pollutants, US technology, skilled jobs for digester installers, cheaper energy for farmers
CH4 from waste breakdown
Biogas
© 2008 ECOSECURITIES GROUP PLC
Buyers from EcoSecurities’ Portfolio
© 2008 ECOSECURITIES GROUP PLC
II. An Introduction to the Carbon Markets
© 2008 ECOSECURITIES GROUP PLC
Carbon credit type
Purpose/Use Example $
Allowances Gov’t issued permit to emit 1tCO2e
EUAs, RGGI allowances
Varies by stringency of cap
Offsets (Regulatory)
Gov’t approved credit representing 1tCO2e project-based reduction
CERs Varies by rigor of offset standards
Offsets (Voluntary) Represents 1 tCO2e project-based reduction achieved voluntarily, and used for carbon neutrality, CSR, etc.
VERs, CRTs Varies by project type, geography, approval standard, vintage, co-benefits, etc.
CFIs Could represent member reduction, offset project, REC
CFI Usually low, anywhere from $1.80-$7
Other Environmental Commodities
Represents another env. commodity but has embedded carbon value
RECs, white tags varies
© 2008 ECOSECURITIES GROUP PLC
The “carbon market” is a mixed bag• Generally, all carbon “credits” represent 1MtCO2e• Beyond that, offsets, allowances, CFIs, etc. all represent different
things and have different values, esp. delving into differences between voluntary vs. regulatory carbon
• Prices of regulatory carbon credits generally somewhat more stable because represent a more uniform commodity
• Voluntary offsets have wildly different values based largely on subjective consumer preference for a certain project type, standard, vintage, geographic location, etc.
• Markets are also just now getting into developing futures, options, etc. for all these commodities, adding another layer of complexity
© 2008 ECOSECURITIES GROUP PLC
What is the carbon market & how does it work?• Markets for “environmental commodities” are not new
• Developed as an alternative to “command & control” regulations, e.g. SOx and NOx markets created by the Clean Air Act—1990’s
• The Kyoto Protocol, signed in 1997 and effective in 2005, sought to address growing concerns about global warming through the creation of a global market for carbon
• The U.S. did not sign Kyoto, but markets have developed without us…
© 2008 ECOSECURITIES GROUP PLC
International Carbon Markets> The Kyoto protocol is an international agreement that aims to
reduce greenhouse gas (GHG) emissions by 2012 and distinguishes two types of countries:
– Annex I countries (industrialized) w/ binding emission targets—incl. Western and Eastern Europe, Canada, Japan, etc.
– Non-Annex I countries (developing) w/ voluntary participation—incl. China, India, South Africa, Brazil, etc.
> Flexible mechanisms also exist:– Joint Implementation (JI): projects between Annex I countries
that generate ERUs– Clean Development Mechanism (CDM) projects in developing
countries funded by developed countries that generate CERs
© 2008 ECOSECURITIES GROUP PLC
Emission Cap
Actual Emissions
Buyer
Carbon Credits (CERS)
Carbon Value ($)
Annex I Non – Annex I
Seller
A CDM project reduces the GHG emissions in the CDM country
The Kyoto ProtocolThe reduced GHGs in a Non–Annex I countries can be sold to an Annex I country
© 2008 ECOSECURITIES GROUP PLC
International Carbon Markets> The European Union Emissions Trading System (EU ETS) is
the largest emissions trading system in the world
> Launched on January 1, 2005 > Administered by the EU Environmental Commission (EC)> Member States (MSs) create National Allocation Plans (NAPs)
that divide credits (EUAs) amongst sectors and emitters> Credits from the Kyoto flexible mechanisms can be traded into
the EU ETS and used for compliance
In 2007, US$50 billion was traded over the counter, bilaterally, and on exchange platforms in the EU, e.g. the European
Climate Exchange (ECX) and London Energy Brokers Assn (LEBA)
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
Carbon Markets in the U.S.Because the US did not ratify the Kyoto Protocol, there are no domestic “compliance” carbon markets yet, but plenty of activity still abounds
>A mix of state and regional policies under development> California’s 2006 Assembly Bill 32> The Western Climate Initiative (WCI)> The Regional Greenhouse Gas Initiative (RGGI)> Midwestern Regional GHG Reduction Accord (MRGHGRA)
>Voluntary carbon markets> The Chicago Climate Exchange (CCX)> Over-the-counter (OTC) carbon offset markets (voluntary offset
markets exist globally as well)
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
Voluntary Offset Credits> VERs, or Verified Emission Reductions, are offset credits
> VER market is driven by voluntary buyers
> The VERs are determined based on a standard (such as the Voluntary Carbon Standard or VCS), as opposed to CERs that are subject to CDM rules and procedures
– There are different VER standards, so VER quality can vary considerably, thus the importance of setting a high standard
– Procedures for generating VERs more flexible than CDM, but still need to demonstrate credible and additional reductions
> CERs are often also used to meet voluntary demand
© 2008 ECOSECURITIES GROUP PLC
The Voluntary Market
Utilities
Aviation
Large Corporations• Financial• Industry• Retail
GovernmentsPublic
United States
Europe
Pre Complianceexamples
Offsettingexamples
• Not a standardized market• Pricing is relatively opaque• Still in development but growing fast• Reputation and credibility is key in this market, so it’s
important to keep a high standard to source VERs
© 2008 ECOSECURITIES GROUP PLC
What’s in the U.S. voluntary market?> The liquid US markets today are:
> CCX and the CCFE (CCX sister Chicago Climate Futures Exchange), which trade CCX CFIs (spot, future and options) and RGGI allowance futures/options
> A small fraction of the CCX market consists of project based reductions; the rest are reductions made by CCX members sold to other members (so CFIs somewhat of a black box)
> The NYMEX Green Exchange, which trades EUAs, SO2, NOx, RGGI, and is developing a VER contract as well
© 2008 ECOSECURITIES GROUP PLC
Pros:– Has been in existence since 2000; road-tested– Legally binding voluntary market– Inexpensive credit pricing– The platform of GHG trading for most large US companies todayCons:– Additionality and transparency issues with regards to the Carbon
Financial Instrument (CFI)– For project-based emission reductions, a higher price premium can
often be found elsewhere– Can be difficult to explain price movements– Has in some ways overcommoditized things (same price for
allowances and offsets and same price for offsets of any sector)One of the only games in town, but not necessarily the best
CCX Pros and Cons
© 2008 ECOSECURITIES GROUP PLC
The Voluntary Market (Cont’d)
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
III. Risks & Opportunities in the Carbon Markets
© 2008 ECOSECURITIES GROUP PLC
Why Get Involved with Carbon?• Compare the recent losses of ~$1trillion on Wall Street with the
annual expected loss in natural capital annually of ~$2-5 trillion, and…• Carbon market value by 2020 is projected as high as $3 trillion…• A highly valuable, growing, and exciting market• For companies, opportunities exist to:
• Develop emission reducing projects to sell credits from into the market, adding a new revenue stream to your business
• Demonstrate corporate social responsibility• Gain experience in the carbon markets• Prepare for pending regulation
© 2008 ECOSECURITIES GROUP PLC
Opportunities in the Carbon Market • Project Development & Investment• Trading, e.g. on CCX and Green Exchange• Credit Brokering• Purchasing offset credits• Participation in the more mature carbon markets overseas• Investments in companies developing emission reductions• Emission improvement investments in company infrastructure to
reduce early and possibly gain credits for early action• Developing new trading platforms, tools, etc.• Green/clean fund investments• Etc.
© 2008 ECOSECURITIES GROUP PLC
What are companies doing today?- 43% of organizations had already implemented an existing carbon
management strategy, with a further 34% of organizations claiming to be in the process of developing one
- 74% of all responses indicated that their organization had already started implementing internal emission reduction activities
- Over 88% of organizations were either currently undertaking carbon offsetting activities or would consider offsetting in the future
- Experience and Brand/Reputation at nearly 88% and 86% respectively, are ranked as most important when making an offset purchasing decision
- The most desirable project location for carbon offsets was N. America
© 2008 ECOSECURITIES GROUP PLC
Opportunities Cont’d.• The risks of not getting involved in some cases may be greater than the
risk of sitting it out—esp. reputational risk of inaction for companies• In regions where there are growing compliance markets (e.g. Europe),
voluntary markets will continue to become more robust as individuals develop a greater understanding of the issue
• In regions where significant compliance markets are not yet established, voluntary markets will continue to grow, and demand for credits will be high
• As compliance rules develop, the growth in demand for carbon credits in the voluntary markets may slow somewhat but compliance markets will pick up substantially
• Experience in and overlap with other commodity markets, esp. agriculture-related, will be key in carbon constrained future
© 2008 ECOSECURITIES GROUP PLC
Risks in the Carbon Market• Largely opaque—e.g. pricing is still relatively hard to come by• Risks increase or decrease depending on your point of
insertion—risks of investing in projects directly are still high and include development risk, operational risk, registration, verification risk, etc.
• Risk that regulation doesn’t come, or doesn’t come as quickly as anticipated
• Price volatility in early years as systems boot up• The regulatory market is entirely based on policy, so a
significant amount of regulatory risk will always exist
© 2008 ECOSECURITIES GROUP PLC
Like it or not…
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Program Start: No later than 2 years after bill enactment (2012-ish)• Offset Limits: Total quantity of offsets each year cannot exceed 2 billion
tons, split evenly between domestic/international. If EPA determines domestic offset supply likely less than 0.9 billion t/yr, proportion can be adjusted to 1.5 billion international/ 0.5billion domestic. Change from discussion draft: Original draft split offsets evenly between domestic and international.
• Offset Discounts: Domestic offsets not discounted; International offsets not discounted until 2018, when they will count 5:4 offsets to allowances. Change from discussion draft: Original draft required submission of 1.25 offsets to equal 1 allowance.
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Project types: Eligible project type list will be for both domestic AND
international offsets; Initial eligibility list by 2011; additional project types added ≤2 years after enactment (2012).Change from discussion draft: original bill silent entirely on project type issue.
• Additionality: Additional projects are defined as 1) activities not required under existing regulations; 2) projects starting after January 01, 2009 or projects started after January 01, 2001 and issued credits by a voluntary carbon offset program;3) projects that exceeded baselines established by the EPA.
• Crediting Period: No less than 5 years; no more than 10 years. Project developers (PDs) can apply for projects to be reapproved no earlier than 18 months before the end of a crediting period.
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Preapproval: Offset project developers can submit projects for
voluntary pre-approval review to get an idea from EPA in ≤6 weeks of the likelihood that the project will be accepted into the offset system.
• Offset Project Approval Process: PDs submit approval petition to EPA no later than submission of first verification report; EPA notifies PD in writing of determination and issues no more than 2 weeks laterChange from discussion draft: detailed explanation of approval process included.
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Early Offsets: Projects eligible if started after 1/1/01. Credits may be issued
under any regulatory or voluntary program EPA determines has:• Been established/recognized before 1/1/09 under state/tribal law/reg• Been developed via a public consultation process• Methodologies that are publicly available• Credits verified by a state agency or 3rd party• Credits with serial numbers and issued in a public registry• Not issued credits for a project which the issuing body has also funded
• Early offsets issued only for ERs occurring after 1/1/09, until the earliest of either 3 years after enactment, or date of promulgation.
• Change from discussion draft: language broadened to potentially allow for credits outside RGGI and CCAR, but as written those still seem the de facto standards.
© 2008 ECOSECURITIES GROUP PLC 2008 preliminary results presentation – 12 March 2009
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• “Ultra-Early Offsets”: EPA may issues credits for offsets from
programs meeting all criteria for early offsets, but not established on or before 1/1/09. Such programs must be subject to criteria/meths of equal or greater stringency to those approved for early offsets or by EPA.Change from discussion draft: this concept originally absent from bill.
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• International Offsets: 2 years after enactment (2012), EPA/State/
USAID/OAIB to promulgate regs for international offsets if the US is a party to bi/multilateral arrangement that includes the host country • Host country must be a developing country• Agreement must ensure all requirements of bill w/r/t domestic offsets are
reinforced; appropriate distribution of offset revenue is achieved• No int’l offsets for black carbon or HFC destruction activities
• Sectoral International Offset Crediting: EPA/State to identify sectors/countries where sectoral crediting is appropriate, and in those instances credit offsets ONLY on a sectoral basis.
• Identification of sectors guided by considerations, e.g. host country GDP, absolute emissions, comparable treatment of sector in US, heterogeneity of sector emissions, competitiveness concerns, leakage risks, MRV, etc.
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Non-Sectoral International Credits (CDM/CDM 2.0): EPA/State
may issue “US international offsets” in exchange for essentially CERs, IF EPA determines EB has substantive & procedural requirements that provide equal or greater integrity to domestic program• Phased out after 2016
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• REDD: EPA may issue credits against a historical baseline for REDD
activities, discounted for uncertainty, country-specific circumstances, etc.• National Level REDD: countries w/ strong MRV & institutional capacity,
incentives for forest governance and mechs for equitable revenue distribution, and strategic land use plan.
• Baselines shall consider ≥5 years average annual historical deforestation rates, establish trajectory to no deforestation in ≤20 years, and account for all significant deforestation sources.
• State/Provincial REDD: EPA may credit against state/provincial baselines (phase out by 2017) subject to same reqs for national DD baselines for states/provinces in countries with:
• No country-wide eligible baseline but an eligible state/regional one, major REDD emissions
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• REDD at the Project/Program Level: EPA/USAID/State to make list of
countries responsible for ≤1% total global GHGs and <3% total forest emissions making good faith efforts to develop strategic LULUCF plans. EPA may issue project-based credits against a baseline consistent with NAMAs, accounting for historical deforestation rates over the past 5 years, etc., phase out by 2017; 2025 at the latest.
• International Clean Technology Fund: Overseen by Interagency Group incl.US Treasury, State, EPA, & DOE. Developing countries that sign a climate treaty and take on NAMAs will be eligible for project funding assistance from the ICTF. Funds may be distributed directly, through the World Bank, or other multilateral banks or development institutions, for CCS, RE/EE, and/or transport projects. Projects receiving assistance from this fund are ineligible as offsets
© 2008 ECOSECURITIES GROUP PLC
H.R. 2454 Offsets Highlights• Stationary Source Performance Standards for Non-Capped Emissions:
EPA to identify uncapped emission sources individually above 10,000t/yr; collectively responsible for at least 20% of uncapped emissions.
• HFCs: production and consumption of HFCs regulated under a separate cap. HFCs treated as Class II substances. 2 Class II groups established:• Group I: all HCFC’s• Group II: HFC-23, -32, -41, -125, -134, -134a, -143,-143a, -152, -152a,
-227ea, -236cb, -236ea, -236fa, -245ca, -245fa, -365mfc, -43-10mee, HFO-1234yf, -1234ze, and others identified by EPA
• As of 1/1/2012, illegal to import Class II Group II substances without holding one consumption allowance or one destruction offset credit
• CFC destruction eligible for offsets at 20% discount on CO2e basis
© 2008 ECOSECURITIES GROUP PLC
The Incredible Shrinking Offset PoolLimiting Factors for International Offsets• Eligible PT list will apply to both domestic and international offsets, so CERs
developed in capped sectors in US potentially ineligible• CERs also ineligible in countries/sectors where U.S is crediting sectorally• Projects receiving funds from Int’l Clean Tech Fund ineligible for offsets• CERs ineligible after 2016Limiting Factors for Domestic Offsets• RGGI and CCAR likely the only eligible early offset programs; volumes on
these systems are nonexistent and small but growing, respectively• Early credits only up to the date of offset rule promulgulation rather than
through the full crediting period• Stationary Source Perf Stds obviate CH4 offsets from CMM and LFG
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
ADAGE IGEM
Allowance PriceScenario 2 - WM - Draft
$0
$20
$40
$60
$80
$100
2010 2015 2020 2025 2030 2035 2040 2045 205020
05 D
olla
rs /
tCO
2e
ADAGEIGEM
Marginal Cost of GHG Abatement Sensitivity Cases
96%
2%
-9%
-20% 0% 20% 40% 60% 80% 100% 120%
Scn 5 WM Draft No Int'l Offsets
Scn 4 WM-DraftOutput Based Rebates
Scn 3 WM-Draft Energy Efficiency
% Change from Scenario 2 - WM-Draft*
Why does it matter?
© 2008 ECOSECURITIES GROUP PLC
© 2008 ECOSECURITIES GROUP PLC
US Legislation: A Plausible Timeline• Summer ‘09: Waxman-Markey Bill reported out of Subcommittee to full Energy
& Commerce Committee; then to the full House of Representatives. On Senate side, Boxer has established 5 “Committees” to go through W-M line by line in preparation for eventual uptake in the Senate
• Summer/Fall ‘09: W-M passed by the House. Probably hearings of Senate version in Subcommittee; Senate unable to pass bill before adjournment in late Fall
• December ‘09: US State Department negotiators head to Copenhagen with uncertain domestic mandate; negotiate basic structure to be fleshed out later
• Winter ‘10: 111th Congress, 2nd Session convenes, Senate passes bill by mid to late spring; conferenced bill passed and signed by president by summer 2010; COP 15 bis commence to flesh out details.
© 2008 ECOSECURITIES GROUP PLC
Thank YouBuenos AiresBangkokBeijingBernCasablancaChengduClaremontDelhiDubaiDublinJakartaJohannesburgKarachiKievKuala Lumpur
LimaMadridManilaMexico CityNew YorkOxfordPanamaPortlandRio de JaneiroRomeSan JoseSantiagoSingaporeThe HagueTokyoCountries where EcoSecurities
has projects
EcoSecurities’ current office locations or representatives
For more information:(909) 621-1358
[email protected]://www.ecosecurities.com