The Carbon Market

Trading Emissions Contracts

February 2009

Contents

Introduction
Cap and Trade
Kyoto mechanics
ECX
European market experience
Conclusions

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 dont act, what legacy are we leaving to future

generations?

Understanding Cap and Trade

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

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

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

Cap and trade

SIMPLE!

Creates a cost and/or an opportunity

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
9

Kyoto Protocol flexible mechanisms

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

BACK TO CONTENTS

10

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
11

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?
12

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

13

Performance against Kyoto targets

Country

Base 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

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

24.7

Norway

49.8

54.2

8.8

7.8

Poland

586.9

399.0

-32.0

-6

-26.0

Russia

2989.8

2132.5

-28.7

-28.7

Turkey

170.1

296.6

74.4

-8

82.4

Ukraine

923.8

418.9

-54.7

-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

14

Post Kyoto

Aiming for agreement in Copenhagen 2009

To cover period 2013 2020
20-30% reduction by Annex I countries (?)
Number of CERs to be allowed
Commitment from non-Annex I

15

Corporate structure

Climate Exchange
PLC
(CLE)

European Climate
Exchange (ECX)

Chicago Climate
Exchange (CCX)

Chicago Climate
Futures Exchange
(CCFE)
16

About ECX

European Climate Exchange is the most liquid marketplace

for trading CO2 EU Allowances (EUAs) under the EU

Emissions 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

17

ECX Products

Futures and Options

based on underlying:

EUAs

CERs

European Union Allowances

Certified Emission Reductions

EU ETS -

CDM -

European Union
Emissions Trading Scheme

Clean Development
Mechanism project credits
18

About ECX

19

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

20

Open Interest ECX EUA Futures Contracts

ECX EUA Futures Contracts Open Interest currently rests at 171 million tonnes

21

Volume ECX EUA Options Contracts

341 million tonnes of CO2 have traded in EUA options and 79 million tonnes of CER options on ECX / ICE
Futures Europe

22

Who is the Market?

Hedgers

Investors

Speculators

Arbitrageurs
23

ICE Futures Members enabled to trade ECX Contracts

Accord Energy
ADM Investor Services International
All Energy Trading
All Options Curaao
Atel Trading
Bache Commodities
Banc of America Securities
Barclays Capital
BG International
BHF Bank
BNP Paribas Commodity Futures
BP Gas Marketing
British Energy Trading
Carbon Capital Markets
CEZ
Citadel Derivatives Trading
Citadel Equity Fund
Citigroup Global Markets
Climate Change Capital
Credit Suisse Securities
Deutsche Bank
Dresdner Bank
E&T Energie
E.On UK
EDF Trading
EDP Energias de Portugal
EGL Trading
ELECTRA Deutschland
Electrabel
Endesa Generacion
First New York Securities
Fortis Bank Global Clearing

Galp Energia
Gazprom Marketing & Trading
Geneva Ireland Financial Trading
Getco
GFI Securities
GH Financials
Goldman Sachs International
Grupo Santander
HSBC Bank
ICAP Securities
Infinium Capital Management
IMC
Jane Street Capital
Jaypee International
JP Morgan Securities
Jump Trading
KFW
KlimaInvest
Limestone Trading
Madison Tyler Trading
Marex Financial
Marquette Partners
Marubeni Corporation
Merrill Lynch Commodities
Merrill Lynch International
MF Global
Mizuho Securities USA
Morgan Stanley & Co International
Natixis Commodity Markets
Newedge - Calyon
Newedge FIMAT
Optiver VOF

Osterreichische Elektrizitatswirtschafts-AG
R.J. OBrien & Associates
Rand Financial Services
RBC Capital Markets Corporation
RBS Sempra Energy Europe
Royal Bank of Canada Europe
Sagacarbon
Saxon Financials
Schneider Trading
Schnell & Co.
Scottish Power Energy Management
SEB Futures
Shell Energy Trading
Shell Int. Trading & Shipping Company
Smartest Energy
Spectron Energy Services
Starmark Trading
Statkraft Energi
Sucden UK
Susquehanna
TFS Derivatives
The Royal Bank of Scotland
ThyssenKrupp
Tibra Trading Europe
Tradelink
Tullett Prebon Securities
UBS Clearing & Execution Services
UBS
Universal Data (UK)
Wachovia Bank
XConnect Trading

24

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

25

EUA-CER Price Spread

26

EUA Price Correlations

27

ICE ECX Screen Shot

BACK TO CONTENTS

28

Where Next?

Aus ETS

EU ETS

445Mt

2,080Mt

NZ ETS
100Mt

CERs bridge the

Regional Schemes
Japan ETS
1,272 Mt

US ETS
5,760Mt

Canada ETS
400Mt

China/India?

29

Multiple roads to the same destination

Behavioural change

Renewable energy sources

Voluntary markets
(CSR

and pre-mandatory)

Mandatory cap & trade

30

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

31

Watch this space!

The total global carbon market value could reach

2 trillion ($3.1 trillion) by 2020.
- POINT CARBON, May 2008

32

www.ecx.eu
Patrick.birley@ecx.eu

Proud sponsors of the Catlin Artic Survey

www.catlinarticsurvey.com

Other Information
Authorised Data Vendors

Codes for viewing live ECX CFI prices

EUA Futures EUA Options

CER Futures

Bloomberg

EMIT

OMON

Reuters
CMS
IDC
CQG

0#CFI:
UX
<17>t, UX
UX

0#CFI2Y
n/a
n/a
Options UX

CARA comdty
CT<GO>
0#CERE:
n/a
<17t>CERmy
QCER

ICE Energy Live LUX

n/a

n/a

E-Signal/ Future
LUX
source

n/a

<17t>CERmy

34