Carbon Finance

What is it? How does it work?

Table of Contents
Introduction Kyoto Protocol What are Emissions Trading? Emissions Trading Mechanisms Issues in Carbon Credits Carbon Credits- Project Cycle Carbon Credits Markets Carbon Credits- Opportunities and Options

Introduction

Introduction
What are Green House Gases
Some gases naturally exist in the atmosphere, the so called Greenhouse Gases (GHGs) that form a blanket surrounding the earth and keeps the earth warmer. This is called Greenhouse Effect.

What is the Greeen House Effect

Human activities (fossil fuel burning, depletion of sinks like forests etc.) has been increasing the concentration of GHGs in the atmosphere and is leading to rise in temperatures. This is called Enhanced Greenhouse Effect.

What is Climate Change

Rise in temperatures of earth and other associated climatic changes as caused by the Enhanced Green House Effect is called Global Warming and in broader term Climate Change The biggest factor of present concern is the increase in greenhouse gases such as CO2 levels due to emissions from fossil fuel combustion, followed by aerosols (particulate matter in the atmosphere), which exert a cooling effect, and cement manufacture. Other factors, including land use, ozone depletion, animal agriculture and deforestation, also affect climate.
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Evidence of Global Warming

Empirical Evidence

Mount Hood, Oregon

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Evidence of Global Warming

Empirical Evidence

This Glacier was one of the biggest in South America, but it is now disappearing at a rate of 200 meter per year
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Evidence of Global Warming

Empirical Evidence

A House on the dunes in Rodanthe, resort town on Cape Hatteras, North Carolina, in July 1999 and July 2004

International Response
Global Climate Change Becomes Apparent
Over a 180 countries attend the Earth Summit in Rio de Janeiro, Brazil A legal framework for reducing GHGs The United Nations Framework Convention of Climate Change (UNFCCC) The Convention was signed by 154 states (including Pakistan) and entered into force on 21st March, 1994.

What is the UNFCCC?

It is the first step towards climate policy on global scale It is a non-binding legal framework:
Aims at stabilization of GHG concentration in the atmosphere at safe level. To balance out the response along mitigation and adaptation Measures
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Principle of UNFCCC
Based on the principle of common goals but
differentiated roles On one hand it recognises the
Primary Responsibility of Developed Countries for higher emissions, and therefore, Asks Developed Countries to take a Leading Role

On other hand it establishes

Social and Economic Development as the Rightful Priority of the Developing Countries, and The need to assist developing countries that are vulnerable to climate change

The Kyoto Protocol of UNFCCC

Adopted in Kyoto, Japan in 1997 and ratified in
February 2005 (Pakistan singed the Protocol on 11th January, 2005) emissions by 2012 and distinguish two types of countries: Annex-I countries: With binding emission targets (industrialised countries):
Western and Eastern Europe, Canada, Japan, New Zealand, Russia, Ukraine etc.

The Kyoto Protocol: Aims to reduce GHG

Non-Annex I countries: With voluntary participation (developing countries):

China, India, Pakistan, South Africa, Philippines, Uruguay, Brazil, and other developing countries.

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Background
Kyoto Protocol (1997)
The Kyoto Protocol was adopted at the 3rd session of the Conference of the Parties to the UNFCCC The Protocol defines quantified greenhouse gas (GHG) emissions reduction targets for developed countries and economies in transition (east Europe).
These countries are known as Annex I Parties as there are listed in Annexure I of the Kyoto Protocol

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Kyoto Protocol

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Kyoto Protocol
What is the Kyoto Proocol
The Kyoto Protocol is a protocol to the international Framework Convention on Climate Change with the objective of reducing greenhouse gases in an effort to prevent anthropogenic climate change.

Emission Mitigation Options

Source oriented measures
Energy conservation and efficiency improvement Fossils fuel switching Renewable energy

Sink enhancement measures

Capture and disposal of CO2 (under discussion) Enhancement of forest sinks (limited options)

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Kyoto Protocol
Targets
Annexure I Parties have to reduce emissions by 5% of 1990 levels between 2008 and 2012
EEC countries have differing individual target (e.g. Germany has to reduce emissions by 21%)
Standard Currency for emission trading

6 Greenhouse gases (GHGs) under review

Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Hydrofluorocarbons (HFCs) Perfulourocarbons (PFCs) Sulphur Hexafluoride (SF6) [21 CO2e] [310 CO2e]

[1 CO2e(quivilent)]

[140 ~ 11,700 CO2e] [6500 ~ 9200 CO2e] [23,900 CO2e]

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Kyoto Protocol
Annex I countries
Annex I countries (industrialized countries): Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States of America 40 countries and separately the European Union

Annex II countries
Annex II countries (developed countries which pay for costs of developing countries) Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States of America 23 countries and separately the European Union; Turkey was removed from the annex II list in 2001 at its request to recognize its economy as a transition economy

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Annex I and Annex II Countries, and Developing Countries

Annex I countries (industrialized countries)
Annex I countries agree to reduce their emissions (particularly carbon dioxide) to target levels below their 1990 emissions levels. If they cannot do so, they must buy emission credits or invest in conservation.

Annex II countries (developed countries which pay for

costs of developing countries) Annex II countries, that have to provide financial resources for the developing countries, are a subgroup of the Annex I countries consisting of the OECD members, without those that were with transition economy in 1992.

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Annex I and Annex II Countries, and Developing Countries Developing countries

Developing countries have no immediate restrictions under the UNFCCC. This:
Avoids restrictions on growth because pollution is strongly linked to industrial growth, and developing economies can potentially grow very fast. Allows them to get money and technologies from the developed countries in Annex II.

Developing countries may volunteer to become Annex I countries when they are sufficiently developed.

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Kyoto Protocol
Arguments
Some opponents of the Convention argue that the split between Annex I and developing countries is unfair, and that both developing countries and developed countries need to reduce their emissions. Some countries claim that their costs of following the Convention requirements will stress their economy. Developing countries are not expected to implement their commitments under the Convention unless developed countries supply enough funding and technology, and this has lower priority than economic and social development and dealing with poverty.

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What is Emissions Trading?

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What is Emissions Trading?

Emission Allowance
The Protocol agreed caps or quotas on the maximum amount of Greenhouse gases for developed and developing countries. In turn these countries set quotas on the emissions of installations run by local business and other organizations, generically termed operators. Countries manage this through their own national registries, which are required to be validated and monitored for compliance by the UNFCCC. Each operator has an allowance of credits, where each unit gives the owner the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market.

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What is Emissions Trading?

Emission Allowance
As demand for energy grows over time, the total emissions must still stay within the cap, but it allows industry some flexibility and predictability in its planning to accommodate this. By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in cleaner machinery and practices or by purchasing emissions from another operator who already has excess capacity. Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries within the European Union under its European Trading Scheme (EU ETS) with the European Commission as its validating authority. From 2008, EU participants must link with the other developed countries who ratified Annex I of the protocol, and trade the six most significant greenhouse gases.

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What is Emissions Trading?

Carbon Credit
A credit can be an emissions allowance which was originally allocated or auctioned by the national administrators of a capand-trade program, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period. The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits

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What is Emissions Trading?

Mechanism
International Emissions Trading (IET) Countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol. Joint Implementation (JI) A developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. Clean Development Mechanism (CDM) A developed country can sponsor a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use.

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What is Emissions Trading?

Mechanism
These carbon projects can be created by a national government or by an operator within the country. In reality, most of the transactions are not performed by national governments directly, but by operators who have been set quotas by their country.

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What is Emissions Trading?

Emission Market
For trading purposes, one allowance or CER is considered equivalent to one metric tonne of CO2 emissions or other gases equated to CO2 equivalent terms These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission. Climate exchanges have been established to provide a spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity. Carbon prices are normally quoted in Euros per tonne of carbon dioxide (CO2) or its equivalent (CO2e). Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon dioxide. These features reduce the quota's financial impact on business, while ensuring that the quotas are met at a national and international level.

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What is Emissions Trading?

Emission Market
Currently there are at least six exchanges trading in carbon allowances:
Chicago Climate Exchange, European Climate Exchange, Nord Pool, PowerNext, Multi Commodity Exchange and National Commodity and Derivatives Exchange.
Recently, NordPool listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs).

Many companies now engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on one of the exchanges. At least two private electronic markets have been established in 2008. Managing emissions is one of the fastest-growing segments in financial services in the City of London with a market now worth about 30 billion, but which could grow to 1 trillion within a decade.
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What is Emissions Trading?

Reducing Emissions through Carbon Credits
Carbon credits create a market for reducing greenhouse emissions
by giving a monetary value to the cost of polluting the air. Monetize an previously unvalued commodity Carbon Emission Rights (CERs)

Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets.
Consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government is an Annex I country that enacts a law to limit the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. Instead it may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.

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What is Emissions Trading?

One seller might be a company that will offer to offset emissions through a project in the developing world, e.g. recovering methane from a cattle farm to feed a power station that previously would use fossil fuel. So although the factory continues to emit gases, it would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissions from the atmosphere for that year. Another seller may have already invested in new low-emission machinery and have a surplus of allowances as a result. The factory could make up for its emissions by buying 20,000 tonnes of allowances from them. The cost of the seller's new machinery would be subsidized by the sale of allowances. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly

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Emissions Trading Mechanisms

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Emissions Trading Mechanisms

International Emissions Trading
Annex I Parties which have ceilings for GHG emissions (emission caps) Trading of Kyoto Protocol emission units (KP units) between Annex I Parties. The total amount of emission cap of Annex I Parties will not change Through market mechanism, International Emissions Trading can decrease total cost of Annex I Parties to achieve their collective emission reduction targets.

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Emissions Trading Mechanisms

International Emissions Trading

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Emissions Trading Mechanisms

Joint Implementation (JI)
Annex I Parties assist other Annex I Parties to implement project activities to reduce GHG emissions
The credit from the JI is called emission reduction unit (ERU). Credits will be issued based on amount of emission reductions achieved by the project activities. Party where JI project is implemented, is called a host Party. Any such project shall provide a GHG emission reductions, or removals by sinks, that is additional to any that would otherwise occur.

Annex I Parties can use ERUs to contribute to compliance of their quantified GHG emissions reduction targets of the Kyoto Protocol.
The total amount of emission cap of Annex I Parties will not change, because JI is credits transfer between the Parties both of which have emission caps ERUs will be issued only after 2008.

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Emissions Trading Mechanisms

Joint Implementation

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Emissions Trading Mechanisms

Clean Development Mechanism (CDM)

Annex I Parties assist non-Annex I Parties (developing countries) which dont have emission caps, to implement project activities to reduce GHG emissions
Credits will be issued based on emission reductions achieved by the project activities. A Party where CDM project is implemented, is called a host Party. The credit from the CDM is called certified emission reduction (CER). Reductions in emissions shall be additional to any that would occur in the absence of the certified project activity.

A Promising quid pro quo for Developing countries

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Emissions Trading Mechanisms

Annex I Parties can use CERs to contribute to compliance of their quantified GHG emissions reduction targets of the Kyoto Protocol.
As a result, the amount of emission cap of Annex I Parties will increase.

The CDM will issue CERs before the 1st commitment period.
CERs issued based on activities during the period from the year 2000up to 2012 can be used in achieving compliance of Annex I Parties in the 1st commitment period.

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Emissions Trading Mechanisms

Clean Development Mechanism (CDM)
Basic Idea
Industrialized countries are supported in reaching their emission targets Sustainable development benefits for developing country

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Clean Development Mechanism

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Clean Development Mechanism

CDM can work because of differing Marginal Abatement
Costs the cost of eliminating an additional unit of pollution Arbitrage Opportunity
Japan USA Pakistan $400 / ton of Carbon $200 / ton of Carbon <$50 / ton of Carbon

It has a direct environmental impact on a global level

due to un-localized nature of CO2 it does not matter for environment where reduction occurs.

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Clean Development Mechanism

Benefits
Environmental Benefits
Local environmental protection Global emission reduction

Social Benefits
Job Creation

Economic
Additional financing for local Sustainable Development priorities potential of Catalyzing large Foreign Direct Investment (FDI) flows Export Earnings from CERs

Technological
Additional Energy Production Access to Latest Technology
appropriate Technlogies not recycled technologies

Financial viability
~ Carbon financing can increase project Internal Rate Returns (IRRs) between 0.5 to 50% (WB)
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Clean Development Mechanism

Key Players
Conference of Parties (COP)
Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol

Designated National Authority (DNA)

Countries in the CDM shall set up a designated national authority (DNA) for the CDM. CDM project participants (PPs) shall receive written approval of voluntary participation from the DNA of each Party involved.
The written approval shall include confirmation by the host Party that the project activity assists it in achieving sustainable development. The details of approval procedure is up to each Party.

CDM Executive Board (EB)

The EB supervises the CDM, under the authority and guidance of the COP/MOP
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Clean Development Mechanism

Key Players
Designated Operational Entity (DOE)
Is either a domestic legal entity or an international organization accredited and designated by the EB to
validate and subsequently request registration of a proposed CDM project activity Verify and certify emission reduction of a registered CDM project activity, and request the EB to issue Certified Emission Reductions (CERs) accordingly AS of now there are only 18 DOEs that have been accredited by the EB, and hence validation is often the bottleneck of the whole project

Upon request, the EB may allow a single DOE to perform all these functions within a single CDM project activity.

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Carbon CreditsOpportunities and Options

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Carbon Credits- Opportunities and Options

Energy Industries
Switching fuel sources Utilizing waste heat during generation Modernizing inefficient processes Alternative Energy: Solar home systems, Solar water pumps, hydro, wind, biogas Improvement of energy distribution
Alternative Energy

Power Demand Side

Improvement of energy factor Efficient illumination, phase out of standard light bulbs Refrigerator and air-conditioner replacement Building insulation
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Energy Efficiency

Carbon Credits- Opportunities and Options Manufacturing Industries

Switching the fuel source Utilizing waste heat Modernizing inefficient processes

Rural Development
Mini biogas as alternative to fire wood and kerosene Solar home systems, Solar water pumps Solar air-conditioning for rural hospitals, schools
Rural Development

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Carbon Credits- Opportunities and Options

Municipality
Landfill Waste Management Waste to Energy Afforestation/Reforestation for carbon sequestration Energy Efficient pumping stations Animal Waste

Transport
Substituting transport with pipeline Transport gasification through CNG buses

Municipal Solid Waste

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Carbon Credits- Opportunities and Options

Chemical Industries
Introducing a chemical agent, Switching the fuel source, Utilizing waste heat Modernizing inefficient processes
Waste Heat Recovery

Metal Production
Utilizing waste heat during smelting process

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Carbon Credits- Opportunities and Options

Fugitive Emissions from Fuel
Capturing Tail Gases and flared gases Captive generation of power Utilizing waste heat Re-injection of natural gas into the ground instead of flaring CO2 injection into oil fields

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Issues in CDM

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Issues in CDM
Creating Real Carbon Credits
The principle of Supplementarity within the Kyoto Protocol means that internal abatement of emissions should take precedence before a country buys in carbon credits. However it also established the Clean Development Mechanism as a Flexible Mechanism by which capped entities could develop real, measurable, permanent emissions reductions voluntarily in sectors outside the cap. Many criticisms of carbon credits stem from the following issue
Establishing the fact that an emission of CO2-equivalent greenhouse gas has truly been reduced involves a complex process. This process has evolved as the concept of a carbon project has been refined over the past 10 years.

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Issues in CDM
Creating Real Carbon Credits
The first step in determining whether or not a carbon project has legitimately led to the reduction of real, measurable, permanent emissions is understanding the CDM methodology process. This is the process by which project sponsors submit, through a Designated Operational Entity (DOE), their concepts for emissions reduction creation. The CDM Executive Board, with the CDM Methodology Panel and their expert advisors, review each project and decide how and if they do indeed result in reductions that are additional.

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Issues in CDM
Additionality and Its Importance
Additionality is a term used by Kyoto's Clean Development Mechanism to describe the fact that a carbon dioxide reduction project (carbon project) would not have occurred had it not been for concern for the mitigation of climate change. More briefly, a project that has proven additionality is a beyond-businessas-usual project and is specifically for a CDM Poject. Project Participants (PPs) have to write explanation of how and why this project activity is additional.
If the starting date of the project activity is before the date of validation, provide evidence that the incentive from the CDM was seriously considered in the decision to proceed with the project activity. This evidence shall be based on (preferably official, legal and/or other corporate) documentation that was available at, or prior to, the start of the project activity.

Additionality of Funds
CDM Projects cannot lead to a diversion of development aid
Industrialised countries need to provide New funds for CDM projects.

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Issues in CDM
Additionality and Its Importance
GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions. World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD)

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Issues in CDM
Additionality can be proved due to following barriers
Investment Barrier
a financially more viable alternative to the project activity would have led to higher emissions;
investment comparison analysis using a relevant financial indicator, benchmark analysis or a simple cost analysis (where CDM is the only revenue stream such as end-use energy efficiency).

Technological Barrier
a less technologically advanced alternative would have been used and led to higher emissions
Non-availability of human capacity to operate and maintain the technology lack of infrastructure to utilize the technology unavailability of the technology High level of technology risk - performance uncertainty

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Issues in CDM
Additionality can be proved due to following barriers
Access-to-Finance barrier
the project activity could not access appropriate capital without consideration of the CDM revenues
E.g. a statement from the financing bank that the revenues from the CDM are critical in the approval of the loan.

Prevailing practice
prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions;
project is among the first of its kind in terms of technology, geography, sector, type of investment and investor, market etc.

Other Barriers
institutional barriers limited information managerial resources organizational capacity financial resources capacity to absorb new technologies

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Issues in CDM
Baseline
The baseline for a CDM project activity is the scenario that reasonably represents GHG emissions that would occur in the absence of the CDM project Difference between the baseline emissions and GHG emissions after implementing the CDM project activity (project emissions) is emission reductions. A baseline (scenario and emissions) shall be established by taking into account relevant national and/or sectoral policiesand circumstances, such as sectoral reform initiatives, local fuel availability, power sector expansion plans, and the economic situation in the project sector. Before calculating baseline emissions, it is necessary to identify baseline scenarios. A baseline shall cover emissions from all gases, sectors and source categories within the project boundary.
Multiple Baseline Options are possible

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Issues in CDM
Baseline Options Case Study of Clean power in
Pakistan
A project which envisages development of a windfarm for production of electricity to be used in the national grid.
Current Emissions Most likely choice as this are often real savings Thar coal RFO is too expensive coal is next choice for future energy needs. Similar projects Based on argument that currently new IPPs Emissions from the next (marginal) Power plant (a are RFO/HSD Thar Coal plant) EconomicallyAverage of similar project (RFO / HSD) attractive gas is preferred choice without CDM (availability?) emissions of national grid (mix of hydro, RFO, Current HSD, Emission of Wind etc) power
Economically attractive project (e.g gas)

Emissions

Emissions of proposed project (e.g. Wind Power)

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Issues in CDM
Key Concerns
Additionality
Are emission reductions really additional.
Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened. Dan Welch, Ethical Consumer Magazine

Perverse Effects Although UNFCCC encourage countries to develop and improve policies and programs to minimize GHG effects and create mechanisms to foster sustainable Why enact development in developing countries emission
reducing technologie s if doing so will reduce CERs from projects

consideration of compliance with legal requirements as part of the additionality test and baseline calculations, inhibit developing countries from enacting adequate policies and legislation towards GHG mitigation

Narrow Project Boundaries Only the impacts of individual CDM projects are measured the factory as a whole is not considered
E.g. countries like India take full benefit of installing wind farms in their countries, whilst not being penalized for installation of emission intensive technologies like coal power plants
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Carbon Credits- Project Cycle

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Carbon Credits- Project Cycle

Life Cycle Overview

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Carbon Credits- Project Cycle

Phase I
Understanding of the project Gathering data and information from the plant for all the project and baseline study Development of a project strategy PDD design (in case of approved methodology) Preparation of monitoring & Verification Protocol plan Review environmental impact of the project Collecting stake- holders comments Arranging host country approval Arranging receiving country approval Validation by UNFCCC approved certifier Submission of methodology to UNFCCC

Deliverable
Project Identification Note as per UNFCCC format Project Design Document as per UNFCCC Guidelines
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Carbon Credits- Project Cycle

Phase II
Identifying a validator Project validation Methodology approval Arranging host country approval Project implementation Monitoring of emission reductions Issuing annual monitoring protocol Annual verification by UNFCCC approved certifier Identification of buyer Emission Reduction Purchase Agreement (ERPA) Conducting audit prior to annual verification

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Carbon Credits- Project Cycle

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Carbon Credits Markets

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Carbon Credits Markets

Potential Market Size
The overall value for primary CERs was US$5 billion in 2006
More than doubling over the previous year Secondary CERs accounted for another US$444 million

Overall volumes transacted to the tune of 518 MtCO2e

State of Carbon Market

Prices are Highly Volatile
Project-based emission reductions attracted, on average, a price of US$10.90 per tCO2e for CERs
52% increase over 2005 levels

Long-term prices will depend on establishment of compliance regime beyond 2012 EU Emission Trading System for period 2008-2012, a price of up to US$ 30 per tCO2e was already reached as forwards

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Carbon Credits Markets

Financing is a key constraint US$4.7 billion of new capital had entered the market at the end of March 2007
even more funds are required to bring to the market enough emission reductions to satisfy the appetite of compliance buyers

Monetization of long-term CDM contracts is limited

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Carbon Credits Markets

Preferences
Buyers Preference
Secure delivery !!!! LOW PRICES !!! Consistent delivery Schedule from Sellers High seller rating and guaranties Damages for nondelivery Credible seller (Strict credibility checks) Ability to become a Project Participant Payment on Delivery
Sellers Preferences
HIGH PRICES !!! Funding for PPD preparation Equity / Debt Participation Upfront payment for CERs Transfer Project risk to Buyers Ability to easily transfer CERs Secure long-term payments No obligations in case of non-delivery No exposure to price risk
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Carbon Credits Markets

Demand and Supply
Pressures
Supply Pressures
Increased activity fast approval of CDM Projects Excess EU ETS allocations have not entered market due to institutional reasons and lack of legal infrastructure Unknown behavior of Russia as a seller UNFCCC methodologies become very strict Time before 2012 runs out to set up CDM projects
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Demand Pressures
Canada has not even begun to buy Japan will continue to remain dominant buyer EU tightness will seek CERs to fill needs EU self obligation of min. 20% after 2012 Exhaustion of cheap reduction possibilities