Carbon Credits--A Business Oppurtunity
• Carbon credits – A new revenue source
• Kyoto Protocol came into force on February 16, 2005
• UNFCCC has designed CDM, under the Kyoto Protocol
The Kyoto Protocol is a legally binding agreement under which industrialized nations will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990.
The goal is to lower overall emissions from six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur Hexafluoride, HFCs and PFCs –calculated at an average over the five-year period of 2008-12.
Kyoto Protocol & The Three Mechanisms to reduce emissions
• Joint Implementation (JI)
• Clean Development Mechanism (CDM)
• Emission Trading
What is Emission Trading?
Emissions trading (ET) is a mechanism that enables countries with legally binding
emissions targets to buy and sell emissions allowances among themselves.
Risk Elements in CDM
Delivery risk
- Project risk
- Regulatory risk
• • • Risk of certification
• • • Cap in European National Allocation Plan
• • • Implementation of ITL
- Risk of contract fulfillment
Market price risk (Fuel prices, weather, economic growth, EUA, etc.)
CDM Project Developer Common Concerns
• What is the real worth of my CERs?
• What are the various options to trade my CERs?
• What will it cost them to market CERs?
• Who is a reliable buyer?
• What is the time line involved?
EUAs Price Influencing Factors
• Policy issues
• CO2 emissions
• Weather/Fuel prices
• CERs
• Foreign exchange fluctuations
Pricing of CERs is based on
• Fixed contract
• Index linked contract - to get high prices of EU market
Price Influencing Factors
§ Supply-demand mismatch
§ Policy issues
§ Crude oil prices
§ Coal prices
§ CO2 emissions
§ Weather/Fuel prices
§ European Union Allowances (EUAs) prices
§ Foreign exchange fluctuations
§ Global economic growth
Correlation between various Energy Commodities and Carbon Credits
• Correlation between Brent Crude Oil and EUAs –78.05 % (2007)
• Correlation between Electricity and EUAs – 49 %(2007)
• Correlation between Electricity and Brent Crude Oil – 66.5 % (2007)
• Price Volatility of EUAs – 4.04 % (from inception on ECX platform to 14th November 2007)
Note: Brent crude oil and Electricity prices were from Intercontinental Exchange, while EUA prices are from ECX traded on ICE platform. Latest period considered in all the above cases for analysis was till 14th November 2007.
Emission Market Participants
• Hedgers
• Producers
• Intermediaries in Spot Markets
• Ultimate Consumers
Investors
• Arbitragers
• Speculators
• Portfolio Managers
Diverse participants with wide participation objectives
• Commodity Financers
• Funding agencies
• Corporates having risk exposure in energy products
Global Exchanges Trading Carbon Credits
• Nord Pool Exchange – Electricity & CERs
• European Energy Exchange (EEX) – Electricity, Coal, Natural Gas & EUAs
• European Climate Exchange (ECX) – EUAs& CERs
• Chicago Climate Exchange (CCX) – VERs
• Host of New Exchanges coming up
Why MCX in India?
• MCX alliance with the Chicago Climate Exchange (CCX)
• MCX can launch mini-sized versions of ECX CFI
• First exchange traded environment product in the Indian Subcontinent
• Designed to offer an advanced, standardized and financially guaranteed tool
• Timeline matches with Western markets
• Compliment natural gas and crude oil contracts
• No forex risk
• Carbon credits – A new revenue source
• Kyoto Protocol came into force on February 16, 2005
• UNFCCC has designed CDM, under the Kyoto Protocol
The Kyoto Protocol is a legally binding agreement under which industrialized nations will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990.
The goal is to lower overall emissions from six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur Hexafluoride, HFCs and PFCs –calculated at an average over the five-year period of 2008-12.
Kyoto Protocol & The Three Mechanisms to reduce emissions
• Joint Implementation (JI)
• Clean Development Mechanism (CDM)
• Emission Trading
What is Emission Trading?
Emissions trading (ET) is a mechanism that enables countries with legally binding
emissions targets to buy and sell emissions allowances among themselves.
Risk Elements in CDM
Delivery risk
- Project risk
- Regulatory risk
• • • Risk of certification
• • • Cap in European National Allocation Plan
• • • Implementation of ITL
- Risk of contract fulfillment
Market price risk (Fuel prices, weather, economic growth, EUA, etc.)
CDM Project Developer Common Concerns
• What is the real worth of my CERs?
• What are the various options to trade my CERs?
• What will it cost them to market CERs?
• Who is a reliable buyer?
• What is the time line involved?
EUAs Price Influencing Factors
• Policy issues
• CO2 emissions
• Weather/Fuel prices
• CERs
• Foreign exchange fluctuations
Pricing of CERs is based on
• Fixed contract
• Index linked contract - to get high prices of EU market
Price Influencing Factors
§ Supply-demand mismatch
§ Policy issues
§ Crude oil prices
§ Coal prices
§ CO2 emissions
§ Weather/Fuel prices
§ European Union Allowances (EUAs) prices
§ Foreign exchange fluctuations
§ Global economic growth
Correlation between various Energy Commodities and Carbon Credits
• Correlation between Brent Crude Oil and EUAs –78.05 % (2007)
• Correlation between Electricity and EUAs – 49 %(2007)
• Correlation between Electricity and Brent Crude Oil – 66.5 % (2007)
• Price Volatility of EUAs – 4.04 % (from inception on ECX platform to 14th November 2007)
Note: Brent crude oil and Electricity prices were from Intercontinental Exchange, while EUA prices are from ECX traded on ICE platform. Latest period considered in all the above cases for analysis was till 14th November 2007.
Emission Market Participants
• Hedgers
• Producers
• Intermediaries in Spot Markets
• Ultimate Consumers
Investors
• Arbitragers
• Speculators
• Portfolio Managers
Diverse participants with wide participation objectives
• Commodity Financers
• Funding agencies
• Corporates having risk exposure in energy products
Global Exchanges Trading Carbon Credits
• Nord Pool Exchange – Electricity & CERs
• European Energy Exchange (EEX) – Electricity, Coal, Natural Gas & EUAs
• European Climate Exchange (ECX) – EUAs& CERs
• Chicago Climate Exchange (CCX) – VERs
• Host of New Exchanges coming up
Why MCX in India?
• MCX alliance with the Chicago Climate Exchange (CCX)
• MCX can launch mini-sized versions of ECX CFI
• First exchange traded environment product in the Indian Subcontinent
• Designed to offer an advanced, standardized and financially guaranteed tool
• Timeline matches with Western markets
• Compliment natural gas and crude oil contracts
• No forex risk
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