Update on Worldwide Greenhouse Gas Market Developments

1
Update on Worldwide Greenhouse Gas Market
Developments
Michael J. Walsh, Ph.D. Senior Vice
President 1.312.554.3350 www.chicagoclimateexchan
ge.com
2
Summary Carbon Market Status Worldwide

• Now live CCX, UK (pre-EU)
• Regulatory Kyoto and before
• being implemented (e.g. EU)
• under discussion (Canada, NZ)
• unclear (Japan)
• State-level regulatory
• active New South Wales
• under discussion Northeast U.S.
• Russia, Ukraine will they be trade-eligible at
  2008?
• Developing Countries sellers from mitigation
  projects

 
 
 
3
Global Carbon Market Size Potentially Huge!
Sources Value at Risk Climate Change and the
Future of Governance CERES Sustainable
Governance Project Report, April 2002 Reuters,
April 7, 2000
 
 
 
4
U.S. Situation

• Total emissions 6.9 billion mt CO2 (2002) (11
  gt1990)
• President Bush reduce emissions intensity
  (CO2/GDP)
• 18 by 2012 fund RD
• Crediting under revised 1605b program legally
  unclear
• McCain/Lieberman bill
• return U.S. emissions to 2000 levels by 2010
• trading upstream and downstream sequestration
• latest Senate vote 43 yes, 55 no
• Chicago Climate Exchange is live and growing

 
 
 
5
Chicago Climate Exchange
Chicago Climate Exchange is a voluntary, legally
binding pilot greenhouse gas trading program for
emission sources and offset projects in North
America and offset
projects in Brazil.
6
CCX Reduction Timetable

• 2003-2006 reduce emissions to 1, 2, 3, 4
  below 1998-2001 baseline
• Includes major direct emissions sources small
  sources (e.g. fleets) and electricity purchases
  can be opted-in

7
CCX Members (1 of 2)
 
 
 
8
CCX Members (contd.)
CCX total emission baseline of 250 million mtons
CO2 would make CCX the second largest country
in EU CO2 market
 
 
 
9
Initial list of CCX eligible offset projects

• Landfill and agricultural methane destruction
• Sequestration reforestation and agricultural
  soil projects
• Brazil energy, methane, forestry (reforestation
  conservation)
• CCX protocols eligibility, quantification,
  verification
• Early Action Credits

10
CCX Market Screen
bids and offers completed
trades (each contract is 100mt CO2)
11
Market Data CCX Weekly Trade Volume and Prices
12
Canada

• Total emissions 743 million mt CO2
• 2012 Kyoto Goal -6 by 2012 (currently
  20gt1990)
• Planned GHG trading system (2008) Large Final
  Emitters
• 600 sites 46 of Canadas total emissions (342
  mt)
• Feds promising per-ton net cost cap of
  C15/mtCO2
• National government to be active (CDM) purchaser?

 
 
 
13
European Union

• European Council Directives
  
• Establish EU ETS for 2005 through 2007
• Instructions to each EU-25 Member State

Allocate tradable CO2 emission allowances to
affected installations

Establish uniform, linked registries
Require monitoring, verification, true-up and
penalty systems
14
EU ETS (2005 2007)

• Covers CO2 emissions from 12,000 installations
• combustion devices gt20mw (electricity, heat,
  steam)
• oil refineries, metals, cement, glass, ceramics
• pulp and paper
• Covers 46 of total emissions (total 4.9 bil
  mt CO2)
• Annual true-up by April 30, independent
  verification
• Encourages Linkages (e.g. Japan, Canada, Norway)
• Allows UN-approved CDM credits

15
EU ETS 2005-2007 CO2 Reduction Schedule
-2.7

16
EU Market Activity to Date, Prices

• Total allowance trading volume gt3 million tons
  (forwards)
• CCX founds European Climate Exchange at IPE

17
European Union Market Issues

• Largest Germany (barely short) and UK (very
  short)
• Natural longs (e.g. Poland) but may not
  over-allocate
• Natural shorts (e.g. Ireland, Portugal) growth
  allocations
• No allowance banking after 2007 price spike or
  crash?
• CDM CERs are bankable premium commodity??
• Viability of registries/transaction log tax,
  accounting
• issues capacity of verifiers

18
Norway, Switzerland

• Norway emissions 56 million mt CO2 (1999)
• National goal 1 vs. 1990 by 2012 (now 8
  gt1990)
• Long experience with carbon taxes (from
  10-51/tCO2)
• Switzerland emissions 45 million mt CO2
• National goal -8 vs. 1990 by 2012 (now 1990)
• Now imposing carbon taxes on fuels
• Both countries are natural candidates for linkage
  with EU.

19
Russia, Ukraine

• Russia emissions 1.88 billion mt CO2 (38 lt
  2012 target)
• Over 1 billion mt/yr surplus if this persists
  (now growing?)
• IETA survey finds buyers in west are willing,
  especially if
• purchases linked to reduction initiatives
• Ukraine emissions 704 mil mt CO2 (23 lt 2012
  target)
• Over 200 mt/yr surplus if this persists
• Both countries may have trouble achieving GHG
• inventory quality required to trade under Kyoto

20
Japan

• Emissions 1.3 billion mt CO2
• 2012 goal -6 vs. 1990 (currently 9)
• Industry emissions flat, opposes caps and taxes
• Government may be big buyer on behalf of
  industry
• Corporates, government active with CDM
  (forwards)
• No specific implementation plan for trading
  system

21
Developing Countries

• Clean Development Mechanism (CDM) under Kyoto
• Certified Emission Reductions from mitigation
  projects
• Predominant project types to date
• HFCs 31 of tons
• Landfill gas 18
• biomass energy 14
• small hydro 11
• CERs usable in ETS, bankable past 2007 still
  discounted
• Prices non-Kyoto 0.30-3.00
• buyer takes CDM risk 3.00-4.25
• seller takes CDM risk 3.00 - 6.50

22
Developing Countries

• 65 countries now have Designated National
  Authorities
• Includes Brazil, Mexico, China, India
• Four approved verification firms (Designated
  Operational
• Entities)
• Japan Quality Assurance, DNV, SGS, TUV
• CDM Executive Board has approved 11 projects, 5
  more
• on B list (good candidates), 14 incomplete,
  2 withdrawn
• Forest projects yield temporary CERs

23
Developing Countries Volume Growth

• (All vintages, subject to Term Sheets or
  contracts, delivery subject to CDM, other risks)
• Biggest buyers Japanese Firms, Netherlands,
  World Bank
• Biggest sellers Asia (51), Latin America (27)
• Source World Bank Prototype Carbon Fund

 
 
 
24
How to Raise Opportunities for Brazil(1)?

• Near-term grow ability to profit from global
  market
• Long-term
• Brazil must bring superior knowledge, built
  through hands-on MARKET experience, in order to
  effectively influence Kyoto Phase II and beyond
• Aggressive education/support for CDM projects
• DNA, other bodies
• Natural CER customers global corporates with
  Brazil operations

25
How to Raise Opportunities for Brazil (2)?

• Industrials - adopt offset purchase commitments
• Provide additional market for Brazil offsets
• Stimulate knowledge base
• Preparation for international policy evolution
• Participate in existing/emerging markets
• Take emission reduction commitments in CCX (North
  America and Brazil operations?)
• Pure trader EU, Chicago
• Submit alternative projects into CCX