Download Phase II

Introduction to the Emissions
Market
February 2008
Mélanie Stauffer
1
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The response to global warming is being driven at international
through to local levels under the Kyoto Protocol
International Response to Global Warming
International
• Kyoto Protocol:
– Reduce GHGs by
5.2% compared
with 1990
emission levels
• Europe:
– Reduce by 8%
against the same
period
National
Sector
Installation
Individual?
• Annex 1:
– Developed world,
EU, Switzerland,
Japan etc.
• Annex 2:
Connection Between Annex 1 and 2 Countries
Joint Implementation (JI):
– Developing
countries
• Allow Annex 1 nations to obtain emission credits
(Emission Reduction Units – ERUs) for projects that
reduce emissions in other Annex 1 countries.
Clean Development Mechanism (CDM):
• Annex 1 countries can obtain permits (Certified Emission
Reduction Units - CERs) for projects that reduce
emissions in Annex 2 countries.
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In the EU, carbon trading was introduced to meet the Kyoto
obligations - Europe has the largest emissions trading market
Overview of Phases of EU Emissions Trading Scheme (EU – ETS)
Phase I
Phase II
Phase III
(2005-07)
(2008-12)
(2013-20)
• Cap on
estimated
1990 levels
Market
Assessment
Investment
Opportunities
• 8% reduction
on 1990
levels
• 20% - 30%
reduction on
1990 levels
Long
(150 Mt / year)
Short
(-220 Mt a year)
Short
(-750 Mt a year)
Low
High
Medium
3
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Carbon trading schemes aim to place a price on carbon by
providing a market place for tradable contracts
How the Emissions Market Works
Trading
within
EU-ETS
Installation A
Installation B
Allocated emissions allowance:
10,000 t
10,000 t
Actual emissions:
9,500 t
10,500 t
Option 1
Trade: sell
500 t
buy
500 t
Option 2
Using
CDM / JI
Projects
• Installation B invests in an installation in a developing country
• Investment into the foreign installation reduces emissions by 500 t
• Emissions reductions are verified and transferred as CERs to Installation B
Option 3
Penalty
• Installation B is fined €100 / tCO2 for each tonne above their allowance for
failing to reduce emissions and is also required to buy carbon credits
4
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There are six major drivers that can influence carbon prices in the
EU-ETS
Drivers Influencing Carbon Allowance Prices
Business cycles
Weather
• Strong economic growth increases energy
consumption and therefore leads to higher
demand for carbon credits.
• Changing weather impacts demands for
heating in the winter and air conditioning in
the summer
• Weak growth could result in lower prices
• This influences energy consumption
Fuel Switching (Gas vs. Coal)
Availability & prices of CERs
• Gas emits less carbon / unit energy vs. coal
• China - main supplier of credits via CDM
• Switching to gas cuts emissions
• China introduced a price floor of €8/tCO2,
which could support EUAs prices if there is a
scarcity of credits in the EU-ETS
• Higher gas prices could cause a switch to
coal, increasing demand for carbon credits
Innovation
Regulation
• Development of new renewable fuels or
more energy efficient technologies could lead
to reduced demand
• Carbon regulation changes effect prices
• There is considerable uncertainty over the
terms of Phase III and global energy
blueprint that could effect Phase II prices
5
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Phase II allocation plans have helped provide greater stability in
the pricing of carbon allowances (EUAs) compared with Phase I
EUAs Future’s Price Analysis ‘07 vs ‘08
Analysis of Phase 1 and 2 in EU-ETS
Phase I:
• Allocations of carbon credits in Phase I were
too generous
• In spring 2006, when the first set of verified
emissions data was published – prices fell as
a consequence to a few cents / tonne
30
Futures Prices Dec 2008
25
Phase II:
15
• New national allocation plans ensure the
market will be short of allowances if it
continues as business as usual
10
Futures Prices Dec. 2007
€ per tonne
20
5
12-07
11-07
9-07
10-07
8-07
7-07
6-07
5-07
4-07
3-07
2-07
1-07
12-06
11-06
9-06
10-06
8-06
7-06
6-06
5-06
4-06
3-06
• Though CERs are cheaper an import cap has
been imposed
2-06
1-06
0
• Chinese CERs are capped at €8/tCO2
protecting EUAs
• To date Phase II contracts have stayed in a
range of €12 to €30
6
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The Bali Roadmap sets a course for a new global climate deal to
be agreed in Copenhagen in 2009
The Deal in Bali
• Acknowledged global warming
• Agreement to tackle deforestation in developing countries
• Launch of a two-year "Bali Action Plan" for negotiations on a new international
climate regime
• Adaptation Fund launched to protect poorer countries from global warming
• Sectoral emissions proposals to be considered
• Considered how to transfer clean technologies from industrialised nations
The negotiations process is scheduled to conclude in December
2009 in Copenhagen.
7
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There are significant opportunities to invest into the carbon market
over the next few years
Investment Opportunities
• Growing market: Worldwide carbon market is growing rapidly and estimated to be
worth USD 60bn in 2012 and USD144bn in 2020.
• Carbon allowance shortfall: Credit shortage will support prices, which should be
more stable and trade in a EUR 12 to EUR 30 range in Phase II.
• Greater certainty: More clarity on Phase III and forecasted prices around EUR 35
• No correlation to other asset classes:
Market
Equity Bonds Oil
Correlation 20%
44%
Gas
52% 31%
GF Invest proposes a number of structured products giving private
investors access to the Carbon markets.
8
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Opportunités
Février 2008
Carbon Wedding Cake
Capital Protection
Currency
Maturity
Underlying
100%
EUR
1 year
EUA Phase II Dec. 2009 Future (MOZ9)
EUA
Range 1
Range 2
Range 3
31.00
26.00
21.00
16.00
11.00
Aug 05
Payoff Schedule
Aug 06
Aug 07
If Underlying remains inside [85%, 125%]: 122%
If Underlying remains inside [80%, 130%]: 111%
If Underlying remains inside [75%, 135%]: 105%
Else: 100%
9
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Opportunités
Février 2008
Carbon Reverse Convertible
Currency
Maturity
Underlying
EUR
1 year
EUA Phase II Dec. 2009 Future (MOZ9)
Coupon
Barrier
15.50%
60% of initial level
EUA Phase II
Barrier
30.0
25.0
20.0
10
2007
2006
10.0
2005
15.0
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