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www.kestrelmanagement.com
Carbon Trading:
Opportunities and Cautions
Philip Trowbridge
Kestrel Management Services
Email: [email protected]
Direct Phone: (512) 795-9119
Management Systems • Risk and Liability Management • Process Improvements
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Presentation Overview
• Emissions trading overview
• Purpose
• Explanation
• History
• Policy & regulatory development
• Kyoto
• EU
• US & regional
• Climate change program considerations
• Exchange vs brokerage
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Emissions Trading Overview
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
• 60% - climate change important to strategy
Source: McKinsey Global Survey
December 2007
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
• 61% - climate change impact profits positively
Source: McKinsey Global Survey
December 2007
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
• 61% - regulation likely
Source: McKinsey Global Survey
December 2007
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
• 47% - carbon tax likely
Source: McKinsey Global Survey
December 2007
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
• 49% - cap & trade likely
Source: McKinsey Global Survey
December 2007
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Climate Change Importance
• McKinsey surveyed nearly 2200 Executives
However, only 30% of companies incorporate
climate change into their corporate strategy
Source: McKinsey Global Survey
December 2007
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Emissions Trading
• Goal: Reduce emissions
• Often referred to as “Cap & Trade”
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Emissions Trading
• Market forces reward reductions
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Emissions Trading
• Alternative to:
• Voluntary measures
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Emissions Trading
• Command and control
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Emissions Trading
• CO2 tax
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What is a Cap & Trade System?
• Cap – emissions limit
• Limit at or below current emissions
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What is a Cap & Trade System?
• Government either gives away or auctions emission
allowances
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What is a Cap & Trade System?
• Permits issued within limits
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What is a Cap & Trade System?
• Reduction goals included in regulatory limit
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What is a Cap & Trade System?
• Purchased offsets are retired
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What is a Cap & Trade System?
• Trading occurs between companies/continents
• Market forces drive price
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How Cap & Trade Works
Image Credit: Union of Concerned Scientist
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Cap & Trade History
• Established in U.S. through 1990 Clean Air Act
Amendments
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Cap & Trade History
• Established in U.S. through 1990 Clean Air Act
Amendments
• SO2 & NOx trading
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Cap & Trade History
• Allowances are “free”
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Cap & Trade History
• Lessons learned
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Cap & Trade History
• Flexibility provided by ‘banking credits’
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Cap & Trade History
• Allowances allocated at no cost
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Cap & Trade History
• Monitoring & enforcement
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Cap & Trade History
• Limited regulatory involvement
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Policy & Regulatory
Developments
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Kyoto Protocol
Kyoto Protocol (1997)
• Established mechanisms for trading CER’s between
countries/continents
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Kyoto Protocol
• Emissions trading
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Kyoto Protocol
• Clean Development Mechanisms (CDMs)
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Kyoto Protocol
• Joint Implementation
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Kyoto Protocol
• CDM’s
• 15 sectoral scopes
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Kyoto Protocol
• Project verifier approved per scope
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EU Emissions Trading Scheme
• Largest emission trading system in world
• Covers 10,000 installations
EU Emissions Trading Scheme
• Largest emission trading system in world
• Covers 10,000 installations
• Includes variety of heavy industry
EU Emissions Trading Scheme
• Other industries to be added
EU Emissions Trading Scheme
• Covered only CO2 initially
EU Emissions Trading Scheme
• Allowances (EUA’s) are “free”
EU Emissions Trading Scheme
• First phase (2005-2007) plagued with over
allocation
EU Emissions Trading Scheme
• Second phase (2008-2012) to limit allowances
U.S. Policy Overview
• Seven Cap & Trade proposals introduced in U.S.
Congress in 2007
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U.S. Policy Overview
• Most recent – Lieberman/Warner bill made it out of
committee – Died June ‘08
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U.S. Policy Overview
• Expect some harmonization with EU Emission Trading
Scheme (ETS)
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U.S. Policy Overview
• States actions include voluntary reporting of CO2
emissions and emission reduction targets
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U.S. Policy Overview
• Regional initiatives formed for registry and cap and trade
systems (WCI, RGGI)
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U.S. Policy Overview – continued
• Carbon trading program considerations
• Economy-wide program – regulated “upstream”
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U.S. Policy Overview – continued
• Multiple GHG’s – beyond CO2
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U.S. Policy Overview – continued
• Auctioned allowances
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U.S. Policy Overview – continued
• Mechanism to limit price risk
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U.S. Policy Overview – continued
• International trading
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Western Climate Initiative
• Formed: February 2007
• Partners: NM, AZ, CA, OR, WA, MT, UT, BC,
MAN
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Western Climate Initiative
• Goal: 15% reduction by 2020 (2005 baseline)
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Western Climate Initiative
• All Partners members of The Climate Registry
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Western Climate Initiative
• Expect Cap & Trade proposal August 2008
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Western Climate Initiative
• Point of Regulation – tbd
• Allocation of allowances
• Reporting
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Regional Greenhouse Gas Initiative
• Formed: August 2003
• Partners: CT, DE, ME, NY, VT, MD,
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Regional Greenhouse Gas Initiative
• Reduction Goal: Developed by each state
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Regional Greenhouse Gas Initiative
• Action Plan
• Launch Cap & Trade system by 2009
• Cap set relative to 2000; 10% cap reduction by 2019
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Regional Greenhouse Gas Initiative
• Allowances auctioned
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Corporate Climate Change
Program Considerations
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Corporate Strategic Response
Considerations
• Strategic timing – understand why taking action now is the
right time (leader, close follower, laggard)
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Corporate Strategic Response
Considerations
• Establish appropriate levels of commitment and priority at
all levels (BOD, CEO, & others)
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Corporate Strategic Response
Considerations
• Participate/Influence policy development
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Corporate Strategic Response
Considerations
• Shift thinking from business risk to business opportunity
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Corporate Strategic Response
Considerations
• Overcome short-term solution tendency
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Corporate Strategic Response
Considerations
• Systematic approach to program development – including
direct and indirect source emissions
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Benefits of Participating in
Carbon Trading Today
• Development & maturity of GHG accounting
practices
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Benefits of Participating in
Carbon Trading Today
• Demonstrates commitment to climate change
strategy
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Benefits of Participating in
Carbon Trading Today
• Potential leadership recognition
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Benefits of Participating in
Carbon Trading Today
• Gain knowledge of carbon trading
platform/practice
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Benefits of Participating in
Carbon Trading Today
• Experience to help drive policy development
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Benefits of Participating in
Carbon Trading Today
• U.S. has experience with SO2 trading
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Carbon Trading Cautions
• C&T is a redistributive system – net
reductions?
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Carbon Trading Cautions
• Voluntary market limits participation
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Carbon Trading Cautions
• Additionality principle
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Carbon Trading Cautions
• Carbon restrictions impact economic
growth
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Carbon Trading Cautions
• Due diligence
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Carbon Trading Cautions
• Point of regulation
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Exchange vs Brokerage
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Chicago Climate Exchange (CCX)
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•
•
•
Launched 2003 (+300 members)
Voluntary, legally binding
Trades six GHG’s (CO2, N2O, HFCs, PFCs, CH4, SF6 )
Carbon Financial Instruments (CFI’s) issued
annually (CFI’s = 100 metric tons priced/ton)
• Offset project verification
• Initial and annual third party verification
• Reports reviewed by CCX and FINRA
• Reduction targets - 3% existing members; 6%
new members
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Chicago Climate Exchange (CCX)
Source: www.chicagoclimatex.com 06/10/08
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Cantor CO2e
• Provide professional brokerage services to the
energy and environmental commodity markets in
U.S. & EU
• Headquarters: London & San Francisco
• Began emissions trading in 1992
• Trade CO2, NOx, SOx, VOC’s, REC’s,
• Carbon related services include:
• Support for “carbon neutral” – corporate and
consumer
• Market carbon offsets
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Trading: Exchange Member or Broker?
• Annual membership
fee $5K to $35K
• Transaction fee $5 per
trade
• Audits reviewed by
NASD to ensure
conformance
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Trading: Exchange Member or Broker?
•
•
•
•
No membership fee
No Master Agreement
Brokerage fee 3% to 5%
No reduction target
requirement
• Rigorous due diligence
process
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Conclusion
• U.S. has a history of cap & trade
• Carbon trading will likely be part of climate
change regulation solution
• Preparation depends on part you want to play
• Market participation may help better prepare you
for future
• Economics may help resolve whether to use
brokerage or exchange
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Thanks!
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