carbon credits ppt

Carbon Credits

Introduction What are GHG’s? What is Carbon Trading? Why are GHG’s traded? What are UNFCCC and Kyoto Protocol? What is CDM? What is CER? What are Emission Allowances?

GHG’s regulated by KP Carbon dioxide Equivalents (CO2e)

Global Warming Potential (GWP)

What is one unit of GWP?

Participants Annex I Parties: OECD countries+ EIT countries,

including the Russian Federation, the Baltic states and several Central and Eastern European States.

Annex II Parties: OECD members of Annex I excluding the EIT parties. required to provide financial resources to enable

developing countries to undertake emission reduction activities and to help them adapt to adverse effects of climate change

Non – Annex I: Developing countries – India and China is a part of non-Annex I. They are usually the net sellers of emission offsets.

International Carbon Map

Highlights:USA: Biggest Emitter

Australia changed positionThe EU and Japan ratified it: Biggest Buyers

Kyoto Mechanism The Clean Development Mechanism (CDM)

Earn and Trade Covers developing countries CERs

The Joint Implementation (JI) Earn and Trade Covers developed countries ERUs

International Emissions Trading Cap and Trade Only for developed countries AAUs

Types of Transactions Allowance Based

AAUs, EUAs prevalent under a cap and trade system

Project Based Projects are funded, conceptualized by

companies in developed countries and implemented in developing countries or financially more viable countries

Is covered by CDM and JI.

Trading in Theory

Tradable products under UNFCCC

Comparison between EUA, ERU and CER

Allowances v/s Credits

Contd…

Only 10% of excess emissions can be covered under EU ETS

Fungibility

The Process (Allowances) Cap and Trade

Cap = Limit on emissions Trade = trade for deficit/surplus and ensure you are

under Cap Trading Options:

Buy from fellow compliance participants having surplus Buy from offset projects (ie CDM)

Penalty In EU fine of Euro 100 per tonne of CO2e that is above

the cap In addition to this the exceeded emissions need to be

covered up in the subsequent year.

The Process (Credits) Earn and trade

Earn = Reduce carbon emissions through more efficient projects and get it certified by UNFCCC

Trade = Sell these certified reductions with buyers in need.

Principle of Additionality

Around the World

Who is Selling?

Source: Point Carbon

42,219

18,735

9,120

305,330

0 200,000 400,000 600,000 800,000 1,000,000

Asia Pacific

Latin America andCaribbean

Middle East

North AfricaMediterranean and

Eastern Europe

Sub Saharan Africa

At validation Correction request Reg. request Registered Rejected

Request review Under review Withdrawn Grand Total

889,341

Kt CO2e

By Volume (ktCO2e 2012)

Expected annual CERs from registered Projects (By Country)

Source: www.unfccc.int

No. of Projects (By country)

Inferences India has 32.42% of total projects but

generates 14.37% of total CERs

Korea which is No. 4 in terms of total CERs generated, lies at No.7 in terms of total number of registered projects.

Chinese projects are the most efficient. 198 projects generate 107,128,288 CERs.

Top Buyers RWE, ENEL and EDF Trading

are compliance buyers

Rest of the buyers are Carbon Credits intermediaries/

aggregators

Composition of Buyers (By Country)

Source: State of the Carbon Market

Macroeconomic Price Determinants Upward Price Pressures

Japanese buying from 07 to 08 EU demand Australian demand post ratification

Downward Price Pressures Canadian govt. rejection Increased registration of CER projects Major non CO2 mega projects (e.g $1 bn

Chinese HFC projects) Corporations with excess allocations not

trading yet

Price Signals Demand Side Signals

Gas – Coal Price Spread Oil Prices (Weak correlation) Weather Conditions Regulatory Conditions (case of EU) Economic Growth Rate

Supply Side Signals CER Supply

Long Term Indicators Potential supply of surplus AAUs from EIT

countries AAU prices in turn affects CER prices

EU allocation issues will be the biggest driver (Compliance levels from 10% to 5%) EUA already a benchmark for domestic prices

Contd… Prices influenced by COP

Provides positive or negative signals through their decision

Development of internal ETS akin to EU ETS

Prices of CERs at different stages of the project life cycle.

Indian Markets Introduced on the two leading commodity exchanges

MCX NCDEX

MCX CFI Futures Contract was introduced in the Indian markets on Jan 21, 2008

The NCDEX CER Futures Contract (CERNCDEX) in carbon credits was introduced on Apr 10, 2008.

Contract Specifications 1 MCX EUA Futures Contract = 200 tonnes of

CO2e = 200 EUAs Underlying asset: EUAs

1 NCDEX contract = 500 tonnes of CO2e = 500 CERs Underlying asset: CERs

Prices and Volume (Before Apr 2008)

Prices and Volumes (NCDEX Contract)

Prices and Volumes (after Apr 2008)

Notes Only Dec contract has been considered

because:

Only Dec contracts have significant liquidity. Both on the Indian as well as international markets

CERs traded only on the NCDEX. No contract for EUA

Conclusions MCX drives volumes upto 76000 tonnes of CO2e

or 76000 EUAs

NCDEX although a late starter managed to drive up the same volume in just 2 days.

After the launch of the NCDEX contract, MCX managed to trade just 5600 tonnes of carbon offsets from 10th April to 5th May.

During the same period NCDEX oversaw trading of 2,370,200 tonnes of carbon credits

Contd… Low volumes implies low volatility.

Unable to fulfill aim

Difference due to different underlying assets

EUA cannot be used, produced or held by Indians

Basis Risk, Hedging and Arbitrage opportunities

Risks Over-allocation of Allowances

Excess allowances meant target easily achieved

Volatility lead to speculation and profit trading

Regulatory impediments and hurdles

Lack of liquidity

Post 2012 uncertainty