CER Guide(Certified Emissions Reductions)

IntroductionOverviewThis guide is designed to help individuals, businesses and organisations to understand the carbon market and Certified Emissions Reductions (CERs). Information about the carbon market is often incomplete, fragmented and hard to understand due to carbon-specific jargon. Eco Global Markets therefore presents as clear, concise introduction for people new to the carbon market.

What is the carbon market?The term carbon market can either refer to the entire worldwide carbon industry as a whole or a specific geographical region within it, such as Europe. Commercially, the term carbon market can also be used to describe the various deal-ings, activities, and interactions – usually business-to-business – within the carbon industry itself.

These interactions may also include those between the various carbon brokers, originators, auditors, consultants and project developers

around the world. Such participants within each of the various carbon markets around the world such as governments, businesses, and individuals can buy, sell, develop, and trade units of greenhouse gas emissions (GHG) or their equivalents by utilising such mechanisms and agreements as the Kyoto Protocol.

Currently they can do this by using carbon credits, offsets, allowances and permits.

A carbon credit is something that people can use to assign a commercial dollar value to one metric tonne of greenhouse gas emissions or its equivalent, so that they can measure, buy, sell, and trade them. When someone purchases a carbon credit from a third party, they are essentially paying someone else to offset, or reduce, one tonne of carbon emissions from the atmosphere in another location on their behalf. Effectively, they are paying someone else to do what they either can’t do or don’t want to do themselves.

While using carbon credits does not reduce someone’s own physical carbon footprint, when used correctly they do have a positive net effect on the global environment. If people buy the right type of certified carbon credits from a trusted source, most of the money they spend will go towards funding new projects and green technologies, which is good for the environment in the long term.

What is a carbon credit?

Without trying to state the obvious a compliance based market is one that its participants have been told they must comply with (usually by a governing body) whereas a voluntary market is one where its participants choose to be involved.

A good example of a compliance based market is the European Unions Emission Trading Scheme (EU ETS) which is currently the largest carbon market in the world. It currently accounts for more than 90% of the global carbon market and is by far the most structured.In comparison to this the voluntary market is less regulated and definitely not as transparent. It is made up from a number of fragmented markets based on smaller transactions. In most cases the voluntary market is driven by the corporate world and individuals who are looking to be socially responsible for a number of different commercial and personal reasons.

A compliance market (also referred to a mandatory market) is one where its participants have been told that they must comply with. This legislation usually sets an industry standard and or puts a cap in place on emissions where its participants must stay under it. In the event they go over (and emit more greenhouse gases than their allowance) then they are forced to buy credits from someone else. However if they use less than their allowance (such as by using better technology or processes) then they are allowed to sell the allowances that they don’t require.

Voluntary markets on the other hand are all about corporate social responsibility and individuals who are choosing to do the right thing. There are no caps and allowances issued and it is up to the individual to decide on what level of reductions they are interesting in achieving. Often you will hear of companies who have chosen to make a

What is the difference between the compliance (CERs) & the voluntary market (VERs)?

certain product or service carbon neutral which whilst it is normally still for marketing purposes if done correctly and with the right credits it does have a net positive impact on the environment.

The compliance market has a thriving secondary market where credits are traded on a live exchange. There is no such market for voluntary credits and all transactions are over the counter (OTC) and are therefore illiquid.

We believe that the sale of VERs to the general public for investment rather than immediate retirement purposes, does not represent best practice in the industry. ICROA/IETA regards this as a distraction and risk to the industry and discourages member companies to operate in this manner. Our view is echoed by the UK Financial Services Authority.

CER VERLiquid Illiquid

Live Exchange OTC Market

Used for compliance purposes Used for CSR and PR purposes

Strict Validation through the Clean Development Mechanism (CDM)

Less stringent Validation Process

Created from renewable energy projects (eg Solar, Wind etc.)

Created from projects such as forestry

The European Union Emissions Trading Scheme (EU ETS) was the first multinational and multi-sector compliance-based emission trading system in the world. It has been in operation since 2005 and is now in its second trading period (Phase II).

The EU ETS was introduced across Europe to tackle emissions of carbon dioxide and other greenhouse gases, and combat the serious threat of climate change. The current phase (Phase II) runs from 2008-2012 to coincide with the first Kyoto Commitment Period.

The EU ETS Phase II builds on the lessons from the first phase, and has broadened to cover CO2 emissions from glass, mineral, wool, gypsum, flaring from offshore oil and gas production, petrochemicals, carbon black and integrated steelworks.

In 2011 this scheme facilitated more than US$140 billion worth of carbon-related trades, with more than 3 billion carbon spot, future, and option contracts.

European Union Emissions Trading Scheme – EU ETS

EU ETS Phase III (2013 – 2020)Phase III of the EU ETS builds upon the previous two phases and is significantly revised to make a greater contribution to tackling climate change. A more ambitious, EU-wide cap on emissions; auctioning as the preferred means of allocation; reduced

access to project credits from outside the EU and further sectors added will result in greater emission reductions, greater certainty and more predictable market conditions.

Price Predictions for 2013 and Phase 3 of the EU ETS

CER Price Estimates 2013 P3

Barclays Capital € 14.00 € 17.00Citigroup - -Deutsche Bank - -MF Global - -Nomisma Energia € 13.00 € 17.40Point Carbon € 13.50 € 16.5070 Watt € 13.00 € 16.00Schwartzhal Kapital € 20.00 € 22.00SocGen/orbeo € 17.00 € 25.10Tschach solutions - -UniCredit € 12.30 € 16.50 Average € 14.69 € 18.64

77% of all CERs surrendered in 2011 were industrial gas (HFC and N2O adipic –credits). Thus far, in Phase 2, 81% (224m) of CERs have come from industrial gas projects. In January 2010, the European Commission approved a ban of industrial gas credits from the EU ETS effective as of 1st May 2013.

Nevertheless, this has done little to prevent their on-going use in the current phase of the system. Indeed it has actually increased their uptake, as ETS installations scramble to take advantage of this closing window for cheap compliance.

Why are industrial gas credits being banned?

Industrial gas offsets has provoked heated debate that, in January 2010, culminated in the European Commission banning these credits form the EU ETS as of 1st May 2013.

Key concerns are:

•Distortingthegeographicaldistributionof CDM projects away from most vulnerable countries. •Lackinganysustainabledevelopmentben efits for the local community •ProvidingnovalueformoneyinEurope •Creatingperverseincentivestocontinue to produce or even increase levels of production of ozone depleting gas HCFC-22 in order to destroy the waste gas, HFC-23 •UnderminingtheMontrealProtocolwhich was established to accelerate the phase-out of ozone-depleting gasses, including HCFC-22.

Banning industrial gas offsets is a step in the right direction in terms of ensuring the environmental in-tegrity of the EU ETS. This will affect CER prices posi-

Other price drivers - Industrial Gas Credits Ban

ConclusionWe hope that this guide will help you to understand some of the workings of this burgeoning market and the place CERs have within it.

We believe that due to the many changes being im-plemented over the course of the next year that a significant uplift in price is imminent.

The good news is that there are still plenty of op-portunities out there for anyone who wants to get involved in Certified Emission Reduction opportunities right now.

To find out more please contact Eco Global Markets...

Head Office: Heron Tower

Call: +44 (0) 20 3514 0500

email: info@ecoglobalmarkets.com

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City of London, EC2N 4AY, UK