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Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc
Market and Methodologies Meet Ocean FertilizationTill Neeff – EcoSecurities
Ocean Iron Fertilization Symposium
26-27 Septemer 2007, Woods Hole
C A R B O N C R E D I T S — O R I G I N A T I O N T O C O M M E R C I A L I S A T I O N
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
EcoSecurities’ perspective
EcoSecurities was founded in 1997 and is world’s leading creator, acquirer and trader of carbon credits in the global carbon market.
• We have 456 projects in the CDM project cycle
• Current portfolio of >185m tCO2e
• First projects to achieve registration and issuance of credits
• Offices in 21 countries
• Global Consulting Services Group focuses on corporate strategy, GHG markets, and projects
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Presentation overview
• Key market factors– Voluntary markets and regulatory markets
– Where does OIF fit?
• Carbon credit projects and OIF– Key components of methodologies
– Methodological challenges in OIF
• Conclusions
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
The market context
Market demand for carbon offsets
Scattered voluntary demand
Kyoto markets
Non-Kyoto regulatory markets
Prominent voluntary GHG initiatives
Voluntary cap-and-trade
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Regulatory markets
• Carbon credits are compliance instruments: carbon as a commodity
• Kyoto markets: CDM, EU ETS– In 2006, turned over 1.6bn tCO2e, of those 0.5bn tCO2e project based
– Until 2012, post-2012 being negotiated
• Other regulatory markets: RGGI, AB32 (CCAR), NSW, etc.– In 2006, turned over <40m tCO2e, growth expected
– Emerging and thus still being defined
• OIF does not currently access any regulatory markets– Ownership of carbon credits for Kyoto parties only
– The ocean isn’t part of the territory of a Kyoto party
– Need to modify post-2012 ownership rules to allow for OIF credits
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Voluntary markets
• Voluntary offsetting for reasons of CSR and individual life-style choices
– “Story” behind the project
• Market performance in 2006
– Voluntary markets turned over 24m tCO2e, grow exponentially
– No rigid procedural, methodological, legal framework
• Voluntary markets are small compared to OIF
– One OIF cruise can generate Millions of tCO2e
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Importance of the public image for accessing markets
• Public image and market access
– Demand on the voluntary carbon markets is partially driven by public image
– Future inclusion into (new) regulatory markets will consider the public image
• OIF does not have much to offer on the socio-economic or environmental front but delivers high-quality carbon credits
• Analogue example of HFC projects under the CDM
– Offsets are high quality (additional, measurable, etc.)
– Huge amounts of carbon credits
– Simple, low cost, and perception of huge profits
receive criticism on largely emotional terms
receive lower prices
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Market bottom lines for OIF
• Will regulated markets grow post-2012?– US participation in the UNFCCC framework?– Will OIF qualify for participation in future regulated markets?
Credit ownership a major issue for OIF
• Will growth of voluntary markets continue?– Will we see a public backlash against offsets generally?– Can voluntary markets absorb tons from OIF?– How will the public perceive OIF?
• Implications for the business model of project developers– Access to markets uncertain– Market size and prices uncertain– Market demand for OIF uncertain
• The OIF sector needs to take a strategic attitude– Public image is critical– Policy dimension of gaining access to regulatory markets
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Key components of methodologies for GHG projects
Baseline and additionality
Permanence
Leakage Monitoring
Validation and Verification
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Complexity of methodologies
• CDM turned out quite rigorous
– Cumbersome approval procedure
– Methodology process as a political tool
• Chance to be more simplistic for OIF
Average time to final decision from the date of initial methodology submission
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
1 3 5 7 9 11 13 15 17 19
Submission Round
Day
s to
Fin
al D
ecis
ion
Rejection Approval
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Additionality
The project is not Business as Usual:
- Project overcomes barriers
- Risk-related barriers:
- first-of-a-kind project
- unproven technology
- country risk
- Technological barriers
- Investment barrier
- Financial additionality
- Compare financial returns of a project with a benchmark
- Carbon-credit cash flow increases the project return
- Additionality in OIF not complicated
Required return
threshold
Projectreturn w/o
carbon credits
Projectreturn w/
carbon credits
Carbon creditreturn
Gap b/wactual and required
return
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Project baselines
0
2
4
6
8
10
12
14
1 2 3 4 5 6 7 8
Carbon stock
time
project scenario
baseline scenario
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Leakage
• Leakage are emissions outside the project boundary that affect the project’s carbon benefit
• Leakage hard to measure because often indirect via markets
• Methodological ways to deal with leakage
– Measure
– Limit applicability scope
– Discount conservatively
• Leakage sources in OIF
– Ship
– Production of iron
– Dust storm after fertilization event
– Mixing with iron-rich water after fertilization event
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Permanence
• Sinks and sources of GHGs
– Emission reductions: fugitive gases, fossil fuels, etc.
– Carbon storage: planting forests, OIF
• Emission reductions generally considered “permanent”
• Carbon storage not per se permanent
– Risk of carbon reversal
– Options to address non-permanence
Temporary crediting
Ton-year approach
Minimum time frame
• Permanence in OIF?
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Monitoring
• Verification is audit of the monitoring results and procedures before issuance
• Monitoring and verification have become issues in the CDM and projects underperformed
– PDD writers had an incentive to overstate
– Procedural challenges in CDM
– Problems in data collection and archiving
• Monitoring in OIF complex but likely to be done properly
Number of projects with different Issuance success
0
10
20
30
40
50
60
0%-20% 20%-40% 40%-60% 60%-80% 80%-100% 100%-120%
>120%
Issuance success
Nu
mb
er o
f p
roje
cts
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Methodological bottom lines for OIF
• Methodological challenges
– Depends on difficult science
Hard to understand
Measurement is technologically involved
Difficult to find qualified auditors
– Various leakage sources
– Project boundary is conceptual
– Difficult access to the site
Verification needs to work without on-site visit
No re-measurement
– Non-permanence questions
• Simplifying methodological aspects
– Sophisticated scientific setup
– Baseline does not need to be modeled
– Additionality is straight-forward
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
Conclusions
• OIF faces methodological challenges– Difficult site access
– Hard science behind OIF
– Addressing permanence
• OIF faces challenges in the context of current markets– Future access to regulated markets uncertain
– Voluntary market demand will depend on public image
• OIF has the potential to deliver high-quality credits– “Very” additional projects
– Long-term storage
– Numbers have the potential to change the carbon markets
Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc
Ocean iron fertilization and carbon credits
Till Neeff (Senior Consultant)
till@ecosecurities.com
+44 1865 202 635
Carbon credits - origination to commercialisation© 2007 EcoSecurities plc
The GHG project cycle
“Normal” Project
Concept Feasibility
analysis Financial
closure Construction Operation
The Carbon ProjectThe Carbon Project
PINPIN ValidationValidation Registration Registration
and and VerificationVerification
Project Project DesignDesign
DocumentDocument
Find buyer Sign
ERPA
Monitor contract
compliance
Negotiate terms and conditions
The Emission Reduction Purchase Agreement (ERPA)
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