capacity building on business opportunities for cdm projects in china a project funded by the...
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Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Carbon Markets
In relation to CDM projects in China
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Main Elements• Carbon funds and facilities
• Carbon brokers
• Feasibility and risk analysis
• Pricing structures
• Carbon contracts
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Carbon Markets• Compliance markets Players buy carbon
credits in order to meet a mandatory (legally imposed) emission reduction target
• Voluntary markets Based on voluntary efforts to reduce emissions. They are largely driven by the threat of governmental regulation and compliance targets, in non-Kyoto countries
• Offset markets Retail offset purchasers are typically corporations or individuals aiming to become carbon neutral.
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Compliance MarketsKyoto Annex 1 Countries trade:•Certified Emission Reductions (CERs)•Emission Reduction Units (ERUs)•Assigned Amount Units (AAUs)•Units regulated under other schemes e.g. EU Allowances (EUAs) Retail Offset Market
Purchasers (usually individuals, organisations or events) buy CERs and
VERs with high sustainable development benefits in order to become carbon
neutral Voluntary Markets
Non-Kyoto Countries trade Verified Emission Reductions (VERs) and have requirements under various
schemes, e.g. Chicago Climate Exchange (CCX) and New South
Wales Scheme
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Sale of Carbon Credits• Spot market transactions occur when
actual, existing, verified or certified credits are transferred.
• Forward sales are the most common transaction form – they are the promise to purchase credits once they are generated, at a specified price.
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Market Drivers• European Union Began trading carbon
emission reductions in January 2005 based on a cap-and-trade programme
• United Kingdom Project-based GHG emissions reduction pilot launched in 2002
• United States Chicago Climate Exchange (CCX) has established a voluntary cap-and-trade programme initially in North America and Brazil
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
EU Emissions Trading Scheme• EU ETS establishes emission reduction
requirements for about 10,000 large industrial and electricity generating sources (about half of Europe’s emissions of CO2)
• Phase 1 started in January 2005 and runs through 2007
• Phase 2 corrsponds to 2008-2012 (first commitment period of the Kyoto Protocol)
• EU allowances are EU ETS compliance instruments allocated by EU governments
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
EU Emissions Trading Scheme• Market for European Union Allowances
(EUAs) experienced explosive growth in 2005 (from about 9 Mt in 2004 to over 322 Mt in 2005), due largelly to trading activity of electricity generators
• Prices increase dramatically in 2005 from about € 7 to a high of about € 30, due to rising natural gas prices, which resulted in increased coal-fired generation
• Continued expansion in first quarter of 2006
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Market Buyers• World Bank/Prototype Carbon Fund Finances
projects that produce high-quality GHG emission reductions
• World Bank Umbrella Carbon Facility (UCF) Created in December 2005, the UCF will aggregate multiple sources of funding to purchase large volumes of emission reductions
• Natsource GHG Credit Buyers Pool US$ 200 million GHG-Credit Aggregation Pool that will purchase project-based GHG emission reductions
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Market Buyers• Certified Emission Reduction Unit
Procurement Tender (CERUPT) Provides project funding to purchase CERs
• Emission Reduction Unit Procurement Tender (ERUPT) Purchases carbon emission reductions
• International Finance Corporation-Netherlands Carbon Facility (INCaF) Purchases project-based carbon emission reductions
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Market Facilitators• Asian Development Bank Renewable
Energy, Energy Efficiency and Climate Change (REACH) facility Works cooperatively with development funds in Denmark, the Netherlands and Canada
• Global Environment Facility (GEF) Provides cost-sharing grants and concessional funding to help fund projects that protect the environment (climate change mitigation is one of it’s four focus areas)
• Carbon Brokers Natsource, Cantor Fitzgerald/CO2e.com, Evolution Markets LLC
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Possible sources of finance• World Bank/Prototype Carbon Fund• Certified Emission Reduction Unit
Procurement Tender• IFC-Netherlands Carbon Facility• Chicago Climate Exchange (CCX)• GHG-Credit Aggregation Pool• Asia Development Bank (ADB)• GEF• Carbon brokers
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
The future• According to Natsource: EU, Japan and
Canada are likely to be 3 to 4 billion tonnes short of achieving emission reduction targets in 2008-2012
• Continued growth in trading of project-based emission reductions
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Risk areas relevant to CDM projectsRegulatory risk: Are the regulations surrounding independent power producers developed and stable? Is the implementation of a new energy efficiency regulation likely?
Technical risk: RE/EE technologies are often new, or new to the location
Credit risk of parties to transaction: How likely is it that the financier will get their investment back should any aspect of the project fail or under-perform?
Country/political risk: What is the likelihood of local government intervention in the project, or appropriation of profits or assets?
Demand and supply risk of outputs: How well has the market demand for outputs, or availability of supply of project inputs been tested?
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Institutions Risk Tolerance
Reward Expectations
Commercial Bank Low Low
Government technology agency
High Medium
Export credit agency Medium Medium
Donor organisaton Medium High
Venture capitalist High High
Development Bank Medium Low
Foreign Direct Investor Low Medium
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Risk Mitigation Project risks Jurisdiction-specific
issues Counterparty issues Issuance of CERs
• Obligation to act as a prudent operator
• Reporting requiremnts
• Due diligence requirements in host country
• Restricting other project participants
• Credit support, Material Adverse Change clause
• Due diligence and credit analysis
Delivery • Performance guarantees
• Escrow arrangements
• Events of default
Compatibility with back-to-back arrangements
• Conform back-to-back agreements
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Prices paid for project-based emissions reductions
• Stage of the project in the project cycle
• Creditworthiness of the seller and buyer
• Delivery guarantees
• Investment and regulatory climate of the host country
• Technology performance
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Trends in 2005 and 1st quarter 2006• HFC23 destruction projects accounted for 58%
of traded reductions• 78% of traded emissions reduction in 2005 and
the first quarter of 2006 were non-CO2 gases
• Landfill gases were 9% of traded volume• Coal mine methane gases were 6% of traded
volume• Hydroelectric power, wind, biomass and other
renewables and energy efficiency projects accounted for 12% (down from 25% in 2004)
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Regulatory incentives• Companies are liable to a fine of 40 €
per tonne over the permitted limit during the three-year transitional period
• A fine of 100 € per tonne of CO2 will be applicable from 2008 to 2012
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Parties involved in CER purchase
Trader
Legal
Credit
Risk Management
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
CER transaction processInitial Proposal
Term Sheet and
NegotiationSigning of ERPA Ongoing
Monitoring
• Trader discusses principal terms of deal with seller
• Legal checks terms against internal procedures
• Risk Management & Credit analyse Seller and CDM project and give specific requirementzs to legal
• Legal co-ordinates due diligence on CDM project and host country
• Wording agreed between Buyer and Seller
• Final draft subject to review by Board
• Board approves entry into ERPA
• Trader keeps ongoing relationship with Seller
• Risk Management and Credit monitor any events that might affect deal
• If such events occur, all discuss how to respond (termination, amendment, assignment, etc.)
Capacity building on business opportunities for CDM projects in China
A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International
Emissions Reduction Purchase Agreement (ERPA)
ERPA
Risk MitigationType of Purchaser
Time of Transaction
Types of Pricing Mechanisms
Carbon Project Type