who are these guys? cantorco2e litigation sound and fury signifying?
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California Offsets Workshop Current State of the California Carbon Market June 21, 2011 Josh Margolis [email protected] 415-296-9359. Agenda. Who are these guys? CantorCO2e Litigation Sound and Fury signifying? Market mechanics what, when, how Market size $3 - $128 billion - PowerPoint PPT PresentationTRANSCRIPT
© Copyright CantorCO2e 2011
California Offsets WorkshopCurrent State of the California Carbon Market June 21, 2011
Josh Margolis [email protected] 415-296-9359
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© Copyright CantorCO2e 2011
Who are these guys? CantorCO2e Litigation Sound and Fury signifying? Market mechanics what, when, how Market size $3 - $128 billion Allowances & offsets $6 - $70 Transaction types spot, stream, options, hedge Market color its complicated Actions to take now assess, prepare, hedge
Agenda
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© Copyright CantorCO2e 2011
Who is CantorCO2e? California roots
o Since 1992 (and before) Auction agreements with >300 companieso Most credits brokered Los Angeleso CEC Climate Change Advisory Committee San Francisco
Brokerage, strategy, advisory, marketing, and regulatory assistance
Subsidiary of Cantor Fitzgerald, global financial services firm
> $10 billion environmental & energy transactionso CARB CRTs & CAs SO2 EAs NOx SIP Call ERC o GHG VERs RECLAIM HGA DERso RGGI RECs/ROCS Biomass VERso CERs EU EAs Wastewatero VCUs ATUs
Helping companies develop and implement successful offset/carbon management strategies
Innovation
FinanceSecuritizatio
nTechnology
Energy
Renewables
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Litigation fromMarket’s Perspective
• Key dates• Roller coaster
– What’s EJ got to do with it?– it’s all over/we agree with them?– just show your homework– the sun’s coming up tomorrow– the other shoe
• Betting on:– program what’s creditable– start date next lawsuit
• Just give me certainty• Pricing uncertainty• Prohibition on speculation
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Potential Value of Traded* CreditsAllowances 2,700,000,000
Auction Amt Auctioned (est)Unit Price
(est) Total ValueLow (est) 5% $10 $1,350,000,000 High (est) 60% $70 $113,400,000,000
Offsets 216,000,000
Unit Price (est) Times Sold Total ValueLow (est) $10 1 $2,160,000,000 High (est) $70 4 $15,120,000,000
Total Est Value of Allowances & OffsetsLow $3,510,000,000 High $128,520,000,000
* Excludes value of freely allocated emission allowances
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AB 32: Cap vs. Allocations + Offsets
Net Cap Offset forecast The amount of allowances that CARB will remove from each year’s cap and set aside for the Allowance price Containment Reserve• BAU emissions forecast
Mill
ion
Met
ric To
nnes
0
50
100
150
200
250
300
350
400
450
2012 2013 2014 2015 2016 2017 2018 2019 2020
1 2 3
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Declining Emissions Checkbook
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Single Year Trade
400
300
200
Seller Buyer
Sells 100 allowancesto buyer
Buys 100 allowancesfrom seller
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300 250
200
150
100
50 2012 2013 2014 2015 2016 2018 2019 2020
Required obligation
Surplus saleable reduction
Actual emissions
Multiple Year Trade
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Transaction Types
Spot Stream Swaps Options Firm delivery Unit contingent Guaranteed CARB
Offsets Allowances
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Transaction Types Spot Transaction
o Verified, issued offsets or allowances• Pros: POD, low quantity/delivery risk, seamless transaction
• Cons: Some buyers looking for future vintages
Stream Transactiono Multiple years of created, prospective offsets/EAs
• Pros: Lock in future year price, establish cash flow/cost
• Cons: Locked price eliminates ability to transact at better price
• Hedge: Structure a floor/ceiling profit share
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Transaction Types Firm Delivery
o Supplier guarantees delivery at set date/price• Pros Higher price• Cons Penalties for non-delivery, credit?
Unit Contingent o Delivery of credits when/if issued
• Pros No non-delivery penalty if not issued• Cons Likely to be priced lower
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Transaction Types Swaps
o Non cash transaction Options
o Risk management o Right, not obligation
• Calls right to buy at set level over set term• Puts right to sell at set level over set term
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Transaction Types Guaranteed CARB Offset or Allowance Terms
Program in force Dec 12, 13, 14 (one year delay?) Allowances/offsets issued/blessed by CARB
Issues Credit Policy/legal
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216 MMTCO2e through 2020 limit 8% of compliance obligation Location – CA, North America… for now ARB Protocols
o Forestry protocol v 2.1, 3.0-3.2 o urban forests protocol v 1.0-1.1o US ODS protocol v 1.0o Livestock manure protocol v 1-3
Offsets
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What’s next (maybe?) CAR Ag
o Cropland Management o Nutrient Managemento Rice Cultivation
VCS REDD CAR Nitric Acid CAR Mexico Livestock LFG?
Potential Offsets
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Allowances vs Offsets
Allowances Offsets
Available from CARB Yes No
Third Party Market Yes* Yes
Available Outside Auctions Limited Yes
Holding Limit Yes No
Price Limit No No
Forward Buys Yes* Yes
Charismatic (Carbon with a Story) No Yes
Risk of Reversal No* Yes
Due Diligence Importance Limited Very
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Price Indications
Product Type Quantity Vintage Bid/AskCAR Forestry 2.1 25,000 spot 6.50/7.25
CAR Forestry 3.1 25,000 2005-12 6.75/7.50
CAR – Dom ODS - Domestic 25,000 2010-2011 7.75/8.50
CAR Ag Methane 20,000 2010-13 7.25 /7.50
CAR ODS – Article V 25,000 >2005 2.50/4.00
CAR N2O 100,000 >2005 2.00/3.50
CCO Offset 25,000 - 10.50/11.50
CCA Forward DEC-12 Allowance 25,000 - 14.75/16.00
CCA Forward DEC-13 Allowance 25,000 - 15.75/16.50
Recent Bid/Ask for Carbon Instruments (6/20/11)
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Price Indications
Source: Reuters graph ic/Stephen Culp via Point Carbon
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Price Indications
20
August
Septem
ber
October
November
December
January
February
March
AprilMay June
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Indicative Price Trend for CARB-Approved CAR Project Types and CARB Carbon Allowance
ForestryLivestockODSDEC-12 CCA
Sett
lem
ent P
rice
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Market Color• Herky jerkey• Traders mostly, fewer permit holders now
– Depth of market - > millions of tons– Traders, permit holders with trading desks, compliance sources
• Mostly OTC, for now• CARB’s green curtain
– Rules– Methodologies/prospective
• Forecast – Offset re-verification– Policy (go/no go, start date, allocations, trading rules, buyer beware)– Speculation– Credit (offered/taken)– Control, manufacturing, allocation/offset planning
• Cost curves – capital costs vs. offsets and allowances vs. hybrid• Options• Portfolio• Remember CEQA/Voluntary
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Know Who You are Talking To
Motivations, products, and costs between:
Brokers
Traders
Marketers
Retail offset provider
Exchanges
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Appreciate policy challenges/opportunities Quantify current and expected 12 – 20 emissions AB32, CEQA, voluntary Build portfolio of solutions
o Onsite controls, efficiency improvements, biomasso Identify control cost curveo Managing carbon liabilities
Create CARB offsets if possible Define and resolve expected net short position
o Participate in 3rd party projectso Offset due diligence (reversals, delivery, PR risk)
OTC Transactionso Price and termso Swap (ERC, RTC for carbon)o Trade clearing
Actions to Take Now
