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The market for the flexible mechanisms: Carbon till 2012 and beyond

The market for the flexible mechanisms: Carbon till 2012 and beyond. Olga Gassan-zade Point Carbon April 24, 2008. Point Carbon today. Trading analytics , Research & advisory , News and Conferences Covers carbon, power and gas markets 170 employees (25 Ph.Ds)

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The market for the flexible mechanisms: Carbon till 2012 and beyond

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  1. The market for the flexible mechanisms: Carbon till 2012 and beyond Olga Gassan-zade Point Carbon April 24, 2008

  2. Point Carbon today • Trading analytics, Research & advisory, News and Conferences • Covers carbon, power and gas markets • 170 employees (25 Ph.Ds) • Oslo, London, Tokyo, Washington, Kiev • 15.000 subscribers in 150 domains

  3. Overview • Carbon market now • Carbon market in 2008-12 • Post-2012 Focus on mechanisms and AAU trading

  4. Carbon Market Now

  5. Emergence of an effective carbon price Significant impact on European power prices

  6. Maturing market

  7. Still going strong EU ETS remains the key driver

  8. Overview of CDM and JI Activities (as of April 2008)

  9. CER and ERU price categories (April 2008) Lower risk for the seller Higher risk for the seller

  10. 2008-12:Balancing supply and demand

  11. Kyoto Gaps (2008-12) EU 15 Japan Net Kyoto Gap NTP GPP Canada ETS Others 0 500 1,000 1,500 2,000 2,500 3,000 Source: Point Carbon [Mt CO e] 2

  12. 94% Existing projects - not risk-adjusted 19 % JI Upcoming projects - not risk-adjusted 70% 30% 81 % CDM 57% 43% Total 0 1000 2000 3000 4000 5000 Mt Supply: Majority already in pipeline Source: Point Carbon

  13. Issuance 100% 80% 60% Issuance rate 40% 20% 0% Industrial Fuel Renewable Energy Waste Total processes switching efficiency Source: Point Carbon

  14. What we say they will deliver 5,000 4,066 4,000 - 38 % 3,000 -35 % 2,505 Mt 2,000 1,000 - 52 % 0 CDM face CDM PCA est JI face value JI PCA est Total face Total PCA est value value Source: Point Carbon

  15. EU15 Japan Canada Other Eastern Europe Ukraine Russia -5 -4 -3 -2 -1 0 1 2 Gt CO e 2 Source: Point Carbon Make a supply estimate... ...Add the AAUs...

  16. Estimate Kyoto market balance... • Will the market be oversupplied?

  17. Source: Carbon Project Manager, Point Carbon …Not that simple

  18. Realistic supply of AAU

  19. A balancing act between the mechanisms • A split between CER/ERU and AAU demand • Environment and development value of CDM and JI projects • Banking between the periods? • ERUs and CERs can be banked only up to a limit of 2.5 % of the initial assigned amount • Theoretically, AAUs can be banked without restrictions • But will there be a value to AAUs post-2012?

  20. A market with a certain dynamic • AAU supply is sensitive to demand • Snowball effect: • Success will create more supply • No liquidity in the AAU market: • No transparent price-setting mechanism • Pressure on the seller governments to deliver on the AAU value • Pressure on the buyers to deliver on the price or other concessions

  21. Not a commodity market • A market with a limited number of sellers and a limited number of buyers • A commodity with a limited circulation and dangerously close expiry date • Price will not be set by an equilibrium of supply and demand • Instead it will be set by • The willingness of the buyer to pay • The assessment of the seller of the value of the AAUs • Pricing in of risks and valuation of premiums • Competitive selling or a cartel?

  22. The Kyoto balance: Saved by the AAUs? A report by Point Carbon Research. Publication date: May 2008 Timing is critical Eligibility established • Early to end 2008 Compliance • 2 year lag in reporting • Accounting for 2012 will be done in 2014 • True-up: +100 days • True up reporting (undecided) • Compliance assessment: mid-2015

  23. Factoring in post-2012…

  24. InTrade, Apr 15: Winning individual Source: Intrade.com New US President: New policy

  25. The proposal by the European Commission • Proposal for 2020 • 20-30% reduction of emissions • 20% from renewable of total energy consumption • 20% increase in energy efficiency • 10% use of bio-fuels in the transport sector • Strong limitation on imports of credits • Significant increase in carbon and power prices across Europe • Massive investments in renewable energy and CCS • Any demand for new CDM projects? Transforming the European power market

  26. Supply-demand for CDM • EU demand if EC proposal implemented • 20% target: 250 Mt/year, 2008-2020 • 30% target: 370 Mt/year, 2008-2020 • Supply in 2012: 600-700 Mt/year • US bill by Lieberman-Warner • 750 Mt/year from countries that have a cap, not CDM • Potential oversupply, unless • Change in policy • Large demand elsewhere International policy will define the future of CDM

  27. Our main assumptions about post-2012 • We believe there will be an international agreement - with broad participation • US companies will rapidly start setting their mark on the global carbon market over the next couple of years • Offset projects in developing countries will continue to play an important role, but in a different way • We question whether there will be one reference price

  28. Prospects for CDM and JI • JI will take the place of CDM • Developing country caps • Large market • Four types of involvement • Extended Annex I: country cap • Capped developing country sectors • Developing country sectors not eligible for CDM • Developing country sector eligible for CDM Narrow and small CDM

  29. Timing and structure • Timing • New protocol in Copenhagen 2009 • 2-4 years for extending and ratification of the protocol • Instruments for reduction • Cap-and-trade for extended Annex I • Cap for individual sectors in many developing countries • Market structure • Individual markets in USA and Europe • To some extent linked through CDM • Significant developing country emission will be capped

  30. Post-2012: What price?

  31. The known unknowns • Number of participants and level of ambition • Supplementarity limitations • Banking (of hot air) • The redefinition of the CDM • And then we have the unknown unknowns...

  32. Conclusions • From Europe, the global carbon market looks well and healthy • Post-2012 will be very different from the current world • Challenges for JI and AAU trading • Not a negotiating priority • No longer JI as we know it?

  33. Thank you!Olga Gassan-zadeogz@pointcarbon.com+81 90 4420 2641+81 3 3365 5586

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