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Emissions Trading Overview: Who are the Buyers and Sellers and What is Traded?

Emissions Trading Overview: Who are the Buyers and Sellers and What is Traded?. Tetyana Budyakova Lawyer. What is CMS Cameron McKenna?. CEE Magic Circle law firm (Chambers Global 2007) Moscow office client’s choice of the year (2007) Renowned in energy projects

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Emissions Trading Overview: Who are the Buyers and Sellers and What is Traded?

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  1. Emissions Trading Overview: Who are the Buyers and Sellers and What is Traded? Tetyana Budyakova Lawyer

  2. What is CMS Cameron McKenna? • CEE Magic Circle law firm (Chambers Global 2007) • Moscow office client’s choice of the year (2007) • Renowned in energy projects • Founder of CMS alliance (9 major European law firms) • 40 offices in 24 jurisdictions • Kyiv office opened last fall

  3. Our Locations in Europe

  4. Agenda • What is emissions trading • Market Players and legal frameworks that create demand • Main “carbon currencies” and trading platforms • Position of Ukraine in carbon market • What’s next?

  5. What is Emissions Trading • market-based mechanism aimed to reduce emissions at lowest cost • gives companies the • flexibility in choosing cost-effective ways to meet their reduction obligation: (1) reduce; (2) buy carbon units from others; (3) invest into offset projects; • financial incentive to invest into new technologies • Based on success of U.S. Acid Rain Program • cap and trade introduced within the1990 Clean Air Act Amendments • SO2 emissions reduced by 22% or by 7.3 million tons below mandated levels

  6. Carbon market is a new but rapidly growing market Source: World Bank, State and Trends of the Carbon Market 2008

  7. Cap-and-Trade elements • Fixed cap in Mt CO2e • Baseline • Fixed reduction requirement (by 80% by 2050) • Emittors covered, offset projects • Carbon currency

  8. Legal framework: what creates buyers • International: Kyoto Protocol • Regional cap and trade schemes: EU ETS • National schemes: e.g. UK ETS, New Zealand ETS, Australia (by 2010), potentially US & Japan • Regional programs within country: • RGGI in US • NSW GGAS in Australia • State schemes: California Assembly Bill 32; • Voluntary schemes: • CCX in US • Japan’s Keidanren Voluntary Action Plan (for Japan’s Kyoto compliance)

  9. Kyoto Protocol • Kyoto Protocol • Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) adopted on December 11, 1997, and entered into force on February 16, 2005 • Reduction Target • The Parties included in Annex I shall, individually or jointly, ensure that their aggregate anthropogenic CO2e emissions do not exceed their assigned amounts, inscribed in Annex B, with a view to reducing their overall emissions by at least 5% below 1990 levels in the commitment period 2008 to 2012. • Parties • 183 countries + EU (deposited instruments of ratification, accession, approval or acceptance) as of 14 January 2009 • 2 signed but not ratified – US and Kazakhstan • Annex I countries • 40 industrialized countries + EU listed in Annex I to UNFCCC • Annex B countries • 39 countries + EU listed in Annex B to Kyoto Protocol with their specific reduction targets

  10. Kyoto Protocol Parties

  11. Kyoto Protocol Annex B countries targets *  the EU redistribute the -8% target among its members, using the provision of Article 24 of the Protocol (the “bubble”): countries have different individual targets with combined overall target for that group of countries. **  have a baseline other than 1990.*** Belarus was added to Annex B in 2006 by Decision 10/CMP.2 Turkey has a special status and is not Annex B country, Decision 26/CP.7.

  12. Distribution of EU target of -8% * Decision 2002/358/EC (Burden Sharing Agreement), Annex II. Source: Carbon Trust ** Kyoto Protocol, Annex B

  13. Kyoto Flexible Mechanisms • International Emissions trading (AAUs) (Art.17 of KP) • Annex B countries may trade their Assigned Amount Units (AAUs) with each other to meet their targets • CDM (CERs) – Clean Development Mechanism (Art. 12 of KP) • projects hosted in non-Annex I country • generate Certified Emissions Reduction (CERs) • project aim: assist non-Annex I countries in achieving sustainable development and in contributing to the ultimate objective of the Convention • CERs Issued and registered by UN CDM Executive Board • JI (ERUs) - Joint Implementation mechanism (Art. 6 of KP) • projects hosted in another Annex I country • generate Emission Reduction Units (ERUs) • project aim: reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of GHG in any sector of the economy • ERUs issued by hosting country government • Track 2 – registered by JI Supervisory Committee (JISC) • Track 1 – National registration

  14. Regional cap and trade schemes: EU ETS • Trade: EUAs – EU Allowance = 1 Mt CO2e (last price €12.05) • Operates since 2005 under Directive 2003/87/EC(EU ETS Directive) • 27 EU countries + Iceland, Norway, Liechtenstein • joined in 2007 within the framework of the European Economic Area (EEA) agreement, applicable since 1.1.2008 • Joined target: -8% by 2012 redistributed among the Member States • Covered emitters: • over 10,000 big industrial installations in the energy and industrial sectors (collectively ½ of the EU's CO2 emissions and 40% of its total GHG emissions) • aviation since 2012 • Implemented in phases: Phase I (2005-2007); Phase II (2008-2012); Phase III (2013-2020) • National caps during Phase I and II • National Allocation Plans (NAPs) reviewed by Commission • 6.5% below 2005 levels for Phase II • EU-wide cap for Phase III • 21% reduction below 2005 level through annual phase-out from 2012 • Use of offsets: CDM and JI on if additional to own actions • More info: http://ec.europa.eu/environment/climat/emission/index_en.htm

  15. Facilities covered by EU ETS • Energy activities • Combustion installations with a rated thermal input exceeding 20 MW (except hazardous or municipal waste installations) • Mineral oil refineries • Coke ovens • Production and processing of ferrous metals • Metal ore (including sulphide ore) roasting or sintering installations • Installations for the production of pig iron or steel (primary or secondary fusion) including continuous casting, with a capacity exceeding 2,5 tonnes per hour • Mineral industry • Installations for the production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or lime in rotary kilns with a production capacity exceeding 50 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day • Installations for the manufacture of glass including glass fibre with a melting capacity exceeding 20 tonnes per day • Installations for the manufacture of ceramic products by firing, in particular roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain, with a production capacity exceeding 75 tonnes per day, and/or with a kiln capacity exceeding 4 m3 and with a setting density per kiln exceeding 300 kg/m3 • Other activities: Industrial plants for the production of • (a) pulp from timber or other fibrous materials • (b) paper and board with a production capacity exceeding 20 tonnes per day

  16. Regional programs within country: Regional Greenhouse Gas Initiative (RGGI) in U.S. • Trade: RGGI CO2 allowance (last price $3.38) • Operates since 2009 through state regulations, • based on a RGGI Model Rule, and linked through CO2 allowance reciprocity (individual CO2 Budget Trading Programs in each state) • States auction emission allowances and invest proceeds in low-carbon-intensity solutions projects (energy efficiency, renewable energy, other clean energy technologies) • 2 auctions so far: Auction 2 cleared at $3.38; Auction 1 at $3.07 • Cap: 10% CO2 emissions from the power sector by 2018: • power sector CO2 emissions are capped at current levels through 2014. In 2015 - 2018 cap is reduced by 2.5 % in each year • Entity covered: power plants • Territory covered: 10 Northeastern and Mid-Atlantic states of US • Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont • Offsets: CO2 offset allowances • to satisfy only a limited portion of a source’s compliance obligation (initially 3.3 % of a power plant’s total obligation during a control period) • More info: www.rggi.org

  17. Regional programs within country: New South Wales Green House Gas Abatement Scheme (GGAS) in Australia • Trade: NGACs - NSW Greenhouse Gas Abatement Certificates = 1 Mt CO2e (last price about $4) • Operates since 2003 • through amendments to the Electricity Supply Act of 1995 and the Electricity Supply Regulation of 2001 • Cap: 7.27 Mt CO2e in 2007 and till 2021 • per-capita GHG emissions from the electricity consumption (vs. 8.65 tones in 2003) • = 5% reduction below the 1990 level • Entity covered: electricity retailers and certain other parties • Territory covered: New South Wales and Australian Capital Territory only • Abatement certificates provided through activities that abate GHG • reduce the GHG intensity of electricity generation; generate low emission intensity electricity; demand side abatement (reducing/increasing efficiency of electricity consumption); carbon sequestration activities (managing forests to capture and retain carbon from the atmosphere • More info: www.greenhousegas.nsw.gov.au

  18. Voluntary schemes: Chicago Climate Exchange (CCX) • Trade: CFI - Carbon Financial Instrument = 100 Mt CO2e (last price $2.05) • Operates since 2003 through the membership agreements • Members: over 200 including power, automotive, chemical, financial corporations and municipalities (about 20% of US emissions), • Governed by the Committees of Members (Executive, Environmental Compliance, Trading and Market Operations, Offsets, Membership and Forestry) • Cap: 6% below Baseline by 2010 • Phase I (2003-2006) 1% per year, total reduction of 4% below Baseline  • Phase II (2007-2010) reduction schedule, total reductions of 6% by 2010 • Covers all six GHG • Territory covered:US + global affiliates • Currently - Chicago Climate Futures Exchange® (CCFE®), European Climate Exchange® (ECX®), Montréal Climate Exchange™ (MCeX™), Tianjin Climate Exchange (TCX); • in development - California Climate Exchange™ (CaCX™), New York Climate Exchange™ (NYCX™), Northeast Climate Exchange™ (NECX™, India Climate Exchange™ (ICX™) • Offset projects: worldwide projects • Applicable technologies decided by Offsets Committee (e.g. Agricultural, Coal mine or Landfill methane, Agricultural soil carbon, Rangeland soil carbon management, Forestry, Renewable energy, Ozone depleting substance destruction) • More info: http://chicagoclimateexchange.com/

  19. Market players • Buyers: • For compliance: • Governments of Annex I countries (AAUs) for Kyoto compliance • Estimated shortfall - 2.3-2.7 billion MtCO2e for Kyoto Parties (excluding Canada) • European companies covered by EU ETS (EUAs, ERUs, CERs); • Japanese companies for compliance under the Japan’s Keidanren Voluntary Action Plan (for Japan’s Kyoto compliance) (CERs, JIs, AAUs); • U.S. multinationals operating in Europe or Japan or preparing for the RGGI or for California Assembly Bill 32; • Entities covered by other schemes CCX (CFIs); RGGI (RGGI CO2 allowances), GGAS (NGACs) • For income generation: • Intermediaries (aggregators, trading houses, compliance funds and banks) • Asset managers (investors carbon funds, hedge funds) • Sellers: • Governments of Annex I countries that have surplus (AAUs) • Entities in Annex I countries that host JI projects (ERUs) • Entities in non-Annex I countries that host CDM projects (CERs) • Entities that received allowances under respective schemes or the offset providers (EUAs, CFIs, RGGI allowances) • Intermediaries & asset managers

  20. KM – Kyoto Mechanism (AAU, CER & ERU)Mt CO2e = million t CO2eSource: World Bank, State and Trends of the Carbon Market 2008

  21. Source: EEA EEA Signals 2009: Key Environmental Issues Facing Europe

  22. Source: World Bank, State and Trends of the Carbon Market 2008

  23. Source: World Bank, State and Trends of the Carbon Market 2008

  24. Relation between different carbon units VER – reduction unit generated through CDM or JI what was verified but not issued as ERU or CER Source: World Bank, State and Trends of the Carbon Market 2008

  25. Main trading platforms: • EUAs • Over-the-counter (OTC) - 80% of transactions • about 54% at London EnergyBrokers Association (LEBA) • 38% at European Climate Exchange (ECX) • Exchange-traded • 84% traded at ECX • the rest at Nordpool, Bluenext and European Energy Exchange (EEX) • EUAs and CER Derivatives (options and futures/ swaps/ gCER) • by different exchanges through their launched products • E.g. Chicago Climate Futures Exchange® (CCFE®) trades • Futures & Options for CFI, CER • Futures for Dow Jones Sustainability World Index (DJSI-W) & ECO-Clean Energy Index (Eco-Index) • Event Linked Futures - U.S. Wind (IFEX) , Florida Wind(IFEX-FLW), and Gulf Coast Wind (IFEX-GCW) • Futures & Options for Nitrogen & Sulphur Financial Instruments (NFIA & SFI) • Futures for Regional Greenhouse Gas Imitative (RGGI) • ECX offers Futures & options for EUAs

  26. Position of Ukraine • AAUs - one of the main potential suppliers of • Estimated to have about 1-1,5 billion AAUs surplus • subject to Green Investment Scheme (GIS) requirements • JI - N.1 in PointCarbon rating of JI hosts • Additionally: reductions may not be generated if project is not implemented • 33% share of all JI projects globally

  27. JI projects globally Source: World Bank, State and Trends of the Carbon Market 2008

  28. JI project in Ukraine • about 40 JI projects submitted to JISC hosted by Ukraine (various stage of development and implementation) with potential of generating about 60 million tones CO2 reductions by 2012 • 3 projects under Track 2 passed the final determination • 5 projects under Track 1 submitted by NEIA • hosts the first JI project approved by JISC • first transferred ERUs – 1.4 million ‘early’ ERUs to the Japanese registry for the Zasyadko project (immediately after the completion of the connection with the ITL in October 2008)

  29. Types of JI Projects

  30. JI project in Ukraine • Has both Track 1 and Track 2 in place • Track 1 – registration by NEIA; national/international determination and verification • Track 2 – registration by JISC; international determination and verification • Designated authority: National Environmental Investment Agency of Ukraine (NEIA) • Legislation: • Procedure for JI projects development, consideration, approval and implementation, adopted by the Resolution of the CMU of 22 February 2006 N.206; • Requirements to the JI projects documents, adopted by 2 NEIA Orders of 25 June 2008 N.32 and N.33; • Track 1 procedure, adopted by NEIA Order of 18 December 2008 N.79 • JI legal framework recognizes • “early crediting” - issuing credits generated before the beginning of the first Kyoto crediting period of 2008-2012; • “late crediting” – allowing applications for credits to be generated after 2012.

  31. JI registration procedure • Project proposal submitted to NEIA; • Letter of endorsement issued by NEIA that approves development of project design documentation (PDD) • PDD submitted for determination to independent accredited authority; • Letter of approval issued by NEIA; • Letter of endorsement issued by the country of buyer; • Registration by NEIA (+ JISC if Track 2); • Annual reporting by the project owner; • Verification by the independent accredited authority; • NEIA issues ERUs into the account of the seller in Ukraine’s National Registry; • NEIA transforms ERUs into AAUs and transacts them to the account of buyer through the International Transaction Log

  32. Who can register JI project • Legal or natural person (registered entrepreneur) • Whose activity is not suspended due to liquidation, bankruptcy or insolvency procedures • That owns or legitimately possess for the whole duration of the project • An object located in Ukraine which operation causes anthropogenic GHG emissions or their reduction • objects may include: workshop, installation or unit of production or non-production purpose

  33. Project Owners

  34. What is next? • Post-Kyoto treaty to be negotiated and adopted in 2009 at next COP 15 (according to the Bali Action Plan of COP 13) • COP 15 in Copenhagen December 7-18 2009 http://en.cop15.dk/ • Main problem identified at COP 14 in Poznan: • Targets for developing countries big polluters (China, India) • Potential developments meanwhile: • EU adopted a goal of 20 % GHG reduction by 2020 that will develop through EU ETS • US is expected to adopt a national ETS, otherwise regional ETS, like RGGI, will expand • Canada, Australia and other countries may adopt national ETS • Emission reduction and trading will be covered through separate regional/national schemes • Some schemes may link (e.g. EU ETS will extend to other non-EU countries) • Voluntary schemes are developing in non-Annex I countries, e.g. • Tianjin Climate Exchange (TCX) - a joint venture of CCX and China National Petroleum Corporation Assets Management Co Ltd (CNPCAM) along with Tianjin Property Rights Exchange (TPRE); • India Climate Exchange™ (ICX™)

  35. Questions

  36. Thank you! Tetyana Budyakova Lawyer tetyana.budyakova@cms-cmck.com Tel:       +380 44 391 3377 Fax:      +380 44 391 3388 www.law-now.com

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