carbon market report - september 2010

8/8/2019 Carbon Market Report - September 2010

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NEW WORLD CARBON

Copyright 2010, New World Carbon. All rights reserved. 1

Voluntary Offset Prices(Source Standard Carbon, ClearSky Carbon Solutions, The Carbon Neutral Company, Native Energy)

Agricultural Methane

Landfill Methane

Coal Bed Methane

Agricultural Soil

Renewable Energy

$ 15.15

$ 15.15

$ 15.00

$ 15.00

$ 14.18

Last Sale Price

Average Offset Price $ 14.89

$ 18.00

Projected Cap & Trade Price $ 60.00

Minimum Expected Return 300 %

NEW WORLD CARBON

Over the past year, NEW WORLD CARBONhas been monitoring the

emergence of what many financial institutions are considering to be the

fastest growing market in the world: The Carbon Market. The market

has been primarily driven by European companies and investors where

it has grown from just under $10 Billion in 2005 to over $100 Billion in

2009.

While this growth has been dramatic, the market is projected to rise

even more dramatically with several large financial institutions such asBarclays Capital projecting the market to eventually reach $2 Trillion by

2020. Barclays and other leading institutions such as JP Morgan and

Goldman Sachs attribute these projections to eventual demand by the

United States as the nation looks to soon enact pollution controls in the

form of caps on carbon emissions. Other emerging markets such as

China and India are also experimenting with ways to reduce their

carbon emissions with a Cap and Trade system similar to the one

currently experiencing tremendous success in Europe. China has even

announced that they will begin Carbon trading as early as 2011.

In this research report, NEW WORLD CARBONassesses the Carbon

Markets potential as well as the risks involved with investing in thisrapidly growing specialty sector.

Expected Year End Price

History of Carbon Trading

Europe was the worlds first region to warmly embrace the idea of Carbon Trading and currently has the worlds largest Carbon Market, trading upwards of US $100

billion worth of carbon-related trades in 2009, with more than 3 billion carbon spot, future, and options contracts. The European Union Emissions Trading Scheme

(EU ETS) was the first multinational and multi-sector compliance-based emissions trading system in the world. It has been in operations since 2005 and is now in its

second trading period, which ends in 2012 and is poised to be renewed for a third trading period soon.

Under the EU ETS, each member state of the European Union receives an annual emission allocation (CAP). These allocations are then divided among its worse

emissions-producing companies. Those companies are then legally obligated to not exceed the emissions that they are allowed. When a co mpany goes under its

allotted target, it can then sell (TRADE) its excess allowance as a carbon credit to o ther companies that have exceeded their caps. On the other hand, if a company

exceeds its target, it will subsequently have to pay a large penalty and/or then have to purchase carbon credits on the Carbon Markets to make up the difference.

Compared to the EU Carbon Market, The US market is still in its infancy, however it offers the most growth potential. The US voluntary Carbon market traded

nearly $500million in volume in 2009. Although this figure pales in comparison to the $100 Billion traded on the European markets, the number is still impressive

considering that this volume was done on a voluntary basis and not due to compliance or regulatory purposes. The most popular type of voluntary carbon offset

projects last year were those which captured methane (41%), followed by forestry projects (24%) and renewable energy projects (17%). With US President Barack

Obama pledging that the US will achieve a 20% emissions reductions by 2020, there is incredible growth potential in this sector. Barclay s Capital has even predicted

that once the US implements a Federal Cap and Trade system, that the Carbon Market may become the biggest overall market in the world.

Carbon Market Report September 2010


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Climate Change

"Warming of the climate system is unequivocal, as is now evident from the observations in global average air and ocean temperatures,

widespread melting of snow and ice, and rising average sea level."

With these words, the UN's Intergovernmental Panel on Climate Change (IPCC) made certain that the reduction of greenhouse gas (GHG)

emissions, which are widely believed to have contributed to global warming will be a policy issue for decades.

Exacerbating the issue is that humans currently generate about 38 Billion Tons of Carbon dioxide (Co2) every year. That number is expected

to nearly double over the next decade as developing nations such as China and India demand more energy that will be produced by

carbon intensive sources of fuel such as coal and oil.

In response to this dilemma, carbon trading markets have become the most popular solution for reducing GHG emissions, and in particular carbon

dioxide emissions, which are the largest constituent of GHG emissions.

Recent Activity/Acquisitions

"Interest in the pre-compliance carbon market in the U.S. is growing rapidly and we are excited to be able to offer our clients immediate access to adiverse selection of emission reductions to manage their carbon risk," Leslie Biddle, Global Head of Goldman Sach's commodit y sales

The above quote references Goldman Sachs investment in a US based Carbon Credit Developer named Blue Source in late 2008. According to the press

release, the investment would provide Goldman with over 60 million tons of voluntary emissions reduction carbon credits (VERs). We estimate the price

of the VERs could range anywhere from $10-$20 each ton, thus providing Goldman with anywhere from $600million to over $1 Billion worth of carbon

credits. Once the US establishes a Federal Carbon market, the price appreciation could result in a windfall profit in the tens of billions of dollars.

Goldman is not the only large financial institution betting on the future of the US Carbon Market. Since their investment in 2008, there has been a slew

of acquisition activity in the Carbon Market over the past year as many of the worlds leading companies are scrambling to ga in entry into the market

and establish themselves as the early leaders in this potentially Trillion Dollar industry.

Below are highlights of this activity:

General Electric (GE) invested over $400 million to launch the worlds largest Carbon capture project in Australia (October 2 009)

JP Morgan Chase purchased leading UK Carbon Company, EcoSecurities for $200 million (November 2009)

Famed Investor, Warren Buffet purchased leading US rail company, Burlington Northern Santa Fe for $44Billion with intentions of capitalising

on potential billions of dollars worth of carbon credits that the rail company could generate (November 2009)

Leading electronic Futures and Commodities Exchange, Intercontinental Exchange (ICE) purchased London based, Climate Exchange, PLC

(owners of both the Chicago Climate Exchange and the European Climate CCX and ECX) for $600 million (April 2010)

Barclays Bank purchased leading Swedish Carbon Credit Developer, Tricorona for $145 million (June 2010)

Bloomberg, LP acquired UK data provider New Energy Finance for an undisclosed amount in order to offer products useful to investors in the

global carbon markets (December 2009)

Thomson Reuters acquired Norwegian based provider of Carbon Market news and content, Point Carbon for an undisclosed amount (June

2010)

Worlds largest Internet Company, Google announced its intention of becoming carbon neutral and purchased an undisclos ed amount

(rumored to be in the tens of millions) of US Carbon Credits from a landfill methane facility in South Carolina (June 2010)


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NEW WORLD CARBON


Comparison to oil market

There is a case to be made that the nascent Carbon Market can be compared to the Oil Market in the early 1970s. In the early 1970s, the price of

oil lay dormant at approximately $10 per barrel for several years. However, the formation of OPEC resulted in price controls that the market had

never experienced. These price controls resulted in a rapid spike in the price as seen in the chart below. Investors who held oil as a commodity priorto the OPEC formation made 400+% returns in a very short period of time. We see a similar situation playing out in the Carbon Market; however

the price increase is widely expected to be even greater than that of oil in the 1970s. The reasoning for such a big price increase revolves around

simple supply and demand. As more international governments start to regulate their countrys emissions, and as more companies start to limit

their emissions (either voluntarily or due to regulatory purposes), the demand for available carbon credits are poised to rise dramatically.

Therefore, the price of Carbon could potentially experience exponential returns similar to those experienced by oil when price controls by OPEC

were introduced. Again, the key player for this scenario to play out is the United States. When the US establishes a Cap and Trade System similar to

the one in Europe, we concur with Barclays Capital that the Carbon Market will eventually surpass oil as the most widely traded commodity.


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Carbon Prices

European Carbon Credits on the European Climate Exchange (ECX) began trad ing at approximately 5 Euros in 2005. Within a couple of short years,

they experienced a rapid rise to over 30 Euros providing its first investors with very nice returns. The owners of both the ECX and CCX, Climate

Exchange PLC (Symbol CLE) began trading on the London Stock Exchange (AIM) in early 2005. The price of those shares experienced an even greater

rise and made early investors fortunes as its price rose by over 2000% from 2005 to mid 2007.The Climate Exchan ge was recently purchased for

$600 million (a 50% premium) in April 2010 by leading Futures and Commodities Exchange, The Intercontinental Exchange (ICE).

It is our strong belief at NEW WORLD CARBONthat those who missed the remarkable Carbon Market growth in Europe a few years ago will be

provided with another and quite possibly more lucrative opportunity to capitalise on the Carbon Markets tremendous profit potential before the

US enters the market with the passage of Cap and Trade legislation.

Trading Carbon Offsets

Trading in carbon offsets has become a robust market in only a few years. Many investors are purchasing carbon offsets for the

purpose of speculating that there will be an increase in value as more countries (including the United States) join existing carbon

trading schemes, or create their own mechanisms for capping the emissions of industry. It is expected that many of the carbon

instruments will increase in value as demand increases. In the case of the United States, some of the carbon instruments utilised in

the voluntary OTC markets may cross over into the compliance markets with the advent of Cap and Trade legislation.


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Risk Factors

As with any investment, there are several risk factors to consider with regard to the Carbon Market. Based on our research, these risk factors include: liquidity, political

stalling, transparency and barriers to entry for retail investors.

Liquidity

Currently, the Carbon Market does not possess the liquidity one would find on the major stock markets and/or commodity markets. Therefore, entering or exiting the

market cannot currently be performed as quickly as one can with traditional financial instruments such as stocks or bonds. However, as evidenced by the growth of the

Carbon Market over the past five years, liquidity has steadily improved and once the US and other growing countries such as China, India, and Australia join the market,

is expected that the Carbon Market will be even bigger and thus more liquid than traditional markets, including the Oil Market.

Political stalemates

The passage of the Waxman Markey bill in the US Congress during the summer of 2008 positioned the US to enact caps on Carbon Emissions as well as a price on Carbon

credits which would trade in a centralised US marketplace.

US President Barack Obama has been a strong proponent of the bill. Currently, the bill solely needs to be passed by the US Senate in order to become law. The underly

risk is that such as bill does not pass or that it gets stalled. However, in consideration of the current political, economic, and global landscape, we see the US joiningEurope and enacting a Federal Carbon Market possibly by the end of 2010 but no later than 2012.

The Role of the US Supreme Court and the EPA

Mitigating the aforementioned political risk is the fact that in 2007, the US Supreme Court passed a decision under the Clean Air Act which allows the Environmental

Protection Agency (EPA) to enact its own vers ion of Greenhouse Gas Emission Regulation. This decision allows the EPA to bypas s both the US Congress and Senate shou

they fail to reach an agreement on reducing GHG emissions. The EPA has publicly stated that it will act on these powers if an agreement is not reached sometime in the

near future. EPA Administrator Lisa P. Jackson has stated that the EPA plans to start targeting large facilities such as power plants no later than by 2011. The EPA has als

stated that it may impose its own form of Cap and Trade in order to honor its judicial obligation. The threat of EPA involvement has moved several prominent US Senat

such as John Kerry and Joe Lieberman to push harder to pass a Climate Bill which includes a price on Carbon as the focal point of the legislation. The Kerry-Lieberman B

entitled The American Power Act seeks to place an initial floor on the price of carbon at $12 and may even raise the floor in order to incentivise Americas largest

polluters to reduce their emissions. All of these factors should bode very well for the growth of the nascent US Carbon Market as well as for the price of Carbon Credits

Lack of transparency

Another risk factor is finding a reputable dealer of bona-fide US Carbon Credits. We advise those looking to purchase carbon credits to make their purchase through a

verified member of either the Voluntary Carbon Standard (VCS) or the American Carbon Registry (ACR). The VCS and ACR are leading participants in the voluntary US

markets and their members include some of the world s most prominent organisations such as the World Bank. Furthermore, most Carbon offset providers sell their

offsets and credits for the sole purpose of retirement (to offset ones carbon footprint). There are only a handful of companies that allow those looking to speculate or

invest in the market in a manner that would not warrant retirement. Therefore, it is imperative to understand if the purchase is being ma de for retirement or investme

Barriers to entry for retail investors

Currently, there are many barriers to entry in this market for the retail investor. Unfortunately, the market is an institutionally controlled market in which the major

financial institutions such as JP Morgan Chase, Morgan Stanley, Goldman Sachs, and Barclays Bank only deal with large hedge funds and/or Fortune 500 companies tha

are solely looking to offset their carbon emissions. Retail investors have been chagrined to find that in most cases, they need very large capital outlays in order to enter

this market. The most well known firm that enables retail investors to join their fund, Climate Change Capital, recently required a minimum investment of $33.3 million

Although it has been increasingly difficult for the smaller investor to join this emerging market, we strongly believe that once the US enacts a Federal Carbon Market, thfloodgates will open and the retail investor will able to participate as easily as they can with the major stock indices. The problem that the retail investor will likely

encounter is that the price of carbon credits will probably be trading at a much higher premium compared to where they are currently trading, with some projections

indicating that the price of Carbon may reach as high as $100 within the next few years.

Fortunately, based on our research, there are currently a handful of companies that will allow a smaller retail investor to enter the market with minimal initial

investments. However, as previously mentioned, the retail investor is urged to make sure that the Carbon Credits purchased are from a verifiable member of either the

VCS or ACR.


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Disclaimer

NEW WORLD CARBON is an independent research group offering information pertaining to the alternative energy. NEW WORLD

CARBON is not associated nor affiliated in any capacity with the Voluntary Carbon Standard (VCS), American Carbon Registry (ACR) or anyother financial organisation mentioned in this report. Information, opinions or recommendations contained in this report are for

informational purposes only and does not constitute any offer or solicitation to buy or sell. The information used and statements of fact

made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such

information and the opinions expressed are subject to change without notice. All rights reserved. Unauthorised use, distribution, duplication

or disclosure without the prior written permission ofNEW WORLD CARBON is prohibited by law and may result in prosecution.

Recommendation

As with any investment, it is extremely important that an investor perform their due diligence when exercising an investment decision. One must also

clearly identify the risk versus the reward inherent in the position being considered.

Based on our extensive research performed on the Carbon Market, it would appear as though the reward trumps the risk when it comes to investing

in this rapidly growing emerging market.

Clearly, there is an enormous amount of pressure on the US to join the rest of the world and develop methods to reduce its en ormous amount of

carbon emissions. President Barack Obama has already pledged that the US will reduce its carbon emissions by 20% of 2005 levels by 2020 and by 83%

of 2005 levels by 2050. This pledge will not be attainable without the US enacting a Federal Carbon Market that places a high enough price on Carbon

pollution in order to incentivise Amer icas largest polluters to reduce their carbon emissions.

Additional impetus for the US to move forward with a comprehensive Cap and Trade system is currently being provided by China. China has taken the

lead on clean energy development and just recently announced that it will establish its own Carbon Trading Market by 2011 . Chinas announcement

places extraordinary pressure on the US to follow suit. President Obama was quoted earlier this year in his State of the Unio n address as saying The

nation that leads the world in clean energy development, will lead the world in the 21st

century. Therefore, the pressure will increasingly mount on

the US to push forward with passing legislation that puts a price on carbon within the next couple of years.

Furthermore, the US is in desperate need to boost its economy and spur job creation. Adoption of a Federal Carbon Market will open the doors to a

vibrant clean energy economy that encompasses other a wide variety of sources of alternative energy infrastructure development such as solar,

windmill energy, and biofuels. This infrastructure may be the boost that the nation needs to spur innovation and job growth while simultaneously

reducing the environmental ravages of carbon emissions.

As a result of all these factors we have researched, it is our firm belief that it is not a matter of "if" the US follows Europes lead and adopts a Cap and

Trade system, but it is simply a matter of "when." Therefore, it is our recommendation that savvy investors seek ways to properly position themselves

in this emerging market in order to profit handsomely from this expected rapid market growth.

To maximise returns, such an investment should be made prior to the US adoption of a Federal Carbon Market. With voluntary US carbon credits

trading relatively low, we firmly believe that those with the foresight to enter at these current low levels stand to realistically earn 300-500% returns

within the next one to three year time period. Given the current dim global economic outlook, investors will be hard pressed to find other

opportunities that can compete with those expected returns.

carbon market report - september 2010

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