carbon trade & finance capturing opportunities · 2017. 6. 20. · 3 some new thinking from...

1Some new thinking from Natsource.

More growth. Less pollution.

Carbon Trade & Finance Carbon Trade & Finance Capturing OpportunitiesCapturing OpportunitiesUS US VERsVERs; CCX; International; CCX; International

October 25th, 2006October 25th, 2006

David Oppenheimer - Managing Director

Natsource LLC



Natsource at a GlanceNatsource Group

Calgary, La Paz, London, New York, Panama City, Ottawa, Tokyo, Washington, D.C.

Asset Management Services

Transaction Services

Advisory andResearch Services

Greenhouse Gas Credit Aggregation Pool (GG-CAP)

Managed Accounts

Policy Design and Market Expertise

Risk Assessment and Management

Market Intelligence and Pricing

Project ScreeningPortfolio Modeling

Project Development

Greenhouse Gas Commodities

SO2 and NOx

Renewable Energy

RECLAIM

Aeolus Fund



Emissions Trading RationaleEmissions Trading Rationale

Harness market opportunities to achieve targets in most cost-effective and flexible way.Benefits:– Incentive/priority to innovate at home– lower aggregate costs– lower individual costs– Additional revenue for over

achievement



What Is Emissions Trading?What Is Emissions Trading?An ExampleAn Example

What options are most cost-effective?

Can reduce 1000 tons CO2E at €2/ton =

€2000

Can reduce 1000 tons CO2E at €6/ton =

SELL BUY

€2000 Profit €2000 Savings

€6000

Company A - Seller Company B - Buyer

1000 tons CO2E at €4/ton = €4000

Cost of Cost of abatementabatement

https://www.arttoday.com/PD-0031886/Main/signup/index?PRODUCT=AT_3D_TRI

https://www.arttoday.com/PD-0031886/Main/signup/index?PRODUCT=AT_3D_TRI



EU JI: CH4, N2O

The Global Carbon MarketThe Global Carbon Market

EU ETSCO2 Only

CDM: Any gas, any sector

Full Global Trading

Large Sources of CO2, CH4, N2OHFC, PFC, SF6

Transport???

All Major Emitting Countries

Norway

Norway

Phase 1 Phase 2 Beyond 2012

Non-EU JI: Any gas, any sector

EU ETSCO2 only,

Power focus

JapanCanada

US Voluntary



Major Components of the Major Components of the Carbon MarketCarbon Market

European Union Emissions Trading Scheme – EU Allowances, EUAs– 2006-2008

Kyoto Protocol– Clean Development Mechanism

Certified Emission Reductions, CERs 2006-2012

– Joint ImplementationEmission Reduction Units, ERUs 2008-2012

US Markets?



US Market ParticipationUS Market Participation

Some Funds purchasing domestic offsets– Either for compliance with future regulations,

or– As pure speculation

CCX– Generally small, PR-driven participants– Some larger firms, but still largely PR

New regulations on the horizon, but no trades or markets yet



Where is Natsource Going?Where is Natsource Going?

Deploy capital in partnership with development and technology providers to focus on upstream carbon generationGrow asset management division– Increase capital under management– Add targeted fund products

Optimize projects’ non-carbon value and develop synergistic opportunities

------

Natsource in the News



EU ETS (Emission Trading Scheme) up and running since 2005CDM UN Executive Board has registered 239 Projects that are projected to generate 450 million CERsTotal transactions in 2005– 800 million tons traded– $USD 11.28 billion

Clean Development Mechanism/Joint Implementation transactions in 2005: – 425 million tons traded– $USD 2.4 billion

State of the MarketState of the Market



UN FrameworkRio Treaty

Non-binding targets

1990 levels by 2000

Berlin Mandate

Further reductions

needed

JI Pilot Phase

Kyoto Protocol

Binding Targets , Emissions Trading +

CDM

The Hague Collapse

Negotiationsuspendedon KP rules

International Policy & Market International Policy & Market EvolutionEvolution

Marrakesh Accords

KP rules agreed

Kyoto Period

National trading &

compliance programs in

place

JI Pilot Phase

No formal crediting; testing market

solutions

EU ETS Phase II

More sectors + 6 gasses, links to Kyoto Parties

EU ETS Phase I

Targets on Major

Industrials in EU 15

+ Accession Countries

Danes Open CO2 Market Power sector

08 - 1292 94 96 98 00 02 04 05 -07

UK Open CO2 Market All industrials

Bush Administration US withdraws from KP

Source: Compiled by Natsource



Microeconomic Price Determinants:Microeconomic Price Determinants:Specific Risk & Quality DeterminantsSpecific Risk & Quality Determinants

Realized Price = Perceived Value - Perceived Risk Compliance Risk -- Probability that the GHG ER will qualify for desired compliance

Counterparty Risk -- credit worthiness of ER sellers

Regulatory Risk (Country) -- country policies governing crediting and transferring of project-based ERs to buyers

[Performance Risk (Country) -- the investment climate in host country]

Performance Risk (Carbon) -- the technology and extent to which generation, creditability and ownership of ERs is affected by the particular type of technology

Performance Risk (Technology) -- the operational and/or commercial aspects of technologies utilized in ER projects

Structure of Contract -- Spot vs. forward, upfront vs. payment on delivery, optionality (volume, timing, RoFR)



Natsource Risk Management ToolNatsource Risk Management Tool

Exposure

Mitigation

Counter Party Risk

• Credit Limits (volume / duration)• Reduce Concentration by Geography and

Technology• Reduce Concentration by Counter Party• Contract Triggers and Remedies• Collateral: Carbon Escrow, Cash, LOC,

guarantees, surety bonds

• Financial Guarantees• Insurance (Carbon or Credit)• Credit Derivatives• Vintage Swaps• Interruptible Buyer Contracts

• Default Recovery Provisions• Reserve margin• Capital reserve

Transfer AcceptReduce

ER Replacement CostAccounts Receivable if Credit Extended

Probability of Default&

Recovery Potential

Performance RiskCountry

Performance RiskCarbon

Performance RiskTechnology

Delivery Failure

Total Risk

Regulatory RiskInternational, National,

Regional

Estimate of exposure and

duration

Optimize amount quality

and price of mitigation



Historic Pricing Snapshot:Historic Pricing Snapshot:

Did History Repeat Itself?Did History Repeat Itself?

A LookA Look--Back at Other Back at Other Environmental MarketsEnvironmental Markets

EU Allowance PriceDec 2006 Contract (Jan 05 – June 06)

1 Dec 2006 Contract Price

91011121314151617181920212223242526272829303132

Jul-05Jul-05Jul-05Jul-05Jul-05A

ug-05A

ug-05A

ug-05A

ug-05S

ep-05S

ep-05S

ep-05S

ep-05S

ep-05O

ct-05O

ct-05O

ct-05O

ct-05N

ov-05N

ov-05N

ov-05N

ov-05D

ec-05D

ec-05D

ec-05D

ec-05Jan-06Jan-06Jan-06Jan-06Jan-06Feb-06Feb-06Feb-06Feb-06M

ar-06M

ar-06M

ar-06M

ar-06A

pr-06A

pr-06A

pr-06A

pr-06M

ay-06M

ay-06M

ay-06M

ay-06Jun-06Jun-06

Pric

e pe

r EU

A (E

UR

O p

er E

UA

) (O

TC M

arke

t)

Source: Natsource, LEBA

UK Allowance PricingUK Allowance Pricing

Increase in price due to lack of supply as a result of

Verification delays and allowance issuance

Once verification bottleneck resolved

large supply of allowances reached

market

Allowance Price increases in

compliance years

Danish Allowance PricingDanish Allowance Pricing

Few participants (effectively 4) Pricing end 2002: DKr 3 @ 36 (no trades)

2002

USA Spot SO2USA Spot SO2Spot SO2

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

$550.00

$600.00

$650.00

$700.00

$750.00

10/1/

2003

11/1/

2003

12/1/

2003

1/1/200

4

2/1/200

43/1

/2004

4/1/200

4

5/1/200

4

6/1/200

4

7/1/200

4

8/1/200

4

9/1/200

410

/1/20

0411

/1/20

0412

/1/20

04

1/1/200

5

2/1/200

53/1

/2005

Some new thinking from Natsource.More growth. Less pollution.

Would you have sold Would you have sold at the peaks?at the peaks?

NOx Price History

$-$1,000$2,000$3,000$4,000$5,000$6,000

3/26

/02

9/26

/02

3/26

/03

9/26

/03

3/26

/04

9/26

/04

3/26

/05

9/26

/05

Date

Pric

e Vintage 2005Vintage 2006Vintage 2007


USA USA NOxNOx

Initial Market highs Initial Market highs never reached againnever reached again

Southern California NOx RECLAIM Trading Credit (RTC) Spot Prices

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

NO

x R

TC P

rice

per

lb.

RTCs are unbankable--Sellers liquidated expiringcredits prior to Aug. 30 and Mar 1.

January 2001: Regulators announced potential changes in regulations.


Southern California Southern California NOx NOx Reclaim Trading Credit (RTC) SpotReclaim Trading Credit (RTC) Spot



Where Do We Go From Here?Where Do We Go From Here?Is Carbon Finance a Short Term Play?Is Carbon Finance a Short Term Play?

China uses more coal than EU, USA & Japan combinedProblem is long-term– The market may fluctuate but the need for clean

development intensifies– Focus may revert to fundamentals of CDM –

Creating cleaner development instead of windfall profits

CER pricing may get realistic but carbon finance is only just beginning– Technology shifts, Asian Pacific Partnership, US,

Potential Canadian action, China & India must respond to intl. pressure to maintain growth



Emission reduction project Emission reduction project --finance structuresfinance structures

1. Emissions Reductions Purchase Agreement (ERPA)– e.g., in the case of CDM/JI under the Kyoto Protocol –

buying of emission reductions of project – Investor developed country (Annex 1)

– Direct buyer or ‘Carbon Fund’2. Investment in Equity

– Investor (Annex 1)/local: total or partial financing of project in exchange for total/portion of financial revenues and carbon credits

3. Debt - Loans– Investor Annex 1 provides loans at concessional rates in

exchange for carbon credits / carbon credits as a loan guarantee


www.natsource.com

David OppenheimerTel: +1 212 232 5305 Email: [email protected]

http://www.natsource.com






carbon trade & finance capturing opportunities · 2017. 6. 20. · 3 some new thinking from...

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