chicago climate exchange, inc. ©2004 update on worldwide greenhouse gas market developments michael...

CHICAGO CLIMATE EXCHANGE, INC. ©2004

Update on Worldwide Greenhouse Gas Market Developments

Michael J. Walsh, Ph.D.Senior Vice President

+1.312.554.3350www.chicagoclimateexchange.com


Summary: Carbon Market Status Worldwide

• Now live: CCX, UK (pre-EU)

• Regulatory: Kyoto and before• being implemented (e.g. EU)• under discussion (Canada, NZ)• unclear (Japan)

• State-level regulatory:• active: New South Wales• under discussion: Northeast U.S.

• Russia, Ukraine: will they be trade-eligible at 2008?

• Developing Countries: sellers from mitigation projects


Global Carbon Market Size: Potentially Huge!

Source Projection of Size of Greenhouse Gas Emissions Trading Market

World Bank $10 billion by 2005

US Council on Foreign Relations $2.3 trillion of trades completed by 2012

Energy Policy Journal $24-37 billion of trades completed annually during the period 2008-2012

Resource and Energy Economics $46.6 billion of trades annually (unspecified time frame)

The Economist $60 billion - $1 trillion of trades annually (unspecified time frame)

Lockwood Consulting $1.2 trillion market by 2008 – estimated $30 billion/year worth of global

reductionsSources:” Value at Risk: Climate Change and the Future of Governance – CERES Sustainable Governance Project Report”, April 2002; Reuters, April 7, 2000


U.S. Situation

• Total emissions: 6.9 billion mt CO2 (2002) (11% >1990)

• President Bush: reduce emissions intensity (CO2/GDP) 18% by 2012; fund R&D

• “Crediting” under revised 1605b program legally unclear

• McCain/Lieberman bill: • return U.S. emissions to 2000 levels by 2010• trading upstream and downstream; sequestration• latest Senate vote: 43 yes, 55 no

• Chicago Climate Exchange is live and growing


Chicago Climate Exchange

Chicago Climate Exchange® is a

voluntary, legally binding pilot

greenhouse gas trading program for

emission sources and offset projects in

North America and

offset projects in Brazil.


CCX® Reduction Timetable

• 2003-2006: reduce emissions to 1%, 2%, 3%, 4% below 1998-2001 baseline

• Includes major direct emissions; sources small sources (e.g. fleets) and electricity purchases can be opted-in

CCX Emission Reduction Schedule

92%93%94%95%96%97%98%99%

100%

1998-2001 2003 2004 2005 2006


CCX® Members (1 of 2)

Aerospace Rolls Royce Automotive Ford Motor Co. Chemicals Dow Corning DuPont Consulting Domani LLC Global Change Assocs. Natural Capitalism, Inc. Rocky Mountain Institute Diversified Manufacturing Bayer Corporation Electronics Motorola, Inc

Electric Power Generation American Electric Power Green Mountain Power Manitoba Hydro TECO Energy Energy Services Sieben Energy Associates Environmental Services Waste Management Food Processing Premium Standard Farms Legal Services Foley & Lardner Forest Products International Paper MeadWestvaco Corp. Stora Enso NA Temple-Inland, Inc.

Information Technology IBM Open Finance LLC

Liquidity Providers Amerex Energy Ltd. Calyon Financial Inc. Eagle Market Makers, Inc Evolution Markets First New York Securities Goldenberg, Hehmeyer. ICAP Energy LLC Christopher J. Johnson Kingstree Trading Kottke Associates LLC Marquette Partners LP Douglas M. Monieson Natsource LLC


CCX® Members (cont’d.)

Liquidity Providers (cont’d.)

Refco LLC Serrino Trading Co. C. Richard Stark, Jr Jeffrey B. Stern Lee B. Stern Tradelink LLC Tradition Financial Transmarket Group Municipalities City of Chicago Offset Aggregator Iowa Farm Bureau

Offset Provider Klabin S.A. Non-Governmental Organization World Resources Institute Pharmaceuticals Baxter Healthcare Private University Tufts University Public University University of Oklahoma

Semiconductors STMicroelectronics Steel Roanoke Electric Steel Technology Ecoenergetics srl Millennium Cell Transportation Amtrak

CCX total emission baseline of ~250 million mtons CO2 would make CCX the second largest “country” in EU CO2 market


Initial list of CCX® eligible offset projects

• Landfill and agricultural methane destruction

• Sequestration: reforestation and agricultural soil projects

• Brazil: energy, methane, forestry (reforestation + conservation)

• CCX® protocols: eligibility, quantification, verification

• Early Action Credits


CCX® Market Screen

bids and offers

completed trades(each contract is 100mt CO2)


Market Data: CCX Weekly Trade Volume and Prices

0

50,000

100,000

150,000

200,000

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300,000

350,000

400,000

50

51

52 2 3 4 5 6 7 8 9

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44

Wee

kly

Vo

lum

e (m

etri

c to

ns)

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Wee

kly

Pri

ce (

$/m

etri

c to

n)

Weekly Volume Weekly price


Canada

• Total emissions ~743 million mt CO2

• 2012 Kyoto Goal: -6% by 2012 (currently ~20%>1990)

• Planned GHG trading system (2008): Large Final Emitters

• 600 sites ~46% of Canada’s total emissions (342 mt):

• Feds promising per-ton net cost cap of C$15/mtCO2

• National government to be active (CDM) purchaser?


European Union

European Council Directives

• Establish EU ETS for 2005 through 2007

Instructions to each EU-25 Member State

Allocate tradable CO2 emission allowances to affected installations

Establish uniform, linked registries

Require monitoring, verification, true-up and penalty systems


EU ETS (2005 – 2007)

• Covers CO2 emissions from 12,000 installations• combustion devices >20mw (electricity, heat, steam) • oil refineries, metals, cement, glass, ceramics• pulp and paper

• Covers ~46% of total emissions (total~ 4.9 bil mt CO2)

• Annual true-up by April 30, independent verification

• Encourages Linkages (e.g. Japan, Canada, Norway)

• Allows UN-approved CDM credits


EU ETS 2005-2007 CO2 Reduction Schedule

EU ETS Baseline and Reduction Schedule (billion tons CO2)

1.90

2.00

2.10

2.20

2.30

2.40

recent baseline 2005 2006 2007

-2.7%


EU Market Activity to Date, Prices

• Total allowance trading volume >3 million tons (forwards)

• CCX founds European Climate Exchange at IPE

€ 6

€ 7

€ 8

€ 9

€ 10

€ 11

€ 12

€ 13

€ 14

Eur

os p

er m

etri

c to

n of

CO

2


European Union: Market Issues

• Largest: Germany (barely short) and UK (very short)

• Natural longs (e.g. Poland) but may not over-allocate

• Natural shorts (e.g. Ireland, Portugal): growth allocations

•No allowance banking after 2007: price spike or crash?• CDM CERs are bankable – premium commodity??

• Viability of registries/transaction log; tax, accounting issues; capacity of verifiers


Norway, Switzerland

• Norway: emissions 56 million mt CO2 (1999)

• National goal: +1% vs. 1990 by 2012 (now 8% >1990)

• Long experience with carbon taxes (from $10-51/tCO2)

• Switzerland: emissions 45 million mt CO2

• National goal: -8% vs. 1990 by 2012 (now = 1990)

• Now imposing carbon taxes on fuels

Both countries are natural candidates for linkage with EU.


• Russia emissions: 1.88 billion mt CO2 (38% < 2012 target)

• Over 1 billion mt/yr surplus if this persists (now growing?)

• IETA survey finds buyers in west are willing, especially if purchases linked to reduction initiatives

• Ukraine emissions: 704 mil mt CO2 (23% < 2012 target)

• Over 200 mt/yr surplus if this persists

• Both countries may have trouble achieving GHG inventory quality required to trade under Kyoto

Russia, Ukraine


Japan

• Emissions: 1.3 billion mt CO2

• 2012 goal: -6% vs. 1990 (currently +9%)

• Industry: emissions flat, opposes caps and taxes

• Government may be big buyer on behalf of industry

• Corporates, government active with CDM (forwards)

• No specific implementation plan for trading system


Developing Countries

• Clean Development Mechanism (CDM) under Kyoto

• Certified Emission Reductions from mitigation projects

• Predominant project types to date:• HFCs: 31% of tons• Landfill gas: 18%• biomass energy: 14%• small hydro: 11%

• CERs usable in ETS, bankable past 2007: still discounted • Prices: non-Kyoto: $0.30-$3.00

buyer takes CDM risk: $3.00-$4.25seller takes CDM risk: $3.00 - $6.50


Developing Countries

• 65 countries now have Designated National Authorities• Includes Brazil, Mexico, China, India

• Four approved verification firms (“Designated Operational Entities”)

• Japan Quality Assurance, DNV, SGS, TUV

• CDM Executive Board has approved 11 projects, 5 more on “B” list (good candidates), 14 incomplete, 2 withdrawn

• Forest projects yield temporary CERs


Developing Countries: Volume Growth

0

2 0

4 0

6 0

8 0

1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4

C a rb o n M a rk e t G ro w in gV o lu m e tra d e d in p ro je c t-b a s e d tra n s a c tio n s , m illio n tC O 2e

(J a n -M a y )

(All vintages, subject to Term Sheets or contracts, delivery subject to CDM, other risks)

• Biggest buyers: Japanese Firms, Netherlands, World Bank

• Biggest sellers: Asia (51%), Latin America (27%)

Source: World Bank Prototype Carbon Fund


How to Raise Opportunities for Brazil(1)?

• Near-term: grow ability to profit from global market

• Long-term:

Brazil must bring superior knowledge, built through hands-on MARKET experience, in order to effectively influence Kyoto Phase II and beyond

• Aggressive education/support for CDM projects• DNA, other bodies • Natural CER customers – global corporates with

Brazil operations


How to Raise Opportunities for Brazil (2)?

• Industrials - adopt offset purchase commitments• Provide additional market for Brazil offsets• Stimulate knowledge base• Preparation for international policy evolution

• Participate in existing/emerging markets• Take emission reduction commitments in CCX (North

America and Brazil operations?)

• Pure trader: EU, Chicago

• Submit alternative projects into CCX

chicago climate exchange, inc. ©2004 update on worldwide greenhouse gas market developments michael...

Documents

market slide

climate change

growing slide

ccx members

ccx market screen bids

market data

ccx total emission baseline

ccx reduction timetable