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Overview and Status: CDM and JI

Overview and Status: CDM and JI. Heather McGeory Project Manager, Natsource Introductory Workshop on the Clean Development Mechanism (CDM) & Joint Implementation (JI) International Institute for Sustainable Development Winnipeg, Manitoba March 1, 2006. Natsource at a Glance.

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Overview and Status: CDM and JI

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  1. Overview and Status:CDM and JI Heather McGeory Project Manager, Natsource Introductory Workshop on the Clean Development Mechanism (CDM) & Joint Implementation (JI) International Institute for Sustainable Development Winnipeg, Manitoba March 1, 2006

  2. Natsource at a Glance • Asset Management Services • Greenhouse Gas Credit Aggregation Pool (GG-CAP) US$550 million • 26 Buyers from EU, Japan, North America • Managed Accounts • Other pools under development • Advisory and Research Services • Risk assessments • Trading design • Market intelligence and pricing • Transactional Services • Over $7.5 Billion traded in GHG, Renewables and conventional air pollutants markets

  3. What Is Emissions Trading? Comparative Advantage Cost of abatement is less for Company A Can reduce 1000 tons CO2E at €2/ton = €2000 Can reduce 1000 tons CO2E at €6/ton = €6000 SELL BUY 1000 tons CO2E at €4/ton = €4000 €2000 Profit €2000 Savings Company A - Seller Company B - Buyer

  4. Emissions 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

  5. An Expanding Global Market Full Global Trading Large Sources of CO2, CH4, N2O HFC, PFC, SF6 Transport??? All Major Emitting Countries Canada Japan EU JI: CH4, N2O Norway EU ETS CO2 Only Norway EU ETS CO2 only, Power focus CDM: Any gas, any sector Non-EU JI: Any gas, any sector Phase 1 Phase 2 Beyond 2012

  6. Estimated Credit Shortfall 2008-2012 Ratification of the Kyoto Protocol requires that developed countries will reduce GHG emissions during 2008-2012 CDM and JI help manage the total shortage

  7. Major Components of the Carbon Market • EU Allowances (EUAs) • 2006-2008 • European Union Emissions Trading Scheme (EU ETS) • Certified Emission Reductions (CERs) • 2006-2012 • Clean Development Mechanism (CDM) (Kyoto Protocol, Article 12) • Emission Reduction Units (ERUs) • 2008-2012 • Joint Implementation (JI) (Kyoto Protocol, Article 6)

  8. Types of Credits

  9. Assessing CDM/JI projects:Natsource Delivery Risk Model • Outputs at the project and portfolio level: (1) delivery (in metric tons) (2) delivery shortfall against contracted amount (3) standard deviation of delivery (4) equivalent 'investment rating' of project (5) risk management options • Applied in: • assisting the World Bank's Carbon Finance Business develop a framework to evaluate ER projects and portfolios; • working with a large European development bank to develop an acquisition strategy for its EUR 50 million carbon fund; • Natsource’s recently launched carbon aggregation pool, GG-CAP

  10. Project Risk Assessment Project Pre-Screening Project Screening and Scoring Using Natsource Asset Management (NAM) Delivery Risk Model Contractual Conditions Analysis Credit Review, Collateral Requirements and Structuring (if needed) Standard MOU / LOI Due Diligence

  11. Key Screening Factors Example of Key Risk Factors: • Host country’s investment climate • Host country’s CDM institutional readiness • Credit rating of project participants • Project’s financing stage • Project’s stage in CDM cycle • Project’s stage of development • Technology used • Stakeholders’ acceptance • Clear ownership title Project’s Delivery Shortfall + Rating Model

  12. CER Price driven by Delivery Risk CER Price increases • Only a PIN available • Project developing new methodology • No DNA or Host government approval only given after Validation by DOE • Poor Credit • Project not registered • Flexible CER delivery schedule • No punitive damages • Unilateral • Upfront payment • Using approved methodology • Host government approval • Strong project partners, technology supplier • Good Credit • Ability for buyer to become a Project Participant (Multilateral) • Project registered • Guaranteed delivery schedule with punitive damages for non-delivery • Payment on Delivery

  13. Valuation of EUAs vs. CERsCERs are not yet a commodityHigher risk = lower price

  14. Global Carbon Markets:Trends and Current Developments

  15. Carbon Market Transaction Overview 2005 • EU ETS up and running • CDM Registered Projects: 20-30 • Total transactions: • 800 million tons traded • $USD 11.28 billion • Clean Development Mechanism/Joint Implementation transactions: • 425 million tons traded • $USD 2.4 billion

  16. Carbon Market Project Overview 2005 Purchasers Project Types Source: Point Carbon

  17. Carbon Market Overview 2006 • Market liquidity increase • Price increase ($USD 26 to $USD 33 from January to early-Feb) • More players coming into the market • Increased numbers of project approval flow from the CDM EB

  18. CER Pricing Trends Upward price pressure: • Japanese buying will continue • US regional programs may create some demand • EU tightness will continue to seek CERs to fill needs

  19. CER Pricing Trends Downward price pressure: • Canadian uncertainty • Increased registration of CER projects • Industrial Gas “Mega” Projects (i.e. $USD 930 million China HFC Project) • Corporations with excess allocation not trading yet

  20. CER Pricing Trends Uncertain price pressure: • EU ETS uncertainties • First true-up, May 2006 • NAP allocations for 2008-2012, June 2006 • Post-2012 negotiations • Russia & Ukraine supply has not been priced into the market

  21. CER Market Trends • Prices expected to continue to increase in 2006 • Commoditization of CERs • Increased funding for the CDM Executive Board • Increase in the number of registered projects • Will likely continue as mechanism of choice for emissions reductions • Well-established frameworks for project development • Likely to survive post-Kyoto • Link between EU ETS and other developing markets

  22. JI Developments • First meeting of the JI Supervisory Committee on 2-3 February 2006 • In 2005, 28 million tons transacted with a value of €96 million

  23. Canada No firm targets Delays have been, and continue to be, costly Comparatively little interest in international projects among Canadian private sector vs EU private sector Thin market predicted EU Firm targets More companies more seriously engaged Looking to hedge risk in international projects Active market, with purchases made by both governments and corporations Canadian vs. EU Systems

  24. www.natsource.com Heather McGeory hmcgeory@natsource.com + 1 212 232 5305 Natsource offices in: Calgary, Ottawa, New York, Washington, London and Tokyo

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