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Introduction to the Emissions Market

GF I NVEST AG F INANCIAL S OLUTIONS. Introduction to the Emissions Market. February 2008 Mélanie Stauffer. International Response to Global Warming. National. Sector. Installation. Individual?. International. Kyoto Protocol: Reduce GHGs by 5.2% compared with 1990 emission levels

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Introduction to the Emissions Market

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  1. GF INVEST AG FINANCIAL SOLUTIONS Introduction to the Emissions Market February 2008 Mélanie Stauffer

  2. International Response to Global Warming National Sector Installation Individual? International • Kyoto Protocol: • Reduce GHGs by 5.2% compared with 1990 emission levels • Europe: • Reduce by 8% against the same period • Annex 1: • Developed world, EU, Switzerland, Japan etc. • Annex 2: • Developing countries Connection Between Annex 1 and 2 Countries • Joint Implementation (JI): • Allow Annex 1 nations to obtain emission credits (Emission Reduction Units – ERUs) for projects that reduce emissions in other Annex 1 countries. • Clean Development Mechanism (CDM): • Annex 1 countries can obtain permits (Certified Emission Reduction Units - CERs) for projects that reduce emissions in Annex 2 countries.

  3. Overview of Phases of EU Emissions Trading Scheme (EU – ETS) Phase I (2005-07) Phase II (2008-12) Phase III (2013-20) • Cap on estimated 1990 levels • 8% reduction on 1990 levels • 20% - 30% reduction on 1990 levels Market Assessment Long (150 Mt / year) Short (-220 Mt a year) Short (-750 Mt a year) Investment Opportunities Low High Medium

  4. How the Emissions Market Works Installation A Installation B Allocated emissions allowance: 10,000 t 10,000 t Trading within EU-ETS Actual emissions: 9,500 t 10,500 t Option 1 Trade: sell 500 t buy500 t • Option 2 • Installation B invests in an installation in a developing country • Investment into the foreign installation reduces emissions by 500 t • Emissions reductions are verified and transferred as CERs to Installation B Using CDM / JI Projects • Option 3 • Installation B is fined €100 / tCO2 for each tonne above their allowance for failing to reduce emissions and is also required to buy carbon credits Penalty

  5. Drivers Influencing Carbon Allowance Prices • Business cycles • Strong economic growth increases energy consumption and therefore leads to higher demand for carbon credits. • Weak growth could result in lower prices • Weather • Changing weather impacts demands for heating in the winter and air conditioning in the summer • This influences energy consumption • Fuel Switching (Gas vs. Coal) • Gas emits less carbon / unit energy vs. coal • Switching to gas cuts emissions • Higher gas prices could cause a switch to coal, increasing demand for carbon credits • Availability & prices of CERs • China - main supplier of credits via CDM • China introduced a price floor of €8/tCO2, which could support EUAs prices if there is a scarcity of credits in the EU-ETS • Innovation • Development of new renewable fuels or more energy efficient technologies could lead to reduced demand • Regulation • Carbon regulation changes effect prices • There is considerable uncertainty over the terms of Phase III and global energy blueprint that could effect Phase II prices

  6. Phase I: • Allocations of carbon credits in Phase I were too generous • In spring 2006, when the first set of verified emissions data was published – prices fell as a consequence to a few cents / tonne • Phase II: • New national allocation plans ensure the market will be short of allowances if it continues as business as usual • Though CERs are cheaper an import cap has been imposed • Chinese CERs are capped at €8/tCO2 protecting EUAs • To date Phase II contracts have stayed in a range of €12 to €30 Analysis of Phase 1 and 2 in EU-ETS EUAs Future’s Price Analysis ‘07 vs ‘08 Futures Prices Dec 2008 Futures Prices Dec. 2007

  7. Acknowledged global warming Agreement to tackle deforestation in developing countries Launch of a two-year "Bali Action Plan" for negotiations on a new international climate regime Adaptation Fund launched to protect poorer countries from global warming Sectoral emissions proposals to be considered Considered how to transfer clean technologies from industrialised nations The Deal in Bali The negotiations process is scheduled to conclude in December 2009 in Copenhagen.

  8. Investment Opportunities • Growing market: Worldwide carbon market is growing rapidly and estimated to be worth USD 60bn in 2012 and USD144bn in 2020. • Carbon allowance shortfall: Credit shortage will support prices, which should be more stable and trade in a EUR 12 to EUR 30 range in Phase II. • Greater certainty: More clarity on Phase IIIand forecasted prices around EUR 35 • No correlation to other asset classes: GF Invest proposes a number of structured products giving private investors access to the Carbon markets.

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