The Carbon Market
Trading Emissions Contracts
February 2009
Contents
Introduction
Cap and Trade
Kyoto mechanics
ECX
European market experience
Conclusions
2
Why?
• If your house was on fire, would you try to put it out?
• The world is heating up, it is caused by humans
(anthropogenic), and we have the chance to address it.
• The global cost of a Cap and Trade based solution is
estimated at 2% of GDP – if we act now.
• If we don’t act, what legacy are we leaving to future
generations?
3
Understanding Cap and Trade
4
The Cap
• Measure
• License
• Limit supply
• Creating a shortage in something
that was always deemed to be
limitless
• Requires great political leadership
– those covered will naturally resist
• Has different resistance points
depending on local factors
• Will never be truly fair – some
people will suffer more than others
5
Cap – underlying philosophy
• Those who continue to pollute at the old levels will
have to pay, and the charges will increase as the
supply is squeezed. Over time this will make them
LESS competitive
• Those who change early will be rewarded for their
action. Over time they will become MORE
competitive.
• The overall improvement is the quantum of the
reduced supply
6
Trade
• Brings buyers and sellers together thereby creating a price
formation mechanism
• Provides transparency and liquidity
• Allows active financial risk management
• Facilitates the monetisation of excess credits
7
Cap and trade
SIMPLE!
• Creates a cost and/or an opportunity
8
Kyoto Protocol – key points
• Divides world into two parts – Annex
1 countries (developed world) and
non-Annex 1 countries
• Covers period 2008 -2012
• Reduce Annex 1 emissions by (an
average of) 5.2% below 1990 levels
• National caps applied – but multiple
mechanisms for compliance
9
Kyoto Protocol flexible mechanisms
• Emissions Trading
– Annex I parties may trade emissions allowances at a national or
regional level
• Clean Development Mechanism (CDM)
– Annex I parties may implement emission reduction projects in non-
Annex I countries in order to meet their own emissions targets
• Joint Implementation (JI)
– Annex I parties may implement emission reduction projects in
certain other Annex I countries in order to meet their own emissions
targets
BACK TO CONTENTS
10
Kyoto Implementation
• Europe – global leadership
position
• Pre-Kyoto trading scheme (Phase I) 2005-2007
• Phase II coincides with Kyoto period
• EUETS legally binding across all 27 member
states
• Average reduction of 8% (from 1990 levels)
• 12% of allowances can come from CDM (national
limits ranging from 0 to 20%)
• 2013-2020 scheme being finalised
11
Kyoto Implementation
• United States – failed to ratify
agreement
• The largest per-capita emitter of carbon,
•
•
•
•
responsible for approximately one third of Annex 1
pollution
Various regional initiatives – California, RGGI
Voluntary (legally binding0 scheme managed by
Chicago Climate Exchange
Both Presidential candidates vocal supporters of
cap and trade
Possible post-Kyoto implementation 2013?
12
Kyoto Implementation
• ROW – varied responses
• Canada – scheme commencing 2010
• Australia – scheme announced 2010
• New Zealand – scheme to start 2009 (possible link
to Australia)
• Japan – details not yet available
13
Performance against Kyoto targets
Country
Base year GHG
emissions
(mt CO2e)
2005 GHG
emissions
(mt CO2e)
Change in GHG
emissions
base-2005 (%)
Kyoto Protocol
target as change
from base (%)
Difference (%)
Australia
418.3
525.4
25.6
8
17.6
Belarus
127.4
75.6
-40.6
-8
-32.6
Canada
596.0
746.9
25.3
-6
31.3
Croatia
31.6
30.5
-3.4
-5
1.6
European Union
5133.4
4711.0
-8.2
-8
-.2
Hungary
115.7
80.22
-30.7
-6
-24.7
Iceland
3.4
3.7
10.5
10
.5
Japan
1272.0
1359.9
6.9
-6
12.9
Liechtenstein
.23
.27
17.4
-8
25.4
Monaco
.11
.10
-3.1
-8
4.9
New Zealand
61.9
77.2
24.7
0
24.7
Norway
49.8
54.2
8.8
1
7.8
Poland
586.9
399.0
-32.0
-6
-26.0
Russia
2989.8
2132.5
-28.7
0
-28.7
Turkey
170.1
296.6
74.4
-8
82.4
Ukraine
923.8
418.9
-54.7
0
-54.7
United States
6229.0
7241.5
16.3
-7
23.3
Total
18,709.6
18,182.3
-2.8
-5.2
2.4
14
Post Kyoto
• Aiming for agreement in Copenhagen 2009
• To cover period 2013 – 2020
• 20-30% reduction by Annex I countries (?)
• Number of CER’s to be allowed
• Commitment from non-Annex I
15
Corporate structure
Climate Exchange
PLC
(CLE)
European Climate
Exchange (ECX)
Chicago Climate
Exchange (CCX)
Chicago Climate
Futures Exchange
(CCFE)
16
About ECX
• European Climate Exchange is the most liquid marketplace
for trading CO2 EU Allowances (EUAs) under the EU
Emissions Trading Scheme. ECX is part of the Climate
Exchange plc group of companies, listed on AIM of the LSE
• ECX and ICE Futures Europe have a partnership where ECX
manages marketing and product development for its carbon
emissions contracts and ICE lists those products for trading on its
electronic platform known as WebICE.
• ECX CFI (Carbon Financial Instrument) contracts are:
– Listed & traded on ICE Futures Europe electronic platform, a
Recognized Investment Exchange
– Regulated by the Financial Services Authority
– Financially guaranteed by LCH.Clearnet
17
ECX Products
Futures and Options
based on underlying:
EUAs
CERs
European Union Allowances
Certified Emission Reductions
EU ETS -
CDM -
European Union
Emissions Trading Scheme
Clean Development
Mechanism project credits
18
About ECX
Global Exchange Volumes (EUAs + CERs)
January 2009
Nordpool
0.5%
Bluenext
30.8%
EEX
ECX / ICE
1.2%
67.4%
Green Exchange
0.1%
ECX / ICE
Nordpool
Bluenext
EEX
Green Exchange
19
Price and volume ECX EUA Futures Contracts
• 94 million tonnes of CO2 traded in 2005 with a market value of €2.1 billion
• 452 million tonnes of CO2 traded in 2006 with a market value of €9 billion
• 1 billion tonnes of CO2 traded in 2007 with a market value of €17.5 billion
EUA Options
CER Options
EUA Dec-08 Sett
CER Futures
450
€ 35.00
400
€ 30.00
350
€ 25.00
300
250
€ 20.00
200
€ 15.00
150
€ 10.00
100
Settlement Price
VOLUME (million tonnes CO2)
ECX CFI Contracts Monthly Volume
EUA Futures
€ 5.00
50
€ 0.00
0
5
6
7
8
- 05 ul-05 ct -0 n- 06 r- 06 ul-06 ct -0 n- 07 r- 07 ul-07 ct -0 n- 08 r- 08 ul-08 ct -0 n- 09
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DATE
20
Open Interest ECX EUA Futures Contracts
ECX EUA Futures Contracts Open Interest currently rests at 171 million tonnes
ECX EUA Futures Open Interest Breakdown
2012
2011
2010
2009
2008
2007
2006
VOLUME (million tonnes CO2)
300
250
200
150
100
50
0
6
8
9
6
7
8
6
6
6
06
07 r-07 y-07
-07 v-0 7 n-0 ar-08 y-08 u l-0
-08 v-0 8 n-0
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n-0 ar-0 ay-0 Ju l-0 ugv-0 a np
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M
A
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M
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N
M
S
N
M
S
N
DATE
21
Volume ECX EUA Options Contracts
341 million tonnes of CO2 have traded in EUA options and 79 million tonnes of CER options on ECX / ICE
Futures Europe
ECX EUA and CER Options Volume
EUA Calls
CER Calls
EUA Puts
CER Puts
VOLUME (million tonnes CO2)
50
40
30
20
10
0
6
7
8
7
8
7
8
9
7
8
7
8
7
8
v -0 a n- 0 ar-0 ay- 0 Jul-0 ep-0 ov -0 a n- 0 ar-0 ay- 0 Jul-0 ep-0 ov -0 a n- 0
o
J
J
J
N
M
S
N
M
S
N
M
M
MONTH
22
Who is the Market?
Hedgers
Investors
Speculators
Arbitrageurs
23
ICE Futures Members enabled to trade ECX Contracts
Accord Energy
ADM Investor Services International
All Energy Trading
All Options Curaçao
Atel Trading
Bache Commodities
Banc of America Securities
Barclays Capital
BG International
BHF Bank
BNP Paribas Commodity Futures
BP Gas Marketing
British Energy Trading
Carbon Capital Markets
CEZ
Citadel Derivatives Trading
Citadel Equity Fund
Citigroup Global Markets
Climate Change Capital
Credit Suisse Securities
Deutsche Bank
Dresdner Bank
E&T Energie
E.On UK
EDF Trading
EDP – Energias de Portugal
EGL Trading
ELECTRA Deutschland
Electrabel
Endesa Generacion
First New York Securities
Fortis Bank Global Clearing
Galp Energia
Gazprom Marketing & Trading
Geneva Ireland Financial Trading
Getco
GFI Securities
GH Financials
Goldman Sachs International
Grupo Santander
HSBC Bank
ICAP Securities
Infinium Capital Management
IMC
Jane Street Capital
Jaypee International
JP Morgan Securities
Jump Trading
KFW
KlimaInvest
Limestone Trading
Madison Tyler Trading
Marex Financial
Marquette Partners
Marubeni Corporation
Merrill Lynch Commodities
Merrill Lynch International
MF Global
Mizuho Securities USA
Morgan Stanley & Co International
Natixis Commodity Markets
Newedge - Calyon
Newedge – FIMAT
Optiver VOF
Osterreichische Elektrizitatswirtschafts-AG
R.J. O’Brien & Associates
Rand Financial Services
RBC Capital Markets Corporation
RBS Sempra Energy Europe
Royal Bank of Canada Europe
Sagacarbon
Saxon Financials
Schneider Trading
Schnell & Co.
Scottish Power Energy Management
SEB Futures
Shell Energy Trading
Shell Int. Trading & Shipping Company
Smartest Energy
Spectron Energy Services
Starmark Trading
Statkraft Energi
Sucden UK
Susquehanna
TFS Derivatives
The Royal Bank of Scotland
ThyssenKrupp
Tibra Trading Europe
Tradelink
Tullett Prebon Securities
UBS Clearing & Execution Services
UBS
Universal Data (UK)
Wachovia Bank
XConnect Trading
24
Price Drivers
• Macro
• Micro
– Political will
– Demand and Supply
– National developments
– Oil price
– Economic
– Coal price
(growth/recession)
– Innovation
– Gas price
– Weather/temperature
– Interest rates
– Other markets
25
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ar
0
A 7
pr
M 07
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0
Ju 7
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0
Ju 7
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0
Ju 7
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0
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0
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N 08
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0
D 8
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0
Ja 8
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09
EUA-CER Price Spread
€
30.00
25.00
EUA price
20.00
15.00
CER price
10.00
Spread
5.00
0.00
26
EUA Price Correlations
EEX German Power €/MWh
Rotterdam Coal $/Tonne
UK Power £/MWh
UK Nat Gas p/therm
Brent Crude $/Barrel
ECX CFI €/tCO2
40.00
220.00
35.00
200.00
180.00
30.00
160.00
25.00
140.00
120.00
20.00
100.00
15.00
80.00
60.00
10.00
40.00
5.00
20.00
09
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08
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ep
08
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Ju
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08
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M
ar
08
08
Ja
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07
N
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ep
07
07
A
ug
07
Ju
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07
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07
Fe
b
06
D
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6
O
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0
06
0.00
A
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Ju
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0.00
27
ICE ECX Screen Shot
BACK TO CONTENTS
28
Where Next?
Aus ETS
EU ETS
445Mt
2,080Mt
NZ ETS
100Mt
CERs bridge the
Regional Schemes
Japan ETS
1,272 Mt
US ETS
5,760Mt
Canada ETS
400Mt
China/India?
29
Multiple roads to the same destination
Behavioural change
Renewable energy sources
Voluntary markets
(CSR
and pre-mandatory)
Mandatory cap & trade
30
Carbon – The Next Asset Class
“Global greenhouse gas emissions markets are clearly
the next great frontier in the commodities trading world”
Commissioner Bart Chilton – US Commodity Futures
Trading Commission, March 2008
31
Watch this space!
“The total global carbon market value could reach
€2 trillion ($3.1 trillion) by 2020.”
- POINT CARBON, May 2008
32
www.ecx.eu
Patrick.birley@ecx.eu
Proud sponsors of the Catlin Artic Survey
www.catlinarticsurvey.com
Other Information
Authorised Data Vendors
Codes for viewing live ECX CFI prices
EUA Futures EUA Options
CER Futures
Bloomberg
EMIT
OMON
Reuters
CMS
IDC
CQG
0#CFI:
UX
<17>t, UX
UX
0#CFI2Y
n/a
n/a
Options UX
CARA comdty
CT<GO>
0#CERE:
n/a
<17t>CERmy
QCER
ICE Energy Live LUX
n/a
n/a
E-Signal/ Future
LUX
source
n/a
<17t>CERmy
34