C A R B O N C R E D I T S—O R I G I N A T I O N
T O
C O M M E R C I A L I S A T I O N
Market and Methodologies
Meet Ocean Fertilization
Till Neeff – EcoSecurities
Ocean Iron Fertilization Symposium
26-27 Septemer 2007, Woods Hole
© 2007 EcoSecurities Group plc
Carbon credits - origination to commercialisation
EcoSecurities’ perspective
EcoSecurities was founded in 1997 and is world’s leading creator,
acquirer and trader of carbon credits in the global carbon market.
• We have 456 projects in the CDM project cycle
• Current portfolio of >185m tCO2e
• First projects to achieve registration and issuance of credits
• Offices in 21 countries
• Global Consulting Services Group focuses on corporate strategy,
GHG markets, and projects
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Presentation overview
• Key market factors
–
Voluntary markets and regulatory markets
–
Where does OIF fit?
• Carbon credit projects and OIF
–
Key components of methodologies
–
Methodological challenges in OIF
• Conclusions
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
The market context
Market demand for carbon offsets
Non-Kyoto regulatory
markets
Kyoto markets
Scattered voluntary
demand
Prominent voluntary
GHG initiatives
Voluntary cap-and-trade
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Regulatory markets
• Carbon credits are compliance instruments: carbon as a
commodity
• Kyoto markets: CDM, EU ETS
–
In 2006, turned over 1.6bn tCO2e, of those 0.5bn tCO2e project based
–
Until 2012, post-2012 being negotiated
• Other regulatory markets: RGGI, AB32 (CCAR), NSW, etc.
–
In 2006, turned over <40m tCO2e, growth expected
–
Emerging and thus still being defined
• OIF does not currently access any regulatory markets
–
Ownership of carbon credits for Kyoto parties only
–
The ocean isn’t part of the territory of a Kyoto party
–
Need to modify post-2012 ownership rules to allow for OIF credits
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Voluntary markets
• Voluntary offsetting for reasons of CSR and individual life-style
choices
–
“Story” behind the project
• Market performance in 2006
–
Voluntary markets turned over 24m tCO2e, grow exponentially
–
No rigid procedural, methodological, legal framework
• Voluntary markets are small compared to OIF
–
One OIF cruise can generate Millions of tCO2e
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Importance of the public image for
accessing markets
• Public image and market access
–
Demand on the voluntary carbon markets is partially driven by public
image
–
Future inclusion into (new) regulatory markets will consider the public
image
• OIF does not have much to offer on the socio-economic or
environmental front but delivers high-quality carbon credits
• Analogue example of HFC projects under the CDM
–
Offsets are high quality (additional, measurable, etc.)
–
Huge amounts of carbon credits
–
Simple, low cost, and perception of huge profits

receive criticism on largely emotional terms

receive lower prices
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Market bottom lines for OIF
•
Will regulated markets grow post-2012?
–
–
•
Will growth of voluntary markets continue?
–
–
–
•
Will we see a public backlash against offsets generally?
Can voluntary markets absorb tons from OIF?
How will the public perceive OIF?
Implications for the business model of project developers
–
–
–
•
US participation in the UNFCCC framework?
Will OIF qualify for participation in future regulated markets?

Credit ownership a major issue for OIF
Access to markets uncertain
Market size and prices uncertain
Market demand for OIF uncertain
The OIF sector needs to take a strategic attitude
–
–
Public image is critical
Policy dimension of gaining access to regulatory markets
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Key components of
methodologies for GHG projects
Permanence
Baseline and
additionality
Leakage
Monitoring
Validation and
Verification
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Complexity of methodologies
• CDM turned out quite
rigorous
Average time to final decision from the date of
initial methodology submission
19
17
15
13
11
9
7
1
• Chance to be more
simplistic for OIF
700
650
600
550
500
450
400
350
300
250
200
150
100
50
0
5
Methodology process
as a political tool
3
–
Cumbersome approval
procedure
Days to Final Decision
–
Submission Round
Rejection
© 2007 EcoSecurities plc
Approval
Carbon credits - origination to commercialisation
Additionality
The project is not Business as Usual:
-
Project overcomes barriers
-
-
-
first-of-a-kind project
-
unproven technology
-
country risk
-
Technological barriers
-
Investment barrier
Gap b/w
actual and required
return
Carbon credit
return
Required
return
threshold
Financial additionality
-
-
Risk-related barriers:
Compare financial returns of a
project with a benchmark
Carbon-credit cash flow increases
the project return
Project
return w/o
carbon credits
Project
return w/
carbon credits
Additionality in OIF not complicated
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Project baselines
project scenario
14
12
Carbon stock
10
8
6
baseline
scenario
4
2
0
1
© 2007 EcoSecurities plc
2
3
4
5
time
6
7
8
Carbon credits - origination to commercialisation
Leakage
• Leakage are emissions outside the project boundary that affect
the project’s carbon benefit
• Leakage hard to measure because often indirect via markets
• Methodological ways to deal with leakage
–
Measure
–
Limit applicability scope
–
Discount conservatively
• Leakage sources in OIF
–
Ship
–
Production of iron
–
Dust storm after fertilization event
–
Mixing with iron-rich water after fertilization event
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Permanence
• Sinks and sources of GHGs
–
Emission reductions: fugitive gases, fossil fuels, etc.
–
Carbon storage: planting forests, OIF
• Emission reductions generally considered “permanent”
• Carbon storage not per se permanent
–
Risk of carbon reversal
–
Options to address non-permanence

Temporary crediting

Ton-year approach

Minimum time frame
• Permanence in OIF?
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Monitoring
• Verification is audit of the
monitoring results and
procedures before issuance
–
–
PDD writers had an incentive to
overstate
Procedural challenges in CDM
60
50
Number of projects
• Monitoring and verification have
become issues in the CDM and
projects underperformed
Number of projects with different Issuance success
40
30
20
10
0
–
Problems in data collection and
archiving
0%-20%
20%-40%
40%-60%
60%-80% 80%-100%
100%120%
>120%
Issuance success
• Monitoring in OIF complex but
likely to be done properly
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Methodological bottom lines for
OIF
• Methodological challenges
–
Depends on difficult science

Hard to understand

Measurement is
technologically involved

Difficult to find qualified
auditors
–
Various leakage sources
–
Project boundary is conceptual
–
Difficult access to the site
–

Verification needs to work
without on-site visit

No re-measurement
• Simplifying methodological
aspects
–
Sophisticated scientific setup
–
Baseline does not need to be
modeled
–
Additionality is straight-forward
Non-permanence questions
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Conclusions
•
•
•
OIF faces methodological challenges
–
Difficult site access
–
Hard science behind OIF
–
Addressing permanence
OIF faces challenges in the context of current
markets
–
Future access to regulated markets uncertain
–
Voluntary market demand will depend on
public image
OIF has the potential to deliver high-quality
credits
–
“Very” additional projects
–
Long-term storage
–
Numbers have the potential to change the
carbon markets
© 2007 EcoSecurities plc
Carbon credits - origination to commercialisation
Ocean iron fertilization and
carbon credits
Till Neeff (Senior Consultant)
till@ecosecurities.com
+44 1865 202 635
© 2007 EcoSecurities Group plc
Carbon credits - origination to commercialisation
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