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Emissions Trading Overview:
Who are the Buyers and Sellers and
What is Traded?
Tetyana Budyakova
Lawyer
What is CMS Cameron McKenna?
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CEE Magic Circle law firm (Chambers Global 2007)
Moscow office client’s choice of the year (2007)
Renowned in energy projects
Founder of CMS alliance (9 major European law firms)
40 offices in 24 jurisdictions
Kyiv office opened last fall
Our Locations in Europe
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Agenda
 What is emissions trading
 Market Players and legal frameworks that
create demand
 Main “carbon currencies” and trading platforms
 Position of Ukraine in carbon market
 What’s next?
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What is Emissions Trading
 market-based mechanism aimed to reduce emissions at
lowest cost
 gives companies the
1. flexibility in choosing cost-effective ways to meet
their reduction obligation:
(1) reduce;
(2) buy carbon units from others;
(3) invest into offset projects;
2. financial incentive to invest into new technologies
 Based on success of U.S. Acid Rain Program
– cap and trade introduced within the1990 Clean Air
Act Amendments
– SO2 emissions reduced by 22% or by 7.3 million
tons below mandated levels
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Carbon market is a new but rapidly
growing market
market volume
160
140
120
100
80
60
40
20
0
3000
118
2500
64
31
10
1745
2000
1500
1000
500
329
0
2005
2006
2007
2008
Source: World Bank, State and Trends of the Carbon Market 2008
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2983
150
Mt CO2e
US$ billion
market value
2009
2005
2006
2007
Cap-and-Trade elements
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Fixed cap in Mt CO2e
Baseline
Fixed reduction requirement (by 80% by 2050)
Emittors covered, offset projects
Carbon currency
Legal framework: what creates buyers
 International: Kyoto Protocol
 Regional cap and trade schemes: EU ETS
 National schemes: e.g. UK ETS, New Zealand ETS,
Australia (by 2010), potentially US & Japan
 Regional programs within country:
– RGGI in US
– NSW GGAS in Australia
 State schemes: California Assembly Bill 32;
 Voluntary schemes:
– CCX in US
– Japan’s Keidanren Voluntary Action Plan (for
Japan’s Kyoto compliance)
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Kyoto Protocol
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Kyoto Protocol
– Protocol to the United Nations Framework Convention on Climate
Change (UNFCCC) adopted on December 11, 1997, and entered
into force on February 16, 2005
Reduction Target
– The Parties included in Annex I shall, individually or jointly, ensure
that their aggregate anthropogenic CO2e emissions do not
exceed their assigned amounts, inscribed in Annex B, with a view
to reducing their overall emissions by at least 5% below 1990
levels in the commitment period 2008 to 2012.
Parties
– 183 countries + EU (deposited instruments of ratification,
accession, approval or acceptance) as of 14 January 2009
– 2 signed but not ratified – US and Kazakhstan
– Annex I countries
– 40 industrialized countries + EU listed in Annex I to
UNFCCC
– Annex B countries
– 39 countries + EU listed in Annex B to Kyoto Protocol with
their specific reduction targets
Kyoto Protocol Parties
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Kyoto Protocol Annex B countries targets
Country
Target (1990** 2008/2012)
EU-15*, Bulgaria**, Czech Republic, Estonia, Latvia, Liechtenstein,
Lithuania, Monaco, Romania**, Slovakia, Slovenia, Switzerland,
Belarus***
-8%
US
-7%
Canada, Hungary**, Japan, Poland**
-6%
Croatia
-5%
New Zealand, Russian Federation, Ukraine
0
Norway
1%
Australia
8%
Iceland
10%
* the EU redistribute the -8% target among its members, using the provision of Article 24 of the
Protocol (the “bubble”): countries have different individual targets with combined overall target for that
group of countries.
** have a baseline other than 1990.
*** Belarus was added to Annex B in 2006 by Decision 10/CMP.2
Turkey has a special status and is not Annex B country, Decision 26/CP.7.
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Distribution of EU target of -8%
Austria
-13.0 %*
Belgium
-7.5 %*
Denmark
-21.0 %*
Finland, France
0.0 %*
Germany
-21.0 %*
Greece
+25.0 %*
Ireland
+13.0 %*
Italy
-6.5 %*
Luxembourg
-28.0 %*
Netherlands
-6.0 %*
Portugal
+27.0 %*
Spain
+15.0 %*
Sweden
+4.0 %*
United Kingdom
-12.5 %*
Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia
-8%**
Hungary, Poland
-6%**
Cyprus, Malta
No target
* Decision 2002/358/EC (Burden Sharing Agreement), Annex II. Source: Carbon Trust **
Kyoto Protocol, Annex B
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Kyoto Flexible Mechanisms
 International Emissions trading (AAUs) (Art.17 of KP)
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Annex B countries may trade their Assigned Amount Units (AAUs) with
each other to meet their targets
 CDM (CERs) – Clean Development Mechanism (Art. 12 of KP)
–
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projects hosted in non-Annex I country
generate Certified Emissions Reduction (CERs)
project aim: assist non-Annex I countries in achieving sustainable
development and in contributing to the ultimate objective of the Convention
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CERs Issued and registered by UN CDM Executive Board
 JI (ERUs) - Joint Implementation mechanism (Art. 6 of KP)
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projects hosted in another Annex I country
generate Emission Reduction Units (ERUs)
project aim: reducing anthropogenic emissions by sources or enhancing
anthropogenic removals by sinks of GHG in any sector of the economy
ERUs issued by hosting country government
– Track 2 – registered by JI Supervisory Committee (JISC)
– Track 1 – National registration
Regional cap and trade schemes:
EU ETS
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Trade: EUAs – EU Allowance = 1 Mt CO2e (last price €12.05)
Operates since 2005 under Directive 2003/87/EC (EU ETS Directive)
27 EU countries + Iceland, Norway, Liechtenstein
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Joined target: -8% by 2012 redistributed among the Member States
Covered emitters:
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National Allocation Plans (NAPs) reviewed by Commission
6.5% below 2005 levels for Phase II
EU-wide cap for Phase III
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over 10,000 big industrial installations in the energy and industrial sectors
(collectively ½ of the EU's CO2 emissions and 40% of its total GHG
emissions)
aviation since 2012
Implemented in phases: Phase I (2005-2007); Phase II (2008-2012);
Phase III (2013-2020)
National caps during Phase I and II
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joined in 2007 within the framework of the European Economic Area (EEA)
agreement, applicable since 1.1.2008
21% reduction below 2005 level through annual phase-out from 2012
Use of offsets: CDM and JI on if additional to own actions
More info:
http://ec.europa.eu/environment/climat/emission/index_en.htm
Facilities covered by EU ETS
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Energy activities
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Combustion installations with a rated thermal input exceeding 20 MW
(except hazardous or municipal waste installations)
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Mineral oil refineries
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Coke ovens
Production and processing of ferrous metals
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Metal ore (including sulphide ore) roasting or sintering installations
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Installations for the production of pig iron or steel (primary or secondary
fusion) including continuous casting, with a capacity exceeding 2,5 tonnes
per hour
Mineral industry
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Installations for the production of cement clinker in rotary kilns with a
production capacity exceeding 500 tonnes per day or lime in rotary kilns
with a production capacity exceeding 50 tonnes per day or in other furnaces
with a production capacity exceeding 50 tonnes per day
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Installations for the manufacture of glass including glass fibre with a melting
capacity exceeding 20 tonnes per day
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Installations for the manufacture of ceramic products by firing, in particular
roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain, with a
production capacity exceeding 75 tonnes per day, and/or with a kiln
capacity exceeding 4 m3 and with a setting density per kiln exceeding 300
kg/m3
Other activities: Industrial plants for the production of
– (a) pulp from timber or other fibrous materials
– (b) paper and board with a production capacity exceeding 20 tonnes
per day
Regional programs within country: Regional
Greenhouse Gas Initiative (RGGI) in U.S.
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Trade: RGGI CO2 allowance (last price $3.38)
Operates since 2009 through state regulations,
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Cap: 10% CO2 emissions from the power sector by 2018:
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Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire,
New Jersey, New York, Rhode Island and Vermont
Offsets: CO2 offset allowances
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power sector CO2 emissions are capped at current levels through 2014. In
2015 - 2018 cap is reduced by 2.5 % in each year
Entity covered: power plants
Territory covered: 10 Northeastern and Mid-Atlantic states of US
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based on a RGGI Model Rule, and linked through CO2 allowance
reciprocity (individual CO2 Budget Trading Programs in each state)
States auction emission allowances and invest proceeds in low-carbonintensity solutions projects (energy efficiency, renewable energy, other
clean energy technologies)
2 auctions so far: Auction 2 cleared at $3.38; Auction 1 at $3.07
to satisfy only a limited portion of a source’s compliance obligation (initially
3.3 % of a power plant’s total obligation during a control period)
More info: www.rggi.org
Regional programs within country:
New South Wales Green House Gas
Abatement Scheme (GGAS) in Australia
 Trade: NGACs - NSW Greenhouse Gas Abatement Certificates
= 1 Mt CO2e (last price about $4)
 Operates since 2003
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through amendments to the Electricity Supply Act of 1995 and the
Electricity Supply Regulation of 2001
 Cap: 7.27 Mt CO2e in 2007 and till 2021
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per-capita GHG emissions from the electricity consumption (vs. 8.65 tones
in 2003)
= 5% reduction below the 1990 level
 Entity covered: electricity retailers and certain other parties
 Territory covered: New South Wales and Australian Capital
Territory only
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Abatement certificates provided through activities that abate GHG
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reduce the GHG intensity of electricity generation; generate low emission
intensity electricity; demand side abatement (reducing/increasing efficiency
of electricity consumption); carbon sequestration activities (managing
forests to capture and retain carbon from the atmosphere
 More info: www.greenhousegas.nsw.gov.au
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Voluntary schemes: Chicago Climate
Exchange (CCX)
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Trade: CFI - Carbon Financial Instrument = 100 Mt CO2e (last price
$2.05)
Operates since 2003 through the membership agreements
Members: over 200 including power, automotive, chemical, financial
corporations and municipalities (about 20% of US emissions),
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Governed by the Committees of Members (Executive,
Environmental Compliance, Trading and Market Operations, Offsets,
Membership and Forestry)
Cap: 6% below Baseline by 2010
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Phase I (2003-2006) 1% per year, total reduction of 4% below Baseline
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Phase II (2007-2010) reduction schedule, total reductions of 6% by 2010
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Covers all six GHG
Territory covered: US + global affiliates
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Currently - Chicago Climate Futures Exchange® (CCFE®), European
Climate Exchange® (ECX®), Montréal Climate Exchange™ (MCeX™),
Tianjin Climate Exchange (TCX);
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Offset projects: worldwide projects
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in development - California Climate Exchange™ (CaCX™), New York Climate
Exchange™ (NYCX™), Northeast Climate Exchange™ (NECX™, India Climate
Exchange™ (ICX™)
Applicable technologies decided by Offsets Committee (e.g. Agricultural, Coal
mine or Landfill methane, Agricultural soil carbon, Rangeland soil carbon
management, Forestry, Renewable energy, Ozone depleting substance
destruction)
More info: http://chicagoclimateexchange.com/
Market players
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Buyers:
– For compliance:
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For income generation:
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Intermediaries (aggregators, trading houses, compliance funds and
banks)
Asset managers (investors carbon funds, hedge funds)
Sellers:
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Governments of Annex I countries (AAUs) for Kyoto compliance
– Estimated shortfall - 2.3-2.7 billion MtCO2e for Kyoto Parties
(excluding Canada)
European companies covered by EU ETS (EUAs, ERUs, CERs);
Japanese companies for compliance under the Japan’s Keidanren
Voluntary Action Plan (for Japan’s Kyoto compliance) (CERs, JIs,
AAUs);
U.S. multinationals operating in Europe or Japan or preparing for the
RGGI or for California Assembly Bill 32;
Entities covered by other schemes CCX (CFIs); RGGI (RGGI CO2
allowances), GGAS (NGACs)
Governments of Annex I countries that have surplus (AAUs)
Entities in Annex I countries that host JI projects (ERUs)
Entities in non-Annex I countries that host CDM projects (CERs)
Entities that received allowances under respective schemes or the offset
providers (EUAs, CFIs, RGGI allowances)
Intermediaries & asset managers
KM – Kyoto
Mechanism
(AAU, CER
& ERU)
Mt CO2e =
million t
CO2e
Source:
World
Bank, State
and Trends
of the
Carbon
Market
2008
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Source: EEA
EEA Signals 2009: Key Environmental
Issues Facing Europe
Source: World Bank, State and Trends of the Carbon Market 2008
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Source: World Bank, State and Trends of the Carbon Market 2008
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Relation between different carbon units
VER – reduction unit generated through CDM or JI what was verified but not issued as ERU or CER
Source: World Bank, State and Trends of the Carbon Market 2008
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Main trading platforms:
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EUAs
– Over-the-counter (OTC) - 80% of transactions
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Exchange-traded
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84% traded at ECX
the rest at Nordpool, Bluenext and European Energy Exchange
(EEX)
EUAs and CER Derivatives (options and futures/ swaps/ gCER)
– by different exchanges through their launched products
– E.g. Chicago Climate Futures Exchange® (CCFE®) trades
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about 54% at London EnergyBrokers Association (LEBA)
38% at European Climate Exchange (ECX)
Futures & Options for CFI, CER
Futures for Dow Jones Sustainability World Index (DJSI-W) & ECOClean Energy Index (Eco-Index)
Event Linked Futures - U.S. Wind (IFEX) , Florida Wind
(IFEX-FLW), and Gulf Coast Wind (IFEX-GCW)
Futures & Options for Nitrogen & Sulphur Financial Instruments (NFIA
& SFI)
Futures for Regional Greenhouse Gas Imitative (RGGI)
ECX offers Futures & options for EUAs
Position of Ukraine
 AAUs - one of the main potential suppliers of
– Estimated to have about 1-1,5 billion AAUs
surplus
– subject to Green Investment Scheme (GIS)
requirements
 JI - N.1 in PointCarbon rating of JI hosts
– Additionally: reductions may not be
generated if project is not implemented
– 33% share of all JI projects globally
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JI projects globally
Source: World Bank, State and Trends of the Carbon Market 2008
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JI project in Ukraine
 about 40 JI projects submitted to JISC hosted
by Ukraine (various stage of development and
implementation) with potential of generating
about 60 million tones CO2 reductions by 2012
 3 projects under Track 2 passed the final
determination
 5 projects under Track 1 submitted by NEIA
 hosts the first JI project approved by JISC
 first transferred ERUs – 1.4 million ‘early’ ERUs
to the Japanese registry for the Zasyadko
project (immediately after the completion of the
connection with the ITL in October 2008)
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Types of JI Projects
Cogeneration
19%
Energy Efficiency
18%
Natural Gas Leaks
4%
Landfill gas
25%
Coal mine methane
15%
N2O
5%
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Wind Biomass
3%
4%
Heating
7%
JI project in Ukraine
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Has both Track 1 and Track 2 in place
– Track 1 – registration by NEIA; national/international
determination and verification
– Track 2 – registration by JISC; international determination and
verification
Designated authority: National Environmental Investment Agency of
Ukraine (NEIA)
Legislation:
– Procedure for JI projects development, consideration, approval
and implementation, adopted by the Resolution of the CMU of 22
February 2006 N.206;
– Requirements to the JI projects documents, adopted by 2 NEIA
Orders of 25 June 2008 N.32 and N.33;
– Track 1 procedure, adopted by NEIA Order of 18 December 2008
N.79
JI legal framework recognizes
– “early crediting” - issuing credits generated before the beginning
of the first Kyoto crediting period of 2008-2012;
– “late crediting” – allowing applications for credits to be generated
after 2012.
JI registration procedure
1. Project proposal submitted to NEIA;
2. Letter of endorsement issued by NEIA that approves
development of project design documentation (PDD)
3. PDD submitted for determination to independent
accredited authority;
4. Letter of approval issued by NEIA;
5. Letter of endorsement issued by the country of buyer;
6. Registration by NEIA (+ JISC if Track 2);
7. Annual reporting by the project owner;
8. Verification by the independent accredited authority;
9. NEIA issues ERUs into the account of the seller in
Ukraine’s National Registry;
10. NEIA transforms ERUs into AAUs and transacts them to
the account of buyer through the International Transaction
Log
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Who can register JI project
 Legal or natural person (registered
entrepreneur)
 Whose activity is not suspended due to
liquidation, bankruptcy or insolvency procedures
 That owns or legitimately possess for the whole
duration of the project
 An object located in Ukraine which operation
causes anthropogenic GHG emissions or their
reduction
– objects may include: workshop, installation
or unit of production or non-production
purpose
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Project Owners
State
20%
Private
46%
Municipal
34%
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What is next?
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Post-Kyoto treaty to be negotiated and adopted in 2009 at next COP 15
(according to the Bali Action Plan of COP 13)
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Main problem identified at COP 14 in Poznan:
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Targets for developing countries big polluters (China, India)
Potential developments meanwhile:
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COP 15 in Copenhagen December 7-18 2009 http://en.cop15.dk/
EU adopted a goal of 20 % GHG reduction by 2020 that will develop
through EU ETS
US is expected to adopt a national ETS, otherwise regional ETS, like RGGI,
will expand
Canada, Australia and other countries may adopt national ETS
Emission reduction and trading will be covered through separate
regional/national schemes
Some schemes may link (e.g. EU ETS will extend to other non-EU
countries)
Voluntary schemes are developing in non-Annex I countries, e.g.
– Tianjin Climate Exchange (TCX) - a joint venture of CCX and China
National Petroleum Corporation Assets Management Co Ltd
(CNPCAM) along with Tianjin Property Rights Exchange (TPRE);
– India Climate Exchange™ (ICX™)
Questions
Thank you!
Tetyana Budyakova
Lawyer
[email protected]
Tel:
+380 44 391 3377
Fax:
+380 44 391 3388
www.law-now.com