Transcript Slide 1

California Offsets Workshop
Current State of the California
Carbon Market
June 21, 2011
Josh Margolis
[email protected]
415-296-9359
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© Copyright CantorCO2e 2011
Agenda
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Who are these guys?
Litigation
Market mechanics
Market size
Allowances & offsets
Transaction types
Market color
Actions to take now
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CantorCO2e
Sound and Fury signifying?
what, when, how
$3 - $128 billion
$6 - $70
spot, stream, options, hedge
its complicated
assess, prepare, hedge
Who is CantorCO2e?
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California roots
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Since 1992 (and before)
Most credits brokered
CEC Climate Change Advisory Committee
Auction agreements with >300 companies
Los Angeles
San Francisco
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Brokerage, strategy, advisory, marketing, and regulatory assistance
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Subsidiary of Cantor Fitzgerald, global financial services firm
Environment
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> $10 billion environmental & energy transactions
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CARB CRTs & CAs
GHG VERs
RGGI
CERs
VCUs
SO2 EAs
RECLAIM
RECs/ROCS
EU EAs
ATUs
NOx SIP Call
HGA
Biomass
Wastewater
ERC
DERs
VERs
Helping companies develop and implement
successful offset/carbon management strategies
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Markets
Compliance
Voluntary
Energy
Innovation
Renewables
Finance
Securitization
Technology
Litigation from
Market’s Perspective
• Key dates
• Roller coaster
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What’s EJ got to do with it?
it’s all over/we agree with them?
just show your homework
the sun’s coming up tomorrow
the other shoe
• Betting on:
– program what’s creditable
– start date
next lawsuit
• Just give me certainty
• Pricing uncertainty
• Prohibition on speculation
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*
Potential Value of Traded Credits
Allowances
2,700,000,000
Auction
Amt Auctioned (est)
Low (est)
5%
High (est)
60%
Offsets
Low (est)
High (est)
Unit Price
(est)
$10
$70
Total Value
$1,350,000,000
$113,400,000,000
216,000,000
Total Value
$2,160,000,000
$15,120,000,000
Unit Price (est)
Times Sold
$10
1
$70
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Total Est Value of Allowances & Offsets
Low
High
$3,510,000,000
$128,520,000,000
* Excludes value of freely allocated emission allowances
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AB 32: Cap vs. Allocations + Offsets
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2
3
Million Metric Tonnes
450
400
350
300
250
200
150
100
50
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
 Net Cap
 Offset forecast
 The amount of allowances that CARB will remove from each year’s cap and set aside for the Allowance price Containment Reserve
• BAU emissions forecast
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Declining
Emissions Checkbook
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Single Year Trade
400
300
Buys 100 allowances
from seller
Sells 100 allowances
to buyer
200
Seller
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Buyer
Multiple Year Trade
300
Required obligation
250
Surplus saleable
reduction
200
150
100
50
2012
2013
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2014
2015
2016
2018
2019
2020
Actual
emissions
Transaction Types
 Spot
 Stream
 Swaps
 Options
 Firm delivery
 Unit contingent
 Guaranteed CARB
 Offsets
 Allowances
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Transaction Types
 Spot Transaction
o Verified, issued offsets or allowances
• Pros:
POD, low quantity/delivery risk,
seamless transaction
• Cons:
Some buyers looking for future vintages
 Stream Transaction
o Multiple years of created, prospective offsets/EAs
• Pros:
Lock in future year price, establish cash
flow/cost
• Cons:
Locked price eliminates ability to
transact at better price
• Hedge:
Structure a floor/ceiling profit share
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Transaction Types
 Firm Delivery
o Supplier guarantees delivery at set date/price
• Pros
Higher price
• Cons
Penalties for non-delivery, credit?
 Unit Contingent
o Delivery of credits when/if issued
• Pros
No non-delivery penalty if not issued
• Cons
Likely to be priced lower
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Transaction Types
 Swaps
o Non cash transaction
 Options
o Risk management
o Right, not obligation
• Calls right to buy at set level over set term
• Puts right to sell at set level over set term
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Transaction Types
 Guaranteed CARB Offset or Allowance
 Terms
 Program in force
 Dec 12, 13, 14 (one year delay?)
 Allowances/offsets issued/blessed by
CARB
 Issues
 Credit
 Policy/legal
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Offsets
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216 MMTCO2e through 2020 limit
8% of compliance obligation
Location – CA, North America… for now
ARB Protocols
o Forestry protocol v 2.1, 3.0-3.2
o urban forests protocol v 1.0-1.1
o US ODS protocol v 1.0
o Livestock manure protocol v 1-3
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Potential Offsets
What’s next (maybe?)
 CAR Ag
o Cropland Management
o Nutrient Management
o Rice Cultivation
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VCS REDD
CAR Nitric Acid
CAR Mexico Livestock
LFG?
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Allowances vs Offsets
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Allowances
Offsets
Available from CARB
Yes
No
Third Party Market
Yes*
Yes
Available Outside Auctions
Limited
Yes
Holding Limit
Yes
No
Price Limit
No
No
Forward Buys
Yes*
Yes
Charismatic (Carbon with a Story)
No
Yes
Risk of Reversal
No*
Yes
Due Diligence Importance
Limited
Very
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Price Indications
Recent Bid/Ask for Carbon Instruments (6/20/11)
Product
Type
Quantity
Vintage
Bid/Ask
CAR
Forestry 2.1
25,000
spot
6.50/7.25
CAR
Forestry 3.1
25,000
2005-12
6.75/7.50
CAR – Dom
ODS - Domestic
25,000
2010-2011
7.75/8.50
CAR
Ag Methane
20,000
2010-13
7.25 /7.50
CAR
ODS – Article V
25,000
>2005
2.50/4.00
CAR
N2O
100,000
>2005
2.00/3.50
CCO
Offset
25,000
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10.50/11.50
CCA Forward DEC-12
Allowance
25,000
-
14.75/16.00
CCA Forward DEC-13
Allowance
25,000
-
15.75/16.50
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Price Indications
Source: Reuters graph ic/Stephen Culp via Point Carbon
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Price Indications
Indicative Price Trend for CARB-Approved CAR Project Types and
CARB Carbon Allowance
$16.00
$14.00
Settlement Price
$12.00
$10.00
Livestock
ODS
$8.00
$6.00
$4.00
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Forestry
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DEC-12 CCA
Market Color
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Herky jerkey
Traders mostly, fewer permit holders now
– Depth of market - > millions of tons
– Traders, permit holders with trading desks, compliance sources
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Mostly OTC, for now
CARB’s green curtain
– Rules
– Methodologies/prospective
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Forecast
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Offset re-verification
Policy (go/no go, start date, allocations, trading rules, buyer beware)
Speculation
Credit (offered/taken)
Control, manufacturing, allocation/offset planning
Cost curves – capital costs vs. offsets and allowances vs. hybrid
Options
Portfolio
Remember CEQA/Voluntary
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Know Who You are Talking To
Motivations, products, and costs between:
 Brokers
 Traders
 Marketers
 Retail offset provider
 Exchanges
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Actions to Take Now
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Appreciate policy challenges/opportunities
Quantify current and expected 12 – 20 emissions
AB32, CEQA, voluntary
Build portfolio of solutions
o Onsite controls, efficiency improvements, biomass
o Identify control cost curve
o Managing carbon liabilities
 Create CARB offsets if possible
 Define and resolve expected net short position
o Participate in 3rd party projects
o Offset due diligence (reversals, delivery, PR risk)
 OTC Transactions
o Price and terms
o Swap (ERC, RTC for carbon)
o Trade clearing
© Copyright CantorCO2e 2011
Thank You
Josh Margolis
CEO
415.296.9359
[email protected]
www.emissionstrading.com
© Copyright CantorCO2e 2011