Carbon Offset Market And Industry Overview
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Strictly private and confidential
Carbon Offset Market June 2009
Strictly private and confidential
Carbon Offset Market Overview Joint Implementation 2% Primary Other* CDM 1% 5% Secondary CDM 13%
Overview
EU ETS 79% Note: Other includes Voluntary OTC, CCX, Kyoto [AAU], New South Wales, RGGI, Alberta’s SGER(a) and Other exchanges
Source: Ecosystem Marketplace, New Carbon Finance
European Union Emission Trading Scheme (EU ETS) is currently the world’s largest multinational GHGemissions trading scheme. In 2008, the EU ETS market traded 2,978MtCO2e, and the market was valued at US $94bn. EU ETS covers CO2 emissions from approximately 11,000 installations in energy intensive sectors in the EU, accounting for approximately 46% of CO2 emissions per year EU intends to expand ETS by linking it to other carbon trading systems by 2015 and include emerging economies by 2020
Carbon offset market is valued at US$ 125bn (at the end of 2008) showing a robust growth of 84% y-o-y Carbon market came into being when the carbon trading originated from the Kyoto protocol that came into force in 2005 with the intention to control greenhouse gas (GHG) emissions worldwide The Kyoto Protocol describes 3 market mechanisms (Joint implementation, Clean development mechanism and Emissions trading) that make up the carbon market wherein carbon credits in the form of carbon offsets are traded by various participants such as businesses, governments, individuals etc. A carbon offset is a financial instrument aimed at reducing GHG emissions – It is an emission reduction credit or unit that the participants receive by funding the environmental projects of various organizations – One carbon offset represents the reduction of one metric ton of CO2 or its equivalent in other greenhouse gases The offsets are a way to reduce carbon footprints of the participants and are traded in the regulated as well as voluntary markets Offsets trading in the voluntary market is growing more rapidly than in the regulated market – Carbon offsets trading in the voluntary market increased 87% y-o-y in 2008 compared to the regulated market wherein it grew 40% y-o-y in the same period
Source: Frost & Sullivan (2009), press
Growth of Carbon Offset Market (2005-2009E) 160
Carbon offsets are generated as the result of a GHG emission reduction project delivering measurable reductions in emissions through a variety of technologies Various organizations undertake projects that help in reducing GHG emissions in the atmosphere – These projects include renewable energy & other energy efficiency projects Such organization provide carbon offsets as credits to individuals and companies that fund such projects – These credits (offsets) purchased by the individuals and companies represent reduced, avoided or absorbed GHG emissions from the atmosphere through such projects The buyers (individuals, companies etc.) can use these offsets to compensate for their own GHG emissions – For example, to compensate for air travel, for emissions coming from driving a vehicle, using electricity & water or emissions from factories etc. The organizations undertaking projects that reduce GHG emissions benefit from selling the offsets as such projects become more economically viable The buyers of these offsets also benefit as apart from using these offsets to mitigate their own greenhouse gas emissions, they can save money as it may be less expensive for them to purchase offsets than to eliminate their own emissions
Source: Press
(2005 - 2009E):
140
92.2%
125
120
100
80 64 60
40
20
30
11
0 2005
2006
2007
2008
2009
Year Source: Frost & Sullivan (2009)
Generation of Carbon offsets
150
CAGR
Market Size (US$ bn)
Offset Trading in different markets (2008)
Types of Offset Projects and their cost
Wind Power: Wind power is a conversion of wind energy into useful forms such as electricity using wind turbines. A wind power project of 2.5kW to 6kW would cost between £11,000 – £19,000. Wind offset projects cost from £7.50 - £16.50 per tonne CO2 Hydropower: Hydroelectricity is a form of hydropower and is a widely used form of renewable energy. Hydro costs are very site specific and are related to energy output. Low head systems costs around £4,000 per kW. A typical 5kW domestic scheme may cost up to £20-25,000. Hydropower offset projects can cost from £7.50 - £16.50 per tonne CO2 Solar Power: Solar power is the conversion of sunlight into electricity by photovoltaics and concentrating solar thermal devices (water heating). A domestic sized Solar PV system can save around 1.2 tonnes of carbon dioxide emissions per year and can cost around £5,000 - £7,500 per kWp installed Biomass: Biomass refers to recently dead or living biological material that can be used as fuel. A biomass stoves to heat a single room costs between £2,000 - £4,000 and provides a detached home with 10% of annual space heating requirements could save around 840kg of CO2 Others: Other offset projects include Cleaner Energy, Tree Planting, Rainforest Protection etc.
Source: Press
1
Carbon Offsets – Key highlights Determining Offset Quality
Basic Cap and Trade Mechanism (2009)
Additionality: In order to neutralize the emissions generated by a project by buying offsets, it should be ensured that these offsets are additional, in terms, if the buyer would not have invested or funded the offset project, the project would not have occurred Baseline Determination: In order to calculate an offset project’s GHG benefits, a baseline must be established. It represents the counterfactual scenario of the emissions that would have occurred, if the project had not been implemented Benefit Quantification: The quantification of the GHG emissions reductions (or sequestration) resulting from an offset project would reflect key potential uncertainties, as well as the potential for leakage (if the project increases emissions anywhere else) Permanence: The offsets should not be subject to potential reversal in the future for e.g. in carbon sequestration projects the trees might die by fire or pest infestation) Ownership: Ownership of the reductions should be clear, making it less likely that the same offsets might be claimed and sold multiple times Registration: The offsets should be registered to provide a paper trail and to reduce the possibility that the same offsets might be sold multiple times Others: Other criterion may include offset costs, ancillary environment benefits and offset timing
Source: Clean Air-Cool Planet
EcoSecurities
Issue Pollutant Permits
Issue Pollutant Permits
Company B Emission = Z tonnes> X
Company A Emission = Y tonnes < X tonnes
Demand for Emission Permits
Excess Emission Permits
Sale of Excess Permits at Market Price: Emission Trade
Countries Purchasing Offsets to Meet Mandated Emissions Reductions (2007)
17.2% 14.3%
The Carbon Neutral Company Climate Care
12.2%
Cantor CO2e
Spain 4% Other Europe 6%
7.6%
Green Mountain Energy
5.9%
Terrapass
5.9%
Camco International
5.5%
Carbon Clear
5.1%
First Climate
4.2%
My Climate
3.8%
Source: EcoSecurities Survey (2008)
Issue Cap Pollutant = X tonnes
Source: Frost & Sullivan (2009)
Top 10 Recognized Offset Suppliers (2007)
0.0%
Central Authority: Government
10.0%
Italy 4%
Austria 2% Others 2%
Japan 11% Europe Baltic Sea 12%
UK 59%
20.0% Source: World Bank Report (2009)
2
Carbon Market Trends & Outlook
800 600 400 200 0
Trends
2008
2005 2006 2007
2003 2004
2002
MT Co2e
Voluntary Carbon Markets
Year Other Exchanges Chicago Carbon Exchange OTC Source: Ecosystem Marketplace, New Carbon Finance
The voluntary carbon market has recently been in the spotlight attracting attention from the media, US Congress, major multinational corporations and individuals. Highprofile companies are voluntarily offsetting their greenhouse gas (carbon) emissions, upping the ante for corporate action on climate change. This rising demand for voluntary offsets is supporting explosive but highly fragmented growth in the supply of carbon offsets
Governments in various countries have initiated voluntary emissions reduction and carbon offsetpurchasing programs, few of them include: – Japan’s Keidanren Voluntary Action Plan on the environment comprising of 61 different Japanese business associations and corporations committed to reducing their average emissions from 2008 to 2012 to below 1990 levels as per their Kyoto commitments – The US EPA’s Climate Leaders program encouraging industrial partners to develop comprehensive climate change strategies, setting aggressive reduction goals and annually reporting their emission reduction progress to the EPA – Australia’s Greenhouse Challenge Plus program
also includes emissions reduction progress reporting and technical assistance along with an initiative to certify credits from emissions abatement programs as well as “carbon neutral” claims – Canadian GHG Clean Start Registry allows the companies to purchase carbon offsets that have been: (a) registered on a public registry, (b) certified by a third-party and (c) serialized & retired
Private firms are now purchasing the bulk of offsets for investment/resale purposes (35%) instead of retirement purposes (29%)
Almost all voluntary credits or offsets are now being verified by an independent third-party organization based on various verification standards identified – In 2008, 96% of voluntary credits were verified by independent third-party organizations (up from 87% in 2007) – Third-party credit-accounting registry is also gaining attention with 29% of the voluntary transactions were tracked in a third-party registry in 2008
Outlook
Industrialized nations such as Australia, China and the US are anticipated to implement a formal emissions reduction system during 2009-2014
EU ETS and proposals of Australia's Garnaut Review are expected to drive the development of the carbon credit market
The carbon market is expected to stay relatively insulated from prolonged turmoil in the financial markets, with healthy predictions of the market value expecting to reach over US$ 550bn by 2012 – There is overall optimism with respect to carbon market in the long term with the market value expected to surpass US$ 2,500bn
Despite healthy forecasts, current global economic downturn is expected to have a relatively unfavorable effect on the carbon market in the short term – Unavailability of financing is expected to hamper the progress on projects commissioned under the CDM and other infrastructure projects, thereby making the CDM market vulnerable – Cost of cutting emissions is likely to increase
Shrinking industrial output due to the economic recession in the EU is expected to reduce the CO2 emissions that could possibly reduce the demand for carbon offsets by around 40% the period 20082012 – CO2 emissions in the EU are expected to reduce by around 100 million tonnes in 2009 compared to the 2007 levels
The economic slowdown is expected to increase the price of carbon offsets by 1.7% per annum over the second EU ETS phase spanning from 2008 to 2012 – The subsequent effect on the price would be a downward correction of less than US$1.29 per tonne
Apple Source: Ecosystem Marketplace & New Carbon Finance (2009), Frost & Sullivan (2009)
3
Carbon Offset Market June 2009
Strictly private and confidential
Carbon Offset Market Overview Joint Implementation 2% Primary Other* CDM 1% 5% Secondary CDM 13%
Overview
EU ETS 79% Note: Other includes Voluntary OTC, CCX, Kyoto [AAU], New South Wales, RGGI, Alberta’s SGER(a) and Other exchanges
Source: Ecosystem Marketplace, New Carbon Finance
European Union Emission Trading Scheme (EU ETS) is currently the world’s largest multinational GHGemissions trading scheme. In 2008, the EU ETS market traded 2,978MtCO2e, and the market was valued at US $94bn. EU ETS covers CO2 emissions from approximately 11,000 installations in energy intensive sectors in the EU, accounting for approximately 46% of CO2 emissions per year EU intends to expand ETS by linking it to other carbon trading systems by 2015 and include emerging economies by 2020
Carbon offset market is valued at US$ 125bn (at the end of 2008) showing a robust growth of 84% y-o-y Carbon market came into being when the carbon trading originated from the Kyoto protocol that came into force in 2005 with the intention to control greenhouse gas (GHG) emissions worldwide The Kyoto Protocol describes 3 market mechanisms (Joint implementation, Clean development mechanism and Emissions trading) that make up the carbon market wherein carbon credits in the form of carbon offsets are traded by various participants such as businesses, governments, individuals etc. A carbon offset is a financial instrument aimed at reducing GHG emissions – It is an emission reduction credit or unit that the participants receive by funding the environmental projects of various organizations – One carbon offset represents the reduction of one metric ton of CO2 or its equivalent in other greenhouse gases The offsets are a way to reduce carbon footprints of the participants and are traded in the regulated as well as voluntary markets Offsets trading in the voluntary market is growing more rapidly than in the regulated market – Carbon offsets trading in the voluntary market increased 87% y-o-y in 2008 compared to the regulated market wherein it grew 40% y-o-y in the same period
Source: Frost & Sullivan (2009), press
Growth of Carbon Offset Market (2005-2009E) 160
Carbon offsets are generated as the result of a GHG emission reduction project delivering measurable reductions in emissions through a variety of technologies Various organizations undertake projects that help in reducing GHG emissions in the atmosphere – These projects include renewable energy & other energy efficiency projects Such organization provide carbon offsets as credits to individuals and companies that fund such projects – These credits (offsets) purchased by the individuals and companies represent reduced, avoided or absorbed GHG emissions from the atmosphere through such projects The buyers (individuals, companies etc.) can use these offsets to compensate for their own GHG emissions – For example, to compensate for air travel, for emissions coming from driving a vehicle, using electricity & water or emissions from factories etc. The organizations undertaking projects that reduce GHG emissions benefit from selling the offsets as such projects become more economically viable The buyers of these offsets also benefit as apart from using these offsets to mitigate their own greenhouse gas emissions, they can save money as it may be less expensive for them to purchase offsets than to eliminate their own emissions
Source: Press
(2005 - 2009E):
140
92.2%
125
120
100
80 64 60
40
20
30
11
0 2005
2006
2007
2008
2009
Year Source: Frost & Sullivan (2009)
Generation of Carbon offsets
150
CAGR
Market Size (US$ bn)
Offset Trading in different markets (2008)
Types of Offset Projects and their cost
Wind Power: Wind power is a conversion of wind energy into useful forms such as electricity using wind turbines. A wind power project of 2.5kW to 6kW would cost between £11,000 – £19,000. Wind offset projects cost from £7.50 - £16.50 per tonne CO2 Hydropower: Hydroelectricity is a form of hydropower and is a widely used form of renewable energy. Hydro costs are very site specific and are related to energy output. Low head systems costs around £4,000 per kW. A typical 5kW domestic scheme may cost up to £20-25,000. Hydropower offset projects can cost from £7.50 - £16.50 per tonne CO2 Solar Power: Solar power is the conversion of sunlight into electricity by photovoltaics and concentrating solar thermal devices (water heating). A domestic sized Solar PV system can save around 1.2 tonnes of carbon dioxide emissions per year and can cost around £5,000 - £7,500 per kWp installed Biomass: Biomass refers to recently dead or living biological material that can be used as fuel. A biomass stoves to heat a single room costs between £2,000 - £4,000 and provides a detached home with 10% of annual space heating requirements could save around 840kg of CO2 Others: Other offset projects include Cleaner Energy, Tree Planting, Rainforest Protection etc.
Source: Press
1
Carbon Offsets – Key highlights Determining Offset Quality
Basic Cap and Trade Mechanism (2009)
Additionality: In order to neutralize the emissions generated by a project by buying offsets, it should be ensured that these offsets are additional, in terms, if the buyer would not have invested or funded the offset project, the project would not have occurred Baseline Determination: In order to calculate an offset project’s GHG benefits, a baseline must be established. It represents the counterfactual scenario of the emissions that would have occurred, if the project had not been implemented Benefit Quantification: The quantification of the GHG emissions reductions (or sequestration) resulting from an offset project would reflect key potential uncertainties, as well as the potential for leakage (if the project increases emissions anywhere else) Permanence: The offsets should not be subject to potential reversal in the future for e.g. in carbon sequestration projects the trees might die by fire or pest infestation) Ownership: Ownership of the reductions should be clear, making it less likely that the same offsets might be claimed and sold multiple times Registration: The offsets should be registered to provide a paper trail and to reduce the possibility that the same offsets might be sold multiple times Others: Other criterion may include offset costs, ancillary environment benefits and offset timing
Source: Clean Air-Cool Planet
EcoSecurities
Issue Pollutant Permits
Issue Pollutant Permits
Company B Emission = Z tonnes> X
Company A Emission = Y tonnes < X tonnes
Demand for Emission Permits
Excess Emission Permits
Sale of Excess Permits at Market Price: Emission Trade
Countries Purchasing Offsets to Meet Mandated Emissions Reductions (2007)
17.2% 14.3%
The Carbon Neutral Company Climate Care
12.2%
Cantor CO2e
Spain 4% Other Europe 6%
7.6%
Green Mountain Energy
5.9%
Terrapass
5.9%
Camco International
5.5%
Carbon Clear
5.1%
First Climate
4.2%
My Climate
3.8%
Source: EcoSecurities Survey (2008)
Issue Cap Pollutant = X tonnes
Source: Frost & Sullivan (2009)
Top 10 Recognized Offset Suppliers (2007)
0.0%
Central Authority: Government
10.0%
Italy 4%
Austria 2% Others 2%
Japan 11% Europe Baltic Sea 12%
UK 59%
20.0% Source: World Bank Report (2009)
2
Carbon Market Trends & Outlook
800 600 400 200 0
Trends
2008
2005 2006 2007
2003 2004
2002
MT Co2e
Voluntary Carbon Markets
Year Other Exchanges Chicago Carbon Exchange OTC Source: Ecosystem Marketplace, New Carbon Finance
The voluntary carbon market has recently been in the spotlight attracting attention from the media, US Congress, major multinational corporations and individuals. Highprofile companies are voluntarily offsetting their greenhouse gas (carbon) emissions, upping the ante for corporate action on climate change. This rising demand for voluntary offsets is supporting explosive but highly fragmented growth in the supply of carbon offsets
Governments in various countries have initiated voluntary emissions reduction and carbon offsetpurchasing programs, few of them include: – Japan’s Keidanren Voluntary Action Plan on the environment comprising of 61 different Japanese business associations and corporations committed to reducing their average emissions from 2008 to 2012 to below 1990 levels as per their Kyoto commitments – The US EPA’s Climate Leaders program encouraging industrial partners to develop comprehensive climate change strategies, setting aggressive reduction goals and annually reporting their emission reduction progress to the EPA – Australia’s Greenhouse Challenge Plus program
also includes emissions reduction progress reporting and technical assistance along with an initiative to certify credits from emissions abatement programs as well as “carbon neutral” claims – Canadian GHG Clean Start Registry allows the companies to purchase carbon offsets that have been: (a) registered on a public registry, (b) certified by a third-party and (c) serialized & retired
Private firms are now purchasing the bulk of offsets for investment/resale purposes (35%) instead of retirement purposes (29%)
Almost all voluntary credits or offsets are now being verified by an independent third-party organization based on various verification standards identified – In 2008, 96% of voluntary credits were verified by independent third-party organizations (up from 87% in 2007) – Third-party credit-accounting registry is also gaining attention with 29% of the voluntary transactions were tracked in a third-party registry in 2008
Outlook
Industrialized nations such as Australia, China and the US are anticipated to implement a formal emissions reduction system during 2009-2014
EU ETS and proposals of Australia's Garnaut Review are expected to drive the development of the carbon credit market
The carbon market is expected to stay relatively insulated from prolonged turmoil in the financial markets, with healthy predictions of the market value expecting to reach over US$ 550bn by 2012 – There is overall optimism with respect to carbon market in the long term with the market value expected to surpass US$ 2,500bn
Despite healthy forecasts, current global economic downturn is expected to have a relatively unfavorable effect on the carbon market in the short term – Unavailability of financing is expected to hamper the progress on projects commissioned under the CDM and other infrastructure projects, thereby making the CDM market vulnerable – Cost of cutting emissions is likely to increase
Shrinking industrial output due to the economic recession in the EU is expected to reduce the CO2 emissions that could possibly reduce the demand for carbon offsets by around 40% the period 20082012 – CO2 emissions in the EU are expected to reduce by around 100 million tonnes in 2009 compared to the 2007 levels
The economic slowdown is expected to increase the price of carbon offsets by 1.7% per annum over the second EU ETS phase spanning from 2008 to 2012 – The subsequent effect on the price would be a downward correction of less than US$1.29 per tonne
Apple Source: Ecosystem Marketplace & New Carbon Finance (2009), Frost & Sullivan (2009)
3
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