Cdm

There is huge opportunity for arbitrage opportunities between exchange

A seamless market for trading of carbon credits around the world would be the most viable option going forward in the future. The future ahead The Investor Network on Climate Change ( www.icnr.com ) , a network of North American Investors with assets worth more than $ 3 trillion being managed between them recognizes that climate change is a no longer just an environmental issue but has implications on several areas of the business. The 50 participating members like Goldman Sachs , JP Morgan , Morgan Stanley and like , of INCR have identified climate change as a key fiduciary concern and as one of the greatest challenges of the 21st century. In fact this network is actively engaged in policy formulation of its portfolio companies on ways to tackle potential threats due to climate risks and the opportunities it brings along with it. Such is the impact of climate change risk worldwide on companies.

The CDM The CDM by its very design is intended to a vehicle for investment and technology transfer into developing countries . Investment of these kinds would assist those countries to achieve "sustainable development" by enabling necessary economic growth and at the same time reduce the greenhouse gas emissions on a global level. India’s carbon credit market

In India so far, 242 projects have been identified for generating CERs while a total of 318 projects have received clearance by the Ministry of Forestry and Environment. For the Indian carbon market — which has the potential to supply 30-50% of the projected global market of 700 million CERs by 2012. The role of carbon asset management services & Carbon aggregator •

Costs of completing the CDM project cycle have a strong fixed element   

Costs for PDD, methodology development, validation, verification are mostly fixed Only CDM Executive Board administration fee is completely variable Projects with less than 10,000 CERs per year have problems in recovering these costs due to the high fixed cost component.

The need to develop Renewable Energy and Energy Efficiency Projects Traditionally investments were going in projects which had a huge potential HFC23, a byproduct of chlorodifluoroethane (HCFC22) often used as coolant in refrigerators, is thousands of times more potent than CO2. This means that HFC23 projects generate large volumes of carbon credits to sell with relatively smaller investment. Other highly dense greenhouse gases include nitrous oxide (N2O) and methane. N2O is 310 times the potency of CO2 and methane is 21 times that of CO2, which also mean that such projects offer sellers larger volumes of CO2 credit to sell with lower investments. The gases which are broadly traded are What greenhouse gases are regulated under the Kyoto Protocol: The six greenhouse gases specified in the Kyoto Protocol are: • • • • • •

Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N20) Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs) Sulphur hexafluoride (SF6)

There are also 25 other gases but these gases do not produce adequate amount of carbon credits.

So future carbon credits has to come only from RE and EE processes.

Bundling of projects Bundling of projects refers to bring various Small Scale CDM (SSC) projects under one portfolio without losing their distinct characteristics of the project. This bundling of projects is important as the SME’s do not have the scale to construct projects which would make them eligible for CER credits. We would play the role of aggregator and using our products would The future potential Global warming, which many scientists say can cause more heat waves, droughts and flooding has caused the investors to look up to rule makers to emission reductions more seriously and on a sustainable basis. Stricter emission norms post Kyoto protocol could transform this from a multibillion industry to a trillion dollar industry and enormous amount of capital would be pumped into p

Points to be covered a) need for climate exchange in asia- why an exchange in asia look at ccx and their advantages and weaknesses b) revenue model for our services c) table for our services – competitiors , business model etc d) risk mitigation strategies/exit strategies in India e) rating services in india f) how to attract buyers in India - terrapass g) buyers in Europe h) why it should be sooner

 The broad objectives of the CDM is:  contribute to the emission reductions and thereby create a greener world,  support the sustainable development of the country where the project is proposed,

 to subsequently use the emission reductions to meet compliance requirements of the developed countries.  The revenue from CDM is additional apart from project revenue. Project Related Risks (Write the solutions for project related risks- one of our key strengths)  Even where the project is registered there are several other issues involved with regard to carbon credits  Non-delivery of the contracted volume may attract exorbitant Penalty  Price uncertainty – There is no certainty of CER price  Liability to the lenders whether the project performs or not  Developer may also be sued for non-fulfillment obligations by the lenders / by the buyer  The IRR worked out to 10.14% considering the incentives available for the biomass based power projects. This IRR improves to 14.54 % with GHG income.  A Sensitivity analysis has been carried out with three probable scenarios and the IRR is worked out as under:

Normal case

IRR(%) IRR (%) with without GHG GHG 10.14 14.54

10% decrease in PLF

7.99

12.01

10% increase in Project Cost 10% increase in Fuel Price

8.20 7.95

12.26 12.46

•

CDM shall lead to “measurable and long term emission reductions that are additional”

• •

Determination of reductions requires definition of baseline methodology and monitoring of key parameters throughout the lifetime of the project Bottom-up development of methodologies for large projects, top-down for small projects Basic data about CDM

• • • •

43 projects issued 15.5 million CERs 334 registered projects forecast 600 million CERs by 2012 >900 submitted projects forecast 750 million CERs by 2012 Governments and companies in industrialized countries have budgeted more than 4.5 billion € for CER acquisition

Huge difference between different qualities of CER

30 No approved methodology Approved methodology Registered project Issued CER

25 20 15 10 5 0

2002 2003 2004 2005 2006 Seppre- 06 crash

EU allowance 2008

Two paths for post-2012 First Step

Second Step

2008-2012

2013?--

Ultimate Regime

2030?--

“Cap First” Strategy

Kyoto Protocol: Cap & Trade Regime

Another Cap & Trade Regime Mutually Reinforce, Or Conflict? Technology and Developmen t Cooperation

Ultimate Regime: Consists of Cap& Trade, Technology, and Development

“Empower First” strategy

Capacity

Generation

Assumptions

1MWcapacity

8.7MUgeneration

Assuming100%PLF

1MWcapacity

3.0MUgeneration

Assuming 35%PLF

1MWcapacity

3.0MUgeneration x750CERs =2250CERs

1MWcapacity

3.0MUgeneration x750CERs x10Euros xRs56

1MWcapacity

3.0MUgeneration

I MWCapacity

(365X24)

Assuming: • 1CER=1tonneof CO2avoided • Baselinefor northis.75 • 1MUgeneration=750tonnesavoided or 750CERs Assuming: • 1CERistradingbetweenEuros8to10 • 1Euros=Rs.56 =Rs.12.6lacsCDMrevenueless10% • 5%Transactioncost • 2%AdaptationFund • 3%VerificationCost • Assuming4.5croresascapital cost per MW • About 2.52% Returnoncapital cost

under the Kyoto treaty, developed countries are required to cut emissions by an average of 6% from 1990 levels by 2012. Each country is permitted to emit a certain number of tons annually of carbon dioxide or its equivalent. Governments then issue emission "allowances" to polluters within their borders, and these can be bought and sold by companies worldwide. Through this carbon trading system, big polluters in developed countries can pay companies in developing nations to cut emissions in their stead. Since many factories in developing countries use dirty, inefficient processes, it's often cheaper to clean them up than to replace the more modern equipment used in wealthy nations. There's little doubt that India and China will be big sources of credits. Both are industrializing at a breakneck pace with little regard for the environmental consequences, so there's no shortage of areas where pollution can be reined in. India has already negotiated dozens of carbon credit sales in projects ranging from hydro stations to harnessing methane gas released by decomposing garbage. But as the market gets more efficient at separating smart projects from wishful thinking -- and as companies in the West struggle to meet their Kyoto targets -- prices are likely to rise. "As the deadline gets near," says Andres Liebenthal, an environment specialist at the World Bank in Beijing, "there is going to be a scramble" for credits.

Financial innovations a) securitization b) climate exchange c) rating agencies

Other business models a) climate exchange b) marketing strategies through the use of viral marketing – terrapass.com and carbon fund.org

c) think of a punchline and marketing strategies for the same “Get serious about global warming -- or be prepared for the consequences.” Terrapass and carbonfund.org

The services we provide - take that from Chicago climate exchange & asian carbon monitoring services –once project has been started due diligence services database registry ,

• •

As opposed to the traditional route the site owner/operator simply makes one call to EcoMethane, who manage the complete process. EcoMethane undertakes ALL aspects of your project even down to the financing so there is no financial risk or capital investment required on your behalf.

Tackle climate change or face deep recession, world's leaders warned Sir Nicholas Stern, a former chief economist with the World Bank, in his report on impact of Climate Change on the world economy warned that governments need to tackle the problem head-on by cutting emissions or face economic ruin. Countries are increasingly becoming aware of the

The starting of the Carbon Exchange would mark the beginning of the Eco capitalism in this part of the World. With growing recognition

We feel that the voluntary market of carbon reductions has an enormous potential and this initiative is a the first of its kind in India ( and in South East Asia too) for allowing our customers to voluntarily reduce their emissions by purchasing credits from us. We can target any of the industries like airlines, automobile sectors ( particularly the premium car segments ) for buying credits from us. These clean energy projects are off the limits of ordinary people who wants to contribute to the economy but by aggregating their purchase we can successful invest in them. Though we believe that initially the revenue from Indian operations on the buy side wil contribute to a negligible percentage of our volumes, we would be the first of its kind in both India as well as Asia to target this market . The market consists broadly of 2 categories the polluting industries who are particular about social Responsible investing and the customers ( say the car drivers, the airline flyers ) etc who wants to contribute to the environment in some way or the other. This Vertically integrated business model in essence completes the loop for our Carbon trading model and this gives us an economy of scope.

India as a potential market for selling credits At present, India is rated as the 6th largest contributor of CO2 emissions with China being the 2nd. Fossil fuel emissions in India continue to result largely from coal burning as India is the largest producer of coal in the world. India is highly vulnerable to climate change as its economy is heavily reliant on climate sensitive sectors like agriculture and forestry.

In a study conducted by EIA ( Energy Information Administration) conducted by the US department of Energy, the Global GHG emission is expected to grow by 30 to 85% by 2025 and by 70% to 210% , depending on the assumptions made. This poses an ominous signal for the world’s environment and climate. Projected GHG emissions (source US Department of Energy)

Among developing countries India and China and India, the world's two most populous nations and emerging economic powers, are not only the most attractive CDM investment destinations but also has the potential to become a huge buyers market. India is the fifth-largest emitter of carbon dioxide after the US, China, Russia and Japan. Although India & China, are adamantly opposed to accepting legally binding greenhousegas reduction targets , it is only a matter of time that these countries adopt some sort of Voluntary capping mechanism . In this context, it is very likely that in the coming years after the end of the commitment 1 period , Socially responsible corporates in countries like India and China, taking a cue from the US model start reducing their emissions at least on a voluntary basis. This would make India and china as one of the key buyers in the market place. (Write about the corporate India going to be CSR responsible)

We plan to tap this space by establishing India’s First Carbon Exchange, which could well be on its way to become South East Asia’s Carbon exchange in the not so far future.

How to participate and obtain in Carbon Credits?

A complete Service Package

 Determining project feasibility and ‘additionality’ One of the most critical prerequisites for a CDM project is proof of its additionality, i.e. that the project would not have been implemented without the revenues from carbon credits. Without such proof, the project cannot qualify. With our expertise and knowledge, we would evaluate whether – and how – the project can fulfill these requirements.  Preparing the Project Design Document (PDD) We intend to take care of preparing the Project Design Document (PDD) in line with the Kyoto protocol provisions as well as more recent developments in the approval of baseline methodologies by the UNFCCC.  Validation and registration We plan to support clients in validating and registering CDM projects with the CDM Executive Board.  Selling carbon credits Parallel to registration, we shall start up the process of selling carbon credits, which includes the following steps. • We write and submit the project idea note on your behalf to inform and attract potential buyers.

• We identify potential clients within our large network, which includes private companies, banks, brokers and government representatives. • We will negotiate the best conditions for you and arrange the signing of an Emission Reduction Purchase Agreement.  Monitoring and reporting After a year of operation, a Designated Operational Entity must verify the CO2 emission reductions achieved (set against the monitoring plan). The figures are then certified and the project obtains its first CERs (Certified Emission Reductions). We shall help to implement the monitoring so that everything goes according to plan.  Additional services Equity or investment arrangements Identifying technology partners

OUR STRENGTHS We understand and appreciate that CDM is an investment scheme. So we intend to facilitate the investors with  Well-established institutional set-up, e.g. one-stop shopping.  Clear and transparent rules and approval procedure.  Minimum uncertainty and low transaction costs COMMON REASONS FOR FAILURE + OUR APPORACH TOWARDS THEM  Complexity and difficulty of the project. We are aware that the more complex and difficult the project, the less attractive it will be to CDM investors, although many are willing to take on these risks in return for a proportion of the carbon credits. Projects that minimize risk will attract CDM investment, and therefore projects scaling up or replicating existing successful processes will be more likely to succeed.  Instability and governance measures missing. A stable political environment and good governance is necessary to attract CDM investment. Importantly, the host country must have ratified the Kyoto protocol, and set up a designated national authority to approve CDM projects.  Donor competition in certain countries It is difficult to avoid but we plan to coordinate different donors by organizing Advisory Body meeting. Uncoordinated workshops and activities without follow-up and coordination We plan to organize co-workshops with other donors to maximize synergies.

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Flow back of a high share of project budgets into investor country or international consultants: We plan to reduce that by using 60% for in-country activities

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 No funding for real institution buildings: We intend to budget to set up DNA but need to ensure its post project financial sustainability

Risk Management System Need is to develop a proprietary decision-making support system that addresses and quantifies the risks associated with Clean Development Mechanism (CDM) projects. We plan to develop an Excel-based, systematic tool that evaluates and ranks CDM or JI projects in a portfolio. The system includes 

 

Review, assessment, rating, and ranking of CDM projects based on their likelihood to deliver Certified Emission Reductions (CER) or Emission Reduction Units (ERU). A risk-weighted estimation of the number of CERs or ERUs delivered. Calculation of Net Present Value (NPV) of the portfolio's discounted worth.

Risk Assessment for following risks perceived:

Process Risk

Likelihood of CER issuance

Project Technology Risk

Project Proponents Risk

Country Risk

Likelihood of project technology performance

Likelihood of successful performance by project proponents

Likelihood of approval of project.

Individual risk ratings are compiled for each project and for each of the four elements based on the user input/selection of responses to queries.

Strategies to attract buyers and sellers

1. Promotion of Exchange

   

AGENDA Formalized national project approval procedures CDM promotional publications & brochures A national CDM website Pipelines of CDM projects: PINs, PDDs

2. Participating and Organizing of Investors forum: Audience of such forums shall be Carbon investors, carbon brokers, national carbon funds and VER brokers.

   

AGENDA Marketing of CDM project portfolio in participating countries and their neighbors. Informed the sellers on Terms & Conditions of some of the existing Emission Reductions purchase programs. Informed the buyers on CDM institutional preparedness of countries in the region (DNA & KP ratification). Discussions between buyers and sellers regarding CDM project details.

Ways to obtain Carbon Credits Exposure in Carbon Credits can be obtained only through three major ways a) Directly generating Carbon credits by developing CDM projects b) Indirectly obtain exposure by investing in Carbon Funds c) Obtain derivative instruments through buying Credits in Exchange

Business Proposition for SME Insert Picture in PPT ( RASHIMA) What will be future of Carbon Trading after the first commitment period? There are uncertainties about the future of carbon trading and the role of carbon intermediaries after the first commitment period. We believe that with the growing concern of both the various governments, regulatory bodies and Corporates due to

the detrimental effects of Climate change and global warming, the Kyoto protocol in its next Version would only get stronger. Some states in USA (USA is not a signatory of the current version of Kyoto protocol due to non inclusion of countries like India and China has signatories) like California have taken the right step by voluntarily reducing emissions and other countries like Russia , Ukraine are expected to follow suit and if happens has the potential to increase the market manifold. So Carbon Trading would likely continue atleast for the next 20 years to come. Future of Kyoto Protocol

First Step

2008-2012

Second Step

2013?--

Ultimate Regime

2030?--

“Cap First” Strategy

Kyoto Protocol: Cap & Trade Regime

Another Cap & Trade Regime Mutually Reinforce, Or Conflict? Technology and Development Cooperation

Financial innovations in this sector

Ultimate Regime: Consists of Cap& Trade, Technology, and Development

“Empower first” strategy

About the financial innovations We primarily in the business of energy intervention services would work towards sustainable development of the host country’s economy with a special focus on the Kyoto Protocols. We would want to start a online carbon exchange to facilitate the price discovery of carbon credits in an efficient and transparent manner.

The Clean Development Mechanism’s dual goals of attaining sustainable development and at the same time creating cost effective greenhouse gas emission reductions can be achieved only via carefully structured financial instruments. CDM transactions offer specific challenges, as the parties involved are varied and often have extremely different business and cultural perspectives. Issues Facing the SME’s in the CDM implementation and our Business Solutions Most financing deals to the project developers from carbon funds occur after the carbon credits are fully validated, certified, registered and transferred. It takes 1-2.5 years on an average for a typical small /and medium size CDM project to be started and implemented and project developer is provided no finance when he needs most. This causes many project developers not to take up potentially lucrative CDM projects due to non availability of finances Securitization – An innovative financial solution of packaging illiquid assets into liquid securities could well be the big trigger for CDM projects in India. This will help bridge the divide between the sellers need for upfront capital and buyers risk aversion. INSERT DIAGARAM One of the important impediments to securitization contracts is the lack of knowledge about the CDM projects to investors and the in ability to monitor the project for variances on a regular basis. An independent third party analysis on the viability of the future CER credits and the project would go a long way in attracting more investors.

We would like to provide third party rating services (the first of its kind) in association with a Rating agency like ICRA , Crisil to rate the underlying asset pool ( The CDM projects ) and thereby help the rating agency to rate the securities thereby lending credibility and increasing marketability of the securities. Rating and Risk evaluation System CAPITAL COST

Rating and Evaluation System for FIXED&VARIABLE RUNNING COSTS Prioritizing Investments in Reducing IMPLEMENTATION RISKS Emissions is very critical for an DELIEVERY RISKS investor. We plan to develop a smart MANAGEMENT TIME DEMANDS RATING tool which can assist managers in AVOIDED FUEL & POWER COSTS VARIABLES prioritizing their energy and carbon CARBON VALUE RELEASED saving options. It shall help the PROJECT LIFE CYCLE investors in analyzing the variables PROJECT PHASING that determine the value and feasibility REPUTATIONAL VALUE of an energy or carbon-saving project in the real-world commercial environment. Following are the variables which we consider utmost important to rate a CDM project.