EMISSIONS

BROKERAGE
GROUP
Greenhouse Gas

Introduction to the Carbon

Emissions Trading Market
Jack Cogen
President
NATSOURCE LLC

Presented at Katoomba V
Tokyo, Japan
November 5, 2002

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

Overview
Greenhouse Gas

 Natsource Introduction
 Basics of Emissions Trading
 KP Update and Overview
 The Market
 Natsource’s Views
 Questions

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas
Natsource Introduction

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

Natsource: At a Glance
Greenhouse Gas
 Over-the-Counter commodities brokerage house
 Global Reach
– Calgary, London, New York, Tokyo , Toronto, Oslo, Ottawa, Sydney ,
Washington D.C.
 Large Energy and Environmental Broker
– Rated Top GHG Broker (Environmental Finance Magazine Survey, 2000 &
2001)
– Large Broker of SO2, NOX
– One of Highest Volume US Natural Gas Brokers
– Major US Electricity Broker
 Greenhouse Gas (GHG) Advisory Services
 Client base of over 600 major firms
– Utilities, Power marketers and Producers
– Large industrials
– Governments
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Organization in Japan
Natsource Japan was established in May 2001, as a unique firm to help
Greenhouse Gas
companies deal with and take advantage of drastic change in the energy and
environmental field.
Capital Increase
The Tokyo Tanshi Co.,Ltd. Undertaking Companies
Mitsubishi Corporation
Tokyo:Financial Products
Tokyo: Trading Company Cosmo Oil Co.,Ltd.
Broker
Geoscience&Petroleum
Consulting Corporation
Tullett & Tokyo Liberty Kansai Environment
Mitsubishi International
London: Financial Products Engineering Center Co.,Ltd.
New York
Broker
Mizuho Securities Co.,Ltd.
Nippon
Natsource LLC Petroleum Refining Co.,Ltd.
New York: Energy Products Osaka Gas Co.,Ltd.
Broker
Sumitomo Corp
Tokyo Gas Co.,Ltd.
Natsource Japan
Tokyo: Energy Products Tokyo Sangyo Co.,Ltd.
Broker Toyota Tsusho Corp
Tullett & Tokyo Liberty
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

Basics of Emissions
Greenhouse Gas
Trading

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas What Is Emissions Trading?
What options are most cost-effective?
Company A can reduce Company B can reduce
1000 tons CO2E at 1000 tons CO2E at
$2/ton = $2000 $6/ton = $6000

SELL BUY
1000 tons CO2E at $4/ton
= $4000

$2000 Profit $2000 Savings

Company A - Seller Company B - Buyer
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

KP Update &
Greenhouse Gas
Overview

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas 95 Countries Have Ratified
100

90
55 Parties
80 Needed to
Ratify
70

60
and
55 Current Total: 95
50
55% of Annex
1 Party 1990
40
Non-Annex 1 (70) CO2
30 Emissions
20

10 Annex 1 (25)
Source: UNFCCC as of
MARKET 0
September 27, 2002
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas Options for Meeting the 55% Threshold
55.0 Poland? = 3.0% 55.0 Canada? = 3.3%

50.0 50.0

Russian Federation? Russian Federation?

45.0 = 17.4% 45.0 = 17.4%

40.0 40.0
NOTE:
35.0 35.0
Japan = 8.5% Canada and Japan = 8.5%
Poland have both
30.0 30.0
indicated their
intent to ratify.
25.0 25.0

20.0 20.0
EU = 24.2% EU = 24.2%
15.0 15.0

10.0 10.0

5.0 5.0

Other Annex 1 = 4.4% Other Annex 1 = 4.4%

0.0 0.0
MARKET
ANALYSIS
Source: UNFCCC as of Sept. 27, 2002
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas Kyoto Compliance Drives Demand
and System Development

 National and regional systems under

development
 Policy makers do not have benefit of clear
international rules
 Concurrent policy development increases
difficulty of harmonizing systems

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP Early Market:
Defining the Terms of Trade
Greenhouse Gas
 With government rules still in formation,
participants define temporary rules
– Nature of tradable commodity
– Pricing structure
– Liability for non-performance
– Definition of baseline
– Monitoring & verification plan
 Asgovernment rules are set, market will
conform

MARKET
ANALYSIS
 EMISSIONS

Key Issues for International

BROKERAGE
GROUP
Greenhouse Gas
GHG Market

 Domestic system compatibility

– Lack of international policy framework led to
development of incompatible systems
– Loss of economic and environmental benefits
from fragmented market
 Party and non-Party trading linkages

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas
The Market(s)

MARKET
ANALYSIS
 EMISSIONS

Early Market: Attributes of

BROKERAGE
GROUP
Greenhouse Gas
Transactions
 Earlymarket began to emerge after 1997
agreement in Kyoto
 Transactions involved:
– Early stage “emission reduction” units
– These evolved into “verified emissions
reductions” (3rd party review, higher credibility)
– In 2001, “candidate” CERs, ERUs and AAUs
emerged in market terminology
– In 2001, actual GHG compliance instruments
began trading in UK & Denmark
 Higher quality commands higher price
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE

Recent Market Activity

GROUP
Greenhouse Gas
 1997 to June 2002 Estimated 200 mmt GHG Traded
 Last 12 months most active in GHG market (compliance
tools, VERS); 30 to 50 mmt CO2e traded in last year
 UK GHG trading program
– DuPont - Mieco executed first GHG transaction of government-sanctioned
instrument
– Auction held to provide companies with funds to reduce emissions below a
baseline; $305 million allocated, 4 mmt of reductions committed
– Approximately 20 trades have occurred and 100,000 to 200,000 allowances
traded
 Danish power sector cap & trade program
– Initial cap on CO2 of 23 million tons in 2000 is reduced 1 million tons per year
through 2003
– Approximately 10 trades have occurred and 300,000 to 500,000 allowances
traded
 First swap of UK and Danish allowances brokered in 2002
 Swaps of Danish allowances for VERs have occurred

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas GHG Market Is Evolving
Kyoto Protocol:
Australia:
Drives Demand United Kingdom:
US$208 million in and System
government Development Began April 2002;
tenders for GHG Tax discount in
reductions exchange for
reduction target

Other EU
Countries: Denmark:

Planning to GHG cap in power

implement sector, 2001-2003;
domestic trading Danish and UK
programs in 2005 allowances
in line with EU plan swapped

Japan: Netherlands: European Union:

Ratified Kyoto Purchased $31 Ratified Kyoto
Protocol; GHG million in GHG Protocol; GHG
trading simulations reductions; 2 more trading system
in 2002; tenders issued for operational 2005
implementation of JI and CDM-like
domestic measures reductions

MARKET
ANALYSIS
 EMISSIONS

Recent Market Pricing

BROKERAGE
GROUP
Greenhouse Gas
GHG Prices by Commodity and Vintage (US$ per ton CO2E)

Com m odity Type V intage Ye ar Pr ice pe r ton CO2E (US$)

V e r ifie d Em is s ion Re ductions ("V ERs ")
A nnex B V ERs 1991-2007 $0.30-$2.00
A nnex B V ERs 2008-2012 $1.50-$3.00
CDM V ERs 2000-2012 $3.00-$6.00
Dutc h ERUs 2008-2012 $4.40-$7.99
Com pliance Tools
UK allow anc es 2002 $16.39-$17.17
UK allow anc es 2003 $11.71-$12.49
UK allow anc es 2004 $11.71-$12.49
Danish allow anc es - bid 2002 $1.14-$2.60

Source: Natsource, September 2002

NOTE: Prices of GHG commodities are difficult to estimate. Prices are particularly difficult to estimate beyond
2012 because the international community will likely negotiate a new target for the Kyoto Protocol 2nd
commitment period and because U.S. action is still uncertain.

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

Natsource Views
Greenhouse Gas

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

GHG Price Expectations

Greenhouse Gas
 Pre-Kyoto (2005):
– Most companies expect GHG prices from $3-5 *
– Range: $2-10; median $5; mean $5.33
– Over 60% predict $5 or less
 Mid-Kyoto (2010):
– Most expect prices to be around $10.
– Range: $1.74 to $30; median $10; mean $10.96.
– 70% expect $10 or less.
 In these prices, most firms presume:
– Kyoto has entered into force by end 2002.
– U.S. does not join Kyoto, but adopts separate policies that
create modest market demand for international reductions

* US$ per tonne CO2e

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas Future GHG Price Expectations

$45.00
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas Private sector price expectations
30
Energy companies Energy intensive industry Financial sector

Transport
25
Price expectations ($/tCO2e)

20

2005
15
2010

10

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP Natsource Views:
Market Characteristics 2002-2007
Greenhouse Gas
 National-level and EU trading schemes will
continue to emerge
 Voluntary corporate initiatives intensify
 Market influenced by a few large buyers (e.g.,
Dutch CDM & JI programs)
 Likely to see continued interest within Canada,
Japan, the U.S. for VERs
 Gradually demand for VERs will shift to permits, as
superior risk-hedging tool

MARKET
ANALYSIS
 EMISSIONS

Natsource Estimates:
BROKERAGE
GROUP

2002-2007 Prices
Greenhouse Gas
 Fragmentation of markets is expected,
producing regional prices
 No single global permit price is likely

VERs: below $5*

UK: $15.00 or less
Denmark: $4.80 or less
EU (05-07): $2.50-9.00
* US$ per tonne CO2e
MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas Natsource Views:
Market Characteristics 2008-12
 Kyoto rules should eliminate most regulatory
discrepancies between systems
– Increased opportunity to seek low-cost reductions
– Russian/FSU permits will keep prices low
– Russia should meet most minimum GHG inventory
criteria
– Global competition will limit Russia’s ability to employ
strategic anti-competitive behavior
– Increased regulatory certainty and demand will stimulate
increased supply, limiting price rises
 Separate U.S. policy is likely to appear, creating
some international demand

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP

Natsource Estimates:
Greenhouse Gas
2008-2012 Prices
 Globalprices will emerge
 Regional differences will narrow

Global AAU/CER price: $5 - $11

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas
Questions

MARKET
ANALYSIS
 EMISSIONS
BROKERAGE
GROUP
Greenhouse Gas For More Information…
www.natsourcejapan.com
Natsource Japan : telephone ０ 3.5200.1710
fax ０ 3.5200.3369

<General> Mitsunobu Takano

([email protected])
<Emission>
trading : Itsuho Haruta ([email protected])
advisory : Norio Suzuki ([email protected])
<Power>
Yuichiro Yanagida
([email protected])
<Weather derivatives >
Akiko Yogo ([email protected])

MARKET
ANALYSIS