Annex H - Carbon Trading Platforms: International Experiences and Lessons for Kenya

Transcription

1 Annex H - Carbon Trading Platforms: International Experiences and Lessons for Kenya Report prepared for Government of Kenya December 2011

2 2 This document is an output from a project funded by the UK Department for International Development (DFID) and the Netherlands Directorate-General for International Cooperation (DGIS) for the benefit of developing countries. However, the views expressed and information contained in it are not necessarily those of or endorsed by DFID, DGIS or the entities managing the delivery of the Climate and Development Knowledge Network*, which can accept no responsibility or liability for such views, completeness or accuracy of the information or for any reliance placed on them. 2012, All rights reserved * The Climate and Development Knowledge Network ( CDKN ) is a project funded by the UK Department for International Development (DFID) and the Netherlands Directorate-General for International Cooperation (DGIS) and is led and administered by PricewaterhouseCoopers LLP. Management of the delivery of CDKN is undertaken by PricewaterhouseCoopers LLP, and an alliance of organisations including Fundación Futuro Latinoamericano, INTRAC, LEAD International, the Overseas Development Institute, and SouthSouthNorth.

3 In the Menu Ribbon, go to Insert -> Header & Footer, replace this text with the title and press apply to all 3 Key Findings 1. It is possible to distinguish between primary and secondary carbon trading platforms. Primary platforms allow carbon credit purchasers to buy credits from project developers. Secondary platforms allow ultimate compliance purchasers and market intermediaries to purchase credits and manage their carbon price exposure. 2. It is unlikely that a secondary trading platform would be effective in Kenya. These platforms are located close to the ultimate source of demand for credits. The volume of credits typically traded on these platforms is far in excess of the cumulative CERs that have been generated in by Kenyan/East African projects to date. In addition, volumes on these markets are declining. Other attempts at developing such trading platforms in Non-Annex 1 countries have failed. 3. There are considerably greater opportunities to develop a primary trading platform. This could perform a number of roles including providing project developers with information about carbon finance and matching credit purchasers with project developers. Over time, it could evolve to help source capital for project developers and support the emergence of domestic voluntary trading and carbon offsetting. 4. The number of projects/credits on the platform will be crucial to its success. Buyers will be reluctant to engage unless it is large enough. To act as a permanent platform, it may need to offer ~1m credits per annum from around projects. This points to the importance of changes to the EU ETS rules, engaging projects generating both voluntary and compliance credits and potentially looking at developing a regional platform as crucial to the platform s success. Creating a series of regular conferences bringing together buyers and sellers may be more be easier to achieve and more effective in the short-term.

4 4 Contents 1. Alternative views of carbon trading platforms 2. The problems with creating a secondary market trading platform in Kenya 3. The opportunities for a primary trading platform

5 5 Two models for a carbon trading platform What is a carbon trading platform? Secondary trading platform allows compliance buyers and market traders to purchase credits/manage carbon risk through various carbon credits including CERs commodity markets, large volume of trades of standardised, well-known products examples include BlueNext, ICE, EEX etc located in Annex 1 countries Primary trading platform facilitates matching of project developers with carbon credit purchasers (and brokers) specific characteristics of each project/opportunity are important aspects of what this platform might do can be seen across range of NA1 countries

7 Two key challenges with creating a secondary trading platform of in Kenya Assuming that there are no plans to create a domestic compliance market in Kenya 7 although it appears possible in principle for CERs to be traded in Non-Annex 1 countries, there are good reasons to believe a secondary trading platform in Kenya would be ineffective 1. Liquidity and pools of talent have already concentrated in a few key locations which are close to where credit buyers and providers of ancillary services e.g. legal services, are located. Kenya is unlikely to be able to replicate this liquidity. 2. Volumes on trading platforms are either in decline (in the case of spot markets) or supported by trading in a range of other commodities that may not be so readily traded in Kenya.

8 Millions of CERs 8 Challenge 1: Kenya is unlikely to be able to generate the liquidity needed for a secondary trading platform Figure 1. The volume of CER trading on Europe s only pureplay CER spot market (Bluenext) exceeds the number of CERs issued in Kenya by almost 100 times Cumulative CERs issued from Kenyan projects Cumulative CERs issued from East African projects CER trading volumes on Bluenext Source: Vivid Economics and Bluenext. East Africa defined as Kenya, Tanzania, Uganda and Rwanda

9 Volume of CERs traded, million 9 Challenge 2: CER trading volumes are declining Since the start of 2010, trading volume have fallen by an average of >100,000 CERs per month Figure Volumes of CER trades on Bluenext s have been falling Average trading volume decline since start of 2010: 110,000 CERs per month Source: Vivid Economics and Bluenext

10 Challenge 2: with most other platforms having a diversity of commodities that protect them from this decline Many of these are unlikely to be traded in Kenya in the near-term 10 Figure 3. Most European carbon exchanges allow a wide range of commodities to be traded ICE EEX Nordpool Source: Vivid Economics and Bluenext

11 11 Most other Non-Annex 1 platforms have either been a failure or await the development of domestic compliance markets India two platforms where carbon (futures) contracts could be traded: MCX and NCDEX no trading of carbon on MCX platform since 2009 or on NCDEX platform since September 2009 (and no longer reported since March 2010) China 3 main environmental exchanges: Shanghai Environment and Energy Exchange, China Beijing Environmental Exchange, Tianjin Climate Exchange main activities have been pollutant allowance trading (SO2 and COD), VER trading and providing asset transaction services for environmental protection opportunities some activity in relation to helping to transact CDM projects i.e. Shanghai Environment and Energy Exchange is reported to have helped transact around 70 CDM projects, but this is akin to primary platform model discussed below gearing up for emergence of domestic compliance market i.e. recent deal between China Industrial Bank and Shanghai Environment Exchange to finance trading activity will coincide with launch of pilot trading market in the City

13 In the Menu Ribbon, go to Insert -> Header & Footer, replace this text with the title and press apply to all 13 A possible roadmap for a Kenyan carbon trading platform This takes account of Kenya s key constraints to greater carbon market access and international experience on what has worked Figure 4. A possible roadmap for a Kenyan carbon trading platform Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital providers Facilitating voluntary domestic/regional trading PRIORITY Source: Vivid Economics LONGER TERM

14 Increasing awareness of CDM possibilities Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading other work in the subcomponent identified lack of awareness of CDM possibilities as a key constraint holding back CDM activity in Kenya there is a lack of understanding of the CDM process and the its requirements. This leads certain project proponents to neglect the CDM potential or not consider carbon credits until it is too late and on the other hand leads to raised or unrealistic expectations of carbon income on the part of some developers important first role for a carbon platform (or an enhanced DNA) might be to address this lack of information : explain CDM process, provide guides/support on compiling PINs and PDDs provide up-to-date information on policy developments, networking opportunities examples include Finanzocarbono.org (see next slide) as well as Prochile and FONAM (Peru) this would not be a profitable activity, would be a need for public support a website would not be sufficient; would need to become a one-stop shop for all activity related to carbon markets in Kenya/East Africa marketing campaign would be very important 14

15 Finanzascarbono.org provides an example Finananzascarbono.org aims to increase awareness of carbon markets in Latin America, established by IADB, World Bank Institute, and UNEP Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading Conversation being organised Provides information on: carbon project development and funding mechanisms characteristics and application of methodologies and for establishing baselines current status of carbon markets in Latin America institutional and regulatory environment in LAC also offers for a for discussion on relevant topics 15

16 The platform could also help match project developers with credit purchasers Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading the platform could help to match project developers with credit purchasers or brokers possibly help to improve price transparency for Kenyan/East African developers to work, the lower search costs for investors/brokers from the platform, would need to offset the possible higher credit prices CBEEX offers a similar service for China, helped by partnership with Bluenext FONAM and ProChile organised conferences to facilitate matching in Peru and Chile this requires the platform to reach a certain critical thresholds so that investors could no longer ignore it (see next slide) key benefit would also come if the only projects listed were known to be supported in principle by the government of Kenya i.e. consistent with national strategies (prior to receipt of Letter of Approval) would need to be more than just a website; other activities to bring together project developers and brokers/purchasers would be needed, especially conferences individuals in the institution would need to become recognised as the key contact people for information on offset projects in Kenya (or that region) 16

17 To be effective, there would need to be sufficient projects listed on the platform Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Points again to the importance of access to EU ETS and developing cross-regional approach How many projects/cers might be required? industry experts have suggested that this might be 1 million CERs per annum or possible projects including ones of sufficient size China s CBEEX platform in partnership with Bluenext currently lists 48 projects with total potential credits of almost 6,000,000 tonnes per annum How does this compare with Kenya s current pipeline? around 20 Kenyan projects have submitted a CDM Prior Consideration form (and a further 42 from the rest of East Africa) but these statistics are flattered by the rush to beat the 2012 deadline, so is the likely maximum flow from CDM pipeline in Kenya Implications number of CDM projects from Kenya alone unlikely to justify a platform especially if no change in EU ETS rules that will make credits registered post 2012 from non-ldc countries (including Kenya) ineligible for compliance need to combine CDM and voluntary projects and look at an East African platform Matching project developers and capital Facilitating domestic or regional trading or start smaller by organising conferences for selected (high quality) buyers and sellers (in which case only ~10 credible projects and ,000 tpa required) along with publication of handbooks for key methodologies and ERPA templates 17

18 Over time, the platform might also help developers find capital for projects Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading access to capital remains a significant barrier to offset project development in Kenya Early stage risk capital for project development is hard to come by the potential and risks of small scale or distributed projects is also not well understood by many investors or banks lastly many projects require amounts of capital that are too small to attract large investors but too big to be eligible for microfinance or donor support as well as matching project developers with carbon credit purchasers (or brokers), the platform could also provide opportunities for project developers to access capital for project for some Chinese carbon platforms this is one of their main roles i.e. Shanghai Environment and Energy Exchange more likely to work in relation to projects that are already reasonably mature and looking for capital for financial close could also be used to help project developers with early stage, seed-capital requirements building on initiatives such as kickstarter.com, ongreen.com also a possible/role overlap for financing mechanism/fund 18

19 It could also help domestic companies in purchasing voluntary offsets Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading Carbon Africa reports increasing interest by Kenya companies in measuring their carbon footprint and offsetting through (voluntary) projects e.g. Kenya Airways launched a Carbon Offset Program for passengers (through IATA) and is planning to offset initially via pre-cdm VERs from geothermal projects in Kenya if this activity grows then a carbon trading platform in Kenya could facilitate this activity in two ways: providing a source of Kenya offsets for purchasers providing carbon neutral accreditation to Kenyan firms this activity would be insulated from international developments and could be profitable for a private company without government support 19

20 The SCX has had success in supporting voluntary market activity in Chile Increase awareness of CDM/carbon market Matching of credit buyer/brokers with projects Matching project developers and capital Facilitating domestic or regional trading Santiago Climate Exchange formally launched in April 2011 as collaboration between Celfin Capital and Fundación Chile, and eight other leading companies in Chile initially envisaged two roles to involve players other than sophisticated large corporates and, especially, the financial market, in international carbon offset trade. to support the development of the voluntary market in Chile through bringing together domestic offset projects and domestic purchasers of offsets the latter aspect of its business has become increasingly important provides carbon neutrality accreditation (based on internationally recognised standards) and sources domestic credits to ensure this demand from current clients is expected to be around 500,000 tonnes in 2012 rising to 1,000,000 tonnes in 2013 unclear whether there would be similar demand for credits from Kenyan companies 20

21 21 Contact us: 306A Macmillan House Paddington Station London W2 1FT Author contact details: John Ward T: E: Company Profile Vivid Economics is a leading strategic economics consultancy with global reach. We strive to create lasting value for our clients, both in government and the private sector, and for society at large. We are a premier consultant in the policy-commerce interface and resource and environment-intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world. The success we bring to our clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations. Practice areas Energy & climate change Competition & strategy Infrastructure & resources Development economics & finance Innovative policy