Carbon Certificates Market Potential in Russia

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1 Carbon Certificates Market Potential in Russia Conference: Kyoto Protocol as a financial tool for implementing energy efficiency projects Yekaterinburg, April 6 and 7, 2011 THE CARBON OPPORTUNITY FIRM April 6, 2011

2 Russia has a huge potential to reduce emissions mainly by implementing cost-saving energy efficiency measures In Mt CO 2 e 2, Cost-saving measures , ,939-26% 2005 Growth 2005 to 2030 Reference case 2030 Energy efficiency Agriculture Renewables Industrial process changes Remaining emissions 2030 Russia ranks 5 in the Top 10 CO 2 emitting countries (2,147 Mt CO 2 in 2005) 345 billion EUR cost savings potential until 2030 with invest requirement of only 120 billion EUR Emission reduction of nearly 700 Mt CO 2 e in 2030 compared to 2005 levels Implementation of key measures also saves cost at short paybacks; additional generation of carbon certificates partially possible Source: IEA, McKinsey (2009) 1

3 Carbon markets build on mandatory cap and trade schemes and carbon offsets mechanisms Cap and Trade regimes Defined limit/ cap on CO 2 emissions (decreasing per period/ year), which can be compensated by a specific amount of allowances at the end of a period Distribution/ auctioning/ sales of allowances to participants EU ETS EU-27 regulation that sets carbon emission cap on 1:1 selected sectors (covering > 50% of EU CO 2 e- emissions; target: -20% reduction till 2020 vs. 1990) Carbon Offsets Project-based mechanism to reduce CO 2 emissions Kyoto-based offsetting mechanisms: CDM Projects in developing countries, e.g., China, India, African countries RGGI US-based regional GHG 1 -Initiative capping CO 2 e- emissions from selected sectors in 10 states JI Projects in Annex-1 countries, e.g., Russia, Eastern European countries Voluntary carbon offsets Projects that comply with voluntary standards 1 Green house gas Source: UNFCCC, NREL, EIA, US Department of Energy, EU commission, RGGI, EECS, AIB, The CO-Firm 2

4 Mandatory markets and Kyoto-based offsetting mechanisms account for the majority of global carbon trading Carbon certificate type Mechanism Regional scope Market size 2009 In Mt CO 2 e In EUR million Relevant for Russia Joint Implementation (JI) Annex 1 countries 26 (developed countries) Voluntary over the counter (OTC) Int. offset mechanism 255 International Other exchanges International 2 9 EU Emission Trading Scheme (EU ETS) Mandatory cap and trade EU-27, Iceland, Lichtenstein, Norway 6,326 85,193 Secondary CDM 1 Int. offset mechanism Developing countries 1,055 12,615 Primary CDM* Int. offset mechanism Developing countries 211 1, ,688 Regional Greenhouse Gas Initiative (RGGI) Mandatory cap and trade US (10 Northeast states) 813 1,918 CCX 2 Voluntary cap and trade US, international offsets CDM Clean Development Mechanism 2 CCX Chicago Climate Exchange closed down operations at the end of 2010 Source: SEI, Ecosystem Marketplace, Bloomberg New energy Finance, EU Commission; RGGI, CCX, UNFCCC, The CO-Firm 3

5 The different carbon offset types are leveraged by distinct customer groups Customers for certificates Mandatory Voluntary Potentially from Russia Carbon offset Carbon scheme European companies 1 regulated under ETS Voluntary buyers: Companies, individuals European Allowance Unit (EAU) EU ETS Focus certificate No activity Certified Emission Rights (CER) Kyoto CDM Till 2012 potential substitute for EAU under EU ETS Some activity: Internationally certified reductions Emission reduction unit (ERU) Kyoto JI Till 2012 potential substitute for EAU under EU ETS Limited activity: Certified reductions, but OTC 2 -sales processes Gold Standard (GS) Voluntary Potentially, as additional marketing mechanism High reputation & price; includes social & other environmental benefits Voluntary Carbon Standard (VCS) Voluntary Potentially, as additional marketing mechanism Low-price carbon offset option 1 Power and industrial companies 2 Over the counter Source: The CO-Firm

6 Voluntary carbon markets and certification methodologies form an additional source of carbon credit revenues on global scale Voluntary carbon markets Objective: Incentives to reduce carbon emissions outside of regulated sectors and regions Regional scope: International Applicable project types: Depending on standard, similar to CDM Application process: Depending on standard, very much in-line with CDM, do not require UN approval Duration to issuance: Depending on standard, VCS ~ 2 4 month Credit prices: Depending on standard: 3-8 EUR/tCO 2 Trends: Consolidation of methodologies expected; likely to gain more importance if no successor of Kyoto protocol Certification methodologies 1 Voluntary Carbon Standard Gold Standard Regional scope: Global, no restrictions Eligibility criteria: Very much in line with CDM, excl. social/ other environmental benefits Average 2009 prices: 3.38 EUR/ tco 2 e Regional scope: Global, mainly developing countries 2 Eligibility criteria: In line with CDM, incl. additional strict social/ other environmental benefits Average 2009 prices: 7.98 EUR/ tco 2 e Applicability: Also applicable to CERs, increasing the value of credits 1 Examples 2 GS VER projects cannot be implemented in countries with an emission cap, except if allowances under cap and trade are permanently retired Source: SEI, New Energy Finance, Ecosystem Marketplace, The CO-Firm 5

7 These voluntary certificate types relevant for Russia do not only cover more than 40% of the global voluntary market Voluntary carbon market In % 100% = 94 Mt CO 2 e 7 Standard Gold Standard Carbon certificate Gold Standard Voluntary Emission Reduction (GS VER) Relevant for Russia 35 Voluntary Carbon Standards Voluntary Carbon Unit (VCU) 31 Climate Action Reserve Climate Reserve Tons (CRT) Other Chicago Climate Exchange 1 American Carbon Registry Carbon Financial Instrument (CFI) Emission Reduction Tons (ERT) Total Voluntary Markets CCX closed operations end of 2010 Source: APX: VCS Project Database, APX: Gold Standard Database, CCX Registry, Ecosystems Marketplace, Bloomberg New Energy Finance, New Carbon Finance, The CO-Firm 6

8 For Russia, the generation of voluntary certificates will become more and more relevant RUSSIA New JI projects only regulated under Kyoto Protocol until 31 December Joint Implementation (JI) Projects Gold Standard (GS) Projects Voluntary Carbon Standard (VCS) Projects Current voluntary buyers of JI- and CDM-projects might compensate by buying voluntary certificates Relevancy and price of voluntary certificates likely to increase after 2012 Source: The CO-Firm, UNFCC, Russian Government Resolution No. 332 & 843 7

9 but are also likely to find increasing demand Carbon Disclosure Project FT Global Response Rate % Carbon Disclosure Project Organization supporting financial investors demands to understand the carbon footprint of companies better 59 Company response to disclosure request is voluntary 47 Response rate to CDP request is an indicator of relevance of carbon topic to major companies FT Global 500: Annual snapshot of the world s 500 largest companies published by the Financial Times Newspaper Source: Carbon Disclosure Project 8

10 Generation of VERs under the Gold Standard requires a thorough assessment of social and environmental co-benefits Process overview Generation Process Project Design Registration Implementation Certification & Issuance Timeline 6-7 months 2-3 months Project specific months Actors Project developer DOE DOE Project developer Project developer DOE GS Board Activities Writing project concept note Defining baseline methodology Assessing additionality Consulting stakeholders extensively Assessing sustainability Conducting site visit with DOE Receiving validation by DOE Reviewing by GS Technical Advisory Committee Implementing project Monitoring by operator Obtaining verification & sustainable monitoring report by DOE Obtaining certification and issuance by GS Board End Product Gold Standard Passport Registration Operative installation GS VER GS Shared-Of-Proceeds fee: 2% of issued VERs Success Criteria Additionality Social and environmental co-benefits Consult all stakeholders No pre-announcements about project Continuous involvement of all stakeholders Reliable support Reliable emission measurement & controlling Note: DOE Designated Organizational Entity Source: SEI, Gold Standard Foundation, The CO-Firm 9

11 Generation of VCUs under the Voluntary Carbon Standard follows a simple verification and certification procedure Process overview Generation Process Project Design Implementation Certification & Issuance Ongoing monitoring Timeline 1-2 Project specific 2 4 months Ongoing Actors Project developer VCS verifier Project developer VCS registry operator Project developer VCS verifier Activities Writing project description Assessing additionality Consulting stakeholders Implementing project Check documentation Check database if project was previously registered Place documents into custodial service Issue VCUs End Product VCS project description Validation & verification report Operative installation VCUs VCSA registration levy: EUR 0.04 for every VCU issued VCUs Success Criteria Additionality Quantifiable Conservative approach Continuous involvement of all stakeholders Reliable support Reliable emission measurement & controlling Note: DOE Designated Organizational Entity Source: SEI, Gold Standard Foundation, The CO-Firm 10

12 Business Case Example Joint Implementation Russia/Japan FLARE GAS RECOVERY PROJECT (JI0535) Traditional cash flows Additional cash flows Nippon Oil&Energy Corp. Project development Fees Gazprom Neft Mitsubishi Operations/ Investment Project CO 2 CO 2 coordination revenues revenues (legal) Interest Sberbank: Financier / investor Equity/debt Payment for ERU certificates Buyer of CO 2 certificates GN: construction works, operation and maintenance NOE: project development M: project coordination ERU sales, Expected to earn 3.1 Million ERUs (abatement of 3.1 million t CO 2 e) in Revenues approx million EUR (assuming EUR/tCO 2 ) Quelle: 11

13 Carbon certificates can significantly boost the profitability of clean technology and energy efficiency investments CASE EXAMPLE: BIOMASS PLANT UTILIZING ANIMAL MANURE Biomass Plant Gold Standard Carbon Certificates Investment on farm: Biomass power plant with waste heat recovery for efficient electricity generation Manure management system providing biomass feedstock for the power plant Benefits: Revenues from electricity fed into grid Gas cost savings from using waste heat Revenues from sales of biomass plant output (digester output or ash) as high value fertilizer Environmental benefits (groundwater quality, smells) Additional investment: Project development and Gold Standard registration Carbon monitoring system Total additional cost approx. 4 EUR/t of manure (incl. certificate issuance fees) Additional benefits: Revenues from GS certificate sales approx. 8 EUR/t of manure Resulting in approx. 4 EUR/t of manure profit; IRR over 20 years: 27% Source: The CO-Firm 12

14 Globally, carbon abatement is being fostered substantially by supporting regulations Generating under carbon scheme JI EU ETS RGGI Voluntary CDM CDM CDM (JI) Voluntary Additional regulatory measures Energy saving and energy efficiency law: Contracting, product and building standards; energy revisions; subsidy schemes Feed-in tariffs Tax breaks Renewable subsidies Feed-in tariffs Tax breaks Renewable subsidies Tax breaks Top 1,000 targets for industry Feed-in tariffs Tax breaks Feed-in tariffs (e.g. in Malaysia) Tax breaks (e.g. in Thailand) Source: The CO-Firm 13

15 What it takes to make it happen Barriers Underestimation of certificate revenue impact on business case Complex registration process Uncertainties about current CO 2 emissions and abatement potential Realizing the potential might require building new business models and networks Unreliable emission measurement, therefore certificate losses Key success factors Precise document preparation for CO 2 certificate registration Determination of correct CO 2 emission baseline methodology and abatement potential Holistic approach to business case analysis Broad network across actors and experience in developing win-win business models Reliable and accurate CO 2 emission measurement and controlling system Success Source: The CO-Firm, Envidatec 14

16 Many thanks for your attention. Your contact: Dr. Nicole Röttmer Mobile: THE CARBON OPPORTUNITY FIRM

17 The CO-Firm team has expertise in energy efficiency, renewable energies and CO 2 footprint measurement and optimization Dr. Nicole Röttmer Dr. Daniel Hesse Johannes Röhren More than 7 years work experience with McKinsey & Company, projects in Germany, the Netherlands, Russia and USA Clients from Chemical, Automotive, High Tech, Packaging, Financial Services, Public Sector Specialized in energy efficiency optimization, carbon strategies, strategic and operative transformations, product development Example: Energy efficiency optimization in industrial companies Development of strategic energy concepts Process optimization, technology innovation, waste heat recovery Development of performance indicators, client training programs Definition of controlling and implementation concepts More than 3 years work experience with McKinsey & Company, projects in Germany, Belgium, UK, France and USA Clients from High Tech, Automotive Sector Specialized in renewable energy, energy generation and electric vehicles Example: Energy generation, transmission and renewables Strategies for energy suppliers Strategies für low voltage components Evalulation and comparison of solar technologies Impact analysis of energy and CO 2 emission cost trends 3 years work experience with McKinsey & Company, projects in Germany, the Netherlands, South Africa and Switzerland Clients from Pharma, Consumer Goods and Retail Sector Specialized in CO 2 footprint optimization, carbon trading and markets Example: CO 2 and energy efficiency optimization in industrial companies Impact analysis of energy and CO 2 emission cost trends Assessment of energy efficiency potentials Development of efficiency measures and integration of energy and CO 2 targets into management Quelle: The CO-Firm 16

18 Regulations play an increasing role as financial incentive for carbon abatement across regions TECHNOLOGY PLAYER Situation Variety of carbon certificate schemes Complex regional regulation on carbon issues Tax breaks (e.g. in China: 5 year corporate income tax exemption on energy saving equipment) Subsidies on CAPEX (e.g. in France: 2.000/5.000 EUR for hybrid/electric vehicles) Feed-in tariffs (in more than 50 countries) Compulsory green product buying schemes (e.g. in China for public institutions) Opportunities Include subsidies and carbon certificates in product marketing Choose target markets based on regulatory environment Design products to fit target market regulation Case example: Technology supplier for biomass power plants Problem Attractive potential target markets for new plant type? Analysis: Project IRR from customer perspective Standard tariff Feed-In tariff Incl. other subsidies Incl. CO 2 certificates GER -9% 2% 18% RUS 3% 5% Incl. opport. cost IND -4% -1% < -10% 1 Conclusion Focus on Germany and Russia 1 Only negative cash flows Source: The CO-Firm, REN21.net, Blomberg 17

19 The Gold Standard has the best reputation among all carbon standards and certificate schemes Source: EcoSecurities - The Carbon Management and Offsetting Trends Survey Results