Carbon markets

Carbon Finance
• Carbon markets are trading systems in which
carbon credits are sold and bought.

• One tradable carbon credit equals one tonne

of carbon dioxide or the equivalent amount of
a different greenhouse gas reduced,
sequestered or avoided.
Evolution of the Carbon Markets
• Global market for compliance carbon credit is
estimated to be worth € 238 Billion, with
annual trading volume estimated to be 10.7
billion giga tons (Gt). The global volume of
carbon credits traded reached 188 Million
tons CO2 eq (tons carbon dioxide equivalent)
in 2020, taking the annual traded value to $
473 Million.
• Compliance markets are created as a result of
any national, regional and/or international
policy or regulatory requirement.
• Western Climate Initiative (WCI) & Regional
Greenhouse Gas Initiative (RGGI)
• Voluntary carbon markets – national and
international – refer to the issuance, buying and
selling of carbon credits, on a voluntary basis.
  voluntary carbon credits
• private entities that develop carbon projects,
or governments that develop programs
certified by carbon standards that generate
emission reductions and/or removals.
 compliance market
• emissions trading systems
• cap-and-trade
• emission/pollution permits, or allowances by
governments (which add up to a total
maximum, or capped, amount)
• EU
• INDIA
 Compliance markets
• Under the EU’s emissions trading system
(ETS) launched in 2005, member countries set
a cap or limit for emissions in different
sectors, such as power, oil, manufacturing,
agriculture, and waste management. This cap
is determined as per the climate targets of
countries and is lowered successively to
reduce emissions.
• China launched the world’s largest ETS in
2021
• estimated to cover around one-seventh of the
global carbon emissions from the burning of
fossil fuels.
• Markets also operate or are under development
in North America, Australia, Japan, South
Korea, Switzerland, and New Zealand.
• Polluters that exceed their permitted
emissions must buy permits from others with
permits available for sale (i.e., trade).
• Clean Development Mechanism (CDM)??
• emission-reduction projects in developing
countries have generated carbon credits used
by industrialized countries to meet part of their
emission reduction targets.
 Paris
Article 6

Carbon Finance
NDC

• Market
Mechanisms

carbon markets can help accelerate the transformation needed, by

effectively putting a price on pollution and creating an economic
incentive for reducing emissions. They can also help generate some
of the vast sums needed to build resilience
• The pace of decarbonization and
adaptation needs to be accelerated and
carbon markets provide an option to offset
the costs of moving away from fossil fuels
and towards a green economic
transition,” said World Bank Senior
Energy Specialist Monali Ranade.
• 83 percent of NDCs state the intent to make
use of international market mechanisms to
reduce greenhouse gas emissions
• ADAPTATION FUND
• Influential Sector
• Energy
• Forest
• Land Use
 Article 6
• gave the green light to a market where
countries can trade carbon
credits generated by the reduction or
removal of greenhouse (GHG) emissions
from the atmosphere -- such as by
switching from fossil fuel to renewable
energy or by increasing or conserving
carbon stocks in ecosystems such as a
forest.
 Pollution
BAU
control

OPTIONS?
Preventiv
Reactive
e
• Baseline scenario targets set an emissions
reduction goal relative to a future “business-
as-usual” (or baseline) scenario — for
example, pledging to reduce 2030 emissions
by 30% relative to business-as-usual.
Project Developer- End Buyer

Apple and Google, airlines, and oil and gas

majors
 Retail Traders
• To link supply and demand, there
are brokers and retail traders, just as
in other commodity markets. Retail
traders purchase large amounts of
credits directly from the supplier,
bundle those credits into portfolios,
ranging from hundreds to thousands
of equivalent tons of CO2, and sell
those bundles to the end buyers,
typically with some commission.
 exchanges
• Singapore based AirCarbon Exchange (ACX).
• The Certified Emission Reductions (CERs) are a unit of
carbon that is reduced or sequestered.
– there is a worldwide demand for projects and activities for
‘carbon’ reduction or fixation
– Many of these projects will be in Developing Countries.
Two main commodities traded in the
carbon market
• Emission allowance
• Project-based emissions reductions

Four different major markets

• > Kyoto Protocol
• > EU Emissions Trading Scheme
• > Canada Greenhouse Gas Offset System
• > Japan (voluntary trading system)
 Purpose
1. to assist developing countries in mitigating
Climate change and achieving sustainable
development
1. (EMISSION REDUCTION)
2. to assist developed countries in achieving
compliance with part of their quantified
emission reduction commitments
(EMISSION ALLOWANCE)
 • Annex 1 countries
EU – 25
Developing CDM
Canada JI Central and
Countries Japan Eastern Europe
Other OECD

Certified Emission Reduction Emission Reduction Units (ERUs)

(CERs)
 Carbon Market

Compliance Market Voluntary Market

CER VER
Compliance markets generate and Voluntary markets generate and
trade green house gas emission trade greenhouse gas emission
reductions known as Certified reductions that are not regulated or
Emission Reductions (CERs) that directly initiated by the Kyoto
are regulated and directly initiated Protocol and known as Verified
under the Kyoto Protocol’s Clean Emission Reductions or (VERs).
Development Mechanism (CDM).

Certified Emission Reduction Verified Emission Reduction

(CERs): Green house gas reduction (VERs): Green house gas
of any CDM project is measured reduction outside Kyoto Protocol is
according to internationally agreed measured according to
methods and are quantified in internationally agreed methods and
standard units called Certified are quantified in standard units
Emission Reductions (CERs). called Verified Emission Reductions
These are expressed in tons of (VERs). These are also expressed
carbon dioxide (CO2) equivalents. in tons of carbon dioxide (CO2)
equivalents.
 CDM Concept- Non working after
Paris
Developing Country
• Many opportunities for
$
projects that reduce
Developed Country emissions eg
• Govt and companies Investment
want to reduce GHG – Forestry planting
emissions – Renewable electricity
– Invest in their own – Energy efficiency
country – Clean transport
– Invest in a project in – Biomass energy
Developing Country
• Project Produces CERs
CERs
 Basic Rules
• Emission reductions from project must be
additional in developing country
• Use of CERs can only supplement emission
reduction at home in developed countries
• CDM projects must:-
– be approved by the host country
– lead to sustainable development in host country
– result in real, measurable and long-term benefits in
terms of climate change
 Types of Projects
• Energy efficiency
– End use improvements
Identify 1 project
– Supply-side improvements in each
• Renewable energy
• Methane reduction eg landfill gas capture
• Fuel switching
• Agriculture (CH4 and N20)
• Industrial processes
• Sequestration/sinks – only afforestation and
reforestation
 BASICS
Additionality and baselines
“A project is eligible if greenhouse gas emissions are reduced below those that
would have occurred in the absence of the project.”

GHG emissions
(tCO2eq) 1. Validation of project design, 2. Verification / Certification
baseline and monitoring plan of emission reductions

Emissions baseline

ADDITIONAL
EMISSION
REDUCTIONS

Emissions after the project

Years
Project implementation
 Additionality

• Reductions in emissions that

• are additional to any
that would occur in the absence of the certified
project
 Baseline Concepts
• The baseline is a measure of emissions that would
have occurred in absence of project
• Used to estimate emission reductions for project –
basis for CERs
– On a project by project basis
• Standard baselines for small scale projects
– 15 MW renewable energy
– 15GWh energy efficiency
 Baseline Methodologies
• 3 main accepted methodologies approved on the
basis of:-
– Status Quo - future emissions would been the same as
current/historic emissions
– Market Conditions - the technology used in the market is
the baseline and market barriers prevent new technology
being adopted
– Best Available Technology - for markets where conditions
are changing, historic emissions are less relevant – assume
emissions for the technology that would have been
installed
 Baseline Examples
Project Baseline Approach Type of CDM
Baseline
3 Micro-hydro The communities did not have Market Conditions
access to electricity, so emission (technology used
reduction based on displacement is the baseline)
of kerosene
Biomass power Current electricity is fossil fuels Status Quo
plant and future additions would be
similar. Current emissions used
as baseline.
Wind Power, This project is displacing the need Best Available
for a new thermal plant. Technology
Emission reductions based on
average emissions of typical
thermal plants in previous 5 years
+ performance in top 20%
 Exercise
•Market Conditions
•(technology used is the baseline)
•Status Quo
•Best Available Technology
 Investment Structures
• Full or partial equity in project
– CER ownership becomes annex to the normal
financing agreement
– Usually investing for more than just CERs
• Financial contribution
– Usually upfront payment and takes ‘rights’ to
CERs as they are produced
– Normally not more than 10% project cost
• Loan
– Company provides loan at concessional rates in
return for CERs eg. payment of interest in CERs
• CER Purchase Agreement
– Company buys CERs as they are produced
– Becomes additional income stream to project
finance
 Choosing a Host Country
what do investors want?
1. Clear Policy
– Willingness for investment in projects
– Transparent and clear processes,
– Quick and smooth government approval
Time, effort and resources to complete deal
2. Secure investor climate
– Political and economically stability
What could occur that could affect investment?
3. Sound Techno-Economic potential
 Case Study
• 3.65 MW micro hydro project Indonesia
• Project offsetting diesel generation – 18,500t
• $9.89m capital cost; $0.4m operating costs
• Project executed by IBEKA a local institute
• 16.5% IRR without CDM; 18.2% w CER @$5
• Investment plan:-
– Up to 70% of project capital through long term loan from financial
institution; rest through equity
– CDM investor options:-
• Long term CER purchase agreement
• Equity (JV partner) + commitment to buy CERs
• Soft loan against realisation of CERs
 Project CYCLE
Project
National Validation &
Design &
Approval Registration
Formulation

Project Verification&
Monitoring
Financing Certification

Issuance of CERs
• Standardized format for PDD – Project Design Document

• A. General description of the project

• B. Setting of the baseline
• C. Duration of the project / Crediting period
• D. Setting of the monitoring plan
• E. Estimation of GHG emission reductions
• F. Environmental impacts
• G. Stakeholders’ comments
• -
• Annex 1: Contact information on participants in the project
• Annex 2: Information regarding Public Funding
• Annex 2: Baseline information
• Annex 3: Monitoring plan
Opportunities identified:
• Bagasse Cogen; 60 - 100 MW
• Waste to Energy; 20 + 45++ MW identified
• Hydro Dam; 50MW
• Wind; Up to 60 MW
• Hydro; Up to 30 MW RoR
• Solar Water Heaters
• Solar PV –small scale
• Green Building Code
Challenges

> Process not worth it for small projects (high

transaction costs);
> Many small projects deliver significant local
sustainable development benefits;
> Small-scale technologies are some of the most
promising for solving the long term problem of
climate change (e.g. solar; wind; fuel cells);
• Size limits for small-scale projects
– > Electricity generation from renewable sources, up to 15
MW.
– > Energy efficiency projects saving, up to 15 GWh p.a.
– > Project reducing emissions up to 15.000 t CO2eq p.a.

• Small-scale projects benefits from simplified rules and

procedures
– > Simplified PDD;
– > 14 pre-approved baseline methodologies
– > Same operational entity may undertake validation and
verification / certification;
– > For small-scale projects, sufficient to demonstrate that
barriers would have led to higher emissions in absence of
CDM.
Renewable energy Waste management
> Wind power > Capturing of landfill methane emissions to
> Solar generate power
> Biomass power > Utilisation of waste and waste water
> Hydro power emissions for generation of energy

Energy efficiency measures

> Boiler and steam efficiency
> Pumps and pumping systems
> Efficient cooling systems Electrical energy saving
> Back pressure turbines 1 kWh = 0.8 ~ 0.9 kg CO2
> etc… Power generation (waste heat / renewable)
1 MW = 4.000 ~ 5.000 t CO2
Cogeneration in industries having both Coal saving
steam and power requirements 1 kg = 1.3 ~ 1.6 kg CO2

Power sector Fuel oil saving

> Induction of new technologies which are 1 litre oil = 3 ~ 3.5 kg CO2
efficient (thermal) NG based power generation
> Reduction in technical T&D losses 1 kWh generation = 0.35 ~ 0.45 kg CO2
1 kg NG burning/saving = 2.4 ~ 2.5 kg CO2
Fuel switching
> From fossil fuel to green fuel like biomass…
Renewable energy Waste management
> Wind power > Capturing of landfill methane emissions to
> Solar generate power
> Biomass power > Utilisation of waste and waste water
> Hydro power emissions for generation of energy

Energy efficiency measures

> Boiler and steam efficiency
> Pumps and pumping systems
> Efficient cooling systems
> Back pressure turbines
> etc…

Cogeneration in industries having both

steam and power requirements

Power sector
> Induction of new technologies which are
efficient (thermal)
> Reduction in technical T&D losses

Fuel switching
> From fossil fuel to green fuel like biomass…
• Project Identification Reduction of methane
• Host Country Approval India/China
• Project Design Societal benefits/NPV
calculations/
• Implementation planning
• Validation DOE
• Registration National Registry
• Issue CER’sCER’s issued & compared
• Verification Executive Board
•
 Carbon funds

Provides Equity
for a carbon
offset project

Offset
project
Credits are sold
to high
polluters,
electricity is sold
to people who
need
 OTC MARKET
• Over the counter market
• Exchanges:
– Chicago climate exchange
– Members who need Cer’s, offset aggregators, offset
providers
– Europe climate exchange

– Baselines are created

– Surplus are banked or trades
– Shortages are purchased
• Allowance based credits
• Offset based credits: RET’s/carbon
sequestration
 Offset aggregators
• Who aggregate the portfolio of offsetting
projects in different parts of the world and
trade them
• Carbon Farmers
• Carbon Green
• Ecosecurities
Project
1

Aggregation of
CER’s by offset
P2 aggregators
Sale of CER’

P3
 Carbon indices
• Track the performance of Carbon market
• Asset managers, Private Banks, Institutional Investors
• Barclays Capital Global Carbon Index
• Tracks the performance of Carbon credits associated
with the GHG credit schemes
• Merrill Lynch launched MLCX Global Carbon dioxide
Emission index
• Dow Jones Indices (CCX)
• Dow Jones/CCX European Carbon Index
 RGGI
• Cap & trade System of US
• Reduce GHG emissions from Power Sector
• 2009; aimed to reduce 10% of the CO@
emitted in power generation by 2018
• RGGI allowances distributed to develop clean
energy technology
 Western Climate Initiative
• Launched in 2007
• Western states and Canadian provinces
• Cap & Trade structure
• 90&% of regions emissions and reduce GHG
emissions by 15% from the 2005 level by 2020
 risks
• Multiple credits
• Administrative and regulatory approvals
• Accurate verification
• additionality
• The Clean Development Mechanism (CDM)
under the Kyoto Protocol was the world’s first
international carbon finance scheme
• Article 12 of the Kyoto Protocol, adopted in
Kyoto in 1997
• companies acquire certified emission reduction
credits when it is confirmed that they have
made investments in energy conservation and
new energy projects in developing countries
 PROJECT DEVELOPERS
• Project developers represent the upstream part
of the market. They set up the projects issuing
carbon credits, which can range from large-
scale, industrial-style projects like a high-
volume hydro plant, to smaller community-
based ones like clean cookstoves.
 AIM OF THE PROJECT
• destroy or manage the direct emissions
resulting from industrial processes
– fugitive emissions management
–  ozone-capture or destruction of ozone-depleting
substances
– wastewater treatment
– Nature-based projects include REDD+ (avoided
deforestation), soil sequestration or afforestation
– tech carbon capture such as direct air capture
 payoffs
• avoiding or removing GHGs
• additional 'co-benefits' and help meet some of
the UN's Sustainable Development Goals
 (SDGs)
 END BUYERS
• downstream market is made up of end buyers:
companies – or even individual consumers –
that have committed to offset part or all of
their GHG emissions
• joining the market as they set their own net-
zero targets or look for a way to hedge against
the financial risks posed by the energy
transition
  RETAIL TRADERS
• Retail traders purchase large amounts of
credits directly from the supplier, bundle
those credits into portfolios, ranging from
hundreds to thousands of equivalent tons of
CO2, and sell those bundles to the end buyers,
typically with some commission.
 BROKERS
• Brokers buy carbon credits from a retailer
trader and market them to an end buyer,
usually with some commission.
  STANDARDS
• Standards are organizations, usually NGOs,
which certify that a particular project meets
its stated objectives and its stated volume of
emissions.
• Standards have a series of methodologies, or
requirements, for each type of carbon project.
For example, a reforestation project will follow
specific rules when calculating the level of
CO2 absorption of the planned forest and
therefore the number of carbon credits it
produces over time.
• A renewable energy project will have a
different set of specific rules to follow when
calculating the benefit in terms of avoided
CO2 emissions and carbon credits generated
over time.
• Standards' certifications also ensure certain
core principles or requirements of carbon
finance are respected
• Additionality: The project should not be legally required, common
practice, or financially attractive in the absence of credit revenues.
• No overestimation: CO2 emissions reduction should match the
number of offset credits issued for the project and should take
account for any unintended GHG emissions caused by the project.
• Permanence: The impact of the GHG emission reduction should
not be at risk of reversal and should result in a permanent drop in
emissions.
• Exclusive claim: Each metric ton of CO2 can only be claimed once
and must include proof of the credit retirement upon project
maturation. A credit becomes an offset at retirement.
• avoidance projects (which avoid emitting
GHGs completely therefore reducing the
volume of GHGs emitted into the atmosphere)
• removal (which remove GHGs directly from
the atmosphere).
• The removal category includes projects
capturing carbon from the atmosphere and
storing it. They can be nature-based, using trees
or soil for example to remove and capture
carbon. Examples include reforestation and
afforestation projects, and wetland management
(forestry and farming). They can also be tech-
based and include technologies like direct air
capture or carbon capture and storage.
• Removal credits tend to trade at a premium to
avoidance credits, not just because of the
higher level of investment required by the
underlying project but because of the high
demand for this type of credits. They are also
believed to be a more powerful tool in the
fight against climate change.
• When the underlying carbon project also
helps to meet some of the UN's SDGs, the
value of a credit from that project to potential
buyers may be higher, and the credit can trade
at a premium to other types of projects.
• price of one carbon credit can vary from a few
cents per metric ton of CO2 emissions to
$15/mtCO2e or even $20/mtCO2e for
afforestation or reforestation projects to $100
or even $300/mtCO2e for tech-based removal
projects such as CCS.