CONFIDENTIAL AND PROPRIETARY Overview of the California Carbon Market Presented by Randy Lack Founder amp Chief Marketing Officer ELEMENT MARKETS INTRODUCTION US Emissions House of the Year 2010 ID: 236552
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Slide1
September 2011
CONFIDENTIAL AND PROPRIETARY
Overview of the California Carbon Market
Presented by:
Randy Lack
Founder & Chief Marketing OfficerSlide2
ELEMENT MARKETS INTRODUCTION - US Emissions House of the Year - 2010
Business Units
Greenhouse Gas (GHG) and Emissions Services
Credit Marketing
GHG Offset Projects
Asset Management
Credit Aggregation
Credit Monetization
Methane (Landfills, Coal Mines, Agriculture)
Industrial Gases (N20 & ODS)
Forestry
Renewable Energy Group
Credit Marketing
Biogas Development
Launched in 2005, Element Markets has become the largest integrated environmental credit marketing and project development company in North America
Marketing Compliance Solutions
Project Types
Leading marketer of environmental commodities in the US with a focus on Emissions, GHG, and Renewable Energy Trading and is the largest account manager in CAR.
Transacted over $700,000,000 in environmental credits since inception in 2005
Has retired over 500,000 tonnes of CAR offsets voluntarily for clients in the last 12 months
EM is one of the largest developers of biogas projects in the US and owns the largest Anaerobic Digestion Project in North America that produceSlide3
BackgroundIn December 2010, the California Air Resources Board approved California’s proposed cap and trade regulations, a key part of the AB32 / The Global Warming Solution Act of 2006
In late June, CARB Chairwomen Mary Nichols announced that California would delay the compliance obligation for affected entities under AB32 for one year
Beginning in 2013, the regulations will cover GHG emissions from electric generation facilities, industrial emitters, and fuel suppliers, and require them to reduce emissions to 1990 levels by 2020 The program will be implemented over 3 phases or compliance periods: 2013-2014 (Phase I); 2015-2017 (Phase II); 2018-2020 (Phase III)
Covered Entities
Phase I (2013-2014): Electric Generation Units, Industrial Stationary Sources (including Carbon Dioxide Suppliers) and Importers of Electricity from specified sources with emissions over 25,000 tpy
, as measured in any single year from 2008-2011. Also included is electricity from unspecified source – threshold is 0 MWhs
Phase II and Phase III (2015-2017, 2018-2020): Liquid fuel suppliers and suppliers of natural gas with emissions >25,000 tpy. Also included are importers of electricity – threshold is 0 (tons or MWhs) for all sources of electricity
AB32 PROGRAM OVERVIEWSlide4
Effects of Reduced Emissions on an Entity’s Compliance Obligation
Entities are in the program until their emissions are below 25,000 tpy for an entire compliance period or if they shut down the facility
If a facility triggers the threshold in any year, they must remain in the program until the end of the current compliance period at a minimumNote that entities can opt into the program and be eligible to receive free allocations; they can subsequently opt out after a compliance period Compliance Instruments
Allowances issued by ARBAllowances / Offsets from programs linked to California (e.g. Western Climate Initiative states)
Offset credits issued by ARB (including Early Action offsets)Sectoral-based Offset Credits
AB32 PROGRAM OVERVIEWSlide5
AUCTION FORMAT
Auction
Allowance ReserveFrequency
Quarterly Auction
3 weeks after each quarterly auctionAvailable for sale
Current vintage and current
vintage + 3 years 121.8 million tons (from future vintages and through borrowing from future years)
available at start of program
Format
Single-round, sealed-bid, uniform price format
Fixed
Price Sale -
Tiers of Allowances, with minimum purchase price for each tier; Participants
submit bids for purchase of allowances from each tier
Who can participate
Anyone
Covered Entities under AB32, possibly covered entities from linked programsFloor Price (2013)Min. price of $10 (constant $2009)($10 for 2015 vintage)$40 (Tier I)
$45 (Tier II)$50 (Tier III)Floor Prices (2014+)Increases every year by CPI+ 5%
Increases every year by CPI+ 5%
First Auctions – August 15, 2012 and November 14, 2012
For 2013 allowancesSlide6
Based upon the current offset % allowed for compliance the estimated maximum amount of offsets used for each Phase is as follows:
Phase I – 25.8 millionPhase II - 91.8 million
Phase III – 83.1 millionTo date, only 5.1 million tonnes of ARB eligible offset credits have been issued under the Climate Action ReserveOnly 4.2 million tonnes of those credits have not been retired and are still available
Offset supply right now is expected to be low compared to the maximum amount that can be usedAt least until additional protocols are approved by ARB
OFFSETSSlide7
Early OffsetsThe program allows the use of offsets from the Climate Action Reserve (CAR) for certain projects types (remaining CRTs)
Urban forestry – 0 tonnes
Forestry – ~2 million tonnesDomestic ODS – ~1.9 million tonnesLivestock (Ag.) – ~292,000 tonnesRequirements
Project State Date - prior to 1/1/2013Project Location - United States
Eligible Credits - 1/1/2005 - 12/31/2014In order to be exchanged for ARB credits, the projects that earned the offset credits must be re-verified or checked in some manner by an ARB-accredited verifier
Process is still being defined, but does pose some risk on transference
Other Potential Project Types (LFG, N2O, CMM, International ODS, etc.)If these projects were eventually accepted by ARB, they could allow older vintages
For example N2O – could consider credits before they are required to capture under AB 32 (1/1/2012)
OFFSETS – EARLY ACTION OFFSETSSlide8
Once the program starts, ARB will implement its General Offsets programProject Types – For right now, same 4 protocols are eligible with new protocols considered in 2012
Urban forestry, Forestry, Domestic ODS, LivestockStart Date
Post December 31, 2006LocationProjects to be located in the United States, Canada, and Mexico.
Eligible Offset RegistriesExternal registries can apply to be eligible ARB registries
The registries can administer offset project registration, verification, etcApproval of an Offset Project Registry is valid for 10 years
An approved Offset Project Registry must use the ARB-approved Compliance Offset Protocols
OFFSETS – POST 2012 OFFSETSSlide9
California Carbon Allowances (CCA): AB32 Allowances for 2013 Delivery
Auction floor price of $10The program must be initiated and allowances trading for product to existHistorical lifetime range of CCAs has been $11.50 - $24.25/ CCACurrently valued at $18/ CCA
California Carbon Offsets (CCO): AB32 Guaranteed Offsets for 2013 DeliveryCCOs are offsets issued by CARBFalls under the 8% of allowable offset usage limitThe program must be initiated and allowances trading for product to existCurrently valued at $12.00/ tonne
AB32 CAR Approved Offsets: One of the four approved CAR offset protocols Offsets from one of the 4 CAR protocols that approved by CARB
Falls under the 8% offset usage limitThese offsets bear re-verification risk by CARBCurrently valued at $10.50/ tonne
PRODUCTS AND PRICINGSlide10
Superior Court CaseARB is moving forward with accepting its updated CEQA analysis to fulfill the outcome of the court case
In the meantime, a stay is in place allowing ARB staff to continue implementationOffsets
ARB has stated that they plan to issue new protocols for adoption by early 2013Expectation is 1-2 protocols to be adopted and it will be interesting to see which protocols are selected with the offset supply concerns that exist by compliance entitiesLinkage with Other Programs
The potential effect of other programs linking with AB 32 is unknownQuebec, Ontario and British Columbia all hope to initiate compliance in 2013 as well
Still uncertain if other states/provinces link with California, but could have large impacts on the market
GOING FORWARDSlide11
The implementation of a state wide cap and trade program has the potential to have significant impacts on underlying commodities prices including natural gas and power
Under AB32 will likely have a considerable effect on operating expenditures and business yields
As the details of the program are still evolving it is important to be proactive and put into place internal and external controls to mitigate the affects of this program to your organizationIn California’s current economic state and increasing regulatory environment, it is important to work with a firm that will assist you indentifying compliance options, project investment opportunities, energy efficiency measures, and that understands the overall costs of the program in order to enhance value and optimize your portfolio
CONCLUSIONSlide12
ELEMENT MARKETS
Randy Lack, Chief Marketing Officer
Element
Markets,
LLC
3555 Timmons Lane, Suite 900
Houston, TX 77027Office:
281-207-7213
rlack@elementmarkets.com
www.elementmarkets.com