Carbon Trading
Carbon Story Environmental externalities of industrial production & development – market based mitigation strategy n The instrument is a negative commodity – valuation is on destruction of the underlying i. e pollution / emission n Production System n Ø The atmosphere's capacity to absorb the pollutant gases is measured, divided into units, and traded amongst various market players
Market growth rate Value in bn USD 60 50 40 30 20 10 0 2005 2006 2007
Global Position - Trading Schemes
International Schemes n KYOTO PROTOCOL (United Nations) Launched: 2005 Ø Mandatory for 37 rich countries Ø Target: 5. 2% reduction in 1990 emission level by 2008 -2012 Ø Contains three sub-schemes to help signatories meet targets Ø v Clean Development Mechanism (CDM): Rich countries can invest in clean energy projects in developing nations v Joint Implementation (JI): Rich countries can invest in clean energy projects in former communist countries v Assigned Amount Units (AAUs): Signatories can trade surplus emissions rights amongst themselves First commitment period expires in 2012, governments scrambling to negotiate a successor agreement. n EU ETS - European Union Emissions Trading Scheme Launched: 2005 (Phase I: 2005 -2007, Phase 2: 2008 -2012, Phase 3: 20132020) Ø Mandatory for 27 nations in EU Ø Covers around half of all EU emissions Ø Target: Reduce EU ETS emissions by 21% by 2020 compared to 2005 levels Worth $50 billion in 2007 Ø
Emergence of Carbon as an Asset Class: Summary n Kyoto Protocol acknowledges carbon as a commodity Ø Ø Ø Ø Ø Global Carbon Market transacts billions of dollars worth of business EU demonstrates success of Emissions Trading CDM CERs creates new tradable products in Europe (secondary CERs, futures, options, swap, insured product) Dynamic Linkages between prices of EUAs and CERs analysed and reported Settling time for fungibility among AAUs, EUAs, ERUs and CERs Connectivity issues between National Registries and International Transaction Log impacts regional (within EU) and global trading Carbon traders and brokers dominate transactions EU Utilities are the major participants in trading carbon EU Phase II expects stringent allocation and more auction
Trading interest n n n n Compliance/portfolio trading Third party services for industrial customers / merchant activities Hedging Price discovery/proprietary trading Long Term investments Cross Commodity Trading Carbon neutralization of retail products (power /gas) and servicing offset initiatives
Trading Instruments n n n Forwards Futures Options Indices Swaps Bonds
Exchanges n Specialised exchanges have come over with futures and options contracts for catering emission market demands: Ø NYMEX – Green Exchange CERs v EUAs v Ø NYSE – Bluenext CERs v EUAs Other Majors are: 1. EUREX- EEX 2. EXAAA 3. Nordpool 4. CCX v Ø ECX (on Intercontinental Exchange - ICE platform) CERs v EUAs v
Indices n n Ø Global Carbon Index (BGCI) v LAUNCH: Dec 6, 2007 WEIGHTINGS: 80 percent EUAs (ECX) 20 percent CERs (ECX) v Greenhouse Emissions Index v BARCLAYS CAPITAL Ø UBS LAUNCH: Feb 6, 2008 WEIGHTINGS: 80 percent EUAs (ECX) 20 percent CERs (Nord Pool) v n MERRILL LYNCH Ø n MLCX Global CO 2 Emissions Index v LAUNCH: March 7, 2008 WEIGHTINGS: 71 percent EUAs (ECX) 29 percent CERs (broker Quotes) SOCIETE GENERALE Ø SGI-orbeo Carbon Credit Index v LAUNCH: March 14, 2008 WEIGHTINGS: 50 percent EUAs (ECX) 50 percent CERs (ECX) v v
MARKET OUTLOOK
Trends in International Carbon trade n Liquidity centre – Europe n Review of success: Ø Ø Ø Compliance driven market; penalty of Euro 100 on default Instrument is issued before hand so ample availability for trade – approx. One bn EUAs are issued for each year Minimal risk in terms of quality and delivery issues (Process is much simplified and infrastructure is well integrated) Major liquidity providers in financial and commodity space participate in the trade More awareness as major industries are affected
Contd. . n Globally Ø Banks and other Financial institutions play a very critical role in the development of these markets Ø Complex technical details but necessary understanding price indicators Ø High correlation between carbon and energy instruments Ø Keen interest by Institutional players (Banks, Mutual funds and lately Pension and hedge funds also)
OTC and Exchanges n n n Last year OTC volumes significantly outweighed exchanges, though this trend is on the downswing March-April 2008 saw OTC volumes accounting for 69% of total allowance trade, or 126. 2 Mt. CO 2 e Most liquid contract—DEC 08 EUAs— 66% of the overall market was still traded via OTC brokers In the secondary s. CER market, the OTC market share increased to 84% of overall CER trades in the last month, according to LEBA and ECX data Market share of exchange should continue to see rapid growth
Developing Country Perspective India -unilateralism on projects development and banks CERs and hence the hot spot for exchange based trading n China –strongly supports bilateral transactions; discourage speculative trading n Rest of Asia : not keen in pursuing exchanges based trading due to lack of projects development and hence supply constraints n Brazil –initiated auction of issued CERs guaranteed by World Bank n
FUTURE PROMISES
Outlook n Emergence of the US market US federal scheme to be the largest in the world (4 -5 bn allowances) Ø Federal scheme will gradually absorb state markets (e. g, RGGI) and voluntary schemes Ø n Market deepening in Europe Increasing ―churn rate (number of times each asset is traded) Ø Broadening of market scope and depth Ø n Other markets are smaller, but potentially attractive Ø n Australia, New Zealand, Canada Growing market share of exchanges at expense of OTC market
Europe n EU ETS confirmed until 2020 Linked phases create a continuous market 2008 -2020 Ø More auctioning, centralized allocation in phase III Ø n Expansion in scope EEA countries (Norway, Iceland, Liechtenstein) and Switzerland Ø Aviation under a separate scheme from 2010? Ø Other sectors, gases (aluminum, fertilizer) in phase III Ø n Part of a broader EU climate / energy package 20% renewable energy target Ø 20% energy efficiency target Ø 20% overall emission reduction target Ø
North America n US state-level initiatives lead Regional Greenhouse Gas Initiative (RGGI) Ø Western US Initiative Ø California AB 32 Ø n US federal level catching up Lieberman-Warner Climate Security Act Ø Before the Senate in H 1 2008 Ø Federal scheme now likely by 2003 -2015 Ø n Canada Ø Intensity targets for large emitters
Asia Pacific n New Zealand (NZ ETS) Starts trading in summer 2008 with forestry Ø Covering all emissions by 2013 (industrial processes by 2010) Ø n Australia (AETS) Starts trading in 2011 Ø Covering >70% of emissions (ex. Agriculture, forestry, fugitive emissions) Ø n Japan—Focus on voluntary schemes (JVETS)
CER market n CDM is a comparative advantage for Asian exchanges 75% of the CDM pipeline is in Asia Ø Particularly China (34%), India (28%) Ø n Secondary CERs -the fastest-growing carbon asset in 2007 Ø n Trading volumes up from US$ 0. 5 bn (2006) to US$ 5. 5 bn (2007) Is there scope for exchange-traded primary CERs? Large underlying asset base of ca. 1. 6 bn t. CO 2 Ø But contracts differ project-by-project (country, sector risk) Ø Need for standardisation Ø
About NCDEX
Our Shareholders Institution Share Domain Expertise NABARD 15 % Apex bank for agricultural lending NSE 15 % Largest stock exchange in India. Highest volume in single stock futures in world. LIC 15 % Largest life insurance company in India CRISIL 12% India’s first & largest credit rating agency. Now a Standard & Poor company IFFCO 12% Largest farmer cooperative with affiliation of 36, 000 cooperatives PNB 8% Large public sector bank with strong rural reach specially in North India Canara Bank 8% Large public sector bank with strong rural reach specially in South India Goldman Sachs 7% Global Expertise in commodity markets Intercontinental Exchange* 8% 6 th largest commodity futures exchange in the world *Acquired from ICICI Bank - 46% held by public sector and balance by other institutions, NSE & IFFCO hold 24% - No private shareholding
Profile 56 (42 agri, 2 bullion, 1 CER Products Members Exchange 3 polymers, 2 energy, 6 metals 900 Terminals ~20, 000 in ~700 centres Delivery centres 800 with 1 mn t capacity architecture is vast and dynamic DPs 66 Clearing banks 12 Weather stations ~400
Awareness n ice tio Pr ina em ss from markets Warehousing & Logistics W St eath at io er ns to structured e ric P ot ing Sp Poll Unstructured Di Shifting Ed Ce uca rti tio fic n at & io n NCDEX as a Catalyst
Strategic Partners Goldman Sachs ICE Global DCE TGE BPCL Partners spread GAIL Business across different domains BBA CIRCOT Grading IARI FCI Warehousing CRIDA Punjab Marfed
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