Learn to Trade Carbon

Learn to Trade Carbon

Introduction
Carbon Credits are a way of using investment markets to ethically and sustainably reduce and offset carbon emissions, as well as generate profit. Carbon credits are being traded all around the world by companies to meet environmental emissions targets, individuals looking to decrease their personal emissions, and investors looking to profit from the carbon market boom whilst helping the environment. This is now big business. According to the latest report from the World Bank, the global carbon trading market is now worth a phenomenal US$144 billion. So what are carbon credits and how can they help? Each carbon credit represents one tonne of CO2; creating a way of monetarising greenhouse gases. Each carbon credit bought puts money into a project that is verified to reduce greenhouse gas emissions, and can then be sold to companies who need to reduce emissions to comply with global targets, or to individuals who want to reduce their emissions. The opportunity to trade carbon credits was created by the United Nations Kyoto Protocol, a legally binding document committing countries to efforts for the reduction of greenhouse gases (GHGs). The treaty created a number of emission reduction targets that nations needed to meet to safeguard the environment. Collectively, industrial nations agreed to reduce their GHGs by 5.2% from 1990 levels. On an individual country basis, this ranges from an 8% reduction in the European Union to 6% for Japan, 0% for Russia, and an increase permitted of 8% for Australia and 10% for Iceland. These countries are now responsible for ensuring that companies, and the governments themselves, are reducing GHGs. To facilitate this, the Kyoto Protocol gave GHGs a value, known as a carbon credit. Each carbon credit is equivalent to one tonne of CO2. If a company has emissions over its allowance, then this entails a cost. Conversely, companies able to stay under this allowance receive credits which can be traded on exchanges for their value. Thirdly, projects in developing countries which actively reduce GHG emissions become eligible for these carbon credits and by selling on an exchange can raise funds. Private investors, through a broker, can get access to these credits on exchanges, and trade rising demand for credits to make a profit and to channel funds into these projects, helping them grow.

Carbonex www.carbon-ex.lu info@carbon-ex.lu 0845 519 6142

Trading in carbon credits involves risk, you may get back less than the total sum invested and in extreme cases lose your total investment. However you may also benefit from any possible upside to the investment. Any returns shown or suggested are a projection only and cannot be guaranteed.

About Carbon Credits

There are three main types of carbon offsets.

VERs
VERs are generated by projects verified by a third party, but without the costs associated with CERs, which are a type of carbon credit subject to much more stringent regulation, pushing up the price. This means that individuals and companies can reduce their emissions in a more efficient and cost effective way. Despite there being less regulation, VERs are still subject to a standard, and emissions reductions must be real, measurable, permanent, additional to what is already being done, and independently verified. VERs trade over the counter and on some exchanges such as the Chicago Climate Exchange (CCX). This is giving structure to the market, and helping it grow. The VER market is growing. In 2008, 123.4 million metric tones of CO2 were transacted, a near doubling of the 2007 volume. VER prices then increased by 20% in 2009, and the market was valued at US$705 million, with annual growth of 15% projected. General market opinion is that the wider scope of the voluntary market, and growth led by the private sector, not public policy, means that it has a strong potential to outstrip the mature market size of the compliance regime. By the end of 2013, the total value transacted in the carbon markets is projected to reach US$669 billion, making it one of the biggest growth stories in investment (Carbon Emissions Trading Markets Worldwide, 2010).

Gold Standard and VCS

Gold Standard credits are offered for sale in markets established by the Kyoto Protocol as well as the voluntary offset markets. They are certified by the Gold Standard Foundation, a non-profit organization that has trademarked the Gold Standard Label, which is today internationallyrecognised as the leading indicator of quality in carbon markets. Supporters of the Gold Standard are committed to promoting sustainable development through carbon offset markets that are characterized by transparency and equality of access for all market participants. It was designed to ensure that emissions reductions that back up carbon credits are not only real and verifiable, but that the project activities make a measurable impact on sustainable and social development in local communities. The Gold Standard logo is a trademarked brand that represents premium quality in the carbon market. The VCS (Voluntary Carbon Standard) Program provides a robust global standard and program for approval of credible voluntary offsets. VCS offsets must be real (have happened), additional (beyond business-as-usual activities), measurable, permanent (not temporarily displace emissions), independently verified and unique (not used more than once to offset emissions).

CERs
Certified Emission Reductions (CERs) were created under the Kyoto Protocols Clean Development Mechanism (CDM) to allow industrialised countries to invest in emission reducing projects in developing nations. Projects which register under the CDM must undergo a strict regulatory procedure under the Kyoto Protocol, and are then available for governments and companies to purchase to comply with the protocol. CER credits are highly regulated and must meet a number of criteria as defined by the CDM and the Kyoto Protocol. The emissions reductions must be real, measurable, permanent, additional to what is already being done, and independently verified.

EUAs
These are the emission allowances given to participants in the EU ETS and are traded in a secondary market on the European Climate Exchange (ECX). One EUA gives the holder the right to emit one tonne of CO2. Approximately 2.3bn EUAs have been issued annually to industries covered under the EU ETS.

Transaction volume by standard

12% CCX 31% CAR

7% Gold Stantard

ACR (4%) ISO-14064 (2.1%) Social Carbon (1.6%) CCB (1.3%) Internal (4%) Other (2.4%)

By the end of 2013, the total value transacted in the carbon markets is projected to reach US$669 billion

35% VCS OTC, 2009

Carbonex www.carbon-ex.lu info@carbon-ex.lu 0845 519 6142

Trading in carbon credits involves risk, you may get back less than the total sum invested and in extreme cases lose your total investment. However you may also benefit from any possible upside to the investment. Any returns shown or suggested are a projection only and cannot be guaranteed.

Demand
A wide variety of organisations as well as individuals create the demand for carbon offsets. Categories of purchasers generally fall into: Business (for retirement) Business for profit (for resale) Business for profit (for compliance) Governments (for retirement or compliance) NGOs/non-profit organizations (for retirement) NGOs/non-profit organizations (for resale) Individuals (for retirement) Individuals (for resale)

A wide variety of organisations as well as individuals create the demand for carbon offsets.

How it Works
Suppliers in the carbon market include retailers selling offsets online, conservation organizations, developers of potential Clean Development Mechanism (CDM) projects with credits that cannot currently be sold into the CDM market, project developers primarily interested in generating VERs, aggregators of credits and brokers. Depending on their position in the supply chain, sellers can be categorised into four major types: 1. Project Developers: Develop GHG emissions-reduction projects such as waste treatment, biofuel manufacture, green technology development and much more. They may sell the credits to aggregators, retailers, or final customers. Wholesalers: Only sell offsets in bulk and often have ownership of a portfolio of credits. 3. 3. Retailers: Sell small amounts of credits to individuals or organizations, usually online, and have ownership of a portfolio of credits. Brokers: Facilitate transactions between sellers and buyers. Organizations are increasingly vertically integrated and frequently operate in more than one of these categories. Many suppliers are also engaged in business activities other than selling VERs. For example, most major brokerage firms dealing in VERs also transact in regulated markets or in other emissions markets as well as in energy markets. 4.

2.

Transaction volume by type of buyer

23% Business-for-profit (pre-compliance)

Non-profit (retirement) 6% Individuals (retirement) 3% Non-profit (resale) 1% Govt (retirement) 0.7% Other 2%

26% Business-for-profit (resale)

38% Business-for-profit (retirement)

OTC, 2009

Carbonex www.carbon-ex.lu info@carbon-ex.lu 0845 519 6142

Trading in carbon credits involves risk, you may get back less than the total sum invested and in extreme cases lose your total investment. However you may also benefit from any possible upside to the investment. Any returns shown or suggested are a projection only and cannot be guaranteed.

Emissions Exchanges
Credits are traded though a number of exchanges and marketplaces, such as the European Climate Exchange (ECX), which has seen trading volumes soar, with 2009 seeing an 82% increase year-on-year, surpassing 5 billion tones of CO2e equivalent to 68 billion. Over 100 global businesses are direct members including Barclays, BP Newedge, E.ON UK, , Fortis, Goldman Sachs, Morgan Stanley and Shell, in addition to several thousand traders around the world with access via clearing members. As well as the ECX, the European Union Emissions Trading Scheme (EU ETS) is the largest multi-national emissions trading scheme in the world, and a major pillar of EU climate policy. The EU ETS is a scheme which monitors European companys carbon emissions, and creates a market for them to buy and sell credits to meet emissions targets. And its not just in Europe. The US is actively setting up its own trading scheme, the US ETS, to create a more efficient marketplace for growth, and there is already the Chicago Climate Exchange (CCX), which trades voluntary credits from 400 members including Ford, DuPont and Motorola, driving global growth further.

Summary
Effective carbon traders will have: A good broker, with access to emissions exchanges High-quality credits, preferably Gold Standard or VCS A trading strategy Access to carbon market news, or a broker who keeps them up to date

The volatility in the carbon markets has created a number of opportunities to profit for investors, and as the market continues to grow many analysts believe it will continue to offer more opportunities.

Carbonex www.carbon-ex.lu info@carbon-ex.lu 0845 519 6142

Trading in carbon credits involves risk, you may get back less than the total sum invested and in extreme cases lose your total investment. However you may also benefit from any possible upside to the investment. Any returns shown or suggested are a projection only and cannot be guaranteed.

Trading in carbon credits involves risk, you may get back less than the total sum invested and in extreme cases lose your total investment. However you may also benefit from any possible upside to the investment. Any returns shown or suggested are a projection only and cannot be guaranteed. Every effort has been made to ensure that the data and other information in this report is accurate, however information within the investment markets is subject to change from time to time. The purpose of this report is to provide information, analysis and a background to the specific topic. It is not intended for use directly or indirectly in market forecasting or for making investment decisions. Carbon-ex accepts no responsibility or liability for any losses or damages incurred as a result of improper use of this report. Please remember that investment carries risk. Whilst we undertake all due diligence and research to present accurate scenarios and investment opportunities, the figures are based on todays market value and predicted growth rates and as such can not be guaranteed.