As more and more governments start to regulate their countries emissions, Carbon trading could become the World’s biggest commodity market; UNEP, ecologists and the scientific community have long argued that forests are worth billions, if not trillions of dollars, if their worth can be captured by economic and financial models.
In the efforts to reduce, control and (one day) eliminate harmful
emissions, each member state of the EU currently receives an
annual emission allocation that is then divided between its worst
These companies are then legally obliged to comply with their set
emissions targets. If a company comes in under its set target, it
can sell its excess as “carbon credits” allowance to other
companies that have overshot their targets. If a company exceeds
its permitted levels, it has to pay a penalty and buy credits to make
up the difference.
Right now, with an abundance of carbon credits available, their
price is relatively low. However, with the second phase of the
program, 2008-2012, now in play and a reduced amount of
credits available and ever more stringent emissions targets, prices
are set to rise. When the United States signs the Kyoto agreement
and sets its own guidelines and targets, the price of carbon credits
could potentially explode.
The European Climate Exchange (ECX)
is the leading marketplace
for trading carbon dioxide (CO2) emissions in Europe and
ECX currently trades two types of carbon credits: EU allowances
(EUA’s) and Certified Emission Reductions (CERs).
Trading on ECX began in April 2005, when futures contracts were
launched on European carbon dioxide emissions, known as EU
Allowances, with options on EUAs following in October 2006. Futures
and Options on CERs were introduced in 2008, further cementing
ECX’s position as the industry benchmark for carbon trading globally.
In 2009, two new spot-like contracts were added, the EUA and CER
Daily Futures contracts.
ECX volumes are experiencing tremendous growth. The carbon
market’s total value for 2008 was estimated at 92bn (US$125bn),
more than double the 40bn it was worth in 2007.
ECX carbon contracts are listed for trading on ICE Futures Europe
(the former International Petroleum Exchange). ECX and ICE Futures
Europe have a partnership whereby ECX manages the product
development and marketing of its emissions contracts and ICE lists
those contracts on its electronic trading platform. All contracts are
cleared by ICE Clear Europe, enjoy standardized terms and are
regulated by the UK’s Financial Services Authority (FSA).
Over 100 leading global businesses have signed up for membership
to trade ECX emissions products. In addition, several thousand traders
around the world have access to the ECX emissions market on ICE
Futures Europe via banks and brokers.
ECX is a member of the Climate Exchange Plc group of companies.
Other member companies include the Chicago Climate Exchange
(CCX) and the Chicago Climate Futures Exchange (CCFE). Climate
Exchange Plc (CLE) is listed on the AIM market of the London Stock
Exchange. ECX offices are located in London.
Chicago Climate Exchange (CCX)
operates North America’s
only cap and trade system for all six greenhouse gases, with
global affiliates and projects worldwide.
CCX Members are leaders in greenhouse gas (GHG)
management and represent all sectors of the global economy, as
well as public sector innovators. Reductions achieved through
CCX are the only reductions made in North America through a
legally binding compliance regime, providing independent, third
party verification by the Financial Industry Regulatory Authority
(FINRA, formerly NASD). The founder, Chairman and CEO of CCX
is economist and financial innovator Dr. Richard L. Sandor, who
was named a Hero of the Planet by Time Magazine in 2002 for
founding CCX, and in 2007 as the “father of carbon trading.”
CCX emitting Members make a voluntary but legally binding
commitment to meet annual GHG emission reduction targets.
Those who reduce below the targets have surplus allowances to
sell or bank; those who emit above the targets comply by
purchasing CCX Carbon Financial Instrument® (CFI®) contracts.
CFI Contracts, the CCX Tradable Commodity
traded on CCX is the CFI contract, each of which represents 100
metric tons of CO2 equivalent. CFI contracts are comprised
of Exchange Allowances and Exchange Offsets. Exchange
Allowances are issued to emitting Members in accordance with
their emission baseline and the CCX Emission Reduction
Schedule. Exchange Offsets are generated by qualifying offset
Clean Energy and Carbon offset projects represent a potential for explosive profits of earth saving proportions.
No-one can predict with any certainty what the energy mix will
look like in 2030, let alone 2050. Fossil fuel generation will
undoubtedly still be a substantial part of the equation. However, it
is clear that any future low carbon energy infrastructure will have
to include a significant proportion of energy generated from
renewable sources – most scenarios showing the proportion of
primary energy having to reach 40-50% by 2050. Some of the
leading technology contenders are emerging and, in some cases
have begun to build significant experience.
In this section, we highlight eight renewable energy technologies
which look particularly promising in terms of two factors:
abatement potential and current state of competitiveness. In the
next section we will look at some of the other technologies –
principally around the digital/smart grid, energy efficiency, power
storage and carbon capture and sequestration – which will be
required if low carbon energy is to fulfill its full potential within
the future energy mix.
The most mature of the renewable energy sectors, the onshore
wind industry saw 21GW built in 2007, bringing installed capacity
to over 100GW. In Germany, Spain and Denmark wind power now
supplies 3%, 11% and 19% respectively of total electricity
production during the course of the year, and in Denmark up to
43% of the country’s electricity demand at times of peak wind
supply. Electricity from onshore wind can be generated at prices
of 9-13 c/kWh, making it only 32% more expensive than natural
gas CCGT, even in the absence of a carbon price.
When the best sites for onshore wind have been snapped up, the
next place to look for large quantities of renewable energy is
offshore. Offshore wind offers enormous potential, with stronger
more predictable winds and almost unlimited space for turbines.
Planning permission can be easier to obtain than onshore, farms
can be built at scales impossible on land, and the availability of
space is almost unlimited if deep waters are mastered. At present,
the cost of electricity from offshore wind is high – around 16-21
c/kWh – but this will come down rapidly as more project
experience is gained.
Solar Photovoltaic Power
Photovoltaic (PV) technology has made very rapid strides in the
past four years, in terms of reducing the cost of crystalline silicon
(its main component) and commercializing thin film technology,
with investment volume growing to US$ 50 billion in 2007-2008.
Although there has been a bottleneck in the production of solargrade
silicon, new capacity is coming on line and costs are set to
drop rapidly from US$ 4/W to US$ 2.60/W by the end of 2009,
making unsubsidized solar PV generation costs comparable with
daytime peak retail electricity prices in many sunny parts of the
Solar Thermal Electricity Generation
While PV is ideal for smaller projects and integrated into buildings, the technology of
choice for big solar plants in the world’s deserts looks set to be Solar Thermal
Electricity Generation (STEG): concentrating the heat of the sun to generate steam,
which can be used in conventional and highly efficient turbines. There are relatively
few projects up and running yet, but with costs already in the 24-30 c/kWh range,
this technology is shaping up to be a part of the solution in the sunniest parts of the
Municipal Solid Waste-to-Energy (MSW)
The use of municipal solid waste to generate energy is increasing, led by the EU countries.
Waste has traditionally been deposited in landfill sites, a practice which is becoming
increasingly expensive and constrained by shortage of sites. Landfill also creates methane,
a powerful greenhouse gas. Waste that cannot be recycled, however, can be used to
generate electricity by a variety of technologies at costs starting at 3 to 10 c/kWh.
Government support for the development of MSW plants is increasing, for example through
the Private Finance Initiative (PFI) in the United Kingdom. The US MSW sector is also
seeing a resurgence, with specialist operators planning to build several new plants.
The period 2004-2006 saw US investment in biofuels soar, with investors pouring
US$ 9.2 billion into the sector. But most of this flowed into corn-based ethanol, which
is more expensive to produce than sugar-based ethanol, subject to volatile prices and
controversial because its feedstock is a food staple around the world. By contrast,
Brazilian sugar cane-based ethanol is competitive with oil at US$ 40 per barrel; it
grows well in many southern hemisphere countries (and far from the Amazon); and
there is no shortage of land to increase production substantially without jeopardizing
Cellulosic and Next Generation Biofuels
The argument over food vs fuel is an emotive one. In most regions, there is sufficient land
to increase biofuels production from the current 1% of transport fuel to 3% or even 5%
without impacting on food availability (as long as we can quickly return to increasing annual
agricultural productivity). But after that the only way to increase production of biofuels will
be to source feedstock that does not compete with food. Luckily, the cost of producing
biofuels from agricultural waste through cellulosic conversion and algae is coming down
rapidly, and the future fuel system is likely to include a proportion of fuels from these
sources. Future technologies could include artificial photosynthesis and synthetic genomics.
Geothermal power is particularly attractive as a renewable energy source because it
can be used as predictable base-load power in a way that wind and solar power cannot
be. Until now, geothermal power has been used only in limited regions, but a raft of
new approaches has helped make it economically viable across a wider area. In
addition, all countries can exploit geothermal resources for ground source heat pumps
or district heating, if not for large-scale electricity generation.
It is important to emphasize that these are by no means the only clean energy sectors
of promise. There are many other emerging technologies – a wide range of biomass
based power generation approaches, wave and tidal power, ground source heat
pumps, ocean thermal and osmotic power – each of which has substantial potential
and its fervent admirers. Nuclear power is also set for a renaissance in many countries
around the world. Nuclear energy’s share of total electricity production has remained
steady at around 16% since the 1980s, when 218 reactors were built around the
world. However, nuclear power will clearly be part of any future energy system,
although its contribution will be limited by issues of cost, storage, safety and public
resistance. We do not consider it in detail in this paper.
Carbon Markets: an immediate necessity
In summary, the long-term outlook for carbon remains bullish as
momentum towards a network of national and regional schemes
remains strong. In a short space of time, carbon credits are
beginning to provide an economic rationale for the large-scale
roll-out of renewable energy, commercial carbon capture and sequestration projects.
Perhaps the biggest problem the carbon market presents to investors – other than its sheer complexity – is its apparently uncertain future. The Kyoto Protocol in its current form lasts only
until 2012. Two processes are under way, working to develop a successor regime: one involving those nations that have ratified Kyoto, and a second, the so-called Bali roadmap, which includes the US.
The December 2008 Poznan negotiating session, which took place after the US election but before the Inauguration of President Obama, produced little of substance, although this was
not surprising. Issues debated included the adoption of emissions targets for large developing countries (India and China) –although this was firmly rejected, the structure of the CDM, the
inclusion of credits from avoided deforestation and carbon capture
and sequestration and, of course, the potential commitment by the US. President Obama has signified that such a commitment will be forthcoming under his leadership. Negotiations in Copenhagen were seen as the last chance to set a solution in place before the current Kyoto arrangements expire
in 2012, although missing that deadline does not mean the process is dead.
Whatever happened in Copenhagen, the future of the EU ETS and
CDM is secure. The EU has shown a strong commitment to climate goals in general – most recently passing the climate package which sets out its target of reducing emissions by 20%
by 2020, and by 30% if other nations join in – and to the EU ETS
in particular. It will also continue allow CDM credits to be used in trading of local carbon reductions. New Carbon Finance’s central forecast for the price of credits in Phase II of the EU ETS is for an increase from the current US$ 21 per tone to US$ 40 per
tone in 2012. Beyond 2012 prices will continue to rise as carbon caps bite more deeply in the run-up to 2020 and beyond, and easy sources of credits are exhausted.
Early Stage investment into reforestation may well reap huge rewards for investors, and help save our planet.