Carbon Trading
Carbon Story
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Environmental externalities of industrial
production & development – market based
mitigation strategy
The instrument is a negative commodity –
valuation is on destruction of the underlying i.e
pollution / emission
Production System
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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
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KYOTO PROTOCOL (United Nations)
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Launched: 2005
Mandatory for 37 rich countries
Target: 5.2% reduction in 1990 emission level by 2008-2012
Contains three sub-schemes to help signatories meet targets
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Clean Development Mechanism (CDM): Rich countries can invest in clean energy projects
in developing nations
Joint Implementation (JI): Rich countries can invest in clean energy projects in former
communist countries
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.
EU ETS - European Union Emissions Trading Scheme
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Launched: 2005 (Phase I: 2005-2007, Phase 2: 2008-2012, Phase 3: 20132020)
Mandatory for 27 nations in EU
Covers around half of all EU emissions
Target: Reduce EU ETS emissions by 21% by 2020 compared to 2005 levels
Worth $50 billion in 2007
Emergence of Carbon as an Asset Class:
Summary
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Kyoto Protocol acknowledges carbon as a commodity
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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
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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
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Forwards
Futures
Options
Indices
Swaps
Bonds
Exchanges
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Specialised exchanges have come over with
futures and options contracts for catering
emission market demands:
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NYMEX – Green Exchange
CERs
 EUAs
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NYSE – Bluenext
CERs
 EUAs
Other Majors are:
1. EUREX- EEX
2. EXAAA
3. Nordpool
4. CCX
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ECX (on Intercontinental Exchange - ICE platform)
CERs
 EUAs
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Indices
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BARCLAYS CAPITAL
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Global Carbon Index
(BGCI)
LAUNCH: Dec 6, 2007
WEIGHTINGS: 80 percent EUAs (ECX)
20 percent CERs (ECX)
UBS
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SOCIETE GENERALE
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SGI-orbeo Carbon Credit
Index
LAUNCH: March 14, 2008
WEIGHTINGS: 50 percent EUAs (ECX)
50 percent CERs (ECX)
LAUNCH: Feb 6, 2008
WEIGHTINGS: 80 percent EUAs (ECX)
20 percent CERs (Nord Pool)
MERRILL LYNCH
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Greenhouse Emissions Index
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MLCX Global CO2 Emissions
Index
LAUNCH: March 7, 2008
WEIGHTINGS: 71 percent EUAs (ECX)
29 percent CERs (broker Quotes)
MARKET OUTLOOK
Trends in International Carbon trade
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Liquidity centre – Europe
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Review of success:
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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..
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Globally
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Banks and other Financial institutions play a very critical
role in the development of these markets
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Complex technical details but necessary understanding
price indicators
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High correlation between carbon and energy instruments
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Keen interest by Institutional players (Banks, Mutual
funds and lately Pension and hedge funds also)
OTC and Exchanges
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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 MtCO2e
Most liquid contract—DEC08 EUAs—66% of the overall
market was still traded via OTC brokers
In the secondary sCER 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
 China –strongly supports bilateral transactions;
discourage speculative trading
 Rest of Asia : not keen in pursuing exchanges
based trading due to lack of projects
development and hence supply constraints
 Brazil –initiated auction of issued CERs
guaranteed by World Bank
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FUTURE PROMISES
Outlook
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Emergence of the US market
US federal scheme to be the largest in the world (4-5 bn
allowances)
 Federal scheme will gradually absorb state markets (e.g,
RGGI) and voluntary schemes
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Market deepening in Europe
Increasing ―churn rate (number of times each asset is traded)
 Broadening of market scope and depth
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Other markets are smaller, but potentially attractive
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Australia, New Zealand, Canada
Growing market share of exchanges at expense of OTC
market
Europe
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EU ETS confirmed until 2020
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Linked phases create a continuous market 2008 -2020
More auctioning, centralized allocation in phase III
Expansion in scope
EEA countries (Norway, Iceland, Liechtenstein) and
Switzerland
 Aviation under a separate scheme from 2010?
 Other sectors, gases (aluminum, fertilizer) in phase III
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Part of a broader EU climate / energy package
20% renewable energy target
 20% energy efficiency target
 20% overall emission reduction target
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North America
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US state-level initiatives lead
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US federal level catching up
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Regional Greenhouse Gas Initiative (RGGI)
Western US Initiative
California AB 32
Lieberman-Warner Climate Security Act
Before the Senate in H1 2008
Federal scheme now likely by 2003-2015
Canada
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Intensity targets for large emitters
Asia Pacific
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New Zealand (NZ ETS)
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Australia (AETS)
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Starts trading in summer 2008 with forestry
Covering all emissions by 2013 (industrial processes
by 2010)
Starts trading in 2011
Covering >70% of emissions (ex. Agriculture,
forestry, fugitive emissions)
Japan—Focus on voluntary schemes (JVETS)
CER market
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CDM is a comparative advantage for Asian
exchanges
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Secondary CERs -the fastest-growing carbon
asset in 2007
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75% of the CDM pipeline is in Asia
Particularly China (34%), India (28%)
Trading volumes up from US$ 0.5 bn (2006) to US$
5.5 bn (2007)
Is there scope for exchange-traded primary
CERs?
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Large underlying asset base of ca. 1.6 bn tCO2
But contracts differ project-by-project (country,
sector risk)
Need for standardisation
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%
6th 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
Products
Exchange
vast
and dynamic
3 polymers, 2 energy, 6 metals
Members
900
Terminals
~20,000 in ~700 centres
Delivery centres
800 with 1 mn t capacity
architecture
is
56 (42 agri, 2 bullion, 1 CER
DPs
66
Clearing banks
12
Weather stations
~400
NCDEX as a Catalyst
Awareness
Shifting
from
Unstructured
to structured
markets
Warehousing
& Logistics
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
THANK YOU