An Introduction to Carbon Credits

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  • 8/6/2019 An Introduction to Carbon Credits

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    eco2-trading for the Future

    An introduction toCarbon Credits

  • 8/6/2019 An Introduction to Carbon Credits

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    MH-Carbon www.mhcarbon.com [email protected] T 020 7929 6141

    For risk warning and other important notes see back cover.

    Carbon Offsetting

    environment, the Kyoto Protocol of 1997,since signed by 187 countries, introducedvarious measures and an infrastructure hasevolved which, mainly through the mediaof Carbon Credits, rewards organisations

    making a valuable contribution to reducingcarbon emissions and charges those whosecarbon footprint is considered excessive.The dramatic growth of the Carbon Creditmarket to date shows just how muchpotential exists in a market which is onlynow beginning to be embraced by playersas significant as America and China

    Regulations, mostly subsequent to the KyotoProtocol, and, quite separately, a demandemanating from a radical change in publicmood have created two distinct markets forcarbon offsets.

    Many scientists, naturalists and well-established mainstream ecologicalfoundations believe our world is beingthreatened by global warming and theeffects of CO2 emissions and acceptance

    of this concept has become morewidespread in recent years. Even in thesesafe and relatively temperate shores,notable changes have occurred. The fivemonths from May to September 2009 werethe hottest in the UK since records began.

    These scientists believe that reductions incarbon and greenhouse gas emissions areessential if we are to minimise our impacton the environment.

    In response to the impact that industrialisednations are having on the global

    In the Compliance Market, companies,governments, or other entities buy carbonoffsets and indeed have to do so in orderto comply with post-Kyoto regulations onthe total amount of carbon dioxide they are

    allowed to emit.In the Voluntary Market, governments,companies and individuals all choose topurchase carbon offsets to mitigate theirown greenhouse gas emissions be theyfrom transport, power consumption or someother function. They are not legally obligedto do so.

    It is important to understand the differencebetween these two markets.

    Introduction

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    How it Works

    Each carboncredit is equivalent

    to one tonne ofCO

    2

    is regularly checked and verified by independentreview boards appointed for each country. Each

    such project goes through rigorous testing andanalysis to determine the resultant reduction ofcarbon emission or the amount of carbon it isin fact to remove from the atmosphere. Oncevalidated and registered, the credits generatedby a project are known as Certified EmissionsReductions (CERs).

    The Voluntary Market

    In the Voluntary Market, governments, companiesand individuals all purchase carbon offsets tomitigate their own greenhouse gas emissions bethey from transport, power consumption or someother function.

    There are broadly two reasons why theseorganisations and individuals choose to buyvoluntary credits. Firstly they may be doing todemonstrate Corporate Social Responsibility andto establish their brand as being sympathetic tomajor global issues. Secondly they may considerthat emissions regulations will become moregenerally applicable in future and it is only amatter of time before they will be involved in acompliance scheme anyway.

    Additionally they may consider the Voluntarymarket to be attractive financially and see goodreason to hold a portfolio of credits.

    Though Voluntary Emissions Reductions (VERs)

    are verified by a third party, they do not carry

    The Compliance Market

    We have seen that the opportunity to tradecarbon credits was created by the UnitedNations Kyoto Protocol, a legally bindingdocument committing countries to achievingreductions in the emission of greenhouse gases(GHGs). The treaty created a number of suchtargets that nations needed to meet in orderto safeguard the environment. Collectively,industrial nations agreed to reduce their GHGsby an average of 5.2% from 1990 levels, themajor impact of this to be borne by the mostdeveloped countries. The government of eachKyoto signatory country is now responsible forensuring that it and companies operating thereare reducing GHG emissions.

    To facilitate this, the Kyoto Protocol established amedium, known as a carbon credit. Each carboncredit permits emissions of one tonne of CO2.If a company has emissions over its allowance,then this entails a cost. Conversely, companiesable to stay under their allowance receive creditswhich can be traded on exchanges.

    Additionally, companies creating projects, sayin developing countries, which actively reduceGHG emissions become eligible for these carboncredits and then can raise funds, by selling them,perhaps to a company exceeding its allowance,on an exchange.

    Credits generated for the compliance market

    must come from a high standard project which

    the costs associated with Certified EmissionsReductions (CERs), which are subject to much

    more stringent regulation, pushing up the price.This means that individuals and companiescan reduce their emissions in a more efficientand cost effective way. Despite there beingless regulation, VERs are still subject to astandard and emissions reductions must be real,measurable, permanent, additional to what isalready being done, and independently verified.

    The voluntary market may at present be smallerthan the compliance market. However its growthis led not by public policy but by the privatesector which is evolving its own infrastructure oforganisations such as the Carbon Trust to advisecompanies on achieving carbon neutrality. Withmajor companies such as Tesco, The Co-op, and

    Marks and Spencer aiming for carbon neutrality,it is the opinion of many active in these marketsis that the wider scope and more competitivepricing of the voluntary market mean that it has astrong potential to outstrip the mature market sizeof the compliance regime.

    This is where our clients can come in. They canchoose to buy carbon credits emanating fromprojects which reduce CO2 emissions. In timethey may wish to sell them on to a companyaiming for carbon neutrality.

    Though MH-Carbon is active in both types ofmarket for these reasons it specialises in thevoluntary market.

    United Nations Framework Convention on Climate Change, 2010

    Location of CDM Projects (%)

    Philipines (1.76%)

    22.32%

    39.70%

    15.88%

    China

    India

    Other

    Republic of Korea (1.85%)

    Malaysia and Indonesia (5.62%)

    Mexico (5.28%)

    Brazil (7.60%)

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    Afforestation and reforestation

    Afforestation refers to the process of establishinga forest on land that has never been a forest,

    or has not been one for a considerable periodof time. Reforestation refers to restockingexisting forests and woodlands which have beendepleted. This is especially important in regionssuch as South America where logging and otherenvironmental destruction are widespread.Projects such as these have the added benefitof safeguarding the habitat of hundreds ofspecies of animals which rely on forest andrainforest for survival.

    Wastewater Treatment

    Wastewater treatment facilities have significantimpact on reducing the environmental effects ofvarious industrial processes.

    Industries which use innovation and technologyto reduce this environmental impact are suitablefor significant credits based on CO2 reduction.

    Methane Capture

    Many process and industries produceenvironmentally harmful methane, from landfillsites to mines and farms.

    Methane capture systems are a cost effectiveway of tackling climate change and they useproven technologies to address global warming.Methane fired power plants are already in use,turning the waste into energy. Projects such asthese produce carbon credits.

    Agriculture

    A number of developing countries have largeagricultural sectors but not the financialresources to make them environmentallysustainable. Projects which reduce animalwaste such as methane, one of the mostdangerous GHGs, and change agriculturalprocess techniques to methods which are moreenvironmentally friendly, can achieve significantreductions in carbon emission.

    Mining and Metal production

    These projects involve changing productionprocesses to achieve significant reductionsin carbon emissions and make them moreenvironmentally-friendly.

    Transport

    This refers to the process of switchingtransportation to less carbon intensive means orintroducing new technologies to improve vehiclefuel efficiency.

    Projects reducing emissionsThese are sample categories of environmentalprojects which reduce carbon emissions and maygenerate carbon credits:

    Renewable energy sources

    Sources of renewable energy, such as a windfarm or hydro-electricity plant, generatesignificant reductions in GHG emissions andcan gain high levels of carbon credits. This typeof projects has the added benefit of providingpower as well as reducing emissions.

    Capture of fugitive emission and waste handling anddisposal

    Developing and installing technology which

    captures emissions and waste and then eitherdisposes of it in an environmentally friendly wayor reuses it, results in a reduction in GHGs. Thisis the second biggest project type, as factoriesproduce large amounts of waste are able toreuse it. For example, rice factories produce hugeamounts of waste rice husks that can easily beburned for fuel and are carbon-free.

    Manufacturing and chemical industries

    These projects involve changing manufacturingprocesses to make them more environmentally-friendly. Changes to industrial processes canmake significant reductions in carbon emissions.

    United Nations Framework Convention on Climate Change, 2010

    Each carboncredit is equivalent

    to one tonne ofCO

    2

    CDM Project Distribution by Type (%)

    Manufacturing

    Other (0.85%)

    Chemical industries(2.39%)

    62.61%Renewable

    energy sources

    17.00%Waste handlingand disposal

    Capture offugitive emission

    4.93%

    4.54%Agriculture

    4.82%

    Mining (0.96%)Transport (0.11%)

    Energy demand (0.96%)

    Metal production (0.29%)

    Af/Re-forestation (0.54%)

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    The project must also conform to the sustainabledevelopment requirements in the host countryand must not have an unacceptable negativeimpact on other elements of the environment asa by-product. The host country must also have

    a project board which verifies potential CDMprojects and this is the point of contact for theproject developer in that country.

    CDM projects also have to conform to the conceptof additionality. This means that all reductions inGHGs must be additional to what would haveoccurred without the project. Incorrect assessmentof additionality is the main reason for projectsubmissions to be held up or rejected completely(UNFCC, CDM Guidelines, 2008).

    The project development cycle below outlines theusual steps a project will go through in order to

    be registered and start receiving credits.

    How Emission Reduction Projects AreProcessedThe overall process implemented by the KyotoProtocol to encourage emission reducing projects

    is known as the Clean Development Mechanism(CDM) and its various stages are outlined here.These stages are applicable to projects whichwill be eligible for the compliance market. Theprocess for the voluntary market may not involveevery stage.

    There are a number of other project requirementsfor CDM projects, which must be met in order toqualify as a credit generating option.

    The project needs to be undertaken in a countrywhich has signed and ratified the Kyoto Protocol.This provides a good deal of variety but it doesexclude projects from the United States as,currently, they have not ratified the Protocol.

    CDM project development cycle

    UNFCCC, 2010

    Identification of project and development of project concept code by project developer

    Development of Project Design Document (PDD)

    Project description

    Select baseline approach and assess additionality

    Set baseline emission level and crediting period

    Calculate net emission reductions

    Develop a monitoring plan

    Assess environmental impacts

    Invite local stakeholders for comments

    Host country approval

    Submission of the PDD

    Make PDD publicly available for 30 days

    Validation of project

    Submission of validation reports and PDD by operational entity

    Registration with the CDM

    Project implementation and monitoring by the project developer

    Verification and certification by the operational entity

    Possible review by the CDM Executive Board

    Issuance of CERs to project developers

    CDM Executive Board (EB)Supervises the CDM, processesregistration requests, developsguidelines, and issues CERs.

    Designated Operating EntitiesIndependent third parties which actas auditors for the project. They arecertified by the EB, to check and validatethe Project Design Document (PDD,a technical document describing theproject).

    BuyersTo raise finance, project developersmay sell to buyers. They are involved byforward-buying CERs at a lower pricebut with more risk, or opting to take anequity stake in the underlying project.These CERs can be sold on later.

    Project DevelopersThe company which develops andoperates the CDM project. These caninclude:

    Private sector companies Governmental bodies NGOs Financial institutions.

    Designated NationalAuthorities (DNA)Each country involved in the CDM has

    a DNA. The authority is responsiblefor granting approval to local projects,which have fulfilled national criteria forsustainable development and with agood chance of succeeding at eventualregistration. They are a focal point forthe project developers. The UNFCCCmaintains a list of DNAs.

    A

    B

    C

    D

    E

    Main parties involved

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    UNFCCC, 2009

    Countries buying carbon credits - 2010/11

    The market: pricing and tradingposition of industrialised countries and whetherthey are buyers of credits. It demonstrates that

    most of Western Europe, Australia and the USAare net buyers of credits.

    There are a number of reasons behind thepurchase of carbon credits:

    Market Prospects

    Many, active in carbon markets, feel that, overtime, prices will rise.

    Each carbon offset not only helps theenvironment but is an asset that can be bought

    and sold. This additionally presents financialopportunities for companies, governments and,importantly, individuals.

    Once a project has been accredited and issuedcredits certified to a recognised standard, itsassociated credits can be traded on a suitableexchange.

    On the compliance side alone, official researchand projections from the United NationsFramework Convention for Climate Changeindicate that the trading schemes are operatingstrongly and that demand for credits is exceedingsupply by approximately 249.6 Mt of CO2 everyyear (UNFCC, 2009). The map below shows the

    Risk-diversication

    A number of buyers are purchasing different typesof credits under all of the trading mechanisms inorder to spread risk.

    Good publicity

    Some buyers, particularly large companies andgovernments, are purchasing credits in order

    to demonstrate to the public and the electoratethat they are contributing to sustainabledevelopment and are concerned about the futureof the global environment.

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    schemes such as these that will lead to growth inthe voluntary carbon market which could interestour clients. BA charge for each tonne of carbonoffset on their flights, at approximately 11.70

    per credit. Clear Offset, one of the largest offsetcompanies, charge 15.49, and Pure Offsettingcharge 10.90. On the EU Emissions TradingScheme (EU ETS), spot prices for EUA creditsare currently e13.58. The prices of voluntarycredits are usually considerably lower than theseand many, actively involved in the carbon creditmarkets, consider that this shows a clear direction

    for the voluntary carbon market.

    Exchanges and funds

    Of the current CER trading platforms, theEuropean Union Emissions Trading Scheme(EU ETS) is by far the largest and it continues todominate the global carbon market.

    Year-end 2008 transactions valued at US$92billion represented an 87% year-on-year growthover 2007 with over three billion contracts traded(World Bank, State and Trends of the CarbonMarket, 2009).

    The options market is used as a tool on theexchange to hedge against volatility and riskand has continued to grow briskly. Optionsvolumes on the London-based European ClimateExchange (ECX) increased five-fold between2007 and 2008, and have continued overallgrowth since, if at a less startling rate thussolidifying its place as the global carbon marketleader (World Bank, State and Trends of the

    Carbon Market, 2009).

    To take advantage of this, a number ofmajor finance houses have set up funds topurchase carbon credits. There are many majorinstitutional carbon funds, including the WorldBank Prototype Carbon Fund which raisedUS$180m from governments and the privatesector in 2002, and Dutch-based Carboncredits.nl, which raised US$250m in the same year(UNFCC, 2009).

    broker might be attractive to both buyers andsellers. Buyers get the benefit of convenience,quality and range of access to projects, whilesellers get the benefit of the broad network of

    buyers this exposes them to.

    Primary and Secondary PricesFollowing the global economic contraction,prices of compliance credits fell dramaticallyfrom a peak ofe28.73 in July 2008 to just undere10 in early 2009 (World Bank, State and Trendsof the Carbon Market, 2009) as buyers concernsover a lack of finance available to completeprojects reached a peak.

    In mid-June 2009, a recovery began in Creditprices of the 2009 vintage (this describing the

    year in which the offset took place) despitequestion marks over short-term supply. In thesecondary market (CER), which is the tradingof already issued CERs, futures contracts forDecember 2009 closed at e12.68 on theEuropean Climate Exchange on 3rd August 2009- a rise of almost 20% from mid-June of that year(Carbon Positive, August 2009).

    The voluntary VER OTC market has seen largegrowth as sales volumes have increased year onyear and the market has become more liquid.

    As well as individuals, companies around theworld have entered the market, offsetting theirown emissions and offering the chance to theircustomers to offset theirs too. BP has enteredinto an emissions reduction programme,implementing a trading system across all itsbusiness units. It emphasises high quality creditswith strict verification requirements.This programme constitutes a part of BPs overallstrategic involvement in clean technologies andrenewables.

    TransAlta, a large Canadian coal fired utility, hasannounced its intention to become net carbonneutral by 2020 - an initiative which wouldsignify the need to purchase millions of tons ofemissions reductions each year.

    Airlines such as BA also offer their customersthe opportunity to purchase credits to offset the

    emissions generated by their flights, and it is

    How are credit prices established?Credits are quoted in Euros (e) or US Dollars(US$) for sale on the global market. Factorsaffecting credit prices include:

    Market price

    In the majority of cases, the value of compliancecredits is benchmarked to the European UnionEmission Allowance (EUA), the most establishedtrading system. It is therefore important to havea strong understanding of the underlying marketdynamics of the EUA.

    Credit

    Price negotiations can often depend on the creditworthiness of buyers and sellers e.g. projectsoperated by developing countries may offer

    lower prices as credit is more risky. Alternatively,projects run in a developing country but operatedfrom the UK often sell for higher prices.

    Terms and conditions of sale

    If the seller offers delivery guarantees, usesestablished methodology or bears the cost ofdeveloping the documentation then premiumprices can be negotiated.

    Risk

    The level of risk can significantly alter theprice. This may include sovereign risk - is theproject located in a politically unstable country?Or Quality risk - is the project developed to

    standards such as the CDM Gold Standard?And delivery risk - are there guarantees if theproject fails to generate the expected volumes ofemissions reductions.

    Stage of project development

    The more developed a project, in terms ofapprovals and documentation as well as physicalconstruction, the less likely it is, in theory, to failto generate credits. Therefore prices tend to beset higher.

    Access to market

    Generally, a wider access to market will resultin higher bids, due to the competitive nature ofbuyers. For this reason, going through a credit

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    Selling Carbon CreditsVERsAs distinct from the CER and compliancemarket, which is geared to comply with theKyoto Protocol, there is also a voluntary market,which is based on trading Voluntary EmissionReductions (VERs).

    This market recognises activities which reduceGHGs and issues credits in the form of VERs.These can be sold to companies or individualswishing to voluntarily reduce their carbonfootprint.

    VERs can be generated from projects which:

    are either based in a country that has notratified the Kyoto Protocol (e.g. USA) or

    does not have the infrastructure to supportthe more elaborate requirements of thesystem required for Compliance Credits

    have not yet been registered under thatsystem

    fall outside the scope of that system are too small to warrant the costs of being

    certified as a Compliance Credit are specifically developed for the voluntary

    market

    VERs are developed according to a number of

    different standards and must be verified by athird party. The voluntary market does not haveto comply with the Kyoto Protocol but there is,nevertheless, a standard which voluntary creditsneed to attain. The best known and respectedof these is the Gold Standard which denotesbest practice methodology and is a high qualitylabel for carbon credits applicable to both thevoluntary and compliance (Kyoto) markets.

    Supporters of the Gold Standard are committedto promoting sustainable development throughcarbon offset markets that are characterised bytransparency, sustainability and equality of accessfor all market participants.

    The voluntary market is growing. In 2008, 123.4million metric tonnes of CO2E were transacted- a near doubling of the 2007 volume. Thereappears to have been a shift in the VER market tomore structured growth facilitated greatly by the

    development of intermediaries such as the Bankof New York which created a registry for VERs inJune 2006.

    2008 2009

    Volume(Mt CO

    2E)

    Value(US$m)

    Volume(Mt CO

    2E)

    Value(US$m)

    EU ETS 3,093 100,526 6,326 118,474

    NSW 31 183 34 117

    Chicago Climate Exchange 69 309 41 50

    Total 3,193 101.018 6,401 118,641

    Carbon offset credits tradings schemes and exchanges

    Volume and value as of end 2009

    Ecosystem Market Place, New Carbon Finance, 2010

    Buyers looking to sell their CERs to generatea surplus need to look at the various optionsavailable and weigh up the merits. Firstly it ismost important to understand the buyer.

    The preferences of buyers are not always justbased on level of risk and price. Other facts mayalso be relevant.

    For those who purchase CERs direct from theproject developer, there are two main structures.

    Equity stakes, where the buyer receives revenuefrom the proceeds of the project, including CERrevenues or the CERs themselves, can be agreed.

    CERsProjects can also generate a secure revenuestream through the sale of forward contracts,where payment is made by the buyer uponagreed delivery of CERs on agreed dates.This provides higher risk but much lower pricesand the potential for stronger price growth oncethe emission reductions are generated and issued(TFSGreen, 2009).

    Prices generated take into account how earlyin the development of the project the buyerbecomes involved and therefore how much riskis being taken on. There are also added benefitsthat can be built into the price such as social

    benefits in terms of job creation, energy securityand poverty reduction as well as any deliveryguarantees. The buyer may also pay a premiumwhere all documentation is already completedand paid for by the project developer.

    The market is growing. In 2008, 123.4 millionmetric tonnes of CO2E were transacted.

    The market isgrowing. In 2008,

    123.4 million metrictones of CO2E were

    transacted

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    Reforestation Costa RicaCosta Rica is now considered a politicallystable country and was one of the first to sellcarbon credits. A massive 30% of the countryis designated as nature reserves and thegovernment has announced its intention tobecome one of the worlds first carbon neutralcountries by 2021. This makes it an ideal placefor a reforestation project.

    Project developers buy rainforest land fromprivate owners in the country and then contractthird parties to measure CO2 levels absorbed byreplanting and avoiding deforestation.One company in particular is selling units worth200 VERs per year for US$12,000. These

    VERs can then be sold through a managementcompany which takes a 5% fee. This essentiallymeans buyers are forward purchasing VERs forUS$16 each. When the market develops, theseare projected to sell for more.

    HotspotsWind farm TurkeyChoosing a location for a wind farm is extremelydifficult and needs to be undertaken by apower company with the appropriate expertiseas a huge number of variables can affect thesuitability of the site.

    Plans to install a wind power plant in Izmir,Turkey, connected to the national grid willsignificantly reduce GHGs and help to reduceTurkeys energy deficit.

    The project is planned to generate approximately797,745 tCO2e emission reductions over 7years and it was funded by the project developerforward by selling VERs.

    Hydro electricity HondurasWith an annual GDP per capita of onlyUS$3,000, Honduras is one of the poorestcountries in the Western Hemisphere. It is a netimporter of electricity with the contribution offossil-fuelled power plants towards total electricityproduction growing from 37% to 60% between2000 and 2003. Meanwhile, in the same period,the contribution of hydroelectricity decreasedfrom 63% to 40%.

    A project developer working with a majorrenewable energy supplier in Honduras, hascreated a hydro-electricity plant in the region.

    As well as creating jobs and increasing economicdevelopment in the region, it is projected toproduce 35,660 tCO2e in reductions every yearover a contract spanning 15 years

    The low start-up costs involved in this projectenhance the prospect of a growth in value of the

    associated carbon credits.

    Reforestation UruguayUruguay also has high potential for areforestation projects. Close to 8% of theland area is forest and, due to the countrysappropriate climate, there is the potential formuch more.

    It has recently adopted a Forestry Lawbenefiting companies in this activity, showingthe government is keen to help this sector. Thisinvolves low start-up costs coupled with taxbenefits.

    A recent study by the Organisation for EconomicCo-operation and Development found thatfunding carbon reduction projects in Uruguayhas the potential to absorb 23% of its total GHGemissions by 2030.

    Agricultural Management - UruguayIn Uruguay, 50.2% of countrys GHG emissionscome from the agricultural sector, in particular,methane from livestock. Uruguay emitsapproximately 1.6 tonnes of CO2 per capita,every year, and the potential to reduce this is yetto be explored. The country has only 3 registeredcredit generating projects and none of these isin agriculture, despite this making the largestcontribution to Uruguays GHG emissions. Thiscreates huge potential for carbon credit buyers.Past studies have shown that, as well as reducingGHG emissions, crop yields are increased asclimate temperatures reduce and this is an addedagricultural benefit.

    The most popular way of managing the methaneis by installing anaerobic digestion systemsat large livestock farms. By working with aUruguayan company with expertise in thisspecialised field, project developers and buyers

    of associated carbon credits can prosper.

    Biomass IndiaAs a major rice producer, there is potential for abiomass project in India. Rice production createsa by-product of rice husks. These are commonlyburnt in landfill sites and give off environmentallydamaging methane. Rice production firmsworking with local power companies are creatinga processing plant enabling the burning of thehusks to generate energy so this will offset theemissions. It is estimated that one processingplant attached to a rice production factory would

    reduce emissions by a total of 322,688 tonnesof CO2. This is an average of 46,098 creditsevery year. The price of credits associated with aproject such as this is likely to rise. .

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    will not reach a satisfactory outcome, and theemission will be decreased by 1.7 billion tons in2020 (-20%).

    These concerns are generally considered to be

    minimal. As long as the environment remains apriority, companies, countries and governmentswill all continue to be on the lookout for ways toreduce their carbon output and buyers of carboncredits will have the potential to benefit.

    The other issue is over-supply. If countries arevery successful in cutting their emissions, thenumber of credits will increase, and prices willfall. However, this is unlikely to happen as longas emission caps are tightened regularly.

    The Kyoto Protocol is set to apply in its currentphase from 2008 to 2012. Until 2012, themarket is expected to stay relatively stable. Aconcern is that we cannot know how the carbonmarket place will change post-2012 followingthe Protocol review and the move into its secondcommitment period. All the signs are that thecaps will be further tightened. The EU ETS iscalling for further sectors to be included in theagreement and has outlined a number of post-2012 scenarios. Under one such scenario, theinternational climate negotiations at UN level

    Carbon trading is extremely new and manycompanies, suppliers and buyers are still comingto terms with its possibilities.

    The main concern is that compliance carbon

    credits are essentially a legal construct, whoseexistence is dependent on government intent. Ifgovernments no longer support the capping ofemissions, the market will in effect cease.

    Rulings on allocations also have a strongimpact. If the European Commission allocatesemission allowances which are too high, then thescheme would in effect be pointless. However,it is commonly felt that its plan is to graduallydecrease the allocations, boosting demand forcarbon credits and tightening their supply, so thisrisk is perceived to be minimal.

    Concerns

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    Prices of carbon credits are indicative only and are based on current exchange rates. Carbon Credit prices can go down as well as up. It may be difficult toobtain true market process for VERs as many are transacted "over the counter" and as such values may vary from reseller to reseller. Currently VER's are illiquidin comparison to the compliance EUA credit market. There may be a big difference between the buying and selling price of carbon credits. Trading in carboncredits involves risk. You may get back less than your total outlay and in extreme cases make no recovery. However you may also benefit from any possible increasein the value of the carbon credits.

    Any growth shown or suggested is a projection only and cannot be guaranteed.

    MH Carbon deals in the physical delivery of carbon credits only operating mainly in the Voluntary credit market. MH-Carbon use carbon credits from recognisedand independently verified projects to ensure the emission reductions are effective.

    Whist efforts have been made to ensure that the data and other information in this report are accurate, no warranty as such can be given and, additionally,information applicable to the carbon credit markets is subject to change.

    The purpose of this report is solely to provide introductory information and some background to the specific topic. It is not intended for use directly or indirectlyin market forecasting or for making decisions.

    MH-Carbon and/or its directors, agents or employees accept no responsibility or liability for any losses or damages incurred as a result of use of this report.The content of this document and other MH-C promotional material, printed and electronic, should not be construed as MH-Carbon (the "Company") makingan offer to sell, nor an invitation to subscribe for or invest in the Company.

    No representation or warranty, expressed or implied, is or will be made as to the accuracy or completeness of the information including all projections oropinions contained in the text and no liability is accepted by the Company and/or its directors, agents or employees. By accepting delivery of the content therecipient agrees not to reproduce and/or distribute this whole or in part. Recipients are advised to consult their own advisers and consider for themselves thefinancial, legal and other consequences of any purchase before doing so. MH-Carbon is not regulated by the Financial Service Authority and recipients arereminded of the risk factors described in the content and in our Terms of business.