Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc Market and Methodologies Meet Ocean Fertilization Till Neeff – EcoSecurities

Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc

Market and Methodologies Meet Ocean FertilizationTill Neeff – EcoSecurities

Ocean Iron Fertilization Symposium

26-27 Septemer 2007, Woods Hole

C A R B O N C R E D I T S — O R I G I N A T I O N T O C O M M E R C I A L I S A T I O N

Carbon credits - origination to commercialisation© 2007 EcoSecurities plc

EcoSecurities’ perspective

EcoSecurities was founded in 1997 and is world’s leading creator, acquirer and trader of carbon credits in the global carbon market.

• We have 456 projects in the CDM project cycle

• Current portfolio of >185m tCO2e

• First projects to achieve registration and issuance of credits

• Offices in 21 countries

• Global Consulting Services Group focuses on corporate strategy, GHG markets, and projects


Presentation overview

• Key market factors– Voluntary markets and regulatory markets

– Where does OIF fit?

• Carbon credit projects and OIF– Key components of methodologies

– Methodological challenges in OIF

• Conclusions


The market context

Market demand for carbon offsets

Scattered voluntary demand

Kyoto markets

Non-Kyoto regulatory markets

Prominent voluntary GHG initiatives

Voluntary cap-and-trade


Regulatory markets

• Carbon credits are compliance instruments: carbon as a commodity

• Kyoto markets: CDM, EU ETS– In 2006, turned over 1.6bn tCO2e, of those 0.5bn tCO2e project based

– Until 2012, post-2012 being negotiated

• Other regulatory markets: RGGI, AB32 (CCAR), NSW, etc.– In 2006, turned over <40m tCO2e, growth expected

– Emerging and thus still being defined

• OIF does not currently access any regulatory markets– Ownership of carbon credits for Kyoto parties only

– The ocean isn’t part of the territory of a Kyoto party

– Need to modify post-2012 ownership rules to allow for OIF credits


Voluntary markets

• Voluntary offsetting for reasons of CSR and individual life-style choices

– “Story” behind the project

• Market performance in 2006

– Voluntary markets turned over 24m tCO2e, grow exponentially

– No rigid procedural, methodological, legal framework

• Voluntary markets are small compared to OIF

– One OIF cruise can generate Millions of tCO2e


Importance of the public image for accessing markets

• Public image and market access

– Demand on the voluntary carbon markets is partially driven by public image

– Future inclusion into (new) regulatory markets will consider the public image

• OIF does not have much to offer on the socio-economic or environmental front but delivers high-quality carbon credits

• Analogue example of HFC projects under the CDM

– Offsets are high quality (additional, measurable, etc.)

– Huge amounts of carbon credits

– Simple, low cost, and perception of huge profits

receive criticism on largely emotional terms

receive lower prices


Market bottom lines for OIF

• Will regulated markets grow post-2012?– US participation in the UNFCCC framework?– Will OIF qualify for participation in future regulated markets?

Credit ownership a major issue for OIF

• Will growth of voluntary markets continue?– Will we see a public backlash against offsets generally?– Can voluntary markets absorb tons from OIF?– How will the public perceive OIF?

• Implications for the business model of project developers– Access to markets uncertain– Market size and prices uncertain– Market demand for OIF uncertain

• The OIF sector needs to take a strategic attitude– Public image is critical– Policy dimension of gaining access to regulatory markets


Key components of methodologies for GHG projects

Baseline and additionality

Permanence

Leakage Monitoring

Validation and Verification


Complexity of methodologies

• CDM turned out quite rigorous

– Cumbersome approval procedure

– Methodology process as a political tool

• Chance to be more simplistic for OIF

Average time to final decision from the date of initial methodology submission

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

1 3 5 7 9 11 13 15 17 19

Submission Round

Day

s to

Fin

al D

ecis

ion

Rejection Approval


Additionality

The project is not Business as Usual:

- Project overcomes barriers

- Risk-related barriers:

- first-of-a-kind project

- unproven technology

- country risk

- Technological barriers

- Investment barrier

- Financial additionality

- Compare financial returns of a project with a benchmark

- Carbon-credit cash flow increases the project return

- Additionality in OIF not complicated

Required return

threshold

Projectreturn w/o

carbon credits

Projectreturn w/

carbon credits

Carbon creditreturn

Gap b/wactual and required

return


Project baselines

0

2

4

6

8

10

12

14

1 2 3 4 5 6 7 8

Carbon stock

time

project scenario

baseline scenario


Leakage

• Leakage are emissions outside the project boundary that affect the project’s carbon benefit

• Leakage hard to measure because often indirect via markets

• Methodological ways to deal with leakage

– Measure

– Limit applicability scope

– Discount conservatively

• Leakage sources in OIF

– Ship

– Production of iron

– Dust storm after fertilization event

– Mixing with iron-rich water after fertilization event


Permanence

• Sinks and sources of GHGs

– Emission reductions: fugitive gases, fossil fuels, etc.

– Carbon storage: planting forests, OIF

• Emission reductions generally considered “permanent”

• Carbon storage not per se permanent

– Risk of carbon reversal

– Options to address non-permanence

Temporary crediting

Ton-year approach

Minimum time frame

• Permanence in OIF?


Monitoring

• Verification is audit of the monitoring results and procedures before issuance

• Monitoring and verification have become issues in the CDM and projects underperformed

– PDD writers had an incentive to overstate

– Procedural challenges in CDM

– Problems in data collection and archiving

• Monitoring in OIF complex but likely to be done properly

Number of projects with different Issuance success

0

10

20

30

40

50

60

0%-20% 20%-40% 40%-60% 60%-80% 80%-100% 100%-120%

>120%

Issuance success

Nu

mb

er o

f p

roje

cts


Methodological bottom lines for OIF

• Methodological challenges

– Depends on difficult science

Hard to understand

Measurement is technologically involved

Difficult to find qualified auditors

– Various leakage sources

– Project boundary is conceptual

– Difficult access to the site

Verification needs to work without on-site visit

No re-measurement

– Non-permanence questions

• Simplifying methodological aspects

– Sophisticated scientific setup

– Baseline does not need to be modeled

– Additionality is straight-forward


Conclusions

• OIF faces methodological challenges– Difficult site access

– Hard science behind OIF

– Addressing permanence

• OIF faces challenges in the context of current markets– Future access to regulated markets uncertain

– Voluntary market demand will depend on public image

• OIF has the potential to deliver high-quality credits– “Very” additional projects

– Long-term storage

– Numbers have the potential to change the carbon markets

Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc

Ocean iron fertilization and carbon credits

Till Neeff (Senior Consultant)

[email protected]

+44 1865 202 635


The GHG project cycle

“Normal” Project

Concept Feasibility

analysis Financial

closure Construction Operation

The Carbon ProjectThe Carbon Project

PINPIN ValidationValidation Registration Registration

and and VerificationVerification

Project Project DesignDesign

DocumentDocument

Find buyer Sign

ERPA

Monitor contract

compliance

Negotiate terms and conditions

The Emission Reduction Purchase Agreement (ERPA)

Documents

Carbon credits - origination to commercialisation© 2007 EcoSecurities Group plc Market and Methodologies Meet Ocean Fertilization Till Neeff – EcoSecurities