Monetizing Carbon Credits

Philippe DELHAISE Founder CIS Carbon Risk Management www.ciscarbonrisk.com

DELHAISE ACEF 2012 Manila

The Pricing of Carbon Credits

Carbon is an asset (or, often, a liability), and the determination of a carbon price has very real financial implications on companies today
Due to its recent development and difficulties in quantifying financial exposure, satisfactory carbon related accounting practices have not been developed yet

CITYU Delhaise October 2010

The Pricing of Carbon Credits

To date, the most visible instance of carbon pricing has occurred in Europe with the EU at the forefront of carbon legislation. The EUs EUA price is largely a function of reduction commitments, power demand and the marginal cost of abatement (Including both E.U. based internal abatement & imported CDM abatement) Many other standards exist for Carbon Credits, especially in the voluntary markets, but we shall concentrate on CERs, the units associated with UNFCCCs Clean Development Mechanism under the Kyoto Protocol.

DELHAISE 2012 CIS Carbon Risk Management

CER eligibility problems

The Kyoto

protocol expires in December 2012 NO agreement has been made to date for a renewal The eligibility of CERs under the EU ETS or under other, similar, schemes will depend on political decisions that have yet to be made

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ERPAs
Holders

of rights on yet-to-be-generated CERs may, for all sorts of reasons, wish to monetize them with some degree of price certainty An ERPA is a good instrument for that purpose Yet the need to protect the parties against price uncertainties has rendered the transactions very difficult

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Monetizing CERs
Transactions

are difficult because someone has to carry the risks associated with the uncertainties about eligibility and therefore about prices This risk has a cost which is difficult to measure The uncertainty is so high that the discount required to compensate that risk is substantial

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A fair price for CERs

The matter of the

discount has been exacerbated by the collapse of carbon credit prices, which have fallen not only because there are uncertainties, but also because the financial crisis of 2008-2012 has reduced CER demand It has become difficult to determine a fair price for the parties involved

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Delivery risk
The risk

assumed by the buyer is determined not only by the political and financial uncertainties (in respect of future CER price levels), but most of the timealso by the risk that the project does not deliver the expected CERs over the years Such delivery risk is sometimes extremely difficult to estimate

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CERs that have yet to be generated

Until a projects CERs are generated, they have their own,

unique, value, which usually is lower than the value of issued CERs. That (potential) market value is determined by a number of factors, the most important being the projects actual yield (the ratio between its annual generation of CERs and its theoretical CER generation capacity, as calculated upon the original registration). Such yield fluctuates in time, and depends on factors as varied as methodology risk, input risk, technological risk, commercial risk, country risk, contract risk etc

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Asymmetry of information
In addition, there is a huge asymmetry of information on

the project between the CER forward seller and the buyer. In the face of such uncertainties, the buyer discounts its offer price to a level that, often, makes it unattractive for the seller to dispose of his CERs.

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Formula pricing
The ERPA can contain terms that, to a degree, distributes

the burden of uncertainty between buyer and seller, such as a formula pricing (with floating prices), or guaranteed CER volumes Yet such terms usually do not remove all the uncertainties

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DELHAISE ACEF 2012 Manila

Misbehavior
Alas, when all is settled, even with a good

ERPA, buyers and sellers are still at the mercy of the dishonesty of the other party in a transaction that is often across borders Prices fluctuations have increased the occurrence of dishonest behavior, and caution is highly recommended

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THANK YOU!

Philippe Delhaise

Capital Information Services Ltd

www.ciscarbonrisk.com philippe.delhaise@ciscarbonrisk.com

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DELHAISE ACEF 2012 Manila

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