California Offsets Workshop Current State of the California
- Slides: 24
California Offsets Workshop Current State of the California Carbon Market June 21, 2011 Josh Margolis jmargolis@cantorco 2 e. com 415 -296 -9359 1 © Copyright Cantor. CO 2 e 2011
Agenda § § § § 2 Who are these guys? Litigation Market mechanics Market size Allowances & offsets Transaction types Market color Actions to take now © Copyright Cantor. CO 2 e 2011 Cantor. CO 2 e Sound and Fury signifying? what, when, how $3 - $128 billion $6 - $70 spot, stream, options, hedge its complicated assess, prepare, hedge
Who is Cantor. CO 2 e? n California roots o o o Auction agreements with >300 companies Los Angeles San Francisco n Brokerage, strategy, advisory, marketing, and regulatory assistance n Subsidiary of Cantor Fitzgerald, global financial services firm n > $10 billion environmental & energy transactions o o o n 3 Since 1992 (and before) Most credits brokered CEC Climate Change Advisory Committee CARB CRTs & CAs GHG VERs RGGI CERs VCUs SO 2 EAs RECLAIM RECs/ROCS EU EAs ATUs NOx SIP Call HGA Biomass Wastewater ERC DERs VERs Helping companies develop and implement successful offset/carbon management strategies © Copyright Cantor. CO 2 e 2011 Environment Energy Markets Compliance Voluntary Innovation Finance Securitization Technology Renewables
Litigation from Market’s Perspective • Key dates • Roller coaster – – – What’s EJ got to do with it? it’s all over/we agree with them? just show your homework the sun’s coming up tomorrow the other shoe • Betting on: – program what’s creditable – start date next lawsuit • Just give me certainty • Pricing uncertainty • Prohibition on speculation © Copyright Cantor. CO 2 e 2011
* Potential Value of Traded Credits Allowances 2, 700, 000 Auction Amt Auctioned (est) Low (est) 5% High (est) 60% Offsets Low (est) High (est) Unit Price (est) $10 $70 Total Value $1, 350, 000 $113, 400, 000 216, 000 Total Value $2, 160, 000 $15, 120, 000 Unit Price (est) Times Sold $10 1 $70 4 Total Est Value of Allowances & Offsets Low High $3, 510, 000 $128, 520, 000 * Excludes value of freely allocated emission allowances © Copyright Cantor. CO 2 e 2011
AB 32: Cap vs. Allocations + Offsets 1 2 3 450 Million Metric Tonnes 400 350 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 § Net Cap § Offset forecast § The amount of allowances that CARB will remove from each year’s cap and set aside for the Allowance price Containment Reserve • BAU emissions forecast 6 © Copyright Cantor. CO 2 e 2011
Declining Emissions Checkbook © Copyright Cantor. CO 2 e 2011
Single Year Trade 400 300 Buys 100 allowances from seller Sells 100 allowances to buyer 200 Seller © Copyright Cantor. CO 2 e 2011 Buyer
Multiple Year Trade 300 Required obligation 250 200 Surplus saleable reduction 150 100 50 2012 2013 © Copyright Cantor. CO 2 e 2011 2014 2015 2016 2018 2019 2020 Actual emissions
Transaction Types § Spot § Stream § Swaps § Options § Firm delivery § Unit contingent § Guaranteed CARB § Offsets § Allowances © Copyright Cantor. CO 2 e 2011
Transaction Types § Spot Transaction o Verified, issued offsets or allowances • Pros: POD, low quantity/delivery risk, seamless transaction • Cons: Some buyers looking for future vintages § Stream Transaction o Multiple years of created, prospective offsets/EAs • Pros: Lock in future year price, establish cash flow/cost • Cons: Locked price eliminates ability to transact at better price • Hedge: Structure a floor/ceiling profit share 11 © Copyright Cantor. CO 2 e 2011
Transaction Types § Firm Delivery o Supplier guarantees delivery at set date/price • Pros Higher price • Cons Penalties for non-delivery, credit? § Unit Contingent o Delivery of credits when/if issued • Pros No non-delivery penalty if not issued • Cons Likely to be priced lower 12 © Copyright Cantor. CO 2 e 2011
Transaction Types § Swaps o Non cash transaction § Options o Risk management o Right, not obligation • Calls right to buy at set level over set term • Puts right to sell at set level over set term 13 © Copyright Cantor. CO 2 e 2011
Transaction Types § Guaranteed CARB Offset or Allowance § Terms § Program in force § Dec 12, 13, 14 (one year delay? ) § Allowances/offsets issued/blessed by CARB § Issues § Credit § Policy/legal 14 © Copyright Cantor. CO 2 e 2011
Offsets § § 216 MMTCO 2 e through 2020 limit 8% of compliance obligation Location – CA, North America… for now ARB Protocols o Forestry protocol v 2. 1, 3. 0 -3. 2 o urban forests protocol v 1. 0 -1. 1 o US ODS protocol v 1. 0 o Livestock manure protocol v 1 -3 15 © Copyright Cantor. CO 2 e 2011
Potential Offsets What’s next (maybe? ) § CAR Ag o Cropland Management o Nutrient Management o Rice Cultivation § § 16 VCS REDD CAR Nitric Acid CAR Mexico Livestock LFG? © Copyright Cantor. CO 2 e 2011
Allowances vs Offsets 17 Allowances Offsets Available from CARB Yes No Third Party Market Yes* Yes Available Outside Auctions Limited Yes Holding Limit Yes No Price Limit No No Forward Buys Yes* Yes Charismatic (Carbon with a Story) No Yes Risk of Reversal No* Yes Due Diligence Importance Limited Very © Copyright Cantor. CO 2 e 2011
Price Indications Recent Bid/Ask for Carbon Instruments (6/20/11) Product Type Quantity Vintage Bid/Ask CAR Forestry 2. 1 25, 000 spot 6. 50/7. 25 CAR Forestry 3. 1 25, 000 2005 -12 6. 75/7. 50 CAR – Dom ODS - Domestic 25, 000 2010 -2011 7. 75/8. 50 CAR Ag Methane 20, 000 2010 -13 7. 25 /7. 50 CAR ODS – Article V 25, 000 >2005 2. 50/4. 00 CAR N 2 O 100, 000 >2005 2. 00/3. 50 CCO Offset 25, 000 - 10. 50/11. 50 CCA Forward DEC-12 Allowance 25, 000 - 14. 75/16. 00 CCA Forward DEC-13 Allowance 25, 000 - 15. 75/16. 50 © Copyright Cantor. CO 2 e 2011
Price Indications Source: Reuters graph ic/Stephen Culp via Point Carbon © Copyright Cantor. CO 2 e 2011
Price Indications Indicative Price Trend for CARB-Approved CAR Project Types and CARB Carbon Allowance $ 16. 00 $ 14. 00 Settlement Price $ 12. 00 Forestry $ 10. 00 Livestock ODS $ 8. 00 DEC-12 CCA $ 6. 00 20 Fe ne Ju ay M Ap ril ch ar M br ua ry y nu ar Ja De ce m be be m ve No to Oc © Copyright Cantor. CO 2 e 2011 r r r be em pt Se Au gu st $ 4. 00
Market Color • • Herky jerkey Traders mostly, fewer permit holders now – Depth of market - > millions of tons – Traders, permit holders with trading desks, compliance sources • • Mostly OTC, for now CARB’s green curtain – Rules – Methodologies/prospective • Forecast – – – • • 21 Offset re-verification Policy (go/no go, start date, allocations, trading rules, buyer beware) Speculation Credit (offered/taken) Control, manufacturing, allocation/offset planning Cost curves – capital costs vs. offsets and allowances vs. hybrid Options Portfolio Remember CEQA/Voluntary © Copyright Cantor. CO 2 e 2011
Know Who You are Talking To Motivations, products, and costs between: § Brokers § Traders § Marketers § Retail offset provider § Exchanges 22 © Copyright Cantor. CO 2 e 2011
Actions to Take Now § § Appreciate policy challenges/opportunities Quantify current and expected 12 – 20 emissions AB 32, CEQA, voluntary Build portfolio of solutions o Onsite controls, efficiency improvements, biomass o Identify control cost curve o Managing carbon liabilities § Create CARB offsets if possible § Define and resolve expected net short position o Participate in 3 rd party projects o Offset due diligence (reversals, delivery, PR risk) § OTC Transactions o Price and terms o Swap (ERC, RTC for carbon) o Trade clearing © Copyright Cantor. CO 2 e 2011
Thank You Josh Margolis CEO 415. 296. 9359 jmargolis@cantorco 2 e. com www. emissionstrading. com © Copyright Cantor. CO 2 e 2011
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