European Emissions Trading Scheme - Market Outlook Dr. Jussi Nykänen Partner and Executive Vice President, Intermediary GreenStream Network Ltd. tel. +358 20 743 7800 GSM +358 40 840 8001 mail jussi.nykanen@greenstream.net Outline of the Presentation Market outlook Review of current markets Traded volumes and allowance prices Business impacts of EU Emissions Trading Scheme (EU ETS) Summary of the presentation 3.11.2005 Copyright GreenStream Network Ltd. 2 Market outlook 3.11.2005 Copyright GreenStream Network Ltd. 3 1
EU Emissions Trading Scheme The first commitment period started 1.1.2005. Obliges companies to cover their CO 2 emissions with emission allowances. Covers facilities from specific sectors: Power industry (>20 MW combustion facilities, oil refineries, coking plants) Production and process of ferrometals Mineral industry (concrete, lime, glass, fiberglass, ceramics) Pulp and paper industry, cardboard manufacturing Initially covers only carbon dioxide (CO 2 ). The first commitment period covers years 2005-07, from 2008-12 the periods cover five years. 3.11.2005 Copyright GreenStream Network Ltd. 4 National allocations 600,0 Allow ances (MtCO2) Number of installations 2 000 1 800 500,0 1 600 400,0 Averege annual allocation MtCO2/a Number of installations 1 400 1 200 300,0 1 000 800 200,0 600 100,0 400 200 0,0 0 Germany The United Kingdom Poland Italy Spa in France Czech Republic The Netherlands Greece Belgium Finland Portugal Denmark Austria Hungary Slovakia Sweden Ireland Estonia Lithuania Slovenia Cyprus Latvia Luxembourg Malta 3.11.2005 National Allocations: Copyright GreenStream Network Ltd. 5 http://www.europa.eu.int/comm/environment/climat/emission_plans.htm Share of National Allocations of Total Amount Cyprus Czech Republic Austria 0,3 % 4,5 % 1,5 % Belgium The United Kingdom 2,9 % Denmark Estonia 11,2 % 1,5 % 0,9 % The Netherlands 4,3 % Sw eden 1,0 % Finland 2,1 % France 7,1 % Spain 8,0 % Slovenia 0,4 % Slovakia 1,4 % Portugal 1,7 % Poland 10,9 % Germany 22,8 % Luxembourg 0,2 % Malta Lithuania Italy Greece 0,1 % 0,6 % Ireland 10,6 % 3,4 % Latvia 1,0 % 0,2 % Hungary 1,4 % 3.11.2005 Copyright GreenStream Network Ltd. 6 2
The EU ETS principles 1/2 Installations covered by the Directive need a greenhouse gas emission permit Emission allowances are allocated to installations according to the national allocation plan (NAP), separately for 2005 2007, 2008 2012 etc. For the first period 2005 2007 scheme covers only CO 2 emissions. Other gases and industry sectors may be included in subsequent trading periods Allowances are valid only during the trading period for which they were issued Installations can freely sell and buy emission allowances in the market 3.11.2005 Copyright GreenStream Network Ltd. 7 The EU ETS principles 2/2 Installations have to monitor and report their emissions Annual emission reports have to be verified by end-march each year Each year installations have to surrender a number of emission allowances corresponding to the verified emissions during the previous year by end-april Non-compliance leads to sanctions; the penalty is 40 / t CO 2 during 2005 2007 and 100 / t CO 2 during 2008 2012. In addition, missing allowances have to be surrendered the following year The Linking Directive enables the use of emission credits from JI and CDM projects in the EU ETS. CDM credits can be used already from 2005, JI credits from 2008 onwards 3.11.2005 Copyright GreenStream Network Ltd. 8 Linking Directive In force from 13.11.2004. The Directive enlarges the markets to global. National implementation in 12 months from publication of the Directive. Possibility of utilising CER credits from developing countries from 2005 and ERU credits from industrial countries from 2008. Plant specific caps on utilisation of imported credits? Issues relating to double-counting must be sloved. http://www.europa.eu.int/comm/environment/climat/emission/link ing_en.htm 3.11.2005 Copyright GreenStream Network Ltd. 9 3
Registries for Emissions Allowances Operational: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Ireland, Lithuania, the Netherlands, Portugal, Spain, Sweden, United Kingdom 3.11.2005 Copyright GreenStream Network Ltd. 10 Review of current markets 3.11.2005 Copyright GreenStream Network Ltd. 11 Current markets Most active companies are coming from the energy sector. Companies from the new Member States are not active on large scale. Price movements can be fast. Exchanges have started their activities. Bilateral deals are usually based on model contracts. Spot trading has started. Futures and options are coming into the picture. The role of intermediaries is still important. Liquidity; prices; details of the deal-making. 3.11.2005 Copyright GreenStream Network Ltd. 12 4
Trades via GreenStream Network Ltd. Forward 2007 Transaction Forward 2005 Spot Buying Customer Industrial Company Selling Customer Other Trader Exchange Energy Company Industrial Company 3.11.2005 Copyright GreenStream Network Ltd. 13 Activities of companies in the markets Reasons not to participate Trading looks too complicated; Price is not good; It is difficult to estimate the price development; It is difficult to estimate the future emissions; Not all the required details are in place; Emissions trading is not core business. Reasons to participate actively Emissions allowances are a new asset that requires management; Emissions trading affects companies both directly and indirectly; The price curves of different emissions trading products create opportunities; Not Doing Anything is also a decision! 3.11.2005 Copyright GreenStream Network Ltd. 14 Exchanges for EU allowances Start-up Products Clip size Steps Clearing party ECX/IPE Futures April 22 nd, spot later? Futures (ECX CFI) with quarterly expiry 1000 t 50 000 t block trade 0.05 EUR/t LCH.Clearne t Ltd. Via Clearing Members EEX Spot March 9 th Spot auctioning 1 EUA 0.01 EUR/t EEX AG Clearing Facilities Nordpool Forwards February 11 th, spot summer/05 Forwards (05, 06, 07) 1000 EUA 0.01 EUR/t Nordpool EXAA Spot June 28 th Spot auctioning 1 EUA 0.01 EUR/t OeKB EuroNext Spot June 24 th Spot 1000 t 0.01 EUR/t Caisse des Depots et consignations Climex /APX June 27 th Spot (also CER & ERU) In the future forwards 1000 t? APX 3.11.2005 Copyright GreenStream Network Ltd. 15 5
Traded volumes and allowance prices 3.11.2005 Copyright GreenStream Network Ltd. 16 Price development of EU allowances The Price development of emission allowances (2005 forward) Euros/tonne CO2 30,00 25,00 20,00 15,00 10,00 5,00 OTC Volume 2005 2005 2004 2003 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 Thousand tonnes CO2 0,00 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Week Source: GreenStream Network Ltd. 3.11.2005 Copyright GreenStream Network Ltd. 17 Traded volumes in exchanges Exchange volumes 1000 tco2 60000 50000 40000 30000 20000 10000 0 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 30,00 25,00 20,00 15,00 10,00 5,00 0,00 /tco2 OTC ECX Nordpool Powernext EEX Nordpool Dec 05 Price 3.11.2005 Copyright GreenStream Network Ltd. 18 6
Pricing of allowances Prediction of price movements is not easy. The price is affected for example by fuel prices, weather conditions, industrial development and market psychology. There is no single factor determining the price. Actions of authorities are still having an impact on prices. Price curves for emissions allowances and reductions are different. The price for the next commitment period is affected by the estimations regarding the 2 nd allocation and possible coupling of the EU market with other markets. 3.11.2005 Copyright GreenStream Network Ltd. 19 Example: Connection between the price of EUAs and the price of electricity Allowance price ( /tco2) 18 16 14 12 10 8 Allowance price EEX Baseload Month Future (June 2005) 40 38 36 34 32 Electricity price ( /MWh) 6 3.1. 17.1. 31.1. 14.2. 28.2. 14.03 30.03 30 3.11.2005 Copyright GreenStream Network Ltd. 20 Business impacts of EU Emissions Trading Scheme 3.11.2005 Copyright GreenStream Network Ltd. 21 7
Effect of EU ETS on companies EU ETS has created a new asset that is being traded across the European Union. Emissions trading affects the companies directly via the value of emissions allowances and indirectly through related markets (electricity, heat, fuels...) Emissions trading affects the competitiveness of products and services, the business strategies and feasibility of investments. In addition of complying with its obligations, the companies must manage the carbon asset. The financial value of the asset is changing as a function of markets prices. The impact of emissions trading is project-specific. The investment decisions require knowledge for example about the future price development. 3.11.2005 Copyright GreenStream Network Ltd. 22 Summary The emissions trading market is pan-european. The national authorities have still an impact on the markets; especially the status of registries is important. The market does not yet perform ideally; the market situation can change fast. Many companies have not yet started activities; preparedness is however quite high in most industrial sectors. The prediction of prices requires knowledge; good timing can increase the profitability significantly. The effects of emissions trading markets on companies are multiple; the impacts are strongest in energy sector. 3.11.2005 Copyright GreenStream Network Ltd. 23 GreenStream Network Expert in Environmental Markets GreenStream Network Ltd. www.greenstream.net info@greenstream.net firstname.lastname@greenstream.net Hamburg Helsinki Karlstad Oslo Paris Stockholm Vilnius 3.11.2005 Copyright GreenStream Network Ltd. 24 8