CD4CDM PERSPECTIVES SERIES PERSPECTIVES SERIES 20 07 he annual CD4CDM Perspectives Series will feature a topic of Equal Exchange: pivotal importance to the global carbon market. The series seeks to communicate the diverse insights and visions of leading actors in the carbon market to better inform the decisions of professionals and 20 07 policymakers in developing countries. The fi rst theme of the series focuses Equal Exchange: on determining an ‘equal exchange’ between carbon buyers and sellers in Determining a CDM transactions. Each of the contributors presents their perspective on the emerging market for emission reductions—its structure, dynamics, Fair Price for Carbon T Price a Fair Determining and likely evolution—as well as how these and other factors, such as risks and fi nancing, infl uence the negotiation power of CDM project sponsors. These insights can help CDM stakeholders to better understand each others’ needs and to maximize the benefi ts accruing to for Carbon all parties through more equitable transactions. P e r s P e c t i v e s s e r i e s 20 07 Equal Exchange: Determining a FairGlenn Hodes and Pricesami Kamel, for Carbon editors Contributors • • Francisco Ascui and Pedro Moura Costa, EcoSecurities • Veronique Bishop, World Bank Group • Jørund Buen, Elisabeth Lokshall, and Marte Nordseth, Point Carbon • Martha Castillo, Andean Development Corporation, Latin American Carbon Program • Martijn Wilder and Monique Willis. Baker & McKenzie • Gao Guangsheng and Li Liyan, Chinese DNA for CDM • Karen Degouve, NATIXIS/European Carbon Fund • Mark Meyrick, EdF Trading • John Palmisano, International Environmental Trading Group • Alfred Ofosu-Ahenkorah, Energy Commission of Ghana Charlotte Streck, Climate Focus introduction 5 Glenn Hodes and Sami Kamel CER MarKet dynaMics 11 Contents Marte Nordseth, Jørund Buen, and Elisabeth Lokshall CER PricinG: LeGaL infLuences 23 Martijn Wilder and Monique Willis strateGies for MaxiMizinG carbon vaLue 37 Veronique Bishop risK, uncertainty, and individuaL decision MaKinG in Emission MarKets 57 John Palmisano initiaL Thoughts on equitabLe CER Prices: The view froM China 69 Gao Guangsheng and Li Liyan CER PricinG and risK 79 Francisco Ascui & Pedro Moura Costa MarKet PersPectives to deterMine fair carbon Prices 95 Martha P. Castillo What is a fair Price for CDM credits? 101 Mark Meyrick neGotiatinG a fair Price for CERs 113 Karen Degouve CDM ParticiPation and credit PricinG in africa 127 Alfred Ofosu-Ahenkorah MaxiMizinG revenue in CDM transactions: strateGies and contractuaL issues 135 Charlotte Streck List of acronyMs 148 Capacity Development for CDM (CD4CDM) Project UNEP RISOE Centre The Technical University of Denmark Box 49 DK-4000 Roskilde, Denmark Tel: +45-4632 2288 Fax: +45-4632 1999 www.uneprisoe.org www.cd4cdm.org ISBN 978-87-550-3595-9 Graphic design: Finn Hagen Madsen, Graphic Design Copenhagen, Denmark Printed by: Schultz, Denmark. Printed on environmentally friendly paper. disclaimer The findings, opinions, interpretations and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the UNEP Risø Center, the United Nations Environment Program, the Technical University of Denmark, the Netherlands Ministry of Foreign Affairs, nor to the respective organizations of each individual author. This report is intended as a public resource for stakeholders undertaking activities that reduce greenhouse gas emissions, whether under the Kyoto Protocol’s Clean Development Mechanism or other market-based instruments for carbon trading. While the report’s authors each provide an independent analysis of the commercial, financial, risk, legal, technical and other issues material to the pricing of carbon credits, this report should in no way be relied upon or construed by the reader as legal advice. Independent legal or commercial advice should always be sought when undertaking a CDM Project or entering into the types of contracts described herein. The example contractual provisions provided are examples only and should be carefully considered and modified to suit the particular circumstances of an individual project. Glenn Hodes and Sami Kamel UNEP Risø Centre editors’ introduction Equal Exchange: One of the foremost concerns of Clean Devel- Unfortunately, this broader knowledge of the opmentDetermining Mechanism (CDM) project a participants Fair Pricemarket is generallyfor quiteCarbon asymmetrical between when entering into any given emission reduc- carbon buyers and investors in the North and tions purchase or sale agreement is whether they CER sellers from middle-income countries, and are getting a ‘fair deal’. This question cannot be is often almost completely lacking on the part easily answered in the context of a specific trans- of actors from least developed countries. Lack of action, on its own, but nor is one that can be ap- perfect price information in the CDM market has preciated in a purely theoretical way, either. resulted in few guideposts by which CDM devel- opers and project sponsors can negotiate specif- A general understanding of the global carbon ic deals. Moreover, the process of determining an market—its underlying structure, dynamics, and equitable exchange for CERs is confounded by a likely evolution—is required, as well as a sense number of factors, such as the sheer dynamism of how various market forces shape demand and and volatility of the carbon market, on the one supply, and hence influence prices. At the same hand, and its complexity and disjointedness, on time, one also needs to understand a bit about the other hand. As Charlotte Streck remarks in the various motivations of individual actors in her contribution to this volume, the rapid pace the CDM market and the factors influencing their of the carbon market’s development has rendered negotiation power in relation to each other. it difficult for knowledge to keep pace with the 5 CD4CDM availability of funds, and particularly challeng- • Global carbon price dynamics. Key driv- ing for sellers to keep abreast of innovations in ers and factors (economic, environmental, structuring and contracting CDM transactions. and political) affecting long-run trends in global prices for carbon, such as supply At the other end of the spectrum, concerns from and demand balances of different types of a variety of quarters point to the need for more emissions reduction commodities (espe- transparency in the pricing practices or policies cially EUAs and CERs). of major carbon buyers. Equitable CER transac- tions should embody not only fair prices that are • CDM project risk profiles and/or pre- consistent with real supply and demand balances miums. Key risk factors between primary at the time of sale, but also exchanges that bridge and secondary CER transactions, how the specific (and time-sensitive) needs of buyers they are evaluated and managed by car- with the desire of developing country sellers to bon buyers, and their correlation to either improve their country’s sustainable development. a price premium or deduction compared In light of growing demand for using CERs in the to the market standard. voluntary and retail carbon markets, CDM trans- actions must also increasingly address consumer • The importance of time factors and de- concerns for exchanges that are non-exploitative, livery guarantees. Key temporal factors have a high degree of environmental integrity, and underlying the determination of prices foster genuinely empowering partnerships. and contracting arrangements between CDM project proponents, lenders, and To address the situation outlined above, and as carbon investors. part of its capacity development objectives, the Dutch-funded Capacity Development for the • The impact of regulatory drivers and CDM Project (CD4CDM) has produced this first post-Kyoto outlook. Guidance on politi- issue of its new Perspectives Series. The CD4CDM cal and social forces that project propo- Perspectives Series will comprise an annual special nents need to consider when negotiating feature showcasing the views and experiences of with buyers, and how to contract for the visionaries and leading actors in the carbon mar- purchase or sale of post-2012 emission re- ket on a topic of pivotal importance to develop- ductions. ing countries in the global carbon market. This year’s feature focuses on the issue of determining • Region-specific outlooks. How, and the fair transactions under CDM. degree to which, views on fair CER pricing and actual ERPA negotiations are affected In total, sixteen authors in eleven different con- differently by regional outlooks, positions, tributions make up this volume. The authors’ and regulatory environments, for example, perspectives are their own, yet they also repre- in Latin America, China, and Sub-Saharan sent a wide spectrum of the various market ac- Africa. tors that are interacting in order to realize both successful and equitable carbon transactions. • Strategies, contracting models, and ap- The essays touch upon one or more of the follow- proaches toward transacting CERs. ing thematic topics: CD4CDM6 Point Carbon’s Jørund Buen, Elisabeth Lokshall, and sell. She emphasizes the need to balance various Marte Nordeseth lay down the foundations for un- price offers with the need to minimize project derstanding the dynamics of the global carbon risks and financing gaps, and provides some ex- market and how these market fundamentals af- amples of financial structuring tools that can fect CER prices. They provide a broad, yet con- be