Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Carbon Markets In relation to CDM projects in China

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Main Elements Carbon funds and facilities Carbon brokers Feasibility and risk analysis Pricing structures Carbon contracts

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Carbon Markets Compliance markets Players buy carbon credits in order to meet a mandatory (legally imposed) emission reduction target Voluntary markets Based on voluntary efforts to reduce emissions. They are largely driven by the threat of governmental regulation and compliance targets, in non-Kyoto countries Offset markets Retail offset purchasers are typically corporations or individuals aiming to become carbon neutral.

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Compliance Markets Kyoto Annex 1 Countries trade: Certified Emission Reductions (CERs) Emission Reduction Units (ERUs) Assigned Amount Units (AAUs) Units regulated under other schemes e.g. EU Allowances (EUAs) Retail Offset Market Purchasers (usually individuals, organisations or events) buy CERs and VERs with high sustainable development benefits in order to become carbon neutral Voluntary Markets Non-Kyoto Countries trade Verified Emission Reductions (VERs) and have requirements under various schemes, e.g. Chicago Climate Exchange (CCX) and New South Wales Scheme

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Sale of Carbon Credits Spot market transactions occur when actual, existing, verified or certified credits are transferred. Forward sales are the most common transaction form – they are the promise to purchase credits once they are generated, at a specified price.

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Market Drivers European Union Began trading carbon emission reductions in January 2005 based on a cap-and-trade programme United Kingdom Project-based GHG emissions reduction pilot launched in 2002 United States Chicago Climate Exchange (CCX) has established a voluntary cap-and- trade programme initially in North America and Brazil

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International EU Emissions Trading Scheme EU ETS establishes emission reduction requirements for about 10,000 large industrial and electricity generating sources (about half of Europe’s emissions of CO 2 ) Phase 1 started in January 2005 and runs through 2007 Phase 2 corrsponds to (first commitment period of the Kyoto Protocol) EU allowances are EU ETS compliance instruments allocated by EU governments

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International EU Emissions Trading Scheme Market for European Union Allowances (EUAs) experienced explosive growth in 2005 (from about 9 Mt in 2004 to over 322 Mt in 2005), due largelly to trading activity of electricity generators Prices increase dramatically in 2005 from about € 7 to a high of about € 30, due to rising natural gas prices, which resulted in increased coal-fired generation Continued expansion in first quarter of 2006

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Market Buyers World Bank/Prototype Carbon Fund Finances projects that produce high-quality GHG emission reductions World Bank Umbrella Carbon Facility (UCF) Created in December 2005, the UCF will aggregate multiple sources of funding to purchase large volumes of emission reductions Natsource GHG Credit Buyers Pool US$ 200 million GHG-Credit Aggregation Pool that will purchase project-based GHG emission reductions

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Market Buyers Certified Emission Reduction Unit Procurement Tender (CERUPT) Provides project funding to purchase CERs Emission Reduction Unit Procurement Tender (ERUPT) Purchases carbon emission reductions International Finance Corporation- Netherlands Carbon Facility (INCaF) Purchases project-based carbon emission reductions

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Market Facilitators Asian Development Bank Renewable Energy, Energy Efficiency and Climate Change (REACH) facility Works cooperatively with development funds in Denmark, the Netherlands and Canada Global Environment Facility (GEF) Provides cost-sharing grants and concessional funding to help fund projects that protect the environment (climate change mitigation is one of it’s four focus areas) Carbon Brokers Natsource, Cantor Fitzgerald/CO2e.com, Evolution Markets LLC

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Possible sources of finance World Bank/Prototype Carbon Fund Certified Emission Reduction Unit Procurement Tender IFC-Netherlands Carbon Facility Chicago Climate Exchange (CCX) GHG-Credit Aggregation Pool Asia Development Bank (ADB) GEF Carbon brokers

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International The future According to Natsource: EU, Japan and Canada are likely to be 3 to 4 billion tonnes short of achieving emission reduction targets in Continued growth in trading of project- based emission reductions

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Risk areas relevant to CDM projects Regulatory risk: Are the regulations surrounding independent power producers developed and stable? Is the implementation of a new energy efficiency regulation likely? Technical risk: RE/EE technologies are often new, or new to the location Credit risk of parties to transaction: How likely is it that the financier will get their investment back should any aspect of the project fail or under-perform? Country/political risk: What is the likelihood of local government intervention in the project, or appropriation of profits or assets? Demand and supply risk of outputs: How well has the market demand for outputs, or availability of supply of project inputs been tested?

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International InstitutionsRisk Tolerance Reward Expectations Commercial BankLow Government technology agency HighMedium Export credit agencyMedium Donor organisatonMediumHigh Venture capitalistHigh Development BankMediumLow Foreign Direct InvestorLowMedium

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Risk Mitigation  Project risks  Jurisdiction-specific issues  Counterparty issues  Issuance of CERs Obligation to act as a prudent operator Reporting requiremnts Due diligence requirements in host country Restricting other project participants Credit support, Material Adverse Change clause Due diligence and credit analysis  Delivery Performance guarantees Escrow arrangements Events of default  Compatibility with back- to-back arrangements Conform back-to-back agreements

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Prices paid for project-based emissions reductions Stage of the project in the project cycle Creditworthiness of the seller and buyer Delivery guarantees Investment and regulatory climate of the host country Technology performance

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Trends in 2005 and 1 st quarter 2006 HFC 23 destruction projects accounted for 58% of traded reductions 78% of traded emissions reduction in 2005 and the first quarter of 2006 were non-CO 2 gases Landfill gases were 9% of traded volume Coal mine methane gases were 6% of traded volume Hydroelectric power, wind, biomass and other renewables and energy efficiency projects accounted for 12% (down from 25% in 2004)

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Regulatory incentives Companies are liable to a fine of 40 € per tonne over the permitted limit during the three-year transitional period A fine of 100 € per tonne of CO 2 will be applicable from 2008 to 2012

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Parties involved in CER purchase Trader Legal Credit Risk Management

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International CER transaction process Initial ProposalTerm Sheet and Negotiation Signing of ERPAOngoing Monitoring Trader discusses principal terms of deal with seller Legal checks terms against internal procedures Risk Management & Credit analyse Seller and CDM project and give specific requirementzs to legal Legal co-ordinates due diligence on CDM project and host country Wording agreed between Buyer and Seller Final draft subject to review by Board Board approves entry into ERPA Trader keeps ongoing relationship with Seller Risk Management and Credit monitor any events that might affect deal If such events occur, all discuss how to respond (termination, amendment, assignment, etc.)

Capacity building on business opportunities for CDM projects in China A project funded by the European Union and carried out by CIRPS, Global Environmental Institute, Instituto Superior Técnico and Helio International Emissions Reduction Purchase Agreement (ERPA) ERPA Risk MitigationType of Purchaser Time of Transaction Types of Pricing Mechanisms Carbon Project Type