1. Combining Project Finance with Trading ERU’s?
Eric Boonman
Head of Environmental Markets
11 January 2019
Designator | author

2. Kyoto protocol
The Kyoto protocol is the fundamental international agreement governing the global carbon market.
The European Union has established the EU ETS in response to its member states’ Kyoto obligations and to help its industry to prepare for the challenges and opportunities presented by global response to climate change.

3. Global supply and demand outlook
Japan BAU short ~1,500Mt
? (100) 1,000
Canada BAU short ~1,500Mt ?
EU non ETS >50% emissions
(700) 1,000
CER & ERU
2,000M +/- 1,000M
PHASE III
???
~1,400
OTHERS US states, Australia, NZ, voluntary, … ?
Any price forecast is futile under such circumstances.
But, it is reasonable to assume that CER/ERU supply will be insufficient to cover all needs. Hence emissions need to be reduced.
Phase II total ~1,400Mt short

4. Fortis: new products for the emerging carbon markets
Accepting returns in carbon
Including carbon value in financing and due diligence
CDM / JI project financing
Carbon Financial Services
Trading on demand or to order
Index based procurement/divestment
CER / ERU purchasing and sales
Delivery date swaps (quasi repo’s)
Trading Services
Managing customers carbon accounts
Custody of other Kyoto Compliance Units
Fund custody and administration
Administration and Trust
Co-sponsorship of the European Carbon Fund to ensure reliable deliveries of Kyoto Compliance Units for customers
Investing in and developing funds
Eliminate counter party risk and guarantee trades
Cross commodity correlation model
Clearing
CDP Climate Leadership 2006 – Top 50 Global
Co-sponsor and guaranteed placement CP for European Carbon Fund
Initiated index based position management contracts for customers
Trading on behalf of 300 customers
Cross selling successfully with trust, custody, escrow & settlement

5. Fortis: a pioneering role in Carbon Banking
2004
Fortis realizes first-ever trade of European Union Emission Allowances (EUA's) using an ISDA-based contract: Carbon Deal of the Year ( Euromoney)
Fortis becomes a co-sponsor of the European Carbon Fund, investing 15 million Euros to help emerging countries combat climate change.
December 2004: the Fortis carbon trust and custody services is launched
2005
Started offering carbon clearing services
October 2005 : won best diversified financial and made Climate Change Leadership Index
December 2005: concluded first index based carbon compliance contracts with clients
2006
January: European Carbon Fund awarded Most Promising investment Opportunity
February: Structured and executed first ever CER call option deal
April: Concluded first complete second phase strip transaction from
Jun: Executed first combined trading/trust/escrow/settlement carbon transaction
July: reached the 100th customer milestone with a record 4 new customers in 1 day
August: transacted and received ownership of issued CERs for the first time
October: executed first to second phase roll
2007
Launch of the Fortis Carbon Neutrality Program
March: start of global 24hr carbon banking services from Amsterdam, Hong Kong and Houston
June: Be selected as the FSP for the UNDP MDG Carbon Facility for its initial pipeline of 15MT
March: Best Trader 2008 reward according to Pointcarbon
Fortis, has quickly established itself as the reference for the market, serving more than 300 clients’ needs on a daily basis

6. CDM project cycle JI two options: Track 1 via host country
An emission reduction project needs to go through a lengthy procedure before being registered at the United Nations CDM Executive Board and eventually receiving CERs.
Normally, 6-10 months is needed to get a project through the process.
An independent consultancy is normally hired to provide an in-depth analysis of the project’s emission reduction potential, methodology, feasibility and social impact. The expected emission reduction is detailed in the PDD (project design document).
The standard contract of forward CER purchase transaction is named ERPA (Emission Reduction Purchasing Agreement).
After the validation by a Designated Operational Entity and the approval by a Designated National Authority, the project is submitted to the United Nations’ CDM Executive Board for registration.
If the project gets officially registered at the UN CDM EB, it is recognized as a CDM project. Following that, verification & certification occurs every 1-3 years.
Upon verification, a corresponding number of CERs will be issued by the UN CDM EB. This quantity will vary compared to the planned quantity in the PDD.
CDM project identification
+ service agreement
PIN
Project Design Document
International buyer search
Validation starts
ERPA
Letter of Approval
Validation ends
Registration
Monitoring
JI two options:
Track 1 via host country
Track 2 comparable to cdm
Verification + Certification
Issuance
CER Distribution

7. Nature of carbon finance for a typical JI project
Capital Markets
(Financial Institutions, Private Equity,
Hedge Funds...)
Equity and/or Debt
Ownership + Dividend and/or Principle + Interest
Power Purchase Agreement
ERUs
Global Carbon Market
Cash
Cash
By-product: ERUs
Main product: Electricity

8. CDM and JI project’s risk assessment
Fortis Bank Environmental Markets has undertaken significant research in the field of CDM and JI project risk assessment.
A thorough understanding and assessment of the JI project’s delivery risk will enable us to maximize our investment return by constructing a diverse CER and ERU portfolio in terms of technology, stage, size and geography.
Fortis Environmental Markets’ desk has developed a highly objective and auto-improving Delivery Risk Model to screen most CDM and JI projects.
This model combines a serie of quantitative and qualitative metrics to help us gauge a potential CDM and JI project’s expected performance.

9. Custody Agreement
The Custody agreement transfers economical and legal ownership
Custodian receives power of attorney from seller and buyer and will become focal point
The pdd CERs or ERUs are inputted into delivery risk model
Outcome will be taken as collateral within financing package
Mitigating counter party risk
To build up investor confidence a similar role for ji projects is recommended

10. Conclusion
To date, many of the world’s premier institutional investors have invested in CDM and JI projects. This strong interest is mainly due to CDM and JI projects’ unique return profile and superior diversification benefits due to its total lack of correlation with traditional securities market.
The window of opportunity for purchasing CDM credits from low hanging fruit type projects has passed but in JI there is still low hanging fruit
The next wave of carbon reduction projects will need to account for the value of carbon abatement in their discounted cash flow models, and in part rely on the carbon credits for repayment, especially for CDM projects.
Due to the volatile nature of the international carbon market, significant risk discounting on the future value of carbon credits needs to take place, but there is enough confidence in the carbon market to be able to use carbon credits as collateral.
However, given the nature of carbon project proponents, a custody agreement governing the legal and economic ownership and title of forward carbon streams can strongly mitigate counterparty risks, leaving primarily technological risks.

11. Thank you eric.boonman@nl.fortis.com +31 653258817
11 January 2019
Designator | author