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Afghanistan

Environment and Natural Resources Management

Naghlu Rehabilitation Carbon Finance: The objective is to prepare a Carbon Finance operation in order to commercialize the carbon dioxide emissions produced by the rehabilitation of Naghlu power station as part of the clean development mechanisms established in the Kyoto Protocol. Pre-appraisal is underway. Environmental Assessment Category B. PID: 99442. US$ 3.6 (IDA).Consultants will be required to develop the project design document and conduct the required verification activities. Ministry of Finance, Pastoonistan Watt, Kabul, Afghanistan, Tel: (93-75) 200-4199, E-mail: info@mof.gov.af, Contact: Mr. Wnwar-ul Haq Ahady, Minister

CDM projects to date

Distribution of CDM emission reductions, by country. Distribution of CDM emission reductions, by project type.

As of 2 November 2007, 828 projects have been registered by the CDM Executive Board as CDM projects ^[12] These projects reduce greenhouse gas emissions by an estimated 171 million ton CO₂ equivalent per year. There are about 2,600 projects in the pipeline (most of which not yet registered) would until the end of 2012 produce over 2.5 billion tons CO₂ equivalent reductions.

For comparison: The current emissions of the EU-15 are about 4.2 billion ton CO₂ equivalent per year^[13]. Of the registered projects in the current pipeline, the majority of CERs have been from HFC destruction projects (see figure), a loophole in the CDM (see discussion above).

urrent yearly trading 2005-2007

Current Kyoto Market

The global carbon  market is still in its infancy, which is most easily noticed in the highly volatile price of Certified Emissions Reductions (CER's).   The two main buyers in the market are the European Union (EU) and Japan, who represent approximately 90% of the market.   The major sellers are China (66%), India (3%) and Latin America (17%). In the EU there are currently six platforms that control 50% of traded European Union Allowances (EUA's).   70-80% of this market is controlled by the European Climate Exchange which makes it by far the largest player in the market.

The total value of the global primary carbon market in 2004 was US$10 billion.   In 2005 it was believed to be US$25 billion. In the 2008-2012 period it is expected to reach US$55 billion - 95% of this is in CER's. The value of transactions in the first quarter of 2006 was equal to nearly all of 2004 - exaggerated by the high price per tonne of carbon.   Interestingly, the 'value' of the market increased substantially not because the number of new credits that entered the market, but rather because of price increases per tonne - it is believed at least 10 hedge funds entered the market in 2005-2006. This suggests there is good demand for near term projects to help improve liquidity - reflected in our recent meetings with potential buyers. In the EU, the actual number of carbon credits (EUA's) in the primary market increased by 4000% from 2004 to 2005 to 322 million tonnes. This massive increase cooled off considerably in 2006 thanks to price volatility which put a lot of newcomers to the market back on the sidelines, however best estimates still put the total EU primary market up by 40% (450 million tonnes) in 2006.

It is believed that nearly half of all Carbon Credits currently derive from Clean Development Mechanism (CDM) credits from developing countries.   The lion's share of these are industrial gas projects (HFC's, Methane, Nitrous Oxide). The reason being that these projects offer large volumes (1 tonne HFC = 11,700 tonnes C02) at low costs (The average transaction size has increased from 500,000 tonnes in 2003 to nearly 2 million tonnes in 2006).

Current trends favour : A) large projects B) short lead times or C) low upfront capital expenditure costs to market. This implies that the most attractive projects are proven technologies or large tonnage - i.e. landfill or coal mine methane gas capturing, renewable energy projects or industrial gas capturing/destruction.   CO2 pumped back into the ground is another possible market if the governing groups give official approval for CDM status. The legitimacy of HFC projects has come into question recently, which if banned, would have a huge impact on the market as it was the single largest area of CDM projects in 2005/2006.

How big is the market of the future?

Nine EU member states have publicly stated that they are setting aside  â‚¬2.7 billion to purchase 365 million tonnes CO2e up to 2012.   The Japanese government has announced it will acquire 100 million tonnes up to 2012.   The European Carbon Fund has committed â‚¬143 million in carbon procurement.   Endsea, Spain's largest utility has stated it requires 15 million tonnes to meet its commitments. Canada, Australia and the United States are still getting their act together.   Major changes in policy in these regions would have a profound impact on the prices of CER and VER's.


Conclusion
The total number of projects coming to market, the number of credits actually available and the fixed prices project generators are receiving are all very difficult to predict due to the poor tracking of new projects and lack of disclosure of confidential deals. What is blatantly clear is there is lack of liquidity in the market which strongly suggests continued robust demand for new projects to allow buyers to trade in the market more efficiently and to reduce volatility.


Maximum profits will come from focusing on:

1. Targeting proven technologies with a better chance of delivering CER's as projected
2. Low up front capital costs to bring to market
3. Lowest possible cost per tonne
4. Largest possible volume - economies of scale are very attractive to players in the market.
5. Projects that can be brought to market the quickest

Maximum risks come from:

1. Less proven areas for greenhouse gas delivery
2. Low volume projects that attract a higher cost per tonne for a broker to shift and therefore a lower profit per tonne for GCX
3. Projects that require large upfront investment


As far as  can be seen, this market will continue to have strong growth in the primary market and multiples of growth in the secondary market. In excess of 1 billion tonnes per annum in the next 3-5 years is certainly possible.   What is harder to predict is the price C02e will be trading at in light of uncertainty post 2012 and the infancy of the market.

That suggests maximum emphasis should be placed on the quickest, most cost effective, lowest risk projects to bring to market. Projects that require longer lead times, higher upfront investment/time, tighter margins etc  joint venture partners  with capital and experience to mitigate GCX's exposure to unforeseen difficulties in project delivery/costs.

GCX's mix of small to medium but relatively simple low cost projects in proven areas of CER delivery is perfectly suited to this concept.