East Meets West on Asia’s New Auction Block

Climate Forests Investments Jan 1, 2001
Careesa Gee

The first auctions of Certified Emission Reductions generated by Clean Development Mechanism projects were held at the end of 2005, in a joint operation by New Values (Climex) and Asia Carbon Global. The Ecosystem Marketplace takes a look at what happened at the auctions and considers what they bring to the field of emissions trading. HONG KONG, January 2006– While talks on setting new targets to reduce carbon emissions are now slated to begin once the Kyoto treaty ends in 2012, many countries will likely fail to meet the current targets that have been established for reductions. More creative means of tackling climate change clearly are needed. Fortunately, Kyoto's flexible mechanisms still hold potential for further innovation, and the carbon market continues to produce new avenues for players to diversify their emission cutting strategies. An ever-growing market for carbon emissions trading has emerged since the implementation of the European Union Emissions Trading Scheme (EU ETS) in January 2005, with futures and spot contracts of European Union Allowances (EUAs) trading on several exchanges across Europe (see EU Emissions Trading Scheme turns One). These exchanges offer a variety of carbon financial instruments, use either auction or continuous trading models, and cater mostly to companies within the high-emission power and steel sectors affected by the first phase of CO2 allowances under Kyoto. This has created a market for emissions trading across sectors and countries, but all the exchanges have had to face growth issues connected to geographical spread and liquidity (see Creating a "Wall Street" for Carbon). Now, one partnership has emerged among the exchanges to link the European carbon market to the development of Clean Development Mechanism (CDM) projects in Asia. The CDM allows companies in developed nations to fund emissions reduction projects in the developing world in exchange for Carbon Emissions Reductions (CERs) that they can use to meet emissions requirements under the Kyoto Protocol. Together, Asia Carbon Global (Asia Carbon Exchange-ACX-Change) and New Values (Climex) have set up a CDM market in the form of auctions using an existing carbon trading platform, making them the first to offer global on-line auctions for forward CERs contracts generated by CDM projects. So far, two auctions have taken place, the first during the last week of November, and the second in mid-December. A third is scheduled for this week on 13 January, and its results will show if the momentum that has built between the first two will continue and keep expanding the carbon market's use of CERs.

Round One

New Values, an Amsterdam-based exchange that uses Climex as its online CO2 emissions trading platform, hosted both of the first two online auctions, using moderators to supervise the proceedings. The first auction saw approximately 1,5-mil CERs up for bids. The CERS came from 12 CDM projects based mainly in India and Vietnam in the field of renewable energy. The vintages of the CERs ranged from 2007 to 2012, and all the projects had submitted a Project Design Document to the CDM Executive Board at the time of the auction. On the buying end, five potential buyers submitted bids of prices ranging from € 3.75 to € 6.25. A total of eight transactions were closed for a total of 130.000 tons (1 CER = 1 tonne) and one whole project was sold in Vietnam. According to Vinod Kesava, Chief Operating Officer of ACX, "[T]here is clearly an interest for CDM projects as a defined channel for acquiring emission rights. ACX-Change is constantly aggregating more CERs arising from CDM projects and our on-line trading model is an excellent and transparent way to find the best possible price for the CERs."

Asia Carbon Global

ACX-Change is the trading platform of Asia Carbon Global (ACG). Formed in 2003, ACG provides carbon advisory services, carbon finance and carbon asset management services under several different initiatives. It also runs the Asia Carbon Fund, aimed at financing renewable energy technologies used for power generation. ACG's Carbon Advisory team helps project developers assess potential CDM projects and register them with the UNFCCC. In particular, ACG advises project developers on the drafting of the Project Design Document (PDD), a key registration document containing the case for project additionality and the emissions baseline. Once projects have a PDD they are eligible to be listed on the auction. Other registration measures such as verification by a Designated Operational Entity (DOE), the confirmation of registration by the UNFCCC, and the obtainment of host country approval, do not need to be finalized for a project to be listed on the auction. While the fact that projects may not yet be completely registered by the CDM's Executive Board means that buyers are taking on a certain amount of risk, ACG's Carbon Due Diligence is supposed to mitigate this by rigorously determining a project's eligibility and quantifying its carbon credit generation potential. The future forwards set-up of the auction contracts allows buyers and sellers to proceed with investments without having to wait for the CDM's Executive Board to issue CERs to CDM projects–a good thing, since the Board just issued its first credits in October 2005, to two hydroelectric projects in Honduras (see Kyoto's CDM: Frustration Mounts). So far, ACG has worked on CDM projects with developers in China, India, Vietnam, and Indonesia, many involving the use of wind, biomass, and waste for power generation. The idea to hold an auction of the CERs from the projects was brought about through the launch of the ACX-Change platform in May 2005, and by the partnership with New Values that it soon secured after that. This provided a joint platform that brought together buyers and sellers, on which a structured and open bidding process could take place. At the time of announcing their collaboration, Axel Posthumus, CEO of New Values noted that the partnership "intends to connect the EU ETS market with the global CDM market and intends to provide additional CERs for European institutions. For market players this means that the market becomes more liquid and therefore more trustworthy." The ACG partnership fits with Climex's strategy of increasing the market liquidity by expanding geographically through the use of partnerships. In this vein, the Climex Alliance was launched in November 2005, to bring together the regional partners of Sendeco2 (Spain), STX Services (the Netherlands and Czech Republic), Vertis Finance (Hungary) and UKPX and APX B.V. (the Netherlands and United Kingdom). The partnership with ACG however, has taken New Values outside of Europe, and has opened up another avenue for companies interested in expanding their means of tackling emission reductions.

Round Two

The second on-line auction, held on December 16th saw a huge increase in the number of CERs sold. A total of 610.000 tons were bought by 11 different buyers, signaling both an increase in volume of over 400% and a doubling of the number of buyers participating. Approximately 1.75-million tonnes of forward CERs were offered from 13 CDM projects during the December auction. Again, most of the projects auctioning off credits were based in India and Vietnam in the field of renewable energy. The CERs sold boasted vintages ranging from 2001 to 2012 and two whole projects were sold. "We are certainly satisfied with the amount of buyers, so far, that are interested in the exchange platform and (that) recognize the streamlined opportunity it offers to both buyers and sellers of CERs. The kind of reactions we are receiving from potential sellers of CERs is very positive and they are quickly recognizing the opportunities in placing CERs on our joint platform, as it shows them the speed at which CERs can be sold in the open carbon market in a cost-effective, transparent manner," says Kesava of ACX. "We were hoping to see a significant improvement in the prices bid for the auction and an increasing number of participants and CERs sold." While Kesava's wish for increased participation and volume was realized in the second auction, the price range for the CERs that sold was nearly identical to the first auction. Most projects received bids ranging from € 3.30 to € 6.10, with a total of ten transactions concluded. The current prices from the two auctions position CERs from CDMs as a cheaper alternative to emissions trading. However Tames Rietdijk, Chief Technology Officer at New Values, says that prices may not continue to be lower in the long-term "Buying CERs now in a forward contract, in which the price is agreed upon already, will result in a lower price for CERs then expected in the near future to be paid for both CERs and EUAs," he says.

Looking Ahead

The next auction is scheduled for this week (January 13 2005), when it will be interesting to see whether the price stability continues for auctioned CERs. Climex and ACX-Change plan to hold auctions regularly throughout 2006, with CDM Projects expected to yield approximately 3 million tons of forward CERs. Prospective buyers and sellers can register with either Climex or ACX-Change. "The ACX-Climex auction platform has proven to show stability in conducting these trades and we are confident of attracting buyers who we provide with an efficient opportunity to select and purchase CERs from a large variety of projects," says Rietdijk. "In return, project developers can be more and more certain of benefiting from transparent and competitive price developments within the CDM Auction as a distribution channel for them." As to the development and growth of the format and processes of the auction, Rietdijk notes, "we are still in an early stage and therefore also continuously developing our platform and auction procedures. For example, we have identified different types of buyer groups and for the January auction we are tailoring the platform to their specific needs." While the auctions seem set to continue for at least the next year, when asked how long he thinks the auction format will continue, Rietjik predicts, "as soon as standardization has reached a level of fungibility of CERs over the various projects, we will start trading CERs over our existing exchanges on a continuous basis." Careesa Gee works in sustainable development, and is currently based in Hong Kong. She can be reached at careesa.gee@nullgmail.com. First published: January 11, 2006