2014/3/25 1

From BIGGER to BIGGEST

---China’s Carbon Market

广州碳排放权交易所

China Emissions Exchange

2014/3/25

From CDM to CCER 二

一 NAMAs and Chinese ETS

Waste or Gold Mine 三

2

2014/3/25

NAMAs and Chinese ETS

Trading volume of global carbon market reaches 10.7 billion tons, 26% increase year-by year; 61 billion.

Average carbon unit price

fall below 5.7 euro per

ton, only half of 2011

level (11.2 euro/ton)

2012 Trading volume of global market is 5.7 billion tons, 21 billion dollar.

Average price is 3.7 euro/ton,

CER? 0.XX euro/ton

2013

Worth Doing? Or start our own trading system?

3

Source: World bank & IETA

2014/3/25

NAMAs and Chinese ETS

• Target: commitment to reduce the CO2 emissions per unit of GDP by 40 to 45 percent from 2005 levels and use non-fossil fuels for about 15 percent of our energy.

• Top Level Plan: 18th’ National Congress of the CPC propose to carry out the carbon emissions trading.

Working Plans:

• State Council published 12th Five year plan on controlling GHG emission, which also emphasize the importance of carbon emissions trading.

• NDRC published Notice of national development and reform commission agreement in carbon emissions trading pilot , which proves seven pilots to launch ETS.

• CPC Central Committee and State Council published Decisions on enhancing work for coping climate change.

Clear National Policy

Before establishing national carbon market

4

NAMAs and Chinese ETS

Guangdong Shanghai Tianjin Beijing Shenzhen

Covered Emission/Regional Gross

43%-50% About 50% About 60% About 40% 38%

Allowance Allocation

Covered Sectors Power, cement, steel, iron, petrochemicals) Textile, non-ferrous metals, plastic, paper may be included later. Transports and buildings (public, commercial) construction are part of the newly released regulation

16 sectors: industrial sectors (electricity, iron & steel, petrochemical, non-ferrous metal, chemical, building materials, textile, pulp & paper, rubber, chemical fiber), other sectors (airlines, ports, airports, railway, commercial, hotel and financial sector buildings).

Iron and steel producers, chemical facilities, power and heat generators, oil and gas exploitation, residential buildings.

Electricity providers, heating sector, manufacturers (automobile, cement, petrochemicals) and major public buildings (health, education, banking, …)

Almost all sectors. 26 sectors for now. Including industrial companies, building sector and electricity generators. Transport inclusion under consideration.

2013 Allowance Vol. 388 mtons 160 mtons 160 mtons 103 mtons 30 mtons Starting Date 2013/12/19 2013/11/26 2013/12/26 2013/11/28 2013/6/18

Allocation methods For P1: mainly grandfathering based on 10-12 emissions, considering sectors’ characteristics.

One-off free allocation for 2013-2015 based on 2009-2011 emissions, growth considered. Whenever possible, benchmarks will be used.

Free allocation based on historical emissions (existing entities) and benchmarks (new entrants).

Free allocation based on 09-12 emissions or carbon intensity (corrected by a sector-specific factor) declining with time. New entrants’ allocation based on benchmarks.

Free allocation based on firms’ historical emissions, performance and future activity level.

Offset mechanism CCERs allowed for up to 10% of compliance obligation, 70% of which must stem from local projects.

Up to 5% of annual compliance obligation.

Up to 10 % of CCERs are allowed for compliance obligation.

Up to 5% of CCERs are allowed for compliance obligation. At least half of used CCERs must originate from local projects (except certain types of projects owned by liable entities).

Up to 10 % of CCERs are allowed for compliance obligation.

Enforcement/Penalty (including administrative

penalty)

Fraud in emission report: rectification and then ¥ 10k -30k penalty/firm. Impediment of verification work: rectification and then ¥ 10k -30k up to 50k penalty/firm. For non-compliance penalty: deduct 2 times the missed quota from next year’s allowances and ¥ 50k penalty Also penalties for fraud of trading exchange and verification entities.

Failed to submit emission report in due time: or fraud in emission report rectification and then ¥ 10-30k/firm. Impediment of verification work: rectification and then ¥ 30k -50k /firm. Non-compliance penalties range from 5,000-100,000 RMB/firm. Also penalties for fraud of trading exchange and verification entities.

Levels and details of penalties not specified.

Failed to submit emission report in due time: rectification and then ¥ 50,000/firm. For non-compliance:3-5 times market carbon price for every missing allowance.

Failed to submit emission verification report in due time or fraud: rectification and then ¥ 10-100k/firm. For non-compliance: reduction from following year’s allowances and 3 times the market price for every missing allowance. Also penalties for fraud of trading exchange and verification entities.

MRV Reporting before 31th March, Verification by a third party is required and report submitted before 30th April, Compliance before June 20 Allocation on July 1 each year

Following-year monitoring report submitted by December 31. Yearly emissions report by March 31 and verification report by a 3rd party submitted by April 30. Annual compliance between June 1 and June 30.

Following-year monitoring report submitted by November 30. Yearly emissions report and verification report by a 3rd party submitted by April 30. Compliance by May 31. Not allowed to use the same verification agency for 3 consecutive years.

Yearly emissions reports submitted by April 15. Verification by accredited 3rd party required and report submission before April 30. Allowance allocation by June 30 and compliance by June 15. Compliance information dissemination before end July.

Yearly emissions report submitted by March 3, and verification report submitted by a third party before April 30. Yearly allowance allocation before May 31. Compliance by June 30. Not allowed to use the same verification agency for 3 consecutive years. Compliance information dissemination before end July.

Trading

Trading Platform CEEX SEEEX CTEEX CBEEX CERX OTC Not Allowed Not Allowed Not Allowed Allowed, need to

register Not Allowed

Trading Products GDEA&CCER(SPOT)

SHEA&CCER(SPOT)

TJEA&CCER(SPOT) BEA&CCER(SPOT) SZA&CCER(SPOT)

Allowed Participants Compliance entities,

individuals and investment institutions.

Compliance entities,

individuals and investment institutions.

Compliance entities,

individuals and investment institutions.

Compliance entities

Investment institutions,

individuals are not allowed.

Compliance entities,

individuals and investment institutions.

Comparison of five pilots that have been launched.

2014/3/25 5

2014/3/25

NAMAs and Chinese ETS

Resource: BNEF, Point Carbon

How big is Chinese carbon market

Assuming all seven pilots launch as planned…

2203

833 178 348 340

EU China CA-Quebec Korea Australia

It is estimated that National wide Chinese carbon market will be bigger that EU, could’ve reach 25 billion allowances.

6

In million allowances

CDM Legacy…

• Thousands of emission reduction projects established in relatively short time

• Capacity in MRV and project developing • Fairness---Issuance system v.s. Corruption • Methodology system is mature • ......

From CDM to CCER

2014/3/25 7

Till 24th February 2014, NDRC approved 5007 Chinese CDM proejcts.

Area distribution of approved projects

2014/3/25 8

From CDM to CCER

Approved CDM projects in characters

2014/3/25 9

Energy Efficiency Renewable

Alternative Energy

Methane Utilization NO2 Destruction HFC-23

Waste Incineration

Reforestation

Others

From CDM to CCER

We expect same proportion in CCER projects portfolio

What is CCER: Chinese Certified Emission Reduction

2014/3/25 10

From CDM to CCER

CDM Methodology

EB

Buyer:Annex I

CCER Modified

Chinese NDRC

Domestic entities

2014/3/25

•Constructed after 2005/2/16

•Applied NDRC approved methodology

•Has been approved by NDRC as CDM projects but not

registered in EB

•Produced ER before registered in EB and proved by

NDRC

•Registered in EB but has not yet been issued

What projects are eligible to become CCER？

11

From CDM to CCER

Approximately 150 CDM methodologies have been transferred into Chinese CCER methodology and approved by NDRC

2014/3/25 12

From CDM to CCER

Energy 74%

Industrial processes

7%

Agriculture 15%

Waste manag. 4%

Energy 77%

Industrial processes

10%

Agriculture 11%

Waste manag. 2%

Composition of China’s GHG emission by sectors in 2005 and 1994

Source: P.R.C. Initial and Second National Communication on Climate Change

2014/3/25 13

Waste or Gold mine?

2005 1994

2014/3/25

Source: Point Carbon Carbon Market Monitor.

14

Waste or Gold mine?

2-3% of gross Guangdong emission = 15-20 million tons

85 projects under public review, total estimated ER reaches 25 million tons, in which waste projects contributes to 584,149 tons of ER.

2014/3/25 15

Methane Capture from

Farm Landfill Gas

Municipal Solid Waste …

Waste or Gold mine?

Maximum Demand of CCER during pilots’ period is 87 million tons---Great Opportunities

2014/3/25 16

Waste or Gold mine?

Profitable

Carbon sales (5-

15%)

Waste treatment subsidiary (20-30%)

Power Sales(With

Feed-in-tariff 0.65Yuan/kw

) 70-80%

Example of revenue structure of Guangdong local Waste Power Plant (Treat 1500tons of waste per day and generate 550,000kw)

Source: Interview with plant investor

2014/3/25 17

Waste or Gold mine?

Problem

2014/3/25 18

Challenges

For Potential National ETS: • Data collection and data quality • Top-down implementation of ETS • Integrate pilots’ ETS and national ETS in harmony way • Huge amount of capacity building work • MRV and upfront cost incurred with establishing Chinese ETS

For Voluntary Market (CCER), especially for waste sector: • Without stable price signal, investors are more attracted with large scale

projects (project cost coverage) • Need more flexible methodology to develop small scale projects or PoA • Whether waste power plant should be covered by ETS or be allowed to develop

CCER project and obtain credits profit. • Co-benefits requirement/standards? Environment? Society? etc…

2014/3/25

Thanks Warren Li, Senior Business Manager

China Emissions Exchange

lyuan@cnemission.com

19