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US bid-ask spreads


									US, Russia: How they affect Japan?
     —Intentions of Big Players—

             Climate Experts Ltd.
               Naoki Matsuo
EU: Utilization of Emissions Market
 EU ETS—Model: US SO2 Allowance Trading Scheme
   Clear message to the participants
      e.g., Implement regardless of entry into force of the Protocol,
      and continue beyond 2013
   Liquid market realized
      Hundreds of thousands of transactions per day;
      Bid-Ask spread: around € 0.2 (1%)
   Participants are incorporating the EU allowance price into the
   daily decision making of corporate management
       e.g., Indicator: spark spread of natural gas and coal
           Spark spread: almost zero incl. EU allowance [market functions!]
   EU allowance price: rapidly growing (by high oil price)
      Already influenced for Japanese firms to buy CERs
           Japanese firms: lack a sense of urgency,
           EU firms: seeking low cost CERs
                                (Source) Natsource Japan Letter


          (Source) Argus European Emissions Markets
        Russia: Political Game
Political Aspects
   At Kyoto Conference: Obtain huge ‘subsidy’
      −5% → 0% (if not accepted, Russia may have not participated…)
      [Note] “Hot Air” is not an environmental but a political issue
   Bargaining chip ⇐ Got many benefits from EU
      Let Illarionov, presidential economic advisor, to play a villain
   How Russia behaves in the negotiations of the 2nd Period’s target?

   At the end of the 1st Period… [2014]

      If supply will be in short, Japan must buy a lot even if very expensive
          Surplus units do not need to be sold cheeply, as they can be carried over
          How Japan would promote CDM/JI and domestic reductions by then?
          Would GHG reductions be promoted trough price signal anywhere?
            » Emissions market works = Market looks for hidden reduction options
       Russia: Huge Supplier?
Eligibility conditions to participate in Kyoto Mechanisms (by 12/2006)
   Necessity conditions
       Ratification; Settlement of the base year emissions
   Conditions to invite JI track 2 (CDM-like)
       + Registry system (bank of the GHG units) establishment
   Conditions to invite JI track 2 and participate in Emissions Trading
       + National GHG Inventory system (monitoring system) establishment
Will Russia be able to meet all of these conditions?
   At present, only “ratification” is met
   Whether inventory/registry system will be prepared in a year and a half?
       EU is now supporting, but… ?!
       Review is technical. Judgment by the Compliance Committee (not COP/MOP)
   What will happen if the conditions are met beyond 2007?
       Russia may be eligible to participate in emissions trading, but it is doubtful to
       sell the excess GHG units (esp. AAUs) in the past retroactively…
              US: Political Aspects
Former Bush administration [steering a reality course]
    Developed some institutional infrastructures (e.g., Energy Policy Act 1605(b))
    Negotiated/ratified the UNFCCC
Clinton – Gore administration [steering an idealized reality course]
    Failure of BTU tax ⇒ Difficulties in introducing strong measures, politically
    Forced introduction of “emissions trading” as the last resort
        Emissions trading may be able to get across industries and the Senate…
        CDM is almost a copy of JI concept in the US proposal
        Kyoto Protocol is almost identical to what the US desired, except for voluntary
        participation clause of the non-Annex I countries
        US insisted on “rigid” rules in the negotiation to the Hague (COP 6)
              Market works only under the rigid institutional framework (based on the SO2 experiences)
              Market works only under the rigid institutional framework (based on the SO2 experiences)
Bush – Cheney administration [dislike Gore’s Protocol and climate issue]
    Almost no new roll expected (domestic/international) during this administration
        On the other hand, DOE/EPA tries to go forward within limited compass
              e.g., (Hydrogen) energy technologies development;
              e.g., (Hydrogen) energy technologies development;
              new Guidelines for EP Act 1605(b) (with early crediting)
              new Guidelines for EP Act 1605(b) (with early crediting)
        Domestic GHG emissions trading is proposed in the Congress (still difficult in reality)
            US: Future Prospect
Dependent on the following administration(s)
Unlikely to rejoin the Kyoto framework in the 1st Period

   Emissions are unrealistically high now to accept current target level…
Key: Whether rest of the world will be able to prepare a framework
for the US to participate…
   Fascination of the emissions market
       At present, the US is most experienced in this new market…
   Target setting in reality
   Non-Kyoto framework (under the Convention), if needed
       Common for participation of non-Annex I countries
Other points
   Revival of nuclear in the US
   High oil price ⇒ Coal fired power increase
   US’s behavior will affect the emissions market price a lot
China: China Development Mechanism?
 Unrealistic to set target in the coming decades
 Huge potential under CDM
    Provisional Guidelines (June, 2004) ⇒ Revision at the end of 2005 (?)
    Unique stances
        Revenue of CERs belongs to China
            Investing Annex I must “purchase” CERs (at market price?)
               » Even the project implements very low-cost options
               » “CER price” is a judgment item for Governmental approval
            Some portion of CER revenue is kept back by the Government (based on
            sustainability consideration)
               » HFC 23, N2O from adipic acid: 60~70%
               » Energy saving, coal-mine methane, renewables: almost zero
    What portion of the huge potential will Japan acquires…?
        Around 100 million CO2eq/annum for HFC 23, N2O
                              2                     2
        Strategic behavior needed…

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