As more and more governments start to regulate their countries emissions, Carbon trading could become the World’s biggest commodity market; UNEP, ecologists and the scientific community have long argued that forests are worth billions, if not trillions of dollars, if their worth can be captured by economic and financial models.

In the efforts to reduce, control and (one day) eliminate harmful emissions, each member state of the EU currently receives an annual emission allocation that is then divided between its worst emissions-producing companies.
These companies are then legally obliged to comply with their set emissions targets. If a company comes in under its set target, it can sell its excess as “carbon credits” allowance to other companies that have overshot their targets. If a company exceeds its permitted levels, it has to pay a penalty and buy credits to make up the difference.
Right now, with an abundance of carbon credits available, their price is relatively low. However, with the second phase of the program, 2008-2012, now in play and a reduced amount of credits available and ever more stringent emissions targets, prices are set to rise. When the United States signs the Kyoto agreement and sets its own guidelines and targets, the price of carbon credits could potentially explode.

The European Climate Exchange (ECX) is the leading marketplace for trading carbon dioxide (CO2) emissions in Europe and internationally.
ECX currently trades two types of carbon credits: EU allowances (EUA’s) and Certified Emission Reductions (CERs).
Trading on ECX began in April 2005, when futures contracts were launched on European carbon dioxide emissions, known as EU Allowances, with options on EUAs following in October 2006. Futures and Options on CERs were introduced in 2008, further cementing ECX’s position as the industry benchmark for carbon trading globally. In 2009, two new spot-like contracts were added, the EUA and CER Daily Futures contracts.
ECX volumes are experiencing tremendous growth. The carbon market’s total value for 2008 was estimated at 92bn (US$125bn), more than double the 40bn it was worth in 2007.
ECX carbon contracts are listed for trading on ICE Futures Europe (the former International Petroleum Exchange). ECX and ICE Futures Europe have a partnership whereby ECX manages the product development and marketing of its emissions contracts and ICE lists those contracts on its electronic trading platform. All contracts are cleared by ICE Clear Europe, enjoy standardized terms and are regulated by the UK’s Financial Services Authority (FSA). Over 100 leading global businesses have signed up for membership to trade ECX emissions products. In addition, several thousand traders around the world have access to the ECX emissions market on ICE Futures Europe via banks and brokers.
ECX is a member of the Climate Exchange Plc group of companies. Other member companies include the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE). Climate Exchange Plc (CLE) is listed on the AIM market of the London Stock Exchange. ECX offices are located in London.

Chicago Climate Exchange (CCX) operates North America’s only cap and trade system for all six greenhouse gases, with global affiliates and projects worldwide.
CCX Members are leaders in greenhouse gas (GHG) management and represent all sectors of the global economy, as well as public sector innovators. Reductions achieved through CCX are the only reductions made in North America through a legally binding compliance regime, providing independent, third party verification by the Financial Industry Regulatory Authority (FINRA, formerly NASD). The founder, Chairman and CEO of CCX is economist and financial innovator Dr. Richard L. Sandor, who was named a Hero of the Planet by Time Magazine in 2002 for founding CCX, and in 2007 as the “father of carbon trading.” CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets.
Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument® (CFI®) contracts.

CFI Contracts, the CCX Tradable Commodity The commodity traded on CCX is the CFI contract, each of which represents 100 metric tons of CO2 equivalent. CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule. Exchange Offsets are generated by qualifying offset projects.

No-one can predict with any certainty what the energy mix will look like in 2030, let alone 2050. Fossil fuel generation will undoubtedly still be a substantial part of the equation. However, it is clear that any future low carbon energy infrastructure will have to include a significant proportion of energy generated from renewable sources – most scenarios showing the proportion of primary energy having to reach 40-50% by 2050. Some of the leading technology contenders are emerging and, in some cases have begun to build significant experience. In this section, we highlight eight renewable energy technologies which look particularly promising in terms of two factors: abatement potential and current state of competitiveness. In the next section we will look at some of the other technologies – principally around the digital/smart grid, energy efficiency, power storage and carbon capture and sequestration – which will be required if low carbon energy is to fulfill its full potential within the future energy mix.

The most mature of the renewable energy sectors, the onshore wind industry saw 21GW built in 2007, bringing installed capacity to over 100GW. In Germany, Spain and Denmark wind power now supplies 3%, 11% and 19% respectively of total electricity production during the course of the year, and in Denmark up to 43% of the country’s electricity demand at times of peak wind supply. Electricity from onshore wind can be generated at prices of 9-13 c/kWh, making it only 32% more expensive than natural gas CCGT, even in the absence of a carbon price.

When the best sites for onshore wind have been snapped up, the next place to look for large quantities of renewable energy is offshore. Offshore wind offers enormous potential, with stronger more predictable winds and almost unlimited space for turbines. Planning permission can be easier to obtain than onshore, farms can be built at scales impossible on land, and the availability of space is almost unlimited if deep waters are mastered. At present, the cost of electricity from offshore wind is high – around 16-21 c/kWh – but this will come down rapidly as more project experience is gained.

Photovoltaic (PV) technology has made very rapid strides in the past four years, in terms of reducing the cost of crystalline silicon (its main component) and commercializing thin film technology, with investment volume growing to US$ 50 billion in 2007-2008. Although there has been a bottleneck in the production of solargrade silicon, new capacity is coming on line and costs are set to drop rapidly from US$ 4/W to US$ 2.60/W by the end of 2009, making unsubsidized solar PV generation costs comparable with daytime peak retail electricity prices in many sunny parts of the world.

While PV is ideal for smaller projects and integrated into buildings, the technology of choice for big solar plants in the world’s deserts looks set to be Solar Thermal Electricity Generation (STEG): concentrating the heat of the sun to generate steam, which can be used in conventional and highly efficient turbines. There are relatively few projects up and running yet, but with costs already in the 24-30 c/kWh range, this technology is shaping up to be a part of the solution in the sunniest parts of the world.

The use of municipal solid waste to generate energy is increasing, led by the EU countries. Waste has traditionally been deposited in landfill sites, a practice which is becoming increasingly expensive and constrained by shortage of sites. Landfill also creates methane, a powerful greenhouse gas. Waste that cannot be recycled, however, can be used to generate electricity by a variety of technologies at costs starting at 3 to 10 c/kWh. Government support for the development of MSW plants is increasing, for example through the Private Finance Initiative (PFI) in the United Kingdom. The US MSW sector is also seeing a resurgence, with specialist operators planning to build several new plants.

The period 2004-2006 saw US investment in biofuels soar, with investors pouring US$ 9.2 billion into the sector. But most of this flowed into corn-based ethanol, which is more expensive to produce than sugar-based ethanol, subject to volatile prices and controversial because its feedstock is a food staple around the world. By contrast, Brazilian sugar cane-based ethanol is competitive with oil at US$ 40 per barrel; it grows well in many southern hemisphere countries (and far from the Amazon); and there is no shortage of land to increase production substantially without jeopardizing food production.

The argument over food vs fuel is an emotive one. In most regions, there is sufficient land to increase biofuels production from the current 1% of transport fuel to 3% or even 5% without impacting on food availability (as long as we can quickly return to increasing annual agricultural productivity). But after that the only way to increase production of biofuels will be to source feedstock that does not compete with food. Luckily, the cost of producing biofuels from agricultural waste through cellulosic conversion and algae is coming down rapidly, and the future fuel system is likely to include a proportion of fuels from these sources. Future technologies could include artificial photosynthesis and synthetic genomics.

Geothermal power is particularly attractive as a renewable energy source because it can be used as predictable base-load power in a way that wind and solar power cannot be. Until now, geothermal power has been used only in limited regions, but a raft of new approaches has helped make it economically viable across a wider area. In addition, all countries can exploit geothermal resources for ground source heat pumps or district heating, if not for large-scale electricity generation. It is important to emphasize that these are by no means the only clean energy sectors of promise. There are many other emerging technologies – a wide range of biomass based power generation approaches, wave and tidal power, ground source heat pumps, ocean thermal and osmotic power – each of which has substantial potential and its fervent admirers. Nuclear power is also set for a renaissance in many countries around the world. Nuclear energy’s share of total electricity production has remained steady at around 16% since the 1980s, when 218 reactors were built around the world. However, nuclear power will clearly be part of any future energy system, although its contribution will be limited by issues of cost, storage, safety and public resistance. We do not consider it in detail in this paper.

In summary, the long-term outlook for carbon remains bullish as momentum towards a network of national and regional schemes remains strong. In a short space of time, carbon credits are beginning to provide an economic rationale for the large-scale roll-out of renewable energy, commercial carbon capture and sequestration projects. Perhaps the biggest problem the carbon market presents to investors – other than its sheer complexity – is its apparently uncertain future. The Kyoto Protocol in its current form lasts only until 2012. Two processes are under way, working to develop a successor regime: one involving those nations that have ratified Kyoto, and a second, the so-called Bali roadmap, which includes the US. The December 2008 Poznan negotiating session, which took place after the US election but before the Inauguration of President Obama, produced little of substance, although this was not surprising. Issues debated included the adoption of emissions targets for large developing countries (India and China) –although this was firmly rejected, the structure of the CDM, the inclusion of credits from avoided deforestation and carbon capture and sequestration and, of course, the potential commitment by the US. President Obama has signified that such a commitment will be forthcoming under his leadership. Negotiations in Copenhagen were seen as the last chance to set a solution in place before the current Kyoto arrangements expire in 2012, although missing that deadline does not mean the process is dead. Whatever happened in Copenhagen, the future of the EU ETS and CDM is secure. The EU has shown a strong commitment to climate goals in general – most recently passing the climate package which sets out its target of reducing emissions by 20% by 2020, and by 30% if other nations join in – and to the EU ETS in particular. It will also continue allow CDM credits to be used in trading of local carbon reductions. New Carbon Finance’s central forecast for the price of credits in Phase II of the EU ETS is for an increase from the current US$ 21 per tone to US$ 40 per tone in 2012. Beyond 2012 prices will continue to rise as carbon caps bite more deeply in the run-up to 2020 and beyond, and easy sources of credits are exhausted.

Early Stage investment into reforestation may well reap huge rewards for investors, and help save our planet.