Transcript Document - K&L Gates

Carbon trading and finance for funds
Christopher Tung, Partner, K&L Gates, Hong Kong
Rutger de Witt Wijnen, Partner, De Brauw, Amsterdam
3 September 2010
Copyright © 2010 by K&L Gates Solicitors. All rights reserved.
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Overview
 Opening observations
 An introduction to carbon assets
 Underlying projects
 A climate policy & law timeline
 What is a carbon fund?
 Types of carbon funds to date
 Structures for a carbon fund
 Carbon trading and finance for clean tech funds
 Future trends
1
Opening observations
 Why consider carbon assets at all?
 Almost all clean tech projects and solutions result in
emissions reductions
 Carbon assets are an additional revenue stream for
clean tech developers and investors
 Demand for carbon assets from compliance buyers
and intermediaries
 Post Copenhagen prospects and post 2012
 The impact of low carbon national policies
 Build experience and capacity early
2
An introduction to carbon assets
 No universal legal definition
 An avoided unit of pollution
 Greenhouse gases – carbon dioxide, methane,
nitrous oxide, HFCs, PFCs and SF6
 Unit of measure: tCO2e
 A creation of policy and law
 A compliance unit in emissions trading schemes
 Distinguish between credits and allowances
 Not a physical commodity
 An intangible asset
 Nature of carbon asset critical to trading and finance
3
An introduction to carbon assets – cont’d
 Danger of traditional classifications e.g. goods,
services, financial instrument or currency
 Also used as offsets (carbon neutrality, net “zero”
carbon and low carbon solutions) – applied in the
aviation, building & construction, energy, finance and
retail sectors
4
Underlying projects
Underlying projects:
 Renewable energy
 Fuel switch
 Energy efficiency
 Coal mine methane
 Landfill gas
 Waste heat recovery
 Waste (including waste water recycling)
 Forestry (Agriculture)
 Must be additional (a legal and technical test)
emissions reductions that are real, measurable and additional, which
would not have occurred under ‘business as usual’
5
Underlying projects – cont’d
6
Underlying project - cont’d
Baseline
Coal Fired Power
(Business as usual)
Emission Reductions (ERs)
CDM Project
Wind Farm
7
Climate policy & law timeline
1992
Rio Earth Summit
UNFCCC
2004
Introduction of
China CDM
Measures
2012
1st Commitment
Period ends
1993
China ratifies
UNFCCC
2005
Kyoto operational
EU ETS Phase I in
force
COP 13 Montreal
China RE Law
2015
China RE target
15%
Review of
Copenhagen
Accord
End of 12th FYP
1994
China Agenda 21
2007
CNCCP
COP-13 Bali
Bali Action Plan
National Leading
Group on Climate
Change formed
2016
Start of 13th FYP
1997
Kyoto Protocol
2001
Marrakech Accords
2008
China climate
position paper
COP-13 Bali
Bali Action Plan
1st Commitment
Period starts
2020
40-45% national
carbon intensity
reduction target
End of 13th FYP
2002
2003
China ratifies Kyoto
Protocol (KP)
NDRC designated
China DNA
NC4 established
KP extended to
Hong Kong
2010
2009
COP-15
Copenhagen
Accord
China national
carbon intensity
target proposed
China RE target
10%
20% reduction in
energy intensity
of GDP
COP-16 Cancun
2030
Objective for
China peak
emissions (CAS
2009)
2011
Start of 12th FYP
2050
80% emission
cuts by Annex I
countries
8
What is a carbon fund?
An investment vehicle that either:
 repays investors in carbon assets; or
 uses income from the sale or trading of carbon
assets to generate or enhance investment
returns
 distinct from informal legal structures such as carbon
funding and purchasing facilities, pooling, and
aggregation of emissions reduction projects or carbon
credits for sale
9
Types of carbon funds to date
 Multi-lateral bank carbon trust funds (World Bank’s
Prototype Carbon Fund, ADB Asia Pacific Carbon
Fund, EBRD Carbon Fund)
 Government carbon funds/facilities/purchase
programmes (Danish Carbon Fund, IFC-Netherlands
Carbon Facility, CERUPT & ERUPT)
 Private carbon funds (Carbon Assets Fund, Climate
Change Capital Carbon Fund, European Carbon
Fund)
 China CDM Fund (collects & pools CER levy, and
intended to invest in carbon projects)
10
Structures and domicile for a carbon fund
Fund vehicle
 Limited partnerships
 Limited companies
 Joint ventures
 Trusts
Fund domicile
 Cayman Islands
 Luxembourg
Fund structures
 I, II and III (as follows)
11
Fund Structure I
€
Projects
€
Participants
Fund
Carbon
Credit
Carbon
Credit
Manager
12
Fund Structure II
Manager
Participants
Projects
Fund
Participants
Participants
Instructions
Carbon Credits
€
Custody
Carbon Credits
Escrow
€
13
Fund Structure III
Manager
€
€
Projects
Participants
Fund
€
Carbon
Credit
Carbon
Credit
€
Market
14
Carbon trading and finance for clean tech
funds
 A typical private equity clean tech fund
 Not set up for carbon trading or finance
 Fund must have qualifying entities to act as buyer of
Kyoto units (ERUs, CERs), it must also have an
account in a qualifying national registry to receive
Kyoto units
 No such restrictions on the trade of VERs
 Future domestic Chinese carbon credits
 Flexibility to adapt to changing policy and law (note
the ability of HK companies to wholly own Chinese
CDM projects since 1 December 2010)
15
Future trends
 Drive towards the development of low carbon
economies
 Market mechanisms will continue to be part of the
overall policy and regulatory response
 Aggressive development of a domestic Chinese
carbon market
 Export of Chinese know how and carbon finance
 Potential outcomes at COP 16, Cancun in Nov/Dec
16
Contact details
Christopher Tung, Partner
K&L Gates
44th Floor, Edinburgh Tower
The Landmark
15 Queen’s Road Central, Hong Kong
[email protected]
Rutger de Witt Wijnen, Partner
De Brauw
Amsterdam
The Netherlands
[email protected]
Link to article: China & Hong Kong: Building Low Carbon Economies
http://www.climatelawreport.com/2010/06/articles/financinginvesting/china-and-hong-kong-building-low-carbon-economies/
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