Emissions trading and carbon finance: harnessing market forces to reduce greenhouse gas emissions

Carbon trading has emerged as one of the most powerful mechanisms for incentivizing reductions in greenhouse gas emissions at scale. Following the lead of early initiatives successfully targetting acid rain pollutants in the US, governments around the world established cap-and-trade systems for reducing carbon emissions, most notably the so-called flexible mechanisms of the Kyoto Protocol and the EU’s domestic vehicle for achieving its collective Kyoto target, the EU Emissions Trading Scheme (EU ETS). In their short history and with the US sitting on the sidelines, carbon markets have grown rapidly, reaching over $100 billion dollars of annual transactional value, spawning new business models for incentivizing clean energy and carbon reduction projects throughout the world, boosting the economic prospects of new low carbon technologies, and ultimately delivering billions of tons of reductions in carbon emissions. At the same time, serious design flaws in the regulations have reduced the effectiveness of the market and led to considerable public criticism, much of which can and must be corrected as the US develops its own cap-and-trade system.

The main objective of this talk is to introduce the fundamental concepts behind carbon trading and give the audience a practical feel for the mechanics of the existing international carbon markets. We will discuss in detail the two main markets: the EU ETS and its establishment of a real-time price signal on carbon emissions via liquid transactions in government-issued emissions allowances, and the Clean Development Mechanism and its framework for generating carbon assets from new projects which verifiably reduce emissions. How do these market mechanisms incentivize emissions abatement, what factors and events drive the price of carbon, and what have been the major project types and reduction strategies to date?

In light of PARC’s strong history in technology innovation and the Bay Area’s growing focus on cleantech venture development and investing, we will also address the complex process of converting the environmental benefits from new low-carbon technologies and clean energy projects into tradeable financial assets in the carbon markets. What exactly is a carbon asset, and how is it developed and monetized?

Finally, we will close by looking towards the next phase of carbon constraints as the US begins to develop its cap-and-trade system and the international community attempts to reach a post-2012 climate agreement. The sheer size of the US economy and emissions footprint means that a future US domestic carbon market will redefine carbon trading on the international scale. We will discuss the emerging US regulatory scheme and the likely characteristics of a US carbon market, and conclude with some brief thoughts about where emissions trading fits into the overall challenge of stabilizing greenhouse gas emissions in the atmosphere at manageable levels of risk.

Presenter(s)

Alex Rau is a founding partner of Climate Wedge Ltd, an independent firm pursuing principal investments and project development in the carbon markets and providing carbon finance and emissions trading related advisory services. Alex has over eight years of active experience in the carbon markets. He was previously part of the Climate Change Services team in PricewaterhouseCoopers's Energy Corporate Finance practice in London, developing and structuring portfolios of carbon assets during the early stages of the Clean Development Mechanism market as well as designing Kyoto response strategies for multinational corporations. Dr. Rau has worked with numerous clients such as Cheyne Capital, McKinsey & Company, Rio Tinto, News Corporation, Electricite de France, and the California Public Employees Retirement System (CalPERS) on carbon-related issues. He also coauthored the original version of the Voluntary Carbon Standard, the most widely accepted trading standard for non-Kyoto carbon assets, and has published in journals ranging from Science to the Harvard Business Review. Dr. Rau has a Ph.D. in physics from Oxford University and a B.A. from Cornell University.