Preparing for EU Carbon Regulations - A Practical Guide by Evolution Markets & Climate Connect

Preparing for EU Carbon

Regulations: A Practical Guide

Presented By

Lenny Hochschild, Evolution Markets

&

Prashant Kulshrestha, Climate Connect

Please direct your queries to

CC Analyst

Overview, Current Status &

Position of Airlines

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About Climate Connect – Specialist News & Data

provider in emerging Post 2012 Environmental

Markets


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London

Beijing

Our expertise in EU ETS Aviation

I. Latest News Published over 100 news stories on EU ETS Aviation

July 20, 2012 AirAsia signs deal with GE Aviation to cut carbon emissions, fuel consumption

July 19, 2012 Etihad plans to cut emissions using Rolls Royce's fuel optimization...

July 16, 2012 EU ETS will cost €10 million to Emirates

July 10, 2012 EU ETS Aviation may impact production says Airbus; proposes reforms

July 9, 2012 VerifAvia expands operations to cover airport emissions

July 9, 2012 UN calls for $25 per tonne carbon tax in developed countries

July 6, 2012 South African Airways eyeing voluntary carbon offset project

July 5, 2012 NATS partners with Royal Jet to achieve environmental goals

June 21, 2012 European Commission activates single EU Emission Trading registry

II. Dedicated Monthly Aviation Newsletter – Aviation focus To be launched on first week of August 2012

II. Global Newsletter Published Monday to Friday with a section on Aviation

III. Post-2012 Carbon Markets Report Published every Tuesday with a section on Aviation


Climate Connect interviewed Paul Steele, Executive

Director, Air Transport Action Group at COP 17, Durban

Click here to see the interview

http://www.youtube.com/watch?v=IsFAZenppPk&list=UUL-xZaz7ABQL81stAAXoPnA&index=6&feature=plcp

About Evolution Markets – the carbon markets’

leading brokerage firm

Evolution Markets provides strategic financial and industry-leading transactional services to

participants in global environmental markets and the clean energy sector

Unique approach called EvoFinance™, a single source for innovative financial services solutions

Evolution Markets Inc. and Climate Connect, JV that provide comprehensive advisory and

transaction services to assist aircraft operators and their partners around the globe with

services and strategies to comply with the European Union's carbon reduction mandates


Market Pioneer

First Trade of Kyoto Allowances (Green-AAUs) (Dec. 2002)

First Brokered EU ETS Trade (Apr. 2003)

First EU ETS Trades Using the ISDA Contract (Jun. 2004)

First Large-Scale EUA Transaction (400K EUAs) (Nov. 2004)

First EUA Trade for Settlement in 2008 (Nov. 2004)

First Brokered EUA Option (Sep. 2005)

First Indexed CER Trade (Mar. 2006)

First “Phase Three” (post-2012) EUA Trade (Mar. 2007)

First RGGI-Compliant Offset Trade (Jun. 2007)

First CER Option (Sep. 2007)

First RGGI Allowance Trade for Physical Settlement (Mar. 2008)

First Brokered EUA Spot Trade (Jun. 2009)

First Quarterly EUA Options Trade (Jul. 2009)

First Brokered ERU Cleared Trade (Jul. 2010)

First Guaranteed California Compliant Offset Trade (Dec. 2010)

First GreenEx-Cleared California Carbon Allowance Trade (Sep. 2011)

Presentation Structure


Introduction to EU ETS

Aviation under EU ETS & its significance

Opposition by other states – Why?

Important Timelines

Financial implications – Compliance/Non-

compliance

Special issues faced by airlines

Mitigating the Compliance – Data needed

EU ETS Registry

Documentation, Monitoring, Reporting &

Verification

Trading allowances under EU ETS

Associated Risks with the Trading

EUA/EUAA/CERs – Historical prices/trend

Compliance efforts -Current Scenario

Future forecast

Evolution & Climate Connect – Snapshot of

our Services

Thank You

Q&A

Launched in 2005 with ‘cap-and-trade’ as its principle

Covers 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and

Norway), 40% of total GHG emissions

Covers 11,000 power stations and industrial plants in 30 countries

Inclusion of Aviation from Jan 1st,2012, others from 2013

Introduction to EU ETS

Phase I Phase II Phase III

2005-2007

Emissions rose 1.9%

Increase of 37.88 million tons

2008-2012

Allowance cap: 2.8 billion tons

Average cut of 7% from 2005 levels

2013-2020

EU-wide emissions cap

Reduce emissions to 1.7 Bn tons

Various European Commission

documents


Aviation under EU ETS & its

significance Global emissions of carbon dioxide (CO2) rose by 3%

Worldwide, flights produced 676 million tonnes of CO2

CO2 emissions from EU international aviation increased by 110% between 1990 and 2008

On 2 February 2009, EU legislation incorporated aviation into the EU Emissions Trading Scheme (ETS)

as from 2012

Airlines operating into and out of the EU are required to immediately begin purchasing emissions

allowances, but are only expected to remit the sums in 2013

Non compliance, leads to fines of up to EUR100 (USD122) for each tonne of carbon dioxide emitted


Opposition by other states –

Why?


A group of 26 countries including China, the United States and India jointly

denounced the ETS as "illegal“

EU ETS breaches the Chicago Convention, which prohibits taxation of international

aviation

BASIC (Brazil, South Africa, China & India) nations showed deep concern about

the unilateral action by the EU to include international aviation in the EU-ETS

EC estimates the ETS will cost Chinese airlines less than €2.5m a year and Indian

airlines €1m a year, which is an "insignificant amount"

Important Timeline

Allowance allocation in 2012

Free allowances: 180.95 Mn tons

Allowance auction: 31.93 Mn tons

July 2012

Identify requirements and resources

for Carbon Registry Account

application

Aug 2012 Submit Carbon Registry

Account application

Sept 2012 Submit new Monitoring Plan for

next trading period (if required)

Oct 2012

Activate Carbon Registry

account

Obtain approved plan and

approval letter from Competent

Authority

Nov 2012 QA assessment validating

internal process

Jan 2013 Submit report and supporting

documentation to a third-party verifier

Various resources available

at European Commission


Mar 2013 Submit verified report to

Competent Authority

Financial implications –

Compliance/Non-compliance

$0.5 - $1 billion by 2020

€3.1 billion by 2020

$719 million by 2020

Reuters estimates: $2.8 billion by 2020

Bloomberg estimates: 844 million offset deficit

by 2020

IATA estimates: $17.7 billion by 2020

EC estimates: $20 billion profits by 2020

Cost Estimates

To comply: Airlines that do not have

enough allowances will have to buy

them in the carbon market or face a

€100 / ton fine.


Special issues faced by the

Small Airlines


Difficulty to directly access to international carbon market in Europe

Inability to qualify or meet stringent Know your customer (KYC) requirements of big

carbon traders or exchanges

Inadequate access to regulatory and market information

Inability to find qualified staff in country of origin with adequate carbon market

knowledge

Administrative expenses could be higher relative to compliance obligation

No avenues for carbon market education in country of origin

Mitigating the Compliance – Data needed


All the airlines will have to

Monitor tonne-kilometers and CO2 emissions begins 1 January each calendar year for EU-

ETS

Report tonne-kilometer data to your Member State's regulatory authority no later than 31

March of each calendar year

Report CO2 emissions data to your Member State's regulatory authority no later than 31

March of each calendar year

Surrender allowances for 2012 emissions by 30 April 2013

DETERMINATION OF CO2 EMISSIONS

CO2 emissions = Fuel consumption x emission factor

Emission factors for aviation fuels

Fuel Emission factor

(tCO2 /tfuel)

Aviation gasoline (AvGas) 3,10

Jet gasoline (Jet B) 3,10

Jet kerosene (Jet A1 or Jet A) 3,15

Documentation, Monitoring,

Reporting & Verification


What is a monitoring plan?

Aircraft operators will be required to submit two monitoring plans to their administering Member State:

How the aircraft operator intends to monitor and report fuel consumption (the emissions monitoring plan) and

Tonne-kilometre data (the tonne-kilometre monitoring plan)

Data required in emissions monitoring plan

Data identifying the aircraft operator, contact details of the aircraft operator

A list of aircraft types in the fleet, the number of aircraft per type and the fuel calculation method per aircraft type.

An indicative list of the additional types and numbers expected to join the fleet.

A description of the procedures used to monitor the list of flights operated.

A description of the methods used for monitoring (and transmitting, storing and retrieving) fuel consumption data,

including:

The chosen methodology for the calculation of fuel consumption.

The procedures for measurement of fuel uplifts and fuel in tanks.

The procedure to ensure the total uncertainty of fuel measurement will comply with the monitoring and

reporting requirements.

The procedure for measurement of fuel density, and the emission factors used for each fuel type used

Continue…


tonne-kilometre monitoring plan

A list of aircraft types in the fleet, the number of aircraft per type and the fuel calculation method per

aircraft type.

An indicative list of the additional types and numbers expected to join the fleet.

A description of the procedures, systems and responsibilities used to update the list over the

monitoring year.

A description of the procedures used to monitor the list of flights operated.

A description of data acquisition and handling activities, and quality control and assurance activities,

including maintenance and calibration of measurement equipment.

A description of the methods used for determining tonne-kilometre data per flight, including:

The procedures, responsibilities, data sources and calculation formula for determination and

recording of distance per aerodrome pair (=GCD + 95km).

Description of the procedures or method used to determine the mass of freight and mail and the

mass of passengers and checked baggage.

Description of the measurement devices used for measuring mass of passengers, freight and mail

as applicable.

EU ETS Registry


The Union registry or EU ETS Registry is a secure web-based application that

records:

Allowances allocated and held in registry accounts

Annual verified emissions

The transfer of allowances between accounts

Annual compliance status

Each Aircraft operator have to open an Aircraft operator holding account (AOHA) for

the transaction of allowances in the Union registry

• A certified copy of Certificate of Incorporation or registration of the Applicant evidencing the full name of the Applicant

• The company registration number and VAT registration number

• The names of all Directors

• A statement signed by the individual or Authorised Representative confirming the full name, permanent residential address, place & date of birth, email address etc.

Documents Required (Any one)

Important

Step-by-step registration process


Trading allowances under

EU ETS


Exchange Traded:

Margining implications

Clearing

Access to real time pricing

Access to live quotes on screen

Bilateral/Non-Exchange Traded

Credit Approval

Pre-Trade Bilateral Documentation

Counterparty Risk

Access to wholesale pricing

Associated Risks with the

Trading Carbon Credits


Insufficient Risk Management Controls

Counterparty Performance Risk / Credit Risk

Price Volatility

Political/Regulatory Uncertainty

Reputational Risk

EUA/EUAA/CERs – Historical prices/trend


5

6

7

8

9

10

2/28/2012 3/28/2012 4/28/2012 5/28/2012 6/28/2012

EUAA Dec 12: Price Action

3.00

7.00

11.00

15.00

19.00

23.00

27.00

31.00

Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12

€

EUA & CER: Price Action

Pre -2012 Strip EUA

Pre-2012 Strip CER

11-'14 EUA Strip

11-'13 CER Strip

Compliance efforts -Current

Scenario


Biofuel Alaska Airlines launched its maiden biofuel-powered flight, from Seattle to Washington D.C.

Australia's Qantas airline makes first commercial biofuel flight

Azul Airlines announces plans to test Amyris sugarcane-based jet fuel

United Airlines, Boeing, Honeywell’s UOP, the Chicago Department of Aviation and the Clean Energy

Trust announced the formation of the Midwest Aviation Sustainable Biofuels Initiative (MASBI)

KLM Royal Dutch Airlines became the first airline in the world to operate flight on aviation biofuels

Boeing, Airbus team up on EU carbon charge, biofuels

Emission

Trading

Air Berlin concluded first trade of EU aviation allowances

SAA to Raise Surcharge to comply with EU Emissions Trading Scheme

major airlines Deutsche Lufthansa AG, AirFrance-KLM and others buying or plan to buy carbon

permits

Virgin will receive nearly 3.6 million EU aviation allowances for the year 2012, and a total of 27 million

for the period 2013-2020

Efficiency United Airlines orders 150 Boeing 737s, 15% more fuel-efficient per seat

Etihad Airways chooses Rolls-Royce to help cut emissions and save fuel

Boeing, American Airlines 737-800 ecoDemonstrator Airplane Prepares for Flight Test Program

ANS EU prepares for common air traffic management

LATAM Airlines eyes wider use of RNP navigation tools

Royal Jet colloborate NATS, air navigation service provider to improve the environmental

performance of its flights in UK airspace

Regulatory IATA Welcomes ICAO Progress on a CO2 Standard for Aircraft

Canada launches its own GHG reduction plan for aviation

Current & Future regulatory

developments


EU ETS inspired other countries and regions to launch cap and trade

schemes

ICAO establishing a worldwide CO2 Standard for aircrafts, a system,

which characterizes the CO2 emissions for aircraft types with varying

technologies

Aviation industry looks for other ways of reduction of CO2 emissions e.g.

South African Airways exploring the implementation of voluntary carbon

offset project

Carbon Leakage

New sectoral market mechanisms in the EU ETS

Evolution & Climate Connect – Snapshot of our

Services


Aviation Advisory Services:

Sustainability Consulting: A comprehensive report on the

Aviation ETS program, inclusive of compliance obligations,

allowance allocation, auction structures and frequency, and

carbon offset programs.

Compliance and Reporting: Support in fulfilling EU ETS

obligations, including analysis of emissions data, reporting,

and timely submission of data to the respective authorities.

Governance and Risk Management: Development of a

comprehensive and strategic risk management program.

Sustainability Reports: Reports and analysis of Aviation

Allowances, Carbon Emissions, and market trends.

Registry Services and Documentation: Acting as your

appointed representative, allowing you to cost-

effectively outsource coordination with the appropriate

registry for the delivery of compliance units.

Monitoring and Verification: Assessment and procurement

of the services of a third-party verifier to complete the

monitoring and verification of emission data.

Carbon Trading: Accessing the carbon market for

allowance and offset procurement and sale, as well as

execution of various hedging strategies.

Knowledge Services:

Carbon Workshops: On-site workshops or Webinars to

stay on top of market and regulatory developments.

News Broadcasts: News and regulatory updates on

carbon markets designed specifically for the aviation

industry. Carbon Market Research: Research reports on

carbon pricing and market liquidity, focused on your

specific risk profile and information needs.

Intelligence Reports: Aviation industry business

intelligence reports and case studies on aircraft operator

strategies to meet carbon compliance obligations.

Allowances and Carbon Credit Reports: Reports

detailing EUAs and CERs issuance and surrender rates.

Carbon Price Data: Access to industry-leading market

data services.

Thank You Privileged Information Seeker

www.climate-connect.co.uk | www.evomarkets.com

To find out more about Evolution Markets’ and Climate

Connect’s advisory services for the aviation sector

Call: +1 415.963.9138 (US), +44 207.193.8996

(UK/Europe), +91 11.4505.6713 (India)

or email: [email protected]

Disclaimer: Climate Connect Ltd has taken due care and caution in compilation and reporting of data as has been obtained from various sources including

which it considers reliable and first hand. However, Climate Connect Ltd does not guarantee the accuracy, adequacy or completeness of any information and it

not responsible for errors or omissions or for the results obtained from the use of such information and especially states that it has no financial liability whatsoever

to the users of this report. This research and information does not constitute recommendation or advice for trading or investment purposes and therefore Climate

Connect Ltd will not be liable for any loss accrued as a result of a trading/investment activity that is undertaken on the basis of information contained in this report.

Climate Connect Ltd does not consider itself to undertake Regulated Activities as defined in Section 22 of the Financial Services and Markets Act 2000 and it is

not registered with the Financial Services Authority of the UK.


Evolution Markets Inc. and its suppliers believe the information or data contained herein was obtained from reliable sources. Nevertheless, Evolution Markets Inc.

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Preparing for EU Carbon Regulations - A Practical Guide by Evolution Markets & Climate Connect

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