SOURCE: Natsource LLC

May 02, 2007 12:06 ET

Greenhouse Gas Market Trading Approached $30 Billion in 2006

Market Value of Traded Instruments Triples From Year-Ago Levels; Natsource Analysis Contributes to World Bank's Annual Report on Carbon Market

COLOGNE, GERMANY and WASHINGTON, DC -- (MARKET WIRE) -- May 2, 2007 --Natsource Advisory and Research Services, a division of Natsource LLC, a leading emissions and renewable energy asset manager, announced the completion of its annual analysis of greenhouse gas (GHG) market trends in 2006 on behalf of the World Bank. The report indicates that the market grew significantly in 2006 and that the value of traded instruments that can be used to comply with GHG emissions targets reached $29.76 billion (EUR 22.82 billion) -- nearly triple the value in 2005.

These amounts include traded volumes for European Union Allowances (EUAs), Certified Emissions Reductions (CERs) created by Clean Development Mechanism (CDM) projects located in developing countries that have ratified the Kyoto Protocol (KP), and Emission Reduction Units (ERUs) created by Joint Implementation (JI) projects located in countries with economies in transition that have taken on emission targets under the KP.

Natsource believes that emission reduction requirements at the national level under the KP, and at the firm level under the EU Emissions Trading Scheme (EU ETS), will continue to drive demand and growth in the GHG markets. Natsource estimates that the countries that comprise the European Union, Japan and Canada will be approximately 3-4 billion tonnes short of achieving their emission reduction targets in 2008-2012, based upon existing measures and business-as-usual emissions trends.

"The GHG markets continued to grow and mature in 2006," said Jack Cogen, Chief Executive Officer of Natsource LLC. "In 2006, we saw growing activity in this asset class not only from industrial companies that must meet compliance targets but also newer participants, like commercial firms, banks and financial institutions that recognize the attractiveness of this market for managing risks and earning returns on capital. Natsource will continue to use its expertise to help our customers reduce their costs to comply with GHG targets and to take advantage of opportunities in these growing markets."

Natsource participated in several large transactions in 2006, including the first billion dollar transaction. "The company will continue to use its expertise to help our customers reduce their costs to comply with GHG targets and to take advantage of opportunities in these growing markets. In addition, we look forward to participating in the growth in North American markets as climate policies move forward in this part of the world," said Cogen.

Natsource's research on market trends and experts' views was commissioned by the World Bank and incorporated into the Bank's annual "State and Trends of the Carbon Market" report. These reports have covered GHG market activity from 1996-2006. Natsource Advisory and Research Services is the only entity that has provided information and analysis since the first report. Natsource has been a major participant in the GHG market since the late 1990s. Most recently, the company has launched a series of asset management products including the Greenhouse Gas-Credit Aggregation Pool (GG-CAP). It will use over EUR 510 million (approximately US$670 million) committed by its 24 participants located in Europe, Japan and Canada to purchase and manage delivery of a large pool of CERs and ERUs which participants can use to comply with GHG emission targets from 2005-2012. Natsource also established a series of Managed Accounts and the Aeolus on-shore and off-shore Funds in 2006. The Managed Accounts and Aeolus are investment-oriented vehicles which take advantage of significant opportunities that exist in emissions and renewable energy markets. They employ a variety of regulatory, financial and trading strategies to achieve superior returns for their investors.

What follows are some conclusions from the report on GHG market activity in 2006. Additional information as well as graphics may be found on the Natsource website at www.natsource.com.

The EU Emissions Trading Scheme

The EU ETS establishes emission reduction requirements for approximately 10,000 large industrial and electricity generating sources accounting for nearly half of Europe's emissions of carbon dioxide (CO2). Phase 1 of the EU ETS started in January 2005 and runs through 2007. Phase 2 corresponds to the 2008-2012 first commitment period of the KP. EUAs are EU ETS compliance instruments which are allocated by EU governments to regulated installations. They can be purchased by entities with short positions to comply with their reduction targets.

Market Value Grew by over 200% from 2005 Levels. The market for EUAs experienced significant growth in 2006, tripling from approximately 321 million tonnes (Mt) in 2005 to 1,101 Mt in 2006. The value of these transactions grew by over 200%, from $7.91 billion (EUR 6 billion) in 2005 to $24.36 billion (EUR 18.7 billion) in 2006.

Market Pricing. Prices for EUAs that can be used to meet Phase 1 requirements (Phase 1 EUAs) experienced significant volatility during 2006, increasing to approximately EUR 30 in April, then declining sharply to as low as approximately EUR 10 in May. Prices settled at approximately EUR 15-16 from June through September, and then decreased steadily to approximately EUR 2-3 at the end of the year. The price decline in April/May occurred after uncoordinated announcements from various Member States that 2005 emissions were lower than expected, which suggested that the market could be in a long position during the remainder of Phase 1. The lack of reliable emissions inventories and forecasts prior to the start of the EU ETS was a key factor leading to allocations being higher than actual emissions in 2005. The European Commission has emphasized that allocations for Phase 2 will be based on verified emissions for 2005, which are known with certainty.

Following the price decline for Phase 1 EUAs, the share of Phase 2 trades increased to approximately 50% of traded volume in December 2006 as the market anticipated the onset of Phase 2 of the program and the European Commission's decisions on Phase 2 National Allocation Plans (NAPs) developed by EU Member States. The first set of decisions on 10 NAPs was issued in November 2006. As of April 16, 2007, the Commission had issued decisions on 19 NAPs.

Trade in Project-Based Reductions

Growth in Traded Volumes and Value Characterized the Market for Structured Products in 2006. Traded volumes of carbon dioxide equivalent (CO2e) emission reductions created by projects authorized by the KP grew by 36%, from 362 million tonnes (Mt) in 2005 to 491 Mt in 2006. Approximately 450 Mt (or 92%) of this volume was associated with primary transactions of CERs created from CDM projects hosted by developing countries that ratified the Protocol. Another 25 Mt was associated with secondary transactions (i.e. resales) of CERs, and approximately 16 Mt was associated with ERUs created from Joint Implementation (JI) projects. Since 2001, traded volumes have increased by a factor greater than 50, from approximately 9 Mt in 2001 to 491 Mt in 2006. The value of trade in KP project-based transactions in 2006 totaled US$5.4 billion (EUR 4.2 billion) -- a 100% increase from 2005 levels.

A summary of key trends in the international GHG market for these structured products follows.

--  Prices for KP project-based reductions have increased, but vary
    considerably depending on type and contract terms.  The average price for
    primary CERs in 2006 was $10.90 (EUR 8.40), up 52% from $7.17 in 2005.  The
    volume-weighted average CER price was $11.10 (EUR 8.50) in Q1 2006, and
    declined slightly in the remainder of the year, likely due to declining EUA
    prices.  The average price for secondary CERs was approximately $17.76,
    which represented a 20% decrease from 2005 average prices of approximately
    $22.21.  The decrease was likely due to lower average EUA prices in 2006,
    and a shift in price basis for secondary CERs from Phase 1 EUAs in 2005 to
    Phase 2 EUAs in the second half of 2006.  The average price for ERUs in
    2006 was $8.70 (EUR 6.70).  This represented a 45% increase from the 2005
    average price of $6.00.  The price gap between ERUs and CERs can be
    attributed to the nascent stage of the JI mechanism in 2006.  Prices for
    ERUs in 2006 were affected by lack of clarity in the rules governing asset
    creation, and in the procedures for JI project approval in Russia;
    uncertainties and risks relating to the issuance of ERUs by host country
    governments; and some JI deals being based on partial upfront payment (and
    consequently lower prices).
    
--  HFC23 destruction projects accounted for the largest share of traded
    CERs.  HFC23 destruction projects created CERs that accounted for 34% of
    project-based transaction volumes, down significantly from 67% in 2005.
    The next-largest project categories were N2O destruction at 13% of traded
    volume, energy efficiency and fuel switching at 9%, coal mine methane at
    7%, hydro at 6%, and wind and landfill gas projects, each at 5%.  Energy
    efficiency and fuel switching increased their share from 1% last year, and
    renewable energy projects increased their share from 10% to 16%.
    
--  China hosted projects that created 61% of traded CERs.  Led by China,
    Asia dominated the market, hosting projects that created 80% of the CERs
    traded during 2006 (up from 73% in 2005 through Q1 2006).  For the second
    straight year, China accounted for the largest share of traded volumes --
    61%, down from 73% in 2005.  India's share was 12% (up from 3% in 2005),
    followed by Brazil at 4% (down from 10% in 2005 through Q1 2006).  Latin
    America accounted for 10% of traded volumes, down from 17% in 2005 through
    Q1 2006.
    
--  European buyers are the largest buyers in the market.  EU buyers
    purchased 86% of the project-based reductions that were created in 2006, up
    from approximately 51% in 2005.  This reflected the maturity of the EU ETS,
    and EU buyers' anticipation of the need to comply with tighter targets in
    Phase 2 of the ETS.  UK buyers alone accounted for 50% of traded volumes.
    Japanese buyers' share declined to only 7%, from 46% in 2005.
    
Natsource LLC is a leading emissions and renewable energy asset management firm. The company's Asset Management, Transaction Services and Advisory and Research Services business units utilize their regulatory, market and trading expertise to assist private firms around the world in the strategic management of environmental risk, and to provide superior returns to investors by taking advantage of opportunities in local, regional, and global emissions and renewable energy markets. Natsource is headquartered in New York and has offices in Calgary, La Paz, London, Ottawa, Panama City, Tokyo and Washington, DC, providing the company with global reach and proximity to many of the world's leading financial centers. More information is available at www.natsource.com.

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