News June 2000 New York law threatens future of SO2 market A new law in the state of New York which restricts the free trading of sulphur dioxide (SO2) emission allowances, could limit trading activity and hinder the development of new emissions markets in the US, traders say. The legislation, which imposes constraints on the sale of SO2 allowances granted to power plants in New York State, was signed into law by Governor George Pataki on 24 May. Under the act, if an allowance issued to a plant in New York is later used by a source in any of 14 states 'upwind' of New York, to meet its obligations under the Clean Air Act, the New York source will be fined an amount equal to the sale price of the allowance. "This new law will combat acid rain by keeping federal air pollution allowances from falling into the hands of out-of-state power companies whose smokestack emissions pollute New York's air and water," said senator Carl Marcellino in a statement explaining the action. State officials and environmentalists are particularly concerned about damage caused by acid rain to the lakes and forests of the Adirondack region. Investment bank warms to weather Merrill Lynch is set to become the first big Wall Street name to have a significant presence in weather derivatives a development that existing players hope will bring much-needed liquidity to the market. The US investment bank is to expand its market-making activities and its menu of structuring and risk transfer solutions according to Ertan Yenicay, who is spearheading the effort. While it will be largely driven by customer business, the bank is to set up a trading book which could see it take proprietary positions in the market. Dutch government enters carbon market The Dutch government is inviting tenders for permits to emit three million tonnes of carbon dioxide (CO2), or equivalent, as part of the country's plan to meet its commitments under the Kyoto Protocol. The Ministry of Economic Affairs has $25 million to spend on emissions reductions generated by joint implementation (JI) projects in central and Eastern Europe. This is set to be the first of a number of tenders to source the 125 million tonnes of carbon permits that The Netherlands will need to comply with Protocol, according to Adriaan Korthuis, programme manager at Senter Internationaal, the Hague-based government agency charged with the procurement. North American firms plan internal trading schemes Two major North American companies are following the lead of Shell and BP Amoco in setting up internal greenhouse gas (GHG) emissions trading schemes. Suncor Energy, a Canadian energy company, is to establish a credit-based system by the end of the year. The other company, a leading metals multinational, plans to launch its system next year, and is understood to be in the very early stages of its design. We hope to use this [trading scheme] to help us eventually become emissions neutral, says Geoffrey Johns, Suncor's newly appointed emissions trading manager. US carbon trading project wins funding The US has joined the growing list of countries researching ways to trade carbon emissions, thanks to a $347,000 grant to the Kellogg Graduate School at Northwestern University. The one-year grant will be used by Richard Sandor, chairman and CEO of Environmental Financial Products and a visiting scholar at the Kellogg School, to design a pilot carbon trading market in the Midwest. If the design phase is successful, a second phase would set up a voluntary market and trading mechanism. Climate change funds exceed targets Two recently launched 'carbon' funds have attracted more funding than originally expected. The funds aim to help mitigate climate change while also generating healthy cash returns for investors. The Renewable Energy and Energy Efficiency Fund (REEF), initiated by the International Finance Corporation (IFC), the private sector arm of the World Bank, has begun operating after raising $65 million in private equity by its first closing. This was some 30% above target, says Dana Younger a senior project officer in the IFC's technical and environmental department. Meanwhile, the World Bank's Prototype Carbon Fund (see Environmental FinanceFebruary page 6) has won board approval to exceed its original cap of $150 million. This limit was not expected to be reached until early 2001 but by the end of March $135 million had already been promised from six governments and 15 private sector companies. A further nine companies wish to subscribe for an additional $45 million, Chandra Sinha of the Bank's PCF team, told the Carbon Finance conference in London on 5 May. Friends to engage across the board Friends Provident is now applying a social, environmental and ethical engagement policy across its main equity investment portfolio, covering over £15 billion of assets. The UK insurer is using the Responsible Engagement Overlay (REO) developed by the ethics unit of Friends Ivory & Sime, Friends Provident's asset management arm. We're aiming to set a best practice standard for taking account of social responsibility issues in investment management, says Craig Mackenzie, ethics unit manager at Friends Ivory & Sime. But in a statement, Friends Provident adds that investment decisions will continue to be made on a solely financial basis. US ozone regulators praise first NOx trading season The 'cap and trade' programme launched last year to reduce emissions of nitrogen oxides (NOx) in eight states in the north east US was successful and is likely to be expanded. The system works and it is growing, Bruce Carhart, executive director of the Ozone Transport Commission, told delegates to the Spring Meeting of the Emissions Marketing Association in New Orleans on 8 May. The participating states were: Connecticut; Delaware; Massachusetts; New Hampshire; New Jersey; New York; Pennsylvania; and Rhode Island. The OTC comprises representatives from these eight states plus the District of Columbia, Maine, Maryland, Vermont and Virginia. Storebrand announces SRI push Storebrand is launching three new socially responsible investment (SRI) vehicles, and has renamed its existing SRI fund the Environmental Value Fund (EVF) the Storebrand Principle Global Fund (PGF). This reflects the addition of social as well as environmental analysis into the stock selection process for the E150 million ($139.2 million) global equity fund, which was launched in 1996. In early July Storebrand, a Scandinavian financial services company with a total of $20 billion under management, plans to launch two other equity SRI funds the Storebrand Principle Europe Fund and the Storebrand Principle UK Fund. Wine bar hedges against empty glasses A London-based wine bar chain has transacted what its underwriters believe is the first UK weather derivatives deal outside the energy sector. Corney & Barrow, with bars in London's financial district, has put a deal in place to protect its revenues if the City has a cool summer. The company generates a large proportion of its revenues over the summer months on a small number of the hottest days of the year. The warm weather brings London's bankers and clerks streaming from their offices to drink outside their nearest pub or wine bar. However, Britain's uncertain summer weather can just as easily send them streaming home. "A bunch of customers suggested we should hedge against this, and it seemed to make good sense" says Sarah Heward, managing director of Corney & Barrow. ELRiX expands into weather Swiss Re has followed Enron in offering weather derivatives online to its clients. From the end of May, contracts covering 40 US, five Canadian and four German cities were listed on the reinsurer's ELRiX electronic trading platform. It plans to add contracts referenced to UK and French cities, pending regulatory approval. We hope this boosts liquidity in the weather market, says Frank Caifa, an associate director at Swiss Re New Markets in New York. This will give hedge funds and other investors in particular some comfort that they will be able to trade out, if necessary, of at least part of their positions. Natural disasters hit reinsurers' results An unusually large number of severe windstorms, hurricanes and earthquakes hit the reinsurance sector hard last year, says credit rating agency Standard & Poor's. Eight events caused estimated insured losses of $1 billion or more, says Rob Jones, S&P's London-based director of insurance ratings. An S&P survey of European reinsurers' 1999 results paints a sorry picture, Jones says. The agency has a 'negative outlook' on the industry as a whole and says several reinsurers may be downgraded in the medium term. JOINT effort to clarify JIS A major European initiative to help clarify the conditions necessary for successful reduction of carbon emissions in Joint Implementation (JI) projects has been launched. Known as JOINT, the venture brings together the largest international consortium working directly on JI projects. Joint Implementation is one of the market mechanisms defined in the Kyoto Protocol; such projects must involve more than one industrialised country and limit or reduce emissions of greenhouse gases. The focus of the Euro 1.7 million, 18 month project is on the electricity and heating industries in Europe which are responsible for more than a third of the continent's greenhouse gas emissions. The aim is to develop a framework for private electricity and combined heat and power (CHP) companies from across the EU to work with their counterparts in Poland, Hungary, Estonia, the Czech Republic and Slovenia to identify commercial projects that result in measurable, quantifiable GHG emissions reductions. Texaco eyes carbon credits from US Oil giant Texaco is spending $900,000 on a 70-year reforestation project which is forecast to remove some 800,000 tonnes of carbon dioxide from the atmosphere. The trees will be planted by Atlanta, Georgia-based ecology company Environmental Synergy in the lower Mississippi River valley in the US states of Louisiana and Mississippi. "Texaco is dedicated to playing a positive role in the goal of managing greenhouse gas emissions," says Elliott Laws, the company's president of safety, health and environment. "We are particularly interested in the project's carbon dioxide sequestration benefits," he adds. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE