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News December 2001 - January 2002
Mexico scores weather trade first 
Agroasemex, a Mexican government-owned agricultural insurance company, has transacted what is thought to be the first weather derivative contract in a developing country. On 7 December, Agroasemex bought a call option from Kansas City-based Aquila Energy to reinsure its portfolio of agricultural insurance policies.
Agroasemex turned to the weather derivatives market in the face of rising international reinsurance prices. Hector Ibarra, director of reinsurance operations at Agroasemex in Queretaro, says that the option premium was around half the price of a comparable reinsurance contract.
GEMCo claims first mobile source CO2 trade
The Greenhouse Emissions Management Consortium (GEMCo) plans to buy emissions reduction credits (ERCs) up to an equivalent of 3.5 million tonnes of carbon dioxide (CO2e) generated by reduced car use in the US. The trades, if they take place, will be the first CO2 emissions transactions based on reductions from vehicles, the counterparties say.
In November, GEMCo, a consortium of nine Canadian energy companies, signed a letter of intent with Teletrips Inc., to hammer out contracts that would see GEMCo members buy options on reductions generated between 2002 and 2012. The first ‘deliveries’ of reductions are expected to take place in late 2002, says Scott Fleming, Teletrips’ founder.
Commission okays UK trading scheme
The European Commission has given the green light to the UK’s planned greenhouse gas (GHG) emissions trading scheme (ETS). On 28 November, the Commission ruled that the scheme – under which financial incentives are paid to some participants – complies with EU rules on state aid and competition.
And, in a separate development, the UK government has extended the deadline for companies to register for the auction for the financial incentives to 1 February 2002, back from 31 December.
But the thorny issue of the compatibility of the voluntary UK scheme – which is still due to begin operating in April – with a proposed mandatory EU scheme pencilled in for a 2005 launch is unresolved. “If our proposed directive is adopted, the UK scheme will have to be adapted,” says a Commission official in Brussels.
UBS axes planned ‘carbon fund’
Swiss banking giant UBS has pulled the plug on its planned carbon fund, UBS Alternative Climate, citing lack of investor interest. The fund was intended to invest in projects that generate greenhouse gas emission reduction credits under the terms of the Kyoto Protocol, the 1997 international climate change agreement.
“We feel that, at the moment, we’re significantly ahead of the curve,” says Andreas Jacobs, head of European product development and management at UBS Asset Management in Zurich.
US out of step on export credit rules
European trade officials say they are perplexed by the US decision not to endorse proposals for curbing export credits that finance environmentally destructive projects.
Some 24 countries, including Japan, Canada and many in Europe, have decided to implement new environmental rules governing projects that are supported by their export credit agencies. The US and Turkey, however, refused to back the new rules, thrashed out over 15 months of negotiations, at a meeting of the Organisation for Economic Cooperation and Development in early December.
RMS delivers daily temperature model
Risk Management Solutions (RMS) has added a daily temperature simulation model to Climetrix, its internet-based weather risk management system.
The new model should give more accurate valuations of certain weather derivatives than more commonly used models based on indexes of historical temperature data, RMS claims. In particular, it should be especially helpful for valuing contracts covering short periods of time (such as one week) and those whose payout is determined by how often a specific temperature is reached.
Systeia plans weather fund
Paris-based Systeia Capital Management plans to launch a new weather derivatives and catastrophe bond fund in January.The fund will mirror similar products run by Barep Asset Management, another French fund manager, whose chief executive and managing director left to form Systeia in 2000.
Fabien Dornier,the manager of the new fund, says Systeia is marketing the fund primarily to European and US institutional investors, although he adds that Systeia’s CEO travelled to Japan in late November on a marketing trip. French bank Credit Lyonnais, Systeia’s parent, has pledged €30 million–40 million ($27 million–36 million) of seed capital to the fund.
Denmark sees first emissions trades
Allowances representing over 160,000 tonnes of carbon dioxide (CO2) have changed hands under the previously somnolent Danish emissions trading scheme. The trades are the first under the ‘cap-and-trade’ emissions reduction scheme, covering eight Danish electricity producers, that came into force in January 2001.
Four trades, which took place in late November and early December, were spurred by the imminent end of the first compliance year, says Sigurd Pedersen, senior analyst at the Danish Energy Agency, which runs the scheme. “Only now are companies in a position to estimate their actual emissions for 2001,” he says.
California bonds promise green power surge
San Francisco is set to become the renewable energy capital of the US, after voters approved two measures on 6 November that will allow the municipal authorities to issue bonds to finance green power in the city. Analysts believe the measures might be replicated in dozens of cities across the country, promising a substantial boost for renewables.
Under Proposition B, which passed with 73% of the vote, San Francisco’s city government is permitted to issue a revenue bond of $100 million to finance the installation of solar and wind energy generation facilities on city property. Proposition H, supported by 55% of voters, gives the city government the power to issue additional revenue bonds for renewable energy without going to the general public for a vote.
Work begins on biodiversity index
Hancock Natural Resource Group (HNRG) has joined forces with Washington DC-based environmental group Conservation International to develop a ‘biodiversity index’. Such an index – which could ultimately form a global benchmark of the relative biodiversity value of areas of land – is intended to form the basis of a tradable market in biodiversity.
“We’re working with Hancock to try and create value from environmental services such as biodiversity,” says Sonal Pandya, the manager of Conservation International’s carbon offsets programme.
Social Investment Forum reports uneven performance
Assets held in socially screened portfolios grew more than 1.5 times faster than that of all US managed assets from 1999 to 2001, according to the Social Investment Forum’s (SIF) latest report, Socially Responsible Investing Trends in the US. The Forum, a US social investment research body, announced at the end of November in its fourth biannual report that socially screened assets grew by 36%, from $1.49 trillion in 1999 to $2.03 trillion in 2001, compared to a 22% rise in total US managed assets.
ICE breaks into weather market
The Intercontinental Exchange (ICE), an Atlanta-based online market for energy and metals, has launched the first exchange-traded weather derivative contracts based on short-term average temperatures.
Listed on 20 November, the contracts are swaps settled on the five-day average temperatures in five US locations: Chicago, Dallas, New York, Philadelphia and Sacramento. They mark a change from the monthly and seasonal temperature products available on the Chicago Mercantile Exchange and the London International Financial Futures and Options Exchange, and are likely to appeal particularly to power and natural gas traders. They are expected to use the swaps to hedge their short-term energy positions, according to traders who helped develop the contracts.
Liffe weather futures go live
The London International Financial Futures and Options Exchange (Liffe) launched weather futures contracts on 10 December based on temperatures in three European cities. On the first day of trading, no contracts changed hands but prices were posted for some of the six contracts.
“We knew volumes were going to be modest, but we were delighted with the tremendous amount of interest from the market,” says Ian Dudden, director of non-financial products at Liffe.
New NOx markets emerge in US
A regional market in nitrogen oxide (NOx) emissions in the Houston area will begin allocating allowances in January 2002, according to the Texas Natural Resource Conservation Commission (TNRCC). But the expansion of an existing multistate NOx market to include Midwestern states is likely to be delayed until May 2004, emissions traders say.
The Houston market, which covers an eight-county region in southeast Texas, is a state-run NOx ‘cap-and-trade’ programme. The region has failed to comply with ozone standards mandated by the federal Clean Air Act for 30 years.
The programme covers all 320 stationary NOx sources in the region. A limited number of emissions allowances will be granted to both electric-generating utilities (EGUs) and industrial sources, with the cap set at each site’s average emission level between 1997 and 1999.
Japanese voluntary scheme shows rising CO2 output
Emissions of carbon dioxide (CO2) by Japanese industry remained on a rising trend last year, according to the Japanese Federation of Economic Organisations (Keidanren).
The association’s fourth annual review of its voluntary action plan to reduce emissions, revealed at the United Nations’ COP 7 meeting in Marrakech in late October, showed that CO2 emissions from the 36 industries participating in the initiative totalled 486 million tonnes in 2000, an increase of 1.1% on their 1999 level.
Nuon goes to Guatemala for green certificates
Dutch utility Nuon has bought ‘green certificates’ from a Guatemalan hydro electric generator in what the arrangers say is the first such deal involving a developing country seller.
Under the terms of the transaction, Nuon will receive green certificates generated by Hidroelectrica Papeles Elaborados’ (HPE) new 8.2MW Poza Verde ‘run of river’ hydro facility over 10 years.
UK generator begins internal sulphur trading
UK electricity generator Innogy has set up an internal sulphur dioxide (S02) trading scheme – which it is planning to extend to cover nitrogen oxides (NOx) and greenhouse gases.The S02 scheme – which is modelled on the successful US Acid Rain Program – is designed both to optimise investment decisions and to send a signal to regulators that emissions trading is both possible and desirable, says Hans Jensen, Innogy’s head of environment. “SO2 is a major constraint on generation, and therefore has a value internally,” he says. “The scheme tells us how much a tonne of SO2 is worth.” He adds that prices – at around $150-200/tonne, are in line with those in the US sulphur market.