News February 2002

Dutch trading scheme to lean on end-users

A Dutch government-appointed committee has presented its final recommendations for a national greenhouse gas (GHG) emissions trading scheme, due to start in 2005. Its report, Trading for a better climate, proposes a far-reaching scheme, designed to help the Netherlands reach its GHG reduction target under the Kyoto Protocol, which targets both energy producers and consumers from the largest emitter to the smallest household.
However, a European Commission official voices concerns that yet another national emissions trading system – following the UK and Danish schemes – could prove to be incompatible with the proposed EU-wide trading scheme, also pencilled in for a 2005 start.

UBS spurns Enron weather

UBS Warburg’s planned acquisition of Enron’s North American gas and electricity trading operation will not include its weather derivatives team. But Mark Tawney, the desk head, says he is in advanced discussions to move “a significant number of Enron weather employees” to a new employer en masse.
“We’re in discussions with a handful of firms,” he says, adding that he expects to conclude a deal by the end of February. The companies include non-bank financial institutions, he notes. “What is clear is that the company we select will allow us to be significant players in the marketplace,” he says, but declines to elaborate.

Controversy dogs UK emissions auction

Trading experts have reacted with dismay to the final rules on the auction for financial incentives to join the UK greenhouse gas (GHG) emissions trading scheme. Latest guidance from the Department for Environment, Food and Rural Affairs (Defra) “has significantly shifted the goalposts,” says a trader at one of the UK’s largest companies.
In its UK Emissions Trading Scheme Guidance, released on 25 January as Environmental Finance went to press, Defra says the “budget” for financial incentives that will be paid to companies for tonnes of GHG reductions – originally set at £215 million ($303 million), plus tax – will be decided only after the first round of bidding. “The budget chosen will depend on the level of interest”, the guidance says.
“The government is hedging its position against a lack of supply [of reductions]”, says Lionel Fretz, director at environmental consultancy EcoSecurities. “But it raises a key element of uncertainty – especially for those basing their bids on major capital expenditures.”

Dutch turn to multilaterals for credits

The Dutch government is in discussions with a number of multilateral financial institutions on dramatically expanding its carbon credits purchase programme – and has already signed a $40 million deal with the International Finance Corporation (IFC) to buy the equivalent of 10 million tonnes of carbon dioxide (CO2e).
The World Bank also hopes to sign a contract with the Dutch by early March to sell credits worth around $30 million a year, says Ken Newcombe, manager of the Bank’s Prototype Carbon Fund in Washington.
In mid-January, the Ministry of Economic Affairs and the European Bank for Reconstruction and Development (EBRD) signed a letter of intent to “explore issues relating to the purchase of emission reduction credits from the EBRD”.

Swiss Re pins faith on auctions of weather options

Swiss Re has licensed a derivatives risk management software package from New York-based Longitude to spearhead its renewed effort to become a major player in the weather risk market.
“We plan to use Longitude’s patented technology to try to reignite the weather industry,” says Frank Caifa, associate director with Swiss Re in New York. "This is a key element of our refocused weather strategy,” he adds.

White House examines fuel economy credits

A White House task force is to meet car makers and other stakeholders to discuss reforms of the Corporate Average Fuel Economy (CAFE) standards, including the potential use of tradable fuel economy credits.
The National Academy of Sciences (NAS) released a report on CAFE last July and recommended the use of fuel economy credits to give automakers more flexibility in reducing emissions and an incentive to exceed federal guidelines on fuel economy.

NACEC explores North American emissions trading

The North American Council on Environmental Cooperation (NACEC) is to release its findings this month on the potential for emissions trading between Canada, Mexico and the US – which could include greenhouse gas emissions.
Created in conjunction with the North American Free Trade Agreement (NAFTA), to explore the potential for environmental cooperation between the three countries, the NACEC held an exploratory meeting in San Diego in late November to discuss cross-border trading of emissions from power utilities.

CDM board off to a flying start

The executive board of the Clean Development Mechanism (CDM) has got off to a good start in tackling its work programme in the run-up to COP 8, says Christine Zumkeller, of the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC). The board had its first working meeting – after a largely ceremonial inaugural meeting in Marrakech in November – in Bonn in January.
“The board got off to a very business-like way of proceeding – which is unlike the full plenary meetings,” says Zumkeller, noting that the board adopted draft rules of procedure – something that the full COP Conference of the Parties to the Kyoto Protocol on climate change) has failed to do.
The 10-strong executive board will be responsible for running the CDM, whereby investors in emissions reducing projects in the developing world can earn carbon credits under the Protocol. The board will have the final say on approval of projects.

Weather data pours in

A welter of new weather derivatives data products are coming to market, with four firms launching new or refined data services in January and February. The firms are responding to growing demand for accessible high quality data, say traders.

QuantWeather, a newly-launched service from UK weather portal I-WeX, has begun offering hourly data for 262 US weather stations, alongside daily data for a total of 8,000 sites worldwide.

WeatherXchange.com, a joint venture between the UK Met Office and Umbrella Brokers, is to begin posting ‘ensemble’ weather forecasts for 25 sites across Europe. The forecasts – which assign probabilities to a range of possible outcomes – will cover maximum, minimum and mean temperatures and precipitation.

Applied Insurance Research (AIR) has enhanced its suite of data by making available 'cleaned’ maximum and minimum daily temperature data for the previous day from around 220 US weather stations.

Energy Argus, a New Jersey-based publishing company, has launched 47 new temperature indexes for the US, referenced to natural gas pipelines, power trading hubs, geographical regions and Federal Reserve Bank regions.

Reinsurer SCORs with catastrophe bond

SCOR, France’s largest reinsurer, placed a three-year $150 million catastrophe bond in the capital markets on January 9, linked to earthquakes in California and Japan and windstorms in Northern Europe. There has recently been a pick-up in catastrophe bond issuance, due in part to hardening prices in the reinsurance market.
The catastrophe bond is linked to published information on tectonic activity and windspeed, rather than to SCOR’s actual losses after a catastrophe, which enhances the bond’s transparency, says Risk Management Solutions, a California-based risk modeling firm, which helped to design the structure. The placement is intended to protect SCOR against second and third catastrophic events until the end of 2004, and supplements its three-year $200 million placement in March 2000 to cover a first event of the same three catastrophes.

Aquila guarantees the weather

Aquila has launched a product to hedge the risk of inaccurate short-term US weather forecasts. Buyers of GuaranteedForecast will be compensated if the weather forecast – out to two weeks ahead – is not accurate. The Kansas City-based energy and weather trading firm currently rolling out the product through insurance brokers, although it plans to launch an online version this summer.
“We are locking the unknown out of the equation,” says Brian Tobben, vice president of business development for weather at Aquila. “It can give clients a lot more options for hedging.”

SRI firms on parade for Swedish foundation

Sweden’s Foundation for Strategic Environmental Research (MISTRA) is to hold a beauty contest to choose between five leading socially responsible investment (SRI) asset managers and research firms. The Foundation is planning to manage all its SKr4 billion ($387 million) of assets against SRI criteria – but has yet to decide how, says deputy director Eva Thornelof in Stockholm.
“We haven’t decided which route to take, although we’ll definitely have 10–20% of our assets in SRI by the end of the year,” she says, adding that MISTRA’s approach could involve offering mandates to SRI fund managers, simply buying in SRI research, or a combination of the two.

Bank Leu pools catastrophe risks in new fund

Switzerland’s Bank Leu has launched a fund which it claims is the first global public fund to invest exclusively in catastrophe bonds. Such bonds generally pay significantly higher coupons than conventional bonds of similar maturity, except in the event of specific natural disasters such as earthquakes, windstorms or hurricanes. Their returns therefore have a low correlation with those from conventional financial assets.
Returns to investors in the Bank Leu Prima Cat Bond Fund should be 3–5%, after charges, on top of the three-month money market rate, says Zurich-based fund manager Bruno Wicki. The bank hopes the fund will attract around $150 million within the next 12 months, he adds.