News May 2002

Developers slam UK project proposals

Recommendations on how to incorporate emission reduction projects into the UK’s greenhouse gas emissions trading scheme have been sharply criticised by emissions trading specialists, who believe that they will impose unnecessarily high costs on project developers.

“They are very strong on environmental integrity, but they’re not sufficiently market-facing,” says Lionel Fretz, chief financial officer of consultancy EcoSecurities and chairman of the UK Emissions Trading Group’s committee on projects. “They don’t have private sector support.”

Trading begins in UK ETS – and crosses borders

The UK’s emissions trading scheme (ETS) has got off to a strong start – with Shell alone claiming around 15 trades since the launch of the scheme on 2 April, including the first swap of UK and Danish emissions allowances.

Shell’s rival BP claimed the first trades on 10 April, buying allowances equivalent to 6,000 tonnes of carbon dioxide (CO₂e) from an undisclosed seller from the chemical sector, brokered by TFS Energy, and selling 5,000 and 1,000 tonnes respectively to North British Distillery and Imerys, a minerals processing group. All the BP trades were transacted at £5($7.25)/tonne CO₂e.

Typhoon derivatives storm weather market

Japanese businesses can now protect their revenues against the impact of the July–October typhoon season using specially designed weather hedges.

‘Typhoon derivatives’ have been launched by Tokio Marine and Fire Insurance as hedges against losses resulting from the 30 storms that hit the Japanese region in an average year. Of these, three typically make landfall. The derivatives – essentially options contracts – were developed in response to requests from clients in the leisure, tourism, transport and shipping industries that are concerned about losing customers and sales due to typhoons, says Tokio Marine.

New smog rules to expand ERC market

Demand for nitrogen oxides emission reduction credits (ERCs) could significantly expand following a 26 March ruling by the US Court of Appeals for the District of Columbia. The ruling upheld the US Environmental Protection Agency’s (EPA’s) tougher smog and soot rules, issued in 1997.

“This should have a profound impact on ERC markets scattered across the country,” says Mike Intrator, managing director at New York-based environmental broker Natsource. “Many more areas will be in non-attainment, meaning many more localised markets.”

ERCs are state-regulated emissions offsets required for the building of any new power plant or other major emission source in any area judged by the EPA to be in violation of its health-based air quality standards.

CO2e.com acts to protect trademark

CO2sim, a new Australian company developing simulations and software for greenhouse gas (GHG) emissions trading, has been forced to change its name in response to legal action by CO2e.com, the GHG brokerage. The new name of the company is CarbonSim.

Lawyers acting for Cantor Fitzgerald subsidiary eSpeed, which operates the CO2e.com website, accused CO2sim of “trade mark infringement”; “conduct that is misleading or deceptive … in breach of the Trade Practices Act”; and “passing off”. The charges were made in a 4 March letter to Craig Windram, chief executive officer of CO2sim, from Sydney law firm Allens Arthur Robinson, which claimed the CO2sim website was “operating in competition to our client's website”.

Dutch shelve domestic trading scheme

The Dutch government has decided not to adopt the national greenhouse gas (GHG) emissions trading scheme that an independent committee devised earlier this year. The Cabinet announcement was made on 12 April, three weeks after the Social and Economic Council (SER), a principal advisory board to the Dutch government, published a 60-page report, National CO₂ Emissions Trading: a European Perspective.

The SER recommended that the Netherlands instead wait to trade under the European Union GHG scheme, which is planned to begin in 2005.“We want to be on the same track as the EU scheme,” says a Dutch ministry official.

ROCs trade – despite contract woes

Cinergy and Powergen have completed the first trade of Renewable Obligation Certificates (ROC) “as a commodity”, under the UK's recently launched green certificate market. But trading in the market, which was launched on 1 April, remains dogged by the lack of industry-standard contracts, traders say.

On 23 April, Powergen, a leading UK electricity supplier, bought 5,000 Rocs, representing the generation of 5,000 MWh of renewable energy, which will be delivered in April 2003 by Cinergy Global Trading, a US-based energy trading firm. The two firms declined to comment on the price paid.

The novelty of the trade is that it doesn’t specify the source of generation, removing ‘volume risk’: that is, the risk that a seller of ROCs will turn out not to generate as many certificates as expected. Cinergy is managing this risk by over-buying ROCs,
and plans to sell any excess in the spot market, says Gareth Simpson, renewables analyst at the firm.

US pension fund eyes SRI performance boost

A Californian municipal pension fund has awarded an investment mandate that will use socially responsible investment (SRI) criteria to help it enhance returns. It is understood to be the first time that a US pension fund has adopted this style of investing.

In late March, the $3 billion Contra Costa County Employees’ Retirement Association invested $150 million with Connecticut-based Aeltus Investment Management. The mandate will incorporate an SRI overlay – Innovest Strategic Value Advisor’s EcoValue 21 methodology – to help it beat its benchmark index, the S&P 500.

Slovakia sets pace on carbon trading

The US-based Center for Clean Air Policy (CCAP) is to submit its recommendations within the next month on a ‘cap-and-trade’ system for reducing carbon dioxide (CO₂) emissions in Slovakia – which the government hopes to have up and running by 2005.

Ivan Mojik, the director of the department of air protection in the Slovak Ministry for the Environment, says the government will use CCAP’s report as the basis for a trading scheme, which he expects the government to formally approve later this year.

Exchanges plan new European weather contracts

Two more exchanges are planning to launch European weather contracts – despite a lack of trading in weather futures launched on the London International Financial Futures and Options Exchange (Liffe) late last year.

The Atlanta-based Intercontinental Exchange (ICE) is considering launching European weather contracts to complement its existing US products, and HEX, the Helsinki securities and derivatives exchange, is planning to launch a weather contract at the beginning of June, based on average monthly temperatures in Helsinki.

‘More regulation needed’ to boost SRI

Further government regulation may be needed to boost socially responsible investing (SRI) in the UK, according to a new survey of fund managers from consultants Deloitte & Touche. But while they believe pension fund trustees have little interest in SRI beyond protecting their reputation, fund managers are becoming increasingly convinced of the business case for social investing.

Barclays in,Tempest out?

TempestRe, a Bermuda-based reinsurance company, is to scale back its involvement in the weather risk market – while UK bank Barclays is considering jumping in. In April, Brock Webel, manager of Tempest’s two-man weather desk, confirmed that “we won’t be as active in the market”. Tempest was, however, a relatively small player, which typically only underwrote about 10 deals each season.

However, Barclays Capital is considering setting up a weather derivatives desk in London, following the hire of two Enron electricity and natural gas traders. A spokeswoman for the bank – which is the investment banking arm of the UK’s Barclays Group – says that weather “is something we’re looking at, but it’s very early days”.

Meacher disappointed by UK reporting

Voluntary sustainability reporting in the UK “is just not good enough” at present, according to UK Environment Minister Michael Meacher. The government is examining the Company Law Review – a far-reaching independent review of UK company law – to see if it can help improve the situation. The review includes recommendations on the disclosure of environmental information in annual reports, he noted.

In addition, he said the government was looking “with some interest” at France’s new mandatory approach that requires all publicly quoted firms to include environmental and social data in their annual reports.

Lloyd’s of London enters cat bond market

Lloyd’s of London, the brokered insurance market, has issued its first catastrophe-linked (cat) bond, whose payout will be determined by the occurrence of earthquakes in California and the New Madrid seismic region in the central US. Hiscox, which manages one of Lloyd’s 108 underwriting syndicates, says it placed $33 million worth of three-year notes with a broad range of fixed-income investors.

The private placement is only the third cat bond publicly announced since 11 September, despite predictions that the crisis of capacity in the insurance sector following the attacks on the World Trade Center would lead to a boom in cat bond issuance (see Environmental Finance, March 2002, page 22). Michael Barry, managing director of the insurance group at Fitch Rating, the international credit rating agency, says the cat bond market is currently very slow, and does not believe this relatively small placement marks an upsurge of issuance.

New Hampshire imposes CO₂ cap

New Hampshire became the first state in the US to legislate a cap on carbon dioxide
(CO₂) emissions on 21 April when the state Senate passed the Clean Power Act. The act sets up a ‘cap-and-trade’ system to reduce emissions of sulphur dioxide (SO₂) and nitrogen oxides (NOx) as well as CO₂, while also imposing limits on mercury releases.

“Other states and the federal government must follow our lead so that ‘downwind’ states like New Hampshire can have clean air,” says Governor Jeanne Shaheen, who helped propose the law and will sign it when it reaches her desk.“We brought people together – Republicans and Democrats, business and environmentalists – to find a commonsense solution that would work.”

Comparing corporate carbon plans

The Partnership for Climate Action (PCA) has issued its first report, which analyses and compares the different approaches taken by its corporate members to reduce
their emissions of greenhouse gases (GHGs).

Besides achieving cuts in their emissions, the eight firms also provide “a body of practical experience, demonstrating how to reduce pollution while continuing to profit,” says Fred Krupp, executive director of the US advocacy group Environmental Defense which is also a member of the PCA.

go to Features May 2002