News February 2003

Pressure builds for tight controls on CDM projects

The European Commission is understood to be leaning towards tight restrictions on the types of greenhouse gas (GHG) reduction projects that will be admissible within the planned EU emissions trading scheme. Concerns over the environmental integrity of the scheme are pushing the Commission – and member state governments – towards adopting tougher rules on project credits than those set by the Kyoto Protocol on climate change.

At the same time, a coalition of environmental pressure groups has launched a campaign urging many industrialised nations to impose tighter eligibility criteria than those agreed in international negotiations on the Protocol, which sets GHG reduction targets on industrialised countries.

Huge weather hedge to pay out?

Cold weather in north-east Europe in recent months has brought the world’s largest weather derivatives contract close to a pay-out – with brokers suggesting that many holders of the risk are likely to be unhedged.

The five-year option, written in time for winter 2001/02, covers more than €500 million ($538 million) worth of risk linked to low temperatures at Schipol Airport in Amsterdam.

AEP, Ford and others pledge on GHGs

American Electric Power, the largest electricity generating company in the US, Ford Motor Co and electronics giant Motorola are among 14 organisations that have made a binding commitment to reduce their emissions of greenhouse gases (GHGs) over the next four years, as founding members of the Chicago Climate Exchange (CCX).

They have all pledged to reduce their GHG output in 2006 to 4% below the average of their emissions in the period 1998–2001. As in the UK voluntary GHG ‘cap-and-trade’ scheme, the participants will be allowed to buy and sell ‘reduction credits’ from each other to help ensure that emissions are reduced at least cost. Trading is due to begin in the spring of this year. A spokesman for the CCX declined to be more specific on the timing and added that no decision has yet been taken on the penalties to be imposed for failure to hit the targets.

EPA gives green light to water pollution trading

The US Environmental Protection Agency (EPA) has formally adopted a policy to allow states to set up credit trading schemes to address water pollution. The policy follows the launching of pilot projects based on EPA guidelines over the last year (see Environmental Finance, June 2002, page 6).

“Our new Water Quality Trading Policy will result in cleaner water, at less cost, and in less time,” says administrator Christie Whitman. “It provides the flexibility needed to meet local challenges while demanding accountability to ensure that water quality does improve.”

IFC sells first carbon credits

The International Finance Corporation (IFC), the private sector branch of the World Bank, has put together its first financing deal involving carbon credits. The World Bank’s Prototype Carbon Fund will purchase credits generated by the El Canada 43MW hydroelectric power plant in Guatemala.

“The prospect for the sale of carbon credits generated by the project highlights the potential of this new significant revenue source to enhance the profitability of renewable and environmentally-friendly power projects,” says Francisco Tourreilles, director of the IFC’s power department.

Dutch government commits to four more JI projects

The Dutch government has signed contracts for carbon credits from four projects in Eastern Europe, following its third emission reductions purchase tender. Credits purchased will count towards its obligation to reduce its emissions to 6% below 1990 levels by 2012, under the terms of the Kyoto Protocol, the international greenhouse gas reduction agreement.

Two projects were selected from Romania – an energy efficiency project at a cement facility and the modernisation of a hydroelectric facility – alongside a landfill gas project in Slovakia, and a coal-to-biomass fuel-switching project in Hungary.

Carbon Trust pinpoints low carbon technologies

The UK’s Carbon Trust has identified the technologies that it intends to target with £75 million ($122 million) of investment over the next three years. Its favoured list includes combined heat and power, fuel cells, biomass and the infrastructure to support a hydrogen-based economy.

“As part of the investment process, we want to focus on the technologies in which we can be material in moving things forward, and that will have the greatest impact in terms of reducing emissions,” says Tom Delay, chief executive of the Trust.

Momentum builds on US climate action

US senators have introduced two new bills to mandate cuts in greenhouse gas (GHG) emissions – but the Bush administration is continuing to pursue a voluntary approach to tackling GHGs.

On 8 January, Senators John McCain and Joseph Lieberman held a hearing on their draft bill before the Commerce, Science and Transportation Committee, a day after Senators James Jeffords and Tom Daschle delivered their climate bill to the Environment and Public Works Committee. While analysts say the bills have little chance of becoming law, they reflect growing momentum behind imposing mandatory reductions on GHG emissions in an effort to tackle climate change.

UK pension funds to drive SRI?

Fewer than 10% of UK pension fund trustees think companies provide enough social, ethical and environmental (SEE) information, according to a survey conducted by Just Pensions, a London-based socially responsible investment advocacy group. But over a third of the 101 respondents believe that pension fund activism will have a substantial impact on how companies manage these issues in the long term, with a further 48% thinking there will be some impact.

“I am heartened by their optimism,” says Helen Wildsmith, executive director of the UK Social Investment Forum, which manages Just Pensions with Ashridge, a London-based business school, and the Trades Union Congress. However, trustees should pay greater attention to SEE issues themselves, according to a Just Pensions’ report, Will UK Pension Funds Become More Responsible?, published in late January.

UK government, industry downplay EU emissions scheme fears

UK emissions trading specialists are downplaying concerns in a recent report that plans for a European Union trading scheme have “driven a coach and horses through UK climate policy”. However, the government has encouraged the creation of an industry-led working group to look at how the EU scheme might be implemented in the UK.

Last December, EU governments reached a political agreement on a greenhouse gas emissions trading scheme, due to start in 2005. The EU scheme – which is not yet set in stone – differs from UK climate policy, notably in setting emissions targets for electricity generators, as well as users of electricity.

Steve Sorrell, a research fellow at Science and Technology Policy Research, part of Sussex University, says the EU scheme “will require major changes to the Climate Change Levy [a tax on UK business’ use of energy] and the Climate Change Agreements [on energy efficiency] and could signal the end of the UK Emissions Trading Scheme”.

New fund to boost renewables in France

A total of €45 million ($48 million) has been raised for a new public-private investment fund that will help finance renewable energy and waste recycling projects in France. The fund – known as Fideme – is sponsored by CDC Ixis, the investment bank subsidiary of French banking group Caisse des Depots; Banca Opi, part of Italy’s Sanpaolo IMI Group; and ADEME, a state-owned French agency for environmental and energy management issues.

Around two-thirds of the total funding came from French and Italian banks, with the remaining €15 million from ADEME. This tranche of state finance will enable Fideme to leverage additional investments from the private sector up to a total of around €300 million, estimates Philippe Germa, a senior vice president in the financial engineering division of CDC Ixis and manager of the Fideme fund.

Brokers unite to auction Enron allowances

Rival US brokers Cantor Environmental Brokerage and Natsource teamed up recently to carry out a novel auction of emissions allowances owned by failed energy giant Enron. The late-December auction raised almost $5 million from the sale of Houston– Galveston Area NOx Emission Allowances and Volatile Organic Compounds Emission Reduction Credits.

“We put together a fairly unique way of dealing with this,” says Josh Margolis, San Francisco-based managing director at Cantor. “We were able to reach across the river and pull off an auction with our competitor.”

Insurers escape high catastrophe losses – for now

Insurers escaped above-average losses from natural catastrophes in 2002, leading reinsurers Munich Re and Swiss Re report, but they warn that the industry should expect losses to resume their upward trend.

Natural catastrophes – which killed about 11,000 people last year – caused total economic losses of $55 billion, up $20 billion from the year before, says Munich Re, in an annual survey, published in late December. However, insured losses stayed at the previous year’s $11.5 billion mark, it says.

FSA passes buck on Xstrata

The Financial Services Authority (FSA), the UK’s financial regulator, has refused to act on allegations about the stock market listing last year of Xstrata, according to Friends of the Earth (FoE). Last August, FoE wrote to the FSA accusing the coal mining firm of “30 specific failures” in its listing particulars, mostly related to the disclosure of risks to its business from efforts to tackle climate change.

In a January letter to FoE, the FSA – which regulates the listing of companies on the London Stock Exchange – said that it was not responsible for the contents of listing particulars, according to Simon McRae, a corporate campaigner at FoE in London.

Isda close to weather contract

The International Swaps and Derivatives Association (Isda) has made rapid progress with its planned standardised weather derivatives documentation, and is on course for publication in March.

Isda’s ‘weather index derivative transaction confirmation’ will “help tremendously with the growth of the weather market,” says Adele Raspé, general counsel at Connecticut-based weather dealer XL Weather & Energy, formerly Element Re, and chair of the Isda committee drafting the confirmations.

go to Features February 2003