News September 2003

The following are summaries of news stories that appeared in the September 2003 print edition of Environmental Finance magazine

Commission unveils emissions projects directive

The European Commission has published its draft directive linking the planned European Union greenhouse gas emissions trading scheme (EU ETS) with the Kyoto Protocol’s ‘flexible mechanisms’. The directive, published in late July, sets out the terms under which companies covered by the EU ETS can use ‘carbon credits’ generated by Joint Implementation and Clean Development Mechanism projects.

Industry specialists have largely welcomed the directive. “It’s good to have it here – now we know how things will happen,” says Laurent Segalen, director of climate change services at PricewaterhouseCoopers in Paris.

Environmentalists, however, are concerned that the directive will dilute the environmental integrity of the EU scheme, and some predict that the European Parliament will attempt to tighten up its terms.

First CDM methodologies approved

The body overseeing the Clean Development Mechanism (CDM) – one of the Kyoto Protocol’s flexible mechanisms – has approved the first two methodologies underpinning greenhouse gas (GHG) emission reduction projects.The decisions, following the Executive Board’s June rejection of all of the first 14 methodologies submitted, give “a major boost to the CDM”, according to the United Nations Framework Convention on Climate Change secretariat.

The methodologies relate to a landfill gas project in Brazil, under development by a subsidiary of French utility Suez Environnement, and an initiative in South Korea that will reduce emissions of hydrofluorocarbons – potent GHGs – from the Ulsan Chemicals Company. This latter project was carried out by UK chemicals company Ineos Fluor in cooperation with Korea’s Foosung Group.

CME to launch European weather contracts

The Chicago Mercantile Exchange (CME) plans to launch futures and options based on European weather – and is confident that its contracts will succeed where rival exchanges have failed. It has joined forces with the UK Met Office and its joint venture weather risk management firm WeatherXchange to develop derivatives referenced to temperatures in six yet-to-be-identified European cities.

The contracts will be based on monthly and seasonal heating degree day and cumulative average temperature indexes, and will begin trading on the CME later this year, pending regulatory approval.The Met Office and WeatherXchange will provide meteorological data and European weather market expertise, they say.

CCX poised to begin trading

Electronic trading of greenhouse gas (GHG) emission allowances is due to begin on the Chicago Climate Exchange on 10 October. The exchange is a voluntary market for reducing GHG emissions in which the participants have undertaken to reduce their emissions by 1% each year for the next four years.

They include a variety of North American industries, agricultural organisations and municipalities. Among them are Ford, International Paper, Motorola, Waste Management, Baxter International, AEP, ManitobaHydro and the City of Chicago.

The first day of trading will follow an auction of emission allowances to CCX members, on 1 October, which is intended to provide them with price data and thus facilitate trading.

Ten US states plan carbon trading scheme

Ten northeastern states joined forces in late July to develop what could be the US’ first mandatory multi-state greenhouse gas (GHG) ‘cap-and-trade’ scheme. The initiative, which would cover emissions of carbon dioxide from power companies in the 10 states, runs counter to the Bush administration’s rejection of the Kyoto Protocol on climate change and strong controls on GHGs in domestic legislation.

The governors of Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, Pennsylvania, Rhode Island and Vermont have expressed willingness to work with New York Governor George Pataki to develop the scheme.

United Utilities seeks £1 billion to meet green regulations

United Utilities, one of the UK’s leading utility firms, has turned to its shareholders to help it meet upcoming EU environmental regulations, by announcing plans to launch a £1 billion ($1.6 billion) rights issue.

The scale of investment is primarily “driven by European river and bathing water directives and increasing amounts of [power] generation directly connected to our distribution network,” said chief executive John Roberts in a statement.The company estimates it will have to spend at least £5.4 billion over the next seven years on its regulated water and electricity businesses.The exact amount will depend on the contracts for the 2005–10 period to be agreed with water and energy sector regulators Ofwat and Ofgem.These are being negotiated now.

UK–Austria venture targets carbon assets

A new joint venture to help companies optimise their assets in the emerging markets for greenhouse gas (GHG) emission reductions has been launched by ESD, a UK-based sustainable energy consultancy and KWI Consultants and Engineers of Austria.

Launched at the Environmental Finance conference, Carbon Credits in Project Finance, in July, the new company – Camco – aims to help both generators and purchasers of GHG emission reductions optimise their positions by “sourcing, developing, adding value to, and managing such ‘carbon assets’ on their behalf”.

Largest cat bond issued

A Japanese agricultural insurer has placed the largest catastrophe (cat) bond to date with a $470 million issue linked to Japanese earthquakes and typhoons. This deal, recent bonds from Swiss Re and other imminent deals in the pipeline are set to make 2003 a record year for cat bond issuance.

The five-year, $470 million cat bond was issued by the Japanese National Mutual Insurance Federation of Agricultural Cooperatives last month. Swiss Re, the world’s second largest reinsurer and a leading participant in the cat bond market, assumed a ‘transformer role’ in the deal to overcome regulatory hurdles, but did not assume any risk. The deal consists of three individual tranches linked to Japanese earthquakes and typhoons, and offers coupons of 245 and 350 basis points over three-month dollar Libor, the rate at which banks lend to each other.

Also in August, Swiss Re issued $205 million-worth of cat debt under its newly-created ‘Arbor’ programme.

This brings total new cat bond issuance this year to approximately $910 million, according to Judith Klugman, New York-based managing director of institutional sales at Swiss Re Capital Markets. This is approaching last year’s record issuance of $1.2 billion.

UK regulator to green listing rules?

The UK’s stock market regulator is in discussions with the government’s Environment Agency about introducing environmental disclosure requirements for companies listing on the London Stock Exchange.

The Financial Services Authority (FSA) says the move is designed to help the UK comply with imminent European Union rules standardising listing requirements. But it follows recent criticism by Friends of the Earth of the FSA’s failure to act over what it claimed was inadequate disclosure when mining group Xstrata listed last year.

ROC market shaken by TXU revelation

The UK’s Renewable Obligation Certificate (ROC) market has been thrown into disarray by an announcement from Ofgem, its regulator, that there may be a £20 million ($32 million) shortfall in the “smearback” paid to certificate holders. Brokers estimate that this could be equivalent to £3.50–4.00 per ROC, which traded at £46 each in late August.

“It’s disastrous, frankly,” says Chris Matthews, ROCs trader at energy trading firm Cinergy. “If this doesn’t get fixed, the market will not deliver what [the government] expects it to deliver” – ensuring the UK meets a target of generating 10% of its electricity from renewable sources by 2010.

The problem arises from electricity supplier TXU Europe going into administration last October, owing £20 million in unpaid ROC penalties. An Ofgem spokesman says it is only a potential shortfall at this point, and that the regulator is “exploring what action we can take” to recover the money from TXU’s administrators. Traders note that it will join a long list of creditors.

AstroPower’s woes see it fall out of Nasdaq

The fortunes of former alternative energy bellwether AstroPower took another dip in July, when it was delisted by the Nasdaq exchange. The move follows the solar power company’s continued failure to supply financial statements, as required by the tech-dominated stock exchange. The company failed to file statements for all of 2002 and the first quarter of 2003.

“It’s incredibly disappointing. AstroPower was one of the star turns of the alternative energy sector,” says Bruce Jenkyn-Jones, investment director at UK-based Impax Asset Management.

Credit Lyonnais launches SRI subsidiary

French firm Credit Lyonnais Asset Management (CLAM) has launched a new subsidiary dedicated to socially responsible investment (SRI). The subsidiary, set up in July, is to manage three existing SRI funds and plans to launch a fourth in October.

The new firm, Integral Development Asset Management, manages assets of €700 million ($777 million) in the three SRI funds previously run by ABF Capital Management, a CLAM subsidiary.

UK investors form united front on engagement

Eight UK institutional investors, with more than £454 billion ($722 billion) under management, have joined forces to engage with companies on social and environmental issues.

The investors are the Cooperative Insurance Society, Henderson Global Investors, Insight Investment, ISIS Asset Management, Jupiter Asset Management, Morley Fund Management, Schroder Investment Management and the Universities Superannuation Scheme.The group will be supported by the UK Social Investment Forum.

Federal judge backs New Source Review

Work done by FirstEnergy subsidiary Ohio Edison on its WH Sammis plant violated the New Source Review (NSR) provision of the Clean Air Act, a US federal judge ruled in early August.

The ruling represents the first judicial opinion on the legality of Clinton-era prosecutions under the NSR, which a number of utilities have been fighting.The NSR provision requires companies to install state-of-the-art pollution control technology whenever they undertake “improvements” at older, coal-burning power plants.

Cool summer knocks down NOx prices

Allowance prices in the US nitrogen oxides markets have tumbled to record lows, after reaching unprecedented highs at the beginning of the summer. 2003 vintage allowance prices fell below $2,700 a ton in early August, after hitting $8,000/ton in May.

Brokers say that the weather is primarily responsible for the sharp drop in price.“The weather has been relatively soft, gas prices have softened up a bit and, in general, interest has waned as a result,” says Andy Kruger, Connecticut-based vice president at Cantor Environmental Brokerage.

go to Features September 2003