News October 2003

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

Chemicals spat clouds EU emissions allocation

A dispute over the extent of chemicals sector involvement in the European Union emissions trading scheme (ETS) has thrown a spanner in the process of allocating emissions targets and allowances to industry. Several member state governments are resisting a European Commission interpretation of the directive that would include ‘process emissions’ from chemicals plants in the scheme.

Some industry specialists are concerned that the dispute could make it difficult – if not impossible – for governments to complete their national allocation plans, which set the carbon dioxide emissions targets for companies covered by the ETS. These plans are due to be submitted to the Commission by the end of March 2004 and the scheme is set to come into force in 2005.

Others, however, expect some member states – led by Germany and the UK – to ignore the Commission’s interpretation, and press ahead with their allocation plans.
The nightmare scenario would be that the issue is sent to the European Court of Justice for a ruling – a process that could take two years.

EU allowance prices, volumes, begin to rise

Prices for European Union emissions trading scheme allowances – and trading activity – are ticking up, traders say, as companies likely to face tight targets under the scheme begin to enter the market.

By late September, prices had risen above €10/tonne ($11.48) of carbon dioxide, from €5.50–6.50 in June, with little supply in the market. Even though companies are unlikely to know their targets until the second quarter of next year, many can be reasonably confident they will need to buy allowances, and some are beginning to make purchases, traders say.

Review threat to UK ROC prices

UK renewable energy specialists have reacted with concern to a consultation paper issued by the Department of Trade and Industry (DTI) as part of a technical review of the UK’s Renewables Obligation. The DTI is proposing changes to encourage the growth of ‘energy crops’ that can be burnt to generate power. But many are concerned that the proposals will disrupt the UK’s already-battered Renewables Obligation Certificate market, without delivering the government’s objectives.

Chicago Climate Exchange taps equity market

The Chicago Climate Exchange, a voluntary market for greenhouse gas reductions, has raised around £15 million ($24.9 million) via a London-listed investment company. Trading in the shares of Chicago Environmental Plc, a closed-end investment company incorporated in the Isle of Man, began on 18 September on the London Stock Exchange’s Alternative Investment Market.

Fifa, Taiwanese insurer seek catastrophe protection

Two new issuers have turned to the catastrophe- linked (cat) bond market in recent weeks. Fifa, the international governing body of football, has announced plans to issue Sfr350 million ($254 million) of debt to cover the risk of cancellation of the final match in the 2006 World Cup in Germany. Meanwhile, Taiwan’s Central Reinsurance Corporation (CRC) has issued the first cat bond from a non-Japan Asian issuer, with $100 million worth of debt linked to Taiwanese earthquakes. Payouts on Fifa’s bond could be terminated as a result of natural catastrophes, but it is not a pure cat bond, says spokesman Andreas Herren. The key event would be a decision by Fifa to cancel the final match, rather than the occurrence of a natural disaster itself, as is usually the case with cat bonds.

Meanwhile,Taiwan’s CRC has issued a three-year $100 million cat bond to securitise insurance risk from the Taiwan Residential Earthquake Insurance Pool, which it manages. The deal, lead-managed by Swiss Re Capital Markets, was heavily oversubscribed.

Both the US and Japan were hit by unusually severe natural catastrophes in September, but neither are believed to have triggered any of the cat bonds which have so far been issued.

Japanese, German banks plan carbon funds

The pace of investment in emissions reduction projects is picking up, with state-owned banks in Germany and Japan due to launch carbon funds next year. The Development Bank of Japan hopes to raise $100 million for its ‘Carbon Fund of Japan’, while Germany’s KfW is aiming for €50 million ($44 million) for its equivalent.

Both funds will buy ‘carbon credits’ from Joint Implementation and Clean Development Mechanism projects, the two mechanisms created by the 1997 Kyoto Protocol on climate change. These allow greenhouse gas (GHG) reduction projects in industrialised and developing countries, respectively, to earn credits that can be used to meet the Protocol’s GHG targets.

Denmark plans major carbon investment

The Danish government has announced plans to spend more than Dkr 800 million ($125 million) buying carbon credits between 2004 and 2007, to help it meet its greenhouse gas (GHG) emission reduction target under the Kyoto Protocol.

The Danish Environmental Protection Agency said in late August that it would invest in Joint Implementation (JI) projects, one of the flexible mechanisms of the Protocol, the international climate change agreement. Over the period 2004–07, it plans to spend Dkr200 million on a tender to invest directly in emission reductions from JI projects, which are sited in industrialised countries, and Dkr200 million in purchasing JI ‘carbon credits’ from international investment funds.

Belgium’s federal economy minister Fientje Moerman announced last month that the ministry plans to buy carbon credits from Clean Development Mechanism projects to meet its targets under the Kyoto Protocol.

Oil groups back biodiversity

Oil and gas companies should recognise that regions of high biodiversity value are to be found both within and outside protected areas, says a new report by the Energy and Biodiversity Initiative (EBI). And, although some governments may allow exploration and development within such areas, companies must acknowledge that this can present significant risks to biodiversity.

The EBI is a voluntary effort by four leading energy companies and five conservation organisations: BP, ChevronTexaco, Shell, Statoil, Conservation International, Fauna & Flora International, IUCN – The World Conservation Union, The Nature Conservancy and the Smithsonian Institution. In addition to the 58-page report, the EBI has also published on its website ( www.theebi.org) some practical guidelines, tools and models of how biodiversity issues can be integrated into oil and gas development.

Several new protected areas, notably in Madagascar, Senegal and Brazil, were announced at the IUCN World Parks Congress held in Durban, South Africa, in mid-September. In total, they cover well over 200,000 sq km. Pledges of more than $35 million for conservation measures were also announced at the meeting.

Call for environmental investor code for China

The Association for Sustainable and Responsible Investment in Asia (ASrIA) is calling on investors in China to develop an environmental investor code. Such a code is “necessary because of the challenges that still face China in relation to its environmental balance sheet,” says Tessa Tennant, ASrIA chairwoman.

“The first step is for investors to collaborate much more to ensure consistent communications with companies in which foreign investors are interested,” she adds, such as encouraging them to develop environmental management systems and reporting frameworks.

Bank of America divides SRI index groups

Bank of America’s social and environmental performance over the past year is difficult to assess, judging from the latest versions of two leading socially responsible investment indexes. Last month the bank was dropped from the Dow Jones Sustainability Indexes (DJSI) but added to the FTSE4Good indexes, following the latest reviews of their constituents.

Its inclusion in the FTSE4Good indexes stemmed from improvements in the bank’s policies on human rights, says Peter Webster, London-based executive director of the Ethical Investment Research Service, which conducts the social and environmental research for the FTSE Group. But, according to Alex Barkawi, managing director of SAM Indexes, which conducts the sustainability research for the DJSI, Bank of America’s “sustainability activities have lost a little bit of momentum”.

Vattenfall enters weather market

Vattenfall, a major Swedish energy company, has entered the weather derivatives market with the launch of weather trading desks in Stockholm and Hamburg. The company, which has operations across Scandinavia, Germany and Poland, intends both to hedge its own exposure and to offer weather products to its customers.

Speaking at the Weather Risk Management Association conference in Stockholm in mid-September, head of weather risk management Markus Hartwig said:“We aim to develop a well-functioning weather derivatives market … We’ve got the biggest [weather] risk in Scandinavia. If we don’t do it, who will?”

Camisea project wins IADB backing, loses Ex-Im

The controversial Camisea gas development project in Peru won support from one major financial backer last month, soon after being rejected by another.

On 28 August, the US Export-Import Bank turned down an application for a loan guarantee of around $214 million for the $1.5 billion project. The bank is an independent federal government agency that provides loans, guarantees and credit insurance

Australia scotches trading as emissions drop

The secretary of Australia’s Department of Environment and Heritage, Roger Beale, has put an official end to widespread speculation that Australia would implement a national greenhouse gas (GHG) emissions trading scheme. Beale told a 9 September seminar hosted by the Australasian Emissions Trading Forum that “it seems clear that we won’t need to move to emissions trading to achieve our 108% [Kyoto] target, so that is not currently under consideration”.

The latest national GHG inventory figures released by the Australian government on 18 September show that, under Kyoto Protocol accounting rules, GHG emissions in 2001 were 0.1% lower than 1990 levels.The result is in large part due to a decline in the rate of land clearing.

ADB enters carbon market

The Asian Development Bank (ADB) has established a Clean Development Mechanism (CDM) facility to help its member countries generate ‘carbon credits’ under the terms of the Kyoto Protocol. The ADB has identified around 40 candidates in its existing project pipeline that could save the equivalent of more than 20 million tonnes of carbon dioxide.

“The market for CDM projects in Asia is very promising … due to a huge potential for investments in low-cost emission abatement options,” ADB President Tadao Chino said at the launch of the facility, at a greenhouse gas (GHG) conference in the Philippines last month.

Japanese firms launch autumn weather contracts

Japanese insurers have unveiled new weather risk management products to allow companies to hedge their weather exposures for the current autumn season, and expect increased interest in weather hedging following Japan’s coldest summer for a decade.

Tokio Marine and Fire Insurance launched its ‘autumn foliage viewing’ contract last month, which allows companies to hedge their exposure to higher than average rainfall in October and November.

Rival insurer Sompo Japan has added a twist to autumn season precipitation hedges, to offer buyers greater protection of revenues in their busiest periods. It is offering a typical ‘day-count’ option, which is triggered after a set number of days with rainfall above a set amount, but if it rains on weekends or holidays each day is ‘double counted’.

Morley wins UK’s largest SRI mandate

Morley Fund Management has won a £100 million ($160 million) socially responsible investment (SRI) pension fund mandate – which it says is the largest of its kind in the UK – from public sector trade union Unison.

Morley was the only fund manager to offer Unison an SRI approach, says Paul Moody, head of SRI business development at London-based Morley, whose SRI team manages assets of more than £450 million. Unison, like other investors, is “increasingly looking at SRI as an investment style that can add value rather than an investment style that reflects values,” he says.

go to Features October 2003