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News April 2004
The following are summaries of news stories that appeared in the April 2004 print edition of Environmental Finance magazine
Commission draws battle lines on EU ETS
The European Commission has set out the grounds on which it would launch state aid investigations into EU governments’ emissions trading plans – and has warned that it wants to see ‘scarcity’ in the EU’s carbon dioxide emissions market, which starts in January. Writing in this issue of Environmental Finance, Environment Commissioner Margot Wallström says that “it is crucial that the allocations proposed [by member state governments] actually create a sufficient degree of scarcity” (see What will emissions trading deliver for the environment?).
ABN marketing $300m weather bond to Taiwanese investors
Dutch bank ABN Amro is understood to be marketing a $300 million weather bond to Taiwanese investors. The coupon payments on the 10 year bond – to be issued by the Inter-American Development Bank (IDB) – are linked to a $34 million portfolio of weather derivatives risk, believed to have been written by Entergy-Koch Trading, a Houston-based energy and weather trading house.
According to an investor presentation seen by Environmental Finance, the IDB is looking to raise NT$10 billion. The New Taiwan dollars will be swapped into US dollars – to the tune of $294 million – by ABN Amro. $34 million will be placed in a special purpose vehicle linked to a ‘Weather Index Portfolio’ of 24 weather risks.
North Carolina enters interstate air pollution fray
North Carolina has weighed into the increasingly fraught debate around US interstate air pollution – mounting a challenge to the concept of regional ‘cap-and-trade’ schemes.
Last month, the state’s Attorney General Roy Cooper petitioned the federal Environmental Protection Agency (EPA) to stop air pollution in 13 upwind states that are contributing to North Carolina’s potential inability to meet the new National Ambient Air Quality Standards (NAAQS).
The move – an attempt to avoid the state becoming a pollution ‘hot spot’ – could undermine the ability of power plants to trade pollution allowances freely to help meet emissions targets, analysts say.
“We’ve taken steps to cut down on the pollution we produce here in North Carolina, but dirty air doesn’t respect state borders,” Cooper said. “Since we can’t stop air pollution at the state line,we want to cut it at the source.”
Barclays Capital sets up environmental products desk
Barclays Capital, the investment banking division of the UK’s Barclays Bank, is setting up an environmental products desk, focusing on carbon dioxide allowance and renewable energy markets. The desk is being established to “help clients maximise the opportunities presented by the impending European Union Emissions Trading Scheme,” says a bank spokeswoman.
Barclays has hired Louis Redshaw as head of environmental products, reporting to Richard Lewis, head of European power and gas trading. Redshaw was formerly manager of trading and marketing for French electric utility EDF’s extensive hydro portfolio, and also has five years experience of UK power trading.
The bank says the new desk will work closely with the existing commodities trading, origination and sales teams at Barclays Capital. “Interaction between the teams is essential. We will be working with a lot of the same clients, such as electricity producers, and carbon dioxide trading will influence long-term electricity prices for power, gas and other commodities,” says Lewis.
CME reaches out to new users
The Chicago Mercantile Exchange (CME) has reduced the size of its weather derivatives contracts from $100 to $20 per cooling degree day, in an attempt to boost demand for the contracts. The CME also plans to expand its weather contracts to Japan, according to John Holden, a spokesman for the exchange.
“In general we’re looking to tighten the bid–ask spread in the market and this was a step in that direction,” Holden says. “We’re also planning to do the same thing with our heating degree day contracts when the season starts later this year.”
Most other contracts listed on the exchange carry a tick size – the minimum change in value of a contract – in the $10–20 range, which meant that some potential users were put off trading the weather contracts, according to brokers.“It’s basically an attempt to make the product a little more accessible and flexible for a larger audience,” Holden says.
Although users now have to trade five times as many contracts to get the same economic exposure, the smaller tick size changes the perception of the contracts as anomalous and more risky than other products on the exchange, brokers say.
Australian coal industry lays out GHG plan
By 2030, it could be “theoretically achievable” to reduce the greenhouse gas (GHG) emissions intensity of coal-fired electricity generation by almost one third, according to an Australian coal industry blueprint for reducing GHG emissions from coal-fired power plants.
The ‘Coal21 action plan’ says an emissions intensity target for coal-fired electricity generation of 650kg of carbon dioxide per megawatt hour could be achieved by 2030, compared to the current level of about 1,017kg.
The plan – intended as “an input to policy-making” – was developed by the Australian Coal Association with the involvement of Australian federal and state government agencies, electricity generators, coal producers and research bodies. About 85% of Australia’s electricity is generated by coal-fired power stations, and Australia is the world’s biggest coal exporter.
Industry seeks to curb ETS power bill impact
Europe’s energy-intensive industries are lobbying national and EU politicians to win protection from the hike in electricity prices that is expected as a result of the European Union Emissions Trading Scheme.
They want to prevent the extra costs associated with emissions being applied to all electricity, not just that derived from sources that emit carbon dioxide.
Otherwise, they say, European generating companies could reap windfall profits at their expense (see Power industry fears impact on power prices).
In a position paper issued on 3 March, eight industry groups representing
the steel, lime, paper, cement, ceramics, metals, glass and chlor-alkali
industries, suggest that transmission system operators (TSOs) could have
a role to play in achieving this goal. These organisations are responsible
for maintaining a balance between supply and demand on the electricity
grid.
Under the industry proposal, the TSOs would be invoiced by the generating
companies for any emission allowances the generators need to buy to supplement
those they will be allocated free of charge by their national governments.
The TSOs would then invoice electricity users a corresponding amount according
to their level of consumption, in the form of an ‘allowance fee’.
Medicinal biotech better for SRI
than pharmaceuticals – Bank Sarasin
Despite a perception of medicinal biotechnology as a high-risk industry, one of the first in-depth analyses of the sector from a socially responsible investment (SRI) standpoint suggests that it has a lower risk profile than the pharmaceutical sector as a whole.
Sarasin Sustainable Investment’s report, Will Medicinal Biotechnology sustain its promise?, examines the industry’s social and environmental impact and looks at the impact of the ethical issues that surround it on financial risk.
The group, part of Switzerland’s Bank Sarasin and with around €2 billion ($2.42 billion) under SRI management, had previously grouped medical biotech companies under the category of pharmaceuticals. But while the pharmaceutical industry as a whole is classified as being ‘below average’ in Sarasin’s sustainability rating, medicinal biotechnology came out with a rating of ‘average’.
Some of the advantages of medicinal biotech drawn out in the report include the fact that it uses fewer raw materials and less energy than traditional pharmaceuticals, and the sector’s high degree of regulation minimises the potential for accidents. In terms of social benefits, the industry is relatively decentralised, meaning that communities are less dependent on individual employers.
Goldman Sachs forays into
SRI with oil sector ranking
Goldman Sachs has published its first index ranking companies on their social and environmental performance. The Goldman Sachs Energy Environmental and Social index, produced as part of a UN Environment Programme (UNEP) initiative, places BP ahead of Shell, Statoil and ExxonMobil.
Last autumn, 12 fund managers with more than $1.6 trillion of assets under management wrote to 40 sell-side brokers asking them to produce indexes ranking eight sectors with high social and environmental impacts. Fourteen brokers will produce such indexes in time for a June unveiling of the programme, says Jacob Malthouse, senior programme manager at the UNEP Finance Initiative in Geneva.
Anthony Ling, co-head of European investment research at Goldman Sachs, says the index will help its clients make investment decisions: “In the long run, the top performers in the index will [financially] outperform.”
Commission mulls market-based
approach to ship emissions
The European Commission is to launch a tender for further research into using market-based mechanisms to control emissions of sulphur dioxide and nitrogen oxides from shipping. The move follows the publication of a preliminary study* into the issue, carried out for the Commission, by NERA Economic Consulting.
NERA found that market- based mechanisms had the potential to reduce emissions but suggested that, to avoid excess cost and legislation, a relatively simple scheme should be used initially. On this basis, it recommended three possible approaches. The first was ‘voluntary port dues differentiation’, whereby ships with greater emissions would be charged more to enter ports or use shipping channels.
The second was a ‘consortia benchmarking approach’, which would set mandatory benchmark levels for emissions and would allow shipowners to ‘opt in’ to a trading consortium. Finally, a ‘rigorous credit-based approach’ was suggested. Under this scheme, tradable credits would be given to ship owners who voluntarily reduced emissions. These could be traded with other owners, or with land-based cap-and-trade schemes.
Despite growth, Europe
failing on renewables
The European Renewable Energies Federation (EREF) has warned that Europe is in danger of missing its renewable energy targets for 2010. A study released by the federation last month suggests that only Germany is on track to meet its 12.5% target – Europe as a whole may miss its average 22% target by as much as 4.2%. The report from EREF, which represents independent renewable energy producers, follows a series of upbeat announcements from the wind energy industry.
“Some countries appear to be receding in their efforts to reach the targets, in part because of substantial growth in overall energy consumption,” EREF said. “But other reasons involve stalling efforts on the political and administrative level, as well as on the level of grid upgrading/connection.”
The latest figures from the American and European Wind Energy Associations, however, are far more encouraging. They show that the global wind power industry grew faster than ever before in 2003, with the amount of installed capacity increasing by 26%. The new growth, estimated as being worth €8 billion ($9.7 billion), brings the total production capacity of wind turbines across the world to more than 39,000MW, enough to power 19 million European households, say the associations.
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