News July-August 2004

The following are summaries of news stories that appeared in the July-August 2004 print edition of Environmental Finance magazine

Commission rules on first ETS plans

The European Commission has ruled on the first eight national allocation plans (NAPs) setting carbon dioxide emissions targets for the EU Emissions Trading Scheme (ETS) – and sent the price of carbon allowances tumbling. As many expected, the Commission has done little to reduce the overall number of allowances allowed for under the NAPs, which cover emissions from 2005–07.

There was little immediate consensus on what the rulings mean for the ETS. Some suggest they signal an intention to tighten up remaining NAPs – most of which have been viewed as lenient by observers – but others that they spell disaster for the scheme and international emissions trading more broadly.

On 7 July, the Commission approved NAPs from Denmark, Ireland, the Netherlands, Slovenia and Sweden. It asked Austria, Germany and the UK to make “technical” changes to their plans (Allocation plans in the dock). The Commission will rule on the remaining NAPs – some of which are still to be submitted – after the summer break.

World Bank slammed again over EIR

The World Bank Group has come under yet more fire for its handling of its Extractive Industries Review (EIR). NGOs are complaining that delays in the publication of the Bank’s draft response to the EIR in languages other than English have reduced the scope for public comment.

On 18 June, the Bank released its long-awaited draft response to the EIR, a report it commissioned in 2000 to look into its involvement in the oil, gas and mining industries. However, the draft response was not available in other languages for another week, and even then was released without translated annexes. Hannah Ellis, international financial institutions campaigner at Friends of the Earth (FoE) in London, says that FoE had asked for the 30-day consultation period to begin once the response had been translated but the Bank refused.

Clive Armstrong, lead economist in the oil, gas, mining and chemicals department at the bank, says the English version came out before the French, Spanish and Russian versions because the staff were in a hurry to get the response out as quickly as possible.

Developing country weather markets set to flower

Hundreds of millions of dollars of weather risk from the agricultural sector in developing countries could soon come on to the international weather derivatives markets, according to the World Bank. The announcement – made at the Weather Risk Management Association conference in New York in June – follows several years of pilot studies and capacity building.

“The Bank is the largest weather risk insurer in the world,” says Ulrich Hess, an economist in the agricultural risk department. “Between 1980 and 2003, we provided $12.5 billion for emergencies caused by natural disasters. A lot of that could be placed in the weather risk markets.” Hess says the Bank has been helping governments, microfinance institutions and insurers put together weather indexes that relate to crop yields. These can be used to sell insurance policies to farmers, which can then be aggregrated and the risk sold on to international reinsurers or weather derivatives dealers.

RECLAIM broker arrested

Federal agents arrested Anne Sholtz of Automated Credit Exchange for wire fraud on 16 June. A criminal complaint filed the day before by the US Department of Justice charged Sholtz with using forged documents to convince AG Clean Air that a Southern California Mobil refinery would purchase $17.5 million worth of its air pollution credits.

The affidavit that prompted Sholtz’s arrest notes that, from 1999 to 2001, she received $12.5 million from AG Clean Air, a New York-based energy credit trading firm, to purchase air pollution credits under the Regional Clean Air Incentive Market (RECLAIM) programme of the South Coast Air Quality Management District with the understanding that said credits would be sold to Mobil.

Sholtz then allegedly provided documents purporting to be from Mobil executives agreeing to the sale and provided partial payment of $9 million. But when ACE – an online market for pollution credits – filed for bankruptcy in August 2002, no such agreement could be found and, earlier that year, according to an AG Clean Air employee, Sholtz admitted “that she had fabricated documents relating to the Mobil deal”.

California car GHG plan to offer trading

Sellers of cars in California are to be given “significant flexibility” to meet controversial proposed targets announced last month to reduce tail-pipe greenhouse gas (GHG) emissions – including an emissions trading scheme and credit for early action. However, “based on initial analysis, no manufacturer would earn early reduction credits given emissions to date”, the California Air Resources Board (ARB) notes in a report setting out the targets. “This is not surprising given the level of reduction” expected, it adds.

In 2002, California mandated the ARB to set out regulations to achieve the “maximum feasible and cost-effective reduction of GHGs emitted” by cars, sports utility vehicles and light trucks.

The proposed regulations, released by the ARB on 14 June, outline a range of off-the-shelf or near-term technology packages for carmakers to cut emissions in new vehicles. Due to be phased in from 2009, the regulations will require manufacturers to reduce emissions by around 21% for 2012 models compared to a 2002 baseline, increasing to nearly 30% for 2015 models.

Emissions trading not a problem for EU competitiveness – report

The EU Emissions Trading Scheme (ETS) will not affect the competitiveness of most major industries vis-à-vis their non-EU rivals, according to a new study* from the UK’s Carbon Trust. However, the report warns that intra-EU competitiveness issues could arise if member states’ allocation plans are not made more consistent.

The EU ETS is a cap-and-trade system, due to come into force on 1 January 2005, for reducing carbon dioxide (CO₂) emissions from the energy, oil refining, building materials, pulp and paper, and iron and steel sectors. The Carbon Trust’s study modelled the effect of the trading scheme on five sectors – electricity, cement, paper, steel and aluminium – under different allocation and carbon price scenarios.

Based on a price for CO₂ allowances of €10/tonne and an allocation plan where most of the responsibility for reducing emissions is placed on electricity generators, only the aluminium sector would risk an erosion of its competitive position, the report says.

* The European Emissions Trading Scheme: Implications for Industrial Competitiveness

First S&P rating of European wind power financing

Standard & Poor’s (S&P) has released its first rating of a European wind power financing. The ratings agency assigned a preliminary BBB– to the proposed 20-year, €100 million ($123 million) bond to finance wind farms developed by Energiekontor.

The bond – to be issued by Max Two, a Jersey-based funding vehicle – will be used to finance or refinance eight wind farms developed by Energiekontor, a German wind farm developer. Five of these are existing wind farms in Germany, and three are planned for Portugal.

The rating follows the first ever credit rating of a wind financing deal by S&P in June last year, when a $370 million bond from Florida Power and Light in the US was also assigned a BBB– rating.

XL Weather & Energy sheds traders

XL Weather & Energy (XLW&E), the largest weather risk management dealer, has made an undisclosed number of staff redundant – including two traders. Some other dealers suggest this signals the withdrawal of the Connecticut-based firm from speculative trading.

The two traders are Jason Pickard and David Oliviera, who traded the US and European weather markets respectively. Market rumours suggest overall job losses recently total between 10 and 15 – with the remainder in back office and administrative roles. At its height, XLW&E employed more than 50 staff.

EKT sale possibility slows Taiwan weather bond

The announcement that the parents of Entergy-Koch Trading (EKT) are considering the sale of the energy, weather and emissions trading operation has thrown into doubt the issuance of a planned $300 million weather bond. In early June, Koch Industries and Entergy Corporation announced that they are “conducting a broad review of strategic alternatives” for EKT, including the “potential sale” of the venture.

EKT, a Houston-based energy and weather trading company, is working with Dutch bank ABN Amro to structure a weather bond, aimed at Taiwanese investors, to be issued by the Inter-American Development Bank (IADB). The bond’s principal is to be guaranteed by the IADB, but coupon payments are linked to a $30 million portfolio of weather derivatives written by EKT.

According to a source familiar with the bond transaction, the announcement of EKT’s possible sale resulted in a 30-day postponement of the bond’s issuance, to mid-July, but the source could not confirm whether this would now go ahead.

Three catastrophe bonds hit the market

Almost $500 million worth of catastrophe bonds was placed in recent weeks, as the market lurched back into life after last year’s record $1.7 billion of issuance – and structurers are confident that a flurry of deals is likely for the rest of the year.

Aon Corporation, a leading insurance broker, placed one of three recent issues – underwriting a $100 million multi-peril bond for Converium, providing the Switzerland-based insurer with five years of protection against North Atlantic hurricanes, US and Japanese earthquakes, and European windstorms.

Meanwhile, Swiss Re Capital Markets is understood to have placed a $125 million five-year bond for an unknown insurance company. It primarily transfers Tokyo-area earthquake risk.

The third bond, a three-year $227.5 million Residential Re 2004 transaction, was placed by Goldman Sachs and BNP Paribas for US insurer USAA. None of the parties would comment on the bond, but it is understood to cover US hurricane and earthquake risks.

First weather contracts sold in Taiwan

Taiwan’s Central Insurance has sold the first of what it describes as “quasi weather derivatives” in the country, and is planning to launch weather derivatives proper in July in partnership with Japan’s Mitsui Sumitomo Insurance. The move follows the granting of approval in late May by Taiwan’s Ministry of Finance for the company – which is part of Taiwanese securities group Polaris – to offer weather insurance.

To date, two companies – a golf course and an organiser of whale-watching boat trips – have bought contracts from Central Insurance, says Chi-Ming Peng, its weather risk management consultant.

NGOs sue German government over climate change disclosure

Friends of the Earth (FoE) Germany and fellow NGO Germanwatch launched a legal challenge against the German government in June with the aim of forcing it to disclose the extent to which projects supported by its export credit agency Hermes have contributed to climate change.

FoE claims that this information should be publicly available under Germany’s Environmental Information Act, which is derived from EU legislation giving citizens the right to information on the environment held by public authorities.

Carbon market volume set to double again in 2004

Almost 67 million tonnes (Mt) of carbon dioxide equivalent changed hands in the first five months of 2004, according to an interim report, State and Trends of the Carbon Market 2004, from the World Bank. This compares with a total of 78 Mt for the whole of 2003.

The report said that traded volumes are likely to double in 2004 for the second successive year. However, it cautioned that unless there is a clear signal that emissions reductions beyond 2012 – the end of the Kyoto Protocol’s first commitment period – will have some value, the “window of opportunity” for generating credits from Clean Development Mechanism and Joint Implementation projects all but closes in 2006 or 2007.

KLD launches weighted sustainability index

Boston-based socially responsible investment (SRI) research firm KLD Research and Analytics has launched what it believes to be the US’ first SRI index weighted according to companies’ social and environmental performance, rather than according to their market capitalisation.

The new Select Social Index is aimed at institutional and retail investors that seek a wider range of assets and more security than traditional SRI indexes provide, while still wanting a sustainability focus, says Tom Kuh, senior vice-president of business development at KLD.

Stock market setbacks for UK clean energy sector

UK fuel cell maker Intelligent Energy cancelled its planned listing on the London stock exchange in June, citing adverse market conditions. The company had planned to raise up to £60 million ($110 million) from an initial public offering (IPO), which would have valued the company at around £200 million.

Several other European IPOs have been cancelled in recent months due to investor concerns about interest rates and oil prices.

CEO Harry Bradbury said the company could now raise funds through a private placement but may reconsider a stock market flotation in London or New York at a later date.

UK consultants announce acquisitions, mergers

WSP Environmental, one of the UK’s largest environmental consultancies, has bought EMP, a 20-strong project management firm with operations in Finland and Estonia, for an undisclosed sum.

EMP specialises in large projects in the energy sector, including transactions in carbon dioxide emission reductions. The energy industry is currently one of the fastest growing sectors for WSP Environmental, says managing director Stuart McLachlan.

Meanwhile, another UK environmental consultancy – Energy for Sustainable Development (ESD) – is merging with the carbon activities of Greenergy International, a leading supplier of environmentally friendly fuels.The new entity – claimed to be the largest dedicated carbon management business in Europe – comprises ESD, the Edinburgh Centre for Carbon Management and Greenergy Carbon Partners.

Ontario expands SOx and NOx trading scheme

The Ontario Ministry of the Environment has widened its nitrogen oxides (NOx) and sulphur dioxide (SO₂) ‘cap and trade’ emissions reduction scheme to impose caps on more sectors and set increasingly tougher targets over time. But, despite the influx of new players, market liquidity may prove elusive, say industry participants.

The Industry Emissions Reduction Plan announced in June, proposes to cap NOx and SO₂ emissions, from 2006, from six additional industries in the Canadian province: iron and steel, cement, petroleum refining, pulp and paper, glass and carbon black. Previously, limits were imposed only on the electricity and non-ferrous metal smelting sectors.

Ontario’s existing emissions trading scheme – introduced in 2001 – will be extended to the newly affected sectors.

go to Features July-August 2004