News October 2004

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

Russia rescues Kyoto – but questions remain

Supporters of the Kyoto Protocol have warmly welcomed the Russian cabinet’s September decision to send the climate change agreement to the Duma for ratification – a move that would see the long-imperilled pact finally enter into force.

The head of the United Nations Framework Convention on Climate Change, Joke Waller Hunter, said that ratification will “re-energise international cooperation on cutting greenhouse gas [GHG] emissions and launch an exciting new phase in the global campaign to reduce the risks of climate change”.

UNICE, the European employers’ federation, was more guarded, “cautiously welcoming” the news from Moscow, but it called for a “truly comprehensive global agreement” that includes “all countries and regions, particularly the major emitters of GHGs”.

Wind picks up US federal and state support

Wind farm development got a surprising pre-election boost when the US Congress included the production tax credit (PTC) – a 1.8¢ per kWh credit for wind production – as part of a broader tax cut package. While President George Bush had not signed the bill when Environmental Finance went to press, he is widely expected to do imminently, since it extends his tax cut provisions.

“This action by Congress and the expected signature of President Bush mean that about $3 billion in wind energy investments forecast over the next several years is now back on track,” said Tom Gray, deputy executive director of the American Wind Energy Association.

The PTC had expired at the end of 2003 but has been renewed retroactively to 1 January and extended to the end of 2005. As result of the lingering uncertainty around the PTC, wind power development this year has been slow, according to industry participants.

Wind also got another push when New York state adopted a requirement that at least 24% of electricity generated in the state should derive from renewable sources by 2013 – up from 19% now, and requiring an additional 3,700MW of renewable capacity. Electricity suppliers will also be required to source green certificates equivalent to an additional 1% of power sold.

Insurers seen weathering US hurricanes despite record claims

The four powerful hurricanes that hit the US this summer will make 2004 the costliest year ever for natural disasters, with insured losses exceeding $22 billion, says the Insurance Information Institute. But analysts do not expect the impact on insurers to be as dramatic as Hurricane Andrew in 1992, which triggered the collapse of several companies. Claims from Andrew totalled $15.5 billion, or around $20 billion in 2004 dollars.

The unusual series of hurricanes, which are estimated to have damaged one in five houses in Florida and caused dozens of deaths, will wipe out between one quarter’s and one year’s earnings of most property/casualty insurers in the state, says Thomas Upton, an analyst with ratings agency Standard & Poor’s. But, he adds, S&P “does not have any concerns about the solvency” of any of the insurers it rates.

US to block aviation emissions trading?

The US is poised to stymie the imminent inclusion of aviation in the EU’s emissions trading regime, as well as blocking any attempt to introduce aviation taxes, at the International Civil Aviation Organisation (ICAO) meeting in Montreal. As Environmental Finance went to press in early October, the US was due to submit an amendment to the meeting of the ICAO Assembly that would “urge States to refrain from unilateral action to introduce emission-related levies” and call on ICAO to develop further “guidance” before allowing the sector to join planned trading schemes.

“Once again the US is trying to scupper international efforts to combat climate change” says Friends of the Earth (FoE) aviation campaigner Richard Dyer. “America must start to take its international responsibilities seriously and wake up to the threat of global warming.”

Japan should start preparing for emissions trading – report

Japan needs to start preparing now if it wants to establish an emissions trading scheme (ETS) to help it reach its Kyoto Protocol greenhouse gas reduction target, according to a discussion paper* prepared for conservation charity WWF by the Öko-Institut (Institute for Applied Ecology) in Berlin.

In proposing an ETS for Japan’s energy and industrial sectors, the paper supports the view of the Ministry of the Environment, which is considering introducing a scheme before 2007. Such a scheme might not, however, be welcomed by the Ministry of Economy, Trade and Industry.

But, if the Japanese government decides to launch an ETS, “the establishment of the infrastructure and capacity needed for the system should begin immediately,” warns the Öko-Institut paper. “Much can be learned from the failures made in the European Union system.”

*Greenhouse Gas Emissions Trading: Outline of an Emissions Trading Scheme for Japan

CDM Board casts doubt over leading projects

The methodology underpinning the two projects that are closest to being registered under the Clean Development Mechanism (CDM) may have to be significantly revised, according to the body that oversees the CDM.

Such a revision could mean projects based on this methodology will receive far fewer certified emission reductions (CERs) than the project developers expect. Under the terms of the CDM – one of the Kyoto Protocol’s ‘flexible mechanisms’ – CERs are awarded to projects in developing countries that reduce emissions of greenhouse gases (GHGs).

The CDM Executive Board issued a call for public comments on the issue on 22 September. This followed its 3 September decision to “put on hold” the methodology in question – which involves the destruction of the refrigerant HFC23, a potent GHG – even though this was the first process to win Board approval, back in July 2003.

UK finalising plans for trading water rights

The UK government aims to finalise proposals for a tradable system of water rights in England and Wales next year. The government’s Environment Agency is developing these plans after analysing responses to a consultation exercise that ended in October last year.

As part of this work, it has studied the experiences of Australia, Chile, Mexico and Colorado in the US, said Jonathan Fisher, the agency’s economics policy manager, at a meeting of the UK Network of Environmental Economists on 7 September. These states already have tradable water rights but the systems differ according to geographical characteristics and historical licensing practices.

CCX plans SO2 market, unveils EU carbon contracts

The Chicago Climate Exchange (CCX) has announced plans to launch a cash market for US sulphur dioxide (SO₂) allowances by the end of this year. Meanwhile, its new subsidiary, the European Climate Exchange (ECX), has revealed details of the carbon contracts it aims to list ahead of the launch of the EU Emissions Trading Scheme.

At present, all trading in SO₂ allowances takes place in bilateral over-the-counter transactions, except for an annual auction of allowances on the Chicago Board of Trade. The CCX’s new tradable asset will be known as a Sulfur Financial Instrument and will be based on the SO₂ allowances used for compliance with the Acid Rain Program of the US Clean Air Act.

The new ECX carbon contracts will be listed on the International Petroleum Exchange (IPE) as the result of a co-operation and licensing agreement between the IPE and the CCX. A series of futures contracts on new assets known as ECX Carbon Financial Instruments are to be launched by the end of this year, with cash contracts to follow early in 2005 after the EU ETS comes into force on 1 January.

Merrill to buy Entergy-Koch Trading

US investment bank Merrill Lynch is to acquire the energy trading operations of Entergy-Koch (EKT), including its weather and emissions trading desks. Neither side would comment on the value of the business, which employs around 280 staff in Houston and London.

A spokesman for Merrill Lynch declined to comment on its plans for individual parts of the business but, in a statement, the bank noted that EKT “has focused its trading activities primarily on natural gas, electricity and weather-related contracts. Merrill Lynch anticipates making future investments to expand the business into other aspects of energy trading.”

CSR reporting growth “stalling”

The growth of corporate social responsibility (CSR) reporting is stalling in North America and Europe, according to the UK’s Association of Chartered Certified Accountants and CorporateRegister.com, an online database of CSR reports. The two organisations have produced a report, Towards transparency: progress on global sustainability reporting 2004, which tracks the changes in reporting globally over the past 15 years. The number of companies publishing CSR reports annually has grown significantly and is now more than 1,500, but there is considerable regional variation in reporting patterns.

While “North America and Western Europe are the most active reporting regions,” growth in both “is becoming static,” the authors warn. Reporting among pioneering organisations and multinationals is reaching saturation, and the perception that reporting is just for large and multinational companies needs to be challenged, they say.

Innovest launches emerging market SRI product

Innovest Strategic Value Advisors has launched what it believes to be the first sustainable investment product to invest in emerging markets.

“We believe emerging markets are where the sustainability battle will be won or lost,” says Matthew Kiernan, chief executive of the New York-based socially responsible investment (SRI) analysis and asset management firm. He says that the strategy – it cannot be called a fund for regulatory reasons – will also deliver added financial benefits for the investor.

“Information is much less readily available [in emerging markets] – it rewards hard work,” he says. “And it’s exponentially more difficult to find sustainability information.”

FTSE4Good and DJSI Indexes announce new components

Thirty-eight companies were added to the Dow Jones Sustainability Indexes (DJSI) and 79 to the FTSE4Good index series last month, as part of their regular review processes.

However, 32 companies were dropped from the DJSI – which represents the top 10% of companies in terms of sustainability from the Dow Jones Global Indexes – bringing its total size to 167. This review saw the criteria for selection change with, among other things, greater emphasis being placed on the “scope and coverage” of environmental and social reporting and on corporate governance issues.

The FTSE4Good indexes, meanwhile, include all companies from the FTSE All-Share and the global FTSE All-World Developed indexes that meet increasingly tight social and environmental criteria. It has grown from 843 to 899 constituents following the latest six-monthly review, as 23 companies were dropped.

SEC mulls first US clean energy exchange-traded fund

The US Securities and Exchange Commission (SEC) is considering a filing for an exchange-traded fund based on the recently launched WilderHill Clean Energy Index, the first such index listed in the country.

The filing was sent to the SEC by the fund manager, Illinois-based PowerShares, and is in a 75-day ‘quiet period’ while it is reviewed. The process should finish in early October.

go to Features October 2004