News February 2005

The following are summaries of news stories that appeared in the February 2005 print edition of Environmental Finance magazine

EU ETS under way despite concerns

The EU Emissions Trading Scheme has got under way with a sharp drop-off in allowance prices, criticism from environmentalists, continuing uncertainty about emissions targets in some major EU countries and a raft of ongoing legal disputes.

But – despite sensationalist headlines in a number of European newspapers warning of the scheme’s imminent collapse – the official responsible for the scheme has declared himself pleased with its first few weeks of operation, and most observers dismiss questions over the scheme’s long-term viability as scaremongering.

“For the first time, an incentive has been created for companies to reduce carbon dioxide emissions, and to extract value from reducing emissions,” Peter Vis, acting head of the Commission’s industrial emissions unit, told Environmental Finance.

Uncertainty persists over targets

Despite the official launch of the EU Emissions Trading Scheme on 1 January, thousands of companies across Europe still do not know exactly how many allowances they will be granted for the first phase of the scheme, which runs to 2007.

The late provision of information by governments to the Commission mean that five countries have still not had their ‘national allocation plans’ (NAPs) approved – including the UK, whose government has made much of its progressive approach to emissions trading and climate change.

The Commission is charged with ensuring that each NAP meets the terms of the Emissions Trading Directive. It is currently assessing the Polish, Czech and Greek plans, while the Italian government has not yet supplied a list of installations covered.

The UK government was the first to submit a draft NAP, in July. But three months later, it increased the overall allocation by almost 3%, to take into account revised energy projections. While the UK government argues that this is simply a revision to an approved NAP, the Commission is insisting on a full list of installation-level targets to reassess the plan. After numerous delays, the UK is now due to publish the list on 7 February.

Englefield closes €200 million wind fund

One of the venture capital companies behind last year’s landmark Zephyr wind farm financing has raised €200 million ($260 million) into a fund to invest in European wind farms. Englefield Capital’s fund will take equity positions in operating or consented projects – which, alongside typical levels of debt, will bring €1 billion of investments into the sector, its managers say.

The new fund will focus on investments in the UK, Ireland, Germany, France, Spain and Italy and will concentrate on farms above 20MW in capacity.

CSFB to enter environmental markets?

Credit Suisse First Boston (CSFB) has hired a leading US weather derivatives and emissions trader – a move that participants in the market hope will be a prelude to the investment bank beginning to trade weather and US emissions contracts.

John Gallagher, a spokesman for CSFB in New York, confirmed that the bank is building an energy trading capability, initially focusing on electricity and natural gas markets in North America.

However, weather and emissions traders are hopeful that the CSFB team will bring liquidity to their markets. Increasingly, energy traders consider weather derivatives and emissions allowance markets to be integral parts of the so-called “energy complex”, and one of CSFB’s hires, Brian Harrison, was formerly director of environmental markets for Baltimore-based Constellation Energy.

Tsunami caps year of record catastrophe losses

While it is too early for clear estimates of the economic effects of the Indian Ocean tsunami, the tragedy came at the end of a year in which extreme weather events had already brought record losses for those offering insurance against natural catastrophes.

Figures in late January suggest that the December tsunami killed close to 300,000 people. But, as levels of insurance are low in the affected countries, estimates of costs to insurers have, so far, also been relatively low – underscoring the fact that this was primarily a human, rather than economic, catastrophe.

Two leading insurers, Swiss Re and Munich Re, have said that they expect losses of no more than Sfr100 million ($84.4 million) and €100 million ($130 million) respectively as a result of the giant wave, caused by an earthquake off the coast of Sumatra.

The tsunami struck after Munich Re and Swiss Re had released preliminary surveys of the effects of catastrophes in 2004. But the hurricanes and typhoons that battered the US, the Caribbean and Japan earlier in the year had already put 2004 on course for record level of insured losses. Munich Re estimated that insured losses had reached more than $35 billion over the first 10 months of the year, while Swiss Re’s figure, which also included man-made disasters and covers a longer time period, was $42 billion.

California air market reclaims power plants

Power plants in Southern California rejoined the Regional Clean Air Incentives Market (RECLAIM) on 7 January, after three years spent outside the trading programme. The power generators were removed from the scheme during the California energy crisis of 2001 and, while out, were required to meet best available retrofit control technology standards.

As a result, the power producers have shut down older facilities, improved efficiency, or installed pollution controls and realised a substantial reduction in their emissions of smog-causing nitrogen oxide (NOx).

The South Coast Air Quality Management District, which runs RECLAIM, has therefore allowed them to re-enter only at the cost of reducing the market’s overall NOx cap – 34.2 tons of NOx allowances per day – by 7.7 tons per day by 2011.

IFC bows to pressure on performance standards

Following criticism from both NGOs and the private sector, the International Finance Corporation (IFC) has extended the period of public consultation on its new social and environmental guidelines from four to eight months.

The consultation period on the ‘performance standards’ was originally scheduled to end in December, but will now run until April. A copy of the accompanying ‘guidance notes’ – which give advice on how the standards should be implemented – will be made available on 31 January, says a spokesman for the IFC, which is the private sector arm of the World Bank.

Industry split on EU chemicals proposals

European industry remains sharply divided on proposed regulations governing chemicals used in the EU, with several blue-chip companies lobbying for them to be strengthened but many others calling for them to be watered down.

The differences were highlighted last month when the rival camps each issued glossy brochures ahead of a hearing on the proposals in the European parliament on 19 January. The proposals are being considered by several parliamentary committees, ahead of a vote expected in October.

UNICE, the coalition of employers’ federations, produced one of the reports with the support of other trade bodies representing chemicals and non-ferrous metals manufacturers*. It calls for certain inorganic materials and waste to be excluded from the regulations, and for high-risk substances to receive priority attention.

The proposed legislation, known as the REACH (Registration, Evaluation and Authorisation of CHemicals) Proposals, would require companies that produce and import chemicals to assess the risks arising from their use and to take the necessary measures to manage any risks they identify.

A brochure supporting the new proposals was produced by the International Chemicals Secretariat, with the backing of several other industry groups, a number of major retailers and the European Trades Union Confederation**. This group says “it is unfair that the companies and businesses that could ultimately suffer the financial consequences of inadequate information about chemicals have so far received little attention” in the debate over REACH.

* An industry recommendation to improve the efficiency and workability of REACH, UNICE, January 2005

** What we need from REACH, Chemsec, January 2005

UK launches allowance trading for landfill waste

The world’s first allowance trading scheme for municipal waste is due to begin in England in April. It has been designed to help the UK government meet its obligations under the EU Landfill Directive, which aims to reduce the amount of biodegradable municipal waste going to landfill sites.

Environment Minister Elliot Morley said the trading scheme would enable local government “to cut the amount of waste going to landfill sites where it is most cost-effective to do so.” Under the terms of the scheme, waste control authorities across England will be allocated a limited number of allowances to cover the amount of waste they can send to landfill each year. Those that find it relatively easy to meet their targets will be able to sell their excess allowances to those that find it difficult to do so.

AES and PPM inherit the wind

PPM Energy – the Oregon-based subsidiary of global power producer Scottish Power – has acquired the wind farms and development pipeline of Virginia-based Atlantic Renewable Energy Corp, while Virginia-based international electricity company AES has bought the Western wind projects of California-based SeaWest.

As a result of its $60 million purchase, completed in January, AES gains 500MW of existing wind facilities in California, Oregon and Wyoming as well as 1,800MW of potential development in 13 states in the West.

Also last month, PPM Energy acquired for an undisclosed sum 162MW of existing wind farms on the East Coast to add to its 830MW of wind production in the West. And the project pipeline of 500MW at the new subsidiary – dubbed PPM Atlantic Renewable – will help PPM meet its stated goal of 2,100MW of new wind power by 2010.

Some progress’ in stockbroker analysis

Stockbrokers are beginning to show “clearer and stronger institutional commitment” to non-financial issues when carrying out equity analysis, but there is still plenty of room for improvement, according to the first stockbroker evaluation commissioned by the members of the Enhanced Analytics Initiative (EAI).

“Many brokers are still taking a cautious and rather opportunistic approach towards extra-financial issue research,” says the evaluation, the first of an ongoing six-monthly series carried out by Ivo Knoepfel of consultancy onValues. “This being said, several brokers are currently ‘shifting gear’ from an opportunistic attitude to showing clearer and stronger institutional commitment. EAI’s goal is to support this trend.”

Knoepfel assessed 21 stockbrokers on their research into issues such as the environment, human rights and corporate governance over the past year, and asked them about their plans for 2005. The broking arms of seven firms were commended and, along with three runners-up, will be eligible to receive a share of more than €4 million ($5.2 million) which the EAI members will spend on non-financial research in 2005.

go to Features February 2005