News November 2005

The following are summaries of news stories from the November 2005 print edition of Environmental Finance magazine

CDM up and almost running

The first carbon credits have been issued under the Clean Development Mechanism (CDM) – a key component of the Kyoto Protocol on climate change – but companies are unlikely to be able to use them before 2007 at the earliest.

On 20 October, two small hydroelectric projects in Honduras were issued with Certified Emission Reductions (CERs), representing respectively 7,304 and 2,210 tonnes of carbon dioxide emissions effectively avoided by the projects. The next day, a biomass project in Rajasthan, India received 48,230 CERs.

However, several administrative and logistical issues need to be resolved before the CERs can be transferred to project participants and used for compliance. The most important of these is the establishment by the UN of the ‘International Transaction Log’, which will track CER trades, and verify that all such transactions comply with the rules of the CDM. This is not expected until the first quarter of 2007.

Katrina to trigger first cat bond loss

Losses from Hurricane Katrina may result in the first triggering of a catastrophe bond. Investors in the Kamp Re cat bond face losing part or all of their investments if insurer Zurich Financial Services loses more than $1 billion as a result of the storm.

“Based on the current available public information, it appears there will be a loss of principal on the Kamp Re bonds,” says a spokeswoman for Swiss Re. The reinsurance giant arranged the $190 million floating-rate catastrophe note in July, to cover it against potential losses from cover it had written for Zurich.

GuaranteedWeather marketing novel investment fund

US weather derivatives dealer GuaranteedWeather and its sister company Ramsey Quantitative Systems Inc are marketing a commodity investment fund that aims to capitalise on the former’s weather trading expertise. The two companies hope to raise $50 million–100 million into the Parhelion fund – named after a type of sun-spot – which is expected to be up and running by the end of this month.

The fund will pursue five sources of returns: technical commodity trading; modifications to commodity positions based on weather forecasting; relative value volatility trades between weather and commodity markets; stand-alone weather trades; and relative value trades between energy markets inspired by weather variables.

SRI industry hails Freshfields’ fiduciaries report

The socially responsible investment community has hailed a report from leading law firm Freshfields Bruckhaus Deringer that it says demolishes many of the legal arguments used to avoid integrating environmental, social and governance issues into investment decision-making.

The report argues that not only do investors have greater leeway to take such issues into account than many believe, but that they may even be in breach of their obligations to their beneficiaries if they do not do so.

Drax enters into first UK SO2 trade

Drax Power, the operator of a 4,000MW coal-fired power station, has entered into what it believes is the first trade of sulphur dioxide (SO₂) allowances under the UK’s new regulatory regime. No details of the trade are available – even on whether Drax is a buyer or seller – but the company says it “represents an important step in discovering the value of flue gas desulphurisation technology at power stations”.

From 1 October, 17 coal- and oil-fired power stations in England and Wales, with a combined capacity of around 28GW, are required to collectively emit no more than 399,000 tonnes of acid rain-causing SO₂ each year, down from 515,000 tonnes in the previous year. They are allocated allowances which they are permitted to buy and sell, and, at the end of each year, enough must be surrendered to match that year’s emissions.

Robeco and Macquarie to close cleantech funds

Dutch asset manager Robeco and Australian bank Macquarie both hope to close what are believed to be the first clean technology private equity funds of funds next year.

Robeco has raised $170 million into its Sustainable Private Equity Fund, and expects to close it at $200 million in early 2006, while Macquarie’s Clean Technology Fund is due for a first closing at the end of this month. Its final target is $150 million, a sum which it hopes to have raised by mid-2006.

Fight looms over New Source Review change

Environmental groups in the US are preparing to fight a proposed rule change regarding power plants that they regard as devastating to air quality. The electric industry, however, says the change by the Environmental Protection Agency (EPA) is a needed correction to how the Clean Air Act has been applied. The battle is likely to end up in court.

At issue is New Source Review (NSR), which requires plant owners to add pollution controls if they upgrade or expand in ways that increase emissions. In a late October ruling, the EPA said it would only apply NSR if upgrades increase hourly emissions, rather than annual, emissions.

Natsource raises €455 million into carbon buyers’ pool

Natsource has closed its Greenhouse Gas Credit Aggregation Pool (GG-CAP) with total commitments of €455 million ($550 million) from 26 participants. This makes it the world’s largest private sector manager of carbon emissions assets – by a factor of three.

GG-CAP, which has been under development for three years, is a private sector facility to help companies meet emissions targets under the EU Emissions Trading Scheme and the Kyoto Protocol. It is designed to deliver carbon credits from a range of different sources to the participants over an eight-year period (2005–12).

AIG steps up action on climate change

AIG, one of the world’s largest insurance companies, is considering launching a range of new products and services in response to the growing impact of climate change.

Joe Boren, chairman and CEO of AIG Environmental, told an insurance industry meeting in Hartford, Connecticut, on 27 October that the possibilities include: special insurance products for the renewable energy industry; new ‘directors and officers’ policies to cover risks related to a company’s emissions of greenhouse gases; auto insurance policies packaged with emission offsets; and policies to protect against non-delivery of emission reduction credits for companies that need to buy such credits.

Endesa to buy 15 million tonnes of Kyoto carbon credits

Spanish utility Endesa has announced plans to buy 15 million tonnes (Mt) of greenhouse gas emission reductions by 2012 from Clean Development Mechanism and Joint Implementation projects, under the terms of the Kyoto Protocol.

Endesa says this is the first example of a company buying a large volume of emissions reductions directly. Most companies and countries that need to buy carbon credits to help them meet their emissions targets have generally done so by investing alongside others in ‘buyers’ pools’ or carbon funds.

Former Ex-Im head calls for ECA reform

Former US Export-Import Bank chairman James Harmon has called for a major revamp of the rules governing export credit agencies (ECAs). The call comes on the eve of a key meeting to discuss their ‘Common Approaches’ to environmental issues in Paris in mid-November.

“If we are to achieve the Millennium Development Goals of poverty reduction, increased healthcare and a sustainable environment, we will have to use every possible tool available to us in the book. With the right changes, ECAs can be a big help,” said Harmon, now chairman of the Washington-based environmental think-tank the World Resources Institute.

EU considers next phase of climate policies

The EU has launched a consultation process to aid the development of a new tranche of climate change policies.

“It is clear that emissions are not being reduced as quickly as we want,” said Elliot Morley, Environment Minister of the UK presidency, at the launch of the second European Climate Change Programme (ECCP II) on 24 October. “Urgent action is needed in all sectors at both national and EU level to deal with this.”

ECCP II will involve several working groups, with one reviewing existing EU climate change policies, and others examining aviation, road transport, carbon capture and storage, and adaptation to climate change.

SO2 prices crash through $1,000 barrier

Spot prices for US sulphur dioxide (SO₂) allowances broke through the $1,000/ton barrier for the first time on 25 October, and have continued to rise, approaching $1,200/ton on 1 November, as utilities hoard allowances in expectation of further price rises. That represents a steep climb from the $130/ton price in early 2003, and even from the $885/ton level in late September.

Allowances are traded under the Environmental Protection Agency’s Acid Rain Program, which caps SO₂ emissions from fossil fuel-fired power plants.

Although 5 million–6 million excess allowances are currently banked by utilities, generators are drawing those down at a rate of 1 million tons a year, says Francisco Padua, emissions broker with Houston-based Amerex Energy.

go to Features November 2005