Carbon Trading: Constructive - or a Massive Con?

Carbon Trading: Constructive - or a Massive Con?

When the Chicago stock exchange set up a small futures market in clean air, some twenty years ago, many must have asked: "Whatever next?". Trading in dirty air - that's what. For today in Europe "carbon trading" is becoming big business, with significant monetary gains to be made. The rationale behind this new market seems simple enough: those firms that clean up their acts, and reduce C02 emissions below a certain level, get to sell permits to filthier enterprises which then don't have to clean up their's. As a result, overall CO2 emissions are supposed to fall.

But, at the root of the whole enterprise, is profiteering not principle. This, despite the fact that a new UN-US-UK-Australia report ("Meeting the Climate Challenge") warns of global "disaster" in just ten years, if the rise in CO2 emissions continues at the current pace.

As the following articles demonstrate, it's not only plant operators which get to benefit, but also big banks (ironically including ones - like Barclays - which also fund some of the most polluting mining enterprises). Nor are energy utilities alone in the scheme - pulp and paper manufacturers have now joined and, in the very near future, metal producers will be recruited. The opportunities for dodgy or corrupt dealing seem wide open. Even before trading is really up and running, at least one European country, Spain, has succumbed to pressure from its coal industry to "re-jig" internal permit allocations.

Fortis Bank Wants to be Number One in EU CO2 Trading

Story by Anna Mudeva, Planet Ark

January 24, 2005

Amsterdam - Belgian-Dutch bank Fortis is vying to be the top player in the emerging market of EU carbon dioxide (CO2) emissions and take advantage of its lucrative profit opportunities, a bank director said on Friday.

Fortis Bank estimates its share of the market, launched on Jan. 1, at between a quarter to a third of daily volumes and forecasts climbing liquidity and prices as the market matures, Seb Walhain, director environmental products told Reuters.

Companies can trade CO2 allowances under an EU emissions trading scheme which is the centrepiece of the EU's strategy to meet its Kyoto Protocol targets on reducing global warning.

The market is dominated by big utilities and financial institutions, the most active of which include Fortis, Barclays , Dresdner Kleinwort Wasserstein and Sampo Bank.

"We aim to be a market leader in the European CO2 market. We want to be there before anyone else," Walhain said.

"We do just forward trading at the moment. There is no spot market yet, there are no exchanges yet, there is no clearing yet but the market is growing incredibly fast -- the liquidity is increasing, it is becoming a very booming market," he said.

Daily volumes have jumped to an average of 300,000- 500,000 tonnes of CO2 permits since the start of the EU market, compared with only about 350,000 tonnes a month half a year ago, Walhain said.

Speculative Trading

Fortis Bank has so far traded some 5 million tonnes of EU allowances and made around 300 transactions, two-thirds of which was mainly speculative forward trading and the rest was on behalf of clients, he said.

The bank's main clients so far include several European energy companies and pulp and paper producers. It is also in talks with ferrous metals plants, glass and ceramic makers.

Walhain expects the market to pick up and a spot trading to develop once permits are delivered to firms and national registries for the allowances are established in March. The kick off of exchanges will also add liquidity, he said. Four European power exchanges are competing to be the main marketplace for EU CO2 trading -- Nordic's Nord Pool, Germany's EEX, Austria's EXAA and Britain's International Petroleum Exchange which has set up an emissions trading venture, the European Climate Exchange, with Chicago's Climate Exchange.

But Walhain said what the EU CO2 market needed was one pan-European exchange and the bourses would have to consolidate if they wanted to survive.

He also forecast increasing prices as the market matures and more players get involved.

"We feel that the CO2 credits are undervalued. We also think that there is big future in carbon funds, that's why we set up a fund to buy carbon while they are cheap and sell them later when they are more expensive". Fortis put 50 million euros in the establishment a 100- million euro European Carbon Fund late last year, which aims to attract financial institutions and fund managers willing to invest in a portfolio of between 15 to 20 CO2 projects by 2012.

The fund was set up by a consortium of financial institutions, led by Fortis and French bank Caisse des Depots et Consignations (CDC).

The EU trading scheme forces about 12,000 factories and power plants to lower the amount of CO2 they pump out and hold permits for every tonne of carbon they produce. Firms which exceed their limits must pay for the right to do so by buying extra allowances from companies which undershoot their limits. Companies without enough allowances to cover their annual CO2 output face hefty penalties.

Spain Rejigs CO2 Emission Plan in Favour of Coal

Planet Ark

January 24 2005

Madrid - Spain has given extra pollution rights to coal-fired power stations at the expense of cleaner gas-fired plants in its final plan to limit carbon dioxide emissions, the Industry Ministry said on Friday.

Pressured by the coal industry and Endesa, the biggest power company which owns most of the country's coal-fired generating plants, ministers changed the allocation of emission rights on approving the plan for 2005 to 2007 at a cabinet meeting.

"The plan takes in some of Endesa's arguments," the company said in a statement.

The government's initial allocation, part of a European Union wide plan to limit greenhouse gas production and comply with Kyoto guidelines, gave coal-fired plants the right to emit a total of 148.7 million tonnes of CO2 over three years, divided into declining annual amounts.

In Friday's definitive plan, the total rose by 4.5 million tonnes to 153.2 million. To make up for the increase, the plan cut the emissions allowance for combined-cycle plants and reduced the reserve for new power stations that come on line.

Endesa and the number three power company, Union Fenosa, benefit from the extra emissions rights, while rival Iberdrola, which produces most of its power from natural gas and hydroelectric plants, loses out.

Gas Natural, which is just getting into the generation market, also loses.

In the plan, combined-cycle, gas-fired plants ended up with 66.4 million tonnes in emission rights for the three years, down from 67.5 million.

Iberdrola said the difference for it was only marginal -- 0.2 million tonnes less CO2 over the three years.

The ministry said the increase for coal burners had been possible "thanks to new (company) data and to using part of the rights reserved for new entrants".

Spain is currently producing some 40 percent more CO2 than allowed under its Kyoto emission limits, and its companies will have to buy rights from other countries that have excess to sell.

The emission allowance for the country's power generation industry as a whole is unchanged at 89 million tonnes in 2005, falling to 87 million by 2007, the ministry said.

The power industry expects to produce some 92 million tonnes a year of CO2, which implies it would have to buy extra rights at an estimated cost of some 10 euros a tonne.