Clear The Air News Blog Rotating Header Image

June 10th, 2008:

Carbon Emissions Trading Platform

Pollution solution

Asia could benefit from having its own trading platform

Amanda Lee – Updated on Jun 10, 2008 – SCMP

As the global war on pollution intensifies, major corporations are paying greater attention to a multitrilliondollar business which aims to cut back on carbon emissions.

Several countries are signing emissions trading agreements with big polluters. These schemes place a limit on the amount of greenhouse gases companies can produce, forcing heavy polluters to buy credits from firms that pollute less – thereby creating financial incentives to fight global warming. Now, Hong Kong wants to get in on the act and, at the beginning of this year, the Hong Kong Exchanges and Clearing (HKEx) said it wanted to offer Certified Emission Reduction (CER) futures and options as a hedging tool. The announcement was met with enthusiasm by both environmentalists and businesses.

And how much could this be worth? In a workshop last month, held by Hong Kong-based think-tank Civic Exchange at the Hong Kong Stock Exchange, Ian Johnson, a speaker and chairman of research company IDEAcarbon, said the global carbon market could be worth €500billion (HK$6.15trillion) by the year 2020.

Mr Johnson said that the biggest player was the United States and the biggest emissions trading organisation was the Chicago Climate Exchange. The exchange comprises non-Kyoto signatories, corporations with a corporate social responsibility (CSR) perspective and individuals looking to cut their carbon footprint.

What’s more, investment banks, such as Goldman Sachs, are looking to profit from trading carbon futures in the same way as any other commodity.

The voluntary market, including contracts traded over the counter and on exchanges, was worth a total of US$331million last year. Mr Johnson also said the most common over-the-counter transacted projects include those that are related to renewable energy, energy efficiency, methane destruction, forestry land-based projects and CO2 emissions.

Roger Raufer, an independent consultant who is an adviser to the HKEx on carbon emissions trading, says: “It is very important for Asia to have its own platform.” However, he adds that there are many questions about whether China, one of the world’s biggest polluters, should be allowed to purchase credits from the United States. In short, if an exchange is to be established, Asia has to create its own demand.

Demand is strong in Europe, where carbon credits are traded on the Oslo-based Nord Pool and the European Climate Exchange.

A spokesman at the HKEx declined to comment on the results of the exchange’s consultation on the feasibility of establishing an emissions trading platform. The HKEx said in January, in addition to working on a platform for structured products and exchange-traded funds (ETFs), it would seek to partner with an overseas exchange to build a trading/clearing platform for trading in carbon, which would include greenhouse gas allowances and credits.

Research from the Civic Exchange notes that a large proportion of emission allowances are traded by private negotiation. More than half of all European Union Greenhouse Gas Emission Trading Scheme permits are traded over the counter, according to the think-tank.

Other than the Chicago Climate Exchange and European Climate Exchange, there is the Australian Climate Exchange and the Montreal Climate Exchange, which was formed when the Chicago Climate Exchange joined with the Montreal Exchange in order to create the first environmental-product market in Canada.

There seems to be some demand in Asia, particularly from airlines that want to fulfil CSR. Angus Barclay, general manager at Cathay Pacific’s international affairs department and a panellist in the Civic Exchange workshop, says the airline supports carbon emissions trading. Apart from buying credits globally, Cathay Pacific was one of the first airlines to launch a carbon offset scheme, available to all passengers who travel on Cathay Pacific and Dragonair flights.

The scheme, FLY Greener, which was launched at the end of last year, is voluntary for passengers who can either pay in cash or with their Asia Miles.

Cathay Pacific also matched passenger contributions for the first three months from when the scheme was launched. It only costs a fraction of the ticket price for passengers.

A spokeswoman at the airline says that the response is encouraging. “It would be too soon to mention the take-up rate at this stage. The response is reasonably positive for a newly launched scheme,” she says.

“Of course, our aim is to have as many passengers as possible take up the opportunity to participate in the programme. We will be promoting this through many channels to ensure that our passengers are aware of this programme, and our staff are available to assist them to understand how it works.”

HSBC is among the first global banks to buy carbon credits to cover the pollution it generates from its office buildings, and jetting its executives around the world.

A spokeswoman says that although the bank will consider buying credits in Asia, it has been purchasing these in Europe. Other than ETFs and structured products, fund managers, such as Schroders, have launched various funds that invest in companies which work in areas that respond to climate change. Schroders says climate change is going to be the biggest investment theme in the next 20 years.

Investment bank Barclays Capital launched a carbon emission index at the end of last year which tracks the performance of carbon credits associated with the world’s major greenhouse gas emissions trading schemes: the EU Emissions Trading Scheme (EU Allowances) and the Kyoto Clean Development Mechanism, a CER.

It’s no surprise that other investment banks have jumped on the bandwagon. Societe Generale has also launched its own version of carbon emission indices. Merrill Lynch and UBS say they are working on developing these indices.

Globally, policymakers have been encouraging the development of carbon exchanges. Europe has the European Union Greenhouse Gas Emission Trading Scheme and other exchanges to trade carbon.

The US has agreed to take part in emission trading and there are commitments from all presidential candidates. The same cannot be applied in Asia, according to Mr Raufer.

He says although China has established some domestic pilot emission schemes, so far these have not been entirely successful because the mainland initially focused on acid rain.

Trading carbon credits

The Chicago Climate Exchange has established its own reduction commitments. A total of six greenhouse gases are included. Each contract represents 100 tonnes of CO2 or the equivalent.

The contracts are exchange offsets and exchange allowances which are issued to members.

Methane destruction, soil-carbon sequestration, reforestation, renewable energy and CDM-eligible projects are examples of eligible offset projects. Source: Civic Exchange