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July 28th, 2008:

Asia Switches On To The Carbon Market

28 Jul 2008 | Author: Rajesh Chhabara –

The Asian economies want a piece of the world’s carbon trading action. The move adds further threat to carbon brokers dealing in over the counter carbon credits

Exponentially growing global carbon trading has caught the fancy of the top financial centres in Asia. Hong Kong, Tokyo, Singapore, Mumbai, Shanghai and Beijing are reported to be considering opening exchanges for trading carbon credits. But analysts warn that it may be too early for Asia to join the party unless the key economies in the region create local demand for credits.

There is a growing recognition of carbon as a soft commodity that can be traded as carbon credits and in the form of other complex financial products, such as derivatives and exchange traded funds.

According to Oslo-based research firm Point Carbon, the global carbon trade crossed €40 billion in 2007, a growth of 80% over the previous year. In terms of volume, 2.1 billion tonnes of carbon dioxide equivalent credits were traded, a hefty 64% increase over 2006. Carbon trading is estimated to hit €100 billion in 2008.

The global carbon market could be worth €2 trillion by 2020, says Point Carbon, if a greenhouse gas cap and trade scheme takes off in the US.

However, Asia’s role in global carbon trading has remained limited as a supplier of carbon reduction emission (CER) or carbon credits under the Clean Development Mechanism (CDM) of the United Nations Framework on Climate Change Convention (UNFCCC), which was born out of the Kyoto protocol.

CDM allows reduction in greenhouse gases achieved in developing countries to be sold as carbon credits to developed countries, which have ratified Kyoto protocol, to help them meet their emission reduction targets.

China alone accounts for 61% of global supply of CERs followed by India with a 12% share. China, India, Malaysia, Thailand and South Korea together generate a staggering 80% of all the CERs. Almost all the CERs are currently purchased by European companies and governments to meet their own emission reduction targets under the Kyoto protocol.

The bulk of the CER trading takes place through brokers, bi-lateral agreements and personal negotiations. Asia does not have any real trading platforms or exchanges for banking or transacting carbon credits.

Asian ambitions

Asian financial centres now want a piece of the action. The Hong Kong Stock Exchange is going over a feasibility study it commissioned toward the end of last year to determine how to position itself in the carbon trading market. Chinese authorities are working on their own plans for a carbon trading platform.

The Multi Commodity Exchange of India – the country’s largest commodities exchange, which has a strategic alliance with the Chicago Climate Exchange – launched futures trading in carbon credits in January this year. Carbon credit futures are exchange-traded derivatives or standard contracts, allowing the buyer and seller enter into a legally binding agreement to buy or sell carbon credits at a certain price to be delivered at a certain date in the future. Futures protect the contracting parties against a price risk.

The South Korea Stock Exchange plans to launch carbon trading sometime this year. Singapore is aiming to become Asia’s carbon trading hub and is offering tax incentives to carbon trading firms. It is banking on its robust financial institutions and proximity to CDM projects in South-east Asia.

Though most players are tight-lipped about their plans and the scope of trading, market sources say the exchanges may be looking at a variety of options. “Trading in CERs, Voluntary Emission Reductions (VERs) and derivatives are the obvious possibilities,” says Rahul Kar, KPMG’s sustainability services manager in Singapore. Derivatives are complex financial instruments based on the value of underlying assets, which in this case are carbon credits. Types of derivatives include futures, forwards, options and swaps.

The VER market is small, but has the potential to grow. Hong Kong-headquartered Cathay Pacific airlines recently introduced carbon offset options for its passengers using VERs. The airline is buying VERs from greenhouse gas emission reduction projects, mainly in China, which are verified using Voluntary Carbon Standard, developed by The Climate Group, the International Emissions Trading Association and the World Business Council for Sustainable Development. Other companies may follow suit to cater to green demands of their customers, or simply to put forward a socially responsible image.

“Hong Kong can possibly aggregate CER volumes from South Asia and South-east Asia and trade them on the exchange for international buyers,” says Marco Monroy, president and chief executive of MGM International, a leading carbon credit project developer.

China trades up

Last year, the governments of Hong Kong and Guangdong province in China agreed to work on a pilot emission trading programme to reduce sulphur dioxide emissions from industries that want to address pollution over the Pearl River Delta.

In another development, the Chinese government announced in June this year that local companies in Hong Kong can now participate in the CDM projects and sell CERs resulting from projects undertaken within Hong Kong. However, Hong Kong companies are still not permitted to generate CERs from CDM projects by their subsidiaries in the mainland China. China has barred companies in Hong Kong, Macau and Taiwan from participating in the CDM projects in the mainland and treats them as foreign entities.

In spite of sitting next to the world’s largest supplier of CERs, a carbon trading exchange in Hong Kong cannot bank on carbon credits from China. China requires all CDM developers to pre-sell all CERs to foreign buyers, who are almost always European entities, above a floor price set by the government, before approving a project. This means primary CERs will not be available for trading on a Hong Kong exchange.

In China, Beijing and Shanghai are competing to take the lead. Another province, Tianjin, even entered into negotiations early this year with the Chicago Climate Exchange to set up a carbon trading bourse in partnership with China National Petroleum Assets Management and the Tianjin Property Rights Exchange (TPRE). However, the deal fell through in June on account of disagreements on the foreign ownership of the exchange.

Last year in February, China announced two carbon trading initiatives. The first aimed at setting up a carbon trading exchange in Beijing in joint venture with the United Nations Development Fund (UNDP); the second involved $1.7 million carbon finance for 12 western Chinese provinces to educate them in carbon trading. However, sources say there has been no progress on the UNDP-partnered plan.

Peng Zhiyuan, managing director of China Beijing Equity Exchange, who was in Singapore in June for a carbon markets conference, said: “We are working on the model and will be introducing carbon trading in the near future”.

China Beijing Equity Exchange is different from Shanghai Stock Exchange. It deals only in state-owned equity transactions: investors willing to buy government-owned companies’ equities go through here. Shanghai Stock Exchange is the national exchange and operates as any other stock exchange in the world.

Both of them plan to have carbon trading. But at this time, it’s not clear how they will position themselves and what will be traded on them. Both are under different regulatory bodies.

For a local exchange to be successful, China will need to change its CDM policy and allow project developers to sell the credits through a local exchange. If this happens, European buyers will have to buy Chinese CERs on a local exchange rather than through bi-lateral agreements with project developers. A China-based exchange will also make brokers who currently play a crucial role in match-making between buyers and sellers redundant. Most of them are European, such as Eco Securities and TFS Green.

Observers say carbon trading in China will benefit local CDM project developers and increase their access to carbon markets. “A local exchange will reduce the transaction cost and bring more transparency to CER pricing,” says Chen Dongmei, the climate change and energy program director of WWF China. Since the bulk of CER trade takes place through bi-lateral agreements, a central database of price movements is not available. Sellers often complain that the brokers only protect the interests of buyers. But if credits are traded on an exchange, daily prices and volumes are available in real time. Exchanges can also develop indices reflecting the price movement. Industry sources say that, currently, prices of primary CERs (yet to be issued) are in the range of $9-$23 a tonne, though no official figures are available.

There are sceptics of China’s trading plans. A market analyst in Hong Kong said on condition of anonymity that China, unlike Hong Kong, does not have an open and efficient financial market infrastructure. The analyst said China would find it hard to convince international buyers to shop on Chinese carbon trading exchanges.

“It will be best if China encourages Hong Kong to explore emissions trading as Hong Kong is the one market on Chinese soil that is not a closed market, while Shanghai still is,” says Christine Loh, a former legislator and the chief executive of Civic Exchange, a Hong Kong based environmental advocacy group.

Chinese financial markets are heavily regulated, protected from foreign competition and underdeveloped, while Hong Kong is a mature and robust international financial centre with hardly any barriers for foreign businesses and no restrictions on capital flow. Hong Kong has been ranked first in terms of economic freedom for 14 years in a row by the Heritage Foundation, a Washington think tank, which publishes an annual index of economic freedom and rates 157 nations.

Hong Kong Stock Exchange is said to be considering emission related-structured products that may include contracts, options and futures. It also plans a listing of green Initial Public Offerings (IPOs). According to a press release by the Hong Kong exchange, green IPOs will involve “listing companies that provide products and services which help to reduce emissions”.

Hong Kong Exchange has also said it is exploring the potential for establishing an auction platform for CERs.

Japan’s cap and trade

Japan is planning an EU-style cap and trade mechanism, announced by the prime minister in June, which can set the stage for a promising carbon market in the country. The city of Tokyo is also considering a cap-and-trade scheme to reduce emissions.

Japan has until now encouraged industries to voluntarily reduce emissions rather than imposing binding targets.

Tokyo Stock Exchange, the world’s second largest bourse, has said it is planning a carbon trading platform. Currently, Japanese companies buy CERs directly from project developers in developing countries or through brokers. A local exchange can reduce transaction costs.

However, Japanese industry associations have opposed the cap-and-trade plans, saying that tougher emission targets will prompt businesses to shift production to developing countries.

Monroy of MGM International says: “It will be cheaper for Japan to import CERs rather than use cap-and-trade to meet compliance obligation. Efficiencies are already high in Japanese industries and achieving further emission efficiency, which will be needed if cap and trade is imposed, will be very expensive for the industry.”

Creating local markets

Some CER project developers are wary of an emissions exchange. Monroy says: “It is too early to have an emission trading exchange in China. An exchange requires liquidity. Both supply and demand are needed for liquidity and China currently does not have demand for carbon credits.”

Market analysts are similarly sceptical about Asia’s carbon trading dream. Though Asia has a large supply for CERs, there is no local demand in the region except from Japan, which remains the sole buyer of CERs in Asia to meet its Kyoto obligations. Other Asian countries still do not have regulations requiring companies to reduce emission or buy credits.

An exchange requires liquidity which comes from a healthy match of demand and supply. The European Climate Exchange (ECX) and Chicago Climate Exchange (CCX) thrive because they have local demand and supply due to the cap-and-trade mechanism. CER is only a small part of their total trade and accounts for only about 20% of global emissions trading.

Roger Raufer, an emission trading expert who worked on the feasibility report for the Hong Kong Stock Exchange, says: “Asia needs to develop its own carbon trading markets rather than simply copying the European or the US markets. It needs to create its own demand based on local emission issues and solutions.”

The story is different in Europe. The European Union’s Emission Trading Scheme (ETS) was launched in January 2005 as a result of Kyoto protocol, before the UNFCCC’s CDM took shape. A cap-and-trade mechanism was introduced covering energy intensive industries. Companies in these industries are issued an allowance for carbon dioxide emissions. If they emit more, they must buy carbon credits, known as European Union Allowance (EUA), from those who have polluted under their allowance, or face a heavy fine.

The ETS created a huge compliance market for carbon credits. The EU later allowed companies to import CERs to meet compliance when the CDM was introduced.

In the process, the ECX and Oslo-based Nord Pool emerged as the largest carbon trading exchanges in the world. According to carbon research and rating firm Idea Carbon, ECX accounted for 87% of global carbon trading in 2007.

The total value of EUAs traded last year was $43.8 billion, most of it transacted over the ECX, while Nord Pool accounted for $1.6 billion worth of EUAs and CERs. In the US, which did not ratify the Kyoto protocol, a voluntary carbon offset market came into operation. The CCX, which was launched in 2003, has become a significant player for trading in VERs and emission reduction related structured products.

Liam Salter, head of climate for WWF Hong Kong, points out that the CDM market is too uncertain to base a trading exchange upon. “The number of CDM projects can fall if the post-Kyoto scenario remains unclear,” he says. Kyoto protocol expires in 2012 and international negotiations are dragging on to decide the post-2012 mechanism.

Athletes Face Mental Problem With Pollution

Athletes face mental problem with pollution says coach

Mon Jul 28, 2008 1:08pm BST – By Julian Linden

HONG KONG (Reuters) – Athletes competing at the Beijing Olympics will face bigger mental issues than physical problems coping with China’s pollution, Netherlands soccer coach Foppe De Haan said on Monday.

De Haan told a news conference his players had undergone a rigorous training programme to get themselves in the best physical shape to handle the heat and humidity.

But he said nothing could prepare them for the psychological challenge of playing under a thick blanket of haze.

“This is not a physical problem, this is a mental thing,” he said. “I heard today that you can’t see the (Beijing) stadium from 500 metres away. That’s awful I think, but there is no point complaining, it is the same for everyone.”

The Dutch, who are playing a warm-up tournament in Hong Kong with the United States, Cameroon and Ivory Coast, were given a stark warning of the potential problems they face.

De Haan ordered all the players to undergo a month of intense physical training, including spending time in humidity chambers that replicated the climate in Beijing, and two players, who had never had any previous problems with asthma, started to develop symptoms.

“We did a three-week programme with a lot of work on aerobic fitness,” De Haan said. “We took all the players to a hospital in The Hague for tests and most of them were fine but two players started to show signs.”

De Haan said the two unidentified players had reported their conditions to the International Olympic Committee in case they needed to take any medication during the Games.

Cameroon coach Martin Mpile said he had no major concerns about the pollution although he conceded the humidity could force some of the more athletic teams to curb their natural instincts to conserve their energy.

“That’s why we have come here early, to adapt to the conditions,” he said. “I don’t know how the other teams will (cope) but we’re going to try and play our own game.

U.S. coach Peter Nowak said he did not expect the conditions would make it any easier for his team to upset some of the top countries.

“There are no more miracles in soccer anymore,” he said. “Anyone can beat anyone on any given day. The conditions are the same for everyone. It’s not going to be easy, but we know that.”

Olympics Emergency Plan Announced

China’s Anti-Pollution Efforts Failing, Olympics Emergency Plan Announced

AHN – July 28, 2008 10:53 a.m. EST – Linda Young – AHN Editor

Beijing, China (AHN) – With only 11 days until the Olympics begin, and with both Beijing and co-host city Hong Kong enshrouded in smog, on Monday China announced a new emergency air pollution plan.

Even with China’s earlier measures to keep half the vehicles off the roads and shut down many pollution-spewing manufacturing plants, the air quality is still poor. Testing at the Olympic Village revealed one pollutant at levels three times the recommended limit.

The amount of particulate matter in the air has been too high for four straight days. On Monday it rose to more than double the standard set by the World Health Organization. Even worse is the fact that China doesn’t even test for ground level ozone that can build up to high levels in high humidity, and Beijing is experiencing high humidity.

Pollution threatens to postpone endurance events, such as the marathon, triathlon and 10km open-water swim, which athletes can’t compete in if they are trying to do so by breathing polluted air.

A professor who advises the government on pollution told BBC news that a new emergency plan could take 90 percent of the cars off the road, close all construction sights and more factories.

“There is a chance… that we cannot meet the air quality standards so stricter measures are needed,” Professor Zhu Tong, of Peking University, told BBC.

And, it isn’t just the athletes who are affected by training in heavy air pollution.

In Hong Kong, the organization responsible for taking care of the horses for the equestrian events being held there told Agency France Press that they have taken a variety of measures to protect the horses from the air pollution.

“We have kept our horses in a high-ceilinged, six-star stable,” the spokesman told AFP.

If China institutes the new measures, it would do so 48-hours in advance in an effort to clear the air of pollutants.

China’s Emergency Plan for Olympics Pollution

Business Week – Posted by: Bruce Einhorn on July 28

The clock is ticking, the athletes are arriving, and Beijing’s air isn’t getting any better. For years, Chinese officials have known that the greatest threat to a successful Olympics might not be protests about Tibet or Taiwan or democracy but rather smog engulfing the National Stadium on Opening Day. Still, the government, which has done such a great job getting the different venues ready in time, seems to have dropped the ball when it comes to getting the air ready, too. The city started a plan to reduce pollution last week by limiting the number of cars allowed on the roads. (License plates ending in odd numbers on one day, ending in even numbers on the other day.) So far that hasn’t done much. Reuters reported yesterday on the opening of the Olympic Village in the capital, an event obscured by the pollution that “shrouded [the compound] in pea-soup fog.”

How worried are Chinese officials? Even the state-controlled media aren’t burying the news. Today’s China Daily, the mouthpiece of the government, has a front-page story that departs from its usual upbeat reporting about how well the preparations have been going. The headline: “Emergency green plan for Games.” The paper went on to report that Beijing “has not experienced a ‘blue day,’ that is healthy air quality, in the past four days.” No wonder officials are now talking about draconian measures to keep 90% of Beijing’s cars off the roads.

Meanwhile, here in Hong Kong (home of the equestrian events, as Jackie Chan reminds us), today wasn’t a great day for people with lungs either. A typhoon is hitting Taiwan, and when typhoons are in the neighborhood, for some reason the winds in Hong Kong seem to die and the air gets disgusting. On the other hand, the skies had been gloriously blue for the past few weeks thanks to winds from the south blowing away all the soot from Guangdong. No doubt Beijing residents – not to mention athletes and IOC officials – would gladly take a day or two of Hong Kong typhoon air in exchange for their gray skies.

Pollution Leaves Dark Cloud Hanging Over Olympics

BEIJING (AFP) — Beijing and co-host Olympic city Hong Kong were Monday blanketed in smog just 11 days before the Games, raising the stakes for organisers who were planning more emergency measures to clear the air.

Despite years of efforts to rid the Chinese capital of its notorious pollution and a raft of recent attempts at quick fixes, a typically thick haze cut visibility across Beijing to a few hundred metres.

With some athletes already training in Beijing and elsewhere in China, the persistent pollution was jeopardising China’s promise of a “Green Games”.

“I heard today if you are trying to look at the Olympic stadium, you can’t see it from 500 metres (1,600 feet). It’s awful, I think,” Dutch football coach Foppe de Haan said in Hong Kong, where his team is preparing for the Games.

Adding to the swirl of bad publicity for China, Greenpeace released a report saying Beijing’s air quality was still well short of international guidelines.

And a Japanese company that makes industrial-strength dust masks said Japan’s Olympic delegation would take 500 of his products to Beijing to guard against the pollution.

Last week Beijing ordered more than a million of the nation’s 3.3 million cars from the roads and closed dozens of polluting factories, apparently with little impact.

In a last-ditch bid to clear the skies before the Games start on August 8, the state-run China Daily newspaper said the government may ban 90 percent of private cars and close more factories.

The China Daily, citing an official with the city’s environmental bureau among others, said contingency measures such as the more extreme car ban could be implemented two days before the Games.

“We will implement an emergency plan 48 hours in advance (of the Games) if the air quality deteriorates,” Li Xin, a senior engineer with the bureau, was quoted as saying.

Nevertheless, the Beijing Olympics organising committee said it was still confident athletes would have little to worry about in regards to pollution.

“With the measures we have taken, we are fully confident that we can ensure clean air for the Games,” committee spokesman Sun Weide told AFP, adding some of the solutions would need more time to show results.

The pollution woes were not confined to just Beijing, reflecting the long-standing problems across China as the environment has taken a back seat to economic development over the past 30 years.

In Hong Kong, which will host the equestrian events, the city’s air pollution level was classified as high and horses preparing for the Games were forced to train in the smog.

A spokesman for the Equestrian Company, which is responsible for hosting the Olympic equestrian events, said a range of high-tech measures had been employed to protect the horses.

“We have kept our horses in a high-ceilinged, six-star stable,” the spokesman told AFP.

In its report, Greenpeace said levels of particulates, one of the major measures of pollution, were still twice as high in Beijing as recommended by the World Health Organisation.

International Olympic Committee (IOC) president Jacques Rogge warned last year that poor air quality during the Games could result in the suspension of endurance races such as long-distance cycling and the marathon.

However there have been no specific pollution levels given that would trigger the suspension of an event, and Greenpeace called on the IOC to issue minimum environmental standards for future Olympics.

Alongside pollution, security has become one of the highest-profile Olympic concerns for China.

The government has warned that alleged terrorists from China’s Muslim-populated northwest Xinjiang region were planning attacks on the Olympics.

But the state-run Xinhua news agency denied claims by a separatist group claiming to represent people in Xinjiang that it was behind recent deadly bus bombings in Shanghai and the southwestern city of Kunming.

Games Village Opens, But Skies Remain Hazy

Games village opens with fanfare and stars, but skies remain hazy

Martin Zhou – SCMP – Updated on Jul 28, 2008

Organisers of the Beijing Olympics opened the state-of-the-art athletes’ village in the capital yesterday in the presence of the mainland’s top athletes, led by basketball icon Yao Ming and superstar hurdler Liu Xiang .

The fanfare took place under hazy skies, however, and mainland authorities vowed to step up the fight to keep the city’s air pollution within tolerable limits in time for the Games, which open in 11 days.

About 300 athletes, coaches and sports officials stood solemnly in a square in the Olympic Village, northwest of the centrepiece “Bird’s Nest” National Stadium, as the Chinese flag was raised to the national anthem, marking the official check-in of the mainland delegation.

After the ceremony, almost all the athletes were bused out of the village to return to their training camps elsewhere in the city.

“Every team has its own training scheme to follow,” said Huang Yubin , head coach of the gymnastics squad. “Our gymnasts will not move in until August 3.”

Earlier in the morning, Chen Zhili , a former Politburo member turned Olympic Village mayor, presided over the inauguration of the complex, consisting of a 42-block residential compound and a vast recreational area.

A small number of competitors from other nations have moved into the sprawling village, but they have yet to have their flag-raising ceremonies – giving the host team the privilege of being first to raise their flag, in keeping with Olympic tradition.

The national team is also widely expected to shoot into first place on the medals table after selecting a 639-strong squad of Olympians – its biggest to date, and even larger than perennial Games superpower the United States. The Americans won slightly more gold medals than the national team at the last summer Games in Athens.

However, one potential black mark against the host nation was also evident at the village – a thick shroud of haze. The city’s daily air quality index, issued by the Beijing Environment Protection Bureau, rated the capital’s smoggy skies as “slightly polluted” yesterday.

Asked whether authorities would step up their battle against pollution, bureau deputy director Du Shaozhong answered with a resounding “yes”.

Beijing has sidelined up to 2 million of the city’s 3.3 million cars through a daily, odd-even plate policy applied to private motorists, and unprecedented tough restrictions on government vehicles.

Authorities have also scaled down production at pollution-heavy industries, and ordered a ban on construction at city-centre sites.

“In case of extreme weather conditions that impede dissipation of the pollution, we are preparing even more stringent measures,” Mr Du said at his third session of questioning on the air-quality issue by international media in as many days.

A bureau official said details of the new plan would be announced early next week, and could be implemented after the Games open on August 8.

“Under the additional emergency measures, only 10 per cent of the cars would be allowed to remain on the streets, while the traffic controls would expand into neighbouring provinces,” the official said. “Construction sites in the capital could also face a blanket ban.”