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Emissions Trading

UN Environment Boss Warns Economic Crisis Will Diminish Climate-change Commitment

Reuters | Updated on Nov 08, 2008

The global financial gloom would make citizens of rich nations reluctant to use taxes to fight global warming, and any plan to help poor nations should make the polluters pay, the UN’s climate boss said. The warning cast doubt on a Chinese proposal to ask the world’s rich nations to devote up to 1 per cent of their economic worth to pay for cleaner expansion in poorer countries.

“It is undeniable that the financial crisis will have an impact on the climate change negotiations,” said Yvo de Boer, who heads the UN Climate Change Secretariat.

More than 190 nations have agreed to seek a new UN treaty by the end of next year on greenhouse gases. He said the polluters should be directly targeted as a source of revenue to help developing countries.

Speaking ahead of a conference on climate technology transfer in Beijing, Mr de Boer warned the rich world that under a road map for a climate deal to replace the Kyoto Protocol, they had to create revenue to help developing nations fund greener growth.

The plan accepted in Bali last year committed poor countries to curbing emissions if rich governments helped with technology so they did not sacrifice economic growth.

He praised China’s leadership in negotiations and its effort to firm up demands for technology.

“This is a great opportunity for the country that has put so much emphasis on this issue to really focus the debate on how technology transfer can be part of the long-term … response.”

While the financial crisis threatened efforts to tackle global warming, he said, it could also give impetus to talks aimed at forging a climate-change pact.

The crisis has also highlighted the benefits of a trading system, favoured by most rich nations, that sets pollution limits but allows companies to buy and sell quotas to meet their targets.

The auction of credits to pollute could fund cleaner development in poor nations, he said.

A flat carbon tax would be more efficient than the current system, but more complicated to implement, he added.

Scientist Warns Emissions Trading Scheme Too Little, Too Late

Article from: The Courier-Mail, By Greg Stolz | October 31, 2008

  • Flannery pessimistic about ETS
  • Predicts catastrophe within a decade
  • Impact will be unexpected

AN emissions trading scheme will not be enough to stop a potential climatic catastrophe on the same scale as the global financial crisis within 10 years, Australian scientist Tim Flannery has warned.

Dr Flannery told an international carbon market conference on the Gold Coast yesterday that emissions trading schemes alone could not save the planet in time.

The 2007 Australian of the Year said he had a “sense of foreboding” about what lay ahead if more was not done to tackle climate change.

“I suspect that within the next decade, we are likely to see some dramatic climate shift a bit like we’ve seen in our financial systems over the last few months,” he told the Carbon Market Expo Australasia conference.

“It will be swift and it will have many unintended consequences. The problem is a lot closer than we imagined.”

Dr Flannery said the catastrophe could be a large-scale methane release which would cook the planet or major ice sheet destabilisation.

He had not seen the Rudd Government’s economic modelling for the proposed emissions trading scheme but said critics should look to Europe as a guide.

“There has been no impact in Europe and there is likely to be a small impact if any in Australia in my view,” he said.

One of the best ways to slow climate change was to harness the planet’s huge natural power to suck carbon pollution out of the atmosphere, he said

Author Discusses His Vision Of Alternative To Kyoto Accord

Dan Kadison – SCMP | Updated on Oct 20, 2008

An environmental writer thinks the international community should produce a new climate agreement because the Kyoto Protocol is failing to cut greenhouse gas emissions.

British author Oliver Tickell, 50, sat down with the South China Morning Post in the city last week and asserted why the climate accord should not be reformed after its commitment period ends in 2012.

“We’re better off having an agreement which is actually designed to be effective, efficient, equitable, and operate on a much shorter time scale,” Tickell said.

His book, Kyoto2, published in July, focuses on climate change, the accord and solutions to the problem.

The Kyoto Protocol, which was signed in 1997 and came into force in 2005, calls for certain industrialised countries to reduce greenhouse gas emissions and meet targets for a 2008 to 2012 commitment period. Unfortunately, Tickell added, it “provides an inadequate vehicle” for eliminating pollution.

“For a global agreement that’s really going to work … all countries have to be involved. And greenhouse gas emissions have been going up faster in the developing countries with no targets – China, India, Mexico, Brazil, South Africa.”

Tickell’s book proposes a three-part strategy in which greenhouse gas permits are capped and auctioned off to fossil-fuel producers, the estimated trillion dollars raised from the purchase of permits are spent on energy improvements, and regulations are enacted.

“What you’re doing is bringing down those emissions in a targeted way, in an efficient way. At no point does the carbon price have to reach a level at which it is painful.”

As for Hong Kong, Tickell said there were environmentally friendly features that other countries could learn from – walkways and the Mid-Levels escalator for pedestrians, plenty of green space and the taxis burn clean fuel. To make it greener, Hongkongers could build more green-friendly buildings, use more energy-efficient appliances and rely on less air conditioning, he added.

Tickell met city corporate and environmental leaders, discussing climate change with the Climate Change Business Forum and the Earth Champions Foundation.

The Post is the media sponsor of the Earth Champions Quest, a search for local people and groups improving the environment.

Mainland Firms To Increase Emission Reduction Projects – Future Of Carbon Credit Trade Dim As Global Pact Nears End

SCMP, Eric Ng – Oct 02, 2008

The mainland is expected to supply more than half the credits for greenhouse-gas emission trading worldwide until 2012, but the future of such trade remains uncertain as no agreement has been hammered out for when the current global pact expires.

Emission reduction projects on the mainland would cut 116.83 million tonnes of carbon dioxide discharged in each of the next four years, or 52.17 per cent of the global total, according to United Nations data. That represents a sharp increase from 16.61 million tonnes in May 2006, or 30.67 per cent of the global total.

So far, 1,551 projects have been approved by Beijing while 269 projects have also been accepted by and registered at the UN, accounting for 23 per cent of the global total.

Developers of pollution-cutting projects earn so-called carbon credits that can be sold to polluters in countries with mandatory emission limits, primarily in Europe and Japan, which are committed to reduction targets.

Annual greenhouse-gas emission credits from the mainland would amount to more than US$2.5 billion under the Clean Development Mechanism (CDM), according to a report by World Wide Fund for Nature on China’s emission reduction credits market.

Beijing also collects a levy from a percentage of the credits depending on the type of project.

Feng Shengbo, an associate researcher at National Development and Reform Commission Energy Research Institute’s CDM Project Management Centre, said the government had so far collected more than 100 million yuan (HK$112.48 million), which would be used to help the nation combat climate change.

The most popular projects on the mainland include the replacement of ozone-depleting refrigerants, wind and hydro power generation and energy efficiency improvement.

Of the emission reduction volume in projects approved by the central government, about 23 per cent or 27.45 million tonnes came from the five national state-owned power generation firms.

China and India are among the developing nations that have ratified the Kyoto Protocol, a global pact on greenhouse gas reduction, but they are only required to report their emissions and are not committed to any targets.

The United States rejects emission limits set by protocol, but it is widely expected the country, together with China and India, which are among the world’s largest polluters, will commit to some form of reduction after the protocol expires in 2012.

However, Merrill Lynch director of Asia-Pacific commodities solutions Jennifer Jiang Hongbo said uncertainties over the regulatory environment after the protocol expired and Beijing’s ban on credit sales beyond that meant no such credits had been sold so far.

“This has brought valuation challenges for such trade,” she said. “In addition, the sellers prefer to save the credits for themselves ahead of potential emission reduction commitments by China.”

Pollution Can Be A Risky Business

Louis Beckerling – Updated on Sep 16, 2008 – SCMP

Retail investors can get access to the emissions trading market by buying the shares of listed companies that either trade in carbon credits or invest in companies that help polluters reduce their emissions.

However, such investments are inherently risky, warn investment advisers, as indicated by the volatile price of carbon credits traded under the European Union Emissions Trading Scheme (ETS), and the performance of several counters listed on the London Stock Exchange’s Alternative Investment Market.

Following its inception in 2005, as a market on which to trade carbon credits in a bid to put a price on pollution and reduce carbon dioxide emissions, the ETS exploded into activity, providing trading opportunities for credits owned by about 12,000 carbon emitters across Europe.

In its first year of operation, 362 million tonnes of CO2e (carbon dioxide emissions) were traded for €7.2billion (HK$81.45 billion). In the flurry of activity the price of a tonne of CO2e reached a peak of about €30 by the spring of 2006.

But the market was vulnerable to protectionist forces.

“It seemed to work, but brokers had not counted on the politics. Various national governments, anxious to protect their domestic industries, generously issued emission credits for free. This flooded the European market with too many credits,” says Allianz Knowledge, a research unit of global insurer and asset manager Allianz Group, that focuses on climate change, microfinance and demographic change.

The result was a meltdown in the value of the credits as the price of a tonne of CO2e plunged to below €10 within weeks, and by September last year to just 10 euro cents. Alarmed at the prospect of giving polluters a free pass at such prices, and what that would mean for its commitments to reduce carbon emissions under the Kyoto Protocol, European governments then set an EU-wide CO2e cap of 2.08 billion tonnes for 2008-2012 – 10 per cent below the aggregate allowances sought by member states – and pledged to reduce the issue of free credits.

That sent the price of a tonne of CO2e back to €23 by the end of last year, and analysts now expect the price to reach about €30 to €35 per tonne this year, Allianz says.

The moral of the story for those intending to invest in Australian Emission Units? Caveat emptor.

Carbon Copy

Australia is the latest country to get into this potentially rewarding asset class but the fluctuation in carbon credits suggests a cautious approach

Louis Beckerling – Updated on Sep 16, 2008 – SCMP

Energy suppliers are getting the message that they will no longer enjoy a free pass to pollute the atmosphere as a regulatory trend to put a price on the emission of carbon dioxide gathers momentum around the world. Markets are being left to establish what those prices should be so investors have a new and potentially rewarding asset class in which to invest. But the roller-coaster ride taken by the price of carbon credits traded since 2005 under the European Union Emissions Trading Scheme (ETS) suggests they should proceed with extreme caution.

The latest country planning to join the club of carbon trading nations in Europe is Australia, which aims to have an emissions trading system in place within two years. By the time it is up and running in 2010, notes financial consultancy Ernst & Young, the new market will have yielded a number of investment opportunities.

“With the scheme commencing in 2010, we expect a range of new products and services to emerge in the next few years,” says Ernst & Young in a report on the proposed scheme.

Also on the cards, it predicts, is the emergence of derivative investment products based on the carbon trading permits that will be required by polluters. Australia’s largest energy provider, Australian Gas Light (AGL), has already created such a derivative instrument. It did so by taking a punt on what price the market might place on an “Australian emissions unit” that forms the cornerstone of the proposed trading system and will be equivalent to one tonne of C02e or carbon dioxide emissions.

Just weeks after the government signalled its firm intention to push ahead with an emissions trading scheme by releasing a detailed timetable on March 17, AGL announced that its operating arm AGL Hydro Partnership had sold 10,000 tonnes of AETUs at a price of A$19 (HK$128) per tonne for settlement on February1, 2012.

The forward contract has been designed to achieve a number of outcomes, the group says. “First, we will be able to provide some certainty for customers that fall within AGL’s `Major Customer’ portfolio that wish to lock in retail energy pricing now. Second, by providing the opportunity for electricity market participants and other wholesale parties to access a carbon price, it may enable some additional liquidity to be restored in forward electricity contracts beyond July 2010.”

With much of the detail yet to emerge and the business lobby either opposed to the scheme or intent on having it delayed, there has been no trade in the exploratory contract.

But with the environmentally conscious Australian public solidly behind the government’s initiative and the latest study by the United Nations Environment Programme (Unep) providing encouraging signals to the environmental lobby that energy companies are accepting their responsibilities, there is little doubt that the government will push ahead with its plans.

Climate change concerns, growing support from world governments, rising oil prices and ongoing energy security concerns combined to fuel a record-setting year of investment in the renewable energy and energy efficiency industries in 2007, Unep says in a report released on July 1.

Executive director of Unep Achim Steiner says: “The clean energy industry is maturing and its backers remain bullish. These findings should empower governments – both north and south – to reach a deep and meaningful new agreement by the crucial climate convention meeting in Copenhagen in late 2009.”

The report titled Global Trends in Sustainable Energy Investment 2008 was prepared by Britain-based New Energy Finance for Unep’s Paris-based Sustainable Energy Finance Initiative and finds that more than US$148 billion in new funding entered the sustainable energy sector globally last year – up 60 per cent from 2006.

Wind energy again attracted the most investment (US$50.2 billion last year), but solar power grew most rapidly – attracting US$28.6 billion of new capital and growing at an average annual rate of 254 per cent since 2004, driven by the advent of larger project financings, it notes.

“Just as thousands were drawn to California and the Klondike in the late 1800s, the green energy gold rush is attracting legions of modern day prospectors in all parts of the globe,” says Unep’s Mr Steiner, who is also a United Nations undersecretary general. The “three pillars” outlined in the Australian government Green Paper published on July 8 and on which its climate change policy will be based, will be strategies to reduce Australia’s greenhouse gas emissions – to adapt to climate change that cannot be avoided and to help shape global solutions. It has committed to reducing Australia’s greenhouse emissions by 60 per cent by 2050 and says an emissions trading system is central to meeting that target.

Based on a formula yet to be calculated, a stock of carbon permits known as Australian Emissions Units (AEU) will be established with each unit registered with a unique ID number and equivalent to one tonne of CO2e. Controversially – given the experience in Europe – it has announced that qualifying big polluters will be allocated a certain number of permits free with the rest to be sold at quarterly auctions.

Commercial farmers will be off the hook at least until 2015 and the big polluters or Emissions Intensive Trade Exposed entities will be given “transitional assistance” yet to be spelled out in detail for the first 10 years after the scheme comes into operation in 2010.

Once permits have been acquired via auction or allocation, holders will be free to hold or sell permits on an emissions trading market likely to be operated by the Australian Stock Exchange.

In a presentation to potential players made in June (How the financial markets will service the forthcoming ETS), the exchange said the role of the market would be to provide liquidity, price discovery, risk transfer and the clearing and settlement of trades. It envisages the trade of ASX Emission Permit Futures in lots of 1,000 carbon emission permits, with each permit being an entitlement to emit one tonne of carbon dioxide equivalent gas.

Corporate Australia, not surprisingly, has expressed alarm at the prospect of a having to pay for emissions. Business-oriented think tank The Australia Institute warns that cost increases arising from the introduction of an emissions trading system may amount to US$1.4 billion a year.

But, with the voting public solidly behind the plan, business appears to be bracing itself for the introduction of the scheme.

Merrill’s Green Financier Sees Mission In Emissions

Abyd Karmali’s role in carbon trading could help save planet

Eric Ng – Updated on Aug 18, 2008 – SCMP

Climate change and global warming have become hot topics as more extreme weather – from droughts to cyclones – is witnessed across many regions of the world.

The drive to reduce greenhouse gases – and prevent what many fear will be a global catastrophe – is creating increasingly sophisticated emission trading schemes and attracting the attention of the world’s biggest finance companies.

Abyd Karmali, appointed global head of carbon emissions of Merrill Lynch in August last year, has a ringside seat to the unfolding developments. A member of a new breed of environmental financiers, he is responsible for developing carbon-related businesses at the United States-based investment banking giant.

Major investment banks have set up carbon emission trading desks and investment products in recent years to tap the fast-growing market. Emission trading allows companies to buy and sell permits for emissions or credits for reductions in emissions of certain pollutants.

Prior to joining Merrill Lynch, the 40-year-old Briton worked for climate change consultancy IFC International in Washington, Toronto and London, where he served as European managing director. From 1996 to 1997, Mr Karmali was climate change officer at the United Nations Environment Programme’s (UNEP) Industry office in Paris where he worked on negotiations on the landmark Kyoto Protocol. He was recently elected president of the Carbon Markets and Investors Association, a carbon finance industry body.

The emission trading industry is set for big changes. Reduction commitments under the Kyoto Protocol are due to expire in 2012 and negotiators want to seal a new pact at a United Nations conference in Copenhagen in December 2009.

Bringing on board major polluters such as the US, China and India is widely believed to be the key to a global deal and prevention of catastrophic fallout from climate change.

In addition, more signatories to the global emission reduction pact will bring about opportunities for more trading of emission rights, which have become an investment asset on their own, besides being a compliance tool.

In his spare time, the African-born Mr Karmali has volunteered to work on projects for development agencies such as the Aga Khan Development Network and Focus Humanitarian Assistance Europe Foundation. These organisations provided him with a scholarship to attend the Massachusetts Institute of Technology (MIT). London-based Mr Karmali holds a Master of Science degree in technology and policy from the MIT. His hobbies include running, football, world music, adventure travel and gastronomy.

You have had a 17-year career in climate change and carbon markets. What drove you to this industry in the first place?

My interest in climate change stemmed from a landmark book published in 1987 called Our Common Future, which was the report of the Brundtland Commission on Sustainable Development. The report made a compelling case for a need to shift to a more sustainable mode of development and began to identify the adverse impacts on the environment under a business-as-usual scenario. During my undergraduate degree I discovered that I was interested not so much in pure engineering but in the social and market dimensions of technology and this led to my doing the masters programme in technology and policy at MIT.

You participated in the Kyoto Protocol negotiations during your stint in Paris. What was your role and most memorable experience in the Kyoto Protocol negotiations in 1996-97?

The negotiations in Kyoto were incredibly intense and came close to a complete breakdown on several occasions, particularly on the last night. As a UNEP person rather than a country delegate, my role was to work with several government delegations to improve understanding about the key technical and policy issues. I was in a privileged position to be sitting at the UNEP desk during the early morning drama and was present when the deal was reached at 6am on December 11, 1997.

How has your upbringing affected your views?

Perhaps by virtue of being born in Africa of Asian ancestry with parents who instilled in me a strong sense of social consciousness, having my formative education in Europe and obtaining significant professional experience in North America, I have been able to develop an international perspective. This has also attracted me to work on such a global issue as climate change that requires solutions to be designed across disciplinary, cultural and geographic boundaries.

What is Merrill Lynch’s role in the carbon emission rights market?

We work with different types of buyers such as those that need to comply with emission restrictions in Europe and Japan. We can also sell to investors who are interested in a portfolio of different categories of carbon credits. We have credits from Chinese wind farms to Russian natural gas pipelines emission reduction projects. You can create a portfolio representing different carbon risks.

Merrill has launched the “Green & Gold” initiative to drive proactive voluntary emission reduction. Companies tend not to spend a lot on emission reduction until they are required to do so. How do you convince companies to buy into the carbon strategy concept? As there is little or no regulation over voluntary emission offset programmes launched by corporates, how can consumers trust what they are told when they buy such emission reduction add-ons to, say, their air tickets?

This is true but we also think that there are a growing number of companies which are looking to take proactive action to reduce emissions, including through buying carbon offsets because of pressures from consumers and because of the opportunity to develop a leadership position in their sector. Merrill Lynch’s view is that carbon strategy is becoming an area where companies increasingly have to compete, just as they do on choice of technology, research and development efforts, labour costs, and supply-chain management.

How mature is carbon credits as an investment class? Carbon credits are being aggregated into asset-backed investment products as did subprime mortgages. Are there risks of over-securitisation in this nascent sector?

Carbon is a relatively new commodity that has been around only since 2005. Its growth trajectory is quite remarkable, with a market value of US$65 billion last year, possibly reaching US$1 trillion in 2020 if all of the right scenarios play out. But it is more policy-driven than any other commodity we have ever seen. There is massive policy uncertainty in this market.

We think it’s unlikely to appeal to a really broad set of investors. It’s fine for sophisticated investors who are aware of the policy risks. We have developed structured emission products with those investors in mind, but it’s unlikely to reach a point where it is something which can be distributed to the mass market.

Do you think carbon will one day become a hot investment product given the increase in carbon emission awareness?

Sure. The reason why Merrill has developed a global carbon price index, renewable energy index, energy efficiency index and carbon leaders index, is because we realise that institutional investors want to pursue carbon as an individual asset class. It appears from our analysis that carbon as an asset class is not well correlated to many other investments, so from a portfolio diversification point of view, it makes a lot of sense.

This is particularly so given carbon pricing affects the value of other asset classes such as stocks of listed companies. Companies can be directly affected, such as those in the power, cement, steel, paper and refining sectors, or indirectly affected, like aluminium smelters that use a lot of electricity.

Merrill Lynch has invested US$9 million in a deforestation prevention scheme in Aceh, Indonesia. Can such a project be implemented in China where deforestation is also a big problem?

We have had some preliminary discussions with mainland government officials about the interest in doing such a project.

This is under the so-called “Reduced Emissions from Deforestation and Degradation” category of project with the potential to generate carbon credits under a financial mechanism being discussed by the United Nations.

Eventually, this may be fully fungible with carbon credits from the UN’s Clean Development Mechanism scheme.

Why is it easier to start in smaller nations?

This is an area where we need strong government support. There needs to be clarity about legal title of carbon credits to be generated. One of the biggest questions here is who owns the carbon rights to a particular area, and are governments willing to grant licences for credits to be sold to external counter-parties. In Brazil, there were different opinions between central and state governments about who owns carbon rights in the Amazon. While Merrill is interested in being involved, we don’t think it’s the right time due to lack of clarity about who owns title. Aceh has some degree of autonomy, which makes it an easier party to work with.

The Kyoto Protocol will expire in 2012. How likely is it that some form of agreement will be struck by the December 2009 target for mandatory and voluntary carbon emission reductions to continue?

Our view is that we are likely to see a breakthrough in the international negotiations in December 2009 in Copenhagen, but we are also realistic that that would be only one year after a new US president will be in office. Maybe it is more appropriate to look toward 2010 for an agreement. That said, we are of the view that the carbon market cannot afford a gap period between the end of the first commitment period ending 2012 and whatever happens next, be it a second commitment period of Kyoto or an alternative agreement. It would be a disaster if there is this gap during which carbon credits have no value. We are reasonably optimistic about the prospect of a breakthrough partly because Australia has ratified Kyoto Protocol. It is probably the country experiencing the physical impact of climate change the most. China understands its vulnerability with regard to the impact of change in precipitation on agricultural productivity, and the potential of the eastern coast being affected by rising sea levels. We also believe India understands its vulnerability, and what a shift in monsoon timing and location would do to Indian infrastructure.

What if some small nations hold out and do not join the eventual agreement? Are you worried that pollution-prone activities will move to these nations?

This is a valid concern, but given a small number of large nations are responsible for most of the emissions, this is not a major problem. Also, economic activities shift around the globe not just based on costs, but also technology, legal environment, labour cost, productivity and environmental standards.

Do you think the United Nations’ Clean Development Mechanism (CDM) that allows developed nations to help finance carbon emission reduction projects in developing ones will be retained?

There is consensus that a carbon market mechanism absolutely has to be at the core of a global emission reduction agreement, and that the market mechanism does deliver emission reduction in a cost-effective way. I can’t think of any country that would oppose the continuation of CDM or emission trading.

How do you assess the success and shortcomings of the CDM?

There is no question that CDM is imperfect. It’s a very new mechanism. Inevitably there are some teething problems. But we are overall very satisfied with the market mechanism. One of the mechanisms Merrill and other financial institutions are advocating is that there be some kind of private sector-oriented advisory board, given this is a US$65 billion market. This is something the CDM executive board recognises. The board is primarily made up of government officials who may have little experience in implementing projects on the ground, and also little experience from the financial perspective.

What other changes do you envision should the CDM be retained?

I see increasing performance benchmarking, especially for the larger developing nations like China and India. This will mean higher qualifications requirements for projects and a reduction in the number of credits granted to these nations. There was precedence. In the phasing out of ozone-depleting substances under the Montreal Protocol, initially individual projects were proposed, and each was evaluated painstakingly. Eventually, the administrators realised they did not have enough resources to evaluate each project and also wanted to raise the bar. They came up with benchmarks for each project category and it worked.

Many countries and regions in Asia are vying to set up carbon exchanges. Are there significant first-mover advantages and can only a few survive?

One of the challenges to figuring out an answer for this is that there is a heterogeneous set of nations. Japan is a signatory to Kyoto Protocol. Australia is a recent signatory but will be the first country which will have an emission trading scheme within the country. You also have small country like New Zealand eyeing to set up an exchange. Then there are China and India, big sellers of carbon credits under CDM, as well as regional trading hubs like Singapore and Hong Kong. Our view is that initially you will probably see several attempts to have exchanges.

Do you think Hong Kong’s proximity to the world’s largest carbon credit generating market, mainland China is an advantage?

It is difficult to say whether geographical proximity actually makes any difference. It’s more a function of market participants’ comfort with the rules of the exchanges, the clearing mechanism and the contracts. For example, the European Carbon Exchange is a virtual platform that is not physically situated in any one place. Similarly, New York’s Nymex Green Exchange has managed to attract reasonable amount of liquidity of the European Union’s emissions allowance market without even being in Europe.

Do you think Hong Kong will succeed in having a successful carbon exchange?

Hong Kong has a well-established track record for being a regional financial centre. If I was to look into the crystal ball, I’d say that Hong Kong and Singapore would be the natural best prospects to be the regional emission exchange hubs. But part of it depends on the degree to which how they link emissions to other related commodities.

Changsha Jumps On Emission Scheme Bandwagon

Eric Ng and Reuters in Beijing – Updated on Aug 07, 2008 – SCMP

Changsha yesterday became the third mainland city in two days to announce an emissions trading scheme designed to penalise polluters and encourage greener sources of power through pollution credits.

The capital city of Hunan province will set up a local emission trading scheme covering a variety of waste gases and water pollutants, with plans to set up a trading market, Reuters quoted mayor Zhang Jianfei as saying. The system could be in place as soon as next year.

Quotas for dust, carbon dioxide and chemical oxygen demand – a water pollution measure – would be assigned to local districts. Those failing to meet the quotas would be fined, unless they purchased quotas from polluters that had credits to spare.

The announcement came a day after Beijing and Shanghai both launched emissions exchanges.

China Beijing Environment Exchange chairman Xiong Yan said that the exchange would lay a foundation for China to use market-based methods to reduce pollution and save energy by enhancing transparency and information flow.

“There is huge potential in the environment exchange market of China,” he said. “However, the asymmetric information and lack of expertise in Chinese enterprises result in a serious undervaluation in environment exchange products.”

The Shanghai Environment and Energy Exchange was also inaugurated on Tuesday.

Xinhua quoted unnamed municipal officials as saying that the city plans to launch an emission quota allocation and trading system for heavy-pollution-prone sectors.

In addition, some 55 environmental protection and alternative energy projects involving 1.07 billion yuan (HK$1.22 billion) of investment are planned to be listed on the exchange to attract new investors.

They are currently listed on the Shanghai United Assets and Equity Exchange.

Tianjin was also planning to set up an environment and energy exchange, China Daily reported.

Simon Powell, CLSA’s head of regional power, gas and utilities exchange, said news of the exchanges was not unexpected. Several pilot arrangements have been set up on the mainland for voluntary sulphur dioxide and particulates emissions reduction.

“As to the impact on power companies, it would depend on the level of the emission cap to be imposed, the timing and whether it is voluntary or mandatory,” said Mr Powell.

“It is possible that the mainland may adopt a voluntary scheme on sulphur dioxide, nitrogen dioxide and particulates but not carbon dioxide.”

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.

HSBC Insurance Helps Travellers Offset Their Pollution

Finance Asia – By Lara Wozniak, | 24 July 2008

The majority of Hong Kong people who travelled overseas in the past year took no action to address the negative impact of their trip. HSBC aims to change that.

Don’t know how to buy carbon credits to offset your jetting around the region? You’re not alone. But HSBC is offering an insurance policy plan that won’t break your bank and may help cut pollution in Hong Kong.

In a recent HSBC Insurance survey on green travel, 80% of Hong Kong travellers said they did not do anything to offset the carbon dioxide emissions resulting from their travel activities; even as 90% believed that carbon dioxide emissions are harmful to the environment.

When asked about the reasons why they did not do anything, close to half (47%) said they were not aware of any carbon dioxide emissions-offsetting programmes or schemes; 24% did not care about offsetting; 16% did not know that travelling caused damage to the environment; and 13% could not afford the extra amount to pay for environmentally friendly products and services.

On average, the more than 500 respondents in the survey conducted by The University of Hong Kong’s Public Opinion Programme travelled 3.6 times during the past 12 months.

When asked about future plans to offset carbon dioxide emissions from travel, more than half (54%) said that they had no such plans, compared to 32% who answered in the affirmative.

“It appears that the concept of green travel has not caught on among the majority of Hong Kong people who travel,” says Jason Sadler, managing director for HSBC Insurance’s Hong Kong business. “It is alarming, especially as environmental protection and air quality have become priority concerns for the Hong Kong community. However, the survey also shows that a big part of this apathy is due to factors such as lack of awareness about their choices and high costs of going green.”

Of those who said they were willing to pay more for environmentally friendly travel products or services, the average amount that respondents would pay is HK$167 for every HK$1,000 spent on a single trip.

Not surprisingly, given HSBC was connected to the survey, it has a solution that uses Hong Kong technology and benefits the city – its Let’s Travel Green donation programme.

In this plan, 1% of the insurance premiums paid by customers who buy or renew single or multi-trip travel insurance policies from HSBC from now until June 2010, will be automatically donated to fund the use of ‘eco-blocks’ in the buildings and pavements of 10 non-profit organisations in Hong Kong.

HSBC Insurance says it will donate about HK$2 million on behalf of customers to this project. The ‘eco-block’ is a material invented by a team of researchers led by professor Poon Chi-sun of The Hong Kong Polytechnic University’s Department of Civil and Structural Engineering and its Research Centre for Environmental Technology and Management.

Made from recycled glass and ash with a coating of titanium dioxide, the ‘eco-block’ has pollutant-busting properties that break down certain harmful chemicals in the air. Used as a paving andpartitioning material for buildings, streets and pavements, the ‘eco-block’ contributes to improved air quality by removing air pollutants emitted by cars, trains, airplanes and other vehicles.