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Carbon Fraud hit by carousel fraud

Carousel fraud has found its way to the carbon market. The particularly European type of fraud entails setting up complicated import and export schemes between EU member countries, charging buyers for value-added tax in the country of destination, and then absconding with the tax rather than handing it over to the governments.

In 2006 the UK and German governments embarked on a series of raids in 2006, and the UK introduced ‘reverse charging’ for VAT on certain items prone to carousel fraud. At the time carousel fraud was mainly seen as confined to small electronic goods such as mobile phones and computer chips.

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A year later it was it was observed that fraudsters were simply moving away from those goods towards others that hadn’t yet been targeted by authorities. But it wasn’t until high volumes of trade were observed on France’s BlueNext carbon exchange this year that carousel fraud became an issue in the carbon markets.

France last month decided to exempt carbon permits from VAT without seeking the required approval from the EU, and the UK government yesterday applied a zero VAT rate to carbon credits, again without seeking EU approval. The Netherlands meanwhile has introduced rules so that the carbon permit buyer, rather than the seller, is responsible for paying tax. And Spain is reportedly considering what to do about the issue.

Could there be a problem, however, with so many different approaches being taken?

Source: FT, 31.07.2009, by Kate Mackenzie

Filed under: Energy & Environment, News, Risk Management, , , , , , , ,

Is Carbon Trading the Next Big Thing?

The U.S. carbon credit trading business could take off if the Senate passes the Waxman-Markey climate change bill. Current environmental market players such as Citi, the CME, the Chicago Climate Exchange and BlueNext are preparing to capitalize on the expected surge.

The fledgling U.S. carbon credit market, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energy and Security Act of 2009, which recently was passed by the House, makes it through the Senate. The bill would limit, or “cap,” the amount of carbon emissions that companies can produce each year.

Under the bill, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), firms that produce more greenhouse gases than they’re allowed would be able to buy credits from companies that have produced fewer emissions than they’re allotted, creating a large market for carbon credits. President Obama has estimated that more than a half-trillion dollars’ worth of carbon credits will be auctioned in the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments established an emissions trading system to reduce emissions of sulfur dioxide (SO2) from fossil fuel-burning power plants. According to Randy Warsager, director of green products at CME Group, the SO2 market was challenged last year by an unfavorable court decision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trading, primarily through regional initiatives such as the Regional Greenhouse Gas Initiative (RGGI), which covers Maine, New Hampshire, Vermont, Connecticut, New York, New Jersey, Delaware, Massachusetts, Maryland and Rhode Island. In the RGGI’s latest auction in June, 30.8 million allowances were sold for $3.23 each, which raised more than $104 million for the 10 Northeastern states to invest in energy-efficiency and renewable energy programs. (Each allowance represents a ton of carbon that electric plants can release.)

Profiting From the Environment

Citi is among the investment banks that have been moving forward in the environmental products space. Garth Edward, the firm’s director of environmental markets, began trading environmental products with the introduction of the EPA’s NOx Budget Trading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources. For the past few years Citi has focused primarily on CO2 trading, which has been driven by the European Union’s emissions trading system. “This is where the bulk of liquidity is, most of the capital flow that drives emission reduction projects around the world,” Edward notes.

Growth in market activity and the capital deployed in environmental products has been strong, primarily because of cap-and-trade legislation, according to Edward. “Where you have a step forward in legislation such as the EU emissions trading system, the voluntary agreements in Japan and the Waxman-Markey legislation, that’s the kind of process that starts creating compliance requirements on end users and incentivizes service and technology providers to provide solutions,” he says.

Despite the projected growth in environmental markets, Credit Suisse recently cut back its New York-based carbon trading team; Carbon Finance, a newsletter dedicated to the global markets in greenhouse gas emissions, reported that half the team will depart early next year as part of a de-emphasizing of the business. According to the Carbon Finance report, going forward Credit Suisse will focus on environmental trading on behalf of its clients, which are mostly European. (Credit Suisse did not respond to Carbon Finance’s nor to Wall Street & Technology’s requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbon trading are the Chicago Climate Exchange (CCX) and the Chicago Mercantile Exchange (CME). The CCX trades allowance and offset contracts that each represent 100 metric tons of CO2 equivalent. The Chicago Climate Futures Exchange, a subsidiary of the CCX, trades RGGI futures and options contracts. The CCFE reported record trading volume for June 2009 — it traded 133,175 contracts versus its previous record of 132,319 in April.

The CME — along with partners Evolution Markets, Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Tudor Investment, Constellation Energy, Vitol, RNK Capital, ICAP and TFS Energy — has applied for CFTC approval for a Green Exchange, on which it will trade all the environmental products it already trades on its commodities exchange. (For more on the CME’s carbon credit trading efforts, see “CME Revs Up for Surge in Carbon Credit Trading“.)

Europe’s BlueNext, an environmental exchange that’s 60 percent owned by NYSE Euronext, plans to open an office in New York “very shortly,” according to Keiron Allen, the exchange’s marketing and communications director. It plans to start trading contracts within the RGGI market by the end of the year, Allen reports, adding that the exchange intends to compete with the U.S. environmental exchanges. “It will be a race to see who gains critical mass first,” he says.

The European Experience

In Europe, cap-and-trade rules similar to those outlined in the Waxman-Markey bill have been in effect since 2005; carbon credits are traded on the European Climate Exchange (ECX), BlueNext, Nord Pool (the Nordic Power Exchange) and the European Energy Exchange (EEX).

BlueNext trades European Union Allowances, the carbon emission allowances used in the European Union Emissions Trading Scheme, and Certified Emission Reductions, which are carbon credits issued under the rules of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Change, an international environmental treaty with the goal of reducing greenhouse gas concentrations in the atmosphere. BlueNext trades an average of 5 million tons’ worth of carbon emissions a day. Its 100 members (buyers and sellers on the exchange) are carbon-emitting companies, financial firms with their own trading desks and carbon credit aggregators that act as brokers.

BlueNext’s model is different than most other carbon exchanges, Allen says, because it uses a delivery-versus-payment system rather than a clearing system. “In a delivery-versus-payment system, there’s zero counterparty risk,” he contends. “If you sell contracts, you’ve got to put them into your account on the exchange first. And if you want to buy something, you have to put money in your exchange account first. Each party knows the other’s got the right amount of money or contracts.” Allen adds that in BlueNext, trades are physically settled within 10 or 15 minutes, versus the more typical T+1, T+2 or T+3 for commodities settlement.

The European carbon market has been growing quickly; the U.S. market still is in its infancy. Trading activity in the European Emissions Trading Scheme grew by 54 percent in the first quarter of 2009 compared to Q4 2008, reaching $28 billion, according to Carbon Finance. This represented 84 percent of the world’s carbon market in terms of value and 78 percent of its volume. Carbon trading in the U.S., on the other hand, made up only 3.7 percent of the trading volume and 1 percent of the value of the global carbon market. According to CME’s Warsager, though, “We’re hoping to build some market share [in the U.S.] as we move forward with the Green Exchange.”

The CME isn’t the only institution hoping to capitalize on carbon credit trading in the U.S. But what are the barriers to entry to this new market? At Evolution Markets, a White Plains, N.Y.-based voice brokerage for environment and energy products, the trading floor is as noisy and chaotic as any commodities trading room. According to firm spokesman Evan A. Ard, the technology required for carbon credit trading is no different from the technology required to trade other commodities.

Jubin Pejman, VP, Americas, for Trayport, whose energy commodities trading and order matching software is used by 13,000 traders and many investment banks and utilities in Europe and the U.S., agrees that carbon futures trade like any other type of futures contract. “You have hedge funds speculating, you have industrials buying them, you have brokers,” he says. “At any futures exchange around the world, it’s the same type of breakup. From a technology standpoint, there’s a matching engine, there’s risk management, there’s margin management, there are counterparties, there’s clearing. BlueNext, for example, looks very much like other futures exchanges.”

BlueNext’s Allen, however, points out one big difference between carbon emissions contracts and other commodities: “If you’ve got a spot market for oil or grain, you physically deliver that oil or grain to the buyer,” he explains. “You don’t roll up in a giant truck and deliver 15,000 tons of carbon dioxide.”

Regional carbon futures contracts in the U.S. tend to be processed manually or through voice trading. “Europe is about 10 years ahead of the curve as far as technology for energy emissions trading,” Trayport’s Pejman says. He explains that large European financial firms have their own carbon trading platforms; smaller entities turn to third-party solutions such as Trayport’s platform.

But, Citi’s Edward says, in terms of technology and compliance, carbon trading should not be difficult for many U.S. firms because emissions trading in the U.S. has been around for more than a decade. The same IT processes, management systems, accounting systems, and even risk management and hedging systems will work under the new carbon credit trading scheme, he points out. “We’re not introducing something that’s conceptually dramatically new and untried in the U.S.,” Edward notes.

BlueNext’s Allen says the exchange will publish a how-to book by the fourth quarter to help small and medium-size firms get involved in carbon trading. (Hearing this, Trayport’s Pejman jokes that the book will be made out of Styrofoam.)

The Future of U.S. Carbon Trading

Even as firms build out their carbon credit trading capabilities, the market is expected to reach significant levels fairly quickly. President Obama has predicted that about $646 billion worth of carbon credits will be auctioned in the first seven years of the mandatory cap-and-trade system in the U.S.; others have suggested the number could be two or three times that. To the novice onlooker, this would suggest a healthy rate of carbon credit market growth.

But Citi’s Edward demurs. “The actual volume of allowances issued is not necessarily what drives liquidity and price,” he says. “It is the ambition of the target that drives activity.”

According to Edward, the U.S. experience may mirror the EU’s emissions trading system, which, he says, is similar in size in terms of covered installations and required emission reductions. “The EU turns over close to a half-billion dollars’ worth of allowance transactions a day, so that may be a reasonable expectation for the U.S.,” Edward comments.

The Waxman-Markey bill currently would take effect in 2012; the Senate may postpone this start time to 2013. Still, “We’d expect trading to take place far in advance of that first compliance year,” Edward says. “That’s the normal case with environmental trading systems — companies that dispatch power generation or refineries need to hedge in advance their emissions exposure; they need to lock in the margins around running their plant, and that requires them to buy the allowances in advance.” If the first compliance year is 2013, Edward says, he would expect early trading to begin in 2010.

Trayport’s Pejman notes that once the legislation is passed, there will be a race to the market. “Whoever is already in production will have a tremendous advantage over those that are scrambling to get ready,” he asserts.

But what if the Senate doesn’t pass this bill? “That would change everybody’s plans,” BlueNext’s Allen concedes. “I like the Woody Allen joke: ‘How do you make God laugh? Write down your plans.’ “

Source: Wallstreet & Technology, 19.07.2009 By Penny Crosman

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Carbon Trading Market Creating Opportunities

Continued growth in the global carbon trading market and the anticipated adoption of a U.S. climate control bill is creating plenty of new opportunities for investment banks, nascent exchanges, technology vendors and asset servicing agents in the trading and post-trade arenas.

The carbon emissions market, which grew 75 percent to reach $116 billion in 2008 from the prior year, could expand to $2 trillion by 2020 should more markets adopt a version of Europe’s “cap and trade” model for reducing greenhouse gas emissions, according to research firm Celent.

Based on the 1997 Kyoto Protocol, an international treaty, the European Emissions Trading Scheme allows for members of the European Union to create tradable European Emissions Allowances (EUAs) and Certified Emission Reduction Credits (CERs)–otherwise known as offsets. Other countries such as Australia, New Zealand, Canada and Japan are also pursuing their own versions of carbon cap and trade models as is the United States.

“The potential for carbon trading is great, as is the opportunity cost of ignoring the market,” said Stephen Bruel, research director for TowerGroup. Even more lucrative than trading will be advisory services to help energy firms comply with divergent regulations to reduce carbon emissions, he believes. Harmonization between regulatory regimes to create a unified global market, while ideal, is a long way off.

“It is costly for global firms to comply with the patchwork emission schemes and investment banks can help carbon emitter clients navigate this minefield with offset strategies,” said Bruel, citing BNP Paribas, Goldman Sachs and Credit Suisse as examples of firms with specialized carbon risk desks. Hedge funds, he predicted, will also want to capitalize on the arbitrage opportunities between regulatory regimes and will use algorithms to take advantage of the correlations between the price of coal or weather patterns and the price of carbon.

Although much of the trading activity and innovation in the carbon emissions market remains in Europe, where the European Climate Exchange and Bluenext are the largest exchanges, the potential passage of U.S. legislation later this year or in 2010 could easily make the U.S. the largest regulated carbon market.

Under the proposed American Clean Energy and Security Act, the ceiling on greenhouse gas emissions would be divided into billions of permits, each conferring the right to emit one metric ton of carbon dioxide. Fewer permits would be issued to utilities, manufacturers and refiners each year until emissions are 83 percent by 2050 over 2005 levels.

It is unclear what effect the legislation, if passed, would have on several voluntary regional and state projects which have already cropped up, creating emission offset contracts traded over-the-counter, largely through interdealer brokers and web-based mechanisms.

“Trading volumes will continue to expand in the over-the-counter market but U.S. legislation will likely favor exchange-traded contracts and several more exchanges could emerge,” said Jubin Pejman, vice president in the Americas for Trayport, an electronic trading software firm purchased by interdealer broker GFI last year. Exchange-traded contracts are typically standardized and cleared through a centralized facility, which reduces counterparty risk–a key mantra of the new Obama administration for the over-the-counter market.

Three fledgling U.S. emissions exchanges–the Chicago Climate Exchange, its sister company Chicago Climate Futures Exchange and rival Green Exchange, stand to benefit the most from any federal mandate. The CCX, launched in 2003 as a voluntary market with binding targets, offers participants a way to buy and sell “carbon financial instruments” (CFIs) that represent a certain level of emissions reductions; the CCX overtook the over-the-counter market for the first time last year.

The rival Green Exchange created in December 2007, by a consortium of trading firms and the New York Mercantile Exchange (Nymex), is awaiting approval from the Commodity Futures Trading Commission as a designated contract market. Its contracts are already listed for trading and clearing on Nymex.

Pejman said that Trayport’s GlobalVision Broker Trading System, a screen-based network, is scaleable enough for broker dealers to expand their message traffic on bid and offers in the over-the-counter market for carbon emission allowances and credits in the U.S.The firm’s GlobalVision Trading Gateway, which enables traders to trade on multiple liquidity pools through a single user interface, will also link to the Green Exchange, should the market win CFTC approval.

Software vendors with cross-asset capabilities are also finding fertile territory in adding functionality for carbon emission contracts. SunGard has enhanced its GL Clearvision middle office and GL Ubix back-office products–inherited through the 2008 acquisition of GL Trade–for trades executed on Bluenext, a Paris-headquartered exchange majority-owned by NYSE Euronext.

Mark Stugart, product manager of commodities for Calypso Technology, a trading and risk management softwar firm, said that his firm will upgrade its platform to incorporate trade capture, pricing and P&L calculations for EUAs and CERs on the ECX and BlueNext by year end.

Last month, Bank of New York Mellon launched a centralized custody and trade settlement platform called GEM to give customers a single view of their entire carbon portfolio–for regulated and voluntary markets–and perform all transactions including trading, cancellation and retirement of contracts in one place.

Original Article

Source:Securities Industry News, 22.06.2009 by Chris Kentouris

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World’s Biggest Carbon Offset Exchange Comes One Step Closer To Reality As NYSE’s BlueNext And China-Beijing Environmental Exchange Sign China Partnership

NYSE Euronext (NYX) today announced that BlueNext, its majority-owned environmental trading exchange, is partnering with the China-Beijing Environmental Exchange (CBEEX), the first state-level Chinese environmental rights trading platform, to set up an international carbon-trading related information platform.

Bluenext, the world’s largest “spot” trader of carbon credits supported by the world’s leading and most liquid exchange group, operates the world’s largest spot market for Certified Emissions Reductions (CERs). CBEEX is the gateway to China , the world’s largest market for Clean Development Mechanism (CDM) projects.

At an official signing ceremony today in Beijing , BlueNext and CBEEX signed an agreement that includes:

  • A cross-marketing partnership;
  • A comprehensive data sharing agreement that will promote investment- and buyer information of Clean Development Mechanism (CDM) projects in China ;
  • BlueNext sharing its deep understanding of environmental trading knowledge and expertise with CBEEX to grow both markets internationally.

“This is another step in our wish to expand our market into the great potential that is China, and the rest of Asia; but also another step in our long held ambition to be the reference point for a single international price for carbon,” said Serge Harry, Chairman and CEO of BlueNext.

“NYSE’s Bluenext, as an American European company, is ideally placed to open up access to the largest buyers of CDM projects and CERs in the European and American markets,” said Darwin Zheng of CBEEX.

For background about CDM and CERs, please see the below.

Background about CDMs and CERs:

What is the CDM?

The Clean Development Mechanism (CDM) creates credits, Certified Emission Reductions (CERs), from emission abatement projects in developing countries.  CERs can be used for compliance in the European Emissions Trading Scheme (EU ETS) and other national schemes, such as in Canada and Japan .

Key Facts about CDM / CERs in China

  • China had 84% market share in 2008 for the Primary CDM market
  • Between 2002-2008, China accounted for 66% of all contracted CDM supply in the market
  • From January 2008 to March 2009, the CDM pipeline in China grew steadily to about 1730 projects
  • 800 Chinese projects entered the pipeline since January

Key Facts about CERs on Bluenext

  • Price of CER Spot on Bluenext 16.6.09 – 10.75 Euros / Tonne ($14.89)
  • Total volume of CER spots since August 2008 – 24 114 000 tonnes

Source: MondoVisione, 18.06.2009

Filed under: China, Energy & Environment, Exchanges, News, Risk Management, , , , , , , , , ,