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Brasil Mata Viva And Markit Announce Brazilian Environmental Alliance – 13 Million Pending Issuance Units Listed On Markit’s Environmental Register

Markit, a leading, global financial information services company, and Brasil Mata Viva, a Brazilian standards framework for certifying carbon credits from avoided deforestation and Reduced Emission from Deforestation and Degradation (“REDD”), today announced an alliance with a new environmental market in the Brazilian State of Goiás.

The market is being developed with the coordination of the consulting firm IMEI Consultoria e Treinamento Ltda (IMEI) and Bolsa de Títulos e Ativos Ambientais do Brasil (BTAAB – Environmental Bonds and Assets Exchange of Brazil), a Goiânia-based financial exchange for the trading of environmental-related credits. IMEI and BTAAB have selected Markit’s Environmental Registry as the registry system for carbon credits resulting from the State’s projects of avoided deforestation and REDD.

The listed credits will be created and validated in Brazil under the standards framework established by IMEI and BTAAB known as Brasil Mata Viva. Markit will provide the secure online registry facility for the efficient and transparent issuance of credits, as well as ownership transfer and retirement certification. The robust offering provided by Markit’s global environmental registry will help facilitate the sale and ongoing success of the Brasil Mata Viva Credits.

Maria Tereza Umbelino, Executive Director of IMEI, Consultoria e Treinamento Ltda, said: “This new alliance with Markit will provide credibility to the environmental assets created by the Brasil Mata Viva Program. Markit’s secure and transparent credit registry will faciliate the provision of and access to reliable information about the credits available to the market.”

Ary Santos, Superintendent of the Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) and a representative of the Ministry of Environment in the Brazilian State of Goiás, said: “Brasil Mata Viva has been working in cooperation with and along the guidelines required by the State’s forestry conservation and restoration program under our coordination (Prolegal). We support their work with Markit’s internationally recognized carbon registry and the transparency they bring to this program.”

Today, 13 million Pending Issuance Units (PIUs), which will be validated according to the Brasil Mata Viva standards framework, will be issued on Markit’s Environmental PIU Registry. PIUs represent a contractual right to an emission reduction credit that is in process of being verified. Large scale projects, particularly those related to REDD, can take long periods of time to generate their issued credits. The market uses PIUs to facilitate the sale and management of expected credits. These 13 million PIUs represent the saving or replacement of approximately 40,000 hectares of forest and managed lands in the state of Goiás.

Helen Robinson, Managing Director of Markit’s Environmental Registry, added: “The development of the Brasil Mata Viva Program and the creation of an exchange on which to buy and sell these carbon credits, confirms the commitment of Brazil in its focus on reducing emissions. Forestry preservation and restoration is a key focus in climate discussions and Markit is pleased to support this innovative program designed to protect Brazilian forests.”

Source:MondoVisione, 16.12.2009

Filed under: BM&FBOVESPA, Brazil, Energy & Environment, Exchanges, Latin America, News, Risk Management, , , , , , , , , , , , , ,

Is Carbon Trading Un-Ethical? A Guide

07.09.2009 by Oscar Reyes – Carbon trading is allowing industrialised countries and companies to avoid their emissions reduction targets. It takes two main forms: “cap and trade” and “carbon offsetting.”

What is cap and trade?
Under cap and trade schemes, governments or intergovernmenal bodies set an overall legal limit of carbon emissions in a certain time period (“a cap”) and then grant industries a certain number of licenses to pollute (“carbon permits”). Companies that do not meet their cap can buy permits from others that have a surplus  – typically, because they have been given an overly generous allowance in the first place. They can also purchase “offsets.”

What are carbon offsets?
Carbon trading runs in parallel with a system of carbon offsets. Instead of cutting emissions themselves, companies, and sometimes international financial institutions, governments and individuals, finance “emissions-saving projects” outside the capped area to generate carbon credits which can also be traded within the carbon market. The UN’s Clean Development Mechanism (CDM) is the largest such scheme with almost 1,800 registered projects in developing countries by September 2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits generated by approved schemes will cost around $35 billion by 2012.

Although offsets are often presented as emissions reductions, what these projects do at their hypothetical best is to stabilise emission levels while moving them from one location to another, normally from Northern to Southern countries. In practice, this “best case” scenario is rarely seen, with the result being that offsetting increases emissions whilst also exacerbating social and environmental conflicts.

So what’s wrong with cap and trade?
There are fundamental theoretical flaws in the whole cap and trade scheme even before you look at the actual record of its implementation. This is because the scheme was never set up to directly tackle the key task of a rapid transition away from fossil fuel extraction, over-production and over-consumption, but sought instead to quantifying existing pollution as a means to create a new tradable commodity. Within this framework, traders invariably opt for the cheapest credits available at the time, but what is cheap in the short-term is not the same as what is environmentally effective or socially just.

Some of the key problems with the cap and trade approach are:

The “trade” component does not reduce any emissions. It simply allows companies to choose between cutting their own emissions or buying cheaper “carbon credits,” which are supposed to represent reductions elsewhere

The “cap” has too many holes and sometimes caps nothing. The cap is only as tight as the least stringent part of the whole system. This is because credits are sold by those with a surplus, and the cheapest way to produce a surplus is to be given too many credits in the first place (“hot air” credits as a result of caps being set too high). The aim of trading is to find the cheapest solution for polluting industry, and it is consistently cheaper to buy “hot air” credits than to actually reduce emissions.

Cap setting is a political process that is highly susceptible to corporate lobbying which means that there is invariable over-allocation of pollution permits. In fact, lobbying is encouraged through extensive industry “stakeholder” involvement

Offsets loosen the cap. While cap and trade in theory limits the availability of pollution permits, “offset” projects are a licence to print new ones. When the two systems are brought together, they tend to undermine each other – since one applies a cap and the other lifts it. An offset is essentially a permit to pollute beyond the cap. Most current and proposed “cap and trade” schemes allow offset credits to be traded within them – including the EU Emissions Trading Scheme (EU ETS) and the US cap and trade scheme (proposed in the 2009 American Clean Energy and Security Act, ACES)


Will markets concerned with growth be able to deliver reductions of carbon?
The other problem is that markets are by essence growth-oriented, so look for new sources of accumulation. In carbon markets, this is achieved by increasing their geographical scope and the number of industrial sectors and gases they cover. Yet this contradicts the essence of tackling climate change which is about reducing use of fossil fuels and consumption.

It is therefore not a surprise that introducing carbon as a commodity has resulted in new opportunities for profit and speculation. The carbon market is already developing the way of the financial market with the use of complex financial instruments (futures trading and derivatives) to hedge risk and increase speculative profit. This runs the risk of creating a “carbon bubble.” This is not a surprise, as it was created by many of the same people at the Chicago Climate Exchange who created the derivatives markets that led to the recent financial crash.

What examples have there been of Cap and Trade schemes?
There have been a number of Cap and Trade markets – the EU ETS, the United States Acid Rain Program, the Los Angeles Region Clean Air Markets (RECLAIM), the Chicago Emissions Reduction Market System (ERMS) and the Regional Greenhouse Gas Initiative. The EU ETS, established in January 2005, is the largest cap and trade scheme in operation worldwide and is the best for illustrating how carbon trading has failed in practice.

Why does European Union Emissions Trading Scheme (EU ETS) consistently grant over-allocation of pollution permits?
Most cap and trade markets use projections of historical emissions provided by industry itself to calculate the initial caps. Industry has a clear incentive to overstate its past emissions to gain more credits. As a result, cap and trade markets start out with too many permits. This was true of the EU ETS which consistently awarded major polluters with more free pollution permits (called EUAs, European Union Allowances) than their actual level of carbon emissions. This means it gave them no incentive to reduce emissions, and as a result the price of the permits collapsed – ending 2007 at €0.01. In phase I (2005-2007) as a whole, according to the EU’s own data, major polluters had permits worth 3.4 per cent more than their actual level of emissions.

But didn’t the second phase of the EU ETS (2008-2012) resolve this over-allocation?
The EU claims that it has learned from its mistakes and that the second phase of its scheme is working. Whilst it is true that for the first time in 2008, polluters were awarded fewer permits than their actual level of emissions, there is still over-allocation of permits:

  • The vast majority of factories and economic sectors are still over-allocated – it is only the power sector that needs to purchase credits
  • The impact of the EU-wide recession means that the ETS as a whole will again be over-allocated in 2009
  • Corporations get the same number of credits even if they temporarily close or scale down operations for short-term economic reasons


But isn’t Phase II nevertheless leading to emissions reductions?
The EU claims emissions reductions of 3 per cent, or 50 million tons, in ETS sectors in 2008.  The trouble is that at least 80 million tons of “carbon offsets” in the developing world were bought as part of the ETS in 2009 – more than the level of the cap. So, again, the ETS does not require emissions reductions by companies in the EU.

Moreover there is also evidence that some of the supposed “cuts” are fake. One such example is Lithuania which claimed it would be forced to use coal-powered electricity as a result of the closure of Ignalina, a nuclear power plant. As a result it gained a large surplus of credits, which have been sold on and treated as “emissions reductions” elsewhere.

So who profited from carbon trading?
Companies receive most carbon credits for free. This is equivalent to a subsidy – and with allocations made on the basis of historical emissions, the largest subsidy goes to the dirtiest industry (especially coal-fired power plants).

Windfall profits also arise from an accounting trick around “opportunity costs.”  Power companies choose to do the cheapest thing to meet their ETS target – which is usually buying Clean Development Mechanism (CDM) credits – but passing on costs as if they were doing the most expensive – actually reducing emissions. Even power companies receiving free credits from the ETS have nevertheless passed on the cost of these credits to consumers.   Research by market-analysts Point Carbon and WWF  calculated that the likely “windfall” profits made by power companies in phase II could be between €23 and €71 billion, and that these profits were concentrated in the countries with the highest level of emissions.

ArcelorMittal, the world´s largest steel company, is another typical example. It routinely receives a quarter to a third credits than it would have needed to even begin reducing emissions. The company is likely to have made over €2 billion in profits from the ETS between 2005 and 2008, with over €500 million of this achieved in 2008 alone – yet has needed to make no proactive changes to its emissions to do so

What about phase III of the EU ETS?
EU ETS phase III runs from 2013 to 2020, and the debate in Brussels is focussed on the risk of “carbon leakage.” This relates to industry claims that strict regulations in one part of the world will encourage  outsourcing to locations where regulations are weaker. It is already being used as a blackmail tactic by industry to reduce its targets or obligations within the EU ETS (and other proposed schemes in Australia and the US). Over half of the 258 industrial sectors in Europe being assessed for exposure to carbon leakage under the EU ETS will qualify for free emission allowances from 2013, according to an initial assessment by the European Commission.

So what is the problem with carbon offsetting?
Carbon offsets allow companies and countries to avoid cutting their own emissions by buying their way out of the problem with theoretical reductions elsewhere. There are both inter-government schemes – most famously the UN Clean Development Mechanism (CDM) – as well as voluntary programmes undertaken largely for purchase by individual consumers. Unfortunately both systems are deeply flawed:

Selling stories. Offsetting rests on “additionality” claims about what “would otherwise have happened,” offering polluting companies and financial consultancies the opportunity to turn stories of an unknowable future into bankable carbon credits. The EU admits that at least 40 per cent of these are bogus, while a survey by International Rivers found over 60 per cent of projects to be “non-additional.”


Offsets increase emissions. The net result for the climate is that offsetting tends to increase rather than reduce greenhouse gas emissions, displacing the necessity to act in one location by a theoretical claim to act differently in another. Moreover, it keeps delaying any real domestic action and allows the expansion of more fossil fuel extractions.


Making things the same. The value of CDM projects is premised on constructing a whole series of dubious “equivalences” between very different economic and industrial practices, with the uncertainties of comparison overlooked to ensure that a single commodity can be constructed and exchanged. This does not alter the fact that burning more coal and oil is in no way eliminated (and certainly not in the same time frame) by building more hydro-electric dams, planting more trees or capturing the methane in coal mines.


Carbon offsets have serious negative social and local environmental impacts
The use of “development” rhetoric masks the fundamental injustice of offsetting, which hands a new revenue stream to some of the most highly polluting industries in the South, while simultaneously offering companies and governments in the North a means to delay changing their own industrial practices and energy usage.

In practice, carbon offset projects have most of the times resulted in land grabs, local environmental and social conflicts, the displacement of Indigenous Peoples´ from their territories, as well as the repression of local communities and movements.

Might reforestation programmes such as REDD work?
The inclusion of tree planting and other “sinks” projects in the CDM and cap and trade schemes is also under consideration.

These pose additional measurement problems, as many projects are not additional, are difficult to measure, do not include the upkeep of the trees and assume instant absorption of already released carbon – when in fact it will take thousands of years for the carbon to be absorbed. “Reforestation” also tends to count monoculture plantations as forests, but they are not as they lack biodiversity, and so contribute to soil degradation; and also require intensive synthetic fertilisers, which contribute significantly to climate change, pollute water and damage local peoples´ health.

Schemes for Reducing Emissions from Deforestation and Degradation (REDD) repeat the error of emissions trading by commodifying forests. They presume that deforestation happens because standing forests make less money than forests that are cut down. In fact, the commodification of forests is what drives deforestation. This commodification includes the role of corporate and development bank investment in new infrastructure, mining and oil extraction projects; industrial logging; and land clearance to make way for monoculture plantations for the pulp and paper and palm oil industries. REDD is likely to fuel property speculation and so exacerbate land conflicts, dispossessing Indigenous Peoples and forest communities.

What impact will new trading schemes have on offsetting and forest carbon markets?
The most active buyers of offset credits in 2008 were European companies, which bought 80 million credits from the CDM or Joint Implementation projects (a similar UN scheme, operated in countries which have emissions reduction commitments under the Kyoto Protocol) as either a cheaper alternative to reducing their own emissions (under ETS), or for the purpose of speculation and re-sale. But this market is likely to expand massively if the American Clean Energy and Security Act (ACES) is passed, which proposes to allow US companies to purchase from 1 to 1.5 billion international offsets every year. This would spur on a massive increase in damaging offset projects, putting enormous pressure to reduce the already-inadequate checks on their environmental integrity.

What are sectoral credits?
Sectoral credits would introduce new offsets as part of what are called Nationally Appropriate Mitigation Actions (NAMAs) in the climate policy jargon. This is one of a number of proposals currently being debated for inclusion in a new UN climate treaty.

The basic idea is that developing countries should commit to reducing their greenhouse gas emissions “in an indicative range below business as usual,” as the draft of the G8´s L´Aquila declaration in July 2009 puts it. This deviation from an assumed future trajectory would be counted as a “reduction” (although it need be nothing of the sort) and traded to help industries in developed countries avoid reducing their own emissions. The private money flowing through these carbon markets could also be “double counted” as part of the financial commitment that the industrialised countries agreed to make at the UN Climate Conference in Bali.

But isn’t carbon trading better than nothing?
No. As carbon trading helps to avoid change and even increases emissions while exacerbating local conflicts, it is not a question of alternatives to carbon trading but rather of taking measures that actually tackle climate change.

So what are the alternatives?
Carbon markets should be dismantled, starting with offsets. A clear intention to discontinue carbon markets can fatally undermine them even in advance of legislative action. Alternatives then need to be developed that are properly consulted and developed together with local communities to prevent a repeat of the dispossession and social injustice caused by offsetting schemes.

A range of different approaches will be needed but may include:

Recognition of existing climate solutions. The vast range of solutions that already exist – which tend to be distinguished by their sensitivity to the local contexts in which they operate, are overlooked in favour of the accumulation of large-scale “technological fixes” or market-based schemes

Leave fossil fuels in the ground. Proposals to halt new coal power plants and the exploration of new and often “uncoventional” sources of oil extraction are at the frontline of the struggle for climate justice – and should form part of a rapid transition to a post- fossil fuel economy

Rediscovering environmental protection. There are a broad range of environmental policy instruments that have proven to be more effective than market-based approaches – ranging from efficiency standards for electrical appliances and buildings to feed-in tariffs for renewables. The rediscovery of such measures could form part of a solution

New revenues: tax and/or end currency and fuel speculation. Rather than a regressive carbon tax, revenue can be generated by a tax on currency speculation. A heavy tax or an end to speculation on fossil fuel prices would also help as a transitional measure. This should be accompanied by pro-active policy measures to tackle fuel poverty, such as a ban on pre-pay metering

Renewable energy should be supported but not uncritically – with the involvement of local populations and not as basis for sustaining expansions in fossil use or support of unsustainable model of industrial expansion

Public energy research. Private research on energy alternatives and use favours “least cost” false solutions (eg. agrofuels, hydroelectric dams, nuclear power) rather than environmentally effective alternatives, so is less effective than public research. However, this would need to be allied with the democratic transformation of the institutions of “environmental governance,” the agenda for which currently tends to be set by transnational corporations

Re-estimating energy demand. Current models presume limitless growth and overstate future energy demand, which has encouraged oversupply and kept prices low – which is, in turn a key structural driver of over-consumption.

The Transition Towns movement is going some way towards re-estimating demand with its “Energy Descent Action Plans”, but lacks a structural analysis of heavy industry use (or capitalist accumulation) and is often divorced from organising for more equitable distribution of energy

Changing economic calculations. Cost-benefit accounting either fails to take account of environmental or social costs, or is grossly reductionist in its assumptions.

Challenging the “growth” fetish. It is often claimed that continued GDP growth can go hand in hand with reductions in emissions. However, there is no evidence that “advanced” economies are significantly reducing their carbon footprints, or that such a transformation could happen quickly enough to reduce emissions. On the postive side, GDP is a very poor indicator of human-well being, so is not a condition for social improvement or a good life. If the obesession with economic growth is set aside, it becomes easier to see how tackling climate change and maintaining a sustainable and enjoyable life are far from contradictory goals.

Source: Carbon Trade Watch, 07.09.2009

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

Chinese group buys voluntary Carbon Credits

An automobile insurer from Shanghai has become the first Chinese company to become carbon neutral by purchasing credits in China’s fledgling voluntary carbon trading market.

Tianping Auto Insurance paid Rmb277,699 ($40,627) on Wednesday for 8,026 tons of carbon credits accumulated by commuters during last year’s Beijing Olympics. They were auctioned through the Beijing Environment Exchange.

The deal signals the growing potential for carbon trading in China, which is the world’s largest emitter of greenhouse gases but so far does not have a domestic carbon market.

As in Europe and the US, trading in voluntary emission reductions is only one of many segments of the carbon market.

China has become the largest supplier to foreign investors of carbon credits from projects that have been certified to reduce carbon emissions under the clean development mechanism since 2007.

As a developing country, China is not required to limit greenhouse gas emissions under the Kyoto protocol, so there is no domestic demand for mandatory carbon credits.

However, Beijing, as it prepares for the Copenhagen meeting in December, which is due to decide on a successor to Kyoto, is considering introducing some commitment to limiting emissions.

In June, the state council, China’s cabinet, said it would introduce targets for lower carbon emission intensity to its economic and social planning. The statement was widely seen as a hint that the next five year plan, covering 2011-15, will include a carbon intensity target.

That would trigger growth in voluntary carbon trading, climate change experts said.

“Responding to climate change is a task in which the whole society needs to be encouraged to participate, and using market mechanisms is one way of doing that,” said an official at the climate change department of the National Development and Reform Commission, China’s climate change policymaker.

Source: Financial Times, 06.08.2009 By Kathrin Hille in Beijing

Filed under: Asia, China, Energy & Environment, News, , , , ,

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

Filed under: Energy & Environment, News, Risk Management, Services, Trading Technology, , , , , , , , , , , , , , ,

HKEx Publishes Consultation Paper On Certified Emission Reduction Futures

Hong Kong Exchanges and Clearing Limited (HKEx) today (Friday) published a consultation paper on certified emission reduction (CER) futures.

The consultation paper seeks views and comments from all individuals and organisations interested in emissions markets, including financial intermediaries, investors, Clean Development Mechanism project participants and public policy makers, on the business feasibility of developing an emissions trading platform in Hong Kong and CER futures as a product concept.

The consultation paper includes:

  • An overview of the development of carbon trading around the world;
  • A potential design for CER futures which may be suitable for exchange trading in Hong Kong;
  • Some comments and views shared by emission market players in Hong Kong, Singapore, Australia and the UK who met with HKEx executives for informal discussions of CER futures contract specifications; and
  • Six questions for potential respondents’ consideration.

Some of the questions cover specifics, while others are relatively broad.  For instance, Question 5 invites explanations of any issues related to the introduction of CER futures not mentioned in the consultation paper that HKEx ought to consider, and Question 6 seeks comments on the overall development of emissions or pollutants trading markets in Hong Kong.

“We encourage everyone interested in this topic to read our consultation paper and submit their views, and we welcome any information on the development of the carbon emissions markets that people think may be useful to us,” said Calvin Tai, Head of HKEx’s Derivatives Market.

“We hope our Exchange and Clearing Participants will share their insight on the likely demand for CER futures trading in our market at this time,” Mr Tai added.

The consultation paper and questionnaire are posted on the HKEx website.

The deadline for the submission of comments is 31 August 2009.

Source: MondoVisione, 26.06.2009

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Markit And The Carbon Disclosure Project To Launch Climate Change Investment Indices

Markit, a financial information services company, and the Carbon Disclosure Project (CDP), the leading independent global climate change reporting platform, today announced their intention to launch a family of investment indices reflecting the financial performance of companies with strong carbon management strategies.

By combining CDP’s benchmark climate change data and Markit’s index expertise, the two companies aim to create a family of high quality equity indices that will help investors gain exposure to companies that actively manage their impact on the environment.

The stock selection and weighting will be based on CDP’s annual corporate Carbon Disclosure Leadership Index (CDLI) data. CDP gathers data from companies globally through an annual information request on behalf of 475 institutional investors. The individual corporate reports are scored by professional services firm PricewaterhouseCoopers LLP based on the quality of information disclosed. This provides a deep insight into companies’ greenhouse gas emissions and climate change management strategies.

Markit and CDP plan to launch an index for the UK and Europe, in addition to a US index and a global index. Markit intends to license the indices to exchange-traded fund (ETF) and structured product providers.

Niall Cameron, Executive Vice President of Commodities, Indices, Equities and Risk Management at Markit, said: “The creation of this family of climate change indices underscores Markit’s commitment to the environmental markets.

“The quality, transparency and independence of the data underpinning these indices are of vital importance to their success and that is why we have chosen to work with CDP, a leading provider of emissions data, on this project.”

Paul Dickinson, CEO of CDP, said: “Climate change is a material issue for increasing numbers of companies and there are significant commercial opportunities for those with a strong carbon management strategy to benefit from the transition to a low carbon economy. This is why we are working with Markit to produce investment indices based on the Carbon Disclosure Leadership Index.”

Source:MondoVisione, 18.06.2009

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CCX Chicago Climate Exchange signs agreement to collaborate on establishing Emissions Trading in Korea

Chicago Climate Exchange, Inc. (CCX®) signed a memorandum of understanding today in Washington, DC with Korea Power Exchange (KPX), Korea Exchange (KRX) and Korea Energy Management Corporation (KEMCO) to collaborate in preparing for the establishment of emissions trading in Korea.

Parties to the agreement will explore avenues of cooperation in the establishment of Korean emissions trading and matters relating to the infrastructure for emission trading, both of which could play an important role in promoting “low carbon green growth” in Korea.

“Emissions trading is a proven tool for using market-based mechanisms to address environmental challenges and we look forward to working with KEMCO, KRX and KPX, as well as the Ministry of Knowledge Economy and other Ministries in Korea, as Korea moves forward with its important ‘low carbon’ growth goals,” said Dr. Richard L. Sandor, Chairman of CCX and Executive Chairman of Climate Exchange plc.

By creatively integrating public concerns about environmental protection and his experience in financial innovation and business development, Dr. Sandor founded CCX in December 2003 and launched the European Climate Exchange (ECX) in April 2005. CCX also operates the Chicago Climate Futures Exchange (CCFE), which handles NOX, SOX and other criteria pollutant contracts based on the U.S. Clean Air Act.

“CCX is the preeminent and most influential organization in carbon trading. This MOU not only represents a historic collaboration of the parties, but represents a crucial initiative between the United States and Korea,” said KPX CEO Il-Hwan Oh.

“CCX has many international connections we want to be part of. CCX has provided a market solution, with many products as everybody knows, and is facilitating the preparation for carbon trading, fostering green growth,” said KRX CEO Jung-Hwan Lee.

“We are confident the MOU will be part of developing infrastructure in Korea for emissions trading,” said KEMCO CEO Tae-Yong Lee.

Source: MondoVisone, 15.06.2009

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Asia’s first cleantech funds now raising capital

Preqin shows private-equity managers in Asia are beginning to participate in the worldwide boom of cleantech funds.

Perhaps the biggest trend in private equity right now is investing in cleantech, a term that refers to products or services that improve operational performance, productivity or efficiency, while reducing energy consumption, waste and pollution. And PE managers in Asia are introducing the region’s first dedicated cleantech funds, says Preqin, a London-based consultancy specialising in private equity and infrastructure. Click here for original article.

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

According to Preqin, there are now four Asia-based PE funds trying to raise capital for dedicated cleantech funds (see table below). The two largest are from Hong Kong-based First Vanguard, which is raising $500 million for the China and Pacific Rim Water Infrastructure Fund; and Singapore-based Middle East & Asia Capital Partners, which is raising $400 million for its MAP Clean Energy Fund.

There are two more players raising $250 million funds: in Singapore, Ant Global Partners is financing its Ant Global Partners Cleantech Fund; and in Malaysia, Abundance Venture Capital seeks capital for its AVC Abundance Energy Fund.

The first private-equity or venture-capital fund to include a cleantech focus, within a diversified portfolio, emerged in 2005 in India, where IDFC closed a $440 million infrastructure fund. Then in 2006, China’s Prax Capital closed a $153 million fund that included cleantech themes, as did China’s Northern Light Venture Capital, which closed a $350 million fund.

Since then activity has picked up: in 2008, funds in India, China and Hong Kong closed over $5 billion worth of diversified funds that included cleantech plays, while earlier this year, Singapore’s SEAVI Advent closed a $178 million diversified buyout fund.

Preqin says there are now at least 10 PE funds trying to raise capital towards themes that include cleantech, of which four are dedicated, as mentioned above. Together these 10 seek to raise up to $3.6 billion, with the four dedicated funds accounting for $1.4 billion of that.

Preqin has released a report on cleantech funds that shows huge interest among institutional investors and funds of funds. Despite the global financial crisis, overall cleantech fundraising remained steady in 2008, with 29 funds raising a total of $6 billion worldwide, roughly the same as was raised in 2007. The majority has gone to VC funds, with infrastructure funds also playing a big role.

In North America, funds this year seek to raise up to $9 billion, making this the biggest market, followed by European funds, which want to raise over $7 billion, Preqin says.

The consultants also find more than half of cleantech-focused VC firms prefer to take minority stakes, while buyout and infrastructure firms mostly prefer controlling stakes. For institutional investors, these funds represent the preferred means of accessing cleantech themes, as opposed to via the public markets, because the sector is too new to be well represented in the listed space.

Preqin’s 10 largest funds with a cleantech focus raised by Asian fund managers

Fund Fund Type Size (Mn) Vintage Fund Cleantech Focus Fund Manager Fund Manager Location
Baring Asia Private Equity Fund IV Balanced 1,515.0 USD 2008 Diversified Baring Private Equity Asia Hong Kong
IDFC Private Equity Fund III Infrastructure 700.0 USD 2008 Diversified IDFCPrivate Equity India
IDFC Private Equity Fund II Infrastructure 440.0 USD 2005 Diversified IDFCPrivate Equity India
LC Fund IV Venture (General) 400.0 USD 2008 Diversified Legend Capital Management China
Northern Light II Venture (General) 350.0 USD 2007 Diversified Northern Light Venture Capital China
Qiming Venture Partners II Venture (General) 320.0 USD 2008 Diversified Qiming Venture Partners China
Softbank China Venture Capital III Venture (General) 2,000.0 CNY 2008 Diversified SB China Venture Capital China
Nexus India Capital II Early Stage 220.0 USD 2008 Diversified Nexus India Capital India
SEAVI Advent Equity V Buyout 178.0 USD 2009 Diversified SEAVI Advent Singapore
Prax Capital II Expansion 153.0 USD 2006 Diversified Prax Capital China

Preqin’s 10 largest funds with a cleantech focus currently raising by Asian fund managers

Fund Fund Type Target Size (Mn) Fund Status Vintage Fund Cleantech Focus Fund Manager Fund Manager Location
ORYX-STIC Fund II Buyout 500.0 USD Raising 2009 Diversified STIC Investments South Korea
China and Pacific Rim Water Infrastructure Fund Infrastructure 500.0 USD Raising 2009 Pure Cleantech First Vanguard Hong Kong
Sandalwood Capital Partners II Early Stage 350.0 EUR Raising 2009 Diversified Sandalwood Capital Partners India
Ascent India Fund III Expansion 450.0 USD Raising 2009 Diversified UTI Venture Funds India
MAP Clean Energy Fund Infrastructure 400.0 USD Raising 2009 Pure Cleantech Middle East & Asia Capital Partners Singapore
AmKonzen Asia Water Fund Infrastructure 320.0 USD Raising 2009 Diversified AmKonzen Water Investments Management Singapore
Asia Strategic Capital Fund Mezzanine 300.0 USD First Close 2008 Diversified Asia Mezzanine Capital Group Hong Kong
Tripod Capital II Buyout 300.0 USD Raising 2009 Diversified Tripod Capital China
Ant Global Partners Cleantech Fund Venture (General) 250.0 USD Raising 2009 Pure Cleantech Ant Global Partners Singapore
AVC Abundance Energy Fund Natural Resources 250.0 USD Raising 2009 Pure Cleantech Abundance Venture Capital Malaysia

Source: AsianInvestor.net, 08.06.2009 by Jame DiBiasio

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Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

In a sign of the growing importance of renewable sources of energy, global investment in wind power, solar power, and other alternative forms of energy last year exceeded investments in coal, oil, and carbon-based energy for the first time. The United Nations Environmental Program (UNEP) reported that in 2008, 56 percent of all money invested in the energy sector went to green sources of power, with $140 billion in investments in renewable energy compared to $110 billion in fossil fuel technologies.

Wind power attracted the most investment, with $51.8 billion worldwide, while investments in solar power rose 49 percent to $33.5 billion, UNEP reported. Investment in geothermal energy rose most rapidly, increasing 149 percent over 2007, to $2.2 billion. China drove much of the growth in investment in renewable sources, particularly in wind power. Despite booming investment in green energy, the renewable sector still only accounts for 6.2 percent of total power generating capacity.

Source:Yale Environment 360, 03.06.2009,     New York Times, 05.06.2009

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Worldbank: State and Trends of the Carbon Market 2009

Over the past year, the global economy has cooled significantly, a far cry from the boom just a year ago in various countries and across markets. At the same time, the scientific community communicated the heightened urgency of taking action on climate change. Policymakers at national, regional and international levels have put forward proposals to respond to the climate challenge.

The most concrete of these is the adopted EU Climate & Energy package (20% below 1990 levels by 2020), which guarantees a level of carbon market continuity beyond 2012. The EU package, along with proposals from the U.S. and Australia, tries to address the key issues of ambition, flexibility, scope and competitiveness. Taken together, the proposals tabled by the major industrialized countries do not match the aggregate level of Annex I ambition called for by the Intergovernmental Panel on Climate Change, or IPCC (25-40% reductions below 1990). Setting targets in line with the science will send the right market signal to stimulate greater cooperation with developing countries to scale up mitigation.

Download: Trends of the Carbon Market May 2009 Worldbank

Overall Market Grows
The overall carbon market continued to grow in 2008, reaching a total value transacted of about US$126 billion (€86 billion) at the end of the year, double its 2007 value (Table 1). ApproximatelyUS$92 billion (€63 billion) of this overall value is accounted for by transactions of allowances and derivatives under the EU Emissions Trading Scheme (EU ETS) for compliance, risk management, arbitrage, raising cash and profit-taking purposes. The second largest segment of the carbon market was the secondary market for Certified Emission Reductions (sCERs), which is a financial market
with spot, futures and options transactions in excess of US$26 billion, or €18 billion, representing a five-fold increase in both value and volume over 2007. These trades do not directly give rise to emission reductions unlike transactions in the primary market.

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

Source: Worldbank, 26.05.2009

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The Carbon Rating Agency Publishes the First Risk Assessment of a Programme of Activities

Programmatic CDM is one of the most important developments in the CDM world and is attracting the interests of the most farsighted players in this space.  It is being recognised as the natural bridge between the first and the second commitment period, and it has great potential to enable the move from measuring tons to constructively affecting the emission trends of developing countries. However, there has been a very slow uptake due to regulatory and design issues.

Better understanding of the challenges inherent in programmatic CDM (pCDM) development is crucial to promote the uptake of the small scale projects under this very promising category.

The Carbon Rating Agency (CRA) has developed a unique risk assessment methodology to evaluate pCDM, which combines a bottom-up analysis of project activities with the specific considerations applicable for specific pCDM risks. The CRA’s pCDM evaluation process provides a comprehensive risk assessment enabling the project participants to understand both the registration risk of the PoA as well as the performance risks of the first and subsequent CPAs.

CRA is leading the way in setting the analytical framework for government and private sector participants to manage a successful pCDM capability, by developing rigorous risk assessment tools that can assist developing economies to be at the forefront of the imminent market needs.

CRA relies on its experienced team of senior advisors including Christiana Figueres (Vice Chair of the Carbon Rating Agency). She has been instrumental in developing the thinking on pCDM for several years, and remains involved in its implementation. Having joined the company in early 2008, Christiana has provided crucial insights for the development of the pCDM evaluation methodology.

CUIDEMOS Mexico CFL programme of activities

The first PoA assessed under the CRA Programmatic evaluation tool was the CFL distribution Programme CUIDEMOS Mexico. The rating provides an overview of the PoA structure and presents its main challenges.

The evaluation considers the risks related to the distribution plan, the incentives presented to the distribution partners and the target population, the coordination of the educational campaigns to promote the exchange of light bulbs and the verification process for CFL installation.

The financial feasibility of the PoA is evaluated in light of current CER prices and the variations in the exchange rate (US$/€) resultant from the financial crisis. Modelling of the possible price scenarios provide a revised approach of the expected PoA returns.

The Mexican CFL rating report has already been recognised as a useful instrument by developers engaged in pCDM:

“The pCDM Rating is a useful instrument to enhance investor’s confidence in pCDM. It contributes to better understanding of how PoAs are structured and what kind of support is needed for the expansion of such activities.”

Phil Cohn Cool Nrg International

It also received the support from other market participants: “The CRA analysis is crucial to understand how the program is intended to work and helps the reader to build an opinion on the risks associated with the program. I can only encourage the CRA to keep on with their analytical effort in this domain.”

Dr.Klaus Oppermann  KfW Bankengruppe

The Carbon Rating Agency is already engaged in evaluating PoAs in Asia and Africa. As the pCDM market develops, CRA envisages an increased need for an independent overview of all the risks perceived in such emerging mechanisms. CRA initiative of developing a specific tool for pCDM evaluation will assist companies getting involved in next generation emission reductions and enhance credibility in this market.

For a sample of the Mexican CFL report, please contact the Carbon Rating Agency: info@carbonratingsagency.com

Source: MondoVisione, 27.05.2009

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A New Growth Industry: Carbon Fraud

As the U.S. Congress gears up to begin debate on a cap-and-trade system aimed at reducing emissions of carbon dioxide and other global warming gases, fraudsters are licking their lips at the multi-billion dollar potential for gaming the system.

As honey attracts bees, money draws thieves. Such is human nature. So if you create a new multi-billion dollar market, it won’t take long for the bad guys to find a way to get in on the game. The new game is called cap-and-trade and the new currency is the carbon credit. The federal budget put forth by the Obama administration earlier this year forecast revenues of $650 billion over 10 years from the sale of carbon credits. And worldwide, the global carbon trading market is expected to grow to $700 billion annually by 2013 and as much as $3 trillion by 2020 – a fraudster’s dream come true.                                                                                                                  Read orignal article by Kroll  Tendencias May 2009
Cap-and-trade is a market-based system that aims to decrease greenhouse gases in the atmosphere by capping the emissions of polluting companies and reducing those caps over time. If polluters produce emissions below their legal limit, they earn carbon credits which they can sell to companies that do not meet their targets. These credits can be bought and sold on regulated exchanges.

As the United States enters the uncharted waters of cap-and-trade, much of the debate will revolve around the impact of imposing such a quota system for polluters on the cost of doing business. Will cap-and-trade unfairly burden US industry? Will it lead to protectionist policies aimed at emerging markets where emissions are not likely to be capped for many years to come? These discussions are sure to overshadow the issue of fraud. But the artificial restraints of cap-and-trade are certain to propel a new generation of malefactors to quickly learn the art of concealing and trading  not stolen art or African ivory  but emissions credits.

While new in the US and Latin America, carbon markets have been operational elsewhere since 2005. London-based consultancy New Carbon Finance estimates that the global carbon trading market increased from $64 billion in 2007 to $116 billion in 2008, based mostly in the European Union. Globally, the carbon market could reach $669 billion by 2013, according to a report last month by market research firm SBI. That figure includes an estimated $117 billion generated by the proposed cap-and-trade system in the US. In Latin America, Mexican officials have already expressed interest in bringing large polluters, such as Pemex and Cemex, into a cap-and-trade market.

With such huge sums at stake, there is a growing recognition of the potential for fraud. A recent report by accounting firm Deloitte warns that fraud in carbon markets “may be especially prevalent during the early stages of regulation by those looking to take advantage of naive market participants.”

Although still in its infancy, a few of the possibilities for fraud in a cap-and-trade system include:

Pumping Up the Baseline – A baseline scenario is an estimate of greenhouse gas emissions that would occur in the absence of a proposed project. If a project, once completed, produces fewer emissions than its pre-established baseline, the difference can be sold for credits. This gives project owners an incentive to exaggerate a baseline in order to receive more credits than they deserve. In the absence of proper oversight, there is enormous potential for abuse.

Potemkin Factories – Jim Lane, Miami-based editor of Biofuels Digest, a daily online compendium of news stories and commentary on renewable energy projects around the globe, refers to a Potemkin factory as a project built specifically for the sake of generating emissions credits. Like the Soviet Union’s Potemkin villages built to show off a phony communal paradise to naïve foreigner visitors, new emissions reduction projects could be contrived in a similar manner. The Potemkin factory charge has been used in connection with plans to build refrigerant gas plants in China. Critics alleged that the plants, which produce the harmful greenhouse gas HFC23, could potentially generate more revenue from the sale of emissions credits than from their core business.

Outsmarting the Auditors – Clever crooks (think Enron) have been outsmarting even the most conscientious auditors for as long as they have been around. No matter how tight the controls are on carbon production and carbon reduction, the urge to cheat, especially with wildly fluctuating prices of carbon per ton, will be great. For example, highly sophisticated meters and other equipment will need to be installed at companies that claim to be sequestering carbon dioxide emissions. But, as one carbon credit expert recently observed, sometimes gaming the system is as easy as sending air through the meter instead of gas.

Good Old Corruption – Given the amount of money in play, there always remains the possibility that an agent whose job it is to monitor and verify emissions reductions could be bribed. It is worth noting that the auditors that are currently empowered to verify emissions reductions programs around the world are all certified by the United Nations. If the oil-for-food program is any guide, that kind of certification program is far from foolproof.

Controls to prevent such fraudulent activity have been debated and will continue to be discussed during and following the December 2009 Copenhagen Climate Conference, where environment ministers from 192 countries aim to craft an agreement to replace the United Nations Kyoto Protocol, which ushered in the era of cap-and-trade and will expire in 2012. Much practical experience has already been gained from the European Union Emission Trading Scheme, the world’s first operational cap-and-trade system, which went into effect in 2005. Nonetheless, the risks will remain.

While a simpler alternative to cap-and-trade, such as a carbon tax, would be less attractive to fraudsters, some form of carbon trading will likely come into effect in the US and eventually in parts of Latin America. Governments and companies wishing to play the game of carbon credits need to have their eyes open about the real risks of fraud. As Yuda Saydun, founder and CEO of Florida-based carbon operations consultancy ClimeCo, notes, “tight, frequent, ongoing monitoring will be fundamental to the integrity of any cap-and-trade system.”

Source: Kroll Tendencias May 2009 – The author: Shanti Salas (shsalas@kroll.com)  is an Associate Director with Kroll in Miami.

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How to develop Carbon Credits and make money

South Pole is a carbon asset manager that helps companies develop projects that create credits to trade on carbon trading markets. We talk to Renat Heuberger, a managing partner at South Pole, about the industry.

How aware are Asian companies about the carbon trading market?
The world of carbon is dividing into two parts — those with Kyoto targets and those without Kyoto targets. The countries that have Kyoto protocol targets at the moment are mainly OECD (Organisation for Economic Co-operation and Development) countries, and in Asia (ex-Australia), Japan is the only country that has such targets. As a result, only Japan has so far been acting as a buyer.

In other Asian countries, however, there are many companies that are active on the selling side of the carbon trading market. These include Korea, Thailand, Indonesia, Malaysia and of course China and India. The way they participate is by, for example, introducing CO2 reduction measures for their companies, whereby the resulting certificates are then sold. So the level of participation in carbon trading really depends on what country you come from. So Asia is aware of the market.                      Read orignal article by FinanceAsia.com

You help companies that are investing in projects that potentially qualify for emission reduction credits. How does that work?
South Pole is a carbon development and carbon trading company. We have offices staffed with technology experts all around the world. When we’re talking about selling to the carbon market (so I’m talking now about the countries outside of Japan) what these experts do is approach companies and identify what they could do to reduce emissions. Of course, we have a lot of experience in what works and what doesn’t. This is very important, because you need to take measures that reduce at least 50,000 tonnes of CO2 per year to make it worthwhile. If it’s lower than that, it gets tricky, it’s not really worth the effort so much to participate in carbon trading. So we are quite aware of what industries work for carbon trading and we approach companies in those industries and propose emission reduction measures.

We also have technology partners, for instance providers of bio-gas engines, generation equipment or boilers — technology that is directly or indirectly used for reducing emissions — and we introduce these technology providers to the companies.

So basically we come through the door and say: ‘Ok guys, we see an opportunity for emission reductions, and guess what, we have a solution. We can help you reduce the emissions and you can even make money from it.’

How long does this whole process take?
There are two parallel steps. The first part, which is to get the technology in place and start reducing the emissions, can take from six months up to several years. How long this takes is often linked to the question of how fast you can get your financing act together. In parallel, the process to register the project (so it is accepted as a clean development mechanism, or CDM, project) normally takes another year.

Just to be clear to our readers. Under the Kyoto Protocol, developed countries with quantitative emission limits can invest in carbon projects in developing countries to assist their sustainable development. Those projects are known as CDM projects. And those CDM projects produce tradable carbon credits called certified emission reductions or CERs. But there are also voluntary emission credits, or VERs, which are also called carbon offsets. In this case, a purchaser — typically a commercial firm — buys an emissions allowance to offset the carbon produced. This happens mainly for reputational purposes, and to contribute voluntarily in the fight against climate change. There is no formal market for VERs.

So, my question for you is, do you normally do projects that are CDMs, that will produce certified CERs? You don’t usually do VERs, do you?
We do both. Our focus is obviously on CERs because the market is much bigger, but the voluntary market is growing. The good thing is it doesn’t stop in 2012. On the voluntary market you can transact emission reductions for as long as you want. While on the compliance market, things may change once the political circumstances change.

We are the only carbon credit development company in the world which has an office in Taiwan. Taiwan doesn’t qualify for CDMs because its legal status with the United Nations is not clear due to its dispute with China and it is not under the Kyoto Protocol. So we are generating VERs in Taiwan, which is quite an interesting model as well.

Do you tell a company “I think you should produce CERs” or do they usually tell you what they would prefer to do?
It depends. There are certain industries, for instance the starch or the ethanol industry in Thailand, which are already aware that they can produce CERs by covering their waste-water lagoons and producing bio-gas. The starch industry is quite busy in Thailand and these companies are more or less aware of carbon trading and basically it comes down to what company they are comfortable doing business with to produce their CERs.

For other industries, it’s all quite new. There are sectors, such as the transport industry, or producers of energy efficient appliances, which only recently became aware that there is this possibility. So in these cases, it’s typically us going to them and saying: “You have this potential, why don’t you do this…?”

Ok, so once a project has CDM status and you’ve produced CERs, how are they then traded?
For CDMs, it’s like trading crude oil. The volume may be a bit smaller, but it’s the same mechanics. It mostly happens in Europe, because most of the buyers are in Europe. But every day you can check the current spot price. And so you develop your project, and you sell it at a good moment — when you believe the price is not going to move against you. It’s very classic trading techniques.

The difference is that when you trade crude oil, someone actually has the product. You have the one gallon of oil. With carbon trading, you don’t have a product. You just have a couple of bytes on a server at the United Nations. It’s an abstract commodity, if you will. But it can be traded.

Aside from it being abstract, the market is also slightly different because it is exposed to political decisions. If the political winds move in a way that makes them say, no one wants these products anymore, obviously the price will fall. But if the political winds blow in another way, and politicians say we’ve not done enough to prevent global warming and we need to reduce emissions even more, the pricing will go up. So my point is, this market is not only driven by fundamentals but also by political decisions, and that makes it unique from other commodity markets. That’s the CER market.

I think, however, it’s also important to note once again the difference between CERs and VERs because the VERs don’t have this 2012 deadline, which is when the Kyoto Protocol expires. They can sell indefinitely. The voluntary market is like selling any product. For this, you go out and talk to banks and airlines, anyone who can be interested in voluntarily offsetting and making a contribution to prevent global warming and promote sustainable development in the developing world.

So the CER market has this political element, which makes it different, while the VER market doesn’t have such a political element, but much more of a reputational element.

In December, world leaders are coming together in Copenhagen to try to reach a decision on how to, if at all, continue the Kyoto Protocol. Do you think there will be an agreement in Copenhagen in December?
In 2012, the Kyoto Protocol expires. Unfortunately, the world has yet to agree what will happen after that. This is unfortunate right now, because, as I mentioned, it takes about two years to take a project to market, and we’ve only got three years left to go with the Kyoto Protocol. So now, if you were to start a project, you’re only talking about one, maybe two, years of trading under Kyoto — but a typical CDM project could generate up to 21 years worth of credits. One or two years versus 21 years is obviously a big difference. So of course we hope that a resolution is reached in December in Copenhagen that calls for countries to extend their commitment beyond 2012.

At the moment we are hopeful that this will happen because of the new administration in the US. What challenges the whole thing is the financial crisis, which is changing the focus for politicians. Their priority is fighting the financial crisis rather than focusing on the Kyoto Protocol. So the climate issue goes on the back burner. But there are positive signs from the US and Europe. European leaders, for example, have said that if other countries participate they would aim for 30% less emissions by 2020.

Now, what would happen if it doesn’t go through? The reality is this market won’t collapse. The good news is it would not go away just because there is no agreement. What would happen is there would be regional markets. For example, in Australia, the new government has embarked on an emissions trading scheme that is likely to launch in 2010 or 2011. Once it’s online, it will include commitments that go way beyond 2012.

The Europeans have also committed that even if there is no agreement they would continue carbon trading. Of course, the big unknown is the price. No one knows what the price would be in those schemes.

The good thing about the Kyoto market is that there’s one set of rules that applies to everybody. But if nothing is passed in Copenhagen, what could emerge is that we have a series of domestic schemes — one plan in Australia, another in Europe, another in Canada — with everyone having different rules. And that complicates matters. So once you start developing projects you would have to do it according to the rules of the country in which you were going to sell the credits. This would be more complicated, but it could work.

What type of products does South Pole specialise in?
We specialise in renewable energy and energy efficiency. And we of course specialise in the highest quality products — Gold Standard credits — you could say that we dominate that market, as we think it adds far more value. What qualifies as Gold Standard? Mainly energy efficiency and renewable energy. So we have a lot of wind power, hydropower, thermal-power, solar power, bio-gas — these types of projects. There’s a lot of potential in Asia. For example, countries like Thailand and Malaysia have a lot of potential for bio-gas power. And wherever there are mountains — there is potential for hydropower, so Vietnam, Indonesia and China are good countries. So there’s room to grow.

Tell us a little more about the Gold Standard carbon credit that South Pole created.
The point of these projects is to reduce emissions as the main aim is to protect the planet against global warming. But, you get there in different ways. You may have a project where you have a landfill site and you burn the landfill gas. That is good for reducing emissions, but that’s it. There’s no other benefit in doing this. The “only” benefit is to prevent climate change.

Now, there is a group of NGOs, such as WWF and the like, who said: ‘If we do this carbon trading mechanism, we should actually distinguish between the projects that only reduce climate gases and those that reduce climate gases and provide additional benefit to their host country.” We agreed, and contributed to make the Gold Standard happen.

The Gold Standard is given to projects that reduce carbon gases but also have social benefits. Some examples would be employment generation, or other positive impacts on air pollution, or a project that also reduces water pollution, and so on. The focus of the Gold Standard is projects that have a community element — so the money doesn’t just go to the industry but to the community as well. A very good example is rural electrification, which brings clean energy to people in the countryside.

What do you say to people when they are sceptical about CO2 emissions, arguing that it’s not necessary, or whatever their criticism may be? Do you hear criticisms? Or by the time they come to you, are they already convinced that they need to do something?
Well there are two types of critics. Both of them are clearly wrong, I would say. The first type of critic is still sceptical about climate change and the question of whether the problem is man-made. If you’ve got hundreds of scientists agreeing to the fact that the fast worsening of climate change is man-made, it’s amazing there are still people questioning this. There’s just an overwhelming amount of evidence, and it’s just very, very hard to find convincing evidence to the contrary. But there will always be people who will say crazy things.

But even if there wasn’t the issue of climate change, it still makes sense to reduce CO2 emissions, because when you do that you typically save fuel. And the fuel we use — such as crude oil — is going to run out at some point. So there’s anyway value to reducing our use of it.

The second set of critics say that carbon trading is not a good thing — they argue it’s not sound. This is clearly wrong too. Because nations have set up a very extensive set of compliance rules — that’s why it takes more than one year to complete a project — and the process is extremely conservative, in the way we prove and calculate and certify it by an independent entity.

Plus there are lots of economic arguments for carbon trading. Money incentivises people to reduce emissions. If a European company finds it difficult to reduce their emissions any further, it makes sense that they finance a measure in Asia where it can be less expensive to reduce emissions. That’s what climate trading is all about. It leads to a good allocation of resources so that we can protect the planet in the most efficient manner.

Finally, another important point for Asia (and also the rest of the world) is that most of the Asian companies, who participate in carbon trading, actually end up making money doing it (and I’m not talking about trading here, I’m talking about the process). Because what is an emission? It’s waste, it’s inefficiency. And it does intuitively make sense to reduce your inefficiencies.

Source:FinanceAsia, 07.05.2009

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S&P launches US Carbon efficient index

Standard & Poor’s, the world’s leading index provider, today announced the launch of the first in a series of global low carbon indices to meet the growing investor demands for environmentally focused indices.
The S&P U.S. Carbon Efficient Index will measure the performance of large cap U.S. companies with relatively low carbon emissions, while seeking to closely track the return of the S&P 500.

The new Index, which is part of the Standard & Poor’s global thematic index series, provides a benchmark to the market, as represented by the S&P 500, while allowing investors to create financial products that seek to gain exposure from a more environmentally efficient perspective.

“Organizations around the world are paying greater attention to the impact of greenhouse gases on our climate, as increasingly more investors consider carbon efficiency as an important investment theme,” said David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poor’s Index Services.

“Standard & Poor’s is the first independent index provider to offer a broad U.S. market index with an environmental focus, reinforcing our position as the premier provider of global thematic focused indices.” With the addition of the S&P US Carbon Efficient Index to the global thematic family, the series will now cover such green themes as Water, Forestry, Eco and Carbon efficiency.

To reflect its carbon efficiency, the Index is comprised of constituents of the S&P 500 that have a relatively low Carbon Footprint, as calculated by Trucost Plc. Trucost, the environmental data organization quantifies the environmental impact of over 4,500 companies across different sectors and geographies. Trucost calculates the carbon intensity of companies in the S&P U.S. Carbon Efficient Index by researching and standardizing publicly disclosed information and engaging directly with companies to verify its calculations on an annual basis.

Carbon Footprint is calculated as the company’s annual greenhouse gas emissions assessment (expressed as tons of carbon dioxide equivalent) divided by annual revenue.

“With the world’s most st comprehensive database of corporate carbon emissions, Trucost is uniquely able to provide Standard & Poor’s with information to significantly reduce the carbon exposure of its Index,” said Simon Thomas, Chief Executive of Trucost Plc.

The Index is rebalanced quarterly at which point the stocks in the S&P 500 are ranked by their Carbon Footprint. The 100 equities with the highest Carbon Footprints, whose aggregate exclusion does not reduce any individual GICS(i) sector weight of the S&P 500 by more than 50%, are removed.

Historically, the choice to maintain at least 50% of each GICS sector weight provided the greatest reduction in carbon footprint while closely tracking the return of the S&P 500. Standard & Poor’s also excludes companies, if any, which have not yet been assigned a Carbon Footprint by Trucost.

Through 2008, the average annual Carbon Footprint of the S&P U.S. Carbon Efficient Index was 48% lower than that of the S&P 500.

Source: Standard & Poor’s, 10.03.2009

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