ClimateChangeExplained

Two of the biggest voluntary carbon offset standards bodies – the global Voluntary Carbon Standard and the US-based Chicago Climate Exchange – are fuelling a revolt against the offset scheme set up under Kyoto to generate carbon abatement projects in developing countries.

http://www.climatechangecorp.com/content.asp?contentid=5862

Two of the biggest voluntary carbon offset standards bodies – the global Voluntary Carbon Standard and the US-based Chicago Climate Exchange – are fuelling a revolt against the offset scheme set up under Kyoto to generate carbon abatement projects in developing countries. The organisations tell ClimateChangeCorp that they are willing to consider carbon credits rejected by the scheme, known as the Clean Development Mechanism (CDM), for sale under their own standard.

David Antonioli, recently appointed head of the Voluntary Carbon Standard (VCS), criticises the CDM for “unfairly” dismissing offset projects that fall outside the boundaries of the scheme’s narrow rules.

On top of this, the CDM has come under fire from carbon offset project developers, who last month set up a pressure group, called the Project Developers Forum, to voice their discontent about the way their proposals are handled. The CDM executive board, made up of an international panel of experts, have the final word on whether to award carbon credits under Kyoto. The board currently rejects around 10% of offset projects under deliberation, while project assessors, the gatekeepers to the board, automatically reject many more for failing to meet CDM rules.

Along with CDM rules, carbon offset project developers criticise the board’s tactics, which they say include changing regulations at short notice in order to disqualify projects, and rejecting projects on minute details that project assessors claim are immaterial.

According to Martin Enderlin, leader of the Project Developers Forum pressure group and an ex-member of the CDM board, the CDM’s approach to project approval has been “paranoid” for about a year, ever since carbon-offsetting cowboys began to be exposed in the media and by independent studies. The CDM executive board is not shy of penalising its stakeholders – project assessors are also feeling the pressure after one of the biggest CDM auditing firms, Det Norske Veritas, was suspended last month for failing to comply with internal management rules.

Enderlin says that the new super-cautious attitude of the board is to find each project “guilty until proven innocent”, a process that currently takes around a year to complete. He accuses the CDM board members of lacking the expertise to credibly contest project assessors and of playing a “political game” through the approvals process and with their continuous rule-making. “I’ve never seen a standard evolve as much as the CDM standard,” he says.

This month’s international climate negotiations in Poznan, Poland, brought about a host of recommendations to the CDM executive board on how to tidy up its act. Much of the emphasis was on the need for the board to be more transparent and democratic in its decision making process.

The ultimate fear of project developers is that the current decision-making structure of the CDM may be too inefficient to persuade negotiators to bring the scheme into the post-2012 climate agreement – a decision which could leave them creditless and out of pocket.

At the Project Developers Forum launch event, CDM board members retaliated by voicing their own doubts about the “environmental integrity” of the project developers.

Voluntary markets: A solution or sidetrack?

The culture of mistrust between the CDM board and project developers is being compounded by the voluntary offset sector’s readiness to take rejected Kyoto credits off the hands of developers.

Enderlin warns that selling rejected credits on the voluntary markets would be “extremely risky” and would both undermine the CDM’s position and increase its paranoia about carbon cowboy developers.

Whilst some developers, such as global offset developer Ecosecurities, deny trading rejected Kyoto credits, others, like Trading Carbon, based in London, say they are happy to sell credits that have failed to meet the criteria of the CDM board, as long as they are from “high quality” offsetting projects. These would include projects that have failed bureaucratic CDM rules on application time schedules, for example, but not those failing because of a lack of carbon abatement “additionality” – in other words, because the carbon abatement in question doesn’t really need the incentive of credits to go ahead.

Rafael Marques, senior vice president of the Chicago Climate Exchange (CCX), the first cap-and-trade system to be set up in North America, and representing a fifth of companies in Dow 30 Index, tells ClimateChangeCorp: “The CCX is willing to review all projects submitted to the programme, regardless of decision by the CDM”. He goes on to explain that the “CCX is a separate system, with its own set of rules and approval criteria”.

David Antonioli of the VCS, which was set up by project developers in partnership with the Climate Group, says that voluntary standards need to reserve the right to take on failed CDM projects that may have been rejected on immaterial grounds, or – as is the case with forestry projects – were simply “too innovative” to be covered by CDM rules.

However, the voluntary market has yet to prove its worth. Voluntary credits rely heavily on corporate and individual buyers of carbon offsets. On the Chicago exchange, credits currently trade at around a dollar and a half per tonne of abated carbon, and the VCS has yet to set up its first credit registry.

Meanwhile, carbon credits are trading on the EU Emissions Trading Scheme for around €14 per tonne, as Kyoto-compliant countries buy up vast quantities of credits generated under the CDM in order to meet their 2012 emissions targets.

“…(Chicago Climate Futures Exchange) CCFE Members yesterday traded forty-two CFI-US futures contracts, representing 42,000 metric tons of carbon dioxide allowances. These trades mark the first exchangebased transactions for delivery of emission allowances that would be usable for compliance if the U.S. adopts a mandatory federal greenhouse gas cap-and-trade program…”

“Our customers requested a tool for hedging U.S. carbon policy and allowance prices. Listing these new contract expirations on the same day President–elect Obama crisply repeated his intention to implement a carbon cap-and-trade program further validates the astuteness of our Member’s in anticipating policy developments.”

“…Futures contracts that expire in December 2013, 2014 and 2015 were traded, with prices ranging from $11.75 to $15.00 per metric ton of carbon dioxide…”

http://www.mondovisione.com/index.cfm?section=news&action=detail&id=79014 

CCFE’s Carbon Financial Instrument®- U.S. Allowance futures (CFI®-US) contract offers the first tool for directly hedging exposure to possible future U.S. carbon allowance prices, as well as whether and when a U.S. federal greenhouse gas emission reduction mandate is established.

Chicago Climate Futures Exchange® (CCFE®), a Commodity Futures Trading Commission (CFTC) Designated Contract Market, announces the successful listing of new Carbon Financial Instrument-U.S. Allowance futures (CFI-US) for CFI futures contract expirations occurring 2013 and later, as an enhancement to its CFI futures contract.

The CFI-US calls for delivery of greenhouse gas emission allowances that would be usable for compliance under a mandatory federal U.S. cap-and-trade program. Delivery of other specified mandatory CO2 allowances would be required if a U.S. federal mandatory program is not enacted when contracts expire in 2013 and later.

CCFE Members yesterday traded forty-two CFI-US futures contracts, representing 42,000 metric tons of carbon dioxide allowances. These trades mark the first exchangebased transactions for delivery of emission allowances that would be usable for compliance if the U.S. adopts a mandatory federal greenhouse gas cap-and-trade program.

Futures contracts that expire in December 2013, 2014 and 2015 were traded, with prices ranging from $11.75 to $15.00 per metric ton of carbon dioxide.

Shell Energy North America, a customer of NewEdge Group, was a party to the first-ever exchange transaction in this new product.

“As a leader in emissions credits and renewable energy marketing and trading, we are very pleased to support the launch of the Chicago Climate Futures Exchange’s federally mandated U.S. Greenhouse Gas allowance product and to be a counterparty to the first trade of this product on the exchange,” said Mark Quartermain, president of Shell Energy North America. “Our participation in the CCFE complements Shell’s commitment to provide responsible energy solutions that reduce climate change while maintaining a diverse network of supply that helps meet North America’s and the world’s growing energy needs. This diverse supply includes renewable energy and future fuels in addition to traditional energy sources, such as natural gas and crude oil,” Quartermain explained.

A diverse group of industrial and financial players were involved in the opening day of CCFE CFI-US futures transactions. Some of the financials included C-Quest Capital LLC, Digilog Global Environmental Master Fund, Environmental Capital Management, Green Fund LLC, Infinium Capital Management LLC and Royal Bank of Canada.

Dr. Richard L. Sandor, Chairman and CEO of Chicago Climate Exchange said, “Our customers requested a tool for hedging U.S. carbon policy and allowance prices. Listing these new contract expirations on the same day President–elect Obama crisply repeated his intention to implement a carbon cap-and-trade program further validates the astuteness of our Member’s in anticipating policy developments.”

Ken Newcombe, CEO of C-Quest Capital, LLC in Washington DC stated, “We are thrilled to be trading on the CCFE and supporting the pioneering efforts of the Chicago Climate Exchange. The new contract provides a very important price point not only for industry, but those who will provide offsets under the U.S. mandated carbon market.”

“The European experience confirms much of what has been learned from similar U.S. systems for other emissions, namely, that cap-and-trade systems can be constructed, that markets emerge to facilitate trading, that emissions are reduced efficiently, and that the effects on affected industries are less than predicted,”

“…The study found that the most controversial aspect of the European program was how to allocate the permitted emissions levels to different producers. Initial free allocation of allowances, they found, was the necessary price for gaining political acceptance, as it has been in U.S. systems…”

 http://www.carbonyatra.com/news_detail.php?id=2363

Researchers at MIT’s Center for Energy and Environmental Policy Research have produced a report concerning key design issues of proposed “cap-and-trade” programs that are under consideration in the United States as a way of curbing greenhouse gas emissions.

The first contribution of the three-part study found that, based on an examination of the European Union’s system and of similar U.S. programs for other emissions, such a program can indeed be effective in reducing emissions without having a significant economic impact.

“The European experience confirms much of what has been learned from similar U.S. systems for other emissions, namely, that cap-and-trade systems can be constructed, that markets emerge to facilitate trading, that emissions are reduced efficiently, and that the effects on affected industries are less than predicted,” said A. Denny Ellerman, the study’s lead author and a senior lecturer in the MIT Sloan School of Management.

The study found that the most controversial aspect of the European program was how to allocate the permitted emissions levels to different producers. Initial free allocation of allowances, they found, was the necessary price for gaining political acceptance, as it has been in U.S. systems. Over time, the clearly established trend in the E.U. is to phase out the free allocation of permits in favor of auctioning them.

The second part of the report looked at mechanisms that can be used to control the costs that will be imposed on power producers as a result of implementing a cap-and-trade system. Several alternatives were analyzed, including such things as a “safety valve,” banking and borrowing of allowances, and renewable portfolio standards. Rather than a single best choice, the study found that different mechanisms work best for addressing uncertainties associated with long-term, short-term and start-up costs.

The report’s third section examined the relationship between state and federal regulations on greenhouse gas emissions. With no federal policy now in place, many states are moving forward with their own initiatives, which range from commitments to reduce greenhouse gases to a regional, multi-state cap-and-trade program slated to begin in 2009.

While federal legislation is expected in the next few years, it is unclear how it will define the relationship between a federal cap-and-trade program and other state or regional initiatives. The report analyzes the economic and environmental impacts of the range of possible interactions between the federal program and state or regional programs.

Differences in the abatement costs among states can create economic inefficiencies that make achievement of the climate goal more costly than it need be. This inefficiency can be avoided by either federal preemption of duplicative state programs, the authors found, or by a “carve out” of more demanding state programs from the federal cap with linkage.

“…NYSE Euronext (NYX) is eyeing a move into emissions trading and could create its own clearinghouse for U.S. futures, according to a senior executive…”

“…Nasdaq OMX recently announced it will develop standardized products for European and U.S. clients looking to manage and trade allowances for emissions such as carbon dioxide and sulfur dioxide. Eurex, the derivatives arm of Deutsche Borse, and the Green Exchange unit of CME are also active in the space…”

http://www.easybourse.com/bourse-actualite/nyse-euronext/interview-emissions-clearing-in-nyse-euronext-futures-plan-US6294911010-562386

The twin moves are part of a wider expansion in derivatives by the transatlantic exchange operator amid the intensifying competition faced by its equities operations.
The owner of the New York Stock Exchange picked up London-based Liffe, the world’s third-largest futures exchange, as part of this year’s merger with Paris-based Euronext.
“We’ve transformed into a global company,” said Hugh Freedberg, chief executive of Liffe and head of the parent company’s global derivatives operation.
While NYSE prized the potential of the derivatives business, it is slowing growth in futures that has weighed on its stock price, alongside uncertainty over equity volumes after the recent volatility-driven spike.
NYSE Euronext shares were down 69% year-to-date at the close of trading Thursday. The stock was recently down 6% at $25.37.
It has underperformed the three larger global exchange groups by market value – CME Group Inc. (CME), Deutsche Boerse AG (DB1.XE) and Hong Kong Exchange and Clearing (0388.HK). Archrival Nasdaq OMX Group Inc. (NDAQ), which ranks sixth, is down 51% year-to-date.
NYSE Euronext Chief Executive Duncan Niederauer has introduced a raft of initiatives since taking the helm from John Thain last December, broadening its product and geographical focus and using pricing and technology to stem share losses in equities.
It is still derivatives that retain the greatest promise, with Liffe expected to launch the first clearing service for credit-default swaps in Europe next month, while U.S. regulators grapple with a similar domestic offering.
“We’re not going to knee-jerk our strategy,” said Freedberg in an interview with Dow Jones Newswires on the sidelines of the Futures Industry Association conference in Chicago this week.
Freedberg insists investors “understand the story,” and said he did not feel under pressure to change it despite the dismal performance of the stock, and the sector.
Innovation At A Premium Nevertheless, the pressure remains on Liffe to deliver and differentiate its offering. Among exchanges, it has come in for particular criticism over its past record for innovation and product development.
“It leaves a lot to be desired,” said Tom Callahan, the former Merrill Lynch executive hired to head the nascent NYSE Liffe unit. While he was diplomatically talking of innovation across the industry rather than Liffe specifically, the new U.S. business is seeking to break the mold in a number of ways.
For starters, it is looking to seed the U.S. business through an array of partnerships that could see as much as 49% of its equity taken by banks and other dealers.
Callahan said all options are open in terms of collaboration, but product design will be a key issue if NYSE Liffe is to challenge the 98% share of U.S. futures trades held by CME.
The unit started with gold and silver futures acquired from CME earlier this year, with volumes running at around 30,000 contracts a day.
NYSE Liffe will switch to the Liffe trading platform with upgraded technology allowing it to handle the 4 million contracts handled daily by its European sibling.
Callahan admits it will be the second quarter of 2009 before additional products are rolled out in the U.S., focused on avoiding replicating contracts available at other exchanges.
Equity-related products such as some built around exchange-traded funds are expected to provide the focus, reflecting the strength of its parents in the cash markets.
It is also likely to try and roll out some of its European product suite in the U.S., including the successful BClear system for processing over-the-counter products.
Freedberg said CDS and wider OTC markets will be a focus for growth over the next five years, but reiterated that Liffe will not be entering the energy derivatives market, which he sees as well served.
The nascent emissions-trading market on both sides of the Atlantic is, however, one in which Freedberg sees opportunities.
Nasdaq OMX recently announced it will develop standardized products for European and U.S. clients looking to manage and trade allowances for emissions such as carbon dioxide and sulfur dioxide. Eurex, the derivatives arm of Deutsche Borse, and the Green Exchange unit of CME are also active in the space.
To serve an expanded product suite in the U.S., Freedberg said a wholly owned clearinghouse is one option under consideration. From next March, NYSE Liffe will clear through the Options Clearing Corp. for an unspecified period.
“We aim to own more of the clearing chain,” said Freedberg, who has already brought more of the clearing function of its European arm in-house, renegotiating its existing partnership with LCH.Clearnet.
- By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com