issue 10.0, New Values Newsletter

To read the English version of the New Values Newsletter follow the link below.

In this issue:

1. EEX predicts annual emissions trading of between 1 and 6 billion tons CO2
A recent study conducted among 200 international companies by the German Electricity Exchange (EEX) provides exciting indications of future emission prices and the way that trading will be conducted.

The survey indicates that of the c. 2.2 billion tons of CO2 emission rights to be allocated in 2005, between 6 and 11 percent will be traded. By 2008 this will have risen to between 14 and 33 percent. With an average price of € 10 per ton, this means that trading in 2008 will be worth between € 1 billion and € 2 billion. After 2008 this will increase to somewhere between € 3 billion and € 6 billion.

New Values finds these figures impressive, but does not set its own expectations higher than 10% of the allocated rights. After all, the shortage in 2005 will not be very large. And from 2008 onwards the majority of the allocated rights will be used to cover emissions. We regard an average emissions reduction of at least 30% as highly ambitious; we simply don’t yet know the strategic behaviour of companies on the emissions market. We do however expect that, in addition to the emission rights for compliance, other factors such as investment trading, risk management, the purchase of emission rights for the future and the credits from CDM and JI (international Kyoto trading) may well cause considerable growth in the trading volume.

Another question dealt with in the EEX study was whether companies will prefer to trade bilaterally or on an organized basis. It is expected that from 2005 onwards c. 30% will be traded through the spot market and 25% through the futures market. The trading volume through organized markets will then rise strongly, however.

This expectation confirms the need for trading platforms such as New Values and reinforces our conviction that a trading platform can only work if it is developed in close consultation with the clients: what do you want to trade, when and under what conditions? New Values is preparing for all options.

2. New Values news

CertiChange fully operational
Since 30 July of this year active trading in Certificates of Origin has been underway on the New Values platform CertiChange. The marketplace is fully operational. This means that traders are not only supported regarding supply and demand, but that transactions are also fully handled at the administrative, legal and financial levels, including payment and delivery of the certificates.

If you are interested in trading via CertiChange then you can participate in our trial trading sessions in which trading situations are simulated. This lets you experience CertiChange, and what it has to offer, on an obligation-free basis.
(Nieuwe alinea?) Moreover, you can take part in specially organized trading days. A wide range of traders are present on the platform during one of these special days, meaning there is plenty of activity. You need to be a member of CertiChange in order to participate in a trading day.

If you are interested in trial trading or a trading day, then contact Axel Posthumus on axel.posthumus@newvalues.net +31 (06) 29015584. No precise dates for the events have yet been announced.

Would you like to register with CertiChange right away? Then use the registration form at www.certichange.com

Report on Climex workshop, 31 August
On 31 August of this year New Values organized the first in a series of Climex workshops. The Environment and Energy Consultant Jos Cozijnsen got the ball rolling at the well-attended meeting. He indicated the expected size of the CO2 market in Europe on the basis of allocation plans and the Kyoto agreements. Making reference to (historical) price formation, a clear impression was given of the possible volume of future trading activities.

Then two representatives of the New Values partners Baker & McKenzie and PwC took a deeper look at the legal and fiscal context of emissions trading. Boris van Beek of Baker & McKenzie clarified the national and international developments in the field of legislation and standard contracts. The differences between spot market contracts and derivatives contracts were also examined and discussed in depth.

It is becoming clear that the differences between the tax systems in the EU members states may lead to confusion in VAT payments made on international transactions. It is advisable to consider this when deciding whether to sell emission rights to a foreign partner.

Lastly, a trial trading session was conducted in which all participants tried their hand on the trading platform.

Climex is expected to become operational with futures trading in the 2nd half of October 2004. Spot contracts will be added on 28 February 2005.

Have your say
Did you participate in the workshop and would you like to say something more about, or to discuss, a specific subject? Then post your reaction on www.newvalues.net. Even if you weren’t at the workshop, you can of course still take part in the discussion.

3. Environment back on the agenda

With Russia promising a faster ratification of the Kyoto treaty in exchange for membership of the WTO, the United States is now the big player still not on board. However, a major American government study of climate change has recently been presented and this could bring a change in the government’s thinking. According to the report the emission of CO2 and other gases is the only acceptable explanation for the greenhouse effect. The study, entitled ‘Our Changing Planet’, warns of the economic effects of climate change. So far the White House has remained studiously silent.

It can be expected that Bush will take little heed of the conclusions drawn in the report. After all, he has placed his re-election and the terrorism issue higher on the agenda than the environment. So all eyes are on Putin, who will need to keep his promise at the EU-Russia summit in The Hague on 11 November. Secretary of State Van Geel urgently requires the Russian commitment in order to make proposals for future climate policy during the Climate Summit in Buenos Aires.

Preliminary consultations will take place between the EU and Russia on 20 September, led by Minister Bot in New York. Putin will also be reminded of the agreement at the mini-summit between Putin, Chirac and Schroeder on 1 September.

Source: www.fd.nl

4. Jos Cozijnsen’s column

Dutch government and chemical industry take panic measures with opt-out request: “too fast, unjust and unwise”
The parliamentary group of the PvdA is set to give Minister Brinkhorst a tough time: invoking the opt-out rule, he is proposing that chemical companies can be excluded from the emissions trading system. Or at least if the European Commission accepts this request. Brinkhorst and the Dutch chemical industry (VNCI) are concerned that differences in the application of emissions trading may arise: in the Netherlands, Ireland, Austria, Belgium and Denmark the chemical sector is subject to emissions trading, while in Germany and England it is subject only in part. The draft plans of Italy and France completely exclude the chemical sector from emissions trading; the European Commission will issue its verdict on these plans in October.
With this step, the Netherlands is adopting the panic behaviour that the chemical industry has been exhibiting in the EU for a while now. If we are to believe the VNCI and the VNO (the employers’ association), the coming system of emission ceilings and trading will be the coup de grace for the chemical sector. This is strange, because the Dutch allocation actually allows for growth. The fact that the chemical industry is suffering from the economic downturn is another issue. During his visit to the Netherlands at the start of September, Runge-Metzger of the European Commission advised companies against using the option of staying outside the emissions trading system.
This is indeed panic behaviour and it erects new barriers to the introduction of the system and the implementation of Kyoto. A large number of factors clearly indicate that such a step is too fast, unjust and unwise.

• The European Commission still has to approve the French and Italian plans and deal with variations in interpretation; the Netherlands has already requested that the Commission ensure that allocation within the EU is not overly disparate; this was the condition for shifting the total emission ceiling in the National Allocation Plan from 115 to 112 Mton/yr.
• On 10 August the VNO wrote a letter to the Commission asking it to consider this when assessing the plans of Italy and France; at the start of August the VNCI asked the Commission to create an opt-out provision for companies that can convincingly show that emissions trading threatens to put them in an uncompetitive position; the German chemical sector (VCI) has also made a similar request.
• One can ask whether chemical companies will actually be disadvantaged by inclusion in the emissions trading system. The trading reduces the cost of CO2. Companies not permitted to take part in trading will also be subject to environmental measures, compelling them to invest and possibly to lose more money; (petro)chemical companies such as Shell, Esso, GE Plastics and Air Liquide are now preparing at the international level for emissions trading.
• This is an issue of harmonization and competition within the EU: this is indeed important, but the level playing field problems originate in the USA and the Far East, which has nothing to do with EU emissions trading harmonization.
• The Netherlands is currently the chairman of the European Union: it should in fact be asking the European Commission for harmonization and not for one-sided exceptions. In July I wrote in my column “Keeping track of Europe” that the government should explain to members of parliament how the EU Internal Market works; it seems the government should take this lesson to heart itself, too.
• The opt-out provision is not intended as a let-off: according to the Emissions Trading Directive, companies granted an opt-out must nonetheless subject themselves to the same monitoring requirements, emission reductions and penalty systems. Moreover, the opt-out provision is valid only until the end of 2007. This means that from 2008 onwards the chemical companies will be faced with stricter emission obligations, without having gained any previous experience of emissions trading.

Such panic tactics therefore serve no clear general aim. A maximally harmonized EU emissions trading system is not brought closer by this approach, but in fact rendered more distant.

5. Diary

International Congress on EU Climate Change Policy
On 17 and 18 September the University of Leuven is organizing an international congress with the fine title: "The Challenge of Implementing New Regulatory Initiatives: State of Affairs and Critical Issues of EU Climate Change Policy”. The congress will centre around the issue of whether market-based measures will be successful in reaching the environmental goals set by governments.

For more information and to register visit: http://www.law.kuleuven.ac.be/imer/nieuws.html

Eighth annual EMA Fall Meeting and International Conference
From 19 to 22 September the Emissions Marketing Association is organizing an international conference in Toronto, Canada. Workshops are being given on, among other themes, Risk Management for traders in emission rights and trading in emission rights in general.

For more information and to register visit: http://www.emissions.org/conferences/fallconference04

Fourth annual Workshop on Greenhouse Gas Emissions Trading
On 4 and 5 October the International Energy Agency and the International Emissions Trading Association are organizing the fourth annual Workshop on Greenhouse Gas Emission Trading. The gathering will take place in Paris and is an excellent opportunity for participants to take a close look at the market developments.

More information: http://www.iea.org/Textbase/work/workshopdetail.asp?id=193

6. Glossary

CO2 price index
Members of the International Emissions Trading Organisation (IETA) are currently investigating whether the EU Emissions Trading Scheme (ETS) needs a price index which will set the prices of emission rights when trading starts in January 2005. And if so, then what form this should take.

A price index is an essential element of a lively market because it ensures transparency. In addition it forms a natural financial point of reference. Indeed, it is often used by companies in conjunction with their accounting, a procedure known as 'marking to market'.

The energy sector already has a network of price indexes which ensures that prices are transparent and that the market functions. This took some 30 years to come about, however. The crude oil market, for instance, grew from a ‘secret’ market dominated by a few traders with ‘special’ contacts into a dizzyingly complex game involving futures, swaps and physical and forward trading. But this oil trade is still based on a few simple price indexes.

The keyword is thus evolution. And this is precisely the problem facing the IETA working group: isn’t January to early to introduce a price index? Price indexes may ensure transparency, but they also need market liquidity if they are really to work. If there is no trade, then the prices will hardly change. Liquidity is not guaranteed on the EU ETS right from the start because many companies are simply not yet ready for trading.

Another question is what the prices should be based on. One suggestion is to base them on emissions deals that were already concluded before January. But what if these are too few and too far apart, and possibly reflect distorted prices because one big player wanted it that way?

With the lack of a reliable and liquid market, the best solution would seem to be a market consensus on a price. In order to achieve this a large number of traders need to be asked in order to get a good reflection of the market. Running ahead of events by fixing a price index would, in any event, currently seem a case of too much too soon.

Source: Energy Argus

What do you think about the setting of a CO2 price index? You can give us your opinion by responding to this newsletter.