issue 11.0, New Values Newsletter

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

In this issue:

1. Russian Kyoto decision boosts emissions market

If you are a regular reader of this newsletter then Russia’s decision to ratify the protocol will have come as no surprise. Indeed, we have been keeping close track of these developments. This is because once Russian ratification is complete, the implementation of the Kyoto Protocol will lead to international regulations for climate policy and emissions trading. Moreover, recent developments have reduced uncertainties about CO2 ceilings and increased confidence in the emissions market.

But how will the emissions market be affected now that Russia is on board? To begin with, emission rights that Russian retains from its Kyoto budget will not become available until after 2008. By then Russia must have set up a verified emissions monitoring and registration system. This involves a great deal of work. So it will have no effect on the EU emissions market which is due to start in 2005.

By the end of 2004 the Russian government aims to present proposals on how Russia can take part in Joint Implementation and a plan for a national emissions trading system. Even though Russia may have more leeway than the EU for allocation of emissions to companies, one can expect that environmental and CO2 regulations will be imposed on companies in such sectors as energy, aluminium and paper production in order to modernize business practices and to improve efficiency.

It is therefore quite possible that these sectors could be linked to the EU emissions market. The EU and Russia will also need to consult on the conditions under which governments will exchange emission rights (AAUs) from 2008 onwards. Russia may well try to sell future rights (forwards) and to receive credits for early reductions in projects before 2008.

What are the other consequences?

• Liquidity: the appearance on the market of Russian emissions rights from 2008 onwards will increase the liquidity and the possibility of buying extra rights and banking them for later. The banking option will enable stricter emission ceilings in the future.
• Emission prices: the appearance of Russian rights will also exert a downward effect on the price of emission rights. But since Russia needs a sustainable cash flow, it is not expected that all available rights will be dumped on the market at once. A precise price effect cannot be defined but prices may end up either above or below the level of € 5 per ton; the current level is between € 8 and € 9 per ton.
• Market value: Pointcarbon has calculated that if Russia does indeed take a strategic approach to available emission rights and retains 50% of the remaining emission rights, then € 10 billion could be earned in the period 2008-2012. Pointcarbon estimates the value of the actual EU emission rights at € 12 billion in 2007. But it is an open question whether Russia will in fact be able to meet the verification requirements on time and whether it can sell so much.

2. New Values News

Climex on the path to international transactions
The preparations for trading in CO2 emission rights currently being taken in the Netherlands are based on a European directive. And although this directive is being implemented separately by the members states of the European Union, international transactions are permitted. Climex thus aims to provide a platform on which these international transactions can be properly realized, including administrative, legal and financial processing.

In order to achieve this the trading platform must comply not only with the Dutch emission rights registers, but also with foreign registers. If the seller in a transaction is a German organization, for instance, then the transfer of emission rights must be reported to the German register. Via a central European transaction register it is then ensured that the emission rights are credited to the account of, for instance, a Dutch buyer.

In view of the international nature of emissions trading, the German emissions authority DEHSt organized an information meeting for interested market players on 15 September this year. Representatives of New Values were also present at this event. During the meeting the status and planned development of the electronic register were indicated, the projected organization of the German and French emissions authorities were described, the results of an extended survey of the plans and wishes of both German and French market players were set out and various trading platforms were given the opportunity to present themselves.

Besides the (predictable) cultural differences, it was especially interesting for New Values to hear which facilities are offered by the German and French trading platforms. The French intend to develop a large number of standard facilities which can strongly simplify the organization and monitoring procedures for trading platforms and market players. They are developing a reconciliation procedure and the option for players to hold several accounts while also using a single central intermediate account.

The Germans, in contrast, plan to develop a strict security procedure and take a very helpful attitude when it comes to joint development of an electronic link. All in all, these are facilities which will greatly benefit day-to-day use!

During the afternoon, further possibilities were explored in greater depth in a number of parallel sessions. In particular, the differences in the organization of the German and French emissions authorities prompted discussion that often went into considerable detail. Neither of the two countries has planned a demonstration period, meaning that the Netherlands is the only European country to have already gained experience in this way. During the breaks we took the opportunity to make many contacts. In the coming months we will use these contacts to further our goal: making Climex a European platform for transactions in emission rights.

3. The NEa demonstration: an instructive experience

Following 4 months of intensive trading on the New Values trading platform, the NEa demonstration has now drawn to a close. The last transaction took place on 29 September and on 4 October the last transfer was reported to the emissions authority.

For New Values the demonstration period has proved highly instructive. Thanks in part to the feedback from a large number of traders and other interested parties – per e-mail, on the community and during the workshops – we have been able to improve our organization and our platform in a number of ways. We have, for instance, simplified the registration procedure and adjusted our administrative processing of the confirmations sent by the NEa.

But we have made the greatest progress in modification of the application itself. To give a few examples, we have added an extra overview in which the orders are displayed according to price. A sorting option is another new feature. And transparency has been increased through the automatic addition of new orders to the order overview, together with the 10 most recent transaction prices. All these features have been prompted by your suggestions.

During the trial period a total of 66 transactions were conducted by 22 traders from the Netherlands, England and Belgium. During the demonstration period we also spoke personally to almost all these traders. Their responses show that the user-friendliness of our trading platform was received especially well.

However, one point that still requires attention is the “reliability” of the other party with regard to entered orders. After all, the other party remains anonymous for all traders on our platform. One possible solution may be to cover the ‘other-party risk’. In the coming weeks we will make clear improvements in this area. This will further our goal of providing you – as soon as possible – with a high-value, operational trading platform for CO2 emission rights.

4. Jos Cozijnsen’s column: On the weather and weather derivatives

It’s a frequently discussed subject in the Netherlands: the weather. How bad today’s weather is, how far off the mark the weather forecasters have been again, or how hard the winters used to be. This is something that goes right to the core of the climate problems and the CO2 market! So the weather provides an excellent angle for explaining CO2 measures to citizens and to companies and their shareholders.

International meteorological institutes are increasingly convincing in their explanations as to why the weather is out of balance, with northern Europe experiencing more fierce storms and deluges, while southern Europe is becoming dryer and seasons are shifting. The reason is climate change. But the changes are coming ever faster and nature, the economy and population centres are unable to adapt equally fast, while insurers are having to pay out more and more. So governments have decided to be on the safe side, and in the Climate Treaty and the Kyoto Protocol have agreed to reduce greenhouse gas emissions – the cause of this accelerated climate change. Now thanks to the Russian ratification this Protocol is coming into effect. This allows further development of the international framework for climate policy.

After people at the bus stop spent the first half of July complaining about the wet summer, a few weeks later the grid operator was advising steel companies to run their mills at half capacity. Due to the high temperatures, there was suddenly not enough cooling water for the power companies. While these companies themselves, of course, have contributed to climate change. Electricity generation involves too much combustion of fossil fuels.

In order for the economy to run on less fossil fuels, from 2005 onwards the majority of larger production and power companies will have to operate with CO2 permits and emission ceilings. Stricter emission ceilings will come into force in 2008. This mechanism stimulates companies to search for ways of reducing emissions in their own installations, or to buy emission rights on the emissions market.

In the process, companies will keep a close eye on the weather. To give one example: in warm summers amusement parks and the catering sector do well, and electricity companies have to keep the air-cons running at full power in offices and in your home. And this means an increase in emissions. So the energy sector will have to buy extra emission rights. A bad summer leads to less activity for amusement parks and catering establishments and a lower demand for energy, so power electricity can save up some emission rights. This difference between incomes on the one hand and available emission rights on the other creates a risk for companies.

This risk can be covered by weather derivatives. Dutch banks are the biggest suppliers of weather derivatives worldwide: money is paid out in the event of a previously agreed weather type. At the same time, the bank will already have bought up required emission rights on the emissions market. It’s precisely what the Dutch like to do: talk about the weather, and earn money with it at the same time. And this time it’s even good for the environment, too!

Would you like to respond to this column? Then visit our New Values Community and share your opinion with us.

5. Diary

• 19-20 Oct., EUROFORUM Conference 2004 "Umgang mit CO2 Emissions Zertifikaten” (Dealing with CO2 Emission Certificates, conference in German), Berlin
• 19-21 Oct., 2004, 4th Carbon Market Outlook Workshop, organization: Power Ink & Mott MacDonald; Victory House, Trafalgar Place Brighton. England;
• 21-22 Oct., EU Emissions Trading 2004, October 21-22, 2004, Brussels, Environmental Finance (PDF),
• 28 Oct: Trading in Emission Rights, costs & opportunities and a regional approach through cooperation, Chamber of Commerce, Venlo, khombergh@venlo.kvk.nl;