issue 21.0, New Values Newsletter

1. New Values news
New Values likes to involve you in its plans and ideas. We keep you constantly informed about what we're doing and how we're responding to the latest market developments.

2. Jos Cozijnsen's column
He's a familiar figure: Jos Cozijnsen, the man behind emissierechten.nl and guest speaker at various meetings on emissions trading. Every month he airs his opinion in his column.

3. Diary
It's important to stay up to date in a market that is continually subject to change. New Values keeps you informed about interesting congresses and workshops in the Netherlands and abroad.

1. New Values news

Registries getting started

By now seven of the 25 national registries are up and running. The interaction between the German registry and the community independent transaction log (CITL) is working trouble-free. The registries already in operation include the three major countries Germany, the UK and France; however, the allocation to the participants has not yet been completed.

Nevertheless the foundation for a working system has been laid and the liquidity on the CO2 market is starting to improve.

Asian-Pacific treaty

Rumours that Australia and the US are preparing a new pact on climate change with a group of Asian countries, including Japan, China, India and South Korea, have been confirmed by Australian Environment Minister Ian Campbell. The "Beyond Kyoto" pact has been unveiled by the US and Australia in Vientiane, Laos, and according to its initiators is to complement Kyoto rather then to detract from it (see Reuters UK). The treaty, based rather on bilateral agreements than on the multilateral Kyoto approach, will focus on technological solutions to reduce GHG emissions. In particular clean coal technologies seem to be on the agenda, as the involved countries are by far the biggest coal producers and consumers in the world
The initiative is proving highly controversial. On the one hand it is supported by the members as a forward-looking pact, which includes the developing countries. Others see it as a first step by the US in the right direction but say it is still not an effective tool for meeting the challenges of global warming. Detractors, on the other hand, criticise the pact for having no tangible emission cap which really stabilises emissions at a low level. The critics fear that the Asian-Pacific Pact may displace the plans of the Kyoto treaty for the period after 2012. Indeed, this wouldn't seem the right way to avoid the emissions increase of 30% up to 2025 which has been forecasted by the US Energy Information Administration (EIA). It remains to be seen what position the policy-makers will adopt at the upcoming COP 11 in Montreal.

2. Jos Cozijnsen's column

First half-yearly figures for CO2 market: how should we judge them?

'Compliance driven'?
What can we say about the European emissions trading market after its first six months? The framework conditions have not changed: 2.2 billion tons of CO2 emission rights will ultimately see the light of day (6.6 in the period 2005 – 2007). About 10,000 installations will need emission rights to cover their CO2 emissions. Analysts believe that the enterprises have received an emissions quota for about 95% of their emissions and that they will thus have a shortfall of a little over 200 million tons, equalling 70 million tons per year. Does this mean the market will have an annual size of just € 140 million, driven exclusively by compliance? Such an estimate would seem pretty thin, one reason being that the allocation has not amounted to 95% everywhere in the EU and there are also large differences between companies.

'Opportunity driven'?
You could also say that the potential value of the annual European market is 2.2 billion tons of CO2
x € 20 = € 44 billion. But the market won't see the greatest part of the allocated rights because they are needed to cover the emissions. On the other hand we now see that energy traders and the oil companies are both buying and selling, simultaneously. Moreover, investment funds and banks are adopting major speculative positions for their clients. If we assume that 10% of the existing rights are traded, and that a part of this volume may change hands 2 or even 3 times, then we have a potential market of over 220 million tons of CO2: € 4.4 billion.

Drawing the balance
So what has happened over the last half-year? After six months the counter of the emissions market analyst Pointcarbon has clocked up 90 million tons, equal to a market value of almost € 1.4 billion. Pointcarbon expects that for the full year 2005 a total of € 5 billion will have been traded. This has forced a revision of earlier figures; these had been based on an assumed € 8 per ton as market price, leading to a forecast of € 2.1 billion.

It seems that the EU CO2 market got started slower than expected but half-way through it put on quite a spurt, resulting in a final substantial volume that was in line with expectations. What hadn't been expected was the level of CO2 prices, which were 300% higher than forecast. It's interesting to note that 40% of the expected volume was traded by actually less than 10% of the participating companies. I was surprised by the fact that energy companies are keeping such good track of their emissions and aim to cover these with emission rights from the very beginning. And they are prepared to pay the high prices created by the tight supply. Moreover, they are engaging in speculation. Perhaps the high oil price is making them impatient: 'better to take what you can get now instead of waiting to see what happens later.' Another important factor is the incomplete competition on the electricity market. And I hadn't expected the banks to play such a major role right from the start. They are moving to fill the gap in the market caused by the majority of the companies which are still not participating.

By the way, I wouldn't be surprised if Pointcarbon has to adjust its forecasts downwards in December, because the supply from eastern Europe and smaller companies will keep the buyers from paying more than € 10 per ton. But you're used to that from me. I am, I think, one of the few analysts who see a CO2 bear market in the offing.

3. Diary

15-16 Sept: Linking the Kyoto Project-Based Mechanisms with the EU ETS; , Austrian Centre, Vienna, organized by UNIDO;

19-21 Sept: Transatlantic Dialogue on Climate Change, Washington: organized by: Environmental Defence for the European Commission;

22-23 sept: 7th Renewable Energy Finance Forum, London, Euromoney Energy Events.

27-28 sept: IETA/IEA/EPRI 5th Annual Emissions Trading Workshop; Paris;

28-29 sept: European Emissions Trading '05; Optimise your carbon strategy in phase 1 and position yourself perfectly to fully capitalise from phase 2 of the EU ETS, The Crowne Plaza, Brussels, Belgium.

3-5 Oct: Climate Change and Business; Kiev. The biggest JI conference in Ukraine: The conference will bring together investors and project developers, technology providers and potential project hosts. Join us for an in-depth discussion of JI opportunities in Ukraine and learn from the industry's most distinguished experts.

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