The Carbon Brokers

Traders are gearing up for a new futures market. These new carbon exchanges promise billions in potential profit, but will they save the planet? High up in the Rocky Mountains of Colorado, the town of Aspen has
been blanketed with 24 inches of snow in the past week. This has
meant booming business to a 60-year-old company which sells hotel
rooms and ski passes to local attractions like the Hanging Valley

The Aspen Skiing Company may not
always be so blessed. In the not-too-distant future, when climate
change starts to take significant effect, warmer winters and less
snow could cause the business to go bust. That's why this week Pat
O'Donnell, the president of the company, decided to participate in a
voluntary scheme to reduce global warming.

On Tuesday O'Donell announced that his company would join the
Chicago Climate Exchange (CCX) and trade greenhouse gas reductions,
in a market that offers its members the opportunity to
voluntarily commit to reducing their impact on the world's weather.

The way the system works is this: CCX members agree to reduce
greenhouse gas emissions by four percent by 2006. This percentage
comes from a baseline percentage of emmisions that occurred from
1998-2001. Members who reduce beyond the goal may sell emission
allowances on the exchange. Members who do not meet their goal must
buy allowances on the exchange in order to stay in compliance.

"The ski business has to get our own house in order, otherwise we're
sunk," Auden Schendler, the company's director of environmental
affairs, told CorpWatch. "Any sensible business leader knows that
carbon credits are the wave of the future."

The company is not legally required to trade in "carbon credits"
because the United States has not signed the Climate Change
Convention, but across the Atlantic, in Europe, most major power
plants and factories, have become part of a legally binding scheme
to reduce greenhouse gas emissions, that went into effect this week.

The European Union scheme is
the first multi-national emissions trade system in the world that
covers all 25 member states. Canada and Japan are planning their own
carbon markets soon, which will likely be linked to the European
Union scheme.

The first "carbon trade" was actually executed, before the laws went
into effect, in March 2003 between Shell, the global oil company,
and Nuon, a six year old Dutch multinational that also supplies
power to users in Belguim and Germany, in which Nuon bought a
significant volume of allowances from Shell for 2005.

Carbon trading is an umbrella term that includes the trading of
greenhouse gas reduction credits that were defined in the 1997 Kyoto
Protocol of the Climate Change convention, first drawn up in 1992.
There are two major systems of trad that were agreed upon
- Joint Implementation (JI) and Clean Development Mechanisms (CDM).
JI allows emissions credits to be traded between two different
countries. CDM allows companies to earn credits by paying for
emissions-reducing and clean energy projects in developing countries.

Countries set greenhouse gas limits for emitting companies, giving
those companies what the Kyoto Protocol calls "Assigned Amount
Units" (AAUs). If a company produces less than its limit, it can
trade remaining allotments to companies that have exceeded their limit.

Each country gets to decide how to divide up its carbon allocation -
for example Denmark announced this week that its 235 electricity and
heat producers will be allocated 65.1 million tonnes, while 120
industry and offshore producers will be allocated 27.6 million
tonnes. In addition the country set aside a reserve of 0.9 million
tonnes for new entrants and significant growth.

The incentive to trade is based on the fact that for every tonne of
CO2 that goes over their target, companies are liable to a fine of
40 euros during a three-year transitional period. From 2008 to 2012,
the punishment zooms up, to 100 euros per tonne of CO2.

All told, some 13,000 companies across Europe are required to take
part in the scheme, such as electricity and heat generators that
exceed 20 megawatts, cement, ceramics, ferrous metal, glass, pulp
and paper producers, which are the largest emitters of green house gases.

The biggest emitters of carbon dioxide registered under the EU
scheme are respectively; the German energy groups RWE AG and E.ON,
Swedish power company Vattenfall, Endesa from Spain, followed by
Anglo-Dutch steel and aluminium company Corus Group, Royal Dutch
Shell Group, Thyssen Krupp, Estonian power group Eesti Energia and
Britain's Drax Power.

The current market price of a tonne of carbon is currently 7.92 Euros (roughly
$11), but it has fluctuated from 6 to 13.20 euros per tonne. There
are six exchanges that help companies buy and sell carbon credits -
CCX (which also owns Amsterdam-based European Climate Exchange),
newly extablished and Climex and Sendeco2, as well as three existing
electric power trading companies - Nord Pool, EEX and Powernext.

In 2004 alone nine million tonnes of CO2 have changed hands, a
fraction of the 2.2 billion tonnes annually that can be potentially
traded within the European Union starting this year. Trading costs,
charged by the market brokers, have tumbled from 16 cents per tonne
down to as low as 2.5 cents.

Point Carbon, a Norwegian analysis and consultancy company, predicts
that the business could be worth tens of billions of Euros in just a
few years and that Russia alone could earn as much as $10 billion,
because its Kyoto targets were set at levels that peaked just after
the collapse of the Soviet Union. Today Russia's power production
has fallen some 30 percent, making it the world's largest owner of
carbon credits, which also allows it to drive prices up by
restricting supply.

But the biggest challenge is making the system actually deliver
reductions in greenhouse gases, which can only be determined if the
governments cut the number of allowances drastically. Right now,
experts say that too many allowances have been issued for the scheme
to drive a major clean-up of European industry.

"We need to accept that the first phase of emissions trading
(2005-2007) is not going to deliver emissions reduction," Russell
Marsh, head of policy at the Green Alliance, a UK environmental
think tank, told the BBC. "It's clear that at the moment, the way it
has been set up, the carbon price is not going to be high enough to
make a real difference, now or for the next three years."

Indeed, if too many allowances have been issued, the carbon price
will fall and could even hit zero, making the whole scheme collapse.
But Andreas Arvanitakis of the consulting firm, Point Carbon UK,
believes that the price of up to 20 euros is "perfectly feasible."
"A cold and dry winter in Scandinavia would mean that there was
little hydropower available, and more coal would be used, which
would push the price of carbon up," he told the BBC. "In fact, the
winter has been mild and wet, which is one reason why the price has
fallen by more than a euro since the start of the year."

AMP Section Name:Environment
  • 190 Natural Resources

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