Paula Dittrick
Senior Staff Writer
Oil & Gas Journal
Trading of credits for greenhouse gas (GHG) emissions, sulfur oxides (SOx) emissions, and nitrogen oxides (NOx) emissions, is expected to accelerate during 2005, a consultant and a broker each separately told OGFJ.
Capital markets and environmental issues are converging rapidly into a corporate financial issue, they said. Climate risk is becoming a corporate finance issue, and some corporations assign their risk managers to handle the emissions issues.
Peter C. Fusaro, chairman of Global Change Associates, a New York energy and environmental risk management consultancy, believes carbon finance is emerging as a significant market unto its own.
“We are witnessing a market transformation: 2005 will be the breakthrough year with spot trading, high volumes, price indices, and advanced brokerage, similar to the power and gas markets,” he commented.
Randall N. Lack, president of Houston-based Element Markets, said that emissions trading “has a lot of momentum. There are a lot of people starting to look at this. It’s no longer a compliance issue. It’s a risk-management issue, and people are starting to look at it differently.”
Companies are under scrutiny from both lawmakers and shareholders regarding both their US and international activities, Lack said. As a result, companies are hedging risk through emissions trading.
US
In the US, it’s generally acknowledged that a federal emissions trading program will be created, Lack said. The details of that program remain to be outlined, but he believes it will have a major impact on the energy industry.
“The utility sector already has substantially reduced emissions. The next low-hanging fruit in the EPA’s eyes, and in the lawmakers’ eyes, is cement as well as oil and gas.”
Lack said that the US is seeing additional interest regarding CO2 emissions. “It’s not so much about what we are going to do today, but it’s about what we are going to do tomorrow about CO2. It’s starting to be brought into the limelight.”
Fitch Ratings analyst Denise Furey agrees that the US eventually will “have a federal law limiting the emissions of CO2 and possibly other greenhouse gases.” In a December 2004 report, Furey also noted that an emissions trading program puts a market price on the cost of emissions, allowing a company to make an informed choice among its compliance options.
She noted that a few brokers have found a niche in the emissions markets, including New York-based Natsource, one of the largest environmental commodities brokerages worldwide with brokers working in the US, Canada, the UK, and Japan.
Analysis by the Business Communications Co. of Norwalk, Conn., shows 78 million tons of CO2 was traded in 2003, 29 million tons in 2002, 13 million tons in 2001, and eight million tons in 2000.
Another NOx and SOx trading issue is that the Regional Clean Air Incentives Market (RECLAIM) is under review.
"[The US has] the most mature and advanced environmental financial markets in the world." - Peter Fusaro, chairman, Global Change Associates
“There is going to be RECLAIM shaving. Specifically, oil and gas companies in California have such tight restrictions on them already that they might not be able to make the reductions and will have to buy credits,” Lack said.
The US has had regional emissions trading markets since 1995 for SOx and since 1999 for NOx.
Fusaro noted that, “We have the most mature and advanced environmental financial markets in the world.”
The Chicago Climate Exchange (CCX), launched in September, is a voluntary effort of more than 60 companies to reduce GHG emissions. The CCX trades industrial pollution allowances issued by the US Environmental Protection Agency.
Currently, emissions trades are handled through Over the Counter trading. Fusaro expects that the New York Mercantile Exchange will launch emissions contracts through its ClearPort trading platform.
“My own opinion is NYMEX, being the energy exchange, will have a lot of liquidity for these contracts. I think it will be more successful than people realize,” he said.
Europe
As of press deadline, the European Union Emissions Trading Scheme was slated to start on Jan. 1, 2005. The allowance trading system involves nearly 6,000 facilities and multiple industries.
Transactions already have occurred and standardization is progressing. Barclays Capital and Shell International Trading and Shipping Co. completed the first brokered CO2 emissions trade in July 2004.
The trade was based on the official published version of the International Swaps and Derivatives Association (ISDA) contract. Various banks and trading entities worked with ISDA to produce a standard document to trade CO2 allowances. OGFJ
