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I.H.T. Special Report: Energy: Carbon Trading Lurches Off Course
2010-09-02 05:02:36.522 GMT
By SONIA KOLESNIKOV-JESSOP
(International Herald Tribune) -- SINGAPORE — In July 2007,
the Australian Climate Exchange, known as the A.C.X., introduced
the first electronic trading system for greenhouse gas emissions
in Australia. Voluntary Emission Reductions, or VERs, generated
by abatement projects verified by the government-sponsored
Australian Greenhouse Office, had been introduced a few months
earlier and initial business on the exchange was brisk. It set up
a registry for Australian VER certificates and soon was also
trading similar instruments from overseas.
But this January, the A.C.X. discreetly halted business, and
what had started like a lion went out like a lamb.
"We had to close the business down because we'd run out of
funds to continue," said Tim Hanlin, the former managing director
of the exchange. "The government of Kevin Rudd had indicated the
focus would move toward a mandatory market and we had made
significant investments to get ready for that eventuality. That
was our downfall.
"If we had stuck to the voluntary market, probably we would
still be in business today, albeit probably in a much reduced
way."
The outlook for the exchange turned bleak once it became
clear that governments meeting at the U.N. Climate Change
Conference in 2009, commonly known as the Copenhagen summit
meeting, would not provide a new direction or stimulus to the
market. And there has been little to cheer for the carbon trading
business community ever since.
In Australia, the Labor Party government led by Mr. Rudd
backpedaled on its planned compulsory emissions trading plan in
April, a decision that contributed to Mr. Rudd's ouster as leader
in June by his successor, Julia Gillard.
In the United States, a plan for emissions trading has been
stuck in the Senate. There are also concerns about delays in
Japan.
"Having held out for that long, we had to close it down
because there is really no prospect here in Australia for a
market in carbon trading for the foreseeable future," Mr. Hanlin
said by telephone last month. "At the end of the day, we'd made a
significant investment and we needed more funds to continue on.
And there really wasn't a story to say that the voluntary market
was going to grow to an extent where we could make the business."
Three years ago, in anticipation of substantial growth in
the voluntary and compliance carbon markets, governments and
business groups around the Asia-Pacific region were jockeying to
establish a regional hub for carbon trading.
New Zealand had dreams of becoming the world's "Green Wall
Street" and the New Zealand Stock Exchange started working on
developing a carbon trading system and a carbon registry. The
authorities in Singapore also announced plans to pass legislation
enabling tax-free carbon trading that would establish the
city-state as a major carbon trading hub.
Even India joined in, with the Multi Commodity Exchange in
Mumbai, or M.C.X., starting futures trading in carbon credits
early in 2008. But interest fizzled out after three months,
recalled Jignesh Shah, the founder, chairman and group chief
executive of Financial Technologies, a company that owns 10
exchanges, including the M.C.X.
In fact, after three years, little concrete progress has
been achieved, though New Zealand, the first jurisdiction outside
Europe to commit to a nationwide mandatory carbon pricing plan,
started the New Zealand Emissions Trading Scheme on July 1.
In 2007, the New Zealand Stock Exchange had created a
venture known as Time Zone One, or T.Z.1, to provide a trading
system for credits created by the Kyoto Protocol on climate
change and to develop a global registry. But while it managed to
develop the registry, selling it in 2009 to Markit, a global
financial information services company based in London, it has so
far failed to make significant progress on the trading system.
"N.Z.X. has the platform, the technology and the capability
to run a carbon market," wrote Merja Myllylahti, a New Zealand
exchange spokeswoman, in an e-mail reply to questions. "We
generated a very good return out of the carbon registry
business."
"However, the Emissions Trading Scheme, as it is designed,
has very little liquidity. Building the platform does not in
itself create the market." Still, she said, "were this to change
in future, we will be ready."
Helen Robinson, managing director of Markit Environmental
Registry, which acquired the T.Z.1 registry, acknowledges that
the market has remained "lumpy" as a result of the lack of
agreement in Copenhagen and U.S. government delays on the issue.
"There are still pockets of great activity taking place in the
market outside Europe, but you've got to know where to look," she
said, pointing to Brazil, China and some U.S. states.
Amid the financial and economic turmoil of last year, the
total transacted value in the global carbon market continued to
increase, albeit slowly. In 2009, global market volume totaled
$144 billion, up 6 percent from 2008, after doubling in value
from 2007 to 2008, according to a report this year from the World
Bank, "State and Trends of the Carbon Market."
The report said the European Union's Emission Trading
System, or E.T.S., remained the engine of the global carbon
market, with more than six billion so-called allowances traded in
2009 for a total value of $118 billion. But trading in credits
based on carbon-offset projects — in which polluters buy permits
issued to finance investments in initiatives like forestry
programs or clean-energy production — slumped 54 percent, to $3.4
billion. Trading in credits derived from the Kyoto Protocol's
Clean Development Mechanism were worst hit, dropping 59 percent,
to an estimated $2.7 billion.
A separate report by Ecosystem Marketplace and Bloomberg New
Energy Finance, which looked only at the state of the voluntary
market — operating outside regulated carbon emissions reduction
plans — showed that the market slowed significantly in 2008, down
47 percent in value, to $387 million, after three consecutive
years of growth. The overall economic downturn and uncertainty
about future climate legislation were the main factors that
affected the voluntary market.
The slowdown has left its traces on the industry. Last
month, the Chicago Climate Exchange, the platform for the first
cap-and-trade system in North America, was reported to have laid
off nearly half of its employees — the exchange refused to
confirm numbers — and staff changes and cuts have also been
reported on major trading desks.
"For companies that had staffed on the basis that we were a
couple of months away from starting really serious trading,
they've realized they've started too soon, which is why they've
downsized, waiting until something actually happens," said Henry
Derwent, chief executive of the International Emissions Trading
Association, an independent, nonprofit organization representing
companies involved in carbon trading.
"There are a lot of bearish things about the market at the
moment; in particular the slowing down of the expected trajectory
of emissions trading in the United States and Australia, and to a
certain extent in Japan. But let's not go over the top," Mr.
Derwent said. Underlying fundamentals are still supportive, he
said, and there are also some positive, short-term developments
in countries like China, which has restated its commitment to
emissions trading.
"However difficult it is for some countries to swallow at
the moment, emissions reduction is with us forever," he added.
"On a long-term basis, 7 to 10 years, it's difficult to see how
the world can go anywhere else."
The recently set-up Carbon Trade Exchange, C.T.X., which
started trading in July, indicates that plenty of players still
believe in the market's potential. Based in London, with offices
in Australia and New York, C.T.X. bills itself as the world's
first global spot electronic trading platform for voluntary
carbon credits.
"We're seeing more forward thinking toward innovative market
development, and the right infrastructure tools to ensure the
integrity and transparency of the marketplace," said Ms.
Robinson, of Markit, which is providing credit issuance,
registry, transaction and management services for the new
exchange.
Wayne Sharpe, chief executive of C.T.X., is also the founder
of Bartercard, an Australian business he created in 1991 to apply
the credit card business model to barter transactions. Bartercard
has since grown into what it says is the world's largest
international system for noncash trades, handling the equivalent
of $2 billion in annual revenue.
Mr. Sharpe says that background may be an advantage in
getting carbon trading off the ground.
"I think the reason why other exchanges haven't been
successful is because they've approached carbon credit trading
from the platform of commodity trading," he said during an
interview. "But they are not the same thing. We've designed
something from the ground up and taken into consideration what
the industry really needs; something very simple and cost
effective, so that companies don't see it as a major barrier."
"Most of the traders that start carbon trading know nothing
about carbon," he added. "They know about trading, so they're
used to dealing with incumbent software solutions that are more
like a stock exchange."
Many of the principles used in C.T.X.'s technology are
similar to Bartercard, but transposed into a low-cost and easily
accessed Web-based system, he said.
"One of the problems you have with a lot of the incumbent
regulated market exchanges is that in order to use the exchange
you need to subscribe to the exchange and a clearing house, and
also have access to other software to allow you to interface with
the exchange," Mr. Sharpe said.
"The total cost is so prohibitive that only large financial
institutions or traders can afford it. Trading on some climate
exchanges in the first year will cost you 40,000-50,000
Australian dollars," or about $36,000 to $45,000, he said.
For a fringe market with only a few hundred players — even
if they are big ones — that sort of cost is disproportionate and
a barrier to achieving viable scale, he said. In contrast, annual
fees to trade on C.T.X. range from €800 to €2,500, or $1,000 to
$3,200, depending on the size of the player.
Mr. Sharpe said that initial trading volumes on C.T.X. were
small, but growing. "The reality is that we didn't expect to have
any big trading volume for the first few months," he said. "Right
now we're still building inventories and relationships with the
developers and project originators, and brokers."
The exchange has already signed up some of the biggest
project originators, including South Pole Carbon Asset
Management, based in Zurich; Carbonyatra, based in Mumbai; and
Climate Bridge, headquartered in London, Shanghai and Chennai, he
said, as well as large brokers including Tullett Prebon in
London. It is also linked with Masdar City, which is being built
in Abu Dhabi as the world's first carbon-neutral city; and it
plans to offer brokerage services to Middle Eastern state-owned
companies that want to go carbon neutral. The next step will be
to start prospecting for potential buyers of credits, Mr. Sharpe
said.
Other carbon exchanges are also under development, including
the Indian Climate Exchange, a planned joint venture between the
Chicago Climate Exchange and leading Indian industrial companies.
In China, the Chicago exchange is working with the China National
Petroleum Corp. and a Chinese government agency, the Tianjin
Property Rights Exchange, to set up the Tianjin Climate Exchange,
announced in 2008.
The new Singapore Mercantile Exchange, a currency and
commodity derivatives exchange that started live trading at the
end of last month, has also been doing some research to develop a
carbon credit product. Still, its vice chairman, Mr. Shah of
Financial Technologies, said that for any derivative market to
succeed, "the standardization of the physical market is
essential. At this moment, the standardization in the actual
market is not there."
"I believe carbon will be very big — like the new-generation
oil of green energy," Mr. Shah said. "It's bound to work the
moment some standardization comes."
Copyright 2010 The New York Times Company
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