Carbon Trading a Catalyst to Cut Greenhouse Gas
By Park Hyong-ki
Staff Reporter
Economies worldwide are taking aggressive, preemptive steps to curb greenhouse gas as global warming challenges the preservation of the environment.
In response to growing ecological concerns, carbon exchange markets are sought to be developed globally in line with the Kyoto Protocol, which calls for 38 countries to reduce the level of carbon dioxide emissions by 5.2 percent than that of 1990, beginning 2008 to 2012.
The trading of carbon credits and derivatives through global exchanges has proved to be efficient, profitable and encouraging for companies, especially in Europe, to develop businesses on alternative, clean energy, said the Samsung Economic Research Institute (SERI).
It noted that the carbon trading market is expected to reach $150 billion by 2010 worldwide, five-fold from last year. Europe is, by far, the world's biggest carbon market, accounting for about 80 percent of the total, with most of global carbon credit trading taking place at the European Climate Exchange (ECX) headquartered in London, using ICE Futures' trading platform.
Europe has been leading the fight against global warming through the Emissions Trading Scheme (ETS), which regulates companies in polluting the environment. The ETS, which was launched in 2005, is set to enter its second phase next year. The institute said it has become a standard guideline on countering global warming for other economies.
The proposal in accordance with the international treaty on climate change has led European companies to buy and sell carbon credits, which grant firms the right to emit CO2.
By benchmarking global exchanges such as the ECX, the Korea Exchange also seeks to establish a carbon trading market before 2013 ― when the country is expected to fall under the obligation of the KP ― ahead of other Asian markets such as Hong Kong, Japan and China.
Korea is the world's 10th largest emitter of carbon dioxide, and the exchange said, ``It is imperative to adopt market mechanism for carbon trading to offset increasing CO2 emissions going forward.''
The following are comments on global issues of carbon trading by Patrick Birley, CEO of ECX, in a recent written interview with The Korea Times. ― ED.
Outlook for emissions trading
Much of the current trend of convergence among global exchanges points toward traditional trading markets focusing on becoming one-stop shops for an increasingly varied range of securities and commodities. Emissions credits are one of the newer additions to this range of tradable commodities. The fact that mainstream exchanges are seriously taking it into consideration points toward the increasing ``standardization'' of this financial product and its acceptance by the global financial markets. I would say it seems increasingly likely that governments worldwide see the necessity and the efficacy of using financial markets in combination with a clear regulatory framework to tackle greenhouse gas emissions, including the world's major polluters.
Euronext's carbon trading market
The fact that an entity with a reach as large as the NYSE Euronext is stepping into the emissions market (next year) is one that signals the normalization of emission financial products, which I would overall regard as a positive development. Rather than look on this as a mere threat or competitive issue is missing the point altogether. Increased competition can be good for the market if properly directed. Yes, fiercer competition will be an issue, but it will also bring more benefits such as more liquidity and more innovation in the creation of products, which may benefit not only institutional clients but will be of interest to the retail market going forward, bringing emissions products out of the ``exotic'' or niche products range to a broader user base.
EU Emissions Trading Scheme
We are confident that the European Commission will provide continuing guidance on this matter in consultation with industry and all market participants, as they have done in the past. We have, from the beginning, been involved with the Commission, supporting their efforts in setting up the market. We feel there is still much to be done, particularly with connecting the European Scheme to the UN mechanisms such as Joint Implementation (JI) and Clean Development Mechanism (CDM). At this delicate stage, it is hard to say what the impact or development of the EU ETS will lead to. All fingers seem to be pointing to trading on a global scale and CO2 mitigation on a global scale, not just in Europe. The EU ETS is a great start and we are very confident it will continue. But the ultimate goal would be to have all markets connected to maximize greenhouse gas (GHG) mitigation efforts on a global scale.
Skeptics over carbon trading
There will always be skeptics in the market, and criticism of market mechanisms is in itself not a bad thing; they can keep the market on its toes and remind us yet again what the original goal of the scheme is. Viewed globally, emissions may not have fallen yet, but if one looks on an individual level one notices nuances between EU Member States. Germany, for example, the largest emitter in the Union by far, did manage to decrease its emissions during the first phase period. This is encouraging news to all involved.
And as the European Commission has said time and again, Phase I was a phase where there were room for mistakes to be made, a trial phase if you will. Market participants and polluters were grappling with numerous issues from fuel-switching levels, to more advanced technology being implemented to their own investment strategies, as they sought to know the direction of the EU ETS regulatory structure, and how these issues would affect their bottom line. Phase II will, in a way, be the moment of truth to judge the ultimate success or failure of the Scheme.
Launching ECX
Much of the effort when we began was involving market participants in a financial trading environment in which some were not all too familiar. Much of it were early market educational initiatives. Having said that, it is heartening to see how quickly many of them took to this environment once they had been ``initiated,'' so to speak. We see these efforts being duplicated in other markets around the world as more participants are brought into the fold of carbon markets.
Effects from ECX trading
One of the main effects of the system was to establish a price on carbon, which reacts to real, underlying market fundamentals. We saw major industrial companies, such as utilities and industrials recalibrating their investment strategies with regard to energy investments. Investment in cleaner coal technologies or switches to gas-fired facilities were seen and continue to this day. Another is the increased attention the issue has brought to consumers at a grass-roots level. Granted, environmental groups have rightfully brought GHG issues to the fore for years already. What the EU ETS initiative has ignited is to bring this awareness to a point where not only companies but people like you and I are considering our carbon footprint seriously, which hopefully will lead to action on an individual level, and not just on supranational levels.
Innovative Investments
We currently have two carbon derivative products ― the ECX FI Futures contract and the ECX CFI Options contract ― both of which are based on the underlying European Union Allowances (EUAs).
These products are mainly traded by institutional clients, but retail banks such as ABN AMRO and Dresdner offer products which allow retail investors exposure to our products.
Soon we will be launching a futures and options contract based on CERs (Certified Emission Reduction) on our platform as well. The inclusion of products, which are interesting to a wider range of financial and industrial participants, widen the trading scope and create greater space for opportunity in the markets as liquidity increases.
Our hope is to push this space and bring its benefits to a wider base of participants as more people become familiar with these products. Equity fund trading structures are also just beginning to start. This type of retail product is one of the ways forward in the ``democratization'' of emissions financial products.
On China
I would like to clarify that China has signed and ratified the Kyoto Protocol, which the United States has not done. China, however, falls under the Clean Development Mechanism of the KP, which does not currently limit its GHG emissions, which applies to all parties that fall under the CDM mechanism. It does allow China to participate in carbon mitigation by hosting a range of CDM GHG mitigation projects. These projects deliver carbon credits called CERs. European polluters who wish to purchase these credits to cover their emission credit shortfall can purchase these from Chinese projects where real emission reductions have occurred following strict UN-approved guidelines, meaning they have been approved by the UN's CDM Executive Board and independent verifiers.
The issue of whether China can curb its emissions with its own exchange is not a specifically Chinese challenge, but a global one. Our view is that wherever financial markets may assist in decreasing emissions using market dynamics, this can be seen as the start of a positive development.
Advices for Korea
Education, education, education ― educating the market where needed. We also cannot overstress the importance of ``feeling'' the pulse of the market before going out to launch products. Consultation sessions with market players helped us in the beginning.