The carbon scholarships

When carbon dioxide is sold by the ton

Before the end of the year, European Union companies will be able to trade their “rights to pollute” on the European Climate Exchange, a brand new carbon exchange.

If market forces and the environment rarely go hand in hand, a new project, unveiled on September 7, may reconcile them. The European Climate Exchange (ECX), a subsidiary of the Chicago Climate Exchange (CCX), which has entered into a cooperation agreement with the International Petroleum Exchange (IPE) in London, will allow European companies to trade gas emission credits at greenhouse effect. This new stock exchange was created under pressure from the regulations. Because, next January, the European Union will apply new rules intended to reduce carbon dioxide emissions, one of the causes of global warming. Companies in the 25 Member States will be authorized to issue a certain quantity. In the event of an overrun, they will have the possibility of buying credits from firms which have not reached their quotas. ECX expects to allow the trading of futures contracts for emission credits by the end of the year, with cash products following shortly thereafter. Mechanisms of this kind already exist, in another form. Nine brokerage firms thus facilitate over-the-counter transactions. One of them, Evolution Markets, estimates that the volume traded fell from 000 tonnes of carbon dioxide in January to 600 in July. In addition, some companies negotiate directly with each other. But these figures must be placed in context: Germany alone, for example, produces more than 000 million tonnes per year. “We are just starting to have a sufficiently liquid market,” comments Stian Reklev of Point Carbon, a Norwegian analysis company.

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Futures markets may confuse novices

The United States, where the CCX started its activities last year, seems to have fallen behind. Despite the intervention of a few prestigious companies (notably Ford, IBM and Dow Corning), the volume of trade remains modest, for a country which undoubtedly emits a quarter of the greenhouse gases in the world. If the sellers are numerous, the buyers are much rarer, so 1 tonne of CO2 is traded for about 1 dollar, against 10 dollars [8,50 euros] in Europe. This is because the US market has not been stimulated by regulation. The United States, which unlike the Old Continent has not ratified the Kyoto Protocol on climate change, does not force companies to limit their emissions. Nevertheless, the CCX seems to be banking on an evolution of the situation. In fact, nine states in the northeast of the country are considering a closed market system called cap and trade comparable to that set up by the Europeans. The CCX is also announcing the upcoming start of emissions trading for sulfur dioxide, which causes acid rain. But, for now, the CCX has high hopes for its new European subsidiary. The volume of trading on the ECX and elsewhere is expected to soar as soon as the system starts. By 2007, Mr Reklev estimates, transactions on emission rights will reach 10 billion euros, against 65 million this year. But difficulties are to be expected. Indeed, many participants will be new to this field: while energy companies have a long history of hedging at PEI London and other exchanges, others may have difficulty finding their way. familiar with futures trading. The ECX will also face stiff competition. Brokers like Evolution Markets, already present on the market, fully intend to defend their territory. Other stock markets are also planning to jump into the fray. Thus, the European Energy Exchange in Leipzig, specialized in electricity, announces the creation in a few months of a cash market for CO2 emissions. Nord Pool, the Nordic electricity market, and the Austrian Energy Exchange have similar projects. It remains to be seen whether there will be room for everyone ...

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