Carbon Black Wednesday

The EU contribution to the Kyoto Protocol involves the establishment of an Emmissions Trading scheme (ETC).

The ETS is a scheme whereby each government sets an overall cap on the CO2 emissions from its heavy industries and then allocates emissions allowances to each industry within the scheme. Each industry can then decide whether to reduce it emissions eg. by investing in energy efficiency measures, or exceed them and buy more CO2 allowances on the open market - whichever is cheaper for that particular industry. In this way, if the overall cap is set low enough emissions trading provides a cost effect way to cut CO2 emissions.

Domestically, the EU's Emissions Trading Scheme, which encourages companies which can reduce emissions to do so cheaply and to sell unused allowances, will remain a central feature of our climate change policy.

Each country was supplied with a "cap" or maximum level of CO2 emissions measured in metric tonnes of carbon. This did not include transport (incl. aeroplanes), human breath (or animals) or domestic heating. It was based on (mainly) large industrial users of fossile fuels. In anticipation of the likelihood that some producers would reduce carbon and some not it was envisaged that carbon crdits from thrifty users could be sold to excessive producers.

In the UK Mrs Beckett was a huge fan of this scheme and she was to found (and heard) loudly claiming wonderfu(e)l benefits of the scheme.

On January 11th 2005 Lord Patel wrote

"The bearded be-jersied Branson has a letter in the FT today calling for Emissions Trading organised by the Intnl Civil Aviation Org. ICAO, the Airlines cabal... full of " minmising environmental costs"..."delicate marine environments" (don't go by boat)..incorporating shrewdly self congratulation..." Virgin ...has one of the youngest fleets in the world...our emmission on take off fell significantly " (this has no connection with their much touted double beds, apparently).

The Carbon Market is a clever and elaborate ploy to erect yet another casino for Financiers and other money jugglers to play in, Barclays claim it will be worth £56Bn. a year in the UK alone - they as well as Cantor Fitz. BP etc., will be glad to cream off their commissions on this nonsense. By all means Mr Branson, add this burdensome cost to every aircraft flight and play the market - much easier than flying the planes.

I am stunned by the naivity of the tree huggers who embrace this nonsense, who have some mystical belief in the environmental concerns espoused by the market traders of Leadenhall Street.

The Carbon Trust, responsible for this nonsense has a Chief Execitive with a magnificent pedigree, he comes straight from Rail Network where he did such a splendid job for the rail user. "

The Financial Times High prices attract funds to carbon trade scheme, May 25 2005, the day after trading commenced at Euros 19 per tonne.

Hedge funds, attracted by rising carbon prices, have started to invest in the fledgling market in greenhouse gas emissions.

James Cameron, founder of the boutique (?) investment bank Climate Change Capital, said his company had received commitments from several hedge funds. He said the amount was greater than $100m (£54.7m) and could rise to $500m (£273.4m). "It's a new market, but attached to markets [in energy and commodities] that funds understand," he said.

Laurent Segalen, director of the European Carbon Fund at Ixis, said several hedge funds had expressed an interest in the fund. "This is still at an early stage for many of them but in six months' time I expect to see them in the market in larger numbers," he said.

She added that the opening of the UK's carbon registry would boost the City of London, which has become an international centre for the carbon trading business.

Anthony Hobley, senior associate at the law firm Baker and McKenzie, said: "As a result of early commitment to the area by the UK government what has developed in London is one of the biggest concentrations of expertise [on] greenhouse gas emissions trading. Many of the contracts are based on English law, and already the City is working on some sophisticated financial products around carbon."

Well time has moved on and the price has inexorably risen to Euro31 a tonne, egged on and carefully massaged upwards by the sharp suited gents in the city.Then ...

On Wednesday (Carbon Black Wednesday as it will be known soon) a clutch of countries reported week that their 2005 carbon dioxide (CO2) emissions were far below expectation, crashing demand for permits to pollute and so taking the floor from underneath the EU's carbon credit market.

In the past two days, the Czech Republic has said it emitted about 83m tonnes of carbon last year, about 15 per cent below the national cap. The Netherlands said its CO2 emissions for 2005 were 80.4m tonnes, or 8 per cent below its national cap. Estonia came in about 25 per cent below its cap of about 16m tonnes, and the Walloon region in Belgium was 15 per cent lower than the alloc­ation of its carbon allowances last year.

Late Wednesday afternoon, France said its carbon dioxide emissions were 11.6 per cent below the country’s EU quota.That totals some 17% of Europe.

As a consequence the bottom literally fell out of the carbon market and reached as low as Euro 14 per tonne today. It also dragged down power generators and energy supply companies with it. (Graph Euros / last 30 days)

Fears of significant cuts in energy companies' future profitability saw the UK's biggest generator, British Energy, the country's single largest power plant, Drax, and British Gas group Centrica led the FTSE 100 fallers, slipping more than 3% because the the market now be awash with unused carbon dioxide permits.

Paradoxically ultra clean nuclear generators like British Energy emitting no carbon dioxide will, perversely, be hardest hit as they lose profit margin on the falling price of generated electricity but get no gain from reduced costs in emissions trading.

The market waits with considerable fear as Britain, Germany, Italy, Poland and Portugal -- who must between them announce by May 15 must show a need for 36 million tonnes short of carbon credits to avoid a complete price collapse.

"It's precariously balanced," said Louis Redshaw, Head of Environmental Markets at Barclays Capital. "It feels very edgy round here."

"Unless that 40 million tonnes gets wiped out pretty quickly this commodity could be worthless," said a trader."If there's a (net carbon credit) surplus there's no incentive to reduce emissions and the (carbon) price collapses. It won't go to zero, it would effectively go down to the administrative cost of the scheme... it could be 1 euro, who knows?"

Utilities are particularly exposed to the drop, both because of a fall in power prices and because some have on their balance sheets millions of tonnes of carbon credits, whose value has dived.

This emissions undershoot has left traders pointing the finger at companies and countries for inflating those figures, to minimise any financial impact of the scheme.

"This does potentially strengthen the political hand of the European Commission in relation to phase two National Allocation Plans," said Anthony Hobly, general council to the Climate Change Capital fund,(CCC focuses on companies and financial institutions affected by the regulatory and capital market responses to climate change) which has over US$150 million invested in carbon markets.http://www.climatechangecapital.com/

“It does raise the question whether there were too many permits issued and that the governments may have got it wrong,” says Louis Redshaw, associate director at Barclays Capital.

With German utilities holding about 14 per cent of the total EU CO2 permits, the share prices in RWE, E.ON and Vattenfall Europe were all pulled lower on Wednesday by the lower CO2 prices.

What we are seeing is a convergence of capital and environmental markets," Richard Sandor of the Environmental Financial Products Company told the Financial Times. Like other global financial markets, the emissions market will also feature transactions that are purely speculative. Trading house Mitsubishi, for instance, envisages "a business in which we purchase emission rights at low prices and sell them at higher prices for profit." "The potential rewards for smart players in the field are enormous," according to Natsource, a New York-based "over-the-counter broker of energy derivatives." Not only will emissions credits be traded, their derivatives will also constitute a billion dollar market. Hedge funds will also undoubtedly find a niche, as will speculating in 'futures' and 'options'. There is a real danger that the entire range of controversial speculative instruments known from the global financial markets could emerge in the emissions trading game.

These were typical, revealing remarks from the emerging class of new, fast-growing profession- emissions brokers up till Carbon Black Wednesday. Of course they were nothing but snake oil salesmen. Hucksters, shysters, swindlers, swilling someone's money around the City casinos on a rsing ballon fed with hot air from Mrs beckette, supported by the highly adept City PR army.

We are now faced with the spectacle of that casino collapsing - overnight and losses , which will inevitable land on consumer's energy bills that have gone to feed the city fat cats - who have swung the politicians and the tree huggers along in a fenzy of righteous and unfounded speculation.

January 11th 2005
Barclays claim it will be worth £56Bn. a year in the UK alone.

April 27th 2006
"It's precariously balanced," said Louis Redshaw, Head of Environmental Markets at Barclays Capital. "It feels very edgy round here.


“It does raise the question whether there were too many permits issued and that the governments may have got it wrong,” says Louis Redshaw, associate director at Barclays Capital. ("Not my fault Guv if I was hopelessly sucked in")

One of the main roles of the Barclays Capital Energy Team is to introduce the concepts of energy price risk management to companies who are exposed to the uncertainties of energy price movements....... What do the Germans call it ? Schadenfreude ?