Tag Archives: ETS

“Surprised and Concerned” About Illegitimate Government-Sponsored CER Trading?

Environmental Leader has reported

that the Hungarian government sold 2 million previously used CERs, the market became tepid. Then when prices fell from more than 12 euro per credit to less than one euro, trading was suspended on two exchanges, Bluenext and Nord Pool.

The NYT provided more details of the transaction, stating

The credits appear to be part of massive blocks of CERs awarded to Eastern European states and Russia after the collapse of Soviet-era industry.  This created a loophole used by Hungary to reintroduce used CERs back into the market…

Carbon traders said countries like Hungary were exploiting the loophole to earn more money from the carbon trading system than they could by selling the credits that they had previously earned under the Kyoto system…

The traders said at least one other E.U. member state had acted similarly earlier this year.

The EU said they were “surprised and concerned” about the situation.  BusinessWeek quoted others who expressed more urgency about the matter:

“The supply and demand dynamics have been changed,” said Paul Kelly, chief executive officer of JPMorgan’s EcoSecurities unit. While the scope of the problem has yet to be determined, buyers are “questioning the authenticity” of what they are buying.

Unfortunately, this isn’t the only recent development that may cause market participants concern.  This is just the latest in a barrage of credibility and financial damage for GHG emissions trading, including:

  • Last year swindlers robbed governments of about 5 billion euros in revenues — about $6.8 billion — by selling carbon credits and disappearing before paying the required Value Added Tax on the transactions.
  • In January, swindlers used faked e-mail messages to obtain access codes for individual accounts on national registries that make up the bloc’s Emission Trading System, and then used the stolen codes to gain access to electronic certificates that represent quantities of greenhouse gases.
  • In Australia, recent fraud enforcement involved forcing a green power company, Global Green Plan, to purchase carbon credits it had promised to buy on behalf of customers, but never did.  The government is currently pursuing action against carbon capture company Prime Carbon over allegedly misleading claims made by the firm.
  • In Belgium, authorities have charged three Britons suspected of value added taxes (VAT) fraud on CO2 emissions permits.

In the U.S.,  the Regional Greenhouse Gas Initiative (RGGI), a group of Northeastern U.S. states that have a cap-and-trade program for utilities, faced its own demons.

  • The New Jersey government reallocated about $65 million in funds raised in the RGGI auction. The funds were intended for use in developing renewable energy projects, but instead are going to the state’s general fund, Reuters reports.
  • Last year, New York similarly took $90 million from its carbon fund.

So Now What?

Companies with a major stake in the GHG emissions game must conduct a detailed risk assessment of their GHG programs, solutions and exposures.  Given what has developed in the trading market in the past six months, it would be wide to carry out exposure identification, failure analyses, contingency planning and desktop exercises.

Such analyses and assessments may be critical for publicly traded companies in the United States due to SEC’s recent announcement and the newly effective EPA rule requiring reporting of greenhouse gas emissions from fossil fuel suppliers and industrial gas suppliers, direct greenhouse gas emitters and manufacturers of heavy-duty and off-road vehicles and engines.

Lawrence Heim, Director of The Elm Consulting Group International’s Atlanta office, said

Close to 10 years ago, I began posing the question ‘what if the GHG emissions trading market collapses?’  Assuming cohesive legally-enforceable emissions standards existed, the cost proposition presented by emissions trading in comparison to capital expenditures for pollution control equipment was quite attractive.  The impact of a material failure of the trading framework was significant.  This line of thought became incorporated into client risk assessments even back then.

In the US, we can look at the pollution control expenditures related to EPA’s New Source Review (NSR) enforcement initiative to provide insight into GHG control equipment costs.  Of course, NSR enforcement involves pollutants for which there are well-established and commercially-viable emissions control technologies.  We don’t have that luxury with carbon dioxide, which will likely translate into dramatically higher costs.

Further erosion of the viability of GHG emissions trading could have a significant impact on your company.  Please contact us if you would like to understand more about climate business risk assessments and potential risk mitigation options.

Dark Clouds on the Climate Horizon

In 2009, there was a general sense in the US that some regulatory and economic certainty would finally be established relative to greenhouse gases, and CO2 in particular.  The current administration made highly public moves and statements to that effect, which were mirrored by action in Congress and the Senate.  EPA issued its finding of endangerment.  And there was significant optimism that the COP15 Copenhagen meeting would bear fruit.

Fast forward to February 2010.  There has been quite a shift in direction and now there is arguably more business risk related to CO2/GHG than there was going into 2009.  Among recent highlights:

  • Nike formally announced that they are abandoning the use of carbon offsets and Renewable Energy Certificates (RECs), citing, among other concerns:

there is substantial scrutiny of the use of RECs, in particular related to whether they in fact help create new renewable power, or whether they are simply payment to a project that would have existed anyway. … Moving forward, however, our preference is to achieve climate neutrality through a combination of energy efficiency and the purchase of more direct forms of renewable energy, through on-site applications and other means.

  • The German Emissions Trading Authority (DEHSt) computer system was hacked and fraudulent European Union carbon allowance transactions were completed.  Read a report here.
  • Europol, the European law enforcement agency, reported on December 9, 2009 that

the European Union (EU) Emission Trading System (ETS) has been the victim of fraudulent traders in the past 18 months. This resulted in losses of approximately 5 billion euros for several national tax revenues.

As an immediate measure to prevent further losses France, the Netherlands, the UK and most recently Spain, have all changed their taxation rules on these transactions. After these measures were taken, the market volume in the aforementioned countries dropped by up to 90 percent.

  • The Copenhagen meeting failed to achieve the concrete results that had been expected.
  • The accuracy and veracity of data published by key climate scientists was called into question, creating the “Climategate” scandal.
  • The UK government published a report supporting a fixed price or auction reserve on carbon emissions over the current market-driven cap and trade.
  • National-level climate bills in the US are no longer getting the support they enjoyed in 2009.  Read more.
  • Arizona declined to participate in a regional GHG trading program, citing the difficult economy.

However, in contrast to the overarching trend, the US did see two important developments.  First, EPA promulgated its CO2 emissions reporting regulation in October 2009, which is effective calendar year 2010.  Second, SEC issued Interpretive Guidance on the inclusion of climate risks in financial disclosures.

There continues to be significant  uncertainty related to the financial value/risk of climate-related activities.  And that is not likely to change in the near future.