Easy cash but quiet first year in UK emissions trade
Author: Neil Chatterjee
"In terms of being a liquid and efficient market it was far from being a success, but companies set up trading mechanisms and as a precursor to wider schemes there were lessons to be learned," said Atle Christiansen of analysts Point Carbon.
The voluntary scheme, started in April last year, enables companies that cut greenhouse gas emissions above government agreed targets to sell allowances to those unable to meet the reductions. The emissions are blamed for global warming.
The British government hoped for a large uptake to help meet its commitments under the United Nations Kyoto Protocol on climate change, ahead of mandatory European Union trading from 2005 and possible global trading.
It kickstarted the scheme with 215 million pounds ($336.8 million) for 34 organisations, from Barclays Bank to London's Natural History Museum, that pledged to cut over four million tonnes of emissions over five years, either in-house by greater energy efficiency or by trading allowances.
"A lot of people will be kicking themselves for not getting involved - it was a handout," said TFS emissions broker John Molloy. "It was double money - getting cash in the auction and then selling allowances at 12 pounds," he said.
Brokers said those companies selling early on would have made the most money, as prices steadily rose from five pounds ($7.83) per tonne of carbon dioxide equivalent to a high of 12.50 in the first six months, before slumping on oversupply in the second to around three pounds.
Likely candidates are chemical firms Ineos Fluor and DuPont, oil majors Shell and BP, UK Coal Mining and First Hydro, who all received the most allowances to sell. Just 10 companies made up 90 percent of the market, brokers say.
Over half of the 34 direct participants have yet to trade. Some in the auction received money for easily achievable reductions in emissions - in return for about 53 pounds a tonne from the taxpayer. Others may have made no extra reductions.
Marks and Spencer, for example, agreed to a 2,060 tonne cut over five years - which brokers said could be done by turning off a few office lights - in return for 110,000 pounds ($172,300).
British Airways agreed to cut its emissions by 125,000 tonnes or 12 percent, which could be achieved by cutting flights. Or it could buy allowances on the market for much less than the 6.67 million pounds ($10.45 million) it will receive from the government.
CLIMATE CHANGE LEVY
Apart from the 34 direct participants, almost 6,000 companies were expected to join trading, since they risk losing a hefty tax rebate on energy use under the Climate Change Agreement if they miss emissions reduction targets.
Buying from these CCA companies saw prices soar last year, but demand did not pick up further as expected ahead of the mid-February 2003 deadline for industry sectors to comply with targets. Total traded volumes were under two million tonnes.
Brokers said that these CCA participants had not been given enough information about trading and were now being given more time to comply.
"It's been a good first year, with the exception that the CCA participants were not tuned up to get the benefits," said Molloy. "Everyone's in a learning curve."
The Department of Environment, Farming and Rural Affairs (DEFRA), in charge of the scheme, said they were still compiling data from the year and could not yet comment on whether industry sectors had met their targets through the scheme.
Dealers also said the lack of clarity over how the voluntary UK scheme would tie in with mandatory EU trading for carbon dioxide held back trade. 2003 is expected to be a quiet year, though on the plus side the UK now has valuable experience.
"The challenge ahead is the EU trading directive, with consultation to develop the national allocation plan that defines who gets what from a finite amount of allowances - the UK trading scheme has prepared people for it," said trader Garth Edwards of Shell.