Environmental Engineering Reference
In-Depth Information
agricultural yield to counterparty risk, why not
manage climate change risk through the financial
markets as well? Even better, why not manage
these risks through carbon? Carbon is an effective
foreign exchange hedge (carbon is transacted in
Euros) particularly against the dollar (which oil
is transacted in and used as a hedge for, but less
so as pressure to shift from the dollar is seen in
the OPEC states) as well as the British pound.
Clean dark and clean spark spreads have been
created by traders and trading risk managers to use
carbon in showing gains and losses for utilities.
Power spreads represent the theoretical profit
achievable when using either coal (clean dark
spread) or gas (clean spark spread) and buying
the appropriate number of allowances or offsets
to cover the emissions from each fuel. The spreads
are measured in EUR/MWh. A third measure--the
climate spread represents the overall favourability
of coal over gas (or gas over coal if a negative
number). Clean dark and clean spark spreads show
the profitability of one fuel over the other given
the inclusion of the cost of emissions they produce,
also taking into account the greater efficiency
of gas over coal. This in turn gives utilities the
knowledge of when to switch fuels from burning
coal to burning natural gas instead, crucial when
fuel prices or emissions credits' prices rise sharply.
Such risk measures are very important to utilities
and power generators who, as in Germany, often
sell their power forward several years and thus
need to hedge their carbon emissions in years in
advance. Using carbon as not just a liability but
a risk management tool, utilities can take bets on
power supply and demand years in advance, and
hedge it with corresponding purchases or sales of
EUAs and CERs with a variety of counterparties
who may be opting for the opposite position.
Carbon as a counterparty hedge is not unrea-
sonable to manage. On the one hand, it is easy
to see who is managing their emissions on the
exchanges, and as the example of the Hungarian
emissions trading debacle showed—where used
illegitimate counterparty who intended to reuse
the CERs, thus 'recycling' them—carbon creates
a new opportunity for knowing your counterparty,
to assess who is taking the space seriously, and
what implication their own carbon exposure will
have on their trading partners.
Exchange traded carbon credits avoid these
problems and shed light on trading partners.
Exchanges are also expanding the global com-
merce infrastructure in many ways thanks to the
growing carbon markets. Not only are exchanges
reaching regions far flung from the epicentres of
global banking, but they are also taking the infra-
structure with them. Companies like APX (now
APX-ENDEX following a merger in 2009) who
provide both infrastructure and trading solutions
have created platforms for tracking emissions
reduction credits through the project cycle in
Southeast Asia, Latin America and Africa. By
working in tandem with the Gold Standard to
provide a project registry, APX succeeded in ex-
panding its own product offering while managing
projects for developing and developed country
clients. The registry removes the risk of tracking
credits among counterparties and geographies, and
creates a product applicable elsewhere, while new
enterprises can emulate the successes of APX in
geographies with sparse coverage.
Looking again at the OECD, the leading energy
exchange Intercontinental Exchange (ICE) in May
2010 made a cash offer for well above market
price of the world's leading climate exchange,
aptly named Climate Exchange Plc—operating
the European Climate Exchange and the Chicago
Climate Exchange. “We believe that a combination
with ICE makes strategic sense and look forward
to addressing continued opportunities together,”
said Climate Exchange chairman Richard Sandor
(Kouchakji, 2010). This acquisition again expand-
ing significantly the geographical and product
reach of ICE. It builds upon the successes of the
European Climate Exchange, which since its
inception has exponentially grown its product
