PROSPECTS FOR INTERNATIONAL EMISSIONS TRADING

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005284790
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 6
• Document Creation Date: June 24, 2015
• Document Release Date: May 27, 2011
• Case Number: F-2008-00831
• Publication Date: May 14, 1999

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Intelligence Report
Prospects for International Emissions Trading
14 May 1999
The climate change. negotiations next month in Bonn most likely will not achieve a
breakthrough to establish an international emissions trading regime, but private
sector firms are making progress with pilot trading programs that will bring
pressure to bear on the talks for early progress
Cloudy Outlook for Bonn Meetings
EU Moves to Restrict Trading. In preparation for the June meetings of the climate
convention's subsidiary bodies in Bonn, the German EU presidency announced on 10
May that EU Environment Ministers, meeting informally in Weimar, have agreed to a
50 percent cap on international emissions trading matched ton for ton with verified
domestic emissions reductions, I Austria,
Denmark, Finland, France, and the UK supported the German push for a concrete
ceiling on emissions trading despite last year's understanding with the US to agree to
disagree.
I The German formula set the ceiling at 50 percent of the difference between a country's
actual annual emissions for 1994-2000 and its target. The ceiling could be increased with
emissions trading if domestic reductions matched traded allowances on a ton for ton basis
after 1993. Domestic reductions would need to be verified, but how verification would be
implemented remained unclear;
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The Dutch and Swedish cabinets, however, have been unhappy with the German
proposal and won a side agreement allowing more leeway for emissions trading up to
50 percent of their emissions reductions In addition
there is another side agreement with non-climate sweetners
he Dutch cabinet, in particular, was reluctant to commit the country to
limits on trading before it knows the details of the international trading regime.
The Swedish cabinet has appointed an experts group to examine how
the Kyoto Mechanisms can be used in the Swedish market and to
introduce parliament and the political parties to the concept of
emissions trading
German control of the emissions trading issue will continue after Finland assumes the
EU presidency in July. Helsinki has decided to let Germany handle the issue-a
political "hot potato"-through the Fifth Conference of the Parties this October
In effect, the German Green Party delegation from the Environment Ministry in
Berlin will have a relatively free hand to pursue the debate in the Bonn talks, control
the agenda for the EU caucus on the issue, and do the talking for the EU.
r
Umbrella Group Hampered by Japan. The Umbrella Group of non-EU developed
countries3 has an agreed position on unrestricted emissions trading and will provide
the leadership at the Bonn meetings in designing the modalities of an international
system, but Japan has important reservations. MITT insists on government control of
trading due to discomfort with Japanese firms tradin directly with multinational
firms or indirectly through commodity exchange
Moreover, MITI opposes an international registry for trades because it is concerned
about legal liability issues arising from mistranslatiions of Japanese-langugage
trades a
China and India Oppose Trading, Seek Aid. Meanwhile, two key players for the
Bonn meetings remain opposed to emissions trading. At the root of Sino-Indian
2 The Dutch formula called for the ceiling to be calculated as 50 percent of the difference
3 The Umbrella Group of nine non-EU developed countries comprises Australia, Canada,
Iceland, Japan, New Zealand, Norway, Russia, Ukraine, and the US. Kazakhstan, has
attended one Group meeting as an observer because it intends to announce an emissions target
at COP 5.
4 MITI notes that many of the Japanese written language's 10,000 characters do not translate
well into English
 opposition to emissions trading is a complaint that it would leave them out of the cash
flow since they have no emissions targets and are ineligible to trade. The Chinese and
Indian foreign officers last month laid down markers in written submissions to the
secretariat of the climate change convention that they oppose emissions trading
because it diverts attention away from direct transfers for financing leading-edge
clean energy technologies for them.
China speaks with many voices, however, and the Chinese State Environmental
Protection Administration signed a Statement of Intent during Premier Zhu Rongji's
visit to Washington last month to examine market mechanisms, including domestic
emissions trading, as tools to reduce sulfur dioxide emissions in China. The Premier
evidently overruled foreign office objections in this instance.
Chinese agreement in March 1999 on means to implement the pase-out of CFC
emissions under the Montreal Protocol suggests, by analogy, what their financial
interests are in the Kyoto Protocol. While China had agreed to cease CFC production
by 2010, it has now accepted a domestic cap and trade approach to reach that goal.
Donors to theMontreal Protocol's Multilateral Fund, in turn, have agreed to transfer
$150 million to China for the phase-out, starting with an initial tranche of $20 million
and, subject to verified compliance, $13 million annually thereafter
Similarly, India and China have expressed an interest in France's suggestion that the
Global Environment Facility (GEF) serve as the vehicle for cash transfers for clean
energy technologies India has caveated the idea,
however, by insisting that France and other donors generate incremental funding for
the GEF for this purpose in addition to what they have already pledged the fiend,
which is probably not what France has in mind.
? It is also worth noting that Indian Environment Minister Paul recently
urged the Confederation of Indian Industries to take advantage of the
Clean Development Mechanism (which will generate tradeable credits)
to attract foreign investment.
The Buenos Aires Conference of Parties last fall indicated, however, that China and
India do not necessarily represent the views of other developing countries in the
Group of 77 toward emission trading. The African delegations split dramatically with
China and India over implementation of the Kyoto Mechanisms.
 i ential
Progress in the Private Sector
operations, and install new technologies on production platforms.
The company will cap natural gas flaring, wring efficiency gains out of refinerv
True to UK Chief Scientist David Fisk's prediction last year that traders would make
greater progress than governments in setting up emissions trading, several private
sector firms are develo ing rules for trading amon themselves and are launching
pilot programs BP/Amoco, for example,
has been trading emissions allowances among its business units worldwide-
including its North American unit in Cleveland-since last September. Internal
trading has driven down the price of allowances to $18 per metric ton of carbon
dioxide The company's target to reduce greenhouse
gas emissions 10 percent from 1990 levels by 2010 has been reinforced by personal
performance contracts between the Group CEO and the chiefs of its business units.
country, according to press reports
The International Petroleum Exchange (IPE) in London is re arin to set up a
market for trading emissions allowances IPE has
asked Canadian and UK consultants to design a standar contractor allowance
traders and brokers. In addition, IPE is working with the Confederation of British
Industries and the UK government to create a single pilot program for the whole
Elsewhere, Royal Dutch Shell is subsidizing the International Emissions Trading
Association (IETA) to encourage member firms to set up emissions trading programs,
IETA will provide trading backup services, including
Conference on Trade and Development (UNCTAD) as a non-profit organization
overlooks the potential benefit of emissions trading to developing countries
internet trades, certificaiton and verification of allowances, and promotion of CDM
projects that may produce emissions credits for trading. The Climate Action
Network's criticism of IETA as an inappropriate commercial initiative for the UN
NOORDPOOL, the Scandinavian electricity pool, is interested in
trading emissions allowances among its participating utilities, and the
Sydney Stock Exchan ge in Australia has encouraged firms to in
trading on a trial basis
? NYMEX has agreed to set up an electronic exchange with Deutsche
Bourse in Frankfurt for futures contracts based on Germany's
deregulating electricity market and to be tied into EUREX for broader
selling, according to press reprots. The potential is there for emissions
trading as well
 In addition, several Canadian firmsand NGOs jointed with the federal government last
year to start a pilot Greenhouse Gas Emission Reduction Trading program. It has
rules for baseline determination, additionality, proof of ownership, double counting
for buyers' and sellers' accounts, and bverification. Canadian stockholders keep a
registry for the regime.
Despite MITI's concern, Tokyo Forex Company is setting up a network for brokering
emissions trading by the end of the year, and a number of Japanese financial
institutions want to get involved in an emissions trading business, according to the
Japanese press.
Looking for a Nod
As informal markets for trading open in anticipation of a formal diplomatic accord,
trading firms are looking for signals from governments that they are on the right path,
PE, for example, wants guidelines on trading
procedures and says it would welcome a faster pace for the Bonn negotiations.
BP/Amoco has warned governments that it will be unable to expand its pilot program
in the absence of an international trading regime.
Several governments have given positive signals,
E::::]Norway's parliament has encouraged Statoil to engage in emissions trading
as a contribution to achieving the national emissions target. British Columbia has
created a pilot program for the province, and New South Wales has expressed support
for trading. Moreover, the Australian and New Zealand governments have
encouraged as many firms as possible to start trading early with a veiw to creating a
big market with ample liquidity.
In addition, the UK whose foreign office opposes unrestricted trading-has given a
green light for UK firms to trade emissions, in effect, acknowledging the BP/Amoco
pilot program. Chancellor of the Exchequer Brown, in his March 1999 budget,
recognized emissions trading as a cost effective way for energy-intensive firms in the
UK to reduce emissions and earn credit for the "climate change levy" imposed by the
budget, according to press reports. He invited firms to commit to emissions
reductions in exchange for a lower tax rate.
 How IPE Works. The Exchange trades gas oil (heating oil), Brent crude, and
natural gas futures contracts to manage price risks in volatile markets. IPE operates
in a regulated environment with all contracts passed through the London Clearing
House that acts as an independent guarantor with its own financial reserves. Visual
and audio systems monitor all activities of registered floor traders and create a
record of all transactions. In addition, an electronic Energy Trading System is
available as a supplement to vocal trading for natural gas futures. Deals are
anonymous, but transparency is served by Quote Vendors relaying prices-
including bids (buy) and offers (sell)-and volumes of all deals electronically in
real time to 15,000 end users in 85 countries. IPE also feeds price information to
NYMEX in New York and SIMEX in Singapore.
Applications to Emissions Trading. IPE sees a bright future for emissions trading
because firms will have incentives not only to buy and sell allowances but also to
improve the management of their energy resources, reduce energy consumption for
cost savings, and stimulate production efficiency innovations. Some investment
banks view environmental compliance in general as a natural by-product of "value
drivers" such as restructuring and innovative marketing, according to the financial
press.
Although emissions trading under the Kyoto Protocol will not necessarily involve
future contracts per se, several parallels exist.
? Paper trading of signed contracts will occur rather than physical transfers of
metric tons of carbon dioxide.
? Transparency of prices and volumes will be needed as benchmarks for trading.
? Buyers and sellers will be working with a time horizon for deals to exchange
allowances at some future point immediately in anticipation of the 2008-2012
commitment period or during the commitment period.
? An independent third party will be needed to guarantee the financial integrity of
deals-a clearing house, investment bank, or other financial instution.
Moreover, the market will be a global one because allowances will be a fungible as
traded oil.