The Earth’s Exchange
NYSE Euronext is leveraging its technology and market experience to support BlueNext — a leading environmental exchange.
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E-mailWhen it comes to tackling climate change, one innovative market solution is carbon-dioxide emissions and credits trading, an approach that leverages economic incentives to achieve emissions reductions. NYSE Euronext (NYX), through its founding in December 2007 of Paris-based BlueNext SA with partner Caisse des Dépôts, a state-owned French bank, has made its foray into the trading and settlement of carbon credits, helping to bring transparency to the market for these new and innovative securities. In just two years, BlueNext has become one of the world’s leading exchanges for environmental trading.
“We have a great opportunity to expand the great success BlueNext has had in Europe by entering new markets in the U.S. and around the world,” says NYSE Euronext CEO Duncan Niederauer.
“Our aim is to make BlueNext a benchmark for environmental markets with diverse products and services,” adds Serge Harry, chairman and CEO of BlueNext, in which NYSE Euronext holds a 60 percent interest and Caisse des Dépôts the remaining 40 percent.
“Our aim is to make BlueNext a benchmark for environmental markets with diverse products and services.”
According to research firm Celent, carbon emissions trading has been growing astronomically, with trade volumes increasing more than fivefold, to 4.2 billion tons in 2008 from 800 million tons in 2005. The firm says the global carbon emissions market could reach $2 trillion by 2020, becoming one of the largest commodities markets, as major industrialized nations finalize emissions-reduction policies.
What Is Carbon Trading?
The first mandatory emissions-reduction policy was established in 2005 by the European Union. The EU Emissions Trading System, or EU ETS, is now the world’s largest multicountry emissions-trading scheme. Under this “cap and trade” system, explain BlueNext Commercial Director Philippe Chauvancy and BlueNext Business Development Director David Rapin, total emissions for the 27 participating European countries are capped at about 2 billion tons per year. That cap is divided by country and then by installation (such as a factory) among some 3,000 companies and 11,500 installations. Each installation receives a limited number of emissions permits, or “allowances,” for the year, based on its historical emissions, plus a growth rate, minus an emissions-reduction target.
For example, Chauvancy and Rapin explain, a cement company that historically has emitted 1 million tons of CO2 per year, has an EU-defined sector annual growth rate of 1 percent, and has a mandate to reduce emissions by 10 percent would be capped at 909,000 tons. Exceeding this cap would result in stiff penalties. The company has several options, which Chauvancy and Rapin outline: It can decrease production, deploy emissions-reducing technologies or, under the EU ETS, purchase additional allowances from facilities that emit less and therefore can sell allowances. One European Union Allowance, or EUA, provides one ton of carbon allowance. Each year the total amount of allowances issued, or “the cap,” gets reduced, thus lowering total emissions in the long term.
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Cap and Trade
A fourth option under the EU ETS is to invest in an emissions-reducing carbon project in a developing country and, in the process, earn tradable carbon credits, say Chauvancy and Rapin. Here’s how it works, they explain: A Certified Emission Reduction credit, or CER, gets issued every time the U.N. — through carbon projects registered with the Clean Development Mechanism, or CDM — prevents one ton of CO2 equivalent from being emitted. Companies use these offsets against their emissions balance, which must be settled at year-end. These emission allowances and credits are traded on exchanges such as BlueNext, where supply and demand determine their prices. BlueNext trades EUAs and CERs on the spot market, as well as futures on both types of contracts. BlueNext reports that it is the leader in spot sales for both CERs and EUAs, commanding an 80 percent market share. In addition to CO2 trading, it takes responsibility for related settlement and delivery. It now counts more than 100 worldwide members (industrial companies, brokers and financial institutions).
Cap and trade allows governments and markets to do what they do best.
These tradable products came into existence after implementation of the Kyoto Protocol, a 1997 international treaty that, beginning in 2005, has bound most developed nations to a cap-and-trade system for greenhouse gases. Cap-and-trade systems, versus the taxing of emissions, are ideal, explains Harry, because they allow governments (which set and enforce scientific targets) and markets (which find the most efficient prices) to do what each does best. Harry points to data from research firm Point Carbon, which says total emissions from participating countries in the EU ETS decreased 6 percent in 2008.
Innovation and Expansion
BlueNext is looking to expand its environmental trading beyond Europe, targeting the U.S. and China. At the first-ever U.S.-China Low Carbon Conference, which took place in New York last fall, BlueNext announced a global partnership with the China Beijing Environment Exchange, or CBEEX, the first state-level Chinese environmental trading platform, to develop the first voluntary system to limit emissions in China, the world’s largest market for CDM projects. Earlier, in June, BlueNext announced that it had signed an agreement with CBEEX to establish an international global platform for CDM projects.
Recently the World Bank, as trustee for the Adaptation Fund, began regular sales of CERs through BlueNext. Created under the U.N. Framework Convention on Climate Change, the Adaptation Fund finances climate change adaptation projects and programs based on the needs, views and priorities of developing-country signatories to the Kyoto Protocol. “Regular selling on BlueNext represents an important step in our CER monetization strategy, by giving us direct access to buyers in the carbon markets,” says Ivan Zelenko, head of derivatives and structured products at the World Bank.
BlueNext is also meeting the growing demand from institutions and investors for innovative new products. Chauvancy and Rapin point to the January 2010 launch, in conjunction with Citigroup Inc. (C), of the first-ever auction of Emission Reduction Units, or ERUs, which are offsets Annex I (developed) countries can earn by investing in emissions-reduction projects in other Annex I countries. Most ERU trades are done over the counter, so the auction is designed to create visibility and pricing transparency in the market for ERUs, says Rapin. He adds that “auctions are an interesting potential market for us” with the approach of the EU’s Emission Trading System Phase III (2013-2020), when companies will receive most of their allowances via auction.
Another innovation is BlueNext’s new Outright Spread contract, which BlueNext says allows members to price the difference between spot EUA and CER contracts and hedge the liquidity in the two spot markets. Yet another is a strategic partnership with global financial information services provider Markit that allows BlueNext to create environmental indexes and related products. The first index launched was the Markit BlueNext EUA Spot Index, which is calculated based on the EUA spot transactions traded on BlueNext. “This partnership,” says BlueNext Deputy CEO Jean-Pierre Hort, “allows us to provide the financial community with an index family that has the potential to become a global reference for the environmental marketplace.”
This article is as of Dec. 21, 2009, and includes information that may constitute “forward-looking statements,” as it is based on current expectations and assumptions that are subject to risks and uncertainties. Please visit the cautionary note to read more.
