C
Captain Compassion
Guest
Pollution Permits Burn European Consumers; E.ON Gains (Update2)
http://www.bloomberg.com/apps/news?pid=20601109&sid=aeFSX.0e2ga8&refer=home
By Mathew Carr
June 18 (Bloomberg) -- Pollution permits, the biggest money- loser for
commodity investors this year, are poised for a rebound that may spark
a 10 percent jump in electricity costs for the 260 million consumers
from London to Bucharest.
Prices for allowances that give utilities and factories the right to
pump a ton of carbon dioxide into the atmosphere will climb 20 percent
in the next 12 months, according to Lueder Schumacher, an analyst at
Dresdner Kleinwort in London. The reason: Governments are handing out
fewer certificates in the three-year program.
So-called carbon permits, created to reduce dependence on coal and
oil, boosted nuclear plant earnings for E.ON AG, Germany's largest
power producer, and Finland's Fortum Oyj. Companies from steelmaker
Arcelor Mittal to industrial gas maker Air Liquide SA face electricity
prices that doubled since 2004, a year before the emissions program.
``Clean energy doesn't come cheap,'' said Francisco Blanch, the head
of global commodities research at Merrill Lynch & Co. in London. ``If
you want to reduce emissions, you are going to have to pay for more
expensive power.''
Permits for 2008 ended last week at 22.78 euros a ton, after reaching
a 13-month high of 26 euros on May 30, according to Amsterdam's
European Climate Exchange, which has the largest share of EU
carbon-dioxide trading. Prices may rise to above 30 euros by 2009,
according to Dresdner Kleinwort's Schumacher. Per Lekander, an analyst
at UBS AG in London, predicts allowances will reach 30 euros next
year. By comparison, certificates for the initial, three-year trading
phase are almost worthless.
Cutting Carbon Dioxide
The EU emissions trading program is aimed at reducing carbon dioxide,
the main gas blamed for global warming. Some 11,400 factories and
power sites have been granted emissions permits, which trade on
exchanges such as the ECX and the European Energy Exchange in Germany.
Holders of surplus credits can sell them to companies that fail to
meet their emissions restrictions, which require one permit for each
metric ton of carbon dioxide produced.
Increased demand for permits may help increase earnings at Goldman
Sachs Group Inc., Citigroup Inc. and other financial firms, analysts
said.
Banks Trading
Banks and brokerages generated as much as $12 billion in revenue from
trading energy and commodities in 2006, said Ethan Ravage, a San
Francisco-based consultant for the financial services industry. Banks
don't disclose profits from emissions trading specifically. ``The gold
rush is not over'' for emissions traders, he said by telephone.
The securities unit of Barclays Plc has traded 450 million tons of
carbon dioxide permits from July 2004 through May this year, said
Louis Redshaw, head of environmental markets at Barclays Capital in
London. Fees are usually collected based on the amount of tons traded,
he said, without providing details.
Trading in greenhouse-gas allowances tripled last year to $30.1
billion, World Bank figures show. The region is the largest carbon
emissions market, accounting for more than 80 percent of the global
value.
A unit of JPMorgan Chase & Co. started trading carbon dioxide
emissions this month on France's Powernext exchange. Energy
initiatives will help add between $100 million and $160 million in
annual profit as early as this year, William Winters, co-head of
investment banking, told investors in March.
`Natural Fit'
Citigroup, the largest U.S. bank, said in April it would start
European emissions trading in the second quarter. It plans to expand
beyond the European market, said Paul Mead, a Citigroup managing
director for commodities. The New York-based company expects to make
loans and investments of $31 billion in alternative energy sources to
combat global warming, bringing its overall target for so-called green
projects in the next decade to $50 billion.
Goldman Sachs, the world's largest securities firm, in less than a
year profited more than fourfold from a 10.1 percent investment in
Isle of Man, U.K.-based Climate Exchange Plc, which owns the ECX and
an exchange in Chicago. The firm paid 12.3 million pounds ($24.3
million) in September 2006 for a stake valued at 69.9 million pounds
on the London Stock Exchange.
``Carbon may emerge as the largest commodity market in the world,''
said Imtiaz Ahmad, a senior carbon trader at Morgan Stanley in London.
``As an increasing number of banks enter the energy commodities
market, trading carbon is a natural fit.''
Requests Denied
Banks are offering to manage clients' factory emission portfolios for
a fee, and sell risk-management products that allow consumers such as
aluminum smelters to lock in power prices for several years. Banks
also trade allowances for their own accounts.
Emissions permits offer banks ``trading and profit opportunities''
Morgan Stanley's Ahmad said.
Prices of allowances are climbing after all but three of the 22
European nations assessed so far had their permit requests chopped.
The ability of polluters to make up shortfalls with credits obtained
outside of Europe has also been curbed to prevent a repeat of last
year's price collapse.
``The European Commission is being much more rigorous about the way
they've established and approved those national allocation plans,''
said Tony Beck, coordinator of the Australasian Emissions Trading
Forum, an information network for companies and government agencies on
emissions trading in Canberra, Australia. ``They of course know a lot
more now about what the emission levels might be than when they
approved the first round.''
Profit Power
Allowances for the initial three-year phase of Europe's program, which
ends in December, are now almost worthless because the governments
allocated too many. Prices slid as low as 15 cents on May 10, Climate
Exchange figures show. The security touched 32.05 euros on April 19,
2006. The next phase, starting in 2008, runs through 2012.
``The market is much more confident in the integrity of phase II,''
said Mark Lewis, an emissions analyst with Deutsche Bank AG. ``The
belief there will be meaningful scarcity is becoming the consensus
view.''
Earnings at power companies such as Dusseldorf, Germany-based E.ON and
Fortum, based in Espoo, Finland, have been buttressed by rising permit
prices because electricity rates are based on the cost of fossil
fuels, including coal and gas. Electricity from generators that don't
release carbon dioxide, such as those with nuclear and hydro power,
can result in higher margins for utilities.
Electricity Costs
Vattenfall AB, the Nordic region's biggest utility, E.ON and Fortum
earned an extra $4 billion in 2005 and 2006 in Sweden because
emissions trading pushed up power prices, said Niclas Damsgaard, an
economist and partner at Econ in Stockholm.
``The purpose of carbon trading is that those who emit less benefit
and those who emit more pay,'' Fortum spokeswoman Carola Teir-Lehtinen
said by telephone. ``Last year, 84 percent of the power we produced
was emissions free.''
Teir-Lehtinen said the company expects profit to benefit from higher
emissions prices. E.ON spokeswoman Sabine Hower declined to
immediately comment.
Investors in European utility stocks have also been rewarded since the
first phase of emissions trading started on Jan. 1, 2005. The Dow
Jones Stoxx 600 Utilities Index has jumped 88 percent since then, with
the broader Stoxx 600 up 59 percent. Since 2008 permits began their
latest march higher on Feb. 21 of this year, the utilities group is up
7.7 percent, beating a 4.8 increase by the overall benchmark.
Prices Rising
As carbon permits climb, utilities next year may find it's more
economical to burn natural gas instead of coal at power stations. Coal
produces about twice as much carbon dioxide as natural gas for each
unit of power produced.
An allowance price above 30 euros a ton would prompt so- called
fuel-switching, said Lekander.
Benchmark electricity for 2008 in Germany, Europe's biggest market,
last week traded at its highest in almost 13 months, or 57.60 euros a
megawatt hour, according to broker GFI. Central European prices may
reach 63 euros by 2009, according to Lekander. That would be a record.
Carbon permit prices ``could accelerate,'' said Lekander. ``You will
have a step up in utility buying'' this year.
Rising prices are forcing some of Europe's largest electricity users
to band together to cut deals with their energy suppliers. A group of
at least 40 companies in France, including Arcelor Mittal, the world's
biggest steelmaker, and Air Liquide last month reached an agreement
with Electricite de France SA for power supplies for about 15 years,
enabling the Paris-based utility to invest in low-carbon power
production.
Corinne Estrade-Bordry, a spokeswoman for Paris-based Air Liquide,
said she couldn't immediately comment.
Supply Agreements
Seven of Belgium's largest companies, including units of BASF AG,
Solvay SA and Umicore SA, said June 13 that they formed a group to
study how to secure power supplies.
``Such a mechanism is necessary and urgent to ensure the
sustainability and competitiveness of their core industrial activities
in Belgium and to safeguard employment,'' according to the group,
called Blue Sky Development.
Jean Lasar, a spokesman in Luxembourg for Arcelor Mittal, declined to
comment on the company's involvement in Blue Sky Development or its
moves to limit increases in its energy prices.
Consumers in other nations that signed the Kyoto Protocol on climate
change, which calls for average greenhouse gas emissions from 2008
through 2012 to be cut 5 percent below 1990 levels, may also face
higher costs as polluters compete with their European counterparts to
invest in projects that reduce emissions, generating carbon dioxide
credits.
G8 Accord
ECX trading of permits reached a record last month. About 7.8 million
metric tons of allowances were traded on the exchange on May 30, 5.4
percent more than the previous record in April 2006. U.S. President
George W. Bush on May 31 softened his opposition to setting goals for
cutting pollution, calling for talks to ``establish a new framework''
for 2012, when the Kyoto accord expires.
Permit prices jumped the day following Bush's speech, and after
Australia recommended adopting emissions trading by 2012.
Trading is ``pretty much on forecast,'' said Richard Sandor, who
helped create U.S. Treasury bond futures at the Chicago Board of Trade
and is chairman of Climate Exchange. Sandor said he expects U.S.
emissions trading will start by 2010.
The EU will probably push ahead with further cuts in the allocation of
emissions permits for utilities and factories after 2012, having
pledged to cut emissions in half by 2050 at this month's Group of
Eight summit in Germany.
Europe, Japan and Canada agreed to the 50 percent reduction on June 7,
while the U.S. and Russia promised to take part in talks on a new
international treaty to combat global warming in December. Those talks
have a 2009 deadline for agreeing to a follow-up to Kyoto.
Permits May Slide
Western Europe reduced air pollution blamed for global warming by 0.8
percent in 2005 as German electricity companies switched to gas from
coal, putting the region back on course to meet its 2012 target, the
European Environment Agency said last week. The drop reversed an
increase in 2004.
Permit prices may fall in the second half of Phase II as the supply of
credits increases from emission-reducing projects around the world,
said Abyd Karmali, the London-based managing director for Europe at
ICF International Inc., an environmental and energy consulting
company. He predicts an average allowance price of 15 euros a ton in
the five-year period.
Schumacher at Dresdner Kleinwort also said allowances may retreat, to
11.80 euros in 2011.
That's not likely to happen in the near term, analysts said.
``There's going to be a huge attempt not to see the same problems that
we saw in phase one,'' said Michael Molitor, a principal at
CarbonShift, a consultant on climate change in Sydney. Permit prices
will keep rising, and ``I'd be a buyer up to 40'' euros, he said.
--
There may come a time when the CO2 police will wander the earth telling
the poor and the dispossed how many dung chips they can put on their
cook fires. -- Captain Compassion.
Wherever I go it will be well with me, for it was well with me here, not
on account of the place, but of my judgments which I shall carry away
with me, for no one can deprive me of these; on the contrary, they alone
are my property, and cannot be taken away, and to possess them suffices
me wherever I am or whatever I do. -- EPICTETUS
Celibacy in healthy human beings is a form of
insanity. -- Captain Compassion
"Civilization is the interval between Ice Ages." -- Will Durant.
Joseph R. Darancette
daranc@NOSPAMcharter.net
http://www.bloomberg.com/apps/news?pid=20601109&sid=aeFSX.0e2ga8&refer=home
By Mathew Carr
June 18 (Bloomberg) -- Pollution permits, the biggest money- loser for
commodity investors this year, are poised for a rebound that may spark
a 10 percent jump in electricity costs for the 260 million consumers
from London to Bucharest.
Prices for allowances that give utilities and factories the right to
pump a ton of carbon dioxide into the atmosphere will climb 20 percent
in the next 12 months, according to Lueder Schumacher, an analyst at
Dresdner Kleinwort in London. The reason: Governments are handing out
fewer certificates in the three-year program.
So-called carbon permits, created to reduce dependence on coal and
oil, boosted nuclear plant earnings for E.ON AG, Germany's largest
power producer, and Finland's Fortum Oyj. Companies from steelmaker
Arcelor Mittal to industrial gas maker Air Liquide SA face electricity
prices that doubled since 2004, a year before the emissions program.
``Clean energy doesn't come cheap,'' said Francisco Blanch, the head
of global commodities research at Merrill Lynch & Co. in London. ``If
you want to reduce emissions, you are going to have to pay for more
expensive power.''
Permits for 2008 ended last week at 22.78 euros a ton, after reaching
a 13-month high of 26 euros on May 30, according to Amsterdam's
European Climate Exchange, which has the largest share of EU
carbon-dioxide trading. Prices may rise to above 30 euros by 2009,
according to Dresdner Kleinwort's Schumacher. Per Lekander, an analyst
at UBS AG in London, predicts allowances will reach 30 euros next
year. By comparison, certificates for the initial, three-year trading
phase are almost worthless.
Cutting Carbon Dioxide
The EU emissions trading program is aimed at reducing carbon dioxide,
the main gas blamed for global warming. Some 11,400 factories and
power sites have been granted emissions permits, which trade on
exchanges such as the ECX and the European Energy Exchange in Germany.
Holders of surplus credits can sell them to companies that fail to
meet their emissions restrictions, which require one permit for each
metric ton of carbon dioxide produced.
Increased demand for permits may help increase earnings at Goldman
Sachs Group Inc., Citigroup Inc. and other financial firms, analysts
said.
Banks Trading
Banks and brokerages generated as much as $12 billion in revenue from
trading energy and commodities in 2006, said Ethan Ravage, a San
Francisco-based consultant for the financial services industry. Banks
don't disclose profits from emissions trading specifically. ``The gold
rush is not over'' for emissions traders, he said by telephone.
The securities unit of Barclays Plc has traded 450 million tons of
carbon dioxide permits from July 2004 through May this year, said
Louis Redshaw, head of environmental markets at Barclays Capital in
London. Fees are usually collected based on the amount of tons traded,
he said, without providing details.
Trading in greenhouse-gas allowances tripled last year to $30.1
billion, World Bank figures show. The region is the largest carbon
emissions market, accounting for more than 80 percent of the global
value.
A unit of JPMorgan Chase & Co. started trading carbon dioxide
emissions this month on France's Powernext exchange. Energy
initiatives will help add between $100 million and $160 million in
annual profit as early as this year, William Winters, co-head of
investment banking, told investors in March.
`Natural Fit'
Citigroup, the largest U.S. bank, said in April it would start
European emissions trading in the second quarter. It plans to expand
beyond the European market, said Paul Mead, a Citigroup managing
director for commodities. The New York-based company expects to make
loans and investments of $31 billion in alternative energy sources to
combat global warming, bringing its overall target for so-called green
projects in the next decade to $50 billion.
Goldman Sachs, the world's largest securities firm, in less than a
year profited more than fourfold from a 10.1 percent investment in
Isle of Man, U.K.-based Climate Exchange Plc, which owns the ECX and
an exchange in Chicago. The firm paid 12.3 million pounds ($24.3
million) in September 2006 for a stake valued at 69.9 million pounds
on the London Stock Exchange.
``Carbon may emerge as the largest commodity market in the world,''
said Imtiaz Ahmad, a senior carbon trader at Morgan Stanley in London.
``As an increasing number of banks enter the energy commodities
market, trading carbon is a natural fit.''
Requests Denied
Banks are offering to manage clients' factory emission portfolios for
a fee, and sell risk-management products that allow consumers such as
aluminum smelters to lock in power prices for several years. Banks
also trade allowances for their own accounts.
Emissions permits offer banks ``trading and profit opportunities''
Morgan Stanley's Ahmad said.
Prices of allowances are climbing after all but three of the 22
European nations assessed so far had their permit requests chopped.
The ability of polluters to make up shortfalls with credits obtained
outside of Europe has also been curbed to prevent a repeat of last
year's price collapse.
``The European Commission is being much more rigorous about the way
they've established and approved those national allocation plans,''
said Tony Beck, coordinator of the Australasian Emissions Trading
Forum, an information network for companies and government agencies on
emissions trading in Canberra, Australia. ``They of course know a lot
more now about what the emission levels might be than when they
approved the first round.''
Profit Power
Allowances for the initial three-year phase of Europe's program, which
ends in December, are now almost worthless because the governments
allocated too many. Prices slid as low as 15 cents on May 10, Climate
Exchange figures show. The security touched 32.05 euros on April 19,
2006. The next phase, starting in 2008, runs through 2012.
``The market is much more confident in the integrity of phase II,''
said Mark Lewis, an emissions analyst with Deutsche Bank AG. ``The
belief there will be meaningful scarcity is becoming the consensus
view.''
Earnings at power companies such as Dusseldorf, Germany-based E.ON and
Fortum, based in Espoo, Finland, have been buttressed by rising permit
prices because electricity rates are based on the cost of fossil
fuels, including coal and gas. Electricity from generators that don't
release carbon dioxide, such as those with nuclear and hydro power,
can result in higher margins for utilities.
Electricity Costs
Vattenfall AB, the Nordic region's biggest utility, E.ON and Fortum
earned an extra $4 billion in 2005 and 2006 in Sweden because
emissions trading pushed up power prices, said Niclas Damsgaard, an
economist and partner at Econ in Stockholm.
``The purpose of carbon trading is that those who emit less benefit
and those who emit more pay,'' Fortum spokeswoman Carola Teir-Lehtinen
said by telephone. ``Last year, 84 percent of the power we produced
was emissions free.''
Teir-Lehtinen said the company expects profit to benefit from higher
emissions prices. E.ON spokeswoman Sabine Hower declined to
immediately comment.
Investors in European utility stocks have also been rewarded since the
first phase of emissions trading started on Jan. 1, 2005. The Dow
Jones Stoxx 600 Utilities Index has jumped 88 percent since then, with
the broader Stoxx 600 up 59 percent. Since 2008 permits began their
latest march higher on Feb. 21 of this year, the utilities group is up
7.7 percent, beating a 4.8 increase by the overall benchmark.
Prices Rising
As carbon permits climb, utilities next year may find it's more
economical to burn natural gas instead of coal at power stations. Coal
produces about twice as much carbon dioxide as natural gas for each
unit of power produced.
An allowance price above 30 euros a ton would prompt so- called
fuel-switching, said Lekander.
Benchmark electricity for 2008 in Germany, Europe's biggest market,
last week traded at its highest in almost 13 months, or 57.60 euros a
megawatt hour, according to broker GFI. Central European prices may
reach 63 euros by 2009, according to Lekander. That would be a record.
Carbon permit prices ``could accelerate,'' said Lekander. ``You will
have a step up in utility buying'' this year.
Rising prices are forcing some of Europe's largest electricity users
to band together to cut deals with their energy suppliers. A group of
at least 40 companies in France, including Arcelor Mittal, the world's
biggest steelmaker, and Air Liquide last month reached an agreement
with Electricite de France SA for power supplies for about 15 years,
enabling the Paris-based utility to invest in low-carbon power
production.
Corinne Estrade-Bordry, a spokeswoman for Paris-based Air Liquide,
said she couldn't immediately comment.
Supply Agreements
Seven of Belgium's largest companies, including units of BASF AG,
Solvay SA and Umicore SA, said June 13 that they formed a group to
study how to secure power supplies.
``Such a mechanism is necessary and urgent to ensure the
sustainability and competitiveness of their core industrial activities
in Belgium and to safeguard employment,'' according to the group,
called Blue Sky Development.
Jean Lasar, a spokesman in Luxembourg for Arcelor Mittal, declined to
comment on the company's involvement in Blue Sky Development or its
moves to limit increases in its energy prices.
Consumers in other nations that signed the Kyoto Protocol on climate
change, which calls for average greenhouse gas emissions from 2008
through 2012 to be cut 5 percent below 1990 levels, may also face
higher costs as polluters compete with their European counterparts to
invest in projects that reduce emissions, generating carbon dioxide
credits.
G8 Accord
ECX trading of permits reached a record last month. About 7.8 million
metric tons of allowances were traded on the exchange on May 30, 5.4
percent more than the previous record in April 2006. U.S. President
George W. Bush on May 31 softened his opposition to setting goals for
cutting pollution, calling for talks to ``establish a new framework''
for 2012, when the Kyoto accord expires.
Permit prices jumped the day following Bush's speech, and after
Australia recommended adopting emissions trading by 2012.
Trading is ``pretty much on forecast,'' said Richard Sandor, who
helped create U.S. Treasury bond futures at the Chicago Board of Trade
and is chairman of Climate Exchange. Sandor said he expects U.S.
emissions trading will start by 2010.
The EU will probably push ahead with further cuts in the allocation of
emissions permits for utilities and factories after 2012, having
pledged to cut emissions in half by 2050 at this month's Group of
Eight summit in Germany.
Europe, Japan and Canada agreed to the 50 percent reduction on June 7,
while the U.S. and Russia promised to take part in talks on a new
international treaty to combat global warming in December. Those talks
have a 2009 deadline for agreeing to a follow-up to Kyoto.
Permits May Slide
Western Europe reduced air pollution blamed for global warming by 0.8
percent in 2005 as German electricity companies switched to gas from
coal, putting the region back on course to meet its 2012 target, the
European Environment Agency said last week. The drop reversed an
increase in 2004.
Permit prices may fall in the second half of Phase II as the supply of
credits increases from emission-reducing projects around the world,
said Abyd Karmali, the London-based managing director for Europe at
ICF International Inc., an environmental and energy consulting
company. He predicts an average allowance price of 15 euros a ton in
the five-year period.
Schumacher at Dresdner Kleinwort also said allowances may retreat, to
11.80 euros in 2011.
That's not likely to happen in the near term, analysts said.
``There's going to be a huge attempt not to see the same problems that
we saw in phase one,'' said Michael Molitor, a principal at
CarbonShift, a consultant on climate change in Sydney. Permit prices
will keep rising, and ``I'd be a buyer up to 40'' euros, he said.
--
There may come a time when the CO2 police will wander the earth telling
the poor and the dispossed how many dung chips they can put on their
cook fires. -- Captain Compassion.
Wherever I go it will be well with me, for it was well with me here, not
on account of the place, but of my judgments which I shall carry away
with me, for no one can deprive me of these; on the contrary, they alone
are my property, and cannot be taken away, and to possess them suffices
me wherever I am or whatever I do. -- EPICTETUS
Celibacy in healthy human beings is a form of
insanity. -- Captain Compassion
"Civilization is the interval between Ice Ages." -- Will Durant.
Joseph R. Darancette
daranc@NOSPAMcharter.net
